Health insurance firm Aetna’s $200m Vitality Re VII Ltd. (Series 2016-1) health insurance medical benefit ratio catastrophe bond deal has now been priced, with the coupon settling at the upper end of the initial guidance range.
When this ILS deal launched almost a fortnight ago, it saw Aetna seeking to gain a new four-year capital markets source of reinsurance protection for itself, against large increases in its health insurance medical benefit claims ratio.
Structured like a catastrophe bond, this seventh Vitality Re deal from Aetna launched as a $200m deal, split into a $140 million Class A tranche and a $60 million Class B tranche of notes.
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 VII will sell the two tranches of notes to ILS investors to collateralise those reinsurance agreements.
According to sources this deal has not upsized, with the tranches remaining at the same launch amounts and promising Aetna the $200m of reinsurance protection it sought.
However the pricing for the two tranches of notes has been shifted right to the upper end of the launch guidance range, another demonstration of investors having minimum return requirements particularly for these lower-yielding issuances.
The $140 million Class A tranche of notes, which attach at a medical benefit ratio of 100% up to exhaustion at 114%, launched with price guidance of 1.5% to 2.15%. The pricing on this tranche, which are the less risky notes offered by Vitality Re VII, has been fixed at the 2.15% level. This tranche has an expected loss of less than 0.01%, making multiples fairly meaningless.
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%, and were marketed with price guidance of 2% to 2.65%. This tranche has seen the pricing fixed again at the upper end, at 2.65%. while a little riskier, the expected loss for these notes is still only 0.18%.
Last year Aetna’s Vitality Re VI Ltd. (Series 2015-1) cat bond also had a Class A tranche that attached at a 100% MBR, but the pricing settled at 1.75%. The 2015 Class B tranche attached at an MBR of 94% and paid 2.1% coupon to investors.
So investors have not given the same discount to Aetna for the remoteness of the risk in 2016, demanding a higher coupon. As a result it’s encouraging to see Aetna still with the Vitality series and that ILS investors appear to have the ability to push rates up a little, in order to guarantee a reasonable risk adjusted return even for these remote risk deals.
In fact, looking back at Aetna’s 2014 cat bond, Vitality Re V Ltd. (Series 2014-1), it looks like the pricing of the 2016 deal is actually a little higher, or at the very least comparable, again.
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