NAIC Working Group Adopts 0.68% “Look-Through” RBC Factor for Funds Investing in Resi Mortgages

On April 30, 2026, the NAIC Life Risk-Based Capital (E) Working Group (“Life RBC WG”) voted to reduce the C‑1 risk-based capital (“RBC”) factor from 1.75% to 0.68% when life insurers invest in performing residential mortgage loans indirectly through an unaffiliated joint venture (“JV”), partnership, or limited liability company (“LLC”). To provide context, a 0.68% RBC factor is considered quite favorable—comparable to the 0.657% RBC factor for holding an A1/A+ rated bond.

Background

Insurers’ investments in JVs, partnerships and LLCs are governed by Statement of Statutory Accounting Principles (“SSAP”) No. 48 and are reported in Schedule BA (Other Long-Term Invested Assets) of the insurer’s statutory investment schedules. For a life insurer, the default RBC factor for an equity investment in such a vehicle is 30%, but there are exceptions to that general rule, and one of those exceptions is when the underlying investments held by the JV, partnership or LLC have the “underlying characteristics of mortgage loans.”

The rule prior to 2024 was that, if a life insurer held residential mortgages through a Schedule BA vehicle such as a JV, partnership or LLC, the RBC factor for such Schedule BA mortgages would be 1.75% (risk category CM2) if the underlying investments were primarily senior lien mortgages, and otherwise 3.00% (risk category CM3). Those RBC factors were significantly higher than the 0.68% RBC factor that applies to residential mortgage loans in good standing that a life insurer owns directly and reports on Schedule B of the statutory investment schedules pursuant to SSAP No. 37.
In 2024, the Life RBC WG and the Capital Adequacy (E) Task Force (“CAD TF”) voted to apply “look through” treatment (i.e., the 0.68% RBC factor) to residential mortgage loans in good standing that are held in a Schedule BA vehicle that is affiliated with the life insurer. The premise of this “look through” treatment was that when the Schedule BA vehicle is affiliated with the insurer, the insurer is able to look through the vehicle to confirm that the underlying assets are indeed residential mortgage loans in good standing.

The 2024 RBC change incentivized life insurers and their asset managers to create fund-type vehicles that would qualify as affiliates of the insurer in order to obtain the coveted 0.68% RBC treatment. But this was not easy to do in the case of commingled funds with multiple unrelated investors, since affiliate status requires the vehicle to be either controlled by or under common control with the insurer.

The New Development

On April 30, 2026, the Life RBC WG adopted Item # 2026-02-L, which extends the same “look through” treatment (i.e., the 0.68% RBC factor) to residential mortgage loans in good standing that are held in a Schedule BA vehicle that is unaffiliated with the life insurer. This action, which was adopted without any dissenting votes, will be effective with the December 31, 2026 RBC calculation, assuming it is approved by the CAD TF before June 30. The remainder of this Legal Update assumes the CAD TF approval will be granted.

Residential mortgage loans in good standing will then receive the same RBC factor of 0.68%, regardless of whether they are held by a life insurer directly on balance sheet or indirectly through a JV, partnership or LLC. This is in addition to the action taken by the NAIC Statutory Accounting Principles (E) Working Group in December 2025 to allow residential mortgage loans held through qualifying statutory trusts to be reported directly on Schedule B (see our prior Legal Update on that topic).

Aside from the RBC factor, there are other differences between Schedule B and Schedule BA mortgage loan investments that could matter to an insurer. For example, on Schedule B, each mortgage loan is reported as a separate line item, and is accounted for using what is essentially an amortized cost method in accordance with SSAP No. 37—Mortgage Loans. On Schedule BA, there is a single line item for the insurer’s investment in the Schedule BA vehicle, and that investment is generally valued based on the audited GAAP equity of the vehicle in accordance with SSAP No. 48.

Also, because the 0.68% RBC factor only applies when the residential mortgage loans are in good standing (which means they must be current or fewer than 90 days overdue), the Schedule BA vehicle will need to include a mechanism for excluding mortgage loans that become 90 days or more delinquent in order to preserve the vehicle’s ability to use the 0.68% RBC factor. Insurers are expected to have access to loan-level information to substantiate their entitlement to use the appropriate RBC factor (0.68%, 1.75%, or 3.00%).

Application to Collateral Loans

Collateral loans are defined in SSAP No. 21—Other Admitted Assets as “unconditional obligations for the payment of money secured by the pledge of a qualifying investment.” Qualifying investments are investments that would qualify as admitted assets if directly held by an insurer. (State laws governing authorized investments of their domestic insurers may impose additional requirements, such as loan-to-value limitations and restrictions on the categories of permitted collateral.) SSAP No. 21 also provides that a collateral loan does not include investments captured in scope of other statements. So, for example, debt securities need to be analyzed under the principles-based bond definition in SSAP No. 26—Bonds, rather than being treated as collateral loans.

Historically, the RBC factor for collateral loans for life insurers was 6.8%, regardless of the nature of the underlying collateral. In large part, that approach was consistent with the fact that prior to 2025 the statutory statement investment schedules did not separate collateral loans into different subcategories based on the underlying collateral type.

In 2024, the Life RBC WG adopted an interim provision, giving special treatment to collateral loans backed by mortgages (i.e., “loan on loan” structures), which were permitted to receive Schedule BA mortgage RBC factors based on the characteristics of the underlying mortgage loans.

The use of Schedule BA mortgage RBC factors to determine the RBC charges for collateral loans backed by mortgages means that when a life insurer makes a loan that is secured by a pool of residential mortgage loans in good standing, that loan will receive a 0.68% RBC factor, and it will no longer be necessary for the borrower to be an affiliate of the life insurer for the 0.68% RBC factor to apply.

Similar to what was stated above for equity investments in Schedule BA vehicles, insurers that make collateral loans secured by residential mortgage loans are expected to have access to information about the underlying mortgages to substantiate their entitlement to use the appropriate RBC factor (0.68%, 1.75%, or 3.00%) for the loan collateralized by those mortgages.

Looking Ahead

We expect that this development will greatly expand the flexibility of insurance companies and their asset managers to invest in residential mortgage loans in a manner that optimizes logistical and other practical considerations without suboptimal RBC factor outcomes, particularly with respect to multi-investor structures, JVs with originators, servicers or other investors, as well as potentially providing warehouse and other financing to mortgage originators and aggregators, whether as part of a loan acquisition strategy or as separate investments.

Mayer Brown continues to be at the forefront of these developments and we invite you to reach out to one of our lawyers to discuss how we can help you build an optimal investment structure based on your situation and goals.