Washington, D.C.–By a 9 to 5 vote, the Valuation of Securities“E” Task Force (VOS) of the National Association of InsuranceCommissioners decided to defer a decision on the treatment ofhybrid securities until regulators have more clarity on the marketand how they should be treated in an insurer's portfolio.

The decision came during the Kansas City, Mo.-based NAIC'ssummer meeting here this week.

The regulators deferred a compromise solution that would havegrandfathered hybrid securities issued before June 11 and giventhem treatment as debt rather than common stock.

Under the proposal, hybrids issued after that date would havebeen treated as common stock. The issue affects the risk-basedcapital charge that a company is assessed. The charge for commonstock treatment is higher than for securities categorized as debtor as preferred stock. The common stock charge is 15 percent forproperty-casualty companies and 30 percent for life companies.

In deferring a decision on the treatment of the securities, theVOS decided it would hold an interim meeting to get more input andmake a careful decision on the issue. No date was set at presstime.

New York Insurance Superintendent Howard Mills said he hoped thedecision to give the issue a more careful examination would givethe markets more clarity.

Representatives for two trade groups said that no clarity hadbeen provided to the markets, and an investment banker, who spokeduring the meeting and declined to be named, said the practicaleffect was to dry up the market because insurers had stopped buyinghybrid securities due to uncertainty over their treatment.

The market was put in flux when the NAIC's Security ValuationOffice in New York on March 15 reclassified $300 million in ECAPS–ahybrid security issued by Lehman Brothers Holdings Inc. in NewYork–as common stock. Consequently, the New York insurancedepartment began to look at insurers' holdings of hybridsecurities.

The impact on how risky these securities are considered wasexplained in a joint letter from the American Council of LifeInsurers, Washington, and the Bond Market Association, New York. Itsaid that “during the period of time from March 15, 2006 until May14, 2006, spreads on ECAPS widened by approximately five basispoints, while spreads on corporate bonds for such time periodwidened by approximately two basis points.”

The letter continued that because the SVO did not disclosespecifics regarding the features of these ECAPS, hybrid securitieswith similar features “suffered from reduced prices and widerspreads as investors reasoned by analogy rather than insight.”

In discussing his compromise solution of grandfathering hybridsissued before June 11, North Dakota Insurance Commissioner JimPoolman said that it was an effort to give insurers a “pass” onexisting holdings while asserting NAIC support for the decisions ofthe SVO as an “independent body whose constituency is theregulatory body and not the industry. The industry is not going tolike every decision coming out of the SVO.”

Betty Patterson, a Texas regulator, urged that a decision on theissue be delayed for a brief time until both regulators andinsurers could discuss the issue more fully. She said thatrisk-based capital is determined at the same time as annualstatement filings and there was a little time before regulatorswould have to make a decision.

Both Jim Renz, an ACLI representative, and Steve Broadie, arepresentative with the Property Casualty Insurers Association ofAmerica, Des Plaines, Ill., said delaying action was a gooddecision because more discussion is needed on the issue and onpoints such as the wording on the grandfathering resolution.

Mr. Broadie also said that certain participants in the hybridsecurities market got information before others and that is anissue that should also be discussed.

Douglas Barnert, representing the National Alliance of LifeCompanies, Rosemont, Ill., said he supported the grandfatheringproposal and abeyance on the treatment of securities until adetermination could be made.

Jim Connolly is Senior Editor for National Underwriter's Life& Health magazine.