Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Vitality Re II Ltd. Series 2011-1 medical benefit linked securitization now marketing


After the success of their first medical benefit insurance-linked security transaction Vitality Re which came to market in December last year, Aetna are seeking to secure additional catastrophe bond type cover for their Health Re Inc. subsidiary through a second transaction.

Vitality Re II Ltd. is a Cayman Islands domiciled SPV set up specifically for the purpose of allowing Health Re Inc. and ultimately Aetna Life Insurance Co. to transfer some of their medical benefit claims risks to capital markets investors. The deal provides them with a source of indemnity based on an annual aggregate excess of loss reinsurance basis against medical benefit claims reaching above a predetermined level.

The notes which will be issued by Vitality Re II Ltd. help to cover claims payments of Health Re should a defined medical benefit ratio (MBR), essentially an index of claims or losses, exceed attachment levels. Aetna will enter into a quota share reinsurance agreement with Health Re, that allows Aetna to cede $700m of covered premiums to Health Re who will then enter into an excess of loss contract with Vitality Re II for each of two classes of notes being issued. If the medical benefit ratio for the covered premiums exceeds the specified trigger levels Health Re will be entitled to payments from Vitality Re II. The trigger points are initially set at levels that the ceding insurer has never experienced claims at.

It’s a repeat of last years Vitality Re transaction designed to expand the coverage provided to Aetna by the capital markets. Goldman Sachs are again sole bookrunner on the deal with Milliman Inc. providing risk modelling and reset services.

Vitality Re II Ltd. is seeking to issue two tranches of notes, a $105m Class A tranche and an as yet unsized Class B tranche. Standard & Poor’s have given each tranche of notes preliminary ratings with the Class A notes rated ‘BBB’ and the Class B ‘BB+’. The deal is expected to have a term of 2.75 years with maturity expected in January 2014.

Proceeds from the sale of the notes will be invested in two collateral accounts and Vitality Re II will enter into a repurchase agreement with Goldman Sachs.

It’s encouraging to see Aetna seeking to transfer more of their medical benefit risks to the capital markets. If successful it will be a positive sign for other companies who may seek to replicate this type of transaction for health related risks. While this deal is a repeat of the successful transaction completed last year, it will be interesting to see how well received by investors it is at this time when the cat bond market is still coming to terms with the events in Japan. It could see high demand from investors and the eventual size of the deal (given the currently unsized Class B tranche) will be telling of how much risk investors are willing to absorb as a chance to diversify their ILS portfolios further.

Details on this transaction are now in our Deal Directory and we’ll update you as it progresses to market.

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