What is the Risk-Adjusted Capital Ratio?

The Risk-Adjusted Capital Ratio (RACR) is a measure of resilience, a financial metric used to gauge a financial institution's ability to continue functioning in the event of an economic downturn. It is calculated by dividing a financial institution's total adjusted capital by its risk-weighted assets (RWA). RACR provides a nuanced view of capital adequacy by factoring in risk, making it a valuable complement to other capital ratios. Financial institutions use a combination of these ratios to assess their financial stability and regulatory compliance

Two variations of the Risk-Adjusted Capital Ratio

1. RACR #1: This ratio considers the insurer’s capital in relation to its risk exposure. A higher RACR #1 indicates better capital adequacy.
2. RACR #2: Similar to RACR #1, this ratio also evaluates capital adequacy but may use a different methodology or risk assessment. Again, a higher RACR #2 is preferable.

Weiss Ratings Uses Risk-Adjusted Capital Ratio in its analysis of life insurance companies, including life insurance companies that issue structured settlement annuities

Examples

Pacific Life Insurance Company

Newport Beach, CA

Weiss Rating A

Rating Date:  December 2023

NAIC Classification" Life & Annuity

Risk Adjusted Capital Ratio #1 3.42

Risk Adjusted Capital Ratio #2 1.85

Total Assets $178.80B

Capital $11.70B

Net Premiums $14.30B

Net Income $151.30M

USAA Life Insurance Company

San Antonio TX

Weiss Rating B+

Rating Date December 2023

NAIC Classification Life & Annuity

Risk Adjusted Capital Ratio #1  4.11

Risk Adjusted Capital Ratio #2  2.15

Total Assets  $27.77B

Capital $2.64B

Net Premiums $2.05B

Net Income $52.25M

^{Source: WeissRatings.com}

^{Difference Between Risk Adjusted Capital Ratio (RACR) and RBC Ratio?}

^{RBC is a broader regulatory framework, while the risk-adjusted capital ratio specifically assesses an institution’s ability to withstand economic risks. Both place crucial roles in assessing fiancial security.}

What is Risk Based Capital? (4structures.com)