Health insurance company Aetna has successfully secured $200m of multi-year reinsurance protection with the completion of Vitality Re V Ltd. (Series 2014-1), its latest medical benefit claims ratio linked insurance-linked security (ILS).
The Vitality Re V transaction, a catastrophe bond type deal which provides Aetna with coverage for escalating medical benefit or health insurance claims rates, is Aetna’s fifth visit to the capital markets for reinsurance protection through sponsoring an ILS.
Previously Aetna, the first to bring healthy insurance related risks to the ILS and catastrophe bond market, has sponsored Vitality Re Ltd. in December 2010, Vitality Re II Ltd. in April 2011, Vitality Re III Ltd. (Series 2012-1) in January 2012 and Vitality Re IV Ltd. (Series 2013-1) in January 2013.
Vitality Re I and Vitality Re II both matured on the 7th January 2014, so the successful issuance of Vitality Re V is a replacement for at least some of the reinsurance cover that those two deals provided Aetna with.
Vitality Re V provided Aetna with $200m of fully-collateralized reinsurance protection against unusual or unexpected rises in its medical benefit claims ratio, providing indemnity protection for claims above a predefined ratio attachment point, on an annual aggregate basis.
The reinsurance protection secured from the sale of the two tranches of Vitality Re V notes, a $140m Class A tranche of notes and a $60m Class B tranche, runs for a five-year term, with maturity of the notes scheduled for the end of 2018.
Aetna said that entering into the five-year reinsurance arrangement with Vitality Re V Limited is part of the health insurers long-term capital management strategy. The arrangement allows the firm to reduce its required capital and provides it with $200m of collateralized excess of loss reinsurance coverage for a portion of its group commercial health insurance business.
Amounts payable under the reinsurance arrangements are based on the annual medical benefit ratio (“MBR”) of a portion of Aetna Life Insurance Company’s group commercial PPO, POS and indemnity business compared to a threshold attachment point specified in the applicable reinsurance arrangement.
The principal amount of the Vitality Re V notes, which are non-recourse to Aetna, and the coverage available under the reinsurance arrangement will be reduced by any payments to Aetna under the reinsurance arrangement. Aetna will be entitled to begin to receive payments from Vitality Re V under the reinsurance arrangement if the MBR of the covered business for calendar year 2014 reaches an initial attachment point of 96%.
The full $200 million of coverage would be paid to Aetna if the MBR of the covered business reaches an initial exhaustion point of 116% for calendar year 2014.
The attachment and exhaustion points will be reset annually for 2015, 2016, 2017 and 2018 to maintain modeled probabilities of attachment and expected loss on the Vitality Re V notes equal to the initial modeled probabilities of attachment and expected loss.
“This reinsurance arrangement improves our capital efficiency and reduces our weighted average cost of capital,” commented Aetna’s Treasurer J. Lankford Wade. “Today’s transaction, which essentially replaces the Vitality Re II arrangement, marks the successful completion of our fifth such reinsurance arrangement.”
Vitality Re V Limited is a newly formed Cayman Islands domiciled insurance company which issued health insurance-linked notes in a private offering in connection with the Vitality Re V transaction. The Vitality Re V Ltd. variable rate note program and the two tranches of notes issued have been admitted for listing on the Cayman Islands Stock Exchange.
Standard & Poor’s said that it assigned its ratings of ‘BBB+(sf)’ and ‘BB+(sf)’ to the Class A and Class B notes, respectively, issued by Vitality Re V Ltd. S&P notes that this is the first Vitality Re transaction from Aetna which has a variable reset feature, allowing the medical benefit ratio (MBR) attachment point to be reset to below the initial MBR attachment point if the sponsor chooses.
Because of that variable reset feature Vitality Re V offers Aetna the most flexible reinsurance protection yet from its five health insurance cat bond deals. Aetna continues to show its commitment to the ILS market and will likely continue to use these types of transactions while they remain well-priced and good diversifier of its capital sources.
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