Vitality Re XI Ltd. (Series 2020)

Aetna, the health, medical and benefits insurance arm of CVS Health, has returned to the insurance-linked securities (ILS) market for its eleventh Vitality Re transaction.

The Vitality Re series of ILS deals use a catastrophe bond structure to transfer certain risks associated with health insurance medical benefit claims levels to the capital markets.

For its eleventh transaction, CVS owned Aetna has established a new Cayman Islands domiciled special purpose vehicle named Vitality Re XI Limited.

We understand that Vitality Re XI Limited will issue two tranches of Series 2020 notes, which will each be sold to investors. The resulting collateral will be used to collateralise reinsurance agreements for the firm.

As in all previous 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 an excess of loss reinsurance agreement for each tranche of notes with Vitality Re XI.

As in other Vitality Re health ILS’, the coverage is really an annual aggregate indemnity reinsurance arrangement.

The specific trigger that could cause a payout from the Vitality Re XI notes is based on an index of Aetna’s medical benefit claims ratio. If the index rises above a predefined attachment point level for either of the tranches it would trigger a payment.

Coverage will be across four annual risk periods running to the end of 2023, we’re told.

As a result, the indemnity like protection covers medical benefit claims rate inflation risk for Aetna.

For this 2020 deal, Vitality Re XI 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 health insurance book.

The $140 million of Vitality Re XI Class A notes will cover Aetna for losses above a medical benefit claims ratio of 102%, equivalent to a $1.02 billion loss level, which gives them an expected loss of less than 0.01%.

Given their risk remote nature, the Class A notes are offered to ILS investors with price guidance in a range from 1.75% to 2.25%, we understand.

The $60 million of Vitality Re XI Class B notes will cover Aetna for losses above a medical benefit claims ratio of 96%, equivalent to a $960 million loss level, which gives them an expected loss of 0.04%.

Also risk remote nature, the Class B notes are offered to ILS investors with price guidance in a range from 2% to 2.75%, we understand.

The risk levels and pricing are relatively similar to last year’s Vitality Re ILS deal and as these health ILS transactions have never paid out for Aetna, we expect the pricing will be achieved within guidance.

Update 1:

The price guidance was lowered for both tranches of health ILS notes to be issued by Vitality Re XI.

The still $140m Class A tranche, which are the least risky, saw their price guidance reduced from the launch range of 1.75% to 2.25% down to 1.5% to 1.75%.

The slightly riskier and still $60m Class B tranche of notes also saw guidance dropping, falling from the launch price guidance range of 2% to 2.75% down to 1.8% to 2%.

Update 2:

Pricing has now been fixed at the lowest end of the reduced ranges, reflecting a roughly 25% decline from the mid-point of initial guidance for each tranche.

The $140m Class A tranche of notes, which are the least risky, saw coupon pricing settle at 1.5%.

The slightly riskier $60m tranche of Class B notes saw their coupon pricing settle at 1.8%.

These now fixed prices are actually below Aetna’s 2019 Vitality Re transaction, which covered similar risk levels and priced its two tranches at 1.75% and 2%.