Regulators have come up with a short-term method for evaluating the riskiness of the hybrid securities held in insurers’ investment portfolios.
Members of the hybrid risk-based capital working group at the National Association of Insurance Commissioners, Kansas City, Mo., endorsed the short-term measure here at the NAIC’s fall meeting.
Members of the working group endorsed 1 of 5 methods proposed, and advocates of the approach that was recommended hope it will be the basis for short-term rating guidelines that will win approval from the full NAIC membership by the end of the year.
The NAIC’s Financial Condition Committee and its executive committee must approve the short-term hybrid securities proposal before the full NAIC membership can vote on it.
The hybrid RBC working group also is teaming with the American Academy of Actuaries, Washington, and insurance industry representatives to develop a long-term approach to rating hybrid securities.
Hybrid securities are securities that combine features of stock with features of debt securities. Financial experts say efforts to grapple with the issue will affect the way insurers value tens of billions of dollars in portfolio assets.
According to the NAIC, the short-term hybrid risk rating approach endorsed by the hybrid RBC working group would:
- Take effect at the earlier of Jan. 1, 2008, or after adoption of a long-term proposal by the NAIC.
- Treat all defined hybrid securities as preferred stock.
- Cut 1 NAIC rating designation, or notch, from the ratings of all hybrid securities issued after Aug. 18, 2005, and from those hybrids classified in 2006 by the NAIC’s Securities Valuation Office as common stock.