Aetna's Reinsurance Transaction - Analyst Blog

Yesterday, Aetna Inc. (AET) announced a three-year reinsurance agreement with Vitality Re Limited, a newly formed special purpose insurance company based in the Cayman Islands. Per the agreement, Aetna will get $150 million of collateralized excess of loss reinsurance coverage on a portion of its group commercial health insurance business.

The agreement is a part of Aetna's long-term capital management strategy, which will free up capital held with respect to its covered business that can be deployed effectively for other purposes. Aetna will start receiving reimbursement from Vitality Re if its medical ratio, the percentage of premiums spent on medical costs reaches 104%.

The upper limit for the ratio has been set at 114%, implying that in case the ratio reaches 114%, Aetna will get a full payment of $150 million. Since the agreement will be effective for 3 years, the rate will be rearranged for the years 2012 and 2013. 

The agreement saw the issuance of $150 million of insurance linked notes, the first of their kind in a private offering. The $125 million Class A insurance linked notes have clinched a “BBB-“ rating from the rating agency Standard and Poor's, while $75 million were rated “BB”. The “BBB-“ rating is the lowest investment-grade rating while “BB” implies a non-investment-grade rating.

Aetna is slated to release its fourth quarter and full-year earnings on February 4, before the opening bell. The Zacks consensus estimates fourth quarter earnings of 6 cents per share and $3.62 for the full year versus $3.60 as per management's expectations.

Based in Hartford, Connecticut, Aetna Inc. provides health care, dental, pharmacy, group life, disability, and long-term care benefits in the United States.  It operates in three segments – Health Care, Group Insurance, and Large Case Pensions. Aetna primarily serves employer groups, individuals, college students, part-time and hourly workers, health plans, governmental units, government-sponsored plans, labor groups, and expatriates.