Insurance Regulatory Capital

Advantages of Subordinated Debt

Equity and reinsurance are currently the main sources of regulatory capital for mid-sized insurers. Sub debt can be complementary to these more traditional forms, but also has number of other benefits:

  • The capital is maintained on balance sheet
  • Subordinated debt is less expensive than alternatives such as equity
  • No counterparty risk, capital is fully paid up and not contingent
  • It enhances return on equity and avoids dilution
  • Products are transparent and loan notes have a simple structure
  • Loan notes contain limited restrictions or covenants
  • Subordinated debt has tax benefits to the issuer
  • Enables access to new investor classes previously inaccessible to mid-sized insurers
  • Is very flexible in stress situations
  • Designed to be fully compliant with Solvency II requirements
  • Facilitates business growth in adjacent markets or with similar insurance products
  • No rating agency input required
  • Long term capital solution
  • Allows mutual insurers to distribute more surplus to existing members