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Vitality Re X Ltd. (Series 2019)

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Vitality Re X Ltd. (Series 2019) – At a glance:

  • Issuer: Vitality Re X Ltd. (Series 2019)
  • Cedent / sponsor: Aetna
  • Placement / structuring agent/s: Goldman Sachs is sole bookrunner and co-structuring agent. Munich Re is co-manager and co-structuring agent
  • 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 2019

Vitality Re X Ltd. (Series 2019) – Full details:

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

Vitality Re X Ltd. will issue two tranches of Series 2019 notes which will be sold to investors.

As is typical with these Vitality Re ILS transactions, Aetna Life Insurance Company will enter into a quota share health reinsurance agreement with Vermont captive Health Re Inc., and Health Re will in turn enter into two excess of loss reinsurance agreements with Vitality Re X.

These excess of loss reinsurance agreements will be capitalised by the sale of the notes to third-party investors to collateralize the underlying coverage.

The trigger for any payout from the notes is based on an index of Aetna’s medical benefit claims ratio, which if it rises above a predefined attachment points for each of the tranches would trigger a payment. Coverage will be across four annual risk periods.

Hence, this is an indemnity trigger, covering medical benefit claims rate inflation risks for Aetna.

For this 2019 deal, Vitality Re X Ltd. will issue a $140 million tranche of Class A notes and a $60 million tranche of Class B notes, with both covering remote layers of risk within Aetna’s book.

The $140 million Class A tranche of notes will cover Aetna for medical benefit claims losses from a medical benefit ratio (MBR) attachment point of 104%, equivalent to an indemnity loss under the reinsurance of $1.04 billion we’re told, up to an MBR exhaustion at 118%, equivalent to $1.18 billion. This tranche has a modelled attachment probability equivalent to 0.04% and expected loss of less than 0.01%, we understand.

The $60 million Class B tranche will cover losses from a medical benefit ratio of 98%, equivalent to an indemnity loss under the reinsurance of $980 million, to 104%, equivalent to $1.04 billion, so sit beneath the class A notes in the reinsurance tower and are a little more risky as a result. This tranche has an initial attachment probability equivalent of 0.43% and an expected loss of 0.17%.

Price guidance is fixed 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%.

Encouragingly for ILS and catastrophe bond investors, the price guidance ranges are the same as for Aetna’s 2018 Vitality Re IX transaction, despite the fact this 2019 transaction is slightly lower risk.

Update 1:

The pricing has moved, we understand, with sources saying it has fallen to the lowest end of the coupon guidance ranges for each tranche of notes. Both tranches have now fallen to the bottom of the launch guidance ranges, with the Class A notes now offering pricing of 1.75% and the Class B notes 2%.

The pricing remains roughly aligned with previous transactions.

This latest Vitality Re deal is a little lower risk than last year’s issuance, but looks set to price slightly higher, so on a risk-return basis it seems there is a slight upwards shift in pricing on these health ILS deals.

Update 2:

The Vitality Re X transaction priced at the reduced guidance levels, with the $140m Class A notes pricing at 1.75% and the $60m Class B notes 2%.

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