NAIC Working Group OKs Hybrid Measure

- Not notch hybrid securities classified by the SVO as preferred stock in 2006.

- Treat hybrid securities classified by the SVO as debt in 2006 as debt.

- Treat all future hybrids as preferred stock and notch them down by 1 NAIC designation, unless those hybrids are classified as debt by the SVO.

Under the terms of the short-term hybrid rating measure, “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,” the NAIC says.

In the long run, there will be an attempt to determine the risk associated with hybrid securities and to come up with a factor that will reflect those risks, according to Lou Felice, the New York insurance regulator who is chair of the hybrid RBC working group.

During the discussion of the hybrid rating issue, Jim Renz, a representative from the American Council of Life Insurers, Washington, and Tom Considine of MetLife Inc., New York, said the measure that the hybrid RBC working group endorsed was a fair compromise.

Mary Kuan, a representative from the Bond Market Association, New York, said her organization could support the compromise but prefers 1 of the other proposals that the working group considered.

That proposal would define each hybrid as a bond or preferred stock according to the debt-equity guidelines of the SVO, Kuan said.

Under the terms of that proposal, the SVO would take the rating issued to each hybrid by the major securities rating agencies and lower that rating 1 notch for statutory reporting purposes.

In the long-term, according to Felice, there will be an attempt to determine the risk associated with hybrid securities and to define a factor to those risks.