Fasano Associates 7 th Annual Conference. Longevity Risk Protection. Cormac Treanor Vice President Wilton Re. October 18, 2010

Transcription

1 Fasano Associates 7 th Annual Conference Longevity Risk Protection October 18, 2010 Cormac Treanor Vice President Wilton Re

2 Focus of Presentation Extension Risk Protection in the Senior Life Settlements ( SLS ) Market the absence of a developed market and why 2

3 Content of Presentation 1. The premium return from investing in SLS 2. Extension Risk Protection considered 3. Longevity Risk transfer 4. Overview of Wilton Re 3

4 Section I The premium return from investing in SLS 4

5 Life Settlements Risks Considered Key Life Settlement ( SLS ) Investment risks Carrier Credit Legal Longevity Pricing Administration (Servicing, tracking) CoI changes Rescission Market /liquidity Tax Conclusion : Investors take multiple risks when investing in SLS 5

6 Life Settlements Suggested Composition of Yield * Suggested composition of SLS yield* bps Generic Swaps (10 yr) 260 Carrier Credit 300 Non-generic Illiquidity premium 240 CoI Risk 100 Legal 940 bps 100 Operational 100 Longevity 400 Total 1,500 * assumed market SLS yield of 15% ss 6

7 Observation 1 - Premium Return SLS Investors require a spread of 940 bps to take on all additional idiosyncratic SLS risks 7

8 Section II Extension Risk Protection considered 8

9 What is Extension Risk Protection? Is it: a liquidity put option (transfer of all risks) or something less? If something less, does it include: insurance against a Carrier credit event? insurance against a change in policy cost of insurance? protection against rescission, or other related administrative risks? Or is it just insurance against reference individuals living longer than expected? 9

10 What is Extension Risk Protection? (contd) Conclusion Extension Risk Protection means different things to different people! From an SLS Investor perspective, transferring all SLS risks is a zero sum game (or worse!) as far as Investor returns go Investors should consider bifurcating SLS risks and seeking to transfer only those risks that the Investor is uncomfortable with, and for which there is a market to evaluate and price more efficiently A market for partial SLS risk transfer seems more plausible, scaleable and sustainable 10

11 Bifurcation and transfer of Underlying SLS Risks? SLS Yield Composition bps Risk Tfr Comment Swaps (10 yr) 260 Not applicable Credit 300 Yes Requires OTC for a perfect hedge. Illiquidity will be costly, but offset by "super senior" life co exposure Illiquidity premium 240 Yes If structured as pure contingent credit risk CoI risk 100 Unlikely Not helped by recent headlines Legal 100 Unlikely Not helped by extensive ongoing litigation Operational 100 Difficult Perhaps the P&C markets with a first loss and stop loss limit Longevity 400 Yes Pure longevity should be capable of being placed in the life insurance/reinsurance markets Total Investor return

12 Observation 2 What Investors Are Seeking 80% of the reverse enquiry we have seen to date has been a requested transfer of all SLS risks, while seeking to lock in a positive investor return spread! 12

13 Why is there not a developed Extension Risk Protection Market Market confusion: total risk transfer vs. bifurcation of risks and risk transfer accordingly Investor expectation: benchmarked against historic Goshawk cover both in terms of what risks can be transferred, and the cost of risk transfer Execution risk: appears to be contingent on outside forces i.e. a requirement of would be investors/financiers rather than existing investors Insurer/Reinsurer reluctance to get involved in settlement business Lack of discoverability of impaired underwriting A/E beyond duration 7-8 with an average asset duration of

14 Section III Longevity Risk Transfer 14

15 Observation 3 What is achievable? There can and should be a market for transferring the pure longevity risk component embedded in SLS portfolios...the question is, do SLS Investors want such a product? 15

16 Sample Structure of Longevity Insurance Gap Insurance Protect against the adverse scenario of cumulative portfolio mortality actual experience being less than cumulative expected over a period of time Investor protected against the downside, but retains upside from better than expected mortality experience Investor pays Insurer/Reinsurer a one time day 1 premium for the cover Insurer/Reinsurer settles with a cash payment of the gap amount with no physical delivery of policies Investor locks in guaranteed minimum cashflows over the insurance period 16

17 Sample Structure of Longevity Insurance (contd) 80,000,000 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 Protection Payment to Investor E(DB) Actual DB 20,000,000 10,000,

18 Longevity Insurance Structural Considerations: Portfolio based cover The expected curve is Insurer s expected curve. Insurance cover may be written at the expected curve (at the money coverage) or at say 10%, 20% or 30% away from the expected curve (out of the money coverage) The further out of the money the cover is struck, the cheaper the cover. Insurance may be written for the entire period to maturity of all lives in the portfolio, or for a period certain. Payout is the difference between the cumulative expected cashflows to cumulative actual cashflows. Payout is only in respect of mortality experience. No other risks are covered. Policies remain with the insured, and are never transferred to the Insurer. 18

19 Observation 4 Who is Writing SLS Longevity Insurance? a number of credible insurers/reinsurers considering proposals, but unclear whether there is real appetite for pure longevity risk transfer from SLS Investors 19

20 Practical Issues Encountered Expectation Gaps Of risks to be covered, of timing, of price Concept of free look Maturity Mismatch Gap longevity coverage does not fix asset liability duration mismatches Principal Protection ( PP ) Solving longevity risks in a LS portfolio does not produce PP. Many other risks still present Different views on LEs, mortality improvements, tables, etc Investors price off a set of assumptions, Insurer/reinsurer may have materially different assumptions Volatility, and lumpy portfolios Perceived volatility in potential outcomes is ultimately what drives pricing. Execution Even when all the above issues are surmounted, execution risk remains considerable! 20

21 .some final observations a developed longevity risk transfer market would go a long way to increasing the attractiveness of SLS to institutional investors a developed longevity risk transfer market may be the catalyst to attracting reasonable leverage to SLS longevity risk transfer does not produce principal protection 21

22 Section IV Overview of Wilton Re 22

23 Wilton Re Overview US focused Life Reinsurer Founded in 2004 by the former CEO of Swiss Re Life & Health North America with private equity backing. Over $1.3bn in GAAP equity and $6bn in general account assets Insure or reinsure $100bn in face amount, and over 2.6m individual lives No financial leverage on balance sheet Rated A- (positive outlook) by AM Best 23

24 Q & A 24

25 This material is informational only, and is not intended as an offer or a solicitation to buy or sell any securities or enter into any insurance, reinsurance or other risk transaction. By accepting this material, each recipient agrees that it will not reproduce, discuss with or distribute to others, these materials in whole or in part, at any time, without Wilton Re s prior written consent. Wilton Re is not, by making this material available, providing investment, legal, tax, financial, accounting or other advice to you or any other party, and no information or material contained herein is to be relied upon for the purpose of making or communicating investment or other decisions nor construed as either projections or predictions. Wilton Re is not acting as an advisor or fiduciary in any respect in connection with providing this information. Unless otherwise specifically stated, all statements contained herein (including any views, opinions or forecasts) are solely those of the individual(s) making the statement, as of the date indicated only, and are subject to change without notice. Changes to assumptions made in the preparation of such materials may have a material effect on returns. Wilton Re undertakes as a duty to update these materials or to notify you when or whether the analysis has changed. While the information contained in these materials is believed to be reliable, no representation or warranty, whether express or implied, is made and no liability or responsibility is accepted by Wilton Re or its affiliates as to the accuracy or completeness thereof. Wilton Re shall have no liability in either law, equity, contract, tort, negligence, or otherwise arising out of or in connection with the use of these materials including, without limitation, any errors or omissions contained herein. We shall not be liable for any direct or indirect economic losses (including without limitation loss of revenues, data, profits, contracts, use, opportunity, business or anticipated savings); loss of goodwill or reputation; or special, incidental, consequential loss or damage, suffered or incurred arising out of or in connection with your use of these materials. 25

26 Contact details Cormac Treanor Wilton Re Longevity Solutions tel : ctreanor@wiltonre.com 26