Vitality Re XVI Ltd (Series 2025)

This Vitality Re XVI transaction will be the sixteenth health insurance-linked securities (ILS) catastrophe bond structure that provides reinsurance for certain health and medical benefits related risks for sponsoring insurer Aetna.

Aetna, the health, medical and benefits insurance unit of CVS Health, has been bringing Vitality Re health insurance ILS deals to market since 2010.

Each year, a new issuance emerges, as Aetna continues to leverage capital markets backed reinsurance to protect its medical benefits insurance business, staggering maturities and layering the coverage through these Vitality Re health insurance-linked catastrophe bond issues.

For 2025, Aetna has returned with an initial target to secure what could be the biggest health cat bond in the Vitality Re series, we have learned, with this new issuance seeking $250 million of collateralized reinsurance for the company.

Out of the fifteen previous Vitality Re issuances, 11 since 2024 have been $200 million in size, while the 4 prior to that were all $150 million in size.

Another notable point on the sixteenth Vitality Re issuance of health insurance-linked securities (ILS) is that this will be the first to feature three tranches of notes, if all are successfully issued, with each prior deal in the series having only seen two tranches of notes placed.

It’s also notable that the Class C tranche on offer with this Vitality Re XVI health ILS issuance has the highest initial expected loss of any prior tranche of notes issued under the series, as Aetna looks to bring this cat bond like reinsurance protection back a little lower down its tower in 2025.

For 2025, Aetna has set up a new Cayman Islands special purpose issuer named Vitality Re XVI Limited. The vehicle is targeting issuance of three tranches of health insurance-linked notes, that are designed to provide a targeted $250 million of collateralized health reinsurance from the capital markets for the insurer.

As in every Vitality Re deal, this Vitalty Re XVI will transfer some of Aetna’s health insurance risks to capital markets investors in securitized form and on a medical benefit claim ratio basis, which is effectively an indemnity trigger based on the health and medical benefits insurers’ claims experience.

The sale of the three tranches of Series 2025 notes to investors by Vitality Re XVI Limited will provide funding to be used to collateralize reinsurance agreements to the benefit of Aetna.

As with every prior Vitality Re ILS transaction, the Aetna Life Insurance Company will enter into a quota share health reinsurance agreement with Aetna’s Vermont captive Health Re Inc. The captive, Health Re, will in turn enter into an excess of loss reinsurance agreement for each of the tranches of notes issued by Vitality Re XVI Ltd., so passing the protection on.

Effectively, these transactions offer a kind of annual aggregate indemnity reinsurance arrangement, but with the trigger based on an index linked to Aetna’s reported medical benefit claims ratio for the covered health insurance business.

If this medical benefit ratio claims index exceeds a predefined attachment point during the risk period, for any of the tranches of notes issued by Vitality Re XVI, it can trigger a reinsurance recovery for the sponsor.

Each of the three tranches of notes to be issued by Vitality Re XVI will provide Aetna with a four year source of reinsurance protection to the end of 2028, across four annual risk periods from January 1st, with each tranche covering a different layer of its reinsurance needs.

A targeted $160 million of Vitality Re XVI Series 2025 Class A notes will protect Aetna against losses above a medical benefit claims ratio of 106% ($1.06bn), giving them an initial expected loss of 0.01% and covering losses up to a medical benefit claims ratio of 122% ($1.22bn), we understand from sources.

This Class A tranche of notes would be the largest single tranche in the Vitality Re series so far and are being offered to ILS investors with coupon price guidance in a range from 2% to 2.5%, we are told.

Next, a $60 million tranche of Vitality Re XVI Series 2025 Class B notes will cover Aetna against losses above a medical benefit claims ratio of 100% ($1bn), giving them an initial expected loss of 0.20% and they will cover losses to a claims ratio of 106% ($1.06bn).

These Class B notes are being offered to ILS investors with price guidance in a range from 2.75% to 3.25%, we understand.

The final Class C tranche of Series 2025 notes being offered by Vitality Re XVI will cover Aetna against losses above a medical benefit claims ratio of 97% ($970m), giving them an initial expected loss of 0.96% and they will cover losses up to a claims ratio of 100% ($1bn).

These Class C notes are offered to ILS investors with price guidance in a range from 3.5% to 4%, sources said.

The initial price guidance for each tranche is at lower-levels than the risk interest spreads paid for the 2023 and 2024 issuances, with the indicated multiples at the mid-points of guidance being back around the levels paid by Aetna in 2022, Artemis’ data shows.

The riskier Class C tranche, being at a lower medical benefit ratio (MBR) for their trigger attaching, feature the lowest multiple ever seen in a Vitality Re health ILS issuance, given they have the highest initial expected loss we’ve seen in any ILS deal from Aetna.

But, while those Class C notes would attach at an MBR of 97%, it’s worth noting that Aetna’s medical benefit ratio over the last decade, for the covered subject business, has only ever risen as high as 90.8% in 2021 (the peak year with COVID pandemic effects), while the MBR for 2024 was only running at 88.1% in 2024 up to the end of September, sources said.

Both S&P and Fitch Ratings have provided preliminary ratings for the three tranches of Vitality Re XVI Limited notes, as below:

S&P: Class A – BBB+ (sf); Class B – BB+(sf); Class C – B+ (sf)
Fitch Ratings: Class A – BBB+ (sf); Class B – BB+(sf); Class C – BB- (sf).

Update 1:

There have been no changes to the sizes of each of the three tranches of notes, we understand, leaving the $250 million target still likely to be the end result, making this Aetna’s largest Vitality Re ILS deal yet.

However, the price guidance for all three tranches has either fallen or narrowed, indicating still abundant investor demand for new investments in the cat bond market.

The $160 million of Vitality Re XVI Series 2025 Class A notes now have updated price guidance of 1.75% to 2%.

The $60 million tranche of Vitality Re XVI Series 2025 Class B notes now have updated price guidance of 2.25% to 2.75%.

The final $30 million Class C tranche of Series 2025 notes being offered by Vitality Re XVI also have updated price guidance, of between 3.5% and 3.9%.

Update 2:

Aetna has now secured the targeted $250 million of protection from this Vitality Re XVI Ltd. transaction, with all three tranches now priced either below guidance, or at the initial guidance mid-point.

The $160 million of Vitality Re XVI Series 2025 Class A notes priced at 1.75%.

The $60 million tranche of Vitality Re XVI Series 2025 Class B notes priced at 2.25%.

The final $30 million Class C tranche of Series 2025 notes being offered by Vitality Re XVI priced at 3.75%.