Health insurance company Aetna said that its successful eighth Vitality Re health insurance linked securitisation transaction, the $200 million Vitality Re VIII Ltd. (Series 2017-1), contributes to an enhanced capital position for the firm.
The successful execution of the Vitality Re VIII transaction, and sale of the notes issued to investors, now provides the collateral backing a $200m excess of loss reinsurance arrangement between Aetna’s captive reinsurance firm Health Re and the SPV, while the reinsurance protection flows back to Aetna through its quota share with Health Re.
The company said that the four-year reinsurance arrangement with Vitality Re VIII constitutes “part of its long-term capital management strategy.”
Through these health insurance linked ILS transactions Aetna is able to “reduce its required capital,” the company explained, as well as covering a portion of its commercial health insurance book using fully collateralised reinsurance.
“Today’s transaction marks the successful completion of our eighth such reinsurance arrangement,” commented Aetna’s Treasurer David Buda in an announcement. “This reinsurance arrangement improves our capital efficiency and reduces our weighted average cost of capital.”
Any payments made to Aetna, and therefore losses to the investors in the notes, will be based on the annual medical benefit ratio (“MBR”) (so a claims made or loss ratio) on a portion of the company’s commercial PPO, POS and indemnity health insurance business exceeding a pre-defined attachment point.
The principal of the Vitality Re VIII notes would be reduced by any payments to Aetna under the reinsurance arrangement. Payments would only be seen if the MBR of the covered health insurance business for calendar year 2017 hits an initial attachment point of 96%, the MBR trigger point.
Coverage would be available to Aetna up to an MBR of 116% for calendar year 2017, after which the full $200 million would have been paid out and the coverage exhausted.
The Vitality Re VIII notes attachment and exhaustion points can be reset annually for 2018, 2019 and 2020, in order to ensure that the modeled probabilities of attachment and expected loss are equal to the initial modeled probabilities of attachment and expected loss, despite changes in the covered book of business.
By enhancing its capital position using the ILS and capital markets Aetna is benefiting from tail risk reinsurance protection, and an ability to lower its required capital.
With the Vitality Re VIII notes coupons pricing at a very low level, the capital protection and enhancement this eighth Vitality Re offers Aetna may be the most cost-effective and efficient ever.
Aetna had previously sponsored 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, Vitality Re V Ltd. (Series 2014-1) in January 2014, Vitality Re VI Ltd. (Series 2015-1) in January 2015 and Vitality Re VII Ltd. (Series 2016-1) in January 2016.
The seven earlier Vitality Re transactions have provided Aetna with $1.2 billion of reinsurance protection and capital efficiency to-date.
Add in the new $200 million of protection from its eighth deal, Vitality Re VIII Ltd. (Series 2017-1), and Aetna has now secured an impressive $1.4 billion of capital market backed reinsurance efficiency since late 2010.