14 July 2015 Insurance

European insurers should consider subordinated debt

Smaller European insurers should consider the option of subordinated debt as the date of Solvency II implementation looms.

This is the opinion of Oliver Tattan, chief executive officer (CEO) of debt capital provider Insurance Regulatory Capital (IRC).

He explained that the capital solution, which has previously been the domain of large insurers, is now available to small and mid-size insurers and can be very helpful when dealing with Solvency II regulation.

“In the past, smaller insurers have used equity or quota share reinsurance, whereas the larger insurers took advantage of subordinated debt. Now, two things have changed,” said Tattan.

“Firstly, subordinated debt was always eligible in one form or another under Solvency I but it was different in every jurisdiction and therefore supply was very fragmented, whereas now, under Solvency II, eligibility has been harmonised across the European Union. Secondly, investors offering sub debt have entered the market and that’s new.”

The use of subordinated capital is written in to the Solvency II directive, meaning it’s “effectively pre-approved” and insurers can issue subordinated debt that they know will be eligible as regulatory capital.

In 2015, IRC was acquired by Bermuda-based Maiden Holdings. As IRC uses Maiden’s balance sheet, Maiden and other investors make the investment in the insurers.

“We work with everything from mutuals to privately owned companies to captives to run-off insurers. Although it’s a quite new tool, IRC is seeing a huge demand. Any small or mid-size insurance company should consider how they would interact with subordinated debt as a new form of capital in the future,” said Tattan.

He added that for large insurers, about 25 to 30 percent of their regulated capital is in the form of subordinated debt, whereas for small and medium-size insurers subordinated debt does not come into the picture.

Tattan said: “With time, this gap will close, even if it takes a couple of years. In the long run, I expect small insurers to catch up with larger insurers. I expect every insurer to have a perspective on subordinated debt.”

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