Posted on Jan 13, 2011 by Sergio Ulloa
Aetna has entered into a novel three-year reinsurance agreement with Vitality Re as part of the US insurer's long-term capital management strategy.
The purpose of the reinsurance deal is to allow Aetna's commercial health insurance unit to release retained capital in order to provide more flexibility for the expansion of operation essentially arising from developments in US health reforms.
The new agreement between Vitality Re and Aetna will allow the US health insurer to reduce its own capital base by providing collateral for US$150 million of reinsurance coverage on a portion of Aetna's group commercial health insurance business.
The Cayman Island based company - Vitality Re - is a newly formed insurer which has released the industry's inaugural health insurance-linked notes in a private offering in relation to the recent agreement with Aetna.
Joseph M. Zubretsky, senior executive Vice President and CFO of Aetna, said: "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. 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."
In addition to Aetna announcing its new reinsurance agreement, the US health insurer highlighted strategic plans for 2011 at the J.P. Morgan Healthcare Conference held in San Francisco on the 10th January 2011.
A key part of Aetna's business plans for 2011 is to increase its presence in the Medicaid market in conjunction with the President Obama lead health reform program in the US; a major element of the US healthcare amendment being to expand the reach of healthcare coverage in the country.
Medicaid is available to certain low-income individuals and families in the US and is seen as a pivotal factor by Aetna for growth of the insurer's activities in the future.
Medicaid is a joint US federal and state government healthcare scheme providing health insurance for low-income individuals and families in the US under the March 2010 Patient Protection and Affordable Care Act. As the US healthcare reform package begins to take effect, Aetna aims to seize the opportunity to increase the number of policyholders under the Medicaid arrangements.
Arrangements for Medicaid insurance will change in early 2014 making it more accessible to a greater pool of people in the US. From 2014, nearly all American adults under the age of 65 with an individual income under US$15,000 per year will be eligible for Medicaid in all US states. Couples, pregnant woman and people with disabilities will also be able to qualify, with the threshold level being altered to make Medicaid easier to obtain.
Health insurers in the US have experienced a steady decline in membership numbers in recent years resulting from the tough economic conditions following the near collapse of financial markets in 2008 and the resultant increase in the level of unemployment with corporate retrenchment. As the US healthcare system primarily revolved around companies providing their workforce with healthcare coverage, the vulnerability of the health insurance network in the USA - and its impact on the nation's general health - has been exposed.
As the US health reform program starts to take shape, it is expected that an extra 30 million Americans will have access to health insurance with US health insurers, such as Aetna, competing for this market.
However, the US health reforms require insurers to comply with tighter regulations including the requirement to spend roughly 80 percent of collected premiums on direct medical care, with strict guidelines for the provision of healthcare coverage for the vulnerable population.
Aetna announced third quarter earnings amounting to US$419.6 million, covering 18.5 million members - although this reflected a decline of 74,000 in its customer base. Aetna is expected to release fourth quarter figures for 2010 in February 2011.
Aetna recently announced that it has completed the takeover of Medicity, a health information exchange technology company. The acquisition provides Aetna with information on a broad range of products and services covering health systems, hospitals, physician practices and health information exchanges. This will allow Aetna to be more efficient in the provision of patient care and reduce associated healthcare costs.
In addition to health care management services for Medicaid plans, Aetna provides a wide range of health insurance products and services including care plans for medical, pharmacy, dental, behavioural and disability conditions; it also provides group life plans. The client base includes individuals, employer groups, government units, part-time and hourly workers, labor groups and expatriates.
While Aetna, like most health insurers in the USA, has struggled in recent years to maintain, let alone generate new new clients, the proposed reforms to health insurance present US health insurers with new opportunities. Aetna's new agreement with Vitality Re is designed to offer the health insurer more flexibility in writing new commercial health insurance in this very competitive business.
Insurance Company Mentioned:
Aetna is a leading global diversified health care benefits company head-quartered in the U.S., serving approximately 35.8 million people with information and resources to help them make better informed decisions about their health care. Aetna offers a broad range of traditional and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioural health, group life and disability plans, and medical management capabilities and health care management services for Medicaid plans. Our customers include employer groups, individuals, college students, part-time and hourly workers, health plans, governmental units, government-sponsored plans, labour groups and expatriates.