State insurance regulators' new rules for grading insurers' investments could hurt some life and annuity issuers' "risk-based capital ratios," or safety scores.
Helen Zhou Remeza, head of insurance investment strategies at PineBridge Investments, writes about the possibility in a new commentary on insurers' portfolios.
Overall, U.S. life insurers have a "strong liquidity profile, limited policyholder surrender risk, and expertise in asset-liability management," Remeza writes.
But one possible cloud is a new set of "principles-based bond definition" rules, or PBBD, rules, developed by the National Association of Insurance Commissioners. The changes could make some insurers' portfolios look riskier and lower their RBC ratios.
What it means: The new rules could make some annuity issuers look less appealing to your clients.
But, if the new rules turn out to be too confusing or conflict too much with how advisors and clients see the world, the shift could simply make advisors and clients more comfortable with using issuers with lower RBC ratios.
The market backdrop: Remeza sees U.S. life and annuity issuers as having strong enough finances to expand into new investment areas, such as lending directly to borrowers.
If interest rates fall this year, that could help them hang on to even more of their customers' annuity assets, and that could further improve their liquidity, Remeza says.
The PBBD shift: The NAIC developed the new PBBD rules because of concerns that relatively complicated or illiquid assets, such as structured securities and private credit securities, have been going into the same safety rating categories as ordinary corporate bonds.
State regulators use the safety categories to decide how much of the value of an asset can be included in an insurer's RBC ratio calculations.
The new PBBD rules will make it easier for outsiders to see what's in insurers' portfolios, and the rules could cause insurers to push some assets that now qualify for treatment as ordinary bonds into the "Schedule BA" category, which covers potentially riskier assets.
"This could result in a growing BA bucket for select insurers and have potential knock-on effects on reducing statutory capital and surplus," Remeza warns.
The new PBBD rules and other rules still in the pipeline look as if they could have a noticeable effect on insurers' holdings of structured securities such as collateralized loan obligations and asset-backed securities, she says.
The NAIC has also added the discretion to lower the credit ratings of private securities, but "it may do so only sparingly," Remeza says.
Insurers should still be able to invest in structured credit and private securities if they do so through thoughtfully structured investment vehicles, such as sidecars or other arrangements that let insurers share investment risk with partners, Remeza says.
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