Insurers are concerned over the classification of hybrid securities as common stock in their portfolios and it has them asking state insurance regulators what it will mean for the amount of capital they need to hold.
That concern prompted regulators to hold an informational call on April 19.
Hybrid securities have both equity and debt features but can vary greatly depending on the individual security.
Insurers are concerned that the classification as common stock rather than as debt will increase the risk-based capital they are required to hold to ensure that they are financially strong.
"RBC charges will flow from the classification of the SVO," explained Scott Holeman, a spokesman for the National Association of Insurance Commissioners, Kansas City, Mo. The Securities Valuation Office, a unit of the NAIC based in New York, held the call along with the New York insurance department. "Thus, if common stock, it flows through to RBC as common stock and gets a common stock RBC charge.
"The investment limitation statutes in the states would be based upon the SVO decision. If the SVO classified it as common stock, then that would become part of the total common stock portfolio of the insurer, which would be subject to the investment statute limitation for common stock in the domiciliary state," Holeman continued.
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.
Among the companies on the call were Aegon, Credit Suisse, Genworth Financial, HSBC, John Hancock, Merrill Lynch, Prudential Financial and TIAA-CREF.
"We are looking at the issue and trying to get some clarity about what this means for companies," said Whit Cornman, a spokesman for the American Council of Life Insurers, Washington.
The issue was first raised when a Lehman E-Capital Trust I security purchased by a New York domiciled insurer in August 2005 was required by the New York department to be filed with the SVO for analysis.
The required review was made in the fall of 2005, and in early March 2006 the SVO notified the department that the security should be classified as common equity. An appeal was filed on March 24.
The security also is owned by nine other insurers, according to the SVO. In mid-March, following the determination, the New York department requested other insurers to file various hybrid securities with the SVO for analysis.
Howard Mills, New York Superintendent, opened the discussion by noting that concern about the decision and the impact on pricing of these securities in the marketplace and new securities currently in the pipeline led to a decision to hold an informational call.
During the call, Mike Moriarty, director of the New York department's capital markets bureau, noted that the significance of hybrid securities among insurers has increased.
A change in classification of these securities should not impact a company's risk-based capital ratio, he continued. "If it did impact a company's RBC ratio, the company is probably already stressed or the portfolio of hybrids is already significant."