Aetna have completed their third insurance-linked security transaction which allows them to transfer the risk of catastrophic levels of medical benefit claims hitting the firm. The $150m medical benefit linked ILS issued through Cayman Island domiciled Vitality Re III Ltd. provides catastrophe bond type cover to Aetna subsidiary Health Re Inc. against medical benefits claims exceeding pre-determined levels.
The Vitality Re series of deals are an effective source of collateralized reinsurance for Aetna, allowing them to hedge the risk of medical benefit claims increasing dramatically over a year period. The ILS deal is indemnity based and claims qualify on an annual aggregate basis up to a predefined trigger point on a novel medical benefit ratio index.
“We have successfully completed our third reinsurance transaction that provides catastrophic risk protection, improves our capital efficiency and reduces our weighted average cost of capital,” said Joseph M. Zubretsky, Aetna senior executive vice president and CFO. “This transaction allows Aetna to free up additional capital held for the covered commercial health insurance business, and deploy it in an accretive manner.”
Vitality Re III issued two classes of Series 2012-1 notes, $105m Class A and $45m Class B. Each class provides different levels of protection as the medical benefit ratio has to exceed 103% for the Class A notes and for the Class B notes it must exceed 97%.
Standard & Poor’s affirmed the ratings for Vitality Re III’s notes at ‘BBB+’ for Class A and ‘BB+’ for the Class B notes.
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