A short term solution for regulatory rating of hybrid securities was reached during the fall meeting of the National Association of Insurance Commissioners here.
In a 6-month turnaround, the Hybrid Risk-Based Capital working group adopted 1 of 5 scenarios considered by the working group to establish rating guidelines that would be ready by year-end 2006. The working group, under the direction of Lou Felice, the group’s chair, will also develop a long-term approach for rating hybrid securities. That effort will involve the American Academy of Actuaries, Washington, and investment professionals in the industry.
The short term solution was advanced to the Financial Condition “E” Committee, adopted by that committee on Sept. 12, and will be taken up by the NAIC’s executive committee and plenary by the NAIC winter meeting in December.
According to the NAIC, the short term solution is as follows:
What Your Peers Are Reading
“The short-term solution that was adopted, effective at the earlier of Jan. 1, 2008 or adoption of a long-term proposal by the NAIC, would report all defined hybrid securities as preferred stock. The proposal also calls for all hybrid securities issued after Aug. 18, 2005, and those hybrids classified in 2006 by the SVO as common stock to be notched down by one NAIC rating designation. Those hybrid securities classified by the SVO as preferred stock in 2006 will not be notched. Those hybrid securities classified by the SVO as debt in 2006 will be reported as debt. All future hybrids will be reported as preferred stock and notched down one NAIC designation unless they are classified as debt by the SVO.
“An insurer holding a notched hybrid security issued subsequent to the effective date of this proposal may request an SVO review of the security in an attempt to eliminate the notch.”