Driving home the higher spreads and pricing that are now a feature of the catastrophe bond and insurance-linked securities (ILS) market, is the fact even health, medical and benefit insurer Aetna’s latest Vitality Re XIV Ltd (Series 2023) health ILS deal now looks set to price in the upper-half of initial guidance.
Aetna, an insurance unit of CVS Health, is one of the most regular long-term sponsors of catastrophe bond structures, using them as a way to secure efficient reinsurance capacity from the capital markets.
Earlier this month, Aetna returned with what will be its fourteenth Vitality Re health insurance catastrophe bond or ILS issuance, a deal it has renewed each year without fail.
Typically, these health cat bond or ILS deals from Aetna price with very thin multiples-at-market, given they are considered very remote-risk and the insurer has never made a recovery from the program.
But in 2023, the launch pricing of the latest Vitality Re XIV ILS deal from Aetna already implied a significant increase, over previous issuances, reflecting the hardening of reinsurance pricing across traditional and capital market sources.
Now, we’ve learned that even with the much higher pricing, the notes are likely to see their coupon settle in the upper-half of guidance, with the ranges on offer narrowed towards the top-end.
Details on every Vitality Re ILS deal from Aetna can be found in the extensive Artemis Deal Directory.
For 2023, Aetna registered Vitality Re XIV Limited to issue two tranches of notes that secure it $200 million of collateralized reinsurance from the capital markets running across a four-year term.
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.
As in every other Vitality Re ILS transaction, 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 provides what is effectively an 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.
The transaction is still seeking $200 million of capital market backed reinsurance for Aetna, with no changes to tranche sizes, we’re told.
But the price guidance has narrowed and been lifted towards the upper-end, on both of the tranches of notes on offer. This despite the pricing having already been a relatively significant uplift on previous Vitality Re ILS deals.
The $140 million tranche of Vitality Re XIV Class A notes, that only have an expected loss of around 0.01%, were first offered to ILS investors with coupon price guidance in a range from 2.75% to 3.5%, but this has now been raised and narrowed to 3.25% to 3.5%, we understand.
The $60 million tranche of Vitality Re XIV Class B notes, which come with an initial expected loss of around 0.20%, were first offered to ILS investors with price guidance in a range from 4% to 5%, but this has now also been raised and narrowed to between 4.5% and 5%, we’re told.
For comparison, take Aetna’s 2022 Vitality Re XIII ILS issuance, that had a Class A tranche with a 0.01% expected loss and priced to pay a 2% spread, plus its Class B tranche with a 0.18% expected loss that priced to pay investors 2.75%.
The initial expected loss for each of the tranches of the Vitality Re XIV 2023 issuance are the same in the case of the Class A notes, very slightly lower in the case of the Class B’s. But the pricing is significantly higher than the new mid-points of guidance for the latest issuance.
The price increases, either on a multiple or spread basis, are significantly higher in both cases. Taking the mid-point of the revised and higher price guidance for the 2023 deal, the price appears 69% higher in the case of the Class A notes, for both multiple and spread, while for the Class B notes it is 56% higher by the multiple, 73% higher by the spread.
While these year-on-year price increases are in-line with some of the other catastrophe bonds issued in recent weeks, it is telling that the price has risen comparably for what is seen as a very low-risk ILS issuance, with no track-record of recoveries for the sponsor, as the Vitality Re series has never delivered losses to its investors (even during the pandemic).
We’ll update you once final pricing is know.
You can read all about this Vitality Re XIV Ltd (Series 2023) health insurance ILS from Aetna in our extensive Artemis Deal Directory.