Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

S&P upgrades Vitality Re and Vitality Re II on positive claims trends


A few weeks ago in January we wrote that ratings agency Standard & Poor’s had placed the notes issued by Vitality Re Ltd. and Vitality Re II Ltd. on CreditWatch with positive implications. The two medical benefit ratio insurance-linked securities deals sponsored by Aetna had experienced positive claims trends and S&P wrote that they could be upgraded once the new modelling results were received. As they expected, the modelling results lowered the probability of attachment on the deals and as a result some tranches have been upgraded.

Vitality Re Ltd., the first of these unique catastrophe bond type transactions which provide Aetna with cover for health insurance risks linked to medical benefit claims ratios, was issued in December 2010 and secured Aetna $150m of collateralized reinsurance cover. Vitality Re II Ltd., which saw Aetna return to the ILS market to increase the coverage provided by the Vitality Re series of deals by another $150m, was issued in April 2011. In recent weeks Aetna have also completed a third transaction with the $150m Vitality Re III Ltd. coming to market. So at this stage Aetna have $450m of collateralized reinsurance cover for increases in health insurance claims provided by these Vitality Re cat bond type transactions.

S&P have now received updated model results from Milliman Inc. (who provide risk modelling services for these deals) based on the methodology used for the latest Vitality Re III transaction. The modelling confirmed the improved claims experience on the covered business that Aetna subsidiary Health Re ceded to Vitality Re and Vitality Re II. As a result of the improved claims experience, which results in a lowered probability of attachment, S&P raised their rating on Vitality Re Ltd.’s Series 2010-1 Class A notes to ‘BBB+’ from ‘BBB-‘, and its rating on Vitality Re II Ltd.’s Series 2011-1 Class A notes to ‘BBB+’ from ‘BBB’. At the same time, S&P affirmed their ‘BB+’ rating on Vitality Re II Ltd.’s Series 2011-1 Class B notes.

S&P says that the medical benefit ratio (MBR) attachment for the Series 2010-1 Class A notes is 104%, and 105% for the Series 2011-1 Class A notes. When they calculate the updated MBR for the upcoming resets for the two deals they expect the positive claims trends to lower the probability of attachment. They had weighted the initial MBR’s for the first two Vitality deals more heavily based on the 2009 claims experience and MBR which was less favourable than the MBR experienced in 2010 and the first nine months of 2011.

The MBR attachment point for the Series 2011-1 Class B notes is 100%. S&P says that although the updated probability of attachment is lower than before it is still within a ‘BB+’ rating range and so this tranche of notes was not upgraded.

The ratings are based on the probability of attchment in each year, but slightly adjusted to allow for the difference between actual MBR claims ratios and the modelled results. For this they use stress testing scenarios within Milliman’s model to identify strengths and weaknesses and adjust the probability of attachment accordingly.

Investors in the Vitality Re transactions must be pleased with the lower probability of attachment that has been identified with these notes as it suggests a safer and less risky investment.

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