Hybrid RBC (E) Working Group
September 20, 2007

The Hybrid RBC (E) Working Group met via conference call on Thursday, September 20, 2007. During this meeting the Hybrid RBC (E) Working Group:

• Received minutes from the July 19, 2007 conference call in which the Working Group began discussion on the accounting and reporting options related to Hybrids.

• Received minutes from the September 05, 2007 conference call, in which the Working Group continued discussions on the hybrid accounting and reporting options.

• Received a written presentation from the AAA on their work. The following are highlights from that presentation:

• The AAA believes that most hybrids are rated by Nationally Recognized Statistical Rating Organizations (NRSRO), and that these ratings reflect varying levels of “debt-like” risks and “equity-like” risks. The AAA believes that NRSRO ratings capture the credit risk or risk of default; but do not capture other investment risks, such as extension, market, or event risk. However, the AAA believes that most investment risks are captured in the current formula.
• The AAA believes that hybrids are similar to preferred equity, versus debt or common equity. The AAA believes the primary distinction is that debt and preferred equity contain a maturity schedule, while common equity does not.
• The AAA made a recommendation that the RBC for hybrids should be based upon the factors for preferred stock.
• The AAA also recommended the short-term solution for notching be reversed since illogical results can be produced. The AAA recommendation is based in part on a comparative analysis of hybrid risks versus other types of securities and how investment risks are captured in the NAIC RBC formulas.
• The AAA recommended further study regarding Hybrid experience should be conducted.
• The AAA also commented on the importance of accurately capturing hybrid risks and features in cash flow projections and provided initial guidance on considerations for modeling hybrids.

• The Working Group voted to expose the AAA report for a 30 day exposure period ending October 22, 2007.

• The Working will hold conference calls throughout the fourth quarter to review the AAA report and continue discussions on hybrid accounting and reporting issues.

Action Items:

• Exposed the AAA report for a 30 day exposure period ending October 22, 2007.