Insurance bonds: structure and innovation

(Re)Insurers issue subordinated debt to enhance capital structure and satisfy regulatory solvency requirements. Subordinated insurance bonds gained importance after the financial crisis. Defaults are rare and investors benefit from access to attractive returns. Subordinated bonds are designed to absorb loss: from basic gone-concern loss absorption to going-concern principal write-off or equity conversion. An analysis of principal and interest loss absorption features and their triggers is critical to a fair assessment of risk for the investor and capital quality for the issuer. Drawing on her own professional practice, the author demystifies this relatively little-known asset class, providing guidance on the variety of legal features and their effect on the issuer and the investor, as well as rating and regulatory treatment.