Health insurer Aetna’s Vitality Re VI Ltd. (Series 2015-1) ILS has achieved the target size of $200m of protection for the sponsor, while the notes have been priced with one tranche near the lowest end of guidance and the other below it.
When the deal launched in early January Aetna was seeking $200m of reinsurance cover and capital protection from two tranches of notes which are linked to the performance of its medical benefit claims ratio, as a replacement for a maturing $150m Vitality Re III Ltd. (Series 2012-1) deal.
The deal featured a Class A tranche with a preliminary size of $140m and a Class B tranche of $60m. At pricing yesterday both tranches of notes had remained the same size, securing the $200m of cover.
Both tranches of notes are at risk of Aetna’s medical benefit claims ratio exceeding pre-defined attachment points during each annual aggregate risk period and the trigger, while linked to medical benefit claims ratio is actually an indemnity cover.
The $140m Class A tranche of notes, which attach at 100% of the medical benefit ratio and exhaust at 114%, launched with price guidance of 1.65% to 2.15%. At final pricing we understand that the Class A notes will pay investors a coupon of 1.75%, so below the mid-point but not quite at the bottom of guidance.
The Class B notes meanwhile are riskier, attaching at a 94% MBR covering losses up to the 100% level. This tranche launched with price guidance of 2.25% to 2.75%. At final pricing the Class B tranche of notes has seen the price drop below the guidance range, settling at 2.1%.
Once again the Vitality Re VI deal further demonstrates the appetite for insurance-linked securities (ILS) and the ability of investors to support sponsors with decreasing pricing. However the price decline is not as severe as it may seem, as the Vitality Re V Ltd. (Series 2014-1) deal issued a year ago featured a tranche that attaches at 102% MBR which priced at 1.75%, so the same as the 2015 Class A tranche and a tranche with a 96% MBR which priced at 2.5%.
So in comparison to last year the 2015 Class A tranche is actually paying the same coupon for a slightly lower risk than the 2014 Class A tranche, while the 2015 Class B is paying lower for a higher risk.
Once again, this perhaps indicates where appetites stop and a point beyond which investors will not readily see their coupon pricing decline. Of course the low pricing also indicates the appetite for a risk which is truly diversifying compared to ILS funds natural catastrophe positions.
And as we wrote before, the yield on these deals may be low but with such remote attachment probabilities these transactions always have appeal for investors.
For Aetna, the additional $200m of cover at a slightly lower down level continues to improve the health insurers capital adequacy and will give it flexibility in how it uses its capital, as well of course as the reinsurance cover against very severe increases in its health insurance claims.
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