Aetna, the health, medical and benefits insurance unit of CVS Health, has returned to the capital market and insurance-linked securities (ILS) for issuance of its thirteenth Vitality Re health insurance catastrophe bond structure, aiming to secure $200m of reinsurance from a Vitality Re XIII Ltd (Series 2022) transaction.
Aetna has become one of the most reliable sponsors in the catastrophe bond market, with its regular Vitality Re health insurance cat bond a regular feature of January, offering a source of diversification appreciated by some cat bond funds and investors.
As ever, Aetna is staying true to form, in seeking reinsurance capacity from the capital markets to augment its protection and capital, using a cat bond structure to transfer risk on a medical benefit claim ratio basis.
The health insurer has not changed the workings of its Vitality Re catastrophe bonds much over the years, so they have become an issuance that investors find easier to assess and assume, if the returns are deemed sufficient for their strategies.
The Vitality Re notes are not for everyone though, as the returns are very low and deploying capital at such low spreads is not always of interest to every cat bond fund manager or investor in the space.
But, every year since late 2010 Aetna has tapped the capital markets with a Vitality Re ILS transaction and the efficient reinsurance capital they offer has become an integral part of Aetna’s capital planning.
The Vitality Re series of cat bond like deals offer an efficient way for Aetna to leverage reinsurance capital within its financial structure, as a tool to assist and enhance its capital efficiency.
Risk transfer is not the only benefit here, as there is a significant focus on the capital adequacy and solvency related benefits that this efficient form of reinsurance capital add to Aetna’s stack.
For 2022, Aetna has registered a new Cayman Islands company as the issuer of its latest catastrophe bond, Vitality Re XIII Limited, we’re told.
Vitality Re XIII Limited will look to issue two tranches of Series 2022 insurance-linked notes notes.
The notes, which target $200 million in issuance size, will be sold to investors and the resulting collateral will be used to collateralise reinsurance agreements for the health insurers’ 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 issued by Vitality Re XIII Ltd.
The reinsurance coverage Aetna gets from these deals is really 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.
Both of the tranches of notes to be issued by Vitality Re XIII will provide Aetna four years of protection and each will cover a different layer of its reinsurance needs.
Vitality Re XIII Ltd. will look to issue a $140 million tranche of Class A notes and a $60 million tranche of Class B notes, both covering relatively remote layers of risk within Aetna’s health insurance book, typical of how Vitality Re deals have launched in recent years.
The $140 million of Vitality Re XIII Class A notes will protect Aetna for 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 to a medical benefit claims ratio of 119%, or $1.19 billion of losses.
The Class A tranche of notes are being marketed to ILS investors with coupon price guidance in a range from 1.75% to 2.25%, we’re told.
The $60 million tranche of Vitality Re XIII Class B notes will provide Aetna with protection against losses above a medical benefit claims ratio of 99%, equivalent to a $990 million loss level, which gives them an expected loss of around 0.18%. These notes cover losses to a claims ratio of 105%, or $1.05 billion, so the Class B notes detach when the Class A notes would attach and begin paying claims.
The Class B notes are being offered to ILS investors with price guidance in a range from 2.25% to 2.75%, we understand.
Comparing this to last year’s Vitality Re XII issuance, the risk levels are very similar and so are the pricing ranges. Last year’s deal priced at the top-end of guidance in both cases, so it will be interesting to see where the ILS market prices these for 2022.
Aetna is stacking these Vitality Re health insurance cat bonds practically alongside each other, giving robust sideways cover to its medical benefit and health insurance business.
COVID-19 and the coronavirus pandemic is clearly a factor related to these deals, as Aetna’s medical benefit ratio (MBR) has been elevated in recent quarters we’re told.
In fact, the MBR is said to have neared 100% in one quarter earlier this year, which is a level close to where the Class B layers of Vitality Re may have been impacted.
But the MBR’s need to sustain higher levels in order for any recoveries to be triggered and the Vitality Re notes did not even price down in the secondary market significantly, despite COVID related threats.
How Omicron affects health insurance and medical benefit claims is another factor, as a more transmissible COVID variant could elevate claims levels it seems. Although severity is of course also a factor in that and so far we understand levels aren’t moving much more than seen with Delta specific waves.
Aetna’s MBR for 2021 through end of Q3 is said to have been 91%, which is the highest seen in almost a decade, but still well below the triggers for these Vitality Re cat bond deals.
Of course, Omicron came after that, so it will be interesting to see how ILS investors assess that risk to these notes, which will likely be reflected in appetite and pricing.
MBR’s are typically highest in the fourth quarter of the year, on the back of seasonal illnesses. But we’re told the Q3 2021 MBR was particularly elevated at over 99%, so how Omicron might affect this will be a key factor investors will want to understand.
We understand this transaction is slated for later in January and we’ll update you as any new information becomes available.