Presentation 2 - ReFocus Conference 2016

Annuity Longevity Market
Outside the U.S.
Duncan Briggs
Managing Director
Willis Towers Watson
March 9, 2016
Longevity protection is a part of a spectrum of de-risking solutions
Liability protection
Balance sheet
protection
Terms of coverage
Indemnity insurance/
Longevity swap
Buy-out or
complete hedging
strategy
Synthetic portfolio hedge
q-forwards/s-forwards
Buy-in or LDI
Aggressive
investment strategy
Interest rate, equity &
inflation hedges
Asset protection
Source: AEGON
CANADIAN LONGEVITY
Update
Brent Simmons
Senior Managing Director
Defined Benefit Solutions
Sun Life Financial
Risk transfer market (in C$ millions)
Demand for CANADIAN RISK TRANSFER is growing
7,558
8,000
7,000
6,000
5,000
4,000
2,218 2,460
3,000
2,000
1,182 1,012 1,314
748 1,362 1,054
1,000
0
Source: LIMRA
2007
2008
2009
2010
Annuities
2011
2012
Longevity insurance
2013
2014
2015
CONCENTRATION RISK is increasing
Canadian risk transfer market – estimated number of single day transactions over $100 million
10
5
8
0
2010
Source: Sun Life Financial estimates
1
1
2011
2012
5
5
2013
2014
2015
Pension plans have been stung by LONGEVITY RISK
Expected longevity (Canadian male – age 65)
20% to 25%
increase in
liabilities
15.1
yrs
16.7
yrs
17.3
yrs
GAM71
GAM83
UP94…
Source: Sun Life estimates
19.8
yrs
UP94GEN…
21.4
yrs
CPMPriv…
?
New joint
task force
table
2016
CANADIAN thinking on longevity is CATCHING UP
Specialized
research
teams
Continuous
mortality
investigation
(CMI)
Longevity
modelling
software
Consultant
longevity
offerings
Predictive
modelling
CANADIAN thinking on longevity is CATCHING UP
Specialized
research
teams
Continuous
mortality
investigation
(CMI)
Longevity
modelling
software
Consultant
longevity
offerings
Predictive
modelling
CANADIAN thinking on longevity is CATCHING UP
Specialized
research
teams
Source: RMS LifeRisks
Continuous
mortality
investigation
(CMI)
Longevity
modelling
software
Consultant
longevity
offerings
Predictive
modelling
CANADIAN thinking on longevity is CATCHING UP
Specialized
research
teams
Continuous
mortality
investigation
(CMI)
Longevity
modelling
software
Consultant
longevity
offerings
Predictive
modelling
CANADIAN thinking on longevity is CATCHING UP
Bob
Rob
High
Low
Married
Single
Industry
Financial services
Mining
Job type
Management
Hourly, unionized
Pension amount
$50,000
$15,000
Life expectancy
+ 5 years
- 2 years
Socioeconomic status
Marital status
Specialized
research
teams
Image source: Club Vita
Continuous
mortality
investigation
(CMI)
Longevity
modelling
software
Consultant
longevity
offerings
Predictive
modelling
WHAT’S NEXT in Canada?
New joint task force
longevity table
Increased demand
through enabling
regulations
More sophisticated
underwriting
DUTCH LONGEVITY:
Motivations, Transactions,
and Observations
Jeffrey McGlaun
Treasurer for Aegon Americas
Motivation for Longevity Risk Transfer
Aegon Large-scale Longevity Hedges
A business model is emerging
REI NSURER
 Continuing support for clients
 Risk management is key to
Aegon’s business model
 Increasing demand for de-risking
solutions in pensions market
 Customers and stakeholders favor
proactive risk management
Pension Funds
Consumers
Giving holders of longevity risk more choice in the future
Most transactions
But more recently, more insurers hedge –
through reinsurers or capital markets or both
Additional benefits
 Show longevity trend risk
effectively hedgeable for larger
book
 Hedge risk of further acceleration
in mortality improvement
 Market price
€12 Billion Dutch longevity hedge: Hendrikje

Hendrikje van Andel-Schipper (June 29th 1890 –
August 30th 2005) lived to be 115 years old and
is still the oldest Dutch person ever

Reflects the growing number of centenarians in
our society

At the time of her death she was classified as
the oldest living person in the world (turned out
to be incorrect – that was later corrected to be
Maria Esther de Capovilla from Ecuador, who
lived to be almost 117)
€12 Billion Dutch longevity hedge: Deal Structure
100%
0.5%
Best Estimate
99.5%
Percentile
Deal Structure
 Execution in 2012
 Arranged by Deutsche Bank
 Longevity Swap with Investors
 Covered €12 billion in pension
longevity
 20 year maturity
 Tail Risk transferred
Protection
50%
ERC* without hedge
ERC* with hedge
0%
Indicative for illustration purposes only
PV of liabilities
*
Economic Required Capital
Source: Crom, S.: “Opening up new frontiers”, Institutional Investor, Fall 2012
Key Feature: Cumulative Cash Index (“CCI”)
 Sum of benefit payments made on a synthetic portfolio.
 Synthetic portfolio is tracked relative to an agreed baseline.
€12 Billion Dutch longevity hedge: Balancing Act
Issuer Objectives
 Risk transfer



Minimizing inherited deal risks
Economically Efficient
Capital Credit
Investor Objectives
 Expected compensation for risk




Defined maximum loss for investor
Simplicity and transparency
Predefined process reduce moral hazard
Collateralized to minimize credit risk to both parties
€ 12 Billion Dutch longevity hedge
Aegon clinches record longevity protection deal
Winner
Reuters - UK Focus – 3 hours ago
LONDON, Feb 17 (Reuters) - Dutch life insurer Aegon (LSE: AGN.L - news) has struck a 12 billion
euro ($15.65 billion) deal with Deutsche Bank (Xetra: 514000 - news) to protect itself against the
financial impact of customers living longer than expected, the biggest such transaction in Europe
(Chicago Options: ^REURUSD - news) .
Aegon's longevity breakthrough
Deutsche agrees record longevity swap deal
Mark Cobley, Source: efinancialnews
17 Feb 2012
“Life transaction of the year 2012”
“Innovation Award 2012”
International Financing Review
February 17, 2012
Deutsche Bank has agreed the biggest publicly announced longevity deal so far, a €12bn swap
contract with the Dutch insurer Aegon that will protect it against the chance that its
policyholders will live longer than it is expecting.
AEGON secures €12 billion capital market longevity solution
Gill Montia | February 19, 2012 | Insurance Daily
Longevity Swap
Deutsche Bank says it has completed a €12 billion longevity swap with AEGON in a transaction that is
the first of its kind because it is targeted directly to the capital markets.
Wynaendts said Aegon may do more transactions like today’s longevity swap, which will see
Deutsche Bank (DBK) protect 12 billion euros, or one-third of the reserves in the Dutch business.
“The transaction reduces required capital at an attractive cost,” Aegon said.
€1.4 Billion Dutch Longevity combined with US Mortality
Deal Structure – Lot’s of Combinations
 Execution in 2013





Arranged by Soc Gen
20 year maturity
Placed with combination of investors and reinsurers
Underlying risk is a combination of mortality and longevity
Payout is Terminal Present Value (“TPV”)
Key Feature: TPV

Indemnifies issuer for cash flows until maturity related to a synthetic
portfolio on experience adjusted population basis.

Reassesses risk over time and provides commutation at maturity to cover
longevity risk until underlying book of business matures.
€1.4 Billion Dutch longevity combined with US Mortality
€6 Billion Dutch Longevity Risk Transfer
Deal Structure
 Execution in 2015


Reinsurance partner
50 year maturity
Key Features:


Significant proportion of deferreds

Very long transaction and material risk transfer
Migrated market to very Solvency II friendly
construction
Observations

There continues to be significant appetite for longevity risk by capital
markets investors and reinsurers.

Structures continue to innovate that move more risks in higher
resolution to investors.


Multiple structures and types of investors can help to achieve goals.

Continues to be a balancing act to achieve goals of issuers and
investors, but this is achievable.
The market keeps maturing: longer transactions possible, increasing
risk transfer, acceptance of younger lives, increasing capital
efficiency.
U.K. LONGEVITY
Kerrigan Procter
Legal & General
U.K. Longevity Market Demand
Investor
Uncertainty
Unrewarded
Risk
Pension
Scheme
No Natural
Hedge
Risk
Mitigation
Individual
Exposure
Insurance
Company
Aggregate
Position
Capital
Strain
U.K. Longevity Market Supply
Who
UK Insurance Companies
Over 12 Established Global Reinsurance Companies
Other Reinsurers Joining the Market
Why UK
Good Data
Granular Analysis (Post Code)
Market Values Longevity Risk
Historic Market
Size
c£16bn in 2015 (source www.Artemis.bm)
First Pension Scheme Trade in 2009
Insurer to Reinsurer Trades Much Older
Market
Expectation
Supply > Demand in Near to Medium Term
Players Seeking Diversification
Execution
Vanilla Transactions in Under 1 Month
Longer for more Complex Arrangements
U.K. Longevity Market Structures
Pension Scheme
Established Insurer
Established Reinsurer
Retail Customer
Thinly Capitalised Vehicle
Special Purpose Vehicle
End
Customer
Reinsurance
Company
Insurance
Company
Buy-In Annuity
Quota Share
Buy-Out Annuity
Longevity Reinsurance
Individual Annuity
Excess of Loss
Longevity Insurance
Stop Loss
Index & Indemnity