Reflecting the fact insurance-linked securities (ILS) and catastrophe bond investors continue to have minimum return requirements, the pricing on Aetna’s twelfth and $200 million health insurance linked ILS deal, the Vitality Re XII Ltd (Series 2021) transaction, is likely to settle at the top-end of guidance.
When the latest Vitality Re deal from Aetna hit the market a few weeks ago, the company was seeking $200 million of reinsurance protection from the health insurance linked catastrophe bond structure, with pricing suggesting it hoped to secure the cover at pricing only a little higher than previous deals.
But it now looks like the issuance will price at the top-end of guidance, as pricing for the still $200 million offering has now shifted to the high-end for each of the two tranches.
In fact, we believe this could be the highest risk-adjusted pricing on a Vitality Re cat bond since at least 2013/2014 issuances and it is the first time a Vitality Re issuance has priced upwards during marketing for around the same amount of time.
Vitality Re XII Limited will issue two tranches of Series 2021 insurance-linked notes notes, which will be sold to investors and the resulting funds used to collateralise reinsurance agreements to underpin the coverage.
As in every Vitality Re ILS transaction, of which this is the twelfth, Aetna Life Insurance Company will enter into a quota share health reinsurance agreement with Aetna’s Vermont captive Health Re Inc. Health Re Inc. will in turn enter into an excess of loss reinsurance agreement for each of the tranches of notes with Vitality Re XII Ltd.
The reinsurance coverage is really an annual aggregate indemnity reinsurance arrangement, but with the trigger based on an index linked to Aetna’s medical benefit claims ratio.
Should the index rise above a predefined attachment point, for either of the tranches of notes issued by Vitality Re XII, it would trigger a payment.
The transaction will provide Aetna with four years of reinsurance protection and each tranche covers a different layer of the health insurers’ reinsurance tower.
The first, $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%.
The Class A notes were first offered to ILS investors with price guidance in a range from 1.75% to 2.25%, but we’re now told this has shifted to the upper-end and has been fixed at 2.25%.
A $60 million Vitality Re XII Class B tranche of notes will provide Aetna with protection 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 were first offered to ILS investors with price guidance in a range from 2.25% to 2.75%, but we understand this has now also shifted to the top-end of guidance, at 2.75%.
We’re also told settlement for this latest Vitality Re health ILS transaction has been shifted into February, with the final pricing expected later today at these new, higher coupon levels.
Aetna’s Vitality Re series of deals use a catastrophe bond structure to transfer risks associated with health insurance medical benefit claims levels to the capital markets for Aetna, securing efficient reinsurance protection for the firm.
Aetna has tapped the capital markets annually since late 2010 with these transactions and the efficient reinsurance capital they provide have become an integral part of Aetna’s capital planning.
Risk transfer is not the only benefit here, it is also the capital adequacy and solvency related benefits that this efficient form of reinsurance capital add to Aetna’s stack that drive the company to leverage ILS within its capital arrangements.
Pricing now looks a significant uptick from Aetna’s last Vitality ILS, as we compare the transaction to last years Vitality Re XI Ltd. (Series 2020) transaction.
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%. The Class B tranche was similar, attaching slightly lower down than this years at an MBR of 96% and pricing at 1.8%.
So the revised pricing marks for 2021’s Vitality Re ILS deal are certainly higher, which will factor in higher reinsurance and cat bond pricing, but also likely include some compensation for investors given the uncertainty posed by the COVID-19 pandemic and how that could potentially impact health insurance related claims.
We don’t expect any details to now change before it settles, with pricing expected to be finalised at these revised levels later today.