The SVO ratings reflect heavier charges for hybrids that are more like common stocks than bonds.

Lou Felice, a New York regulator chairing the working group that is taking up the hybrid issue, said the group's goal is to “balance the potential additional capital in the short run with a clear message that will facilitate those changes without rattling the markets.”

Industry representatives continue to ask why the new changes are needed at all. And Jim Renz, director-accounting policy with the American Council of Life Insurers, Washington, said that if changes are made, then a “proper” rather than a “quick” solution is needed even if a final decision is not made until after the fall national meeting.

Representatives of the Bond Market Association, New York, and the Property Casualty Insurers Association of America, Des Plaines, Ill., concurred with the ACLI comments.

The ACLI is promising to develop a scenario of its own for hybrids to be considered during the comment period.

Two scenarios have already been proposed as follows:

o Scenario 2A–the SVO classifies hybrids as preferred stock including filing exempt securities. The preferred classification would be accompanied by a single rating notch to reflect regulators' risk assessment of those securities. No additional notching would be done for those securities with common stock characteristics. Insurers could still seek bond status for filing exempt hybrids.

o Scenario 2B–Securities defined as hybrids would be considered preferred stock including filing exempt securities. The preferred stock classification and a single rating notch would apply to those securities but not filing exempt securities. Additional rating notches of up to 2 notches may be considered for those preferreds with common stock characteristics. FE hybrids could still be considered for bond status.

The two new scenarios supplement three scenarios that were offered earlier. Highlights of these are as follows:

o Scenario 1–Bonds and preferred securities for life companies would receive the same factor based upon designation (.4 percent to 20 percent). Bonds and preferred securities for property-casualty and health insurers would receive the same factor based upon designation (.3 percent to 30 percent).

o Scenario 2–No hybrids would be reported as bonds and preferred securities would be treated the same as Scenario 1.

o Scenario 3–Hybrids would receive the same treatment as Scenario 1 except that life unaffiliated common stock would receive a 30 percent default factor adjusted by an insurer's beta or volatility measure to a minimum of 15 percent. Property-casualty and health unaffiliated common stock would receive a 15 percent factor. All affiliated common stock would be a percentage of RBC or other calculation by type of affiliate.