U.S. health insurer
) has announced a four-year reinsurance agreement with Vitality
Re IV Limited, a newly-formed special purpose insurance company
based in the Cayman Islands.
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The agreement is a part of Aetna's long-term capital management
strategy, through which it will get $150 million of catastrophe
bond-type cover for its commercial group health business.
The transaction is expected to release capital held with respect
to Aetna's commercial group health business, thereby effectively
meeting the risk-based capital requirements set by state
Aetna will start receiving reimbursements from Vitality Re if its
medical ratio, the percentage of premiums spent on medical costs,
reaches 96%. The upper limit for the ratio has been set at 116%,
implying that in case the ratio reaches the set limit, Aetna will
get a full payment of $150 million.
Aetna's reinsurance agreement signals that the company is trying
to tap the capital market to refinance debt maturities, enhance
liquidity at favorable interest rates, and fund acquisitions.
Though reinsurance transactions financed by debt in the form of
insurance-linked securities are common in the property and
casualty insurance sector, it is a novel concept in the health
insurance sector. It all begun in 2011 when Aetna launched the
industry's first collateralized reinsurance transaction financed
by health insurance linked to debt securities.
Since the nature of the transaction allows Aetna to replace its
equity capital with lower cost capital, we expect other players -
UnitedHealth Group Inc.
) - to follow suit.
We expect to get more color on this transaction during the fourth
quarter earnings conference, which is scheduled on Jan 31, 2013.
As per the Zacks Consensus Estimate, Aetna is expected to earn 96
cents per share for fourth quarter 2012 and $5.13 per share for
full year 2012.
Aetna currently retains a Zacks Rank #3 (Hold).