Catastrophe deal ABS draws heavy demand from investors

Wed Feb 6, 2013 4:42pm EST

Feb 6 (IFR) - Investors have piled into a private investment deal that repackages risks associated with the insurance on health claims, as they seek any angle that could give them an edge on returns.

At a time when low interest rates have sent investors rushing into riskier deals than previously, the offer from Aetna subsidiary Health Re has drawn wide interest, sources said.

Although the so-called catastrophe ABS (asset-backed security) is only on private offer and not for sale to the public, bankers said interest from investors was very strong.

The ABS offer - from Vitality Re, which collateralizes re-insurance provided by Health Re to Aetna Life Insurance - raised US$150 million at very low levels of coupon, or interest payment.

Aetna Life Insurance pays premiums to Health Re for the re-insurance protection it provides, and those premiums are then passed on to investors buying the ABS.

The sale is being led by Goldman Sachs, with BNP Paribas acting as joint structuring agent and co-manager.

The deal attracted interest from investors across Asia, Europe and the US. About one-thirds of the deal went to hedge funds, with the balance to money managers and pension funds.

The money raised from investors by the sale of the notes would be deposited in two collateral accounts held by Vitality, which would be drawn on only when medical benefit ratios (calculated as claims paid divided by premiums earned) exceeded 102% for the Class A notes or 96% for the Class Bs.

Catastrophe ABS or cat-bonds, a niche investment vehicle that only developed after Hurricane Andrew hit the United States in 1992, usually aim to re-sell insurance risks connected to natural disasters.

But the new deal, based on health insurance claims, has drawn exceptional interest at a time when traditional vehicles such as US Treasuries are offering investors historically low rates of return for their money.

"A number of traditional ABS investors were interested in this transaction, which clearly shows that the catastrophe finance market has evolved," said Michael Millette, head of structured finance at Goldman Sachs.

The current deal sold US$105 million of BBB+ rated Class A notes with a spread of 275 basis points (bp) over the yield provided by Treasury money market funds.

Because Treasury yields have recently been close to zero, that worked out to around 2.75%. The BB+ rated Class B tranche came in at 3.75%. Both notes come due in four years.

These coupon spreads were the lowest ever achieved by Vitality, which has issued three other similar trades since 2010.

Its most recent deal, in January 2012, saw Vitality raise US$150 million from two tranches that paid a yield of 4.2% and 6.2%, respectively.

Even at a much lower rate, however, the latest deal garnered widespread interest from investors willing to take on more risk simply to get a better potential rate of return on their cash.

The 3.75% on the Class B notes, coming due in 2017, compares to just a 0.84% return currently available on five-year US Treasuries, and around 2% on a recent ABS deal that collateralized subprime auto loans.

"The peril covered by Vitality ABS is considered relatively less riskier than traditional cat bonds that cover claims against natural disasters because there is some sort of predictability to the pattern of paid claims and potential losses," said Gary Martucci, an analyst at Standard & Poor's.

"The timing and magnitude of natural disasters like earthquakes and hurricanes are harder to predict," he said.

"In that broader context of taking up assessable risk, we've been told investors are being paid a higher return relative to other non nat-cat bonds, which probably explains the rush of demand for Vitality's latest issue."

For other related fixed-income quotations, stories and guides to Reuters pages, please double click on the symbol:

U.S. corporate bond price quotations...

U.S. credit default swap column........

U.S. credit default swap news..........

European corporate bond market report..

European corporate bond market report..

Credit default swap guide..............

Fixed income guide......

U.S. swap spreads report...............

U.S. Treasury market report............

U.S. Treasury outlook...

U.S. municipal bond market report......