U.S. flu outbreak hits Aetna but unlikely to trigger Vitality Re deals

U.S. health insurer Aetna, which has a number of catastrophe bond like medical benefit linked securitizations providing it with reinsurance protection, has been hit hard by the influenza outbreak in the United States this winter. The U.S. flu outbreak now appears to have peaked, but the higher than normal incidence of flu this season has cost health insurers as claims on health insurance coverages have risen.

Aetna, one of the largest U.S. healthcare insurers, has experienced an increase in paid medical claims due to the flu outbreak with a 9% increase in medical claims in the fourth-quarter of 2012 versus the same period in 2011 alone, according to its recent Q4 results. That increased the amount Aetna paid in medical claims in the fourth-quarter to around $6.12 billion.

Aetna’s Vitality Re Ltd. series of medical benefit linked insurance-linked security (ILS) transactions utilise the company’s medical benefit ratio, a ratio of claims received, to derive a trigger for the deals. If the medical benefit claims ratio (MBR) increases above a certain level then the Vitality Re notes begin to payout and investors in the ILS deals will lose some of the deals principal.

Aetna has four ILS transactions which currently provide the firm with $600m of fully-collateralized reinsurance protection against increases in medical benefit claims rates. Most recently Aetna sponsored Vitality Re IV Ltd. (Series 2013-1) which completed in January. The firms other three Vitality transactions are Vitality Re III Ltd., Vitality Re II Ltd. and Vitality Re Ltd.

In order for the Vitality Re transactions to begin paying out Aetna needs to experience a medical benefit ratio of 96% or above. The highest MBR experienced in previous years was 88.5% in 2009, the year that the H1N1 flu pandemic struck. A while ago, Aetna CEO Mark Bertolini said that he didn’t expect claims in the current flu season to come anywhere close to that level, and according to the insurers Q4 results they haven’t, so far.

In its Q4 results Aetna reported its combined (commercial and personal) medical benefit ratio as 84.1%, up from 80.7% a year earlier. Most of the hit was in its commercial book of business where the MBR was 83.4% in Q4, which is 4.4% higher than a year earlier.

The increase in MBR and paid claims costs Aetna money, the CEO said he expects medical benefit claims from flu to cost between $50m and $100m more than a typical year, but currently the MBR is well below the levels required to worry investors in Vitality Re.

Demonstrating how bad the flu season has been this year in the U.S., health insurer Centene Corp attributed some of its poor performance to flu related claims. Another health insurer Humana said that flu related claims would cost it an additional $75m.

The Vitality Re deals are structured to protect Aetna against large increases in claims which would seriously impact its bottom line. The flu season, while the worst for a few years, has not yet been severe enough to cause that big an impact. The flu season has a way to go before the season is completely over but it is not expected to get any worse than we’ve currently seen so it seems that the Vitality Re ILS transactions will remain safe and continue providing Aetna with reinsurance protection against any future increases in medical benefit ratio.