Buy-side Awards 2016
Prudential Financial's ability to move quickly in the wake of Brexit to secure a reinsurance deal with UK-based insurer Legal & General is the template for how more longevity reinsurance transactions might look in a post-Solvency II world.
The ICI Pension Fund signed a £750 million ($932.6 million) pension buy-in with L&G on July 6, eight days after the Brexit vote. Two weeks later Prudential and L&G reached an agreement to cover the longevity risk of pensioners covered under ICI's buy-in.
The UK buy-in and buy-out market has changed in the wake of Solvency II implementation. Insurers writing that business are now looking to have longevity reinsurance and a matching portfolio of assets in place quickly after deals close. This allows them to apply the Solvency II matching adjustment to the new liabilities and ameliorates the effect on their risk margin calculation under the directive ahead of the next quarter-end.
"We realised early in the year that we needed to accommodate this new dynamic where Solvency II was creating an acute timing need for reinsurance to be known and in place at the time large pension deals are concluded," says Amy Kessler (pictured), senior vice president and head of longevity risk transfer at Prudential, based in Newark, New Jersey.
What sets the post-Brexit deal with L&G apart was the speed at which Prudential Financial was able to complete the transaction. The evaluation and feedback process for a deal of this size typically takes six to eight weeks depending on a number of variables, including the quality of the data provided about the liabilities.
"Our ability to respond to L&G's request following the Brexit vote required a significant compression of our process and that was the challenge we were able to respond to," says William McCloskey, vice-president of longevity risk transfer.
To accommodate ICI's timing needs, Prudential reorientated its team and dedicated an entire quarter of its staff to pricing the eight successive tranches of the ICI block.
"We dedicated one segment of our pricing team to do nothing but ICI because we were aware they would come in small tranches, and each one needed a quick binding price, within a few days to a few weeks, so we could move quickly with execution," Kessler says. "We've never dedicated a segment of the reinsurance team to pricing the ongoing pension risk transfer needs of a single scheme before."
Another change for Prudential was its willingness to start evaluating a transaction prior to the mandate of the insurer being granted, as typically the firm is selective about situations where the block is still up for grabs in the insurance community. However, the firm saw the need to respond to the challenges of Solvency II by changing its practice to provide feedback on a real-time basis.
The firm plans to continue to support the UK pension and insurer community in buy-in and buy-out transactions with rapid pricing and certain execution wherever possible.
The transaction was completed just after the Brexit vote when widening credit spreads created a brief window to execute the buy-in at more favourable levels for both L&G and ICI.
"In a risk-off environment, people in the markets were directionally fearful and all three of us realised that what professional investors and insurance companies should be doing when other people are losing their heads is taking a calm view and executing in that volatility," says Kerrigan Procter, managing director of L&G retirement. "It was quite an incredible pace for a $1 billion (£750 million) deal."
"The reason we were able to do it is because we work closely in partnership with insurers and consultants that work with the pension schemes, so we know what the deals and objectives will be and we try to be ready and as nimble as possible," Kessler says.