Vitality Re IV Ltd. (Series 2013-1) – Full details:
This is the fourth in Aetna’s series of Vitality Re, medical benefit linked securitization deals. It again sees them looking for additional reinsurance cover to protect themsevles against a rise in medical benefit claims rates.
Vitality Re IV Ltd. is a Cayman Islands domiciled exempted company licensed as a Class C insurer in the Cayman Islands established for the purpose of issuing ILS notes to cover the claims payments of Health Re Inc. and ultimately Aetna Life Insurance themselves relating to the covered medical benefit insurance business.
The deal seeks to issue at least $150m of medical benefit claims linked ILS notes to investors in two tranches. The Class A tranche has a preliminary size of $105m while the Class B tranche has a size of $45m.
Proceeds of the sale of the issued Vitality Re IV notes will be used to fund their obligations under excess-of-loss reinsurance agreements with Health Re Inc. and ultimately Aetna, providing a source of indemnity based on an annual aggregate excess-of-loss reinsurance capacity against medical benefit claims above a predetermined threshold.
Claims payments are covered above a medical benefit ratio (MBR) exceeding 102% for the Class A notes and 96% for the Class B notes. The MBR is calculated on an annual aggregate basis and reset annually using updated exposure data as well.
The initial attachment points are calculated from the ceded premiums which are $750m. This works out at $765m for the Class A notes and $720m for the Class B notes (the 102% and 96% mentioned above respectively).
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.
So the Class B tranche is the riskier of the two, with the lower attachment point, having an expected loss of 25bps, while the less risky Class A tranche has an expected loss of 1bp.
Collateral assets from the sale of the notes will be invested in highly rated Treasury money market funds.
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 was significantly oversubscribed which enabled Aetna to get the pricing down on the deal making it more cost efficient over the term.
The $105m Class A notes were originally marketed with a price guidance range of the collateral investment yield plus 350-425 bps. The 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.
The $45m Class B notes saw a similarly large drop in pricing, having begun marketing with a range of 450-525 bps and pricing at 375 bps (3.75%), a drop of 16% from the lower end of the price guidance range or 28% from the upper.