1.1. Application

This Schedule applies to every AIFC-Incorporated Insurer.

2.1. Calculating Eligible Capital

An AIFC-Incorporated Insurer must calculate its Eligible Capital in accordance with the Eligible Capital Calculation Table in rule 2.2 (Eligible Capital Calculation Table) and the provisions in this Schedule.

2.2. Eligible Capital Calculation Table

The Eligible Capital Calculation Table is as follows:

3.1. Permanent Share Capital

Permanent Share Capital means ordinary paid-up share capital, or equivalent however called, which meets the following conditions:

• (a) it is fully paid up;
• (b) any dividends in relation to it are non-cumulative;
• (c) it is available to absorb losses on a going concern basis;
• (d) it ranks for repayment upon winding up or insolvency after all other debts and liabilities;
• (e) it is undated;
• (f) the proceeds of an issue of permanent share capital is immediately and fully available to the AIFC-Incorporated Insurer;
• (g) the AIFC-Incorporated Insurer is not obliged to pay any dividends on the shares (except in the form of shares that themselves comply with this rule);
• (h) the AIFC-Incorporated Insurer does not have any other obligation or commitment to transfer any economic benefit in relation to that permanent share capital;

(i) dividends and other charges on the shares can only be paid out of accumulated realised profits;

3.2. Undistributable Reserves

(1) Undistributable Reserves has the meaning attributed to it by section 72(7) of the AIFC Companies Regulations namely any of the following:

• (a) a Company’s share premium account;
• (b) a Company’s capital redemption reserve;
• (c) the amount by which a Company’s accumulated, unrealised profits (so far as not previously utilised by Distribution or capitalisation) exceeds its accumulated, unrealised losses (so far as not previously written off in a reduction or reorganisation of capital duly made);
• (d) any other reserve that the Company is prohibited from distributing by its Articles of Association or under any applicable AIFC Regulations or AIFC Rules.

(2) Undistributable Reserves also include capital contributions if:

• (i) the capital contributions satisfy the requirements of rule 3.1 (a) to (i); and
• (ii) the AIFC-Incorporated Insurer told the AFSA of its intention to include the capital contributions at least 1 month before the day they were included.

3.3. Fund for future appropriations

Fund for future appropriations means the fund comprising all funds the allocation of which either to policyholders or to shareholders has not been determined by the end of the financial year, or the balance sheet items under international accounting standards which in aggregate represent as nearly as possible that fund.

3.4. Intangible assets

Intangible assets include goodwill, capitalised development costs, brand names, trademarks and similar rights and licences.

4.1. Perpetual qualifying hybrid capital instruments

An AIFC-Incorporated Insurer may only include perpetual qualifying hybrid capital instruments as part of its Tier 2 Capital if:

• (a) they are unsecured, subordinated and fully paid-up;
• (b) they are perpetual; and
• (c) they are available to absorb losses on a going concern basis.

4.2. Subordinated debt

(1) An AIFC-Incorporated Insurer must not include subordinated debt as part of its Tier 2 Capital unless it meets the following conditions:

• (a) the claims of the subordinated creditors must rank behind those of all unsubordinated creditors;
• (b) no interest or principal may be payable:
• (i) at a time when the AIFC-Incorporated Insurer is in breach of its minimum capital requirement; or
• (ii) if the payment would mean that the AIFC-Incorporated Insurer would be in breach of these rules;
• (c) the only events of default must be non-payment of any interest or principal under the debt agreement or the winding-up of the AIFC-Incorporated Insurer;
• (d) the remedies available to the subordinated creditor in the event of non-payment in respect of the subordinated debt must be limited to petitioning for the winding up of the AIFC-Incorporated Insurer or proving for the debt and claiming in the liquidation of the AIFC-Incorporated Insurer;
• (e) any events of default and any remedy described in paragraph (d) must not prejudice the matters in paragraphs (a) and (b);
• (f) in addition to the requirements about repayment in paragraphs (a) and (b), the subordinated debt must not become due and payable before its stated final maturity date except on an event of default complying with paragraph (c);
• (g) the agreement and the debt are governed by the laws of a jurisdiction:
• (i) under which the other conditions mentioned in this subrule can be met; or
• (ii) that is otherwise acceptable, generally or in a particular case, to the AFSA;
• (h) to the fullest extent permitted under the law of the relevant jurisdictions, creditors must waive their right to set off amounts they owe the AIFC-Incorporated Insurer against subordinated amounts owed to them by the AIFC-Incorporated Insurer;

(i) the terms of the subordinated debt must be set out in a written agreement or instrument that contains terms that provide for the conditions set out in paragraphs

• (a) to (h);
• (j) the debt must be unsecured and fully paid up;
• (k) the AIFC-Incorporated Insurer has notified the AFSA that it intends to include subordinated debt as part of its Eligible Capital and the AFSA has not advised the AIFC-Incorporated Insurer in writing within thirty days of the date of the notification that the subordinated debt must not form part of its Eligible Capital.

(2) An AIFC-Incorporated Insurer must not include in its Eligible Capital subordinated debt issued with step-ups in the first 5 years following the date of issue.

(3) For the purposes of calculating the amount of subordinated debt that may be included in its Eligible Capital, an AIFC-Incorporated Insurer must amortise the principal amount on a straight-line basis by 20% per annum in its final 4 years to maturity.

4.3. Legal opinions on Tier 2 Capital instruments

(1) An AIFC-Incorporated Insurer must obtain a written external legal opinion stating that the requirements of rules 4.1 or 4.2 have been met in respect of any perpetual qualifying hybrid capital instrument or subordinated debt that the AIFC-Incorporated Insurer is proposing to include as Eligible Capital.

(2) An AIFC-Incorporated Insurer must provide copies of the opinions referred to in subrule

(1) to the AFSA if requested by the AFSA to do so.

4.4. Other Tier 2 Capital instruments

An AIFC-Incorporated Insurer may include additional items in its Tier 2 Capital with the written approval of the AFSA.

5.1. Investments in subsidiaries and associates

An AIFC-Incorporated Insurer must deduct investments in subsidiaries and associates from the total of Tier 1 Capital and Tier 2 Capital.

5.2. Connected lending of a capital nature

An AIFC-Incorporated Insurer must deduct connected lending of a capital nature from the total of Tier 1 and Tier 2 Capital.

5.3. Inadmissible assets

An AIFC-Incorporated Insurer must deduct the following inadmissible assets from the total of Tier 1 Capital and Tier 2 Capital:

• (a) tangible fixed assets, including inventories, plant and equipment and vehicles;
• (b) deferred acquisition costs;
• (c) deferred tax assets;
• (d) deficiencies of net assets in subsidiaries;
• (f) any investment by a subsidiary of the AIFC-Incorporated Insurer in the AIFC-Incorporated Insurer’s own shares;
• (g) holdings of other investments which are not readily realisable investments; and
• (h) any other assets to be deducted from Eligible Capital as directed by the AFSA.

6.1. Instruments not to be included in Tier 2 Capital—exceeding 100% of Tier 1 Capital

A capital instrument is not eligible for inclusion in Tier 2 Capital to the extent that its inclusion will result in the aggregate amount of Tier 2 Capital exceeding 100% of eligible Tier 1 Capital (net of deductions).