Health insurance giant Aetna is returning to the capital markets and insurance-linked securities with what will be its tenth health or medical benefit risk ILS transaction, a $200 million Vitality Re X Ltd. (Series 2019) deal.
Aetna has been tapping the capital markets, ILS funds and their investors as a source of collateralised reinsurance for its medical benefit book since December 2010, returning at least once a year to securitise more of its health insurance risk premiums and transfer them to investors.
For Aetna, the Vitality Re series of ILS deals have provided it with an efficient way to leverage reinsurance capital within its financial structure, as a tool to add capital efficiency. For the reinsurance risk transfer is not really the main benefit for Aetna, rather it is the capital adequacy benefits that adding this efficient form of reinsurance to its stack provides.
For its tenth transaction Aetna has registered a new Cayman Islands vehicle, Vitality Re X Ltd., sources explained.
Vitality Re X Ltd. will issue two tranches of Series 2019 notes which will be sold to investors.
As is typical with these Vitality Re ILS transactions, Aetna Life Insurance Company will enter into a quota share health reinsurance agreement with Vermont captive Health Re Inc., and Health Re will in turn enter into two excess of loss reinsurance agreements with Vitality Re X.
These excess of loss reinsurance agreements will be capitalised by the sale of the notes to third-party investors to collateralize the underlying coverage.
The trigger for any payout from the notes is based on an index of Aetna’s medical benefit claims ratio, which if it rises above a predefined attachment points for each of the tranches would trigger a payment. Coverage will be across four annual risk periods.
Hence, this is an indemnity trigger, covering medical benefit claims rate inflation risks for Aetna.
For this 2019 deal, Vitality Re X Ltd. will issue a $140 million tranche of Class A notes and a $60 million tranche of Class B notes, with both covering remote layers of risk within Aetna’s book.
The $140 million Class A tranche of notes will cover Aetna for medical benefit claims losses from a medical benefit ratio (MBR) attachment point of 104%, equivalent to an indemnity loss under the reinsurance of $1.04 billion we’re told, up to an MBR exhaustion at 118%, equivalent to $1.18 billion. This tranche has a modelled attachment probability equivalent to 0.04% and expected loss of less than 0.01%, we understand.
The $60 million Class B tranche will cover losses from a medical benefit ratio of 98%, equivalent to an indemnity loss under the reinsurance of $980 million, to 104%, equivalent to $1.04 billion, so sit beneath the class A notes in the reinsurance tower and are a little more risky as a result. This tranche has an initial attachment probability equivalent of 0.43% and an expected loss of 0.17%.
Price guidance is fixed low for both tranches, as you’d anticipate with such remote risks, and the Class A notes are set to offer investors a coupon in a range from 1.75% to 2.25%, while the Class B notes will offer a coupon from 2% to 2.75%.
Encouragingly for ILS and catastrophe bond investors, the price guidance ranges are the same as for Aetna’s 2018 Vitality Re IX transaction, despite the fact this 2019 transaction is slightly lower risk.
Aetna previously said the Vitality Re series of ILS transactions allows it to reduce its required capital and it considers the transactions core to its long-term capital management strategy, hence these deals are an example of ILS capacity utilised for capital efficiency as well as reinsurance protection.
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, Vitality Re VII Ltd. (Series 2016-1) in January 2016, Vitality Re VIII Ltd. (Series 2017-1) in January 2017, and Vitality Re IX Ltd. (Series 2018-1) in January 2018.
In total, including this 2019 transaction at its marketed size of $200 million, Aetna has now brought $1.8 billion of its health insurance risks to ILS funds and investors since 2010.
This latest $200 million Vitality Re X Ltd. (Series 2019) transaction has now been added to our catastrophe bond and ILS Deal Directory. We will update you as the transaction comes to market.
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