On Nov. 15, 2023, when we released our revised insurance risk-based capital adequacy criteria, we assigned a UCO identifier to those ratings that we anticipated could be affected by the change. This designation is used to indicate the potential for a rating action on specific issuer and issue ratings. We assigned a UCO identifier to one or more ratings on 63 issuers, their subsidiaries, or related issues (see "Certain Issuer and Issue Ratings Placed Under Criteria Observation After Insurance Capital Model Criteria Update"). The results since then have been consistent with our expectations. We estimated that the criteria implementation could lead to rating actions on about 10% of insurers, with more upgrades than downgrades and the maximum impact on ratings being one notch (see "Insurer Risk-Based Capital Adequacy Criteria Published," published Nov. 15, 2023).

Key Findings

Under the revised criteria, many insurers saw an increase in our calculation of their total adjusted capital. Several changes to the criteria contributed to this increase, including the removal of haircuts to liability adjustments such as equity-like reserves and value in force. In addition, we no longer deduct non-life deferred acquisition costs. Capital adequacy also improved because of our more-explicit recognition of risk diversification benefits, although this was moderated by our recalibration of risk charges to higher confidence intervals.

Insurance companies are increasingly adopting revised accounting standards--for example, International Financial Reporting Standard (IFRS) 17--that enhance the transparency and visibility of their future profits. Our revised methodology incorporates this improved transparency into our assessment of capital adequacy and financial strength, and has contributed to a more favorable assessment of balance sheet strength for a number of issuers.

For mortgage insurers, capital adequacy primarily improved because we recalibrated mortgage insurance premium and reserve risk charges when we revised our capital model criteria. The revised methodology had little impact on total adjusted capital in this segment. The effect of our changes to loss reserve discounting and the treatment of deferred acquisition costs was marginal for most mortgage insurers. In addition, their monoline business model limits the benefit of our more-explicit recognition of the advantages of risk diversification in our capital model.

Of the five negative rating actions we took as we implemented the revised methodology, three occurred because of changes in the definition of capital in our debt-funded capital formula. For some U.S.-based health insurers that had included material goodwill and other intangibles on their balance sheets, this change reduced the basis used to determine our tolerance limits for debt-funded capital.

For issuers where we revised the outlook, the triggers for potential future rating changes generally relate to uncertainties around:

• The company's commitment to maintaining capital adequacy at the higher level that resulted from the criteria implementation; or
• The company's willingness and ability to bolster capital adequacy after it had been reduced by the criteria implementation, in order to maintain ratings at the current level.

Summary Of UCO Rating Actions

Since Nov. 15, 2023, we have taken 40 positive rating actions on the ratings we designated as UCO, including one that was not linked to the implementation of the insurance capital model (Molina Healthcare Inc.). These rating actions comprised:

• 23 ratings raised by one notch;
• One rating placed on CreditWatch with positive implications; and
• 16 outlooks revised upward to stable from negative or to positive from stable.

In addition, we took five negative rating actions:

• Three ratings lowered by one notch; and
• Two outlooks revised downward to negative from stable.

The ratings designated as UCO on the remaining 18 issuers were affirmed with no outlook revisions, following our review.

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Overall Implementation

As of April 17, 2024, we had also reviewed about 60% of our rated issuers under the revised criteria. In many cases, capital adequacy buffers have changed or we have revised rating component scores to indicate a positive or negative change in capital adequacy. These changes did not prompt rating actions on ratings not designated as UCO, either because the change to capital adequacy was not material, or because capital adequacy is not currently a key driver of a potential rating action for that issuer. For example, in some instances, a company's stand-alone credit profile may improve but the rating itself is already supported by the credit strength of being part of a wider group or constrained by the rating on the relevant sovereign. In other cases, the issuer's limited profitability, business scope, or geographical diversification constrained its potential for an upgrade.

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Related Research

• Certain Issuer and Issue Ratings Placed Under Criteria Observation After Insurance Capital Model Criteria Update, Nov. 15, 2023