Health insurance company Aetna has hailed the completion of its latest ILS transaction, Vitality Re VII Ltd. (Series 2016-1), which it says help it to “reduce its required capital” while gaining a $200m source of collateralized excess of loss reinsurance.
The Vitality Re II 2016-1 health insurance loss ratio linked ILS, or catastrophe bond, deal, saw Aetna returning to the capital markets for the seventh time since it first brought a Vitality Re to the ILS market in 2010.
Over the years since it began to tap the capital markets for an efficient source of capital and reinsurance capacity, Aetna has now benefited from $1.2 billion of collateralized reinsurance capacity across the seven deals. Details of all seven Vitality Re transactions can be found in the Artemis Deal Directory.
Commenting on the completion of the transaction, Aetna’s Treasurer David Buda said; “Today’s transaction marks the successful completion of our seventh such reinsurance arrangement. This reinsurance arrangement improves our capital efficiency and reduces our weighted average cost of capital.”
That’s important to note, as the health insurer has found an efficient way to better manage its capital efficiency, lower its cost-of-capital, while also benefiting from reinsurance protection. Something that all budding catastrophe bond or ILS sponsors should consider.
The transaction provides Aetna with a four-year source of reinsurance protection on a portion of its group commercial health insurance business. Cleverly, the Vitality Re transactions are structured to respond to sharp increases in the medical benefit claims ratio at the firm, thus providing indemnity protection but not based on dollar losses, rather based on claims rates.
For a health insurer this is idea, as it may take many small claims to aggregate for a major balance-sheet event to be fully realised financially by the firm.
Aetna said that the completion of the transaction enables it to “reduce its required capital and provides $200 million of collateralized excess of loss reinsurance coverage on a portion of Aetna’s group commercial health insurance business.”
Under the terms of the reinsurance arrangement and securitization of the Vitality Re VII notes, Aetna will be entitled to begin to receive payments if the medical benefit ration (MBR) of the covered business for calendar year 2016 reaches an initial attachment point of 94%.
The full $200m of reinsurance coverage would be paid to Aetna if the MBR reaches an initial exhaustion point of 114% for calendar year 2016. Both attachment and exhaustion points will be reset annually for 2017, 2018 and 2019, in order to maintain modeled probabilities of attachment and expected loss on the Vitality Re VII notes equal to the initial modeled probabilities of attachment and expected loss.
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