Vitality Re XIII Ltd (Series 2022)

Aetna, the health and medical insurance arm of CVS Health, is back in the capital market with another insurance-linked security (ILS) issuance, targeting issuance of what will be its thirteenth sponsorship of a Vitality Re health insurance catastrophe bond structure, aiming to secure $200m of reinsurance from a Vitality Re XIII Ltd. transaction.

For 2022, Aetna has registered a new Cayman Islands company as the issuer of its latest catastrophe bond, Vitality Re XIII Limited, we’re told.

Vitality Re XIII Limited will look to issue two tranches of Series 2022 insurance-linked notes notes.

The notes, which target $200 million in issuance size, will be sold to investors and the resulting collateral will be used to collateralise reinsurance agreements for the health insurers’ 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 issued by Vitality Re XIII Ltd.

The reinsurance coverage Aetna gets from these deals is really an annual aggregate indemnity arrangement, but with the trigger based on an index linked to Aetna’s medical benefit claims ratio. Should the claims index rises above a predefined attachment point, for either of the tranches of notes issued by Vitality Re XIII, it can trigger a recovery payment.

Both of the tranches of notes to be issued by Vitality Re XIII will provide Aetna four years of protection and each will cover a different layer of its reinsurance needs.

Vitality Re XIII Ltd. will look to issue a $140 million tranche of Class A notes and a $60 million tranche of Class B notes, both covering relatively remote layers of risk within Aetna’s health insurance book, typical of how Vitality Re deals have launched in recent years.

The $140 million of Vitality Re XIII Class A notes will protect Aetna for losses above a medical benefit claims ratio of 105%, equivalent to a $1.05 billion loss level, which gives them an expected loss of around 0.01%. They will cover losses to a medical benefit claims ratio of 119%, or $1.19 billion of losses.

The Class A tranche of notes are being marketed to ILS investors with coupon price guidance in a range from 1.75% to 2.25%, we’re told.

The $60 million tranche of Vitality Re XIII Class B notes will provide Aetna with protection against losses above a medical benefit claims ratio of 99%, equivalent to a $990 million loss level, which gives them an expected loss of around 0.18%. These notes cover losses to a claims ratio of 105%, or $1.05 billion, so the Class B notes detach when the Class A notes would attach and begin paying claims.

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

Comparing this to last year’s Vitality Re XII issuance, the risk levels are very similar and so are the pricing ranges. Last year’s deal priced at the top-end of guidance in both cases, so it will be interesting to see where the ILS market prices these for 2022.

Update 1:

The two tranches of notes being issued did not change in size, with this Vitality Re XIII issuance securing Aetna its targeted $200 million of ILS backed health reinsurance protection.

The $140 million tranche of Class A notes priced at the mid-point of guidance, at 2%.

The riskier $60 million tranche of Class B notes priced at the top-end of guidance, at 2.75%.