Health insurer Aetna is making its annual trip to the catastrophe bond market with an offering of notes that transfer the risk of excess medical claims.

Cat bonds are a form of reinsurance.  In the case of a triggering event, the issuer can retain some or all principal to pay insurance claims.  

In this case Aetna is entering into an agreement with a Vermont subsidiary, Health Re, which in turn will purchase reinsurance from Vitality Re VII, a special purpose vehicle. Vitality Re VIII then issues two tranches of Series 2017-1, a senior tranche with a preliminary BBB+ rating from Standard & Poor’s and a subordinate tranche rated BB+. S&P’s presale report does not indicate the size of the tranches, but according website they total $200 million.

The subordinate notes will be triggered if Aetna’s medical benefits ratio (MBR), which is the percentage of annual premium paid out in claims, rather than expenses and profit provision, reaches 102%. The subordinate notes will be triggered if the MBR reaches 96%.

The MBR for the first nine months of 2016 was 83.3%, up from 81.1% for the same period of 2015, according to S&P, but still well below the so-called “attachment level” for either the senior or subordinate notes.

This is the second Vitality Re ILS from Aetna to feature a variable reset facility, enabling the insurer to adjust the probability of attachment of the notes to higher or lower than at issuance, according to S&P.

It is the eighth bond overall to be rated by S&P covering health care claims; it is insuring the same risk as the other seven (four of which are currently outstanding) Vitality Re issuances, and the MBRs to date have been well below the attachment levels.

The highest calendar MBR for the covered business since 2008 was 88.5% in 2009.

Goldman Sachs is the sole bookrunner; BNP Paribas and Munich Re join it as co-managers and co-structuring agents. Milliman provided the risk modelling.

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