Health insurance giant Aetna has returned to the insurance-linked securities (ILS) market for its eighth Vitality Re transaction, launching a Vitality Re VIII Ltd. (Series 2017-1) deal that seeks $200 million of reinsurance cover against a deterioration of its medical benefit ratio.
Vitality Re VIII Limited is a newly formed Cayman Islands Class C insurer set up specifically for Aetna’s latest health insurance linked ILS deal.
As in previous Vitality Re deals, Aetna Life Insurance Company will enter into a quota share health reinsurance agreement with its Vermont captive Health Re Inc., and Health Re will in turn enter into two excess of loss reinsurance agreements with Vitality Re VIII to cover the same business.
Vitality Re VIII will then sell third-party investors two tranches of Series 2017-1 notes in order to fully collateralise the health reinsurance coverage for Aetna, with coverage in force over a four-year term.
Both tranches of notes feature a medical benefit ratio indemnity trigger, and are calculated on an annual aggregate basis across four risk periods, so would pay out should the ratio of Aetna’s medical benefit claims on the subject business surpass pre-defined attachment points.
A $140 million Class A tranche of notes will provide reinsurance coverage for medical benefit claims losses between a medical benefit ratio attachment point of 102% and an MBR exhaustion at 116%. These notes have a modelled attachment probability equivalent to 0.04% and expected loss of just 0.01%.
A $60 million Class B tranche will cover losses from a medical benefit ratio of 96% to 102%, so sit beneath the class A notes in the reinsurance tower. This tranche has an initial attachment probability equivalent of 0.5% and an expected loss of 0.19%.
Price guidance is, as you’d expect for such remote risks, low for both tranches, with the Class A notes set to offer investors a coupon in a range from 1.75% to 2.25% and the Class B notes a coupon from 2% to 2.75%.
Standard & Poor’s said it had assigned a preliminary rating of BBB+(sf)’ to the Class A notes and ‘BB+(sf)’ to the Class B notes.
S&P noted that the main driver of financial fluctuations has been “volatility in per-capita claim cost trends and lags in insurers’ reactions to these trend changes in their premium rating increase actions.” Changes in expenses and target profit margins are also cited as potential causes of volatility to the covered health insurance business, however for these Vitality Re deals the extreme tail risk is a severe pandemic.
This is the second Vitality Re ILS from Aetna to feature a variable reset facility, enabling the insurer to adjust the probability of attachment of the notes to higher or lower than at issuance, S&P explains.
“For each reset of the class A notes, if any class B notes are outstanding on the applicable reset calculation date, the updated MBR attachment of the class A notes will be set so it is equal to the updated MBR exhaustion for the class B notes,” the rating agency explained.
As with the last Vitality Re ILS transaction, this Vitality Re VIII issuance sees Goldman Sachs as 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 required for this issuance.
Previously Aetna has 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, Vitality Re VI Ltd. (Series 2015-1) in January 2015 and Vitality Re VII Ltd. (Series 2016-1) in January 2016. These seven earlier transactions have provided Aetna with $1.2 billion of reinsurance protection and capital efficiency to-date.
Aetna has yet to claim from the Vitality Re series of transactions, but as well as providing a source of collateralised reinsurance the health insurer also benefits from the capital efficiency that these deals brings to its business model.
The health insurer has previously explained that the Vitality Re series of transactions allows it to reduce its required capital and that it considers the deals a core part of its long-term capital management strategy. So this is an example of ILS used for capital efficiency perhaps more than the reinsurance protection it offers.
Aetna aims to complete its new Vitality Re VIII 2016-1 ILS issuance this month, we understand.
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