Swiss Re Insurance-Linked Fund Management

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Vitality Re III Ltd. medical benefit insurance-linked security brought to market by Aetna


Aetna Life Insurance are returning to the insurance-linked security market to issue a third in their Vitality series of medical benefit linked securitizations. Vitality Re III Ltd. Series 2012-1, which is being issued through a Caymans Islands domiciled SPV, is seeking to issue $150m of medical benefit linked notes to investors in two tranches. The deal will provide catastrophe bond type cover to Aetna subsidiary Health Re Inc. against medical benefits claims exceeding pre-determined levels.

The novel transactions in the Vitality series, which were the first to bring a healthcare type of risk to the ILS market in a cat bond format, have been very well received by investors in the past and we expect this to continue. They provide a good source of reinsurance cover ultimately for Aetna Life Insurance, enabling them to hedge the risk of claims on their medical benefit policies increasing dramatically over a year period during the term of the deal.

This deal is scheduled to provide cover for 3 years and will fund Vitality Re III’s commitments under excess of loss agreements with Health Re, and ultimately Aetna, providing a source of indemnity based on an annual aggregate excess of loss reinsurance capacity against medical benefit claims above a predetermined threshold. The notes use a medical benefit ratio index to measure the annual aggregate claims level with a predefined trigger point at which loss payments would be due. For the Class A notes the medical benefit claims ratio has to exceed 103% and for the Class B notes it must exceed 97%. The medical benefit ratio is calculated on an annual aggregate basis and there are annual rests allowing for the ratio and trigger point to be reset.

At the start of this transaction, Health Re enters into excess of loss agreements with Vitality Re III, which provide coverage if the medical benefit ratio of the covered book of business (commercial accident and health business only) is higher than the specified trigger levels. Vitaity Re III funds the excess of loss agreements by selling the notes and reduces the principal if payments are due under the excess of loss contracts. Vitality Re III establishes a credit-for-reinsurance trust account for each of the two classes of notes and loss payments due will be made into them. Health Re will make interest payments to Vitality Re III to fund the coupon payments in the notes.

At the end of each year period, if the covered business medical benefit ratio exceeds the attachment point, the outstanding principal will be reduced by the amount of claims paid under the excess of loss agreements.

Proceeds from the sale of the notes will be deposited into a collateral trust account and will be invested in highly rated money market funds.

Milliman Inc. are again providing risk analysis for this deal and Goldman Sachs lead the placement and structuring.

The deal is structured in two tranches, with the Class A notes sized at $105m and the Class B at $45m. Standard & Poor’s have given the Class A notes a ‘BBB+’ preliminary rating and the Class B notes ‘BB+’.

It’s encouraging to see this third Vitality deal come to market. The repeatable nature of this transaction must give other medical insurers a reason to look to the ILS market as well given the significant risks that remain in the health and medical benefit sector. It has to be hoped that other insurers will step up and attempt to issue similar deals in ILS form.

We’ll bring you more on this deal as it progresses to market and you can always find the details in our Deal Directory.

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