Health insurance firm Aetna is returning to the capital markets in search of another $200 million or more of fully-collateralised reinsurance protection for losses under its health insurance medical benefit ratio, through a Vitality Re VII Ltd. (Series 2016-1) ILS issuance.
Aetna has been using the insurance-linked securities (ILS) market as a way to tap fully collateralised reinsurance capacity to cover losses in its health and medical benefit business since late 2010 when it came to the ILS market with its first Vitality Re deal.
Structured like a catastrophe bond, the Vitality Re series of deals have all provided the same coverage for Aetna, protecting the insurer against large increases in its health insurance medical benefit claims ratio.
This new transaction, Aetna’s seventh Vitality deal (details of all of which can be found in the Artemis Deal Directory) will be issued by a newly established Cayman Islands company Vitality Re VII Ltd., we understand from sources.
As with all the previous Vitality ILS transactions, Aetna will enter into a quota share agreement with its Health Re captive reinsurance company, which will in turn enter into excess of loss reinsurance agreements with the Vitality Re VII vehicle and Vitality Re II will sell two tranches of notes to ILS investors to collateralise those reinsurance agreements.
Vitality Re II will issue two tranches of notes, a $140 million Class A tranche and a $60 million Class B, of course both could grow while the deal is marketed depending on ILS investor demand. The coverage provided is indemnity protection for Aetna’s losses above a pre-defined medical benefit ratio trigger for each tranche and the notes are both structured on an annual aggregate basis.
The transaction will have a four-year term, covering losses suffered from January 2016 to the end of 2019, with the medical benefit ratio calculated on an annual basis to see whether Aetna’s claims have breached the trigger point and whether any payout is deserved.
The $140 million Class A tranche of notes to be issued by Vitality Re II will attach at a medical benefit ratio of 100% up to exhaustion at 114%. As ever the Vitality Re II notes are very remote risk, with an attachment probability of 0.03% and an expected loss of less than 0.01%. These notes are offered with price guidance of 1.5% to 2.15%, we’re told.
The $60 million Class B tranche of Vitality Re II 2016-1 notes are a little riskier, attaching at a medical benefit ratio of 94% and exhausting at 100%, so sitting beneath the Class A tranche of notes. This tranche has an attachment probability equivalent to 0.47% and an expected loss of 0.18%, so again very remote risk. This tranche is being marketed with price guidance of 2% to 2.65%.
For either tranche of notes to face a payout, the medical benefit ratio must breach the trigger attachment points within one of the annual risk periods.
These two tranches have a similar risk profile to the Vitality Re VI Ltd. (Series 2015-1) deal from last year, which paid investors 1.75% for the Class A tranche and 2.1% for the Class B, so the coupon guidance range the 2016-1 notes are being marketed with seems aligned.
For this transaction Goldman Sachs is sole bookrunner and co-structuring agent, while BNP Paribas and Munich Re are both co-managers and co-structuring agents. Milliman Inc. is again providing the risk modelling and analysis for this Vitality Re II ILS deal.
Previously Aetna sponsored Vitality Re Ltd. in December 2010, Vitality Re II Ltd. in April 2011, Vitality Re III Ltd. (Series 2012-1) in January 2012, Vitality Re IV Ltd. (Series 2013-1) in January 2013, Vitality Re V Ltd. (Series 2014-1) in January 2014 and Vitality Re VI Ltd. (Series 2015-1) in January 2015. These six earlier transactions have provided Aetna with $1 billion of reinsurance cover and capital efficiency to-date.
To date none of the Vitality Re deals have paid any claims to Aetna, however the health insurer benefits greatly from capital relief and efficiency with these transactions, as well as the reinsurance protection against major increases in health insurance claims rates.
Aetna aims to complete this Vitality Re II 2016-1 ILS issuance this month, we understand.
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