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.