Lucida PLC

Lucida and JPMorgan first to trade longevity derivative

Feb 15 2008

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Lucida plc, a new insurance company formed to take on longevity risk and corporate pension schemes, recently announced a deal with JPMorgan to hedge longevity risk through a derivative contract linked to the LifeMetrics Longevity Index. The contract, the first of its kind involving an Insurer, signals continued progress in the development of what many believe to be a significant new market.  

Jonathan Bloomer, Executive Chairman of Lucida, commented, “This innovative transaction demonstrates that Lucida is at the forefront of the emerging secondary market in longevity risk. By selectively entering into longevity swap contracts we can maximise the value we offer our clients. We look forward to being part of this market as it develops.”

Guy Coughlan, Managing Director and head of Pension ALM Advisory at JPMorgan, said, “LifeMetrics is an innovative toolkit that JPMorgan has brought to the UK, US and Dutch markets. We believe that contracts based on LifeMetrics offer effective hedges against longevity risk and we are very pleased to have worked with Lucida on this deal.”

Transaction specifics

The hedge consists of a mortality forward-rate contract which allows Lucida plc to hedge a portion of its exposure to longevity risk. At the maturity of the 10-year contract, JPMorgan will pay the client a fixed mortality rate and Lucida, in turn, will pay JPMorgan the LifeMetrics Index mortality rate prevailing at that time. If mortality rates fall faster than expected and finish below the fixed rate, Lucida will receive a net payout to compensate for the associated increase in the value of its liabilities.

Although the trade has a 10-year maturity it can provide an effective value hedge for the impact of longevity risk on all liability cash flows extending beyond 10 years.

The traditional approach to offloading longevity comes via reinsurance but according to Jan-Hendrik Erasmus, Commercial Actuary for Lucida, this would have simply offloaded all the longevity risk, whereas Lucida is seeking to arbitrage different market views on the likely future path of life expectancy, not to avoid the risk entirely.

“Lucida is in the business of taking on longevity risk so we did not want to hedge the entire exposure to this risk, which is what reinsurance would typically achieve. Where we see value in the hedge as compared to our internal best estimate we would look to lock in this value. We would typically look to execute only transactions which result in value being created on our books.”

About Lucida

Lucida plc is a new company created specifically to focus on annuity and longevity risk business, including the defined benefit pension buy-out market and the market for bulk annuities. Lucida recently completed a deal with Bank of Ireland Life, one of Ireland’s leading insurance companies, to reinsure over EURO 100 million of its existing immediate annuity business plus the majority of the future annuity business written by the Irish company, estimated to be worth a further EURO 40 million a year. 

Lucida was founded by Jonathan Bloomer, Christopher Wales and David Clinton. Information about the management team and the company’s business philosophy can be found on our website: www.lucidaplc.com.

Lucida is backed by Cerberus Capital Management L.P., one of the largest groups of funds in the world with more than US$25 billion of equity funds currently under management. Lucida plc is authorised and regulated by the Financial Services Authority (“FSA”) 

About LifeMetric 

LifeMetrics is the only international index designed to benchmark and trade longevity risk. Launched in March 2007, LifeMetrics provides a non-proprietary and open-source toolkit for transferring longevity risk via the capital markets. Separate indices are available for England & Wales, the US and the Netherlands, with other countries in development. LifeMetrics indices, data, documentation and software can be found at www.lifemetrics.com.

Note to Editors

The LifeMetrics Longevity Index for England and Wales, which is the underlying for the trade, is based on observed mortality rates for England and Wales as published by the Office for National Statistics (ONS). The transaction involves both parties taking a view as to what the observed mortality rates will be in the future and allows annuity companies and pension funds to hedge long-term trends in mortality.

So, for example, if a company’s internal view was that the mortality rates would decrease at a quicker rate than those implied by the index (i.e. people will live even longer in future than is predicted by the index prices today), they could lock into this rate today by trading in a derivative with the LifeMetrics index as the underlying reference.

This is referred to as synthetic mortality as a large amount of trades could be made with reference to the same underlying index without a requirement to have underwritten annuity or other contracts in respect of the individuals involved.

For further information, please contact:

Christopher J Wales, Managing Director, Lucida plc: +44 207 647 1608

Jan-Hendrik Erasmus, Commercial Actuary, Lucida plc: +44 207 647 1625