A Very Long Engagement: Asset Allocation Implications of U.S. Life Insurance Risk-Based Capital Changes

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A Very Long Engagement: Asset Allocation Implications of U.S. Life Insurance Risk-Based Capital Changes 

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Lara Devieux, CFA Vladimir Kovalerchik Michael Ragusa
AUG 05, 2021

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Executive Summary

  • The long-awaited modernization of RBC bond factors for U.S. life insurance companies was approved by the National Association of Insurance Commissions (NAIC).  
  • Taken as a whole, U.S. life insurance industry capital charges will increase as a result of the more granular RBC bond factors, largely owing to significant increases in capital charges for single-A and mid-to-low BBB securities. The biggest “winners” were the at the highest quality (AAA and AA+) and some high yield ratings buckets (BB+, B+ and CCC+), which received capital relief relative to the prior regime.
  • The updated portfolio adjustment factors and the newly approved reduction in RBC capital charges for real estate equity (REE) could be partial offsets to higher bond capital charges, particularly for life insurers that have meaningful exposure to the diversifying REE asset class.
  • Going forward, we recommend that life insurers evaluate relative value on a more granular, capital adjusted yield basis using a breakeven framework to determine capital efficiency.
  • There could be asset allocation implications as a result of the new RBC bond and REE factors: all else equal, compared to the prior RBC regime, high-quality structured finance, loans and real estate equity are more capital efficient, while private fixed income remains attractive given spread premiums to publics.

This article has been prepared in conjunction with MetLife Investment Management (“MIM”)1 solely for informational purposes and does not constitute a recommendation regarding any investments or the provision of any investment advice, or constitute or form part of any advertisement of, offer for sale or subscription of, solicitation or invitation of any offer or recommendation to purchase or subscribe for any investments or investment advisory services. The views expressed herein do not necessarily reflect, nor are they necessarily consistent with, the views held by, or the forecasts utilized by, the entities within the MetLife enterprise that provide insurance products, annuities and employee benefit programs. Subsequent developments may materially affect the information contained in this article. Affiliates of MIM may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned herein. This article may contain forward-looking statements, as well as predictions, projections and forecasts of the economy or economic trends of the markets, which are not necessarily indicative of the future. Any or all forward-looking statements may turn out to be wrong. All investments involve risks including the potential for loss of principle.

1 MIM is MetLife, Inc.’s (“MetLife”) institutional management business and the marketing name for subsidiaries of MetLife that provide investment management services to MetLife’s general account, separate accounts and/or unaffiliated/third party investors, including: Metropolitan Life Insurance Company, MetLife Investment Management, LLC, MetLife Investment Management Limited, MetLife Investments Limited, MetLife Investments Asia Limited, MetLife Latin America Asesorias e Inversiones Limitada, MetLife Asset Management Corp. (Japan), and MIM I LLC.