U.S. Markets closed

Prudential to Insure Longevity Risk for Rothesay Life (Revised)

Zacks Equity Research

Prudential Retirement, a unit of Prudential Financial Inc. (PRU) 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 $160 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 ratios.

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 economic scenario.

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. (RGA), 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. (CI) and FBL Financial Group Inc. (FFG). Both these stocks carry a Zacks Rank #2 (Buy).

(We are reissuing this article to correct a mistake. The original article, issued Tuesday, August 12, 2014, should no longer be relied upon.)

Read the Full Research Report on PRU
Read the Full Research Report on CI
Read the Full Research Report on RGA
Read the Full Research Report on FFG

Zacks Investment Research