Aetna press release on Vitality Re medical benefit linked ILS

Aetna announced today through a press release the completion of the Vitality Re Ltd. medical benefit linked insurance linked security transaction. This catastrophe bond type structure provides Aetna with additional reinsurance cover for certain of its health insurance risks. The press release from Aetna follows below.

Aetna Announces Transaction With Vitality Re

Newly formed insurance company issues health insurance linked notes

HARTFORD, Conn., January 10, 2011 — Aetna (NYSE: AET) today announced that, as part of its long-term capital management strategy, it has entered into a three-year reinsurance agreement with Vitality Re Limited. The agreement allows Aetna to reduce its required capital and provides $150 million of collateralized excess of loss reinsurance coverage on a portion of Aetna’s group commercial health insurance business.¹ Vitality Re is a newly formed insurance company which issued the industry’s inaugural health insurance-linked notes in a private offering in connection with this agreement.

“I am pleased to announce the successful completion of this transaction, which allows Aetna to free up 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. “Through this innovative transaction, we have improved our capital efficiency, enhanced our financial flexibility and reduced our weighted average cost of capital. We expect this to be the first step in a larger program.”

1 Amounts payable under the reinsurance agreement are based on the annual medical benefit ratio (“MBR”) of a portion of Aetna Life Insurance Company’s group commercial PPO, POS and indemnity business compared to a threshold attachment point specified in the reinsurance agreement. The principal amount of the Vitality Re notes, which are non-recourse to Aetna, and the coverage available under the reinsurance agreement will be reduced by any payments to Aetna under the reinsurance agreement. Aetna will be entitled to begin to receive payments from Vitality Re under the reinsurance agreement if the MBR of the covered business for calendar year 2011 reaches an initial attachment point of 104%. The full $150 million of coverage would be paid to Aetna if the MBR of the covered business reaches an initial exhaustion point of 114% for calendar year 2011. The attachment and exhaustion points will be reset annually for 2012 and 2013 to maintain modeled probabilities of attachment and expected loss on the Vitality Re notes equal to the initial modeled probabilities of attachment and expected loss.