Hybrid RBC (E) Working Group
May 21, 2008

• The Hybrid RBC (E) Working Group met via conference call on Wednesday, May 21, 2008. During this call the Hybrid RBC (E) Working Group:
• Adopted minutes from the April 17, 2008 conference call in which the Working Group heard comments from members of the Working Group and interested parties on a proposed Preliminary Recommendations to the Financial Condition (E) Committee handoff memorandum.
• The Working Group continued discussion on the handoff memorandum and heard additional comments from members of the Working Group and interested parties.
• The Working Group adopted the handoff memorandum. The following are some of the key points and recommendations included:
  • The Hybrid RBC Working Group (Working Group) has held a number of conference calls since adopting the AAA report in 2007, to continue its review of the hybrid securities issue. It is the Working Group's conclusion that its adoption of the AAA report, and the adoption by the full NAIC, puts in place a fixed solution regarding RBC treatment for those defined hybrids that were included under its review.
  • The Working Group recommends that its adoption of the AAA report serves to establish the NAIC treatment for the defined hybrid securities. By providing a risk-based capital solution for the defined hybrids, this report confirms that requests for classification analysis under the Guidelines for Determining the Status of New Instruments as Debt, Preferred Equity or Common Equity in Part Seven of the Purposes and Procedures Manual of the NAIC Securities Valuation Office (the Guidelines) are not required or appropriate. The Working Group further recommends that this is only for the group of defined hybrids and does not include other structured securities which were not reviewed by the Working Group.
  • The Working Group recommends that the NAIC continue to re-evaluate its procedures to develop regulatory changes that will ultimately result in improved identification, classification and accounting guidance for new structured investments. The Capital Adequacy Task Force should follow this work and provide input.
  • The Working Group recommends that classification analysis under the Guidelines should be reviewed as part of a more comprehensive effort to modernize the current regulatory process. The Working Group has agreed its current focus should be on improving other existing regulatory tools, or the coordination of those tools, as more fully discussed below. Many of these types of improvements have already been set out by the Invested Asset Working Group of the Valuation of Securities Task Force as part of the NAIC's transparency initiative referred to that body. This document re-enforces many of those same recommendations.
  • In addition, a NAIC Blanks proposal for reporting of the defined hybrids is currently being considered by the Blanks Working Group for 2009 reporting.
  • The Working Group also recommends that this group be dissolved.

Action Items:

1. Adopted the Recommendations to Financial Condition (E) Committee handoff memorandum.
2. Adopted the April 17, 2008, Working Group conference call minutes.