Swiss Re’s $12 Billion Longevity Question

Swiss Re has inked new deal that is says places over $12 billion of aggregated external life risk on its balance sheet in what the reinsurance giant says will solidify its “leadership in the longevity swaps market,” according to an announcement Monday.

Less certain, however, if Swiss Re can profit on its longevity leadership role over the long term and find investor appetite by transferring the risk to the capital markets.

In the latest deal the Zurich-based reinsurer said that is has singed GBP 800 million ($1.28 billion) longevity swap contract with the pension fund LV=, a UK-based insurance society, according to an announcement. The transaction includes longevity exposures for over 5,000 LV= members including 1,000 members “who are still to retire.”

The statement adds that the deal is unique since it is the first time a longevity swap deal has included non-retired members “down to the age of 55.”

“We are pleased to have concluded this deal which maximizes the extent of the longevity coverage by including insurance not just for pensioners but also many of our older deferred members,” according to a statement from LV= Chairman Michael Allen.

Swiss Re similarly touted the deal in a statement, arguing “Longevity contracts are very long-dated and clients need counterparties that are in this market for the long haul.”

“We offer financial strength, a successful track record and the immediate and long-term benefits of dealing with a longevity end-risk holder,” according to a statement from Costas Yiasoumi, Swiss Re’s Head of Longevity Solutions.

The reinsurer adds that the deal confirms Swiss Re’s “position as the leader in the longevity swap market, having transferred over USD 12 billion in longevity liability to its own books.”

But the question remains how long Swiss Re intends to hold onto the billions of longevity risk it has purchased (and hedge the internally at a higher cost) or if can move beyond warehousing the contracts until it can convince investors to take the lion’s share of the portfolio

Swiss Re has been attempting to build investor appetite for longevity risk. In September the reinsurer issued report titled A Mature Market: Building a Capital Market for Longevity Risk arguing that the capital market’s appetite was growing for longevity risk.

The report also adds that reinsurers buying up longevity risk are essentially relying on a business model of “If you build it, they will come” in the hopes of eventually moving the risk off balance sheet in order to grow.

“While the investor base is growing, it is anticipated that re/insurers will accumulate longevity risk on their balance sheets through providing indemnity solutions to pension funds as well as through individual annuities. As the market develops, they can increase their capacity via capital markets to offer more of the indemnity solutions needed by pension funds and individuals,” Swiss Re said in its September report,

So far, investors have not shown a particular interest on longevity instruments. The only successful bond to be placed to date was Swiss Re’s own Kortis Capital instrument in 2010. But that bond represents a freshman effort for the risk in the capital markets, with only $50 million in risk sold to investors compared to the $23 trillion in aggregated defined pension benefit liabilities currently weighing down the private market.

Eventually, even Swiss Re admits in its report that it will reach it risk limit on longevity.

“Reinsurers remain able to provide cost-effective longevity solutions as current client demand falls within reinsurers’ annual capacity targets,” the report states. “But the scale of exposure means that this cannot remain the case in the [long term].”

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