The first insurance-linked security transaction to come to market in 2013 has now completed successfully. The Vitality Re IV Ltd. (Series 2013-1) medical benefit linked securitization provides health insurer Aetna with a $150m four-year source of fully-collateralized excess of loss reinsurance coverage on a portion of its group commercial health insurance business.
The fourth such ILS transaction from Aetna, which provide them with capital markets sourced protection in a catastrophe bond type structure, completed successfully yesterday and ratings agency Standard & Poor’s assigned ratings of ‘BBB+(sf)’ and ‘BB+(sf)’ to the Class A and Class B notes, respectively. The Vitality Re IV Limited specialist debt programme was admitted to the Cayman Islands Stock Exchange official list as a programme under which securities can be issued for a five-year period and the two classes of notes were also listed on the exchange.
The two tranches of notes, $105m Class notes and $45m Class B notes, provide Aetna with reinsurance cover based on the annual medical benefit ratio (MBR) of a portion of Aetna Life Insurance Company’s group commercial PPO, POS and indemnity business. The notes would payout only when the MBR rises above predefined attachment points for each tranche and the notes principal amount would be reduced by any payments made under the terms of the reinsurance agreement with its Health Re, Inc. reinsurance subsidiary. In laymans terms the notes provide a source of cover for increases in the rate of health insurance or medical benefit claims for the specific book of business, so provide some cover for events which could cause large increases in claims such as pandemics.
Payments from Vitality Re IV under the reinsurance arrangement would be made to Aetna if the MBR of the covered book of health insurance business for calendar year 2013 reaches an initial attachment point of 96% for the Class B notes, which would be first to lose principal, and 102% for the Class A notes. The notes principal would be reduced on a sliding scale upwards along the MBR until the full $150 million of coverage would be paid to Aetna if the MBR reaches an initial exhaustion point of 102% for the Class B more risky notes and 116% for the Class A notes. Both attachment and exhaustion points will be reset annually for 2014, 2015 and 2016 to maintain modeled probabilities of attachment and expected loss on the Vitality Re IV notes equal to the initial modeled probabilities of attachment and expected loss.
Aetna said that the transaction allows it to reduce its required capital and it considers the Vitality Re series of ILS deals a key component of its long-term capital management strategy.
“This reinsurance arrangement improves our capital efficiency and reduces our weighted average cost of capital,” said Aetna’s Treasurer Alfred P. Quirk, Jr. “Today’s transaction, which anticipates the end of our first Vitality Re arrangement in December 2013, marks the successful completion of our fourth such reinsurance arrangement.”
The transaction proved very popular and both tranches of notes priced below the originally marketed range. The $105m Class A notes priced down at 275 bps (2.75%), a drop of 21% from the lower end of the original pricing range, or 35% from the upper end. The $45m Class B notes saw a similarly large drop in pricing and priced at 375 bps (3.75%), a drop of 16% from the lower end of the price guidance range or 28% from the upper.
You can find full details on the Vitality Re IV Ltd. (Series 2013-1) in our Deal Directory where you can also read about Aetna’s previous Vitality transactions; Vitality Re III Ltd., Vitality Re II Ltd. and Vitality Re Ltd.