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Retirement Planning > Social Security

Hybrid Securities Dust-Up Continues

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Life insurers are continuing to press for different treatment of hybrid securities by the National Association of Insurance Commissioners and claiming that failure to do so could be costly to companies and unsettling to the capital markets.

At issue is whether such securities are treated as debt or equity and the risk-based capital charges incurred as a consequence of their classification.

In response, Alessandro Iuppa, NAIC president, reiterated that the NAIC’s New York-based securities valuation arm, the Securities Valuation Office, is “not a rogue operation but functions under a set of guidelines established by regulators.” Iuppa added that the SVO’s decisions are “consistent with responsible regulation.”

Iuppa made his remarks in a letter dated June 19. The NAIC reiterated its support for the SVO’s position in a June 22 press release.

The issue was raised during the NAIC’s summer meeting earlier this month and will be brought up again during a public hearing being planned this summer. At press time, details of the hearing were not available.

The American Council of Life Insurers, Washington, and the Bond Market Association, New York, are criticizing the handling of the issue during the summer meeting and are calling for clear guidance and greater transparency over how hybrid securities will be addressed.

Frank Keating, ACLI president and CEO, says the handling of the hybrid securities issue during the summer meeting is “extremely disturbing” to ACLI’s member companies. “A clear disregard for the very legitimate concerns of the insurance industry and the capital markets was evidenced by the decisions that were made, as well as the decisions that were not made,” he said in a June 15 letter.

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.”


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