Insurer Aetna Inc. said Monday that it has entered into a three-year reinsurance agreement with Vitality Re Limited, a newly formed special purpose insurance company based in the Cayman Islands.
Aetna said the deal is part of its long-term capital management strategy. It allows Aetna to reduce its required capital and provides $150 million of collateralized excess of loss reinsurance coverage on a portion of Aetna's group commercial health insurance business.
The first of their kind insurance linked notes were offered in a private offering associated with the deal between Aetna and Vitality Re.
Vitality Re issued $125 million of Class A notes, which have been rated "BBB-" by Standard and Poor's analysts, the lowest investment-grade rating. About $75 million of Class B notes were rated "BB," a noninvestment-grade rating.
Aetna will receive payments from Vitality Re if the medical benefit ratio of Aetna Life Insurance Co.'s group commercial managed health care plans for 2011 reaches a point of 104 percent. The full $150 million will be paid to Aetna if the ratio reaches 114 percent for 2011. The medical benefit ratio measures the percentage of premiums spent on medical costs. Whenever claims exceed the threshold established in the agreement, investors lose part or all of their principal.
The thresholds are reset annually for 2012 and 2013.
In after-hours trading, shares of Aetna added 5 cents to $32.27.