Aetna seeks $200m Vitality Re XV health ILS, at lower price than a year ago

Aetna, the health, medical and benefits insurance unit of CVS Health, has returned to the insurance-linked securities (ILS) market, to sponsor what will be its fifteenth Vitality Re health insurance catastrophe bond issuance, aiming for $200m of reinsurance from a Vitality Re XV Ltd (Series 2024) transaction.

Aetna is among the most consistent and regular long-term sponsors of catastrophe bond structures, using them as a way to secure efficient reinsurance capacity from the capital markets.

The first Vitality Re health ILS, or cat bond, deal was sponsored by Aetna back in 2010 and the health and medical insurer has returned every year since then, with this Vitality Re XV Ltd. deal now its fifteenth.

Of the Vitality Re health ILS series, investors have never suffered any principal losses for any prior transaction.

Details of every Vitality Re health ILS issuance from Aetna can be found in the extensive Artemis Deal Directory.

A year ago, Aetna’s Vitality Re XIV Ltd (Series 2023) health ILS issuance was priced at a level near historic highs for the insurers long-standing series of health insurance linked catastrophe bond deals.

Now, with the catastrophe bond market having moderated somewhat, in pricing terms and ILS investors having more capital and greater certainty over the capital available to them, Aetna is hoping to reduce the spreads for its 2024 issuance and achieve execution of this Vitality Re XV deal at lower pricing.

For 2024, Aetna has established a new Cayman Islands special purpose issuer named Vitality Re XV Limited and, as in most recent years, the insurer targets the issuance of two tranches of health insurance-linked notes, designed to provide a targeted $200 million of collateralized health reinsurance from the capital markets.

As in every other Vitality Re deal, this Vitalty Re XV will transfer Aetna’s risk to the capital markets investors on a medical benefit claim ratio basis, so effectively an indemnity trigger based on the insurers claims experience.

The Vitality Re series of cat bond like deals provide Aetna an efficient way to leverage reinsurance capital within its financial structure, enhancing its capital efficiency and protecting against tail medical claims events, or a significant increase in the medical benefit ratio Aetna reports.

Risk transfer is not the only benefit here, as there is a significant focus on the capital adequacy and solvency related benefits that this form of reinsurance capital provide to Aetna.

Vitality Re XV Limited targets the sale of two tranches of Series 2024 health ILS notes to investors, with the resulting collateral to be used as collateral for reinsurance agreements that would benefit Aetna.

As in every other Vitality Re ILS transaction we’ve seen, 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 XV Ltd., so passing the protection on to the beneficiary

Effectively, these are a king of annual aggregate indemnity reinsurance arrangement, but with the trigger based on an index linked to Aetna’s reported medical benefit claims ratio.

If this claims index exceeds a predefined attachment point during the risk period, for either of the tranches of notes issued by Vitality Re XV, it can trigger a reinsurance recovery payment.

Each of the two tranches of notes to be issued by Vitality Re XV will provide Aetna with a four year source of protection to the end of 2027 and four risk periods, with each tranche covering a different layer of its reinsurance needs.

A $140 million of Vitality Re XV Class A notes are designed to protect Aetna against losses above a medical benefit claims ratio of 106% ($1.06bn), giving them an expected loss of around 0.01% and covering losses up to a medical benefit claims ratio of 120% ($1.2bn), we understand

The Class A tranche of notes are being offered to ILS investors with coupon price guidance in a range from 2.75% to 3.25%, we’re told.

Then, a $60 million tranche of Vitality Re XV Class B notes will cover Aetna against losses above a medical benefit claims ratio of 100% ($1bn), giving them an expected loss of around 0.20% and they will cover losses to a claims ratio of 106% ($1.06bn), meaning the Class B notes attach first, so are riskier and would detach at the point the Class A notes began paying any claims.

These Class B notes are being offered to ILS investors with price guidance in a range from 3.75% to 4.25%, we understand.

As we said, Aetna is targeting lower pricing this time around, compared to the 2023 issuance.

The Vitality XIV 2023 deal a year ago saw a Class A tranche of notes with the same expected loss as this year, but price guidance of 2.75% to 3.5% and the notes eventually priced at the upper-end of that range at 3.5%.

Last year’s Class B 2023 notes also had the same expected loss as this year’s deal and were initially offered to ILS investors with price guidance in a range from 4% to 5%, but priced at 4.5%.

So, it’s clear Aetna is seeking better execution, in price terms, for its 2024 health insurance-linked securities (ILS) issuance, which would align with the current state of the ILS and cat bond market, when compared to this time last year when capacity was much less certain and volatility deemed higher still.

You can read all about this Vitality Re XV Ltd (Series 2024)  health insurance ILS from Aetna in our extensive Artemis Deal Directory.