Vitality Re XII Ltd (Series 2021)

Aetna has returned to the capital markets and insurance-linked securities (ILS) with what will be its twelfth sponsorship of a Vitality Re health insurance catastrophe bond structure, with a targeted $200m Vitality Re XII Ltd. transaction.

For 2021, Aetna has registered a new Cayman Islands company as the issuer, Vitality Re XII Limited.

Vitality Re XII Limited is targeting the issuance of two tranches of Series 2021 insurance-linked notes notes. These notes will be sold to investors and the resulting collateral will be used to collateralise reinsurance agreements for the firm’s benefit.

As in every Vitality Re ILS transaction, 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 XII Ltd.

The coverage provided to Aetna is really an annual aggregate indemnity reinsurance arrangement, but with the trigger based on an index linked to Aetna’s medical benefit claims ratio. If the index rises above a predefined attachment point level, for either of the tranches of notes issued by Vitality Re XII, it would trigger a payment.

Both tranches of notes will provide four years of coverage and each covers a different layer of Aetna’s reinsurance needs.

Vitality Re XII Ltd. is targeting issuance of a $140 million tranche of Class A notes and a $60 million tranche of Class B notes, each covering remote layers of risk within Aetna’s health insurance book, which is typical of how Vitality Re deals have launched in recent years.

The $140 million of Vitality Re XII Class A notes will cover Aetna for losses above a medical benefit claims ratio of 104%, equivalent to a $1.04 billion loss level, which gives them an expected loss of 0.01%.

Given their risk remote nature, the Class A tranche of notes are being offered to ILS investors with price guidance in a range from 1.75% to 2.25%, we’re told.

A $60 million tranche of Vitality Re XII Class B notes will provide Aetna with cover against losses above a medical benefit claims ratio of 98%, equivalent to a $980 million loss level, which gives them an expected loss of 0.25%.

The Class B notes are being offered to ILS investors with price guidance in a range from 2.25% to 2.75%, we understand.

We can compare the transaction to the previous years Vitality Re XI Ltd. (Series 2020) transaction from Aetna.

The Class A tranche of the 2020 issuance attached slightly lower down, at an MBR of 102% and eventually settled to pay investors a coupon of 1.5%, after the pricing fell during marketing. The Class B tranche was similar, attaching slightly lower down at an MBR of 96% and pricing at 1.8%.

So the pricing on offer from 2021’s Vitality Re ILS deal is certainly higher, which as well as accounting for higher reinsurance and cat bond pricing, will also likely include some compensation given the uncertainty posed by the COVID-19 pandemic.

Update 1:

Pricing for the still $200 million offering has now shifted to the high-end for each of the two tranches.

In fact, we believe this could be the highest risk-adjusted pricing on a Vitality Re cat bond since at least 2013/2014 issuances and it is the first time a Vitality Re issuance has priced upwards during marketing for around the same amount of time.

The Class A notes were first offered to ILS investors with price guidance in a range from 1.75% to 2.25%, but we’re now told this has shifted to the upper-end and has been fixed at 2.25%.

The Class B notes were first offered to ILS investors with price guidance in a range from 2.25% to 2.75%, but we understand this has now also shifted to the top-end of guidance, at 2.75%.