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Photo illustration by Emilio Rivera III.
In the Land of Tremors
Competition, bad investments and poor business practices have rocked Japan's life insurers. Has the shaking stopped?

Strange Bedfellows
:A merger of opposites works

They were once pillars of Japan Inc., the well-connected insurance companies that could never fail. Then — thunk, thunk, thunk! Seven have collapsed in the last four years; two failed in October alone. Add the insurance woes to Japan's fragile banks and you have shaky foundations holding up the financial system. Does that mean the whole system is at risk? Probably not. It does mean that Japan's fledgling economic recovery faces renewed pressure. And it suggests that consumers — who have sunk nearly a third of their savings into insurance policies — will remain cautious. The survivors are scrambling into alliances and mergers to stay atop the rising tide of competition. Not all of them are expected to make it.

That's the good news. Behind the panic about Japan's insurance failures are signs that financial restructuring is getting real. On Oct. 9, Chiyoda Mutual Life Insurance filed for bankruptcy. Leaving liabilities of $27 billion, it was Japan's biggest corporate failure since the end of World War II. Less than two weeks later, that record was broken when Kyoei Life went belly up with debts of $42 billion. The two were Japan's 12th and 11th largest life insurers respectively. What killed them? All Japanese life insurers share an underlying problem: negative spreads. In 1980s, they tempted customers with long-term savings-type policies with guaranteed rates of return of 5% to 6%. That was no problem when insurers' stock and property investments were swelling amid the so-called bubble economy. Now that domestic bonds yield 2% or less and land prices are comatose, those policies are sucking insurers dry. When they looked for better returns abroad, the euro's dive added insult to injury. And deregulation starting in the mid-1990s brought greater freedom to set premiums, lower barriers between the life and casualty sectors, and an influx of foreign entrants — all of which turned up the competitive heat.

In a sense, past sins simply caught up with Chiyoda and Kyoei. But the way they fell suggests that the system is changing. In the past, regulators shuttered failed insurers when they became unsound, but Chiyoda and Kyoei chose bankruptcy under new, fast-track rules before their resources were exhausted. That should cut the cost of their rehabilitation under court supervision, says Ito Hideyuki of rating agency Moody's. The two firms' initiative in pulling the plug early contrasts with the old way of putting on a brave face until the prognosis was hopeless. In the case of Chiyoda, its close affiliate Tokai Bank refused to lead a rescue despite strong public pressure from the government, again departing from past practice in which strong companies helped the weak, risking their own health and slowing industry restructuring. "Investors should applaud Tokai's refusal to bail out Chiyoda," analyst James Fiorillo of ING Barings said in a report.

There don't seem to be any more life insurers in immediate danger, says senior analyst Hayashi Seiichi of the Japan Credit Rating Agency (JCR), "but the question is how policy holders react as they look at the failures." (Casualty insurers are in better shape because their policies tend to be annually renewable, avoiding the trap of negative spreads. Dai-Ichi Fire and Marine was an exception; it pioneered long-term policies — and collapsed last May.) What if spooked customers stop buying new policies and cancel old ones at companies deemed vulnerable? Too much of this, and systemic risk looms. Banks hold loans from insurers that could go bad. Liquidation of insurer stock portfolios could hit already rickety equity prices. Fortunately, says Moody's Ito, larger insurers with good credit ratings account for 70% to 80% of policies, so the overall outlook is stable.

The companies still standing are rushing to improve their survival chances with a flurry of alliances. Analysts are not overly impressed. "There's an advantage in allied life and casualty companies being able to cross sell each other's products," says JCR's Hayashi. "That doesn't mean their management is going to improve." But the admissions by industry giants that they cannot be all things to all clients, and that an ally's strong products are better than weak in-house offerings, are regarded as welcome doses of reality. Many companies are seeking tie-ups with foreign firms, which would offer both expertise and capital. In short, an industry that used to be made up of me-too firms with cookie-cutter products is splitting into two: those with strong franchises, unique products and good partnership potential, and those with steadily diminishing prospects. In most countries, they call that competition.

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