Merrill Lynch and Lehman Brothers are spearheading a group aiming to pressure the National Association of Insurance Commissioners and its Securities Valuation Office to change its view that certain kinds of hybrids are equivalent to common stock. Both firms are at the forefront of a Street race to develop and market their own brands of hybrid instruments with the selling point that they satisfy regulatory and rating agency requirements by combining the beneficial features of debt and equity-like securities.
The issue is pressing because the firms stand to lose underwriting assignments if insurers are discouraged from investing in these new products.
Last week, an unnamed New York insurance company filed an appeal, reportedly under the Merrill-Lehman group’s guidance. The problem for the underwriters is that the NAIC will deal only with insurers on regulatory matters. So while the investment banks are handling strategy, communication and coordination of the groups they are representing, they must ultimately go through this insurance company in their dealings with the association.
The SVO announced a week ago that a certain kinds of hybrids are the equivalent common stock because of their junior ranking relative to debt securities. The investment banks insist the SVO’s interpretation is off mark, and point to a variety decisions made by the Federal Reserve, Moody’s Investors Service and Standard and Poor’s. At issue is the kind of capital classification the securities, held as part of some insurers’ portfolios, would receive from the NAIC.
“There are tens of billions of dollars of this type of issuance on the calendar and insurers don’t want to be deprived of the opportunity to at least investigate these assets,” said one bank official close to the situation. He expects the SVO will eventually go back on its decision and grant hybrids a more favorable treatment, but fears the process might take months. In the meantime, issuance of more complex hybrids may temporarily be put on ice.