A.M. Best Briefing: U.S. Pension Risk Transfer Market Heated Up in 2014

OLDWICK, N.J.--()--A.M. Best has released a Best’s Briefing that explores the growing interest by U.S. plan sponsors in executing pension risk transfer (PRT) deals. The uptick in PRT activity is driven by persistently low interest rates; plan sponsors’ desire to focus on core competencies and eliminate the risks associated with managing defined benefit pension plans; strong equity markets; updated mortality tables that will significantly increase pension liabilities; and rising costs associated with managing plans.

The briefing, titled, “U.S. Pension Risk Transfer Market Heated Up in 2014,” is a follow-up to a February 2014 Best’s Special Report on the same subject.

The briefing states that Prudential Financial Inc. (Prudential), which currently manages the pension benefits of nearly 2 million participants at more than 5,700 companies, continued its dominance of the U.S. PRT market in 2014, despite increased competition from insurers. Competition for what A.M. Best characterizes as mega-deals (greater than USD 1 billion) is increasing, as evidenced by Prudential accepting USD 3.1 billion of Motorola’s liabilities without receiving a premium, which typically amounts to 5% to 15% of the liabilities transferred.

In addition to traditional life insurance carriers, reinsurers are interested in U.S. and U.K. longevity risk as capacity and competition increase in their traditional markets. Longevity risk also tends to be a natural hedge against the mortality and catastrophe risk reinsurers typically underwrite. In some cases, reinsurers are joining to win business, as when Aviva Plc reached a deal with a syndicate composed of Swiss Re, Munich Re and SCOR to reinsure GBP 5 billion of liabilities. A.M. Best also notes that additional competitive pressures may come from asset managers and capital market participants such as investment banks, which currently advise many companies on PRT deals. Longevity risk appeals to investors because it is uncorrelated with most classes of invested assets.

A.M. Best expects demand for PRT deals in the United States to continue to increase in 2015 as maintaining corporate defined benefit pension plans becomes more of a burden for sponsors. A.M. Best will continue to monitor activity and available capacity in the PRT market, while looking unfavorably at companies with significant shifts in product mix overweighted to longevity risk. Insurers looking to expand in this market must demonstrate strong enterprise risk management capabilities, solid risk-adjusted capitalization and a history of superior asset-liability management. Therefore, A.M. Best believes only a handful of life insurers have the capacity and scale to pursue mega deals in excess of USD 1 billion; however, there are numerous smaller deals coming to market that many insurers are capable of managing effectively.

To access the full, complimentary copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=232119.

To access the February 2014 Best’s Special Report, titled “Pension Risk Transfer Opportunities Emerging for U.S. Life Insurers,” go to http://www3.ambest.com/bestweek/purchase.asp?record_code=221034.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2014 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

Contacts

A.M. Best
Colleene Parodi, 908-439-2200, ext. 5095
Senior Financial Analyst
colleene.parodi@ambest.com
or
Nick Halen, 908-439-2200, ext. 5126
Industry Research Analyst
nick.halen@ambest.com
or
Christopher Sharkey, 908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com

Contacts

A.M. Best
Colleene Parodi, 908-439-2200, ext. 5095
Senior Financial Analyst
colleene.parodi@ambest.com
or
Nick Halen, 908-439-2200, ext. 5126
Industry Research Analyst
nick.halen@ambest.com
or
Christopher Sharkey, 908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com