Goldman Sachs-owned Rothesay Life, started in 2007, was the biggest pension liability insurer in the U.K. last year after insuring 1.3 billion pounds of liabilities from the British Airways Plc pension plan. The largest swaps deal was completed between Deutsche Bank's Abbey Life unit and Bayerische Motoren Werke AG's U.K. pension plan.
Q-Forward Swaps
Rothesay Life CEO Addy Loudiadis was the architect of a Goldman Sachs deal in 2001 that allowed Greece to mask its indebtedness, according to London-based Risk magazine. Sophie Bullock, a spokeswoman for the firm in London, declined to comment on Loudiadis's involvement in Greece and said she was unavailable to comment.
Goldman Sachs isn't part of the new industry group, the London-based Life & Longevity Markets Association, preferring to develop the market alone, according to Tom Pearce, managing director of Rothesay Life. Pearce said it won't be easy trading a security linked to life expectancy.
"Clearly, if there was a capital market solution that would be helpful for the market generally, but there are some challenges," he said. "The biggest challenge is selling these very long-term risks to shorter-dated investors."
Mortality Indexes
Unlike Deutsche Bank and Goldman Sachs, New York-based JPMorgan doesn't carry any of the risk of pensioners living longer than expected. Instead, it arranges swaps, called q- Forwards, which allow a pension fund to pay a fixed premium to a counterparty based on its members living to a specified age. If members live longer than expected, the counterparty reimburses the fund; if they die sooner, the counterparty profits.
Credit Suisse and JPMorgan have developed indexes that measure mortality rates and life expectancy for the U.S., Germany, the Netherlands, England and Wales. The indexes act as a basis for pricing individual swaps and bonds, according to Cass Business School's Blake, who helped develop them with JPMorgan in 2007. They will help buyers and sellers price derivatives more accurately and give them confidence to trade them, creating a liquid market, Blake said.
Swiss Re sold the world's first longevity bond in December, passing the risk from its own balance sheet to investors. The $50 million bond, named Kortis, was a "test case," said Alison McKie, head of life and health products at the firm.
The bond pays investors a fixed sum from reinsurers for taking the risk that people live longer than projected. If there is a large divergence in mortality improvements between British men aged 75 to 85 and U.S. males aged 55 to 65, investors risk losing some or all of their money, Swiss Re said in December. The bond is rated BB+ by Standard & Poor's.
BNP, Munich Re