Insights

On the 9 September 2016 the MFSA issued feedback to its consultation of the 1 April 2016 in relation to intra-group loans.

The MFSA has now launched a second consultation on this matter which will close on the 30 September 2016.  It was noted that in response to the numerous representations made by the market, the MFSA is proposing amendments to the original consultation.

The revised proposals of the MFSA apply to insurers and reinsurers including captives and require the pre-approval of any intra-group loan before it is granted. A business case and formal agreement would need to be submitted to the MFSA for prior approval.  Permission will not be granted if the loan leads to double gearing of the licensable entities involved.

The loan agreement will be subject to the following minimum criteria:

• a minimum rate of interest payable commensurate with an arms-length transaction;
• be subject to a prescribed definite period and not be open-ended;
• a clear repayment programme, either in the form of a lump sum to be repaid at the end of the loan period or in instalments during the life of the loan; and
• for loans granted to the immediate parent undertaking of the authorised undertaking, a clause requiring any dividend payments to be reduced from the loan.

It is also proposed that the original required conditions in the loan agreement that were proposed to apply to captives be replaced by a general option applicable to all insurers, reinsurers and captives which states that the intra-group loan agreement may include provisions which ensure the repayment of the loan such as by virtue of a guarantee by another group undertaking or by a right of set-off.

It is also proposed that insurers and reinsurers ensure that the counterparty to the intra-group loan has a security rating of BBB or equivalent issued by a reputable credit rating agency. This requirement will not apply to captives. If this minimum rating level is not met, the following tests will apply.  The counterparty:

1. must have a clean audit report;
2. maintain a gearing ratio of less than 50%;
3. maintain an interest cover of at least 3 times; and
4. maintain a current ratio in excess of 1.

The above tests would be based on the audited financial statements of the counterparty within the preceding 12 months prior to seeking MFSA approval to grant the loan.

The above requirements are without prejudice to the Prudent Person Principle requirements and are proposed to be applied to intra-group loans entered into on or after the 1 January 2017.

The original proposals to impose limits up to which intra-group loans may be granted and specific limits and conditions for captives are being removed.  The prohibition to grant intra-group loans within the first two years of authorisation has been retained but is now proposed to be limited to apply to insurers only and will therefore not apply to reinsurers and captives.

The full text of the Consultation Document of the MFSA and the new proposed Insurance Rules can be viewed by clicking here.