Aetna have completed their latest insurance-linked security transaction with a successful issuance under their Vitality Re II Ltd. Cayman Islands SPV. They’ve secured $150m of catastrophe bond type cover for their Health Re Inc. subsidiary making this their second medical benefit insurance-linked security transaction.
Vitality Re II Ltd. Series 2011-1 began marketing at the start of April as a two tranche deal with $105m of Class A notes and an unsized Class B note tranche. The Class B notes sought to issue notes with a greater risk and lower attachment point, something they tried to do but failed in the first Vitality Re Ltd. transaction last year, this time however they have been successful and issued both tranches of notes. The deal has completed at $150m with the Class A notes tranches sized at $110m and the Class B notes at $40m. Aetna will be pleased with the cover the two tranches offer them for their medical benefit risks.
The Vitality Re II deal benefits Aetna by reducing their capital requirements and risk of health insurance claims hitting a predefined point. Aetna has secured $150m of collateralized excess of loss reinsurance over the next 2.75 years through the private placement of notes and will receive payments from Vitality Re II Ltd. should the medical benefit ratio of certain managed care health plans reach 100%. The full $150m payment would be due to Aetna if the medical benefit ratio reached 120% during 2011, the attachment point and exhaustion point will be reset in following years. The medical benefit ratio is worked out based on the percentage of collected premiums spent on actual medical costs.
Aetna says that the Vitality Re deals form an important part of their long-term capital management strategy. “I am pleased to announce the successful completion of our second transaction, which allows Aetna to free up additional capital held with respect to the covered business, and deploy it accretively for other purposes,” said Joseph M. Zubretsky, senior executive vice president and CFO. “As with Vitality Re, this transaction provides catastrophic risk protection, improves our capital efficiency, and reduces our weighted average cost of capital.”
The $110m of Class A notes priced at 440 basis points above Libor while the $40m of Class B notes priced at 625 basis points above. Both tranches are scheduled to mature on 7th January 2014. Standard & Poor’s rated the Class A notes ‘BBB’ and the Class B notes ‘BB+’.