On November 4, 2020, following suggestions and comments made through Public Consultation Notice No. 17/2020 to the Superintendence of Private Insurance (“SUSEP”), Resolution No. 391 of October 30, 2020 was published, establishing the rules for issuing subordinated debt by insurance companies, capitalization companies, local reinsurers and open supplementary pension entities incorporated as corporations, as well as providing for other stipulations.
In general, the structure and concepts already established in Public Consultation Notice No. 17/2020 were maintained. Among the changes made between the draft and the Resolution effectively published, we highlight first and foremost the inclusion of local reinsurers as entities able to also issue subordinated debt, as stated in Article 1 of the rule. In the definition of subordinated debt, the final rule added the instrument of “commercial notes”, in addition to being more generic in defining that subordinated debt may be any debt instrument that contains a clause providing for subordination of payment.
As for the deadline for reporting the issuance of subordinated debt to SUSEP, the published edition of the Resolution innovated by establishing a maximum term of 5 days from the approval by the General Shareholders’ Meeting or the Board of Directors of the issuing entities. In addition, it also defined the minimum requirements that such communication must contain, such as the nature of the funding, the amount to be raised, the maturity term of the debt and the structure of the flow of disbursements to creditors.
In relation to the document that will support the issuance of subordinated debt, provided for in Article 5 of the Resolution, there was a complete reformulation of its sole paragraph, when compared to the draft. The term “insufficient coverage of technical provisions” was defined, as provided for in item III of the Article, as “the amount of guarantor assets less than the total amount of technical provisions minus the value of assets reducing the need for coverage”. Also, there was an improvement in the concept referring to the “need to restore the state of solvency”, provided for in subsection VI of the same Article, which was drafted as being “any prudential requirement that requires the issuer to restore its solvency situation, under the terms regulated by the National Council of Private Insurance (CNSP)”, in addition to the adjusted net worth (PLA in Brasil) being lower than the minimum capital required (CMR), which was already provided for in the Public Consultation.
The Resolution demonstrates a major step in innovation in the sector, in addition to starting a process of bringing the insurance and reinsurance market closer to the capital market. Furthermore, the Resolution represents a new opportunity for regulated companies to raise funds for investments and possible solvency adjustments.
The new Resolution will come into force on December 1, 2020 and can be found in its entirety at this link.
Demarest’s Insurance and Reinsurance team is available to provide any additional clarifications that may be necessary.