The leader of the National Association of Insurance Commissioners is siding with an NAIC investment-evaluation agency in a bitter dispute over the riskiness of securities that straddle the border separating debt from equity.
Alessandro Iuppa, president of the NAIC, Kansas City, Mo., has issued a letter stating that the decisions of the agency, the Securities Valuation Office, are “consistent with responsible regulation.”
The SVO “is not a rogue operation but functions under a set of guidelines established by regulators,” writes Iuppa, who is the Maine insurance superintendent as well as president of the NAIC.
The letter is dated June 19, and the NAIC today issued a press release emphasizing NAIC support for the SVO.
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Iuppa and other NAIC officials have been responding to complaints by life insurers, bond issuers and industry groups about the SVO’s tendency to treat hybrid securities, or securities that combine equity features with bond features, as common stock rather than as debt.
The issue is important to life insurers because it affects how regulators calculate the insurers’ risk-based capital levels.
Because regulators assume that holding stock is riskier than owning debt, they use a discounting strategy, called a charge, to reduce the value of investments in stock when coming up with RBC figures.
The common stock charge is 30% for life companies and 15% for property-casualty companies.
In March, when the SVO reclassified $300 million in “Enhanced Capital Advantage Preferred Securities” or ECAPS, issued by Lehman Brothers Holding Inc., New York, as common stock rather than as preferred stock, that move caused spreads between ECAPS rates and Treasury rates to widen more than twice as much as spreads between corporate debt securities rates and Treasury rates, according to financial services industry groups.