Prudential Finalizes Longevity Reinsurance Transaction With Deutsche Bank

Prudential has broadened its international reinsurance business, completing a UK-focused longevity reinsurance transaction with Deutsche Bank.

(December 7, 2011) — Prudential has completed its third longevity reinsurance deal and its biggest deal to date — a longevity transaction with Deutsche Bank — adding to the divide between the de-risking markets of the United States and the United Kingdom. 

Prudential Retirement, a business unit of Prudential Financial, has announced the successful completion of a key longevity reinsurance transaction with the Frankfurt-based lender, focusing on reinsuring scheme risk derived from the UK market. Under the terms of the transaction, Prudential Retirement will be one of several reinsurers of longevity risk to Deutsche Bank and its client, the Rolls-Royce Pension Fund. Prudential’s transaction covers pension liability values of approximately £500 million GBP, over $784 million US dollars, according to the firm. 

The buy-in/buy-out market is still substantially more developed in the UK compared to its US counterpart, magnified by regulatory and accounting reform. In terms of deals, de-risking volume is roughly five times greater in the UK compared to the US. In terms of longevity-only transactions, there have been 10 such deals completed in the UK, and none in the US, according to Amy Kessler, senior vice president and head of Prudential’s Longevity Reinsurance business. The number of such pension risk transfer deals in the UK market has been growing in recent years as pensions seek to transfer their risk to banks and insurers. Pension consultancy Hymans Robertson showed in a May study that with $7.2 billion (£4.5 billion) of risk transfer deals completed last year, the second quarter of 2011 looks to be a record quarter for the number of buyin and buyout deals completed in the UK. James Mullins at Hymans stated in a release that by the end of 2012, one in four FTSE 100 companies would have completed either a buyout or a buy-in.

“In the United States, we see a tremendous amount of awareness on the need to de-risk,” Kessler told aiCIO. “But there’s an affordability gap compared to the UK where pension plans are closer to fully funded. Nevertheless, we expect to see transaction volume in the US growing,” she said, noting that falling interest rates, market volatility, increasing life expectancy, and accounting and regulatory changes are prompting plan sponsors, around the world to explore available options to manage their exposure to risk and protect their balance sheets. 

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“We’ve demonstrated the depth of our capabilities to bring de-risking strategies to the US,” Kessler told aiCIO, referring to the firm’s first US buy-in in May, when Prudential Retirement completed a $75 million pension risk transfer. North Carolina-based Hickory Springs Manufacturing Company selected Prudential’s Portfolio Protected Buy-in to complete the pension risk transfer transaction.

The UK has been well ahead of America in terms of these types of deals, Phil Waldeck, Prudential’s SVP for Pension Risk Management Solutions unit, told aiCIO in July, referencing the Hickory Springs’ deal. “They had large benefit figures…and more teeth in their funding requirements—so it’s not surprising that they’d be earlier to go down the de-risking path.” This is a common story. Liability-driven investing (LDI)—often seen as a precursor to pension buyouts and buy-ins—was prevalent in Europe when only a handful of American plans had adopted it. Fiduciary management—or, as Americans usually call it, investment outsourcing—follows the same storyline. Pension buy-ins then, can be viewed as another European import. “In 2012, the Pension Protection Act will force companies to write big checks for their pensions,” said Dylan Tyson, SVP at Prudential Retirement. “As they do, companies will ask themselves, for example, ‘am I a pension fund, or am I a car manufacturer?’ It’s not a question of if these types of deals will accelerate, but when—the regulatory pressure is just too great.”

Read an aiCIO Magazine article on pension buy-ins here.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Norway Oil Fund Blacklists Funds Based on Ethics

Norway's Ministry of Finance has excluded Pennsylvania-based company FMC Corporation and the Canadian-based Potash Corporation of Saskatchewan (Potash) from the Government Pension Fund Global (GPFG) investment universe.  

(December 6, 2011) —  Norway’s state pension fund, one of the world’s biggest sovereign wealth funds, has blacklisted investments in Pennsylvania-based chemicals firm FMC Corporation and Canadian fertilizer maker Potash.

A release by the fund stated: “Potash and FMC purchase phosphate from the Moroccan company Office Cherifien des Phosphates (OCP). OCP extracts phosphate in Western Sahara, a territory which is not self-governed and which has no recognised administrator. In 2002, the UN’s legal adviser issued a general legal opinion on the legality of mineral resources extraction in territories which are not self-governed, which also included a specific assessment of this issue with regard to the situation in Western Sahara. The opinion stated that mineral resources extraction in territories which are not self-governed is only acceptable if it benefits the local population of the territory. The Council on Ethics takes the view that the interests of the local population are not served by OCP’s operations, and that it is this unacceptable situation which constitutes the core of the breach of ethical standards in the present case.”

In regards to divestment, the release added: “In its letter of 30 September 2011, the Ministry of Finance instructed Norges Bank to sell its shares in the companies. The share sales have now been completed. At the end of 2010, the GPFG held shares valued at around NOK 300 million in FMC Corporation and around NOK 1 570 million in Potash.”

Last August, Norway’s GPFG excluded two Israeli firms involved in developing settlements, as well as a Malaysian forestry firm, on ethical grounds. Finance Minister Sigbjorn Johnsen said in a news release that the fund sold its shares in Israeli companies Africa Israel Investments and subsidiary Danya Cebus, and the Malaysian company Samling Global. As of December 31, 2010, the fund, which at the time held more than 1% of all global stocks, owned stocks worth 7.2 million kroner in Africa Israel Investments and 8.1 million kroner in Samling Global. In a statement, the ministry said that the oil fund has already sold all its holdings in these companies, as the construction of Israeli settlements in occupied areas “is a violation of the Geneva Convention relative to the protection of civilian persons in time of war.” The divestment was recommended by the ministry’s Council on Ethics, which affirmed that Israeli companies were involved in building settlements in occupied Palestinian territory and that Samling Global, a wood and palm oil company, engaged in illegal logging and other offenses.

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Ethical guidelines for the fund are set by the government. The oil fund refuses to invest in companies that produce nuclear weapons or cluster munitions, damage the environment or abuse workers’ rights. 

Read an aiCIO Magazine article on the effects of keeping potash prices artificially high. 



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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