In deferring a decision on the treatment of the securities, the VOS decided it would hold an interim meeting to get more input and make a careful decision on the issue. No date was set at press time.

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

Representatives for two trade groups said that no clarity had been provided to the markets, and an investment banker, who spoke during the meeting and declined to be named, said the practical effect was to dry up the market because insurers had stopped buying hybrid securities due to uncertainty over their treatment.

The market was put in flux when the NAIC's Security Valuation Office in New York on March 15 reclassified $300 million in ECAPS–a hybrid security issued by Lehman Brothers Holdings Inc. in New York–as common stock. Consequently, the New York insurance department began to look at insurers' holdings of hybrid securities.

The impact on how risky these securities are considered was explained in a joint letter from the American Council of Life Insurers, Washington, and the Bond Market Association, New York. It said that “during the period of time from March 15, 2006 until May 14, 2006, spreads on ECAPS widened by approximately five basis points, while spreads on corporate bonds for such time period widened by approximately two basis points.”

The letter continued that because the SVO did not disclose specifics regarding the features of these ECAPS, hybrid securities with similar features “suffered from reduced prices and wider spreads as investors reasoned by analogy rather than insight.”

In discussing his compromise solution of grandfathering hybrids issued before June 11, North Dakota Insurance Commissioner Jim Poolman said that it was an effort to give insurers a “pass” on existing holdings while asserting NAIC support for the decisions of the SVO as an “independent body whose constituency is the regulatory body and not the industry. The industry is not going to like every decision coming out of the SVO.”

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

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

Mr. Broadie also said that certain participants in the hybrid securities market got information before others and that is an issue that should also be discussed.

Douglas Barnert, representing the National Alliance of Life Companies, Rosemont, Ill., said he supported the grandfathering proposal and abeyance on the treatment of securities until a determination could be made.

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