Prudential Retirement, a unit of
Prudential Financial Inc.
) has agreed to provide longevity risk reinsurance to Rothesay Life
Limited and its affiliates for the fourth time, after having
entered into an agreement with the latter in 2011.
Prudential Retirement will issue longevity reinsurance risk to
Rothesay Assurance Limited and take care of pension liabilities of
$1.7 billion for 20,000 pensioners and deferred members in the U.K.
In 2011, when the first contract was signed with Rothesay Life
Prudential Retirement, covered pension liability was worth
approximately $665 million.
Prudential started providing coverage on longevity risk in 2011.
Longevity risk is faced by pension or annuity providers. It is an
indication that customers may live longer than expected. In such a
scenario, providers would be exposed to higher-than-expected payout
Longevity worries continue to bother pension funds and insurers as
medical advancements and healthier lifestyles have led to an
increase in the average lifespan. This trend has made insurance
risk transfer crucial; as longevity de-risking would release the
capital locked up in such businesses, thus restoring capital
flexibility for businesses, especially in the current tight
Consequently, providers are keen on finding new ways of managing
their liabilities or transferring risk. Of late, growing demand for
longevity risk transfer has led to the emergence of other
innovative reinsurance agreements like Longevity Swap transactions
and Cross-Border risk transfer.
Other factors such as a declining interest rate, greater accounting
and regulatory changes and larger-than-expected funding
contributions have also increased the risk appetite of pension plan
sponsors. There has been a worldwide increase in pension de-risking
demand with U.K. emerging as the leading market.
Moreover, Solvency II is also creating pressure on European
insurers to maintain greater capital levels. Prudential foresees a
growing opportunity in this area and the U.K. market alone is
expected to be worth $1.9 trillion.
At the other end of the spectrum, Prudential, which runs a
significant mortality risk due to its niche presence in the life
insurance market, is planning to counter the losses or gains from
this risk with gains and losses from longevity risk.
If longevity systemically improves, there would be fewer mortality
claims. This would eventually improve profitability and help offset
losses in the longevity business. Conversely, if the mortality
portfolio shows an increase in the number of deaths, there should
be an offsetting profit from longevity risk.
Another payer, Reinsurance Group of America Inc. (
), is also actively participating in risk transfer, with its focus
on the growing pension risk transfer market. Reinsurance Group is
currently managing pension obligations of Royal London Mutual
Insurance Society Ltd.
Prudential carries a Zacks Rank #3 (Hold). Other stocks worth
considering include Cigna Corp. (
) and FBL Financial Group Inc. (
). Both these stocks carry a Zacks Rank #2 (Buy).
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