A number of insurance companies that owned bonds issued by PG&E Corp. may have to weather small increases to their required capital as the California utility's credit ratings plunged in the wake of its announced bankruptcy.

Regulators require insurers to set aside sufficient surplus to be able to maintain solvency and absorb unforeseen negative events such as a drop in investment value or adverse underwriting results. Surplus requirements increase as the perceived risk increases. As the issuer's credit rating slides, the risk of not receiving the full payment of the bond increases. For insurers, this is reflected in risk-based capital requirements, under which an investment-grade bond requires less surplus to be held than one rated below investment grade.

According to U.S. statutory financial statements, three insurance groups held more than $300 million in PG&E Corp. long-term obligation bonds as of Sept. 30, 2018. PG&E's debt rating has declined from A- in May 2017 to a D rating on Jan 29, according to S&P Global Ratings. It did maintain ratings above investment grade throughout 2018 and so carried a relatively small RBC requirement.

Since the start of this year, however, S&P Global Ratings has downgraded PG&E Corp.'s debt rating three times, all the way down to D, which correlates with the National Association of Insurance Commissioners' lowest rating.

A downgrade of this magnitude will likely increase the surplus charges for insurers holding the bond to 30 cents of every dollar from a few cents on each dollar. With PG&E Corp. filing for Chapter 11 protection after Jan. 1, it is possible that any risk-based capital consequence will not be reflected in insurers' annual statements to be released at the beginning of March.

Below is a look at the holdings and hypothetical charges to nonequity asset risk for the largest U.S.-based insurers. While the figures below total into the millions, the overall impact to each of these companies' overall RBC ratio and solvency will likely be inconsequential as each of these companies has billions of dollars in surplus.

For example, the largest holder of PG&E Corp. bonds is the group consisting of Allianz SE's U.S. subsidiaries, most of which are life insurance companies. At the end of 2017, the total adjusted capital for those units was $6.74 billion, which is more than 6x the required capital holding of $1.00 billion. Northwestern Mutual Life Insurance Co. is the second-largest holder of PG&E Corp. bonds, and its total adjusted capital of $27.85 billion is more than 12x the required amount of $2.32 billion. In both cases, the insurers can absorb an impact of more than a few percentage points without affecting their overall solvency.

The figures in this analysis apply only to U.S.-based subsidiaries within the groups; the estimates are based solely on the assumption that all PG&E Corp. bonds held by these companies at Sept. 30, 2018, move to the lowest bond quality tier defined by the NAIC. The charges below exclude very small changes that would occur due to a change in the RBC size factor, which assesses risk based inversely on the amount of diversification of a bond portfolio.

S&P Global Market Intelligence offers a variety of tools to analyze different risk-based capital scenarios for insurance companies. Click here for a template to review risk-based capital scenarios for P&C insurance companies. Click here for a template to review risk-based capital scenarios for life insurance companies.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.