LONDON, Nov 25 (Reuters) - The first catastrophe bond to securitise health insurance has been launched by Goldman Sachs (GS.N) for sponsor Aetna Life Insurance Co (ALIC), with a target size of $200 million, said rating agency Standard & Poor’s (S&P).
Cayman Islands-based Vitality Re will issue two tranches of notes to cover the claims payments of new catastrophe bond sponsor ALIC, part of health insurance provider Aetna Inc AET.N, and its Health Re business.
Catastrophe bonds are typically issued by reinsurers who buy collateralised protection against losses on peak risks from capital markets investors rather than purchasing cover in the traditional reinsurance market.
S&P said late on Thursday it had rated the $125 million Class A notes at BBB-, and the $75 million Class B notes at BB.
Both tranches of risk will be issued with a return of Libor plus a margin.
S&P said the diversification of capital will support ALIC’s portfolio of health insurance risk. “In ALIC’s opinion, Vitality Re would provide it with meaningful catastrophic risk protection for the covered business by shifting a significant portion of the catastrophe risk to the capital markets.”
The indemnity-based cover provides U.S health insurer ALIC with annual aggregate excess-of-loss reinsurance against medical benefit claims above a pre-set threshold based on the medical benefit ratio (MBR).
This is the first issuance S&P has rated that covers medical benefit claims, said the rating agency.
For each class of notes, Goldman Sachs, as repurchase counterparty, will enter into master repurchase agreements with Vitality Re, said S&P. Goldman Sachs then sells a pool of eligible securities to Vitality Re in return for cash, with an obligation to repurchase the eligible securities at maturity.
The pool of eligible securities will be over-collateralised and the market value will be marked to market on a daily basis by The Bank of New York-Mellon, the tri-party agent.
Most of the catastrophe bonds sold so far this year have securitised U.S. hurricane exposure, accounting for around $2.1 billion of a total $3.3 in issuance, or earthquake risk, and investors are keen to diversify into other perils.
The Vitality Re sale is expected to close in December. —To join the Thomson Reuters Insurance Linked Securities Community for more news and analysis, email firstname.lastname@example.org (Editing by Catherine Evans)