Vitality Re IX $200m health ILS from Aetna the first deal of 2018


A new health insurance-linked securities (ILS) transaction from Aetna is the first cat bond or ILS transaction to launch and be listed in our Deal Directory in 2018, with a $200 million Vitality Re IX Ltd. (Series 2018-1) that will secure reinsurance protection against a deterioration of the insurers’ medical benefit claims ratio.

The Aetna health insurance-linked security (ILS) transaction under the Vitality Re naming is regularly the first transaction of the year and in 2018 this is the company’s ninth visit to the capital markets in search of fully collateralized reinsurance protection against a worsening in its medical benefits loss experience.

A new Cayman Islands special purpose vehicle Vitality Re IX Ltd. has been established for this latest issuance from Aetna. The vehicle will seek to issue two tranches of Series 2018-1 health insurance linked notes, both of which will provide the firm with reinsurance protection.

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.

Hence these health ILS deals have an indemnity trigger of sorts, covering medical benefit claims inflation risks for Aetna and being triggered based on that reported ratio rising above specified points.

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.

Aetna has yet to make a claim from its Vitality Re series of ILS transactions, but the health insurer enjoys the benefits of an efficient source of collateralised reinsurance, as well as the capital efficiency that these deals brings to its business model.

Aetna has previously explained that the Vitality Re series of transactions allows it to reduce its required capital and that it considers the transactions a core part of its long-term capital management strategy, making this an example of ILS utilised for capital efficiency as well as protection.

Previously Aetna has sponsored Vitality Re Ltd. in December 2010, Vitality Re II Ltd. in April 2011, Vitality Re III Ltd. (Series 2012-1) in January 2012, Vitality Re IV Ltd. (Series 2013-1) in January 2013, Vitality Re V Ltd. (Series 2014-1) in January 2014, Vitality Re VI Ltd. (Series 2015-1) in January 2015, Vitality Re VII Ltd. (Series 2016-1) in January 2016 and Vitality Re VIII Ltd. (Series 2017-1) in January 2017.

These eight earlier health ILS transactions have provided Aetna with $1.4 billion of reinsurance protection and capital efficiency to-date.

This latest $200 million Vitality Re IX Ltd. (Series 2018-1) transaction has been added to our catastrophe bond and ILS Deal Directory. We will update you as the transaction comes to market.

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