Vitality Re XVII Ltd. (Series 2026)

This Vitality Re XVII Ltd. transaction will be the seventeenth 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 in catastrophe bond form to market since 2010.

Aetna has been particularly consistent in launching a new Vitality deal every year, as it 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 2026, Aetna has returned with an initial target to secure $250 million of collateralized reinsurance for the company, to cover it against spikes in its medical benefit claims ratio.

For this 2026 issuance, Aetna has established a new Cayman Islands special purpose issuer named Vitality Re XVII Limited.

Three tranches of health insurance-linked notes are set to be issued, designed to provide a targeted $250 million of collateralized health reinsurance from the capital markets for the sponsor.

Vitalty Re XVII, like every other deal in the series, will transfer some of Aetna’s health insurance risks to capital markets investors in securitized form. The structure utilises a medical benefit claim ratio trigger, which is effectively an indemnity trigger based on the health and medical benefits insurers’ claims experience.

The Vitality Re series are an efficient way to leverage reinsurance capital within Aetna’s financial structure, enhancing its capital efficiency and protecting it against tail medical claims events, measured against any significant increase in the medical benefit ratio Aetna reports.

Risk transfer is not the only benefit, as there remains a significant focus on the capital and solvency related benefits that this form of reinsurance capital provides to Aetna.

The sale of the three tranches of Series 2026 notes to investors by Vitality Re XVII Limited will provide the funding necessary to fully-collateralize reinsurance agreements to the benefit of Aetna.

As is typical of these Vitality Re ILS transactions, 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 XVII Ltd., so passing the protection on to the sponsor.

The Vitality Re deals provide 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 XVII, it can trigger a reinsurance recovery for the sponsor and so a loss to the note holders.

The three tranches of notes to be issued by Vitality Re XVII will provide Aetna with a four year source of reinsurance protection to the end of 2029, across four annual risk periods from January 1st, with each tranche covering a different layer of its reinsurance needs. Each note will sit atop another, so layering the protection within its reinsurance tower.

Vitality Re XVII is offering a currently $160 million tranche of Series 2026 Class A notes that will protect Aetna against losses above a medical benefit claims ratio of 107.5% ($1.075bn), giving them an initial expected loss of 0.01% and covering losses up to a medical benefit claims ratio of 123.5% ($1.235bn), we understand from sources.

This Class A tranche of notes is being offered to ILS investors with spread price guidance in a range from 1.50% to 1.75%, we are told.

Next, a $60 million tranche of Vitality Re XVII Series 2026 Class B notes will protect Aetna against losses above a medical benefit claims ratio of 101.5% ($1.015bn), giving them an initial expected loss of 0.21% and they will cover losses to a claims ratio of 107.5% ($1.075bn).

The Class B notes are being offered to ILS investors with price guidance for a risk interest spread in a range from 2.00% to 2.25%, we understand.

The final Class C tranche of Series 2026 notes being offered by Vitality Re XVII are $30 million in size, to protect Aetna against losses from a medical benefit claims ratio of 98.5% ($985m), giving them an initial expected loss of 0.98% and they will cover losses up to a claims ratio of 101.5% ($1.015bn).

These Class C notes are offered to ILS investors with price guidance in a range from 3.50% to 4.00%, sources said.

It is the Class C notes that have the highest expected loss ever seen in a Vitality Re tranche of notes, slightly higher than last year’s Class C notes at 0.96%.

These notes are set to be rated by both Fitch Ratings and S&P Global Ratings.

Fitch expects to rate the Class A notes BBB+(sf), the Class B notes BB+(sf), and the Class C notes BB-(sf).

S&P assigned preliminary ratings as follows: Class A – BBB+ (sf); Class B – BB+ (sf); Class C – B+ (sf).