An innovative new insurance-linked securities deal is being marketed by Goldman Sachs. Vitality Re Ltd. (a Cayman Islands based SPV) is the first ILS transaction seeking to transfer the risks of medical benefit claims exceeding pre-defined attachment points. This marks a new stage in the development of the insurance-linked securities market as confidence increases and insurers seek to utilise the asset class to hedge new types of risk.
Vitality Re Ltd. is being issued on behalf of a new entrant to the cat bond ILS sponsor arena, Aetna Life Insurance Company. It’s aiming for $200m of cover and its term is for three years. The notes issued by Vitality Re will cover the claims payments of Health Re Inc. (Aetna’s reinsurance SPV), and so Aetna, against their medical benefit ratio exceeding a specific attachment point. The ratio is to be calculated on an annual aggregate basis (and will act as a kind of index of claims). Through the transaction Aetna receive a source of indemnity-based annual aggregate excess of loss reinsurance capacity against medical benefit claims above a predetermined threshold. If claims exceed the threshold then the transaction would payout and investors lose some or all of their principal.
Risk modelling for this transaction is being provided by Milliman Inc. who created a simulation based stochastic model for the transaction. Standard & Poor’s who are rating the transaction say that they expect results to differ from the modelled results and so they adjust the probability of attachment using stress indicators before coming up with a rating. S&P cite pandemic as the biggest risk of loss to this transaction.
Collateral is being invested in highly rated assets and the account will be over-collateralized. A tri-party repurchase agreement is then entered into between Vitality Re, Goldman Sachs and the Bank of New York.
Vitality Re is issuing two classes of notes. $125m of Class A notes which have been given a preliminary rating of ‘BBB-‘ by S&P while the $75m of Class B notes have received a ‘BB’ preliminary rating. The Class A notes have a medical benefit ratio attachment point of $1.3 billion and the Class B notes attach at $1.225 billion.
It’s going to be very interesting to see how well this transaction is received by investors as it is the first time an ILS transaction has focused solely on health benefit linked risks. If it is well received and completes successfully this could open the doors for other health insurers to transfer a portion of their risks to the capital markets through insurance-linked securities in this way.
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