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Moody's: The 2010 RBC Apples Are Bigger Than the 2009 Oranges

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The median U.S. life insurer company risk-based capital ratio (RBC) was higher at the end of 2010 than at the end of 2009, but analysts at Moody’s Investor Service question how much that comparison really means.

The analysts at Moody’s, New York, discuss apparent improvements in RBC levels and other capital level indicators in a discussion of U.S. life insurers’ 2010 year-end statutory statements.

The analysts found that the median RBC ratio for the companies Moody’s rates increased to 454% of the minimum required level at the end of 2010, up from 425% a year earlier.

The total absolute level of consolidated statutory capital and surplus increased 9% to $255 billion.

The National Association of Insurance Commissioners (NAIC), Kansas City, Mo., developed insurers’ RBC calculation rules to provide an indicator that shows how much financial capacity an insurer has to meet its obligations to insureds. When adjusting various classes of capital for investment risk, insurers can count a higher percentage of assets held in what are believed to be relatively safe investment vehicles.

Between 2009 and 2010, the NAIC made changes in RBC calculation rules that make year-over-year comparisons difficult, the Moody’s analysts say.

The NAIC decided, for example, to hire an outside consulting firm to help it and insurers analyze commercial mortgage-backed securities (CMBS), rather than sticking with the rating agencies’ CMBS ratings.

The new approach led to modest RBC increases at some insurers, and drops of 10 percentage points to 30 percentage points at others, the analysts say.

The analysts say life insurers’ efforts to make their RBC levels look better may be of greater concern.

“Companies, especially those that are publicly traded, have entered into a number of transactions to improve their RBC ratios, such as reinsurance to a captive reinsurer,” the analysts say.

In some cases, the insurers dressed their RBC windows by using captives for variable annuity guarantees and Triple X term life regulatory reserves, the analysts say.

Other RBC coverage from National Underwriter Life & Health:

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