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