As hybrid capital is a perpetual bond, it is counted along with the Club’s free reserves on the balance sheet for solvency and rating agency purposes. Hybrid capital is widely used in the insurance and financial sector and indeed most companies have debt as part of their financial structure. With this programme in place, we do not need to hold so much of our members’ money while meeting FSA requirements for regulatory capital and more importantly providing members with the confidence this financial strength supplies.

Solvency 2 will set out stronger requirements on capital adequacy and risk management for the European insurance industry. As part of the transitional arrangements for Solvency 2, hybrid capital will continue to count as regulatory capital in exactly the same way.

In short, hybrid capital provides flexibility in the Club’s capital requirements. Furthermore, while considerable uncertainties remain about the final shape of Solvency 2, being one of the financially strongest clubs in the International Group is an important benefit to the Club and its members.

Our hybrid capital pays a coupon of 9% each year. The funds raised are invested together with the rest of our assets, so the true net cost is 9% less our annual investment return. For the last two years the average cost (after investment returns) has been 1.85%.

Whilst the hybrid capital is structured as a perpetual bond, the Club has the option in the future to keep it, redeem it or to replace with a fresh issue of hybrid capital. It is extremely flexible.

Although hybrid capital helps with solvency capital, it is not there to cover the cost of unexpectedly high retained or pool claims (as experienced in 2004, 2006 and 2007). To protect us in this area, we have a reinsurance programme in place. You can read about this programme here.