Insurers concerned about the way a regulatory unit classifies some of their investments have been reassured by regulators that it should not impact their solvency picture.

The issue discussed at an April 19 conference call by insurers and regulators involved hybrid securities in carriers' portfolios that have been classified as common stock by the Securities Valuation office of the National Association of Insurance Commissioners.

Mike Moriarty, director of the New York Insurance Department's capital markets bureau, said that a change in classification of these securities should not impact a company's risk-based capital ratio.

“If it did impact a company's RBC ratio, the company is probably already stressed or the portfolio of hybrids is already significant.” The NAIC's RBC requirements are not an indicator of financial strength, he added.

Insurers had expressed a concern that the hybrids' classification as common stock rather than as debt will increase the risk-based capital that companies are required to hold to ensure they are financially strong.

In 2005, the property-casualty industry held $3.6 billion in these instruments, the discussion during the call indicated. Capital and trust preferred securities held by life insurers in 2005 totaled $35 billion in 2005 compared with $29 billion in 2004, said Robert Carcano, SVO senior counsel and senior vice president.

Institutions on the call included Aegon, Credit Suisse, Genworth Financial, HSBC, John Hancock, Merrill Lynch, Prudential Financial and TIIA-CREF.

Classification of hybrids first became an issue when a Lehman E-Capital Trust I security purchased by a New York-domiciled insurer in August 2005 was required by the New York Insurance Department to be filed with the SVO for analysis.

The required review was made in the fall of 2005 and in early March of 2006 the SVO notified the department that the security should be classified as common equity. An appeal was filed on March 24.

Nine other insurers hold the same Lehman security, according to the SVO. And, in mid-March, following the determination, the New York department requested other insurers to file various hybrid securities with the SVO for analysis.

During the conference call, other points the SVO made in response to questions from institutions included:

o All rating agencies are given similar weight when evaluating a security.

o The SVO does not discuss the rationale behind the classifications of securities and whether a precedent is being established.

o An institution has the right to file an appeal to an SVO decision.

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Regulators Reassure Insurers On Hybrid Investments

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