U.S. Life Insurer RBC Trends 2002-2020 Confirm Industry Capital Remains Strong and Reveals Favorable Impact of Private Equity Ownership

Industry capital levels continue to be solid but starting to come under pressure?- Our study examined estimated group RBC trends for 49 stock-owned life insurers and 19 mutuals over the period of 2002-20.??Both forms of life insurer ownership saw their RBC ratios steadily increase between 2002 to 2014 except during the financial crisis of 2008-10.??Since then, mutuals have seen their average estimated group RBC decline from a peak of 586% in 2014 to 511% in 2020 while stock owned insurers have seen their average estimated group RBC ratio drop from 470% to 434%.??To put these ratios in context we would generally equate a 400-425% RBC has being comfortably in the “A” rating category while a 500%-plus would be at least “AA”.??It is important to emphasize that the RBC ratio is only one metric and the purpose of our study was to look at overall industry directional trends versus focus on any particular insurer’s ratio.??

Privately owned insurers suggest they remain highly capitalized??– The past several years has seen a wave of new private equity ownership/control the U.S. life insurance industry.??We examined estimated RBC trends for 19 life groups we identified as being in this category and compared them against 36 U.S. publicly owned or controlled by public foreign life insurers.??While RBC remains only one metric against which to measure a life insurer’s capital strength, what was clear is that privately owned/controlled life groups saw their capital ratios steadily rise after they were acquired.??At the end of 2020 this group had an estimated group RBC average nearly equal with that of the mutuals, whereas publicly owned life groups since 2014 have seen their average RBC slowly decline. ?To be certain, both public and privately owned life insurers appear well capitalized.??But the concern we have heard expressed that privately owned insurers might be de-capitalized in order to generate higher ROE’s and thereby potentially put policyholders at risk does not appear to be supported by the RBC trends we observed; in fact they may suggest just the opposite.

New C1 risk factors will put some downward pressure on RBC?- On June 11, 2021, the National Association of Insurance Commissioners adopted changes that will determine the capital required to support insurer’s fixed income investments as part of their RBC ratio.??The new bond factors cover 20 designations and will be similar to the granular rating scales that rating agencies use (the NAIC currently uses six designations).??Relative to the current bond factors, the changes are mixed.??They are higher for all single-A, BBB, BBB-, BB-, B-, and CCC- bonds, but lower for those rated BB+, B+, and CCC+.??While the impact between individual insurers may vary greatly depending upon the mix of their invested assets, we would not be surprised if on average the new factors reduced RBC ratios by 20-35 points. While we would not expect this to trigger any regulatory/rating agency or investor reaction per se, there may be some insurers that dial back their re-deployment of excess capital in 2022 or reduce dividends from operating subsidiaries in order to build back up their RBC.