Aetna’s new Vitality Re XIV health ILS priced near historic highs

Health, medical and benefit insurer Aetna’s new Vitality Re XIV Ltd (Series 2023) health insurance-linked securities (ILS) has now priced, with the multiples on offer to investors at or near historic highs for the long-standing series of health insurance linked catastrophe bond deals.

Aetna, the insurance unit of CVS Health, is a very regular and long-term sponsor of catastrophe bonds, using them as a way to secure efficient health reinsurance coverage from the capital markets.

Earlier this month, Aetna returned with its fourteenth Vitality Re health insurance catastrophe bond, or ILS issuance, a transaction it has faithfully renewed each year since late 2010.

These health cat bond or ILS deals from Aetna normally price with very thin multiples-at-market, at least in the last few years, given they are considered very remote in terms of risk and the insurer has never made a recovery from the Vitality Re program.

But in 2023, the launch pricing of the latest Vitality Re XIV ILS deal from Aetna already implied a significant increase, over previous issuances, reflecting the hardening of reinsurance pricing across traditional and capital market sources.

Now, Artemis has the final pricing details and to find comparable multiples-at-market, for roughly equivalent levels of risk of each tranche offered, you need to go back to at least 2012.

Details on every Vitality Re ILS deal from Aetna can be found in the extensive Artemis Deal Directory.

This demonstrates that, even the lowest-risk tranches of catastrophe bond or ILS notes are set for significant price increases and it drives home the fact spreads, issuance multiples, and as a result, returns are at least at decadal highs in the marketplace.

To recap, Aetna registered Vitality Re XIV Limited to issue two tranches of notes, aiming for $200 million of collateralized reinsurance from the capital markets, targeted to run across a four-year term.

Like every other Vitality Re deal, the notes will transfer some of Aetna’s risk to the capital markets investors on a medical benefit claim ratio basis, so effectively an indemnity trigger based on claims experience.

The 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 an excess of loss reinsurance agreement for each of the tranches of notes issued by Vitality Re XIV Ltd., to deliver the protection to the sponsor.

It provides an annual aggregate indemnity reinsurance type of coverage, but with the trigger based on an index linked to Aetna’s medical benefit claims ratio. If the claims index exceeds a predefined attachment point, for either of the tranches of notes issued by Vitality Re XIV, it can trigger a reinsurance recovery payment.

The transaction has now secured its initial $200 million target for capital market backed reinsurance for Aetna, with no changes to the tranche sizes.

Aetna typically has a fixed appetite and the Vitality Re ILS deals have been $200 million in size every year since 2014.

During their marketing to investors, the price guidance narrowed and was lifted towards the upper-end, on both of the tranches of notes on offer, as we reported earlier this week.

The $140 million tranche of Vitality Re XIV Class A notes, that only have an expected loss of around 0.01%, were first offered to ILS investors with coupon price guidance in a range from 2.75% to 3.5%, but this has now been raised and narrowed to 3.25% to 3.5%.

We’re now told that the Class A tranche of notes have been priced at the top-end of guidance, at 3.5%.

The $60 million tranche of Vitality Re XIV Class B notes, which come with an initial expected loss of around 0.20%, were first offered to ILS investors with price guidance in a range from 4% to 5%, but this has now also been raised and narrowed to between 4.5% and 5%.

The Class B tranche of notes have now been priced at the original mid-point, or the lower-end of the narrowed guidance, at 4.5%, sources told Artemis.

In recent history, the returns paid on the Vitality Re notes have been very low, with small spreads and dwindling multiples.

But now, compare the 2023 issuance to last year’s Aetna’s 2022 Vitality Re XIII ILS issuance, that had a Class A tranche of notes with a 0.01% expected loss but only priced to pay a 2% spread. Its Class B tranche had a 0.18% expected loss and priced to pay investors 2.75%.

The initial expected loss for each of the tranches of the Vitality Re XIV 2023 issuance are the same in the case of the Class A notes, very slightly lower in the case of the Class B’s. But the pricing is significantly higher than just a year ago, reflecting the hardening of reinsurance and cat bond rates.

In fact, to find a comparable or higher multiple, of spread to expected loss, we need to go back to Vitality Re deals issued over a decade ago in 2012 for the Class B tranche and for the much lower-risk Class A notes.

The Vitality Re XIV 2023 Class B notes (expected loss of 0.20%) have a multiple-at-market of 22.5 times EL, the Vitality Re III Ltd. (Series 2012-1) (which had a slightly higher expected loss at 0.23%) was the last time a Class B tranche was close, with a multiple of nearly 27 times the EL. A 2017 issuance Class B tranche had a multiple less than half the 2023 issuance, showing just how much pricing has moved since then, while the 2022 issuance had a multiple of 15 times EL.

The lower-risk Class A tranche, with the 0.01% EL is harder to compare, but to see a higher multiple-at-market you must look back to the 2012 Vitality Re issuance as well.

It’s encouraging for the catastrophe bond and ILS market to see long-standing sponsors like Aetna continuing to recognise the value in their long-standing series of deals, even at the far-higher pricing levels seen in 2023.

As data points come in, like these new notes now having reached their final pricing, we can clearly see the decadal or more highs in pricing in the cat bond and ILS market.

You can read all about this Vitality Re XIV Ltd (Series 2023) health insurance ILS from Aetna in our extensive Artemis Deal Directory.