Aetna to sponsor $200m Vitality Re XIV health insurance-linked securities

Aetna, the health, medical and benefits insurance unit of CVS Health, is back in the insurance-linked securities (ILS) market to sponsor a fourteenth Vitality Re health insurance catastrophe bond issuance, targeting $200m of reinsurance from a Vitality Re XIV Ltd (Series 2023) transaction.

Aetna is one of the most regular long-term sponsors of catastrophe bond structures as a way to secure efficient reinsurance from the capital markets.

The health and medical insurer first sponsored a Vitality Re health ILS or cat bond deal in 2010 and has returned every year since, with this now its fourteenth.

Details on every Vitality Re ILS deal from Aetna can be found in the extensive Artemis Deal Directory.

For 2023, we’re told that Aetna has registered a new Cayman Islands special purpose vehicle named Vitality Re XIV Limited and like other recent years the company targets the issuance of two tranches of health insurance-linked notes, designed to provide it a targeted $200 million of collateralized reinsurance from the capital markets.

The transaction will, like every other Vitality Re deal, transfer risk to the capital markets investors on a medical benefit claim ratio basis, so effectively an indemnity trigger based on claims experience.

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.

Vitality Re XIV Limited aims to sell the two tranches of Series 2023 notes to to investors, with the resulting collateral will be used to collateralise reinsurance agreements for Aetna’s benefit.

Like every other Vitality Re ILS transaction we’ve seen, the 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 of the tranches of notes issued by Vitality Re XIV Ltd.

It’s effectively annual aggregate indemnity reinsurance arrangement, but with the trigger based on an index linked to Aetna’s medical benefit claims ratio.

If the claims index exceeds a predefined attachment point, for either of the tranches of notes issued by Vitality Re XIV, it can trigger a reinsurance recovery payment.

Both of the tranches of notes to be issued by Vitality Re XIV will provide Aetna four years of protection to the end of 2026, with each covering a different layer of its reinsurance needs.

A $140 million of Vitality Re XIV Class A notes will protect Aetna for losses above a medical benefit claims ratio of 106%, equivalent to a $1.06 billion loss level, giving them an expected loss of around 0.01%. They will cover losses up to a medical benefit claims ratio of 120%, or $1.2 billion of losses.

The Class A tranche of notes are being offered to ILS investors with coupon price guidance in a range from 2.75% to 3.5%, we’re told.

A $60 million tranche of Vitality Re XIV Class B notes will provide Aetna with protection against losses above a medical benefit claims ratio of 100%, equivalent to a $1 billion loss level, which gives them an expected loss of around 0.20%. These notes cover losses to a claims ratio of 106%, or $1.06 billion, so the Class B notes attach first, so are riskier and would detach at the point the Class A notes began paying claims.

The Class B notes are being offered to ILS investors with price guidance in a range from 4% to 5%, we understand.

The coupons and multiples are far higher than last year’s Vitality Re deal, despite having similar expected loss levels. You can compare the 2022 deal here.

This is to be expected in the current harder pricing environment for cat bond and reinsurance coverage.

Aetna did not attach any of its Vitality Re cat bond deals through the COVID pandemic to-date and we understand the medical benefit ratio remained well-below the levels needed to trigger any of the outstanding notes.

You can read all about this Vitality Re XIV Ltd (Series 2023) health insurance ILS from Aetna in our extensive Artemis Deal Directory.