Lower Tier 2 instrumentsLower Tier 2 instruments

Lower Tier 2 instruments

36. For the purposes of subparagraph 31(g) of this Attachment:

(a) a step-up in dividends or interest includes the following events:

(i) a change in margin on a floating rate instrument;

(ii) a change in rate on a fixed rate instrument;

(iii) a conversion from fixed to floating rate (or vice versa), with a change in the effective margin included in the rate of dividend or interest of the instrument; or

(iv) a switch in the index basis (e.g. from a 3-month to 6-month floating rate or from a 3-month LIBOR to a 3-month BBSW) with a change in the effective margin included in the rate of dividend or interest of the instrument;

(b) moderate step-up in the rate of dividends or interest is permitted, provided the increase in dividends or interest is no greater than:

(i) 50 basis points, less the swap spread between the initial index basis and the stepped-up index basis, for an issue with a maturity up to 10 years;

(ii) 100 basis points, less the swap spread between the initial index basis and the stepped-up index basis, for an issue with a maturity of more than 10 years; or

(iii) 50 per cent of the initial credit spread, less the swap spread between the initial index basis and the stepped-up index basis;

(c) the issue documentation specifies which of the three measures specified in subparagraph (b) is to apply to the instrument;

(d) switching among the three measures mentioned in subparagraph (b) is not allowed;

(e) where the step-up involves a conversion from fixed to floating rate (or vice versa), as set out in subparagraph (a), or a switch in index basis, the swap spread must be fixed as at the pricing date and reflect the differential in pricing on that date between the initial reference rate and the stepped-up reference rate;

(f) any step-up in dividends or interest must not be operative within the first five years from drawdown; and

(g) in principle, only one step-up in dividends or interest is permitted over the life of the instrument. Exceptions for step-ups to be undertaken on multiple occasions (or for variable amounts) may be approved by APRA in writing at the time of issuing the instrument.

Dividend and interest payments on Tier 1 and Upper Tier 2 capital instruments

37. Unless otherwise approved, in writing, by APRA:F[20]F

(a) the aggregate amount of dividend payments on ordinary shares must not exceed an insurer’s after-tax earnings, after taking into account any payments on more senior capital instruments, in the financial year to which they relate; and

(b) dividend or interest payments, whether whole or partial, paid on Upper Tier 2, Innovative Tier 1 and Non-innovative Residual Tier 1 capital instruments must not exceed an insurer’s after-tax earnings, after taking into account any payments made on more senior capital instruments, calculated before any such payments are applied in the financial year to which they relate.

For these purposes, “financial year” refers to the last four quarters for which the insurer was required to submit quarterly returnsF[21]F to APRA preceding the date of the proposed payment of interest or dividend.

Holding of shares in insurer by special purpose vehicle (SPV)

38. Direct investments in shares of an insurer, by an SPV (e.g. trust) established under a share-based employee remuneration scheme, may only be included in the insurer’s Tier 1 capital where:

(a) the shares issued to the SPV represent ordinary shares of the insurer;

(b) the amount included in Tier 1 capital is matched by an equivalent charge to the profit and loss of the insurer for expensing the issue or funding the acquisition of ordinary shares by the SPV; and

(c) the ordinary shares issued cannot be converted to payment in another form (e.g. cash).

Deductions from an insurer’s capital base