Insurers may now borrow from banks and create subordinated debt

1.    Introduction

Decree No. 558/2002 introduced important changes to Law No. 20,091 (regarding insurers and their control), some of them subject to the rules to be issued by the Superintendence of Insurance. Among those changes, insurers may now:

(i) borrow from banks; and
(ii) create subordinated debt.

On July 29, 2002, the Superintendence of Insurance issued Communications 60 and 61 regulating these powers. Therefore, insurers are now authorized to resort to bank credit and to create subordinated debt.

2.    Bank credit

Law No. 20,091, Section 29, paragraph g), prevented insurers from "resorting to bank credit for any purpose, except to build properties for their sale or lease, with the prior authorization of the relevant controlling authority".

Given the impact of the economic measures enacted by Law No. 25,561 Public Emergency and Reform of the Exchange System, the Federal Government issued Decree No. 558/2002 of necessity and urgency. This decree set forth that if insurers temporarily lacked liquidity, the Superintendence of Insurance may exempt them from the prohibition of resorting to bank credit.

Communication 60 of the Superintendence of Insurance issued rules setting forth when insurers may borrow from banks and the relevant conditions.

In the first place insurers request authorization from the Superintendence, which shall decide within 10 calendar days. If no decision is issued within this term, the authorization is deemed granted.

Credit may not exceed less than 20% of the computable capital or 100% of the monthly average of premium collections for the last quarter. However, these amounts may be increased if the insurer justifies its request adequately. These credits may be guaranteed.

While there are outstanding amounts under the cancellations of the credits, insurers that are corporations may not distribute dividends in cash. Branches of foreign companies may not remit profits to their head offices.

3.    Subordinated debt

The advantage of allowing the creation of subordinated debt had already been considered in the draft reform of Law No. 20,091 presented by the Government to the Congress in the year 2000, within the framework of a World Bank project .

Decree No. 558/2002 took one of the changes contemplated in the draft law, allowing insurers access to a new source of financing: the creation of subordinated debt, subject to the rules of the Superintendence of Insurance. These rules were finally issued in Communication 61 by the Superintendence.

The debt that insurance entities may create shall be subordinated to:

(i) general and special privileges derived from insurance contracts ;
(ii) the other creditors.

Subordinated creditors only have priority in respect of the shareholders of the insurer.

The debt may not be secured with the insurer's assets.

The creation of subordinated debt must be previously authorized by the Superintendence of Insurance. If the Superintendence does not issue a decision within 30 days after the entity has made the request, the authorization is deemed granted.

The total or partial repayment of the debt or the payment of interest may only be made provided:

(a) the computable capital is equal to or higher than the minimum required capital;
(b) there is no deficit in the coverage of amounts payable to the insured;
(c) there is surplus in the "Statement of Coverage of Amounts Payable and Liquidated Claims Payable"; and
(d) the requirements regarding risk retention are met.

While there is outstanding subordinated debt insurers may not reduce their capital, distribute capital in cash or return capital contributions.