According to market sources the pricing on health insurer Aetna’s Vitality Re V Ltd. (Series 2014-1), its latest medical benefit claims ratio linked insurance-linked security (ILS), has settled below the bottom of the deals launch price guidance range.
Aetna’s fifth Vitality Re medical benefit claims ratio linked ILS deal, structured in a similar way to catastrophe bond transactions but protecting the insurer against high levels of medical benefit claims impacting its health insurance portfolio, is the first ILS transaction to be broadly marketed in 2014.
As such it is interesting to see how pricing moved on the deal, especially since the last similar issuance was a year earlier. Pricing has declined significantly on both tranches of Aetna’s $200m Vitality Re V transaction, perhaps reflecting the increased appetite of ILS investors and their willingness to take on risk for lower returns as has been seen in the catastrophe bond market in 2013.
Vitality Re V remains a $200m ILS transaction, with the Class A tranche still $140m in size and the Class B tranche $60m.
In terms of pricing, which Artemis understands is now finalised, the Class A tranche launched with price guidance of 2% to 2.75% but pricing has settled right down at 1.75%, a decline of around 26% from the mid-point of the launch range.
Meanwhile the Class B tranche, which is a little riskier in terms of attachment probability, launched with price guidance of 2.75% to 3.5% but has settled down at 2.5%, a decline of 20% from the mid-point of the launch price guidance.
These are hefty declines in pricing, but given we only have the Vitality Re IV Ltd. (Series 2013-1) from January 2013 to compare it with the decline is not surprising. All ILS and catastrophe bond pricing is down as much as 40% on a year earlier, so to see this transaction come in by 20% to 26% during marketing is perhaps to be expected.
The two tranches in the Vitality Re V transaction sit directly alongside the two from Vitality Re IV, issued a year earlier, Artemis understands. The Class A tranche issued in 2013 pays investors 2.75%, so the 2014 deal is a whole percentage point lower (36% lower coupon rate). The Class B tranche from 2013 pays 3.75%, so the 2014 deal is 1.25% lower in terms of coupon paid on that layer, which is around a 33% reduction in coupon cost to the sponsor.
These declines in pricing year-on-year really drive home the lower cost-of-capital available to sponsors of catastrophe bonds and insurance-linked securities. Aetna will be delighted with the value this latest Vitality Re V transaction is generating for it, in terms of cost-effective risk transfer to a diversified capital base and its savings compared to the deal issued a year ago.
We’ll update you further when the deal has completed (expected to be next week) and you can read all about Vitality Re V Ltd. (Series 2014-1) from Aetna and its previous four ILS transactions in the Artemis Deal Directory.