December 23, 2010 / 5:15 PM / 9 years ago

Life ILS market re-emerges with issue of 2 cat bonds

(Fixes date)

By Sarah Mortimer

LONDON, Dec 23 (Reuters) - Goldman Sachs (GS.N) has issued the first catastrophe bond to securitise health insurance for sponsor Aetna Life Insurance Co (ALIC), adding another boost to the Life Insurance-Linked Securities (ILS) sector.

The bond by Goldman Sachs and another by Swiss Re RUKN.VX, which transfers the risk of people living longer than expected to the capital markets, indicate the re-emergence of the Life ILS sector, investors and sponsors said.

Vitality Re will cover the claims payments of new catastrophe bond sponsor ALIC, part of health insurance provider Aetna Inc AET.N, and its Health Re business, said rating agency Standard & Poor’s (S&P) on Thursday.

Catastrophe bonds are typically issued by reinsurers seeking collateralized protection from investors, as opposed to traditional reinsurance market.

The Class A notes closed at an upsized $150 million from an initial size of $125 million and is rated BBB- by S&P.

Goldman Sachs, as repurchase counterparty, will enter into a master repurchase agreement with Vitality Re. GS then sells a pool of eligible securities to Vitality Re in return for cash, with an obligation to repurchase the eligible securities at maturity, said S&P.

On a quarterly basis, GS pays a coupon of 350 basis points over three-month Libor to Vitality Re and receives all of the income earned on the eligible securities.

The bond follows Swiss Re’s success at becoming the first reinsurer to produce a cat bond to limit its exposure to large divergences in life expectancy among different populations by launching the first longevity trend risk bond. [IDn:LDE6BM0BE]

The two innovative cat bond issuances follow a three year virtual hiatus of activity in the Life ILS sector after underlying assets associated with subprime mortgages impacted two life securitizations by Scottish Re in 2007 and spooked investors.

ILS life securitizations, such as XXX and Embedded Value (EV) securitizations are long duration indemnity-based transactions, used by life insurers looking for more financing and liquidity as well as capital and risk management.

Over $9.5 billion of XXX and $6.5 billion of EV securitisations were executed prior to the financial crisis, but many remain outstanding with above or below par marks based on their underlying risk, according to Swiss Re.

Now insurers are repackaging insurance risk into derivatives or bond arrangements in an attempt to rebuild the life market, say investors.

These transactions rely on index or parametric triggers rather than the indemnity based triggers of the longer duration life securitizations.

“The XXX and EV trade market is dead in the water - all the life risk is trying to come back in a different form and sponsors are attempting to tap into an alternative investor base,” said one UK-based dedicated life investment fund.

“Vitality Re and Kortis Capital are like trying to start the engine of a car after you haven’t used it for two years. The engine will eventually cough and splutter back into life,” he said.

Compared to similarly rated financial instruments, the spread that can be earned on an ILS life securitization is significantly higher, said Alison McKie, head global L&H risk transformation at Swiss Re.

“Over the last 12 months, spreads have tightened in the life market, which has encouraged more sponsors to use the capital markets. We have seen an inflow of funds interested in investing in life ILS,” she said.

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