Aetna, the health, medical and benefits insurance arm of CVS Health, is back in the insurance-linked securities (ILS) market with what will be the firms twelfth sponsorship of a Vitality Re, health insurance linked catastrophe bond structure, seeking $200 million of reinsurance from a Vitality Re XII Ltd (Series 2021) transaction.
Aetna’s Vitality Re series of ILS deals have become one of the annual issues offering diversification to investors and ILS funds managers, so eagerly awaited by some.
The Vitality Re series use a catastrophe bond structure to transfer certain risks associated with health insurance medical benefit claims levels to the capital markets for Aetna, securing reinsurance protection for the firm.
Since late 2010 Aetna has tapped the capital markets annually with these deals and the efficient reinsurance capital they provide have become an integral part of Aetna’s capital planning.
The Vitality Re series of ILS deals offer an efficient way to leverage reinsurance capital within Aetna’s financial structure, as a tool to aid its capital efficiency. Risk transfer is not the only benefit here, rather it is the capital adequacy and solvency related benefits that this efficient form of reinsurance capital add to Aetna’s stack.
For 2021, Aetna has registered a new Cayman Islands company as the issuer, Vitality Re XII Limited, sources explained.
Vitality Re XII Limited is targeting the issuance of two tranches of Series 2021 insurance-linked notes notes. These notes will be sold to investors and the resulting collateral will be used to collateralise reinsurance agreements for the firm’s benefit.
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 with Vitality Re XII Ltd.
The coverage provided to Aetna is really an annual aggregate indemnity reinsurance arrangement, but with the trigger based on an index linked to Aetna’s medical benefit claims ratio. If the index rises above a predefined attachment point level, for either of the tranches of notes issued by Vitality Re XII, it would trigger a payment.
Both tranches of notes will provide four years of coverage and each covers a different layer of Aetna’s reinsurance needs.
Vitality Re XII Ltd. is targeting issuance of a $140 million tranche of Class A notes and a $60 million tranche of Class B notes, each covering remote layers of risk within Aetna’s health insurance book, which is typical of how Vitality Re deals have launched in recent years.
The $140 million of Vitality Re XII Class A notes will cover Aetna for losses above a medical benefit claims ratio of 104%, equivalent to a $1.04 billion loss level, which gives them an expected loss of 0.01%.
Given their risk remote nature, the Class A tranche of notes are being offered to ILS investors with price guidance in a range from 1.75% to 2.25%, we’re told.
A $60 million tranche of Vitality Re XII Class B notes will provide Aetna with cover against losses above a medical benefit claims ratio of 98%, equivalent to a $980 million loss level, which gives them an expected loss of 0.25%.
The Class B notes are being offered to ILS investors with price guidance in a range from 2.25% to 2.75%, we understand.
We can compare the transaction to the previous years Vitality Re XI Ltd. (Series 2020) transaction from Aetna.
The Class A tranche of the 2020 issuance attached slightly lower down, at an MBR of 102% and eventually settled to pay investors a coupon of 1.5%, after the pricing fell during marketing. The Class B tranche was similar, attaching slightly lower down at an MBR of 96% and pricing at 1.8%.
So the pricing on offer from 2021’s Vitality Re ILS deal is certainly higher, which as well as accounting for higher reinsurance and cat bond pricing, will also likely include some compensation given the uncertainty posed by the COVID-19 pandemic.
Aetna’s in-force Vitality Re health ILS deals had all priced down in the secondary market, as a result of concerns over the pandemic and the level of health insurance claims it could drive to insurers like Aetna.
Pricing on these tranches remain slightly depressed, in the low to mid 90’s on broker secondary cat bond pricing sheets, reflecting continued uncertainty.
So it’s no surprise this new Vitality deal comes to market at an improved price point and a little more risk remote than last year’s deal and it will be interesting to see how the market responds to this issuance.
The risk remote nature can’t be stressed enough, as if Vitality Re notes haven’t been triggered yet, it would seem a considerable worsening of the pandemic is required for any to be negatively affected at this time.
But with COVID cases and deaths rising in the United States, there will remain some concern that the higher pricing may help to assuage.