Aetna, the health, medical and benefits insurance unit of CVS Health, has now priced its thirteenth Vitality Re health insurance catastrophe bond structure and is on track to secure the targeted $200m of reinsurance from its Vitality Re XIII Ltd (Series 2022) transaction, with pricing at the mid and top-ends of guidance.
It’s the second year in succession that Aetna’s annual Vitality Re health insurance-linked securities (ILS) issuance has priced higher up.
The Vitality Re ILS transactions have more typically priced down while market, squeezing the economics on what is a really capital efficient deal for the sponsor.
But, since the emergence of the COVID-19 pandemic and alongside other classes of catastrophe bond and ILS business, we’ve now seen two years where pricing has not tumbled and has in fact increased, or settled on-target.
ILS fund managers and investors will be pleased this is the case, as there is a floor on their appetite even for the most remote risks, beyond which they do not want to keep cutting back margin from their returns.
Aetna returned to the ILS market earlier this month with its latest Vitality Re transaction, which is the thirteenth.
The insurer registered a new Cayman Islands company as the issuer of its latest catastrophe bond, Vitality Re XIII Limited.
Vitality Re XIII Limited was targeting the issuance of two tranches of Series 2022 insurance-linked notes notes, aiming to secure $200 million in risk capital, through the sale of the notes to investors. The resulting collateral will now be used to collateralise underlying reinsurance agreements for Aetna.
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 on 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.
The Vitality Re XIII health ILS deal will provide Aetna with four years of reinsurance protection and each tranche of notes covers a different layer of its reinsurance needs.
Neither tranche has been upsized, which is typical of Aetna’s health insurance linked catastrophe bond style deals, with the $200 million target now set to be achieved as both tranches of notes have been priced.
A $140 million Vitality Re XIII Class A tranche of notes will provide reinsurance to Aetna against 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 up to a medical benefit claims ratio of 119%, or $1.19 billion of losses.
The Class A tranche of notes were marketed to ILS investors with coupon price guidance in a range from 1.75% to 2.25%. We’re now told that pricing settled at the mid-point of 2%.
A $60 million tranche of Vitality Re XIII Class B notes will offer Aetna with reinsurance protection against losses above a medical benefit claims ratio of 99%, equivalent to a $990 million loss level, giving them an expected loss of around 0.18%. These notes are the riskier layer, covering losses to a claims ratio of 105%, or $1.05 billion, so the Class B notes detach where the Class A notes would attach and begin paying claims.
The Class B notes were offered to ILS investors with price guidance in a range from 2.25% to 2.75%. We’re now told that pricing for the Class B tranche has shifted higher and will settle at the upper-end of guidance, at 2.75%.
The pricing is close to where last year’s deal settled and aligned with a slight uptick from historical multiple levels for the Aetna health ILS series of deals.
As we explained previously, Aetna’s medical benefit ratio (MBR) has been elevated in recent quarters and the MBR is said to have neared 100% in one quarter earlier in 2021, which is a level close to where the Class B layers of Vitality Re may have been attached.
So it’s no surprise that the notes didn’t price down, given the potential threat of the pandemic to these notes, as well as ILS fund and investor demand for higher-returns in a market that has been firming.