Swiss Re Insurance-Linked Fund Management

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Vitality Re VIII Ltd. (Series 2017-1)

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Vitality Re VIII Ltd. (Series 2017-1) – At a glance:

  • Issuer: Vitality Re VIII Ltd. (Series 2017-1)
  • Cedent / sponsor: Aetna
  • Placement / structuring agent/s: Goldman Sachs is sole bookrunner and co-structuring agent. BNP Paribas and Munich Re are 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: S&P: Class A - 'BBB+(sf)', Class B - 'BB+(sf)'
  • Date of issue: Jan 2017

Vitality Re VIII Ltd. (Series 2017-1) – Full details:

This new transaction, Aetna’s eighth Vitality deal will be issued by a newly established Cayman Islands company Vitality Re VIII Ltd., we understand from sources.

As in previous Vitality Re 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 VIII to cover the same business.

Vitality Re VIII will then sell third-party investors two tranches of Series 2017-1 notes in order to fully collateralise the health reinsurance coverage for Aetna, with coverage in force over a four-year term.

Both tranches of notes feature a medical benefit ratio indemnity trigger, and are calculated on an annual aggregate basis across four risk periods, so would pay out should the ratio of Aetna’s medical benefit claims on the subject business surpass pre-defined attachment points.

A $140 million Class A tranche of notes will provide reinsurance coverage for medical benefit claims losses between a medical benefit ratio attachment point of 102% and an MBR exhaustion at 116%. These notes have a modelled attachment probability equivalent to 0.04% and expected loss of just 0.01%.

A $60 million Class B tranche will cover losses from a medical benefit ratio of 96% to 102%, so sit beneath the class A notes in the reinsurance tower. This tranche has an initial attachment probability equivalent of 0.5% and an expected loss of 0.19%.

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

Standard & Poor’s said it had assigned a preliminary rating of BBB+(sf)’ to the Class A notes and ‘BB+(sf)’ to the Class B notes.

S&P noted that the main driver of financial fluctuations has been “volatility in per-capita claim cost trends and lags in insurers’ reactions to these trend changes in their premium rating increase actions.” Changes in expenses and target profit margins are also cited as potential causes of volatility to the covered health insurance business, however for these Vitality Re deals the extreme tail risk is a severe pandemic.

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, S&P explains.

“For each reset of the class A notes, if any class B notes are outstanding on the applicable reset calculation date, the updated MBR attachment of the class A notes will be set so it is equal to the updated MBR exhaustion for the class B notes,” the rating agency explained.

Update 1:

Both tranches of the deal saw enough investor appetite to drive the coupon down to the base-line of price guidance, with coupons falling to the low end of guidance.

The $140 million Class A tranche of notes, which will provide reinsurance protection to Aetna for losses from a medical benefit ratio (MBR) attachment point of 102% up to an MBR exhaustion at 116%, have priced at the bottom end of the marketed 1.75% to 2.25% range, so at 1.75% we hear.

Meanwhile, the $60 million Class B tranche, which covers losses from an MBR of 96% to 102%, have priced at 2%, again the bottom of the initial guidance range (2% to 2.75%).

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