Aetna hails efficient, lower-cost capital from launched Vitality Re VI

Health care insurance and benefits firm Aetna has hailed the improved “capital efficiency” and reduction in its “weighted average cost of capital” that it has achieved with the successful completion of its sixth medical benefit claims linked Vitality Re VI Ltd. (Series 2015-1) ILS.

Aetna has been visiting the capital markets to tap insurance-linked securities (ILS) investors as a source of fully-collateralized reinsurance protection since late 2010 when it brought its first Vitality Re deal to market.

The structure hasn’t changed much in that time, providing Aetna with a multi-year source of capital markets protection against increases in its health insurance claims, with any payouts to be determined by a medical benefit ratio trigger.

With Vitality Re VI Aetna has secured $200m of reinsurance protection over a three-year period, which it considers part of its long-term capital management strategy. The deal effectively allows Aetna to reduce its required capital through the provision of excess of loss reinsurance for a portion of its commercial health insurance (PPO, POS and indemnity) business.

The deal replaces a maturing Vitality Re III, which expired earlier in January.

Aetna’s Treasurer David Buda commented on the deals completion; “Today’s transaction, which essentially replaces the Vitality Re III arrangement, marks the successful completion of our sixth such reinsurance arrangement. This reinsurance arrangement improves our capital efficiency and reduces our weighted average cost of capital.”

The deal features a $140m Class A tranche of notes, which attach at 100% of the medical benefit ratio and exhaust at 114%,. This tranche of notes priced to pay investors a coupon of 1.75%, which was below the mid-point but not quite at the bottom of guidance.

A $60m Class B tranche of notes are riskier, attaching first at a 94% MBR covering losses up to the 100% level. This tranche saw the price drop below the guidance range, settling at a 2.1% coupon for investors.

For Aetna, this deal’s additional $200m of cover kicks in at a slightly lower down level than other deals it has sponsored and as a result continues to improve the health insurers capital adequacy. It will give Aetna flexibility in how it uses its capital, as well of course as the reinsurance cover against very severe increases in its health insurance claims.

Aetna’s previous Vitality Re deals can all be found in our Deal Directory: Vitality Re Ltd. in December 2010, Vitality Re II Ltd. in April 2011, Vitality Re III Ltd. (Series 2012-1) in January 2012, Vitality Re IV Ltd. (Series 2013-1) in January 2013 and Vitality Re V Ltd. (Series 2014-1) in January 2014.

Read all about Vitality Re VI Ltd. (Series 2015-1).

– Aetna launches new Vitality Re VI health insurance linked ILS.

– S&P explains volatility in Vitality Re ILS, but pandemic remains the tail.

– Aetna’s Vitality Re VI health insurance ILS prices low at $200m.