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Vitality Re IX Ltd. (Series 2018-1)

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Vitality Re IX Ltd. (Series 2018-1) – At a glance:

  • Issuer: Vitality Re IX Ltd. (Series 2018-1)
  • Cedent / sponsor: Aetna
  • Placement / structuring agent/s: Goldman Sachs is sole bookrunner and co-structuring agent. Munich Re is co-managers and co-structuring agents
  • Risk modelling / calculation agents etc: Milliman Inc.
  • Risks / perils covered: Medical benefit claims levels
  • Size: $200m
  • Trigger type: Medical benefit ratio (indemnity)
  • Ratings: ?
  • Date of issue: Jan 2018

Vitality Re IX Ltd. (Series 2018-1) – Full details:

This is health insurance giant Aetna’s ninth Vitality Re ILS deal and it will be issued by a newly established Cayman Islands company Vitality Re IX Ltd.

As is typical of the Vitality Re series of ILS deals, Aetna Life Insurance Company will enter into a quota share health reinsurance agreement with its Vermont captive Health Re Inc., and Health Re will in turn enter into two excess of loss reinsurance agreements with Vitality Re IX, which will be capitalised by the sale of the notes to third-party investors to collateralize the reinsurance coverage.

The two series of Vitality Re IX health ILS notes can be triggered by Aetna’s medical benefit ratio rising above predefined attachment points for each of the tranches. Coverage will be across four annual risk periods, we understand.

In this 2018 issuance, Vitality Re IX Ltd. is seeking to issue a $140 million tranche of Class A notes and a $60 million tranche of Class B notes, sources said. Both tranches are, as always with these health ILS deals, very remote in terms of risk.

The $140 million Class A tranche of notes are designed to provide Aetna with reinsurance coverage for medical benefit claims losses from a medical benefit ratio attachment point of 100%, equivalent to an indemnity loss under the reinsurance of $1 billion, and an MBR exhaustion at 114%, equivalent to $1.14 billion. These notes have a modelled attachment probability equivalent to 0.03% and expected loss of less than 0.01%.

The $60 million Class B tranche will cover losses from a medical benefit ratio of 94%, equivalent to an indemnity loss under the reinsurance of $940 million, to 100%, equivalent to $1 billion, so sit beneath the class A notes in the reinsurance tower and are slightly more risky as a result. This tranche has an initial attachment probability equivalent of 0.41% and an expected loss of 0.16%.

Price guidance is low for both tranches, as you’d anticipate with such remote risks, and the Class A notes are set to offer investors a coupon in a range from 1.75% to 2.25%, while the Class B notes will offer a coupon from 2% to 2.75%.

Interestingly, that is the same price guidance as the 2017 transaction launched with, although this new 2018 Vitality Re IX deal is slightly less risky.

Update 1:

Pricing was delayed for this Vitality Re IX transaction, due to the U.S. government shutdown and the fact the ACA health insurer fee was under consideration in the associated legislation.

This was resolved with some amendments to offering documents, to allow for the fact the health insurer fee could change during the term of the bond.

Update 2:

Both tranches were priced at levels well below their initial guidance mid-points.

The $140 million Class A tranche of notes which have an expected loss of less than 0.01% and are the least risky layer of reinsurance protection, launched with coupon price guidance in a range from 1.75% to 2.25%. This tranche of notes have now been priced with a coupon of just 1.6%, so below the starting guidance.

The $60 million Class B tranche, which are riskier and have an expected loss of 0.16%, were launched to investors with a coupon guidance range of 2% to 2.75%, but this tranche has now been priced at 1.75%, so again well below the guidance range mid-point.

These price points are very low even for the Vitality series of deals, which is clearly a reflection of ILS investor demand.

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