Regulators say that they will take comments aired by insurers during a public hearing on hybrid securities July 13 and review their risk-based capital treatment as well as examine the issue of rating transparency.
During a joint hearing held by the National Association of Insurance Commissioners, Kansas City, Mo., Alessandro Iuppa, NAIC president, said a new group of regulators would look for risk-based capital solutions that could range from creating a fourth investment category for rating purposes or a notching system that ratings agencies use.
But, he said, the details would depend very much on technical input. And, he noted that although insurers would not be part of the group, they would be able to offer input as a solution was developed.
New York Superintendent Howard Mills, who chaired the meeting, said the first step would be to address expeditiously the risk-based capital treatment for hybrids and have an absolute resolution to the transparency issue by year-end.
The joint hearing of the NAIC’s Valuation of Securities Task Force and the Capital Adequacy Task Force was held in response to insurers’ reaction to the classification of hybrid securities by the Securities Valuation Office, the New York securities rating arm of the NAIC.
The SVO, at the request of the New York insurance department, was asked to review hybrid securities issues. In March, it determined the issues should receive equity rather than debt treatment.
Treating the hybrids as equity rather than as debt significantly can increase the risk-based capital charge for companies. For instance, for an NAIC class 1 security for life insurers, the highest rated security, debt would receive a .3% charge, while common stock would receive a 30% RBC charge. For class 6 securities, the lowest ranked NAIC category, debt would receive a 20% charge and common stock, a 30% charge.
Insurers are saying that it also is threatening the stability of the market. A panel of insurance industry investment officers explained to commissioners the existing impact and the potential result of not changing the current SVO assessment of hybrid securities.
Lou Felice, a New York regulator, said the RBC formulas are in place for 2006 but that regulators could consider where in the annual statement schedules that hybrid holdings are filed, which could impact RBC. The formulas for 2007 will need to be discussed, he added.
Stephen Kandarian, executive vice president and chief investment officer of MetLife, New York, explained that the purchase of hybrid securities from a high grade issuer offers “very low” likelihood of insolvency as well as “attractive spreads” that make it possible for the company’s salespeople to sell products.
Kandarian said hybrids trade like a high-quality bond with a spread over Treasuries and that they should not be classified as common equity.
Such a classification will weigh heavily on insurers, he noted. For instance, the Yankee Tier I hybrids are a $75 billion market of which insurers hold $45 billion or 60% of that market, he said. A lot of these securities were purchased based on a perception of treatment of securities that already had been purchased and rated, he continued.