Common Equity Tier 1 Capital

1. Common Equity Tier 1 Capital comprises the highest quality components of capital that fully satisfy all of the following characteristics:
   1. provide a permanent and unrestricted commitment of funds;
   2. are freely available to absorb losses;
   3. do not impose any unavoidable servicing charge against earnings; and
   4. rank behind the claims of policy owners and other creditors in the event of winding-up of the issuer.
2. Common Equity Tier 1 Capital consists of the sum of:
   1. paid-up ordinary shares issued by a private health insurer (whether listed on an exchange or unlisted) that meet the criteria in Attachment A to this Prudential Standard;
   2. paid-up mutual equity interests issued by a mutually-owned private health insurer that meet the criteria in paragraph 1 of Attachment F to this Prudential Standard up to the limit specified in paragraph 4 of Attachment F;
   3. retained earnings;
   4. undistributed current year earnings (refer to paragraph 33 to 36 to this Prudential Standard);
   5. accumulated other comprehensive income and other disclosed reserves (refer to paragraph 37 and 38 to this Prudential Standard);
   6. technical provisions in surplus/(deficit) of those required by Prudential Standard HPS 340 Insurance Liability Valuation (HPS 340);[4] and
   7. regulatory adjustments applied in the calculation of Common Equity Tier 1 Capital required under Attachment B to this Prudential Standard.
3. Current year earnings must take into account:
   1. negative goodwill;
   2. expected tax expenses; and
   3. dividends when declared in accordance with Australian Accounting Standards.
4. Declared dividends for the purpose of paragraph 33(c) of this Prudential Standard may be reduced by the expected proceeds, as agreed in writing by APRA, of a Dividend Reinvestment Plan (DRP) to the extent that dividends are used to purchase new ordinary shares issued by the private health insurer. A private health insurer must review every six months the expected subscription for new ordinary shares under its DRP having regard to experience over previous years and reasonable expectations of the level of subscription that might apply in future. If a private health insurer identifies any material change in the expected level of future subscription for new ordinary shares under its DRP, it must notify APRA and obtain APRA’s approval to a new amount by which declared dividends may be reduced for regulatory capital purposes.
5. Current year earnings include the full value of fee income not sourced from the insurer’s health insurance policies provided that:
   1. the fee income has either been received in cash or has been debited by the private health insurer to an account to be paid by the provider of the fees or otherwise forms part of the upfront fees owed to the private health insurer;
   2. outstanding amounts of fee income debited by the private health insurer to the account are claimable in full in the event of default on the amounts receivable, or capable of being sold to a third party as part of outstanding debts;
   3. the provider of the fee income has no recourse for repayment in part or full of any prepaid income;
   4. any fees debited by the private health insurer to the account cannot be cancelled by the provider of the fee income where the fees were to be paid upfront; and
   5. there is no requirement for the provision of continuing additional services or products associated with the fee income concerned.
6. Fee income not sourced from the insurer’s health insurance policies may include net positive amounts arising from the netting of deferred or future income and capitalised expenses associated with a product class (not comprising the insurer’s health insurance policies) provided the conditions in paragraph 35 to this Prudential Standard are satisfied. Any deferred income or future income that do not satisfy the conditions in paragraph 35, if not already excluded from current year or retained earnings, must be deducted from Common Equity Tier 1 Capital.
7. Accumulated other comprehensive income and other disclosed reserves include, but are not limited to:
   1. unrealised gains or losses recognised on the balance sheet;
   2. reserves from equity-settled share-based payments (share or share options) granted to employees as part of their remuneration package provided that:
      1. the share or share options granted relate only to the ordinary shares of the private health insurer;
      2. the ordinary shares comprise only new ordinary shares to be issued by the private health insurer, or new ordinary shares already issued by the private health insurer to employees, or new ordinary shares already issued by the private health insurer to employees for this specific purpose; and
      3. there are no circumstances under which such remuneration can be converted into another form (e.g. cash).
   3. foreign currency translation reserve;
   4. general reserves;
   5. cumulative unrealised gains or losses on hedges[5] offsetting gains or losses included in Common Equity Tier 1 Capital (such as movements in the currency value of foreign-currency-denominated hedging instruments that offset movements in foreign-currency-denominated items recognised in the foreign currency translation reserve). This includes fair value gains or losses on derivatives representing effective economic hedges of assets; and
   6. any other gains and losses in accumulated other comprehensive income and other disclosed reserves that may be specified by APRA in writing.

For the purpose of paragraph 37(b) any other reserves associated with share-based payments must be excluded from the capital base.

1. Revaluation of property holdings on the balance sheet may be included as part of other disclosed reserves only if:
   1. the property is owned by the private health insurer;
   2. the property comprises only land and buildings;
   3. the property is readily available to be sold. A property need not be scheduled for sale, nor need a sale be intended. However, such a property must be capable of being readily sold within six months were a decision made to sell the property;
   4. the reserves are shown as a component of equity in the audited published financial accounts of the private health insurer;
   5. the revaluations are reliable, in accordance with Australian Accounting Standards, and subject to audit or review consistent with Australian Auditing and Assurance Standards. A property must be measured at fair value in accordance with Australian Accounting Standards; and
   6. the amount of reserves incorporates the full effect of any fair value gains or losses and any gains or losses on hedges offsetting revaluations of the property included in the reserves.