Aetna, the health, medical and benefits insurance arm of CVS Health, has returned to the insurance-linked securities (ILS) market for its eleventh Vitality Re transaction (Vitality Re XI Ltd. (Series 2020)), as it continues to leverage the capital markets as a source of reinsurance capital.
The Vitality Re series of ILS deals use a catastrophe bond structure to transfer certain risks associated with health insurance medical benefit claims levels to the capital markets for Aetna.
The insurer has repeatedly returned to the cat bond and ILS market at least once a year since late 2010, as the transactions and the efficient reinsurance capital they provide have become an integral part of Aetna’s capital planning.
The Vitality Re series of ILS deals have provided Aetna with an efficient way to leverage reinsurance capital within its financial structure, as a tool to aid its capital efficiency. Risk transfer is not really the main benefit, rather it is the capital adequacy and solvency related benefits that this efficient form of reinsurance capital add to its stack.
For 2020 and its eleventh Vitality Re ILS transaction, CVS owned Aetna has established a new Cayman Islands domiciled special purpose vehicle named Vitality Re XI Limited.
We understand that Vitality Re XI Limited will issue two tranches of Series 2020 notes, which will each be sold to investors. The resulting collateral will be used to collateralise reinsurance agreements for the firm.
As in all previous Vitality Re ILS transactions, 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 XI.
As in other Vitality Re health ILS’, the coverage is really an annual aggregate indemnity reinsurance arrangement.
The specific trigger that could cause a payout from the Vitality Re XI notes is based on an index of Aetna’s medical benefit claims ratio. If the index rises above a predefined attachment point level for either of the tranches it would trigger a payment.
Coverage will be across four annual risk periods running to the end of 2023, we’re told.
As a result, the indemnity like protection covers medical benefit claims rate inflation risk for Aetna.
For this 2020 deal, Vitality Re XI Ltd. will issue a $140 million tranche of Class A notes and a $60 million tranche of Class B notes, with both covering remote layers of risk within Aetna’s health insurance book.
The $140 million of Vitality Re XI Class A notes will cover Aetna for losses above a medical benefit claims ratio of 102%, equivalent to a $1.02 billion loss level, which gives them an expected loss of less than 0.01%.
Given their risk remote nature, the Class A notes are offered to ILS investors with price guidance in a range from 1.75% to 2.25%, we understand.
The $60 million of Vitality Re XI Class B notes will cover Aetna for losses above a medical benefit claims ratio of 96%, equivalent to a $960 million loss level, which gives them an expected loss of 0.04%.
Also risk remote nature, the Class B notes are offered to ILS investors with price guidance in a range from 2% to 2.75%, we understand.
The risk levels and pricing are relatively similar to last year’s Vitality Re ILS deal and as these health ILS transactions have never paid out for Aetna, we expect the pricing will be achieved within guidance.
Aetna has said before that the Vitality Re series of ILS transactions allow it to reduce its required capital, so it considers the transactions as core to its long-term capital management strategy. Hence these deals are an example of ILS capacity utilised for capital efficiency as well as reinsurance protection.
Once this new 2020 Vitality Re ILS transaction is completed, Aetna will have brought sum $2 billion of health insurance risks to ILS funds and investors since 2010, an impressive track-record and the kind of consistency investors and fund managers alike appreciate.
This latest $200 million Vitality Re XI Ltd. (Series 2020) transaction has now been added to our catastrophe bond and ILS Deal Directory. We will update you as the transaction comes to market.