Aetna Buys Reinsurance Coverage - Analyst Blog
January 27 2012 - 12:22PM
Zacks
U.S.health insurer Aetna Inc. (AET) has
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 catastrophe bond-type cover for its subsidiary Health Re Inc.
against medical benefits claims exceeding pre-determined
levels.
The agreement is a part of Aetna’s long-term capital management
strategy, which will release capital held with respect to its
commercial group health business. It is also expected to
effectively meet the risk-based capital requirements set by state
regulators.
Aetna will start receiving reimbursements from Vitality Re if
its medical ratio, the percentage of premiums spent on medical
costs, reaches 97%. The upper limit for the ratio has been set at
117%, 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 last year 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. (UNH),
CIGNA Corp. (CI), and WellPoint
Inc. (WLP) to follow suit.
We expect to get more color on this transaction during the
fourth quarter earnings conference, which is scheduled before the
opening bell on February 1, 2012. As per the Zacks Consensus
Estimates, Aetna’s earnings are expected to be 98 cents per share
for fourth quarter 2011 and $5.16 per share for full year 2011.
Aetna currently retains a Zacks # 2 Rank, which translates into
a short-term Buy rating. Considering the fundamentals, we are also
maintaining our long-term Outperform” recommendation on the
shares.
AETNA INC-NEW (AET): Free Stock Analysis Report
CIGNA CORP (CI): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
WELLPOINT INC (WLP): Free Stock Analysis Report
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