Vitality Re XV Ltd (Series 2024)

This is the fifteenth health insurance-linked securities (ILS) catastrophe bond structure that covers health and medical benefits related risks for sponsoring insurer Aetna.

Aetna, the health, medical and benefits insurance unit of CVS Health, has been sponsoring Vitality Re health insurance ILS since 2010, bringing a new issuance each year as it continues to leverage and stagger capital markets backed reinsurance to protect its medical benefits insurance business.

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.

The spreads on offer are lower than this time a year ago, for Aetna’s 2023 Vitality Re XIV issuance, which is understandable given how cat bond market dynamics have altered over the past year.

Update 1:

Aetna is not looking to upsize this Vitality Re XV health cat bond deal, as it remains at $200 million in size.

But the health insurer is looking to secure reduced pricing, with the Class A notes now offered with spread guidance of 2.5% to 2.75%, while the Class B notes are offered with updated guidance of 3.5% to 3.75%.

Update 2:

The $140 million of Class A notes Vitality Re XV Ltd. will issue were priced at 2.5% and the $60 million of Class B notes at 3.5%, so both at the low-ends of already reduced guidance.