A short introduction to longevity

swaps and Q&A session

Martin Lockwood

18 March 2016

Agenda• The “Problem” – Increasing Longevity

• What is a Longevity Swap?

• UK Longevity De-risking Solutions

• UK Longevity Swap Market

• Sources of longevity business

• Recent longevity market activity

• Developments in the Longevity Market

• Executing deals

• How can I make transacting more likely?

• Questions and Discussion

18 March 2016

The “Problem” – Increasing Longevity

18 March 2016 3

What is a Longevity Swap?

- Exchange of Cashflows

18 March 2016 4

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

Cash

flo

w

Year since treaty inception

Best estimate claims Fixed leg (premiums) Floating leg (claims)

In this example,

we have over-

estimated the

initial level of

mortality, resulting

in more early

claims than

expected…

…but later on we see

we have over-

estimated future

reductions in mortality,

leading to fewer claims.

Margin

UK Longevity De-risking Solutions

18 March 2016 5

De-risking

SolutionsMatching

principle

Changing

Benefits

Transfer

Longevity Risk

Transfer Asset

Risk

Transfer

Liability for

Pensioners

Liability driven

investments

Liability management

Insured Solutions

Longevity

transactions

Buy-in

Buy-out

The UK longevity market

18 March 2016 6

Insurance

Intermediaries

Employee

Benefit

ConsultantsReinsurers

Other

Participants

Pension

Schemes

Sponsors

Lawyers

Regulators

Custodians

Sources of longevity business

18 March 2016 7

Developments in the Longevity Market

18 March 2016 8

Enhanced Annuities

Index-basedswaps

Deferred PensionScheme

Members

Tail Risk Small schemes

Recent longevity market activity

18 March 2016 9

* Includes £16bn - BT dealSource: Munich Re: UKLB internal database as at Jan-2016

2009 2010 2011 2012 2013 2014 2015£0

£5

£10

£15

£20

£25

£30

£35

in £

bn

Longevity Market

With a specialist insurer With an annuity provider With a pension scheme International

*

Executing deals

- So what’s involved

18 March 2016 10

Agreeing a Model

• Design & build model

• Test model (all involved)

• Agree & lock down model

• Apply model

Approvals

• Documenting the deal

• Brief stakeholders on the deal

• Secure stakeholder approval

Operational

• Develop & agree payment

cycle processes

• Develop & agree data

processes

• Arrive at a operational

business model

Pricing

• Quotes

• Agree a price

• Reconcile prices

• Arrive at execution price

Legal

• Term sheet

• Legal structure

• Draft contracts

• Contract negotiations

• Executed contract

Risk / due diligence

• Document due diligence

• Scheme (benefits)

• Due diligence

• Site visit / audit

Executing a deal

– A real timeline that did not go to plan

18 March 2016 11

So how can I make transacting more

likely?

18 March 2016 12

Be prepared before you tender for quotes

– have your data “fit for purpose”

Keep it simpleBe realistic –

transactions are 95% about “price”

Avoid spending time and money on

“last fad” solutions

Think carefully about the role of the deal

advisors

Be prepared to negotiate and compromise

Bio

• Martin Lockwood - Head of Longevity Munich Re, including both the UK and Global Longevity

markets

• Joined Munich Re in 2011 as specialist in annuities, defined benefits and longevity swaps and

has since overseen the execution of a number of longevity transactions

• Before Munich Re, Martin had already accrued a wealth of experience at Prudential, where he

managed the £1bn transfers of the Scottish Life, Phoenix and Royal London back book deals –

which included overseeing the Part VII transfers. He also supervised the accompanying

arrangements and signing of a vesting deal with a number of insurers and banks. He also spent

some time overseeing transactions in the defined benefit arena

18 March 2016

Summary

The “Problem” – Increasing Longevity

What is a Longevity Swap?

UK Longevity De-risking Solutions

UK Longevity Swap Market

Sources of longevity business

Recent longevity market activity

Developments in the Longevity Market

Executing deals

How can I make transacting more likely?

Questions and Discussion

18 March 2016 14