A top insurance regulator says the National Association of Insurance Commissioners should give the public more information about how it rates the riskiness of hybrid securities.

New York State Insurance Superintendent Howard Mills has written a letter to the NAIC, Kansas City, Mo., emphasizing the need for transparency and also asking the NAIC to defer acting on risk classifications of hybrid securities until commissioners decide how to handle the products.

Mills writes in the letter that he does not mean to criticize the NAIC’s Securities Valuation Office, the agency that rates the riskiness of insurance company investment holdings.

The SVO has been operating under the confidentiality guidelines established by the SVO Purposes and Procedures Manual, Mills concedes.

But “in order to defend a position, one must disclose the basis for the decision,” Mills writes.

Hybrid securities are financial instruments that combine some of the characteristics of stock with some of the characteristics of debt securities.

The SVO ruled in the spring that at least some hybrid securities should be treated as stock, rather than debt securities, in assessments of insurers’ risk-based capital levels.

The SVO assumes that stock holdings are riskier than debt holdings, and it assigns stock a lower weight than bonds when computing RBC ratios.

Insurers and hybrid securities issuers have complained bitterly about the SVO ruling, arguing that uncertainty about the risk classification of hybrid securities is hurting the market for those securities, and that treating the securities as stock could cause big problems for some insurers that have purchased the securities.

“Although there have been some varying estimates as to the economic impact [of the SVO ruling], it is our view that even a 1% negative impact on total industry holdings in excess of $40 billion is significant when the basis for the classifications are, for all intents and purposes, not subject to disclosure,” Mills writes in his letter.

Commissioners talked about hybrid securities at the NAIC’s recent summer meeting in Washington, and the NAIC says they plan to take up the matter again soon at an interim meeting.