Aetna’s claim ratio well-below Vitality Re ILS trigger in Q1 despite Covid-19

Despite the impacts of the Covid-19 coronavirus pandemic, the medical benefit claims ratio reported by insurer Aetna for the first-quarter of 2020 has remained well-below the levels where its Vitality Re series of health insurance-linked securities (ILS) transactions could be triggered, we can report.

As we’d explained previously, the Vitality Re health insurance ILS transactions, which provide reinsurance protection to health insurer Aetna, are all exposed to potential triggering by the coronavirus pandemic.

The Vitality Re series of health ILS transactions provide Aetna a mechanism to transfer peak health insurance related risks to the capital markets, as a way to augment its reinsurance protection using a catastrophe bond-like structure.

They provide an efficient way to secure reinsurance capital within the health insurers financial structure, as a tool to aid its capital efficiency and access coverage from a diversified source (the capital markets) as well.

The notes are exposed to increases in Aetna’s reported medical benefit ratio (MBR), so a metric of claims the health insurer has received to enable the notes to provide an indemnity source of reinsurance protection that is tightly aligned with Aetna’s actual claims experience.

As a result of this and given the fact the Covid-19 pandemic has driven significant numbers to hospitals in the United States, which will have elevated health insurance claims levels, ILS funds and investors had been watching for how the MBR would develop and be reported due to the pandemic.

We’re told by sources that Aetna filed an MBR update report with investors in its Vitality Re health ILS deals last week.

The reported medical benefit ratio for the first-quarter of 2020 is reported as 82%, which while above the seasonally expected average for a Q1 is still far below the levels required to see any Vitality Re ILS transaction triggered.

We understand from sources that the norm for a Q1 MBR would be somewhere from 78% to perhaps as much as 80%, meaning the 82% reported is really not that far above average.

Of course this is only for the first-quarter of the year and the pandemic has continued to escalate and rage across the United States in the second-quarter of 2020, so the MBR is likely to remain elevated for this quarter as well.

But it is a better start to the year than many had been expecting, as evidenced by the way the Vitality Re health ILS deals were all marked down and discounted in the secondary market.

The notes have all recovered some value since that time, but remain marked down a few points to as much as down 10% on some pricing sheets for cat bonds and other ILS.

Four Vitality Re health insurance ILS transactions remain outstanding and on-risk at this time, across eight tranches of ILS notes.

These are the $200 million Vitality Re VIII Ltd. (Series 2017-1) issuance, the $200 million Vitality Re IX Ltd. (Series 2018-1) issuance, the $200 million Vitality Re X Ltd. (Series 2019)issuance, and most recently the $200 million Vitality Re XI Ltd. (Series 2020) issuance that only came to market at the beginning of this year.

The riskiest tranche of notes at this time appear to be the Vitality Re VIII Class B layer, which could attach at an MBR of 95.3% since its latest reset, we’re told. Other Class B tranches have trigger points at around the 96% MBR point.

It remains the case that a significant escalation in the pandemic appears necessary for these Vitality Re ILS deals to be triggered, or some other health related crisis to emerge that significantly elevates medical benefit insurance claims levels for the sponsor Aetna.

You can read about every Vitality Re health insurance-linked securities (ILS) transaction from Aetna in our extensive catastrophe bond Deal Directory.