The first insurance-linked security transaction to come to market in 2013 is the fourth in life insurer Aetna Life Insurance Company’s series of Vitality Re medical benefit linked securitization deals. Vitality Re IV Ltd. (Series 2013-1) is being marketed and seeks to issue at least $150m of medical benefit claims linked ILS notes to investors in two tranches. In a similar manner to earlier Vitality transactions the deal is being sponsored by Aetna’s Health Re Inc. reinsurance subsidiary.
The Vitality series of ILS deals were the first to bring medical benefit claims risk to the ILS investor market and have been well received. For Aetna they have proven an effective way to reinsure against the risk of claims against their medical benefit policies increasing dramatically over a year period during the term of the transactions.
The aim of this fourth Vitality Re transaction is to provide Health Re, and ultimately Aetna, with a multi-year source of fully collateralized reinsurance protection against medical benefits claims exceeding pre-determined levels in a catastrophe bond type structure. Aetna has successfully achieved this with their three earlier Vitality Re transactions and the ILS investment market now looks forwards to this regular deal which brings a new diversification opportunity to them.
Vitality Re IV is a Cayman Islands exempted company licensed as a Class C insurer in the Cayman Islands established for the purpose of issuing ILS notes to cover the claims payments of Health Re Inc. and ultimately Aetna Life Insurance themselves relating to the covered insurance business.
It achieves this through the proceeds of the sale of the issued notes being used to fund Vitality Re IV’s obligations under excess-of-loss reinsurance agreements with Health Re Inc. and ultimately Aetna, providing a source of indemnity based on an annual aggregate excess-of-loss reinsurance capacity against medical benefit claims above a predetermined threshold.
The transaction, which is structured into two classes of notes, uses a medical benefit claims ratio index, as did all three of the previous Vitality deals. The Class A notes have a preliminary size of $105m and the Class B notes have a preliminary size of $45m. In the case of Vitality Re IV, claims payments are covered above a medical benefit ratio (MBR) exceeding 102% for the Class A notes and 96% for the Class B notes. The MBR is calculated on an annual aggregate basis and reset annually using updated exposure data as well.
The initial attachment points are calculated from the ceded premiums which are $750m. This works out at $765m for the Class A notes and $720m for the Class B notes (the 102% and 96% mentioned above respectively).
At execution of the deal Health Re enters into excess-of-loss reinsurance agreements with Vitality Re IV, which provides coverage if the medical benefit ratio breaches the specified trigger levels. Vitality Re IV finances its obligations under each excess-of-loss agreement by issuing a class of risk-linked ILS notes. Principal is reduced on the appropriate class of notes if any amounts are payable under that excess-of-loss reinsurance agreement.
With this new Vitality deal Aetna are seeking to expand the cover afforded to them by the series of deals as it essentially covers the same risk. Interestingly, the covered business has not seen a medical benefit claims ratio above 88.5% since they started tracking that statistic back in 2005. So this deal, and the previous Vitality Re’s, provide a source of reinsurance cover which protects Aetna against catastrophic increases in the rate of medical benefit claims on their book of covered business. In this respect, and given that Aetna keeps repeating the deal, we suspect that they find the capital markets a more efficient, and perhaps more cost-effective source of this protection.
Milliman Inc. are once again providing risk modelling and reset services for this fourth Vitality Re deal.
Collateral assets from the sale of the notes will be invested in highly rated Treasury money market funds.
Standard & Poor’s have given the two tranches of Vitality Re IV Ltd. Series 2013-1 notes preliminary ratings of ‘BBB+’ for the Class A notes and ‘BB+’ for the Class B notes.
It’s encouraging to see Aetna seeking to broaden the coverage they receive from the ILS market through this latest Vitality Re transaction. Once completed it will bring their total cat bond or ILS type cover for medical benefit claims to at least $600m, as each of their previous deals were for $150m and are still providing protection. They remain one of the best examples of a sponsor leveraging the cat bond type structure to tap the capital markets to provide cover for non-catastrophe risks.