Health care benefits insurer Aetna has successfully completed its ninth capital markets backed reinsurance arrangement through a $200 million issuance of health insurance-linked securities (ILS), in the Vitality Re IX Ltd. (Series 2018-1) transaction.
The issuance was completed using newly established Cayman Islands special purpose vehicle Vitality Re IX Ltd. which issued and sold the $200 million of health insurance-linked notes to capital market investors, to provide the collateral to back the underlying reinsurance agreements.
The 2018 Vitality deal will provide Aetna with a four-year source of fully collateralized excess of loss reinsurance coverage on a portion of the firm’s group commercial health insurance business.
Aetna sees the Vitality Re ILS transactions, which are catastrophe bond like in their nature, as a key piece of its long-term capital management strategy, enabling the insurer to reduce its required capital while benefiting from efficient reinsurance protection.
“Today’s transaction marks the successful completion of our ninth reinsurance arrangement under the Vitality Re program,” commented Aetna Treasurer David Buda. “The Vitality Re program remains an integral component of our capital structure by lowering our cost of capital and driving capital efficiency.”
The trigger for the deal is based on the annual medical benefit ratio (MBR) of a portion of Aetna Life Insurance Company’s group commercial PPO, POS and indemnity business, with the principal reduced should the MBR rise above a pre-determined attachment level.
The Vitality Re IX transaction provides Aetna with reinsurance coverage if the medical benefit ration (MBR) of the covered health insurance business for calendar year 2018 reaches an initial attachment point of 94%. The full $200 million of principal would be paid to the insurer if the MBR reaches an initial exhaustion point of 114% in the first year of the deal.
The notes attachment and exhaustion points can be reset for each following year, for 2019, 2020 and 2021, in order to keep the modeled probabilities of attachment and expected loss on the Vitality Re IX notes equal to the initial modeled probabilities.
Aetna secured its capital market reinsurance coverage at particularly low pricing levels in 2018, with the Vitality Re IX notes achieving pricing at levels which are very low even for the Vitality series of deals, which is clearly a reflection of ILS investor demand at the current time.
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