Vitality Re XI health ILS pricing falls while marketing for Aetna

The price guidance has fallen for both of the tranches of notes to be issued as part of Aetna’s latest insurance-linked securities (ILS) transaction Vitality Re XI Ltd. (Series 2020) signalling strong investor appetite for what has become an annual diversifying peril for some investors in the sector.

Aetna, the health, medical and benefits insurance arm of CVS Health, returned to the ILS market for its eleventh Vitality Re transaction earlier this month, as it looks to continue its use of the capital markets as a source of reinsurance capital and the catastrophe bond structure as a vehicle for securing it.

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

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.

There’s been no change in the targeted size of the issuance, with $200 million of reinsurance protection still the goal.

A $140 million tranche of Vitality Re XI Class A notes are the most remote in terms of risk and were initially offered to investors with price guidance in a range from 1.75% to 2.25%. But now this price guidance has dropped by around 19%, with the notes now pitched at 1.5% to 1.75%.

Meanwhile, the proposed $60 million of Vitality Re XI Class B notes, which are slightly riskier, although still very remote, where at first offered to ILS investors with price guidance in a range from 2% to 2.75%, but this range has also now fallen by around 20% to 1.8% to 2%.

These new pricing ranges point towards the coupon eventual settling very close to Aetna’s 2019 Vitality Re transaction, which covered similar risk levels and priced its two tranches at 1.75% and 2%.

The way pricing has moved also signals that investors aren’t seeking to push up rates for what is a fully diversifying risk opportunity from the more typical catastrophe risks that proliferate in the catastrophe bond market, despite recent losses that affected the sector.

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. We will update you as the transaction continues to proceed to market.