NAIC Reinsurance Recapture Risk in Non-Reciprocal Cedents

A regulatory finding now sits behind the NAIC's reinsurance recapture charge. About 70% of life insurers ceding to non-reciprocal jurisdictions hold "portfolios of comparatively riskier assets supporting very generous annuity guarantees," Wisconsin Commissioner Nathan Houdek wrote on October 26 (NAIC, Oct. 26, 2026). It comes from the Valuation Analysis (E) Working Group's review of the first Actuarial Guideline 55 filings.

Houdek, who chairs the Financial Condition (E) Committee, addressed the memo to the Life Risk-Based Capital (E) Working Group. Reserves and capital behind those liabilities "may fall below the newly adopted VM-22 annuity reserve standards, as well as U.S. Risk-Based Capital standards," he wrote. He directs the working group to build a charge approximating the capital a cedent would need to take the reserves back, and "this is to be done without regard to the probability of recapture." His committee exposed the memo on October 29 with comments due November 12 (Forvis Mazars, November 2026).

It answers September comment letters that said no deficiency had been shown. On October 6 the working group had ruled recapture probability outside its remit. On October 28 its consultant, Bridgeway Analytics, told the group that non-reciprocal cessions "generally incur a ~$0 RBC charge" under the current formula, because the reserve credit is collateralized (Bridgeway Analytics, Oct. 28, 2026).

Key Takeaways

Houdek's memo reports the VAWG found riskier portfolios behind generous annuity guarantees at about 70% of insurers ceding to non-reciprocal jurisdictions.
The memo says reserves and capital behind those liabilities "may fall below" VM-22 and US RBC, attaching a reserve finding to a capital charge.
The charge is to approximate recapture capital "without regard to the probability of recapture," overriding the likelihood weighting in six September comment letters.
Bridgeway counts $135.3 billion of reserve credit and modco ceded to non-reciprocal reinsurers in 2025, more than 99% of it with Cayman and Barbados.
Bridgeway's worked example needs 9.44 of new capital to restore a 400% RBC ratio after recapturing 70 of reserves, against near zero today.

The Four Findings Behind the Referral

Houdek writes that the July 27 referral rested on four matters from the VAWG's review. Those first AG 55 reports, due April 1, 2026, covered about 80 ceding companies and 100 treaties, according to the referral summarized by Norton Rose Fulbright (August 2026). Because the filings are confidential, he wrote, that "limits the amount of detailed information that can be shared."

VAWG matter	What the memo says the AG 55 filings showed
1. Reserve sufficiency under moderately adverse conditions	Certain transactions show "a greater reliance on comparatively optimistic asset-return assumptions to meet capital adequacy requirements"
2. Excess capital for conditions more severe than moderately adverse
3. Risk profile of the assets behind the reserves	Cedents in these transactions "have generally pursued more aggressive asset strategies" than cedents in comparable deals that do not involve non-reciprocal jurisdictions
4. Business practices of participating insurers	A significant share are "newer market entrants or experiencing rapid growth," issuing annuities with "credited rates that are comparatively higher than the rest of the industry"

Source: NAIC Financial Condition (E) Committee memorandum, Oct. 26, 2026, p. 2.

Houdek also records a complaint about the receiving regimes. Their capital and reserving practices "combine concepts from incompatible accounting, reserving and capital frameworks, which results in a regulatory framework that lacks coherence," he wrote. Bridgeway's deck names the regimes in practice: more than 99% of 2025 non-reciprocal transactions were with the Cayman Islands and Barbados (Bridgeway, Oct. 28, 2026).

Houdek calls the findings "a serious and urgent solvency concern that requires immediate, direct action." CIRCA, the Cayman reinsurers' association, had written on September 23 that "jurisdictional status cannot serve as a proxy for the likelihood of recapture" (CIRCA letter, Oct. 13 packet). His memo removes likelihood from the calculation without answering that argument.

What a Full-Recapture Factor Prices

Life RBC today charges 0.78% pre-tax on reserve credit and recoverables. It then gives the charge back through a negative 0.78% offset for funds withheld, modco and other qualifying collateral, as the site set out when the referral was adopted. Bridgeway puts the exposure at $135.3 billion of ceded reserve credit and modco across 86 cedents and 219 non-reciprocal reinsurers in 2025, against $140.4 billion of collateral (Bridgeway, Oct. 28, 2026). That collateral is "mostly comprised of FWH and ModCo, with some trust agreements," and letters of credit are "of limited use."

Bridgeway's stylized case shows what the memo's instruction costs. A cedent with reserves of 100, minimum RBC of 5 and surplus of 20 runs at 400%. It cedes 70% on coinsurance and transfers 79.44 of assets, leaving both parties at 400%. If the cedent deploys the freed surplus and the treaty is then recaptured, the trust returns the 70 of reserves net of losses. Restoring 400% then takes 9.44 of new capital. That is 13.5% of the ceded reserves at an operating ratio of 400%, or 3.4% at the minimum level (actuary.info calculation from Bridgeway's figures). Today's net charge on the same treaty is zero.

Houdek's phrase "without regard to the probability of recapture" settles the calibration argument from October. Everlake had argued that C-1 bond factors sit below par because default is possible, so a recapture factor at full strain "assumes recapture occurs with certainty" (Oct. 6 packet). An appendix to the American Academy of Actuaries' letter called a factor on ceded reserves "a crude proxy." Recapture's true cost depends on the reserve basis the block returns to, it said, and a factor may double count C-1 and C-3 the cedent already holds on retained business (Academy, Sept. 28, 2026). Houdek fixes the probability at one and leaves severity to the working group.

Sizing happens on the liability side, while the memo's findings sit on the asset side. Under funds withheld and modco, the assets backing the ceded reserves never leave the cedent's balance sheet. Life RBC lets the cedent pass their asset charge to the reinsurer, and recapture passes it back on the same assets. A factor on ceded reserves cannot see what those assets are. Bridgeway wrote that "Level 3 assets supporting reinsurance transactions are not directly identifiable." It counts more than $600 billion of Level 3 bonds on Schedule D, most of them valued by the reporting entity itself. An AG 55 shortfall charge, the Academy's alternative, would read the assets. But AG 55 "explicitly does not analyze the total assets supporting a transaction," the Academy said.

The Same Companies Carry the VM-22 Step-Up

Matter four points at a population: newer or fast-growing writers with above-market credited rates. Houdek measures their ceded reserves against VM-22, which took effect for new non-variable annuity business on January 1, 2026, while in-force business can stay on CARVM until 2029. Most reserves ceded to Cayman and Barbados were written before 2026, so those blocks do not yet carry the standard the memo invokes.

That is changing. An amendment form filed October 19 by Ben Slutsker anticipates a Valuation Manual change "to allow non-variable annuity business written between 1/1/2017 and 12/31/2025 to be valued under VM-22 requirements" (LATF, Oct. 22, 2026 materials). Slutsker, a Minnesota regulator, chairs the Life RBC group and is the memo's addressee. A cedent whose block fails VM-22 under AG 55 testing would then face two bills: a recapture charge on the ceded reserve, and a larger reserve to collateralize once the block leaves CARVM. One credited-rate strategy drives both.

Exposure is concentrated. Non-reciprocal treaties equal to 25% to 50% of the cedent's retained reserves held $56.3 billion of reserve credit in 2025, up from $11.3 billion in 2015. Bridgeway says transactions above 50% of retained reserves "increased noticeably" over the decade. Beyond that sits a larger market. Offshore reinsurers took nearly 56% of ceded annuity reserves in 2025 (AM Best, Aug. 20, 2026). And 72% of the $1.3 trillion ceded offshore stayed with affiliates, most of it in Bermuda, which the charge does not reach.

Comments on the memo close November 12. Slutsker's group plans to present an initial recapture proposal at the Fall National Meeting in Dallas, November 14 to 17 (Forvis Mazars, November 2026).

NAIC Finds 70% of Non-Reciprocal Cedents Hold Riskier Assets

Key Takeaways

The Four Findings Behind the Referral

What a Full-Recapture Factor Prices

The Same Companies Carry the VM-22 Step-Up

Further Reading

Sources

NAIC Finds 70% of Non-Reciprocal Cedents Hold Riskier Assets

Key Takeaways

The Four Findings Behind the Referral

What a Full-Recapture Factor Prices

The Same Companies Carry the VM-22 Step-Up

Further Reading

Related guides

Sources