Japan’s Insurers Opt for Subordinated Bonds to Raise Capital

Japanese insurance companies are on track to offer a record amount of subordinated bonds in 2012, in response to the need to expand their capital buffers ahead of the introduction of tougher capital requirements.

Proceeds from the sale of subordinated bonds, which are lower on the priority scale for repayment than traditional bonds, can be counted towards capital.

According to data compiled by Thomson Reuters, issuances by Japanese life and casualty insurance companies so far this year have reached ¥344bn (US$4.35bn), a 3.2-fold jump on last year and the highest figure since 2000, when comparable data became available.

Nippon Life Insurance issued US$2bn, equivalent to around ¥160bn worth of subordinated notes overseas last month. Fukoku Mutual Life Insurance is issuing ¥30bn ($379m) worth of perpetual subordinated bonds for institutional investors, its first ever for the domestic market.

Offerings earlier this year include Mitsui Sumitomo Insurance’s US$1.3bn worth of subordinated bonds in March, while fellow group member Aioi Insurance raised ¥50bn in a similar offering.

Europe’s move towards adopting the so-called Solvency II requirements has encouraged Japan’s Financial Services Agency (FSA) to consider following suit, which would require Japanese insurers to strengthen their capital reserves to reflect stricter risk assessment methods.

Many of them are keen to shore up their capital voluntarily in any case, due to a weak investment environment contributed to by very low interest rates and depressed share prices. This is expected to continue over the near-term. At the same time, earnings at property/casualty (p/c) insurers have also declined due to increasing claims related to car accidents and natural disasters.

Although mutual life insurance companies are able to draw on kikin funds, the equivalent of capital at a stock company, to do so requires a general meeting, akin to a general shareholders meeting, and other constraints apply. Subordinated bond issuances are not bound by such restrictions.

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