A rating analyst has given a lukewarm review to the idea of using a special purpose captive reinsurer to try to guard against catastrophic health insurance risk.

Aetna Inc. (NYSE:AET) recently announced that it will be getting a five-year, $200 million reinsurance arrangement from Vitality Re V Ltd. — a special-purpose captive reinsurer based in the Cayman Islands.

The company has used four other special-purpose captives to provide health reinsurance in $150 million chunks. The terms for those captives started in December 2010, April 2011, January 2012 and January 2013.

The new $200 million captive replaces the two first Vitality captives.

Steve Zaharuk, a Moody’s analyst, says Aetna has received regulatory approval to get statutory capital credit for the assets held by the reinsurer in the captive collateral accounts. 

The benefits from the Vitality transaction appears to be “quite modest and temporary,” Zaharuk says. 

If Aetna used the captives to replace a significant portion of its long-term capital “the credit implication would be negative,” Zaharuk says.

But, once Vitality V comes on line, the total value of the Vitality deals will be just $500 million, Zaharuk says.

Moody’s will let Aetna count the capital in the collateral accounts in its capital as long as the accounts support no more than 0.25 percentage points of Aetna’s total risk-based capital (RBC) ratio, Zaharuk says.

In February, the $500 million value of the Vitality captives will probably amount to about 0.15 percent to 0.2 percent of Aetna’s RBC ratio, Zaharuk estimates.

Representatives from Aetna were not immediately available to comment on the analysis.

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