Swiss Re Executes Longevity Transfer, More Expected

(January 7, 2011) – What was a dormant industry has once again sprung to life – and pension funds are the likely beneficiaries.

With an estimated $21 trillion in longevity exposure for the world’s pension funds, the ability to hedge against pensioners outlasting an actuary’s predictions is a welcome development. While this market for longevity swaps – which did just that – has been dormant as of late, a Swiss Re deal meant to hedge their own exposure to longevity bodes well for those looking to do the same.

According to a company release, Swiss Re, the giant European-based reinsurer, has issued a “longevity trend bond” that transfers $50 million in longevity risk to capital markets and would be triggered if “in the event there is a large divergence in the mortality improvements experienced between male lives aged 75-85 in England & Wales and male lives aged 55-65 in the US.” The notes yield 4.72% in interest per year and mature in 2017; in return, investors will lose a portion of or the entire bond principle if differences in mortality between the two defined groups diverge greatly.

The deal has been executed through an off-balance sheet vehicle, Kortis Capital.

According to The Wall Street Journal, such hedging opportunities have waned since the onset of the financial crisis, with $2.2 billion in “extreme-mortality securitizations” executed before 2008 and little to speak of after. The investors in the Swiss Re deal, as would be expected, are largely pension funds and other insurers, the Journal reports.