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Large de-risking deals might shrink due to insurers' capacity – Fitch

GLOBAL - The space for very large pension risk transfer deals might be somewhat limited due to the small number of insurance or reinsurance companies that would qualify to manage transactions of large magnitude, Fitch Rating has claimed.

The statement made by the rating agency comes after a number of European companies signed de-risking deals in recent months, mainly for their UK pension schemes.

One of the more recent deals saw Dutch paint and chemicals company AkzoNobel insuring £1.4bn (€1.7bn) of its UK pension plan’s longevity risk through Swiss Re.

Similar to deals in the UK, the US automotive business General Motors (GM) entered into a de-risking agreement earlier this month.  

Fitch said massive pension liabilities had been “constraining” large companies for years that had struggled to de-risk and remained a major concern for investors.

However, the ratings agency distinguished de-risking transactions in the form of reinsurance and group annuity deals as taken by GM.

Under the agreement signed by GM, the US company will offer lump-sum cash payments to eligible salaried retirees who receive monthly pension checks.

GM will then transfer remaining liabilities to Prudential Insurance through its purchase of a group annuity contract from Prudential.

The US automotive company aims to benefit from the transaction in several ways, including reducing risk from volatility in the projected benefit obligation, reducing risk of volatility in plan asset values, and reducing longevity risk, according to Fitch.

It added: “This strategy allows companies to shed some risk associated with mortality rates, and Prudential views the additional longevity risk as a natural hedge to traditional mortality risk.”

However, due to the size and high cost associated with the group annuity model, Fitch believes the number of companies qualified to participate is limited.

“To be sure, GM will be required to pony-up an estimated $3.5bn (€2.8bn) to $4.5bn in cash upfront in order to transfer the plan,” it said.

“That sum includes both the premium and the cash needed to top off the assets before they are transferred to Prudential.

“In addition, there are a limited number of insurance or reinsurance companies that would qualify to manage transactions of this magnitude. Still, we do expect to see some growth in this space.”

According to Fitch, interest rates remain key. As rates rise, the present value of liabilities will start to fall, and, based on the law of averages, long-term interest rates will eventually rise.

“That said, companies who choose to transfer liabilities now are essentially giving up potential benefits provided by future increases in discount rates, which we consider might be meaningful, given a healthy economic environment,” it said.

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