Hot on the heels of the launch of a third Vitality Re transaction which we covered here earlier, the two previous Vitality Re transactions issued by Aetna to cover health insurance risks linked to medical benefit claims ratios have both been placed on CreditWatch with positive implications by ratings agency Standard & Poor’s. S&P cites an improved claims experience on the underlying book of covered business as the reason for the rating update.
Vitality Re Ltd., the first of these unique catastrophe bond type transactions, was issued in December 2010. Vitality Re II Ltd., which saw Aetna return to the insurance-linked securities market to increase the coverage provided by the Vitality Re series of deals, was issued in April 2011.
S&P says that there has been improved claims experience on the covered book of business that Aetna subsidiary Health Re Inc. ceded to Vitality Re and Vitality Re II under the terms of the ILS transactions. The deals use a medical benefit claims ratio to measure and trigger loss payments. The medical benefit ratio attachment point for the Vitality Re 2010-1 Class A tranche of notes is 104% while the attachment for the Vitality Re II 2011-1 Class A and B tranches of notes are 105% and 100% respectively.
With annual resets approaching S&P expects that when calculating the medical benefit ratios the positive claims trends over the past two years to lower the probability of attachment for all three tranches of notes. The initial medical benefit ratio had been weighted more heavily on the 2009 ratio which was less favourable (due to claims experience from that year) than what was experienced in 2010 and the first nine months of 2011.
S&P are waiting for the output of the deals modellers Milliman Inc. who are updating the modelling results, which in turn will reflect the probability of attachment for these deals going forwards. Given the information that they have S&P expect to raise the ratings on the notes one or two notches and resolve this CreditWatch position positively within 30 days.
Coming just after the Vitality Re III Ltd. deals launch this news should enthuse investors looking for a good ILS diversification opportunity as the perception of the riskiness of this series of deals has improved. We’ll update you when the CreditWatch is resolved and new ratings are applied.