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Aetna’s Vitality Re XI health ILS coupon pricing falls ~25%


Aetna, the health, medical and benefits insurance arm of CVS Health, is set to secure its latest and eleventh insurance-linked securities (ILS) transaction Vitality Re XI Ltd. (Series 2020) at attractive pricing, as both tranches saw their respective coupons price down roughly 25%.

cvs-aetna-reinsuranceAetna returned to the ILS market for its eleventh Vitality Re transaction earlier this month, seeking to continue its use of the capital markets as a source of reinsurance capital and the catastrophe bond structure as the vehicle for securing it.

Vitality Re XI Limited is set to issue two tranches of Series 2020 notes to secure $200 million of protection for Aetna, which will be sold to investors and the resulting collateral used to collateralise reinsurance agreements for the company.

The two tranches of notes have both seen their coupon prices settle at a level below the bottom-end of the initial marketed range, representing a roughly 25% decline in pricing from the middle of initial guidance.

That reflects a positive result for Aetna, as these new layers of ILS backed reinsurance coverage are set to come in at pricing levels below its 2019 transaction, suggesting the insurer has not been pushed for higher pricing, given the diversifying and non-catastrophe nature of the insurance exposures it is ceding to investors.

The coverage is really an annual aggregate indemnity reinsurance arrangement, with Aetna Life Insurance Company entering into a quota share health reinsurance agreement with Vermont captive Health Re Inc., and Health Re in turn entering into an excess of loss reinsurance agreement for each tranche of notes with Vitality Re XI.

The trigger is based on an index of Aetna’s medical benefit claims ratio. If the index rises above a predefined attachment point level for either of the tranches it would trigger a payment.

As a result, the indemnity like protection covers medical benefit claims rate inflation risk for Aetna, which we understand in this case runs for four years.

The more remote in terms of risk $140 million tranche of Vitality Re XI Class A notes were initially offered to investors with price guidance in a range from 1.75% to 2.25%. That guidance subsequently dropped with the notes then pitched with guidance of at 1.5% to 1.75%.

At settlement the $140 million of Class A notes priced at the bottom-end of guidance, with a coupon of 1.5%.

The slightly higher risk $60 million of Vitality Re XI Class B notes, which were at first offered to ILS investors with price guidance in a range from 2% to 2.75%, saw that range fall to 1.8% to 2% while marketing.

We now know that the Class B notes have priced with a coupon of 1.8%, so at the bottom of reduced guidance again.

Each tranche has seen its pricing fall by roughly 25% from the mid-points of original guidance, which represents very keen pricing for Aetna.

These now fixed prices are actually below Aetna’s 2019 Vitality Re transaction, which covered similar risk levels and priced its two tranches at 1.75% and 2%.

This demonstrates the value in the ILS market for a remote risk that is also fully diversifying for investors.

The Vitality Re series of ILS deals provide insurer Aetna with an efficient way to leverage reinsurance capital within its financial structure as a tool to aid its capital efficiency. Risk transfer is not really the main benefit, rather it is the capital adequacy and solvency related benefits that this efficient form of reinsurance capital can add to its stack.

You can read all about this $200 million Vitality Re XI Ltd. (Series 2020) transaction in our catastrophe bond and ILS Deal Directory.

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