Hybrid Securities Dust-Up Continues

Keating also wrote that not holding in abeyance the release of ratings until the hybrid securities issue has been resolved will only exacerbate problems.

Additionally, Keating says, ratings assigned to these securities will have an adverse effect on insurance companies holding these securities.

The Bond Market Association, as outlined in a June 19 letter from Mary Kuan, vice president and assistant general counsel, called for greater transparency and immediate and broad distribution of information impacting securities as well as a clear, certain resolution to whether hybrid securities will be treated as debt or as equity.

The treatment impacts the risk-based capital charge and, according to previous industry comments, impacts the spreads on these securities in the marketplace. The charge for common-stock treatment is higher than for securities categorized as debt or as preferred stock. That common stock charge is 30% for life companies and 15% for property-casualty companies.

For instance, industry comments note that the reclassification of $300 million in “Enhanced Capital Advantage Preferred Securities” or ECAPS, issued by Lehman Brothers Holding Inc., New York, as common rather than preferred stock, resulted in spreads widening by 0.05 percentage points, while spreads on corporates widened by just 0.02 percentage points between March 15 and May 14. The SVO had announced its decision on hybrid securities on March 15.

Iuppa’s response to the ACLI noted that the SVO’s rating or classification decision includes engaging companies in discussions and that there is an option to use an advance rating service that will give greater clarity to a particular security’s regulatory treatment.

And, he added the NAIC’s preliminary analysis of the portfolios of insurers holding hybrid securities and trust preferred securities shows a “negligible, if any, impact on the companies.”