Subordinated debt impact on capital

[person]

I just want to clarify some points the core reading makes on the methods for raising capital and if they improve just peak 1, or both peak 1 or 2. Most I think are fairly obvious but I'm not 100% sure on the subordinate debt, as the core reading doesn't explicitly state it either way.


it obviously increases peak 1 surplus. Realistic surplus I'm not really sure about here, my guess is it does (improve it) because its not really created a liability as it ranks even after TCF etc. On the other hand, you would probably expect to have to make payments for it in the form of coupons and redemption, so it is a realistic liability. But in a sense that's no different to be expected to pay dividends on equities, and hence no liability should be created.

Any help appreciated.

 

[mugono]

Hi

I'll give this one a go

We're agreed for peak 1 surplus.

For realistic surplus, insurers will assess the value of the liabilities that they realistically expect to have to meet. The issue of where liabilities rank in relation to p/hs therefore drops away for realistic valuations.

The insurer does not have any discretion regarding paying their debt holders, which differentiates debt vs equity financing where payment of dividends is at the company's discretion.

In this sense debt will be a liability to the insurer.

Hope that helps, queries welcome