In a repeat of 2014, health insurer Aetna is the first sponsor to launch a new insurance-linked securities deal in 2015, with Vitality Re VI Ltd. (Series 2015-1) seeking at least $200m of protection linked to the insurers medical benefit claims ratio.
This is Aetna’s sixth Vitality Re medical benefit ratio linked ILS deal. The series of transactions protect Aetna on a reinsurance basis against sudden rises in health insurance medical benefit claims and the insurer has effectively been using them as a capital tool, freeing up capital while also acquiring protection against unexpected or sharp increases in claims.
Aetna is a regular visitor to the ILS market in January now and typically the first sponsor out of the blocks in the New Year. 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 and Vitality Re V Ltd. (Series 2014-1) in January 2014.
The two tranches of protection provided by Aetna’s Vitality Re III deal, which gave the health insurer $150m of cover, both matured this week. So the Vitality Re VI deal will replace some of that protection but also increase Aetna’s use of ILS as this deal is targeting $200m between the two tranches of notes that are being issued, according to sources.
In this deal Vitality Re VI Ltd. will seek to issue and sell to investors two tranches of Series 2015-1 health insurance medical benefit risk linked notes. A Class A tranche has a preliminary size of $140m while the Class B tranche has a preliminary size of $60m. Both tranches are linked to Aetna’s medical benefit ratio as a trigger.
As with Aetna’s other Vitality ILS deals, it uses its Health Re captive type reinsurer to enter into excess of loss reinsurance agreements with the Vitality Re VI vehicle. The sale of the notes collateralizes the reinsurance agreements, providing Aetna with a multi-year source of fully-collateralized protection. The deal will mature at the end of 2017, thus providing Aetna with three years of annual aggregate coverage.
The notes are at risk of Aetna’s medical benefit claims ratio exceeding pre-defined attachment points during each annual risk period. Claims can accrue during the year towards these attachments, but are then reset at the end of the each year. As such the protection provided is annual aggregate reinsurance and is, despite being based on medical benefit ratio claims, is effectively an indemnity cover.
Artemis understands that the $140m Class A tranche of notes attach at 100% of the medical benefit ratio and exhaust at 114%, while the Class B notes are riskier, attaching at 94% MBR up to 100%. So the Class B notes sit beneath the Class A and would be triggered first. Compared to other in-force Vitality transactions, the Vitality Re VI deal trigger is set lower than the Vitality re IV or V deals, so this is a slightly higher risk issuance.
However these are very remote in terms of the actual risk, as it would take a major health related event to raise Aetna’s MBR so high as to trigger the notes. In fact the expected loss of these notes is explained as 1 basis point for the Class A notes and 24 basis points for Class B, that can be thought of as 0.01% and 0.24%, so very remote risk compared to the more typical catastrophe bond ILS deals. The attachment probabilities are explained as 6 basis points for Class A and 62 basis points for Class B (again akin to 0.06% and 0.62%).
In terms of coupon price guidance, we’re told that the Class A notes are being marketed with a range of 1.65% to 2.15%, while the riskier Class B notes are marketed at 2.25% to 2.75%.
We understand that Goldman Sachs are structuring agent and bookrunner for this Vitality issuance, while BNP Paribas are co-manager on the deal. As with all the Vitality ILS deals Milliman Inc. is providing the risk modelling and calculation agent services.
It’s encouraging to see Aetna returning to use the ILS market once again in 2015. Investors appreciate this different type of risk, that provides some true diversification away from property catastrophe exposures. The yield on these deals may be low but with such remote attachment probabilities these transactions always have appeal for investors.
Vitality Re VI Ltd. (Series 2015-1) has now been added to the Artemis Deal Directory. We will update you as more detail becomes available and as the transaction moves towards completion over the coming weeks.