Officials at the National Association of Insurance Commissioners will be looking at a wide range of strategies for handling concerns about risk classification of hybrid securities.
Alessandro Iuppa, Maine insurance superintendent and president of the National Association of Insurance Commissioners, Kansas City, Mo., talked about the options here Thursday during a hearing on the hybrid securities issue.
The NAIC could create a separate risk classification category for hybrid securities, or it could follow the example of the rating agencies and assign hybrid securities somewhat lower debt ratings than pure debt securities would receive, Iuppa said.
The details of any proposals will depend on technical input, Iuppa said.
Insurers will not be part of the group of regulators working on the issue, but they will be able to contribute ideas as a solution is developed, Iuppa said.
New York Superintendent Howard Mills, who was chairman of the hearing, said the first step will be to address questions about risk-based capital treatment for hybrids and to have an absolute resolution to concerns about transparency by the end of the year.
The NAIC’s Valuation of Securities Task Force and the Capital Adequacy Task Force held the hybrid securities hearing because of insurers’ complaints about a recent risk classification decision made by the NAIC’s Securities Valuation Office.
The SVO, the NAIC’s securities rating arm, reviewed hybrid securities issues at the request of New York insurance regulators.
The SVO concluded that the NAIC should treat the hybrid securities reviewed as equity rather than as debt.
If the SVO and the NAIC stick with that position, large insurers might have to subtract 30% from the value of hybrid securities holdings when computing risk-based capital ratios.
Small insurers might have to discount hybrid securities holdings by almost 60%, and that change could be enough to lead to credit rating downgrades, according to according to Robert Peterson, who spoke for Shenandoah Life Insurance Company, Roanoke, Va.
Hybrid securities issued by high-grade issuers offer a very low risk of insolvency and trade like high-quality bonds, said Stephen Kandarian, chief investment officer of MetLife Inc., New York.
Instead of protecting insurers’ finances, treating hybrid securities as if they were equities would hurt insurers, by forcing insurers to sell otherwise low-risk securities to hedge funds at greatly reduced prices, Kandarian said.
“There will be a wealth transfer from insurers to others,” Kandarian warned.