The failure without management
Truths behind the Seiho crisis in the Heisei era

By Nobuyasu Uemura
Nikkei Inc.

Preface
More than 10 years have passed since I started covering the insurance industry as aratings analyst. During this period the Japanese insurance industry has undergone
repeated upheavals. Non-life insurance firms, particularly large ones, were swept into
waves of realignment while weakened midsize life insurance firms went bankrupt one
after another and large life insurers were downgraded.
With the stock market beginning to recover in 2003 and insurers’ nonpayment exposedin 2005, the focus of attention has shifted from “uncertainty about management” to“distrust of management.” Considering the large number of inquiries received fromthe outside, the insurance industry still seems to command great attention. It is said
that economic magazines featuring insurance are all selling well.
While the public showed much interest in the insurance business, questions about thefailed life insurers which I had covered as an analyst kept nagging at me.
I continued to ask myself these questions, for example: Why were large amounts ofhigh-risk investments and loans made only during a specific period? Why did a
company created by an actuarial expert come to suffer a heavier burden of negative
spread than other companies? Why did a company pursuing a tie-up with foreigncompanies conclude a capital tie-up with another company? Why did the asset
structure become distorted in the latter half of the 1990s?
In Japanese society where the saying “let bygones be bygones” has greater appeal than“failure is the mother of success,” my questions found no answers no matter how long I
waited. I wished to do some work and unravel the truth by myself if I had a chance todo so. Fortunately, I got an opportunity to start research on the insurance industry at
Waseda University in 2005. I had no hesitation in choosing “a critical review of failed
life insurers” as the subject of my research. It was not easy to balance my researchwith my professional duties as an analyst. Having now completed my research, I cansay I did not just record what had happened in the past. I think my work reached thelevel where it may be useful for the management of the insurance business andgovernment administration of the insurance industry as they are today.

iA critical review of instances of failure, which forms the core of this book, would nothave been completed without the warm support and cooperation of people who wereinvolved in the management of failed insurers. Even though a certain period of time
had elapsed, these people must have needed the courage to talk about the past failures.
Some of them may have been uncomfortable looking back over the past. Many musthave agreed to give an interview out of a certain sense of mission. I take thisopportunity to express my deep gratitude to all the people who cooperated in my project.
I wonder how far my analysis in this book succeeded in revealing the truth. Whatever
the result, I am solely responsible for it.
Most of the interviews were conducted as part of “Case studies of failed financial
institutions” commissioned by the Finance Services Agency. The contents andopinions expressed in the research report are ascribed not to the FSA but to this writer.
Let me add that, although it is the FSA’s commissioned research, the government has
provided no internal materials concerning failed life insurance firms nor has it
introduced me to the people of these firms and that I searched for the persons involved
through my connections and asked them for an interview.
Finally, let me express my thanks to Professor Yoshimasa Nishimura of the Graduate
School of Asia-Pacific Studies at Waseda University for his guidance on my doctoral
thesis titiled, “a critical review of factors leading to the failure of life insurers in the
Heisei financial crisis,” upon which this book is based, Professor Mitsuru Iwamura of
the University’s Graduate School, who as a second reader gave me precious advice, andProfessor Nishimura’s seminar members who made various valuable comments. My
thanks go as well to Kyoko, my wife who supported me through the days when I spentmuch of the time I was home working in my own room.
July 2008
Nobuyasu Uemura-ii-Author’s comment on the English-language edition
As the author of this book, I am very pleased that the English-language edition of“The Failure without Management: Truths behind the Seiho Crisis in the Heisei Era”
has been published as a project of the Oriental Life Insurance Cultural Development
Center.
I have been hoping for an English version of “The Failure without Management”
since 2008, when the Japanese version was published. When I made presentations of mystudy overseas, I was often asked whether any of my research papers were available in
English.
We cannot deny that a series of midsize life insurance firms failed from the late 1990s
to the early 2000s, partly because of the challenging economic environment in Japanthat followed the bursting of the bubble economy. However, as discussed in this book,detailed examinations of individual cases have revealed that the series of failures of life
insurers were not caused by structural problems stemming from Japan’s economic andfinancial conditions at those times, but that internal factors unique to individualcompanies, including the business model, management, and the management structure,
had important implications. I do not think that the assumption applies only to theJapanese life insurance industry, but I believe, rather, that there is something universal
and helpful overseas in the assumption.
I feel that I have finally completed my work now that the English version has been
published, about three years after the publication of the Japanese version.
Financial crisis and Japanese life insurance industry
The global financial crisis occurred immediately after the publication of this book(the Japanese version). Giant insurance and financial groups, including AIG, ING, andHartford, were supported by the government, and the financial strengths of Japanese life
insurers were adversely affected. Japanese life insurers retained as many earnings eachterm as they could, however, to enhance their margins of solvency based on the lessons
that they learned from the Seiho crisis. As a result, with few exceptions, they survived
the financial crisis.
I interviewed people at 25 major Japanese insurance companies in 2009. Theinterviews revealed that life insurers’ awareness of risk management and their risk
management technology have advanced since the 1990s, when many life insurers failed,
but that the effectiveness of their awareness and technology varied. I often heard people
say, “Management is not interested in risk management.” Others said, “Management-iii-

thinks that risk management is the responsibility of the division in charge of risk
management.” I assumed that although risk management systems had been developed,
there was still considerable room for improvement in terms of the use of the systems inmanagement. In this book I wrote that inadequate corporate governance increases
bankruptcy risk. I felt that improvements to corporate governance by insurers were only
half done.
Benefiting from the experience of failures of life insurers
I left the rating agency where I worked for more than 10 years in March of 2010. I am
in charge of insurance administration at the Financial Services Agency. Using myexperience as an analyst, I am monitoring individual insurance companies anddeveloping supervisory regulations with the aim of ensuring the soundness of insurancecompanies.
Working for an insurance watchdog agency, I am especially interested in theenterprise risk management (ERM) of insurance companies.
The purpose of ERM is that companies achieve sustainable and stable enhancementof their corporate value while maintaining their financial health. Naturally, insurers
should actively conduct ERM as part of their self-management instead of being
encouraged to do so from the outside.
Nevertheless, regulatory authorities pay attention to ERM because they believe thatsteady improvements in corporate value will help to protect policyholders. For example,
the Financial Services Agency comprehensively reviewed its insurance inspection
manual in February of 2011. The agency added a new category called “integrated risk
management system,” clarifying its policy of having its inspectors inspect the ERM of
insurers. With regard to solvency regulations, the agency is considering not only setting
minimal capital requirements, including a solvency margin ratio, but also establishing aframework in which the authorities examine insurance companies’ reports in their own
evaluation of their management risks and equity capital.
I could say that the Financial Services Agency is seeking to enhance ERM not
because emphasizing ERM is an international trend, but because the agency is aiming toapply lessons from the failures of life insurers.
I believe Japan’s experience will provide useful information for countries in Asia
where the life insurance industry is developing rapidly. I would be delighted if this bookis of any help.

-iv-

著者より英訳版に寄せて
このたび公益財団法人アジア生命保険振興センターの事業として「経営なき破綻 平成生保危機の真実」の英訳版が誕生することを、著者として大変うれ
しく思っています。
英訳版を出したいという思いは、「経営なき破綻」を出版した 2008 年当初からありました。また、海外で研究内容について発表する機会があると、しばしば「論文の英語版はないのか」という問い合わせをいただきました。
1990 年代後半から 2000 年代初頭にかけて起きた中堅生保の相次ぐ経営破綻は、
バブル経済崩壊後の日本の厳しい経済環境が影響したことは否定できません。
しかし、本書を読んでいただくとわかりますが、個別事例を詳細に検証した結果、一連の生保破綻は当時の日本の経済・金融情勢に起因した構造的な問題ではなく、破綻に至るには、ビジネスモデルや経営者、経営組織といった、その会社固有の内的要因が重要な意味を持っていたことが浮き彫りになりました。
おそらくこれは日本の生命保険業界に特有の話ではなく、海外でも参考になる
普遍的なものを含んでいるのではないかと考えています。
ですから、日本語版の出版から約 3 年たつとはいえ、英訳版を出すことができて、ようやく一つの仕事を完了することができたという気持ちです。
金融危機と日本の生保業界本書（日本語版）を出版した直後に世界的な金融危機が発生し、AIG や ING、
ハートフォードといった巨大保険・金融グループが政府の支援を受ける事態に発展しました。日本の生保の経営体力も圧迫されましたが、各社はかつての生保危機を教訓に、毎期の利益を可能な限り内部留保し、支払余力の充実に努めてきたことが功を奏し、一部の例外を除き、金融危機を無事乗り切ることができました。
ただ、筆者が 2009 年に日本の主要保険会社 25 社に対して行ったインタビュ
ー調査によると、破綻会社が続出した 1990 年代当時に比べれば、生保のリスク管理に対する意識も技術も大きく進展したとはいえ、その実効性は様々でした。
「そもそも経営陣にリスク管理に関心を持ってもらえない」「経営陣に『リスク管理はリスク管理担当部門の仕事』という意識がある」といった声もしばしば聞こえてきました。リスク管理態勢の整備は進んだものの、経営への活用という点でまだまだ改善の余地が大きいのでしょう。本書で明らかにした「コー
ポレート・ガバナンスの不備が破綻リスクを高める」ことへの対応は道半ばといった感がありました。

-v-

生保破綻の経験を生かす
個人的な話で恐縮ですが、筆者は 2010 年 3 月に 10 年以上勤務していた格付会社を退職し、現在は日本の金融庁で保険行政の現場に身を置いています。ア
ナリストとしての経験を生かして個々の保険会社のモニタリングに関わるとともに、保険会社の健全性確保を目的とした監督規制等の整備に取り組んでいる
ところです。
なかでも、保険会社の ERM（エンタープライズ・リスク・マネジメント）には監督当局として強い関心を持っています。
ERM の目的は、会社が自らの健全性を確保しつつ、企業価値を持続的、安定的に向上させることです。当然ながら、本来、ERM は外部から促されて実施するものではなく、保険会社が自己管理の一環として行うべきものです。
それにもかかわらず監督当局が ERM に注目するのは、企業価値の安定的な向上が契約者保護に資するという考え方があるからです。例えば、金融庁では 2011年 2 月に保険検査マニュアルを全面的に見直し、新たに「統合的リスク管理態
勢」のカテゴリーを設け、検査官が保険会社の ERM を検証する姿勢を明確にしました。ソルベンシー規制についても、ソルベンシー・マージン比率のような最低資本要件の設定のほか、保険会社が自らの経営リスクと自己資本等の評価を行い、これを当局が報告を受け、検証するといった枠組みを併用することを検討しています。
このような取り組みの背景には、単に ERM 重視が国際的な流れだからというのではなく、かつての生保破綻の教訓を生かそうという意識があると言えるかもしれません。
生命保険業の発展著しいアジア諸国でも、日本の経験が参考になるのではな
いかと考えています。この本が少しでもお役に立てば幸いです。

-vi-

On the occasion of the publication of the English-language edition of “The Failure
without Management: Truths behind the Seiho Crisis in the Heisei Era” by
Nobuyasu Uemura
I would like to offer my congratulations on the publication of the English version of“The Failure without Management: Truths behind the Seiho Crisis in the Heisei Era” by
Mr. Nobuyasu Uemura.
As described in the foreword, the author did not just record what had happened in thepast but wrote the book so that it will be useful for the management of the insurance
business and government administration of the insurance industry as they are today as
well. The administrative authorities with supervisory power have been preoccupied withpreparing liquidation schemes and safety nets and have not conducted full-scale
investigations or analyses of the cause of failure. Against this backdrop, the book has
great value as an academic resource.
Mr. Uemura says that the assumption that the only reasons for the failure of life
insurers are external factors—including falling stock prices, low interest rates, andinadequate oversight of the insurance industry—is “extremely superficial.” Throughdetailed examinations of individual cases, he makes it clear that internal factors unique
to individual companies, such as business models, management, and management
structure, played a significant role in the bankruptcies.
Of particular note is the fact that Mr. Uemura has adopted the oral history method forthe detailed examinations of individual cases, a first for Japan. He interviewed morethan 30 people, including key figures in management. The outline of the book is basedon statistics and business results, but the readers can close in on the “truths behind the
Seiho crisis in the Heisei era,” by reading quotations from the people involved.
In our research as academics, we encounter great difficulty obtaining data andmaterial on the management of insurance companies. Needless to say, we would like to
ask people in the insurance industry to actively disclose information. At the same time,working on research on the management of insurance companies, we have a lot to learn
from the publication of a serious study like this by using the oral history method,
although Mr. Uemura was in a position different from ours as a ratings analyst in chargeof the insurance industry when he wrote the book.
In Chapter 3, Mr. Uemura clearly classifies internal factors within management thatare considered likely to increase the risk of failure into three categories: factors related
to the business model, factors related to manager, and factors relating to the
management structure. Factors related to manager accounted for about 60% of all-vii-

factors and are classified into eight subcategories, including top executive’s competency
problem, top executive’s influence, lack of management awareness, and error inbusiness judgment. I assume that Mr. Uemura needed a lot of patience when heextracted common factors from the interviews, in which the people answered fromdifferent standpoints, and classified them. I greatly respect his efforts.
In Chapter 4, Mr. Uemura interviews people involved in three midsize life insurance
firms that did not fail (Taiyo Life Insurance, Daido Life Insurance, and Fukoku MutualLife Insurance) and points out the following differences between them and life insurersthat did go under:- They developed unique management strategies that were different from those oflarge life insurers- They did not increase high-risk investment in the bubble economy- The management had leadership and did not follow the examples of othercompanies.
- The management did not assume management equals sales and distanced
themselves from the sales division.
Those points appear to be simple, but management at insurance firms should consider
them when they assess the situation at their own companies.
Having learned lessons from the failures of insurers, the insurance industry has
undergone great change from the situation that prevailed up to the 1990s. Insurers haveintroduced advanced asset-liability management (ALM) and integrated risk management.
However, there is still ample room for improvement, says Mr. Uemura. He is concerned
about a lack of people in industry oversight positions, saying, “The authorities shouldstill take on a great role. With few personnel appearing to be well versed in theinsurance field, …”
I believe that this concern has been reduced considerably now that Mr. Uemura has
become an official at the Financial Services Agency, given that he is one of the few
experts in Japan who have analyzed the management of insurance companies. I am
looking forward to his success in his new position.
Lastly, I hope this book will be read widely by people involved in the insurance
industry in countries in Asia who are interested in the failures of Japanese life insurers
and their liquidation procedures, and will contribute to the interests of insurance
consumers and to the healthy development of the industry.
Masahiko Ezawa
Professor in the Academy of Commerce at Waseda University
President of the Japanese Society of Insurance Science-viii-

植村信保著『経営なき破綻

平成生保危機の真実』英語版に寄せて

この度の植村信保氏の著書『経営なき破綻 平成生保危機の真実』の英語版出版に当り、心よりお慶び申し上げたい。
「まえがき」にもあるとおり、本書は、単に過去の記録を残したということではなく、現在の保険経営や保険行政の参考になりうるものとして書かれている。特に監督権限を有する行政当局が破綻処理スキームやセーフティーネット
整備等に追われ、破綻原因に関する本格的な調査・分析が行われなかったこともあり、本書の学問的資料としての価値はすこぶる大きい。
植村氏は、生保会社の破綻要因を「株価下落」、「低金利」、「保険監督の不十分さ」といった外部要因にのみ求める主張を「きわめて表面的」であるとし、個社の事例を詳細に検証することで、会社破綻にはビジネスモデルや経営者、経営組織といった当該会社固有の内的要因が重要であることを明確にした。
また特筆すべきは、植村氏が、こうした個別事例の詳細な検証のために、わが国で初めて関係者（経営のキーパーソン等）30 数名へのインタビューを実施し、それにより収集した「オーラル・ヒストリー」（口述記録）を用いるという研究手法を採用した点である。記述された各種統計や業績数字にもとづいて輪郭は描かれつつも、随所にカッコ書きで記される関係者の発言内容により、
読み手は、まさに「平成生保危機の真実」に肉薄できるのである。
われわれ学界に身をおくものは、研究を進める際、保険会社の経営に関するデータや資料へのアクセスの面で多くの困難を経験する。もちろん保険業界各位には積極的な「情報開示」を要請したい。他方、植村氏が、執筆当時、格付アナリストとして保険業界を担当されていたという立場の差はあれ、「オーラル・ヒストリー」を用いるという研究手法により本書のような本格的な研究書を上梓されたことは、われわれが今後保険経営に関する研究に取り組む折、参考にすべき点も多い。
本書第 3 章においては、破綻リスクを高めると判断される経営内部の諸事象を、「ビジネスモデルに関するもの」、「経営者に関するもの」、「経営組織に関するもの」の 3 つに分け、大変明快な整理がなされている。全体の約 6 割を占めたのが経営者に関する要因で、それはさらに「トップの適性の問題」、「トップの影響力の強さ」、「経営意識の欠如」、「経営判断のミス」他、8 つの小グループに細区分された。個々人がそれぞれの立場で答えたインタビュー
内容について、その趣旨の共通項を抽出し、類型化するといった作業はかなり根気を要するものであったと推測される。植村氏の払われた努力に敬意を表したい。
また本書第 4 章においては、経営破綻に陥らなかった中堅３社（太陽生命、-ix-

大同生命、富国生命）の関係者にもインタビューを試み、それにより以下のよ
うな破綻生保との違いを明らかにした。すなわち、これら 3 社は・大手会社とは異なる独自の経営戦略を採用した。
・バブル期にハイリスク運用に傾斜しなかった。
・経営陣にリーダーシップがあり、他社に追随しなかった。
・経営＝営業という意識をとらず、経営が営業部門と距離を置いていた。
こうした指摘は、それ自体シンプルとも思われるが、保険経営に携わる者にとり、各自の状況に応じて顧みるべき点であろう。
経営破綻という教訓から、生保業界においては 1990 年代までとは様変わりして、高度な ALM（資産負債総合管理）や統合的なリスク管理が行われるようになった。しかし、植村氏は未だ改善の余地が大きいという。そしてそうした面
での「行政の役割は引き続き大きいはずだが、現在でも保険分野に精通した人
材は少ないようであり、・・・」と保険監督における「人材不足」を憂慮されていた。
私は、植村氏自身が、保険会社の経営分析に関する日本で数少ない専門家から、金融庁の担当官へと転身されることで、そうした懸念は相当程度払拭されたと考えている。氏の新天地での大いなる活躍を期待したい。
また最後に、本書が、わが国の生保会社の破綻とその処理に関心を有するア
ジア各国の保険関係者に広く読まれ、かつ保険消費者の利益の向上と保険業界の健全な発展に資することをご祈念申し上げ、結びとしたい。

-x-Contents
Introduction
Truths behind the failure of life insurers in the Heisei era
Failed life insurers not scrutinized enough
Delving into the inside of the failed life insurers
Internal factors related to managers are important
How to learn lessons from instances of failure in the past

1

Chapter 1
Examining external factors – Is the bubble bursting the culprit of all?
7
1. Little-known earnings and risk structures of life insurers and regulatory environment
7
Three reasons that make it difficult to understand the management of life insurers
Earnings structure of life insurers
Profitability of the third sector is highCharacteristics of management risks
Stock companies and mutual companies
Regulatory environment for life insurers
Introduction of solvency margin standards
2. Examining structural factors – External factors for the whole industry 17
View that “the life insurers’ crisis is a structural problem”
Impact of the bubble bursting
Business environment in the 1980s (Part 1: Maturation of the death coverage
market)Business environment in the 1980s (Part 2: Raising the assumed interest rate)
Business environment in the 1980s (Part 3: Burden of policyholder dividend
payment)
Business environment in the 1980s (Part 4: Burden of the regulatory authorities)
Impact of financial deregulation and globalization
3. Effects of scale expansion race, customer base, and constraints of company type40
Were there external factors peculiar to midsize life insurers?
Midsize life insurers competing to grow bigger
The problem of customer baseConstraints due to company type
External factors alone cannot explain failure-xi-4. Roles played by rating and disclosure
48
Disclosure of life insurers
Disclosure of failed life insurers
Why did life insurers’ information disclosure system fail to function as it should?
Role of rating
Failed life insurers and rating
Chapter 2
Where did things go wrong? – Reviewing instances of failure individually
1. Study of individual instances of failure
63
What was happening inside failed life insurers?
Oral history
2. Rapid expansion of business scale was fatal – Nissan Mutual Life Insurance
Direct cause of failure
Launch of annuity insurance loan
Was there no move to control the rapid expansion of assets?
Steps taken after the external environment worsened
Managers of that time
Lack of ALM
Meeting of policyholder representatives and affiliated corporate groups
Ministry of Finance
3. Inappropriate management by top executives – Toho Mutual Life Insurance
Direct cause of failure
Leaning toward asset-based products
Top executive’s behavior
Behavior of those close to the top executives
Steps taken after business turned worse
Management reform by a group of junior staff
Tie-up with GE Capital
Corporate management checking and risk management system
Role played by external discipline
4. Fettered by low earnings structure – Daihyaku Mutual Life Insurance
92
Direct cause of failure
Not much improvement in earnings structure
Difference from Taiyo Life
Steps taken after business turned worse
Reducing strategically held shares

-xii-

63

66

79

Steps taken around the time of tie-up with Manulife
Managers
Actuary
ALM
Role played by external discipline
5. Investments and loans during only two and a half years proved fatal – Chiyoda
Mutual Life Insurance 105
Direct cause of failure
Leaning toward savings-based products
Going ahead with high-risk investments and loans
Why was it possible to make high-risk investments and loans?
Occurrence of the bad loan problem
Public disclosure of bad loans
Selling strategically held shares
Credit uncertainty and outflow of policies in force
Tie-up negotiations with outsiders
Managers at that time
Actuary
ALM and attitude toward risk management
Role played by external discipline
Ministry of Finance
6. “Managerial vacuum” caused failure – Kyoei Life Insurance
Direct cause of failure
Unique management strategy
Launch of single-premium endowment insurance
Delay in discontinuing sale
Steps taken after the external environment worsened
Tie-up negotiations with outsiders
Presence of the founderManagerial vacuum
Actuary

123

Attitude toward risk management
Role played by external discipline
7. Is it true that “rumors caused the failure”? – Tokyo Life Insurance
Direct cause of failure
Decline in market share
Leaning toward savings-based products-xiii-

136

Inappropriate asset management
Management in the first half of the 1990s
Pretax losses and steps taken later
Distortion of asset structure
Delay in handling the problem
Management reforms and tie-up negotiations with outsiders
Managers at that time
Internal management checking functions
Role played by external discipline
8. Role played by internal factors in the management of failed life insurers

152

Chapter 3
Sorting out cause-and-effect relationships in business failures
155
1. Sorting out internal factors in failure 155
Sorting out internal factors
Consideration on results of categorization
2. Undoing the chain of internal factors and external factors
162
Launch of annuity insurance loans (Nissan Mutual Life, 1986)
Rapid expansion of high-cost funds and overconcentration on specific products(Nissan Mutual Life, 2nd half of the 1980s)
Leaning toward asset-based products (Toho Mutual Life, 2nd half of the 1980s)
Inappropriate behavior of the top executive and those around him increased the
management risk (Toho Mutual Life, 2nd half of the 1980s)
Failure to shed the low-earnings structure (Daihyaku Mutual Life)
High-risk investments and loans by those close to the president (Chiyoda Mutual
Life, 1988-1990)
Launch of single-premium endowment insurance (Kyoei Life, 1987)
Delay in discontinuing sale of single-premium endowment insurance (Kyoei Life,
1st half of the 1990s)
Inappropriate measures to prepare for book closing made things worse (Nissan
Mutual Life, 1st half of the 1990s)
Inappropriate steps taken by the management (Daihyaku Mutual Life, 1990-2000)
Inappropriate steps taken by the management (Kyoei Life, 1990-2000)
Inappropriate steps taken by the management (Tokyo Life, 1990-2000)-xiv-

Chapter 4
What decided the fate? – The differences in the life insurers that survived
1. How were the life insurers that survived managed?
170Management reform of Asahi Mutual Life
Effectiveness of loose tie-ups
2. Midsize life insurers that did not fail172
Taiyo Life Insurance
Daido Life Insurance
Fukoku Mutual Life Insurance
3. How were they different from the failed life insurers?
182
Chapter 5
Was Japan an anomaly? – Comparison with failures overseas
185
1. Inappropriate management – Failure of Equitable Life of the U.K. 185
U.K. life insurance market
Corporate profile of Equitable Life
Developments leading to failure
Causes of failure
Rating trends
Comparison with failures in Japan
2. Undisciplined management proved fatal – Failure of South Korean life insurer
South Korean life insurance market
Structural adjustment
Structural adjustment of newly established companies
Structural adjustment of Korea Life
Comparison with instances in Japan
Conclusion
What did we learn from failures? – Lessons going forward
203
What changed and what did not change after the failure of life insurers
Efforts to strengthen governance
Making management “transparent”
Upgrading the risk management system
Changes in the business environment
Lack of transparency of policyholder dividends
Actuary’s role
Administrative discipline

-xv-

170

194

Role of disclosure
Disclosure beyond the framework of insurance accounting
What to learn from instances of failure
Bibliography 220
Chronological Table of Seiho Failures

223

-xvi-

Introduction
Truths behind the failure of life insurers in the Heisei era
1. Failed life insurers not scrutinized enoughNo Japanese life insurance companies had fallen into a management crisis for 50 years
after the end of the World War II. In April 1997, however, Nissan Mutual Life
Insurance Co. received a business suspension order from the Ministry of Finance, thethen regulatory authority for insurers. Since the collapse of the myth that life insurers
would never fail, in just four years up to March 2001, seven midsize insurers failed,creating enormous losses for policyholders.
Only seven companies failed, but the combined assets of these companies accounted forover 10% of the total assets held by the life insurance industry. Moreover, liquidation
procedures for the failed life insurers, in principle, caused a burden on existing
policyholders and policyholders of other insurers via the Life Insurance Policyholders
Protection Corporation of Japan and other safety nets, while public funds were injected
into financial institutions (including banks, credit associations, and credit cooperatives)that went under at around the same time these insurers failed to fully guarantee deposits.
In the case of a 30-year-old man taking out whole life insurance with failed Kyoei Life
Insurance Co. in 1992, for example, insurance benefits were reduced by 58% from theinitially guaranteed amount. Funds contributed from safety nets amounted to a total of¥700 billion.
These instances of failure were large-scale, causing enormous damage to policyholders,
but unfortunately the government and the Diet made few efforts to investigate andanalyze individual instances to put the lessons to good use. In March 2007, theFinancial Services Agency publicly announced “Case studies of failed financial
institutions,” its commissioned research in which I was involved. The contents andopinions expressed in the research report were written by outside authors, notrepresenting the FSA’s official views, however.
There appear to be a number of reasons why adequate review of these instances offailure has not been conducted until now. The business environment surrounding life
insurers has grown increasingly harsh since the late ’90s, driving many insurers into amanagement crisis. Amid such circumstances, both the government and the industry-1-must have been too busy dealing with the problems at hand, such as establishing ascheme for the liquidation of failed insurers and reviewing safety nets, to take time forlearning lessons from what these failed companies went through. After all, it is only
very recently that the regulatory authorities started overhauling rules on solvency margin
ratios and others to gauge the financial soundness of insurers.
Table-Introduction 1: Overview of past bankruptcy procedures
June 1999
March 2000

Daihyaku
Mutual
May 2000
April 2001

ChiyodaMutualOctober 2000
April 2001

August 2000
March 2001

Kyoei

Tokyo

October 2000
April 2001

March 2001
October 2001

Administrative
procedure

Administrative
procedure

Administrative
procedure

Administrative
procedure¥36.5 billion

The Act on
SpecialTreatment ofCorporate
Reorganization
Proceedings
and OtherInsolvency
Proceedings of
Financial
Institutions¥595.0 billion

The Act on
SpecialTreatment ofCorporate
Reorganization
Proceedings
and OtherInsolvency
Proceedings of
Financial
Institutions¥689.5 billion

The Act on
SpecialTreatment ofCorporate
Reorganization
Proceedings
and OtherInsolvency
Proceedings of
Financial
Institutions¥73.1 billion¥302.9 billion¥650.0 billion¥317.7 billion

Unknown

Unknown

Unknown

Unknown

All waived

All waived

All waived¥200.0 billion¥366.3 billion¥145.0 billion¥26.7 billion

none

none

none

0%

10%

10%

10%

10%

8%

0%

¥123.2 billion¥240.0 billion¥147.0 billion¥7.0 billion

About¥320.0 billion¥364.0 billion¥32.5 billion

unknown

4.79%

4.46%

4.05%

3.70%

4.00%

4.20%

2.75%

1.50%

1.00%

1.00%

1.50%

1.75%

2.60%

7 years

8 years

10 years

9 years

10 years

8 years

10.5 years

Aoba Life
Insurance Co.

GE Edison Life
Insurance Co.

Manulife Life
Insurance Co.

Azami Life
Insurance Co.

U.S. American
International
Group Inc.

U.S. Prudential
Financial Inc.

Taiyo Life
Insurance Co.
and Daido Life
Insurance Co.

Nissan Mutual

Toho Mutual

Going bankrupt
Completing
liquidation
Procedure

April 1997
October 1997

Amount ofnegative net
worth
Subordinatedloans and othergeneralliabilities
Funds provided
by thePolicyholders
Protection
Corporationand othersafety nets
Reduced policy
reserves
GoodwillAssumed rateof return
Before goingbankrupt(average)
After goingbankrupt(upper limit)
Deduction forearly
termination
Successor or
restructuringsponsorTaisho*Aoba Life was established by the Life Insurance Association of Japan and then sold to France-based Artémis Group. It mergedwith Prudential Life Insurance Co. in 2004.
*Azami Life was launched as a joint venture between the former Yamato Mutual Life Insurance Co. and SoftBank Corp., which
later withdrew from the business.
*Chiyoda Mutual Life, Kyoei Life, and Tokyo Life were renamed as AIG Star Life Insurance Co., The Gibraltar Life Insurance Co.
and T&D Financial Life Insurance Co., respectively.
*GE Edison Life came under the umbrella of AIG Group (becoming AIG Edison Life Insurance Co.) in 2003.
(Data) compiled by the author from a variety of sources-2-2. Delving into the inside of failed life insurers

Overseas countries have also seen their life insurers go under. For example, 547 life
insurers and health insurance companies fell into a management crisis in the U.S. during
the period from 1976 through 2002, according to a survey by A.M. Best Co., a U.S.
rating firm.
Many of them were considered to be small-scale companies, but several second-tier life
insurers, including Executive Life of California and Mutual Benefit Life, were also
forced to fail. In the U.K., Equitable Life Assurance Society, a second-tier company
known as the world’s oldest life insurer, had to stop underwriting new contracts in
December 2000 due to problems arising from policies with guaranteed annuity rates,
substantially falling into bankruptcy. In South Korea, Japan’s closest neighbor, anumber of life insurers, especially relatively young companies, were forced to go underamid the financial crisis that started in 1997.
Japanese cases are characterized by the fact that many midsize life insurers with long
business histories and a large scale of operations went under in a short period of time,rather than newly established or small-scale companies that are generally deemed to befinancially vulnerable. A few midsize life insurers having as long business histories as
those that went under, however, have also managed to maintain (their) financial health.
This suggests that the failure of Japanese life insurers was not merely caused by the
bubble bursting and other external factors common to all industry players, but rather by
the combination of these external factors with other strong factors.
In the wake of the previously mentioned failure of Equitable Life, the U.K. government
released the “Penrose report” (or the Report of the Equitable Life Inquiry), its report on
the investigation into the cause of the life insurer’s failure, in March 2004. The reporttakes a careful look at the circumstances leading to the insurer’s substantial failure andclosely analyzes the financial standing of the firm. It also sorts out issues related tocorporate governance of mutual companies, accounting audits, actuarial professionals,
rational expectation of policyholders, and supervisory regulations. The investigation,
including interviews with executives, took more than two years for completion.
Following this Penrose report, this book analyzes the causes for the failures of Japaneselife insurers in the financial crisis of the Heisei era, using publicly disclosed data andconducting interview-based investigations. In addition to materials generally available-3-

to the public such as insurers’ disclosure brochures and statistics, “inspection reports(attached materials)” issued by the Ministry of Finance, I have also gathered othermaterials not generally available to the public—by filing right-to-know requests—and
conducted large-scale interviews with officials of failed life insurers (including
managers and staff members of planning, actuarial and financial divisions of that time)
to collect testimony on management in an effort to unveil what was actually happening
within those failed midsize insurers.
As a credit analyst at a rating agency, I have been engaged in analyzing the credit
worthiness of the Japanese insurance industry, including failed life insurers, for morethan a decade and consider myself one of those few experts in analyzing the insurance
business. Undisclosed information that I happened to know during credit rating
investigations cannot be used, but I believe that it is important for an analyst engaged in
the analysis of life insurers credit worthiness for a long time to study and analyze
instances of failure individually, thereby trying to draw lessons from past experiences.

3. Internal factors related to managers are important

A chain of failures among midsize life insurers are generally considered to have beencaused mainly by powerful external stress to the entire life insurance industry (or to agroup of companies having certain special attributes) because such failures occurred
amid harsh economic conditions after the bubble burst, or caused naturally by thebusiness environment during the bubble period. In other words, many market
observers think these failures occurred because “stock prices dropped after the bubble
burst,” “insurers marketed too many savings-oriented policies that promised highyields,” or “the regulatory authorities had failed to adequately oversee life insurers.”
To be sure, the yield on 10-year JGB, which temporarily topped 8% in 1990, dropped toa record low of 1%, while the Nikkei average, which rose to 39,000 in December 1989,
had long slumped later and dipped below 10,000 in September 2001 for the first time in
17 years. Unexpectedly faced with deteriorating external environments, not only
midsize life insurers but also larger players were certainly doing business under
extremely harsh conditions. Thus, many observers believe that a chain of bankruptcies
among life insurers resulted from structural problems rather than problems of individual
insurers, and that these insurers could do nothing to avoid failures no matter how hard
they tried.

-4-However, detailed examinations of individual cases have proved that such
understanding is extremely superficial, highlighting the fact that internal factors inherent
in each company, such as business models, management, and management structure
played a significant role in leading to bankruptcy.
Not just one, but multiple internal factors are often involved. The addition of changes
in business environment (external factors) to these internal factors led to deterioration offinancial structure, generating other signs of future management crisis.
The
management could have avoided the management crisis that happened later if they had
noticed such signs at this stage and taken appropriate steps. Certain internal factors
were at work again, however, keeping the management unable to take appropriate action.
In other cases, the management took inappropriate steps, and further changes in thebusiness environment (external factors) occurred; a chain of these internal and external
factors drove the companies into bankruptcy.
The most important internal factor is concerned with managers. In other words, theinadequate corporate governance of failed life insurers increased their bankruptcy risk.
4. How to learn lessons from instances of failure in the pastFirst, a life insurer’s risk management system, governance and other self-discipline must
function well to avoid business failure. This doesn’t mean it has to reduce risk to aminimum level, but rather, it has to appropriately recognize the risk that it holds andkeeps such risk under control.
Second, in terms of policyholder protection, the government has to continue providing
discipline. It must always improve the framework for maintaining the health of
insurance companies by using monitoring indexes represented by solvency margin
ratios.
Moreover, market discipline via disclosure, rating agencies, stock markets and mass
media can also play an important role. Frankly speaking, with the insurance businessand products becoming increasingly diversified and complicated, we cannot leave all
judgments to the regulatory authorities. The government also could make wrong
judgments.

-5-

The life insurance industry is not the only one to seek to comprehensively utilize theabove mentioned three kinds of discipline. As is well known, new capital ratio
requirements (the so-called Basel II rules) introduced to banks at the end of fiscal 2006
have adopted a “three-pillar approach”: the minimum capital requirements as the firstpillar, self-discipline based on banks’ risk management and the supervisory authority’s
review process as the second pillar and market discipline as the third pillar.
When individually examining the instances of failed midsize life insurers, I havediscovered that any of the self-discipline by these insurers, discipline by the government,or market discipline did not functioned well. Besides, discipline provided by thegovernment and the market, which, after all, were both external parties for insurers, had
its limits as a chain of internal and external factors led to the business failures of life
insurers. The most important lesson that can be learned from the instances of failure in
the past, therefore, may be how to control internal factors that increase the risk offailure—in other words, how to make the self-discipline by insurers work effectively.
In this book, I will first examine the impact of external factors on the management offailed life insurers in Chapter 1, highlighting the fact that the culprit of all was not the
bubble economy or its collapse. I will then closely examine what was happening to theinside of the failed companies in Chapter 2, discuss the internal factors found in Chapter
2 that increase failure risk and present the relationship between the internal and external
factors in Chapter 3.
Chapter 4 will examine the situations of midsize life insurers that have not failed, andfind out what has made these companies different from the failed insurers. Chapter 5
will describe a failure case in the U.K. that happened independently of the bubble
bursting, and that will also talk about a South Korean case in which a number of life
insurers failed around the same time that Japanese players collapsed. I will explain
how the management of Japanese life insurers has changed or has not changed following
a series of failures in the final chapter, showing that the lessons learned from the review
of instances of failure are extremely useful for the current management of life insurers.

-6-Chapter 1
Examining external factors – Is the bubble bursting the culprit of all?
1. Little-known earnings and risk structures of life insurers and the regulatoryenvironment(1) Three reasons that make it difficult to understand the management of life insurers
Before discussing the factors for the failures of midsize life insurance companies, I
would like to briefly talk about the earnings and risk structures of life insurers and theirregulatory environment from the viewpoint of a ratings analyst.
The reasons why the management of life insurers is difficult to grasp can be summarized
in the following three points. The first reason is concerned with terminology unique tothe life insurance industry and financial statements.
For example, an insurer’s balance sheet (Table 1-1) does not have the sections of“current” and “fixed” that nonfinancial firms usually have. The liabilities part of thebalance sheet is largely occupied by the item “policy reserves”. The statement ofincome is also unique in that it doesn’t have the sections of “operating” and“non-operating” with profit and loss from both insurance operations and asset
management operations listed as “ordinary profit and loss.”
The second reason lies in the earnings structure unique to insurance operations. In
most businesses, costs are determined before sales amounts are confirmed. In theinsurance business, however, costs are not determined until insurance claims or benefits
are paid, or contract terms end. Life insurance contracts in particular run decades, andtherefore insurers calculate their policy reserves (reserves in preparation for thepayments of insurance claims or benefits in the future) based on certain estimates andrecognize profit and loss for every period. More specifically, the current insurance
accounting does not necessarily reflect the earnings and risk structures of life insurers.
The third reason stems from inadequate information disclosure and weak analyst
function. Disclosure by life insurers, though having improved compared to disclosure in
the past, is still far from adequate. Moreover, until Daido Life Insurance Co. went
public in April 2002, only media specialized in the insurance industry, insurance critics,
and rating agencies had analyzed the operations of life insurers externally and sent
information to the public. Rating agencies are bound by confidentiality obligation, and-7-moreover, it was not until the late 1990s that rating agencies virtually started theanalysis of Japanese life insurers.
Table 1-1: Financial Statements of Nippon Life Insurance Co.
Balance sheet

Cash & deposits/Call loans
Monetary assets held in trust
Investments in securities
StocksLoans receivable
Tangible fixed assets
Allowance for doubtful accounts
Total assets
Assets in special accounts
Policy reserves and other reserves
Policy reserves
Reserves for price fluctuations in investments
in securities
Deferred tax liabilities
Total liabilities
Foundation funds
Reserves for redemption of foundation funds
SurplusLand revaluation differences
Total valuations, conversions and others
Total net assets
Total liabilities and net assets

March 2007
Composition ratio
10,653
2.1%
1,956
0.4%
373,30272.0%
120,256
23.2%
97,267
18.8%
16,637
3.2%
-332
-0.1%
518,419100.0%
22,792
4.4%
418,87380.8%
403,825
77.9%
4,673
0.9%

100 million yen
March 2008
Composition ratio
6,967
1.4%
1,705
0.4%
340,03870.6%
87,62418.2%
95,53419.8%
16,753
3.5%
-349
-0.1%
481,353
100.0%
18,6033.9%
422,098
87.7%
407,396
84.6%
4,873
1.0%

15,104
460,102
2,500
6,500
4,081
-850
45,22958,317
518,419

2.9%
88.8%
0.5%
1.3%
0.8%
-0.2%
8.7%
11.2%
100.0%

1,382
446,515
2,000
7,000
3,957
-889
21,874
34,838481,353

March 2007
65,141
48,54314,097
11,5632,501
61,83538,311
10,192
2,963
5,475
3,306
462
525
54
260

100 million yen
March 2008
65,09548,89013,526
12,345
2,668
61,97842,129
3,923
5,558
5,529
3,117
12
329
46
200

Statement of income

Ordinary revenues
Premium Income and Others
Investment income
Interest, dividends and other income
Other ordinary revenues
Reversal of policy reserves
Ordinary expenses
Insurance Benefits Paid
Provision for policy reserves
Investment expenses
Operating costs
Ordinary income
Extraordinary gains
Extraordinary losses
Impairment losses
Provision for reserves for price fluctuations ininvestments in securities
Net surplus before taxes for the year
3,243
2,800
Income taxes and residential taxes
1,412
1,033
Deferred income taxes-1,172-998
Net surplus for the year
3,003
2,764
Unappropriated net surplus for the year
2,926
2,813
(Data) compiled from the earnings announcement data of Nippon Life Insurance Co.

-8-

0.3%
92.8%
0.4%
1.5%
0.8%
-0.2%
4.5%
7.2%
100.0%

(2) Earnings structure of life insurers
I will now compare the earnings structure of life insurers with that of banks. The
traditional banking business is to collect deposits from individuals and lend these funds
to business entities. Besides, public and corporate bonds and other securities make upa large part of asset holdings at regional banks that only have a few prime borrowers
because their loan-deposit ratios are low. Banks’ profits mainly consist of interest
income from lending operations (or earnings from securities investments) after
deductions of expenditures such as payments of deposit interest and personnel expenses.
Meanwhile, life insurance companies receive insurance premiums from policyholders
and lend these funds to businesses as banks do. They also invest part of their premium
revenues in securities including public and corporate stocks and bonds, or real estate.
Thus, insurers’ profits are similar to banks’ in that the spread calculated by subtracting
yields promised to policyholders (the assumed interest rate) from interest income fromlending operations or earnings from securities investment is one of the revenue sources
for insurers.
Unlike bank deposits, however, premiums received by insurers are not all applied to the
future payments of insurance claims and benefits as the amount necessary to cover
expenditures and risk margin (loading for contingency) are already included in thepremiums. Therefore, life insurers have no need to use their spreads to absorb
expenditures as banks do, and these charges, along with spreads, have become importantsources of revenues (expense profits and mortality profits). Banks would have to
gobble up their capital if they ended up with negative spreads, but life insurers would be
able to make up for their negative spreads with expense profits or mortality profits.
Term insurance and term insurance riders—which are representative examples of deathcoverage insurance (in other words, compensation for a bereaved family)—are basically“non-savings type” products that steadily generate expense profits or mortality profits
and are not significantly affected by investment performance.
Savings-based
endowment insurance and individual annuity insurance policies, on the other hand, only
provide a small amount of expense profits or mortality profits and are largely affectedby asset investment performance. The so-called negative-spread contracts mainly referto these policies sold from the 1980s through the early 1990s that set high assumed rates
of return.

-9-

Life insurance also includes group insurance where companies and other businesscorporations become policyholders and provide coverage to their employees as part oftheir welfare programs and group annuities, asset management products targeted atcorporate pensions (such as employee pension funds and tax-qualified pension plans), in
addition to individual insurance policies and individual annuity contracts where
consumers individually enter into a contract with an insurance company.
Japanese group insurance is, in principle, required to be renewed every year andtherefore does not result in negative spreads. Its profitability is generally extremely
low because most mortality profits are returned to policyholders as dividends. Groupannuities generate few mortality profits or expense profits as they are asset management
products for businesses, and a large part of their investment returns belong topolicyholders, meaning that the effective profitability of these products is also low (thenegative spreads of group annuities rather weighed down insurers’ operations).
Therefore, most of the profits made by life insurers can be said to come from theindividual insurance sector.
Table 1-2: Comparison of balance sheets between banks and life insurers
Bank’s balance sheet<Assets><Liabilities>

Loans

Deposits(Allowance for doubtful accounts)
Securities
Corporate bonds
Othersothers<capital>
Life insurer’s balance sheet<Assets><Liabilities>

Yen interest-bearing assets(mainly public and corporate bonds)

Policy reserves

Stocks<Contingency reserves><capital>

Others(Data) compiled by the author-10-(3) Profitability of the third sector is highHere, I discuss medical insurance and other “third sector” policies. The third sector
refers to insurance that covers damage mainly from diseases and injuries, and isdifferent from life insurance (called the “first sector”) offering a certain amount of
payouts for people’s death and nonlife insurance (called the “second sector”) coveringdamage arising from accidents.
Accident insurance has been traditionally marketed by non-life insurance companies,
while medical insurance was effectively segmented into “rider-types sold by major life
insurers” and “stand-alone types sold by foreign-affiliated players, midsize, and smaller
life insurers” until recently, due to the government’s special consideration offoreign-affiliated life insurers and a delay in deregulation caused by stalled insurancetalks between Japan and the U.S.
“Medical insurance” and “cancer insurance” remind us of the names of foreign life
insurers such as American Family Life Assurance Co. of Columbus and Alico Japan, aunit of American Life Insurance Co., but since “disaster protection riders” (providing
hospitalization benefits to disaster victims) were established in 1964, a wide variety of
medical-related riders have been launched, becoming mainstay products of major andmidsize life insurers. The most recent data (for fiscal 2007) have shown that premiumincome from the third sector accounts for roughly 30% of the annualized new businesspremiums at major nine life insurers and also about 20% of the total insurance in force.
The third sector insurance is generally said to boast high profitability although the unit
price of premiums for these products is low compared to that for death coverage
products. Especially, the sales efficiency of rider-type products is high because they
are attached to death coverage products which are the main contracts and are marketed
together. With the terms of insurance usually set at 10 years or so, few rider-type
policies result in negative spreads. It can be safe to say that mortality profits generated
by the third sector insurance have greatly contributed to the earnings of major andmidsize life insurers, although we cannot affirm it due to a lack of official data.

(4) Characteristics of management risks
The management risks of life insurance companies mainly include an insurance
underwriting risk, asset management risk, liquidity risk and operational risk as well as-11-risk inherent in the insurance business itself.
I will also compare the risk structure of life insurers with that of banks. In the
traditional banking business, the biggest risk is the credit risk, that is, the risk of being
unable to collect funds due to the business deterioration of borrowers. A mismatch
between funding (deposit) rates and investment (lending) rates is also a serious risk.
Moreover, we cannot ignore the liquidity risk in which funds flow out at once as a resultof a run on deposits caused by credit concerns, or in which banks are faced withdifficulties procuring funds, running into cash flow problems.
Meanwhile, the bad loan problems of life insurers didn’t become as serious as those ofbanks (excluding some companies). That is because life insurers in the 1980s
preferred to invest in foreign bonds that could provide generous interest and dividends
or stocks via money trusts rather than to extend loans to businesses. With life
insurance contracts usually spanning extremely long periods, however, life insurers are
more susceptible to the risk of facing negative spreads resulting from a mismatch
between their assets and liabilities. The price volatility risk of their asset holdings isalso great. The financial standings of life insurers substantially worsened due to thedrop in share and land prices in and after the ’90s.
Life insures’ underwriting risk, including the mortality rate and incidence rate, on theother hand, has never become a problem. The mortality rate seldom worsened
drastically, but rather improved year after year, having a good impact on the
management of life insurers. With respect to the liquidity risk, U.S. life insurancecompanies struggled with sudden outflows of funds in the time of high interest rates inthe early ’80s and the management crisis of life insurers in the early ’90s, but few
Japanese insurers faced funding problems and went under despite a flood ofcancellations caused by deepening credit concerns probably because they held arelatively large amount of readily marketable assets.
(5) Stock companies and mutual companies
Some insurers are stock companies, while others are “mutual companies,” which are aunique structure of insurance operations. A stock company is a profit-making
corporation designed for the benefit of its shareholders, but a mutual company is anintermediate corporation designed neither for profit-making nor for public interest with
its policyholders serving as parties to the contracts and participating in business-12-

operations as members for the company at the same time. The decision-making bodyof a mutual company is a representative members meeting comprising representatives
chosen among its members (that is, policyholders). The operating funds of a mutualcompany are known as “kikin”, and contributors to kikin, unlike shareholders, only
possess a creditor’s right. Many rating agencies also consider kikin as not capital, but“effective non-perpetual subordinated debt” according to Rating and Investment
Information, Inc.
Essentially, a mutual company is formed under the belief (called “the actual costprinciple”) that its members can achieve reasonable, high-quality coverage byautonomously managing the company, using only actual costs needed for the
management of operations. A conflict between policyholders and shareholders does
not occur in a mutual company because there is no shareholder, meaning that thecompany can return a large part of its business outcome to policyholders. Meanwhile,the disadvantages of a mutual company are that it cannot raise funds through theissuance of shares and the way for bolstering the ability to pay claims is limited tointernal reserves from periodic profit and loss. The business monitoring function bymembers and external parties is also weak because of its structural features.
Insurers adopting the mutual company structure became a strong presence in the U.S.,
the U.K., and Canada, but many major mutual companies converted into a stockcompany amid intensifying competition with insurance groups taking the stock company
structure. With the two largest life insurers Prudential Insurance Co. and MetLife Inc.
having demutualized, major life insurers currently adopting the structure of a mutualcompany in the U.S. are The Northwestern Mutual Life Insurance Co., New York Life
Insurance Co., and MassMutual Life Insurance Co. only. The U.K. and Canada now
have no major mutual companies.
In Japan, most newcomers, successors to failed life insurers, and sponsors are also stockcompanies, while such mutual companies as Daido Life, Taiyo Life and Mitsui Life
Insurance Co. converted into a stock company, starting in 2000. The market share ofstock companies has therefore expanded recently with only six companies—the major
four players (Nippon Life Insurance Co., The Dai-ichi Life Insurance Co., Sumitomo
Life Insurance Co. and Meiji Yasuda Life Insurance Co.), Asahi Mutual Life Insurance
Co. and Fukoku Mutual Life Insurance Co. —still operating as mutual companies.

-13-Nevertheless, mutual companies had occupied an overwhelming share in the Japaneselife insurance market until the ’90s. Of 44 life insurance companies, only 16 were
mutual companies as of the end of fiscal 1996, but their total asset shares accounted forover 90%, according to Tanaka (2002).
Table 1-3: Stock company and mutual company
Characteristics

CapitalMembership
Decision-making body

Stock company
Corporation designed forprofit-making (establishedunder the Commercial Code)

Capital invested byshareholders (company
members)
shareholders
General meeting ofshareholders

Insurance relationship

Profit-making insurance (Aninsurance relationship arises
from an insurance contract)

Where profits andlosses belong

Shareholders (but, dividends topolicyholders are stipulated bylaws)
In other words, the distributionof the business outcome isdecided by shareholders andtherefore, a conflict of interest
arises between shareholders
and policyholders.

Number of companies

advantages

The business monitoring
function by the market canwork.
(Data) compiled by the author-14-

Mutual company
Intermediate corporation designed
neither for profit-making nor for
public interest (established under the
Insurance Business Act and not
categorized as companies under theCommercial Code)Funds, or kikin, contributed by fundcontributors (not company members
but mere creditors)
Members, that is, policyholders
General meeting of members(meeting of representatives chosenfrom members)
Mutual insurance (A member
relationship and an insurance
relationship arise concurrently. A
contract based on a non-member
relationship is also allowed.)
Members
In other words, a large part of thebusiness outcome can be returned
to policyholders under the member
autonomy and actual cost principles.

Six out of 40 life insurers are mutualcompanies, while all nonlife insurers
are stock companies (excluding
branch-based insurance companies)
No conflict of interest arises between
shareholders and policyholders.

(6) Regulatory environment for life insurers
The insurance business is highly public in nature, and unless it is conducted in a soundand appropriate manner, the lives of individual policyholders and the management ofcompanies could be seriously affected. The government, therefore, has implemented
legal regulations and exercised administrative supervision to protect the interests ofpolicyholders.
In Japan, the government administration of insurance was a typical “convoy-fleet”
approach until the Insurance Business Law was revised in 1995 and deregulation
proceeded gradually. The approach adopted was based on the substantial supervision
principle that granted the regulatory authority (the Ministry of Finance) a broad range ofpower, allowing it to get involved in all of the business stages of insurers from the startof insurance operations (acquisition of license) to the management of operations, final
liquidation of struggling businesses and mergers under the former Insurance Business
Law wholly revised in 1939, pre-World War II.
The ministry’s oversight of insurance companies extended to the entire management
including the extent of operations, products, premium rates, dividends to policyholders,insurance soliciting systems, and asset management. Detailed business reports were
submitted to the Ministry by insurers every year, and on-site inspections (so-called MOF
inspections) were conducted as necessary. Moreover, the MOF had the authority toforce companies falling into a management crisis to comprehensively transfer theircontracts to other insurers and to change the basic rates of existing contracts, including
the assumed interest rate (these authorities were terminated in the revisions to theInsurance Business Law in 1995).
New entries into the insurance market have been increasingly accepted due to externalpressure from the international community, which had been extremely difficult until the
mid-1990s. Products and premium rates were almost the same at all insurers, anddividends paid to policyholders were not much different among major life insurers.
Midsize players having lower cost efficiency than larger players were allowed to pay
less dividends compared to larger insurers’. The collaborative framework, led bymajor companies, generally worked out despite the competition with postal life
insurance and mutual aid insurance, or the fierce sales race within the industry.

-15-

(7) Introduction of solvency margin standards
In response to increasing moves toward financial deregulation and system reform athome and abroad, the Insurance Business Law was wholly revised in 1995 for the firsttime in half a century. The pillars of the revisions were “to promote deregulation andliberalization,” “to maintain the financial soundness of the insurance business,” and “toensure fair business management.” These three pillars successfully showed the future
direction of the government administration of insurance, although their implementation
was inadequate immediately after the revisions.
The framework for regulations concerning the financial soundness of life insurers has
also greatly changed. In the era of the “convoy-fleet” system, the regulations focusedon returns to policyholders rather than ensuring financial soundness against the
backdrop of abundant latent stock profits. In order to detect and help troubled
companies at early stages, the revised Insurance Business Law introduced the solvency
margin (Excess amount of assets an insurer has over its liabilities) standard as theregulatory authorities’ measure for preventing insurers’ management crisis, and it also
became the criterion for issuing a prompt corrective action in April 1999.
As a result, while bound to put aside reserves to deal with risk within normally expectedlevels as they did before, life insurers have been required to hold solvency margins to
prepare for risk beyond those expectations. Thus, the financial soundness of insurancecompanies has been ensured not only by capital adequacy rules but also two other pillars,
policy reserves, and solvency margins.
Moreover, insurers were required to introduce a system where actuaries, their in-house
experts, check the adequacy of policy reserves. Those actuaries run simulations basedon a given scenario to see, for example, if their companies can set aside required policy
reserves in the next five years even though low interest rates continue (future cashflow
analysis).
However, the revisions to the Insurance Business Law have given the impression thatthe government’s measures to maintain the financial soundness of the insurance
business were rather too late probably because the revisions only came in the harshbusiness environment after the bubble burst.
The solvency margin standard was introduced in fiscal 1996, but before that, discussions-16-

had been underway at the follow-up study group on insurance accounting, a private
advisory body to Director of the Insurance Department of the Banking Bureau of the
Ministry of Finance with trial calculations being performed on two patterns—the A
standard (counting 90% of latent stock profits in an insurer’s claims-paying capacity)and the B standard (reckoning in 45% of such gains)—starting in around fiscal 1993.
While seven midsize life insurers posted pretax losses in fiscal 1994, however,highlighting worsening financial positions of life insurers, the solvency margin ratio
actually introduced was more lenient than the A standard. As a result, in addition to
Nissan Mutual Life, which failed in April 1997 shortly after the introduction of thestandard, several insurers went under although their solvency ratios publicly disclosed
just before the failure exceeded 200%, the level triggering a prompt corrective action.
Table 1-4: Solvency margin ratio
Solvency margin ratio = total amount of solvency margin / total amount of risk x 1 / 2
Criteria for issuing a prompt corrective action
200% or more
Exempt100% to less than 200%
Submission and implementation of a management improvement
plan
0% to less than 100%Submission and implementation of a plan to bolster theclaims-paying capability
Prohibition or limitation of dividends or directors’ bonuses
Change in calculation method of premiums for policies to be
newly underwritten
Limitation of operational costs
Closing of part of the business branches or premises
Downsizing of operations at subsidiaries and others
Less than 0%
Total or partial suspension of operations* The criteria for issuing a prompt corrective action also include the level of “real net
asset-liability balance.”
If the solvency margin ratio is less than 0%, the regulatory authorities can issue a businesssuspension order.
(Data) compiled by the author

2. Examining structural factors—External factors for the whole industry(1) View that “the life insurers’ crisis” is a structural problem
Failures among midsize life insurers are generally considered to have been caused
mainly by powerful external stress to the whole life insurance industry (or to a group ofcompanies having certain special attributes) because such failures occurred amid harsheconomic conditions after the bubble burst, or caused naturally by the businessenvironment during the bubble period. In other words, many people believe that a-17-chain of bankruptcies among life insurers were the result of structural problems rather
than problems of individual insurers, and that these insurers could do nothing to avoid
failures no matter how hard they tried.
As an example, I will quote part of the comments made by Fumio Masada, thenPresident of the NLI Research Institute, which were first quoted by Asatani (2004).
“The definitive cause for failure was generally “negative spreads” that resulted from adrastic change in financial and interest environments far beyond the duty of care owed
by managers and the generally expected predictive ability, although the conditions ofindividual cases were slightly different if examined closely.”
Nishimura (1999) also indicates that he considers the failures of life insurers as aconsequence of their structural problems, by saying, “Insurance companies aggressively
marketed variable insurance and other high-risk products touting high returns during the
bubble economy era and therefore, it’s not that they were not to be blamed for theirfailures. Life insurance, however, can be essentially managed in a stable manner for along time on the premise of sensible interest rates. If rates remain at extraordinarylevels for not just a short period, but such a long period of time, that would naturally
damage their operations”.
I will now look at various external factors cited in a variety of literature that are deemed
to have adversely affected the management of life insurers.

(2) Impact of the bubble bursting
Generally, negative spreads that occurred after the bubble burst, depletion of latent stock
profits and bad loan problems are considered to have largely worsened the managementof life insurers in the 1990s and thereafter. I will quote some representativedescriptions from business books.
From “Review of the Seiho Crisis” written by Mr. Mitsuhiro Fukao, published by theJapan Center for Economic Research, in 2000
“The worsened investment environment following the bubble burst, including sluggish
stock prices and a prolonged period of ultra-low interest rates, has left most life insurers-18-

saddled with large negative spreads, gradually weakening the management bases ofthese insurers. (Page 1)”
From “What Will Happen to Seiho?” published by Nikkei Inc. in 2003
“Stock prices plunged with the bubble bursting. Interest rates dropped to near zerolevels due to monetary easing measures introduced by the Bank of Japan to stimulate theeconomy. Falling land prices made it difficult to invest in real estate. With every
lucrative investment vehicle having disappeared, life insurers with huge funds haveentered a period of total darkness since the bubble burst. (Page 12)”
“The biggest cause for the financial difficulties of life insurers lies in ‘negative spreads,’
or the gap between the yields promised to policyholders at the time of executing
contracts and actual investment return. … The business conditions of insurers have been
deteriorating due to weak investment performance amid ultra-low interest rates andfalling stock prices. (Page 109)”
From “Overcoming the Seiho Crisis” written by Mr. Yasuo Kofuji in 2003
“The negative spread problem is just the cause for as many as seven life insurancecompanies going bankrupt in a short period of time. As interest rates changed
constantly, life insurers faced the historically low interest rates and suffered negative
spreads brought by mainly the products with high assumed interest rate acquired in the
bubble era. Life insurers that became unable to make up for these negative spreads
started to fail. (Page 20)”
I also say as follows in my book “Seiho’s Business Model Will Change” (2003).
“It’s wrong to put the blame for Seiho’s deteriorating business solely on external
environments, but who on earth could have imagined that the Nikkei Average would
plunge to less than 8,000 at the end of March 2003, 13 years after hitting 39,000 in
December 1989? ... Plunged levels of interest rate for a prolonged period of time is also
beyond our imagination. (Page 16)”
Using the business results data of that time, I will examine the impact of the bubble
bursting on the management of life insurers. Domestic stocks accounted for 20% (25%-19-

if money trusts are considered as stocks) of the combined total assets of life insurancecompanies, while general loans and real estate accounted for 32% and 6%, respectively.
At that time, stocks were valued at acquisition cost, which suggests that the percentage
of stocks in the total assets was likely to be much higher on a market value basis(probably more than 40%).
These assets were largely damaged following the bubble bursting. Unlike now, thelower of cost or market value method was adopted to evaluate stockholdings, requiring
life insurers to book valuation losses if the stock prices dropped below the acquisition
costs. Every year from fiscal 1990 through 1997, except in fiscal 1995 when stock
prices recovered, the major three life insurers (Nippon, Dai-ichi and Sumitomo) all had
to post more than ¥100 billion in valuation losses on securities holdings, which weighedheavily on their earnings. In fiscal 1994, as the year-end approached, stock prices fell
further and the yen advanced, forcing many midsize life insurers to book pretax losses
and even major players to draw down price fluctuation reserves and other internal
reserves, due to a large amount of valuation losses.
In the ’80s, life insurers paid special dividends funded from capital gains as well as
regular dividends. They also started tapping into capital gains in the ’90s to secure acertain level of dividend levels for policyholders, while dealing with a massive amountof valuation losses.
Capital gains were booked via “sales to lock in profits” rather than “so-called one-timesales” with stocks sold at acquisition cost and bought back at market value in a numberof cross transactions. Some sales to lock in profits were transactions that did notaccompany trading of stocks to book capital gains, which were permitted only forinsurance companies under Article 84 of the Insurance Business Law (Article 112 of thelaw at present). In the industry as a whole, capital gains of more than ¥500 billion
were posted each year in fiscal 1992 and 1993.
Write-offs of bad loans also started to weigh heavily on their earnings in around fiscal
1993. As I discuss later, life insurers invested mainly in foreign equities and money
trusts because they focused mostly on direct-yields and therefore, insurers’ bad loan
problems never became as serious as banks’. But Sumitomo Life, for example, wrote
off a total of ¥1.5 trillion in bad loans during the period from fiscal 1993 through 1997
as real estate-related investments and loans it actively engaged in during the bubble-20-years ultimately backfired. Nippon Life and Dai-ichi Life also incurred a large amountof bad-loan cleanup costs, though their amounts were not as large as that of Sumitomo
Life’s. These bad-loan cleanup efforts were mainly funded by latent stock profits.
Insurers also used their latent stock profits to deal with currency losses from foreign
equity investments caused by the appreciation of the yen.
Life insurers saw their latent stock profits largely shrink as a result of booking profits oncross traded shares to secure funds for dividend payments and dispose of bad loans aswell as being hit by drops in share prices. This is in stark contrast to non-life insurers,
which continued posting a certain amount of latent profits even after the bubble burst.
The combined latent profit of the life insurance industry is believed to have plunged toaround ¥5 trillion in fiscal 1994 from the peak level of ¥47 trillion recorded at the end of
1989.
For example, the largest player Nippon Life’s latent stock profit shrank to ¥2.3 trillion at
the end of fiscal 1994 from the ¥8.9 trillion reported at the end of fiscal 1989.
Sumitomo Life and Mitsui Life saw their latent profits nearly depleted at the end of
fiscal 1994. These facts suggest that the impact of a drop in asset prices in the 1990s
was extremely severe for even major life insurers.
Meanwhile, the negative spreads of major and midsize life insurers became obvious,
probably around fiscal 1992. The officially disclosed amount of negative spreads forfiscal 1995 was ¥420 billion at Nippon Life and slightly less than ¥300 billion at
Dai-ichi Life and Sumitomo Life, which all exceeded their surplus for the year (¥260
billion, ¥160 billion, and ¥200 billion, respectively). Because the assumed interest rate
for group annuities was lowered from 4.5% to 2.5% in April 1996, each of the threecompanies saw their amounts of negative spreads shrink by around ¥100 billion in fiscal
1996, but every year after that, they still posted hundreds of millions of yen in negative
spreads, which weighed heavily on their earnings.
Major insurers, though, substantially made up for their negative spreads with expense
profits and mortality profits and therefore had no need to dig into capital gains orinternal reserves. That is because their profitability was high thanks to scale merits,
and they marketed a large number of death coverage insurance as their mainstay
products. Meanwhile, the profitability of many of the failed midsize life insurers was
low in the first place, making it difficult to cover their negative spreads with expense-21-

profits and mortality profits.
(3) The business environment in the 1980s (Part 1: Maturation of the death coverage
market)We cannot ignore the fact that the business environments of life insurance companies in
the 1980s was behind the depletion of latent stock profits, severe negative spread, andbad loan problems that occurred after the bubble burst. The major environments
include maturation of the death coverage market, a hike in the assumed interest rate andhigh levels of dividends to policyholders and attitudes of the regulatory authorities.
For quite some time, life insurance referred to “endowment insurance,” under which
benefits would be paid either at the time of death or the expiration of the insurance
terms, but around 1960, the mainstay products of life insurers started to shift toendowment-with-term insurance and other policies focusing on death coverage. Fromthe 1970s when the penetration rate for households exceeded 90%, death coverage grewin size (in the amount of coverage), and fixed-term whole life insurance policies withterm insurance riders 20 or 30 times the size of whole life insurance became leading
products. Behind the expansion of the death coverage market was the accelerating
trend toward nuclear families (with a single wage earner per family, the importance of
paying benefits to bereaved families increased), rising income levels and expanded
marketing forces.
The number of new contracts peaked out in the 1980s, however, indicating that thegrowth of the death coverage market was already reaching its limit. Customer needs
were shifting from death coverage to living benefits such as medical policies andannuities.
Nevertheless, the life insurance industry did not necessarily respond to the change incustomer needs and kept death coverage products at the center of their product lineups,
continuing the traditional strategy of seeking the growth of death coverage and the
expansion of marketing forces. Insurers appear to have concluded that they otherwise
would be unable to cover the labor costs of their sales personnel because theprofitability of individual annuity insurance and small-lot medical insurance was low
compared to that of high-end death coverage products. To stimulate the sales plateau
for death coverage products, life insurers raised the assumed interest rate (meaning a
reduction in insurance premiums) and introduced systems of lowering premiums at the-22-beginning of insurance terms such as a renewal type contract and step-up payment
system (in both of which the amount of premiums goes up after a certain period oftime).
Regarding these steps taken at that time, Mr. Masatoshi Furuse, then Professor of
Ritsumeikan University, says as follows in a research paper published in 1994, shortly
after he moved from Nippon Life to take the position: “The last decade wascharacterized by the fact that the value of new individual insurance policies increased
substantially year-on-year in the years (1981 and 1985) when low rates were
implemented (*premium rates were lowered: the author’s annotation). Then, as thegrowth rate slowed later, the next low rates were implemented as a measure to boost thecontract amount. (Furuse, 1999)”
Meanwhile, contrary to life insurers’ intention, sales of individual annuity insurance
policies increased with savings-based single-premium endowment insurance receiving
investor attention again. For example, single-premium endowment insurance attracted
attention as a “zaitech,” or financial engineering product in the 1980s, as “customers
lined up outside sales offices,” and “media advertised the insurance on their own”
(according to staff members working at the headquarters of Chiyoda Mutual Life at thattime). Individual annuity insurance policies also sold well at both major and midsize
companies and accounted for 6.8% of the combined policy reserves at all life insurers infiscal 1989, up from a mere 3% in fiscal 1986. These contracts later resulted in large
negative spreads, weighing heavily on the management of life insurers.
In the corporate field, sales of group annuities expanded. Looking at changes in
returns on employee pension plans on a market value basis, dividends of 2 or 3% werealways added to the guaranteed yield of 5.5% in the general account of group annuities
in the late 1980s. Because the yields of rival trust banks were basically lower thanthose of life insurers, funds concentrated on group annuities offered by life insurers.
These funds also became a heavy burden on the management of those insurers until the
assumed interest rate was lowered to 2.5% in 1996.
(4) The business environment in the 1980s (Part 2: Raising the assumed interest rate)

Nikkei Research Inc.’s “Report on case studies of failed financial institutions” says,“Life insurers made lenient estimates for the assumed interest rate (in other words, set
the assumed interest rate high) during the economic bubble to expand their assets,-23-thereby winning competition with other financial products, but this led to negative
spreads after the bubble burst, weighing on the management of life insurers and forcing
them into bankruptcy (Page 85),” suggesting that setting the assumed interest rate highand focusing on marketing of savings-based high-yield products were important factors
resulting in life insurers’ failures.
In the retail field, the assumed interest rate hovered at around 4% for quite some time
during the post-war period. The rate was raised three times in 1976, 1981, and 1985,
which undoubtedly deepened the problem of negative spreads in the 1990s andthereafter. The assumed interest rate for new contracts was lowered in line with market
interest rates, starting in 1990, dropping to about 1.5% at present. In the retailinsurance field, however, the burden associated with high yields guaranteed topolicyholders will continue until the contracts terminate, and the assumed interest rate
for new contracts is never applied back to contracts acquired in the past.
Looking at major life insurers’ balance of policy reserves by contract year (in the retailinsurance field), the portion of fiscal 1981 through 1995, including the era of highassumed interest rate, still accounts for around 60% of the total outstanding balance,
weighing heavily on the management of those insurers.
Until the Insurance Business Law was revised in 1995, there were no regulations
stipulating the relationship between the assumed interest rate and market interest rates.
“The assumed interest rate should be set at lower than interest levels for the generalbusiness world in terms of stability of the life insurance business, which puts theprotection of policyholders first (Page 94),” according to “Japan’s Life Insurance”(1994) compiled by Director of Insurance Division I, Banking Bureau, the Finance
Ministry. Mr. Haruaki Deguchi of Nippon Life (in 1990) writes, “When I joined
Nippon Life in 1972, older colleagues told me that the assumed interest rate was usuallyaround half of market rates.” Moreover, market interest rates (yields on 10-year JGB)
peaked out in 1980 and followed a downward trend until around 1987.
Nevertheless, life insurers kept the assumed interest rate high during the 1980s becauseof (1) a request for a rate increase made by a report of the Insurance Council to the
Minister of Finance (2) competition with postal life insurance and (3) a lack of ALM(asset liability management) as well as growing needs to stimulate sales with thematuration of the death coverage market as described earlier. I will now comment on-24-each one of these.
<Request for a rate increase made by a report of the Insurance Council to the Minister ofFinance>
More precisely saying, this is a view that “How the insurance business should be in the
future” the Report of the Insurance Council to the Minister of Finance of 1975
(generally called “Showa 50-nen Tohshin”), led to the increase in the assumed interest
rate afterward.
The report says, “Now that calls for insurance products with low rates and low
dividends (meaning both premium rates and dividend payout ratios are set low: theauthor’s annotation) are growing, it’s not good to factor in too much security and set
premium rates low while holding down the assumed interest rate. It is necessary toconsider raising the assumed interest rate from the current 4% level in response tochanges in general interest rate levels, actual asset investment yields and the move taken
by postal life insurance in December last year to raise its assumed interest rate to 5%(5.5% for policies with the insurance terms of less than 20 years). Especially, higher
assumed rates of return should be applied to contracts with the insurance terms of 10
years or less because projections of future yields on asset investment may be possible tosome extent,” strongly urging life insurers to raise their guaranteed yields. In fact,
following this report, the first increase in the assumed interest rate was carried out in
1976.
It is not necessarily clear, though, whose intention was reflected in the report. To arequest for advice made by the regulatory authorities in 1974 concerning the assumed
interest rate, the Institute of Actuaries of Japan showed its careful stance, saying, “We do
not think the current rate should be raised” and “A rate hike, if any, should be limited toaround 1% for only short-term (10 years or less) products,” according to “A Hundred
Year History of The Institute of Actuaries of Japan” (2000), which suggests that the rate
hike was in response to a strong intention by the Ministry of Finance.
However, according to the parties concerned, major insurers were not in complete
solidarity on this matter. The hike in the assumed interest rate was not based upon aunified opinion of the industry, but the Ministry of Finance and the life insurance
industry may have reached an agreement to choose the option of raising the assumed-25-

interest rate amid a general perception that “life insurers were making too much money.”<Competition with postal life insurance>
As mentioned in the report of 1975, postal life insurance raised its assumed interest ratefrom 4% to 5.0-5.5% in 1974 ahead of private sector life insurers, and since then, therate hike competition between postal life and private sector companies had continued fora while.
To be sure, postal life had been steadily expanding its operations by seeking unity withpostal savings and raising the limits of insurance amounts, and therefore we cannot saythat there were no overlapping operations between the two types of insurers. However,unlike the customer bases of private-sector life insurers (especially, major players),
people served by postal life were not a type of customers who paid tens of thousands of
yen in monthly premiums. The mainstay products were also effectively segmented into
10-year maturity endowment insurance sold by postal life and large-scale death coverage
products sold by major life insurers.
It is reasonable to assume that the rate hike came not because private-sector insurers
were preoccupied with winning the competition with postal life, but rather because theysuccumbed to the charm of lowering premium rates as well as the public pressure toraise guaranteed yields.
<Lack of ALM (asset liability management)>
In essence, this problem was larger than the other two. ALM stands for Asset Liability
Management and refers to the technique of controlling market risk, includinginterest-rate risk, and liquidity risk by comprehensively managing assets and liability.
As mentioned earlier, yields promised to policyholders at the time of concluding
contracts continue for a long period of time for most life insurance products, excludinggroup annuities and variable insurance. The implementation of ALM, which
completely matches changes in assets and liabilities, can be an option for life insurers to
avoid the risk of having negative spreads in the future. In reality, with cancellations
and expirations sometimes surging due to economic conditions and interest rate levels, it
is difficult to grasp changes in liabilities precisely. Moreover, the terms of life-26-

insurance contracts usually exceed 20 years, and therefore it’s not still easy to secure
assets that can match such long-term liabilities. Besides, with premiums for life
insurance products usually paid monthly, merely balancing the terms of assets andliabilities is not enough for the matching of cash flow (interest-rate swaps and othermeans are necessary).
Thus, life insurers’ ALM had technical hurdles, requiring them to exercise ingenuity,
including setting the assumed interest rate conservatively low, in order to reduce the riskof having negative spreads.
Life insurers in the 1980s engaged in investment that fully depended on ever-increasing
assets and ample latent stock profits, and even major players had little idea about
liability-conscious ALM. In other words, life insurers didn’t realize the risk associatedwith guaranteeing rates of return for a prolonged period. Because they raised theassumed interest rate despite the downward trend of market rates, yields on 10-year JGB
fell below their rate of return in the late 1980. The inverse relationship between
funding costs including dividend burden and market interest rates was even greater thanthat between the assumed interest rate and market interest rates. To deal with the
problem, life insurers didn’t lower their assumed interest rate or review their productstrategies, but instead devoted themselves to investment in stocks (including money
trusts), foreign securities and other high-risk vehicles to cover high funding costs.
This lack of ALM consequently increased the asset management risk and negative
spread risk of life insurers.
Insurers were also late lowering their assumed interest rate. The Ministry of Financeasked the life insurance industry in June 1988 to review their rate of return, according tonews reports. “That is because the ministry worried in the context of finance if
insurers could keep their high rate of return for lump-sum endowment and other‘zaitech’ products that continued attracting a huge amount of funds, while the trends of
low interest rates were expected to continue for a long time. Besides, the ministry saw
yields of life insurance products far exceeding those of other financial products as aproblem from the viewpoint of financial order” (according to the Asahi Shimbun dated
December 5, 1988).
Life insurers, however, did not lower their assumed interest rate because they bowed to-27-the general tone that “it wouldn’t be acceptable to cover foreign exchange losses with aprice increase” and postal life insurance kept its rate of return unchanged. It was not
until stock prices entered a downward trend in 1990 that life insurers actually lowered
their rate of return.
(5) The business environment in the 1980s (Part 3: Burden of policyholder dividend
payment)
Many people point out that in addition to a high assumed interest rate, a high level ofpolicyholder dividends in the 1980s eroded the financial health of life insurancecompanies.
Furuse, who I mentioned before, writes (in 1994), “Life insurers’ asset management
strategy during the bubble period was increasingly shifted to investment in foreign
currency-denominated assets, tokkin specified money trusts and other high-risk
investment vehicles to secure financing sources for high guaranteed yields and highdividend payouts. During that time, they sold stocks to lock in profits in order tomaintain high dividend payouts and make up for foreign exchange losses. As a result,the book prices of stocks were inflated.” He thus indicates that a high amount ofdividends raised the acquisition costs of stocks, making life insurers vulnerable to adrop in stock prices.
The Report of the Insurance Council to the Minister of Finance of 1975 calls forlowering insurance premiums rather than policyholders’ dividends by saying, “Manyconsumers want insurance products with low rates and low dividends rather than thosewith high rates and high dividends.” In reality, however, premium rates dropped
further via a hike in the assumed interest rate, while the high level of dividend payouts
was also maintained, resulting in products with “low rates and high dividends.” Life
insurers’ funding costs (combining assumed interest rate, interest dividends and special
dividends for long-term contracts) hovered around 10% during the period from the early
1970s through the 1980s, according to Mr. Deguchi, who I mentioned before. He
writes (in 1990), “From an international standpoint, the high funding costs of Japanese
insurers, in relation to market interest rates, can be summed up in the single word,
abnormal” and “Insurers should not be able to manage their operations in a soundmanner if they continue offering such products with low rates and high dividends.”-28-

Fumio Masada of Nippon Life (in 1994) says in his research report (in 1994), “Life
insurers lowered their assumed interest rate only in an extremely gradual manner in thelate 1980s, the so-called bubble period, despite a plunge in money market rates.”
I will express my views on the following three key words: (1) income dividend principle(2) special dividend and (3) race for group pension money.
<Income dividend principle>
Life insurers’ dividends paid to policyholders come in two types: regular dividends paideach year and special dividends paid at the time of lapse of a contract or after the elapseof a certain period. Regular dividends employed the contribution method, and thesource of interest profit, which is a capital of interest dividends, was limited to interestand dividend income (income gain) under the Insurance Business Law before its
revision in 1995. Article 86 of this law required insurance companies to set aside theprofit on the sale of securities (capital gains) as a reserve, so as to prevent them frommisusing the capital gains.
The introduction of special dividends (in 1972), which will be described later, made it
possible to pass capital gains on to policyholders. However, the life insurance industry
favored single-year book closing and stuck to the principle of paying income dividends
alone even in the 1980s. For life insurers, the purpose of asset management was tomaximize the income gains.
For example, when the interest rate level declined in the 1980s, life insurers increased
investment in foreign securities, particularly U.S. Treasuries carrying high interest rates,in order to secure larger income gains. They continued to boost foreign securities
investment even though, with the yen surging against the dollar in 1985 and thereafter,
they were suffering a large amount of exchange loss from year to year. There might
have been some influence from the change, such that the upper limit of the percentageof the overseas securities to the total asset was raised from 10% to 30% in1986. So it isreasonable to assume that life insurers were trying to secure income gains to ease theexchange loss, which caused by the strong yen, with the latent stock profits. Foreign
bond investments, in which life insurers expected the latent stock profits, were no otherthan the conversion of capital gains to income gains for them.

-29-Another example of the income dividend-paying principle distorted life insurers’
investment activities was also observed when they expanded investment in money trusts,
structured bonds and foreign-currency investment trusts. In 1984, the range ofinvestment vehicles of specified money trusts was expanded from government bonds
alone to include all kinds of securities, making it easier to turn capital gains into income
gains. Life insurers were allowed to use the investment return on money trusts as asource of regular dividends. If an investment loss was incurred, they were able to offset
it by latent stock profits. They used structured bonds and foreign-currency investment
trusts mostly to generate high dividends. According to testimony from insurance
business people, many investment products purchased by life insurers were designed to
pay a higher dividend than the actual return in the initial year. As these products
incurred heavy latent losses in the 1990s, they became a drag on the management of life
insurers in many cases.
The income dividend principle continued to hold sway until the Insurance Business Law
was revised in 1995. Even without this principle, life insurers may have engaged in“management dependent on latent stock profits” in the 1980s. Still, this principle was
one factor that distorted life insurers’ asset management without doubt.
<Special dividends >Special dividends are paid out of profits on the sale of stocks and real estate and come in
two types: special dividends at the time of lapse (mu (μ) dividend) and dividends forlong-term contracts (lambda (λ) dividend). Under Article 86 of the former Insurance
Business Law, life insurers were supposed to set aside profits on the sale of assets as areserve, as mentioned earlier. This article had a proviso to the effect that insurers did
not have to set up a reserve like this if they obtained permission from the competent
minister in charge. According to a notification from then Director-General of the
Banking Bureau, insurers were exempted from the duty of setting up a reserve required
under Article 86 if they used the money to pay special dividends. This rule wasintroduced in 1972 to mitigate the effect of inflation because life insurance contracts
usually extend over a long time, price increases may erode the insured amount.
The Report of the Insurance Council to the Minister of Finance of 1975 stated that: “it isnecessary to make positive efforts to pass capital gains on stocks to policyholders while
ensuring equality among policyholders.” With this, life insurers shifted their focus-30-

from coping with inflation to passing latent stock profits on to policyholders.
There was no reasonable rule for payment of special dividends, and the dividend amount
was decided each year through the talks between the Ministry of Finance and life
insurance industry, according to insurance business people. In fact, life insurers, big
and small, paid largely the same special dividend. The previously mentioned Report of
the Insurance Council to the Minister of Finance of 1992 stated that: “it is necessary tosort out and clarify the functions of latent stock profits (1) providing against stock pricefluctuations, (2) serving as a financial source of special dividends to be returned topolicyholders and (3) serving as a buffer in business management) and to improve thedividend payment system to one based on gross earnings including capital gains.” Itappears that, even in the 1990s, there was no reasonable rule applied when it comes topaying dividends out of latent stock profits.
When life insurers saw their latent profits increase amid the stock market boom in thesecond half of the 1980s, they came under pressure to return more of their profits topolicyholders. In 1987, the administrative authorities (Mr. Masahiro Sakata, thenDirector of Insurance Division I, Banking Bureau, the Ministry of Finance) said that“latent stock profits have sharply expanded with the stock price increases in the past
three years, and we need to check whether this is reflected in the special dividends paidby life insurers” (according to the Nikkei Financial Daily dated November 25, 1987).
Under guidance from the Ministry of Finance, life insurers reduced the interest dividend
and raised the special dividend. As a result, they reported a large amount of
securities-related profit and loss (capital gain minus capital loss and appraisal loss)
every year from fiscal 1986 to 1990. Life insurers were supposed to set aside capitalgain as a reserve under Article 86, as mentioned earlier, but they did not do so. In
those days it was considered common to take advantage of the proviso of Article 86,
according to the parties concerned.
As they continued to pay special dividends in the absence of reasonable rules, life
insurers came to purchase shares at higher and higher prices and ended up weakening
their own management strength.
<Race for group pension money>
Corporate pension funds used to be managed exclusively by life insurers and trust banks-31-until investment advisory companies were allowed into the field in 1990. In the 1980s,
life insurers held shares of companies whose pension funds they managed. By
guaranteeing returns and paying stable dividends, they enjoyed a growing share of thecorporate pension market.
Japanese corporate pension funds, such as employee pension funds and tax-qualified
pension funds, are of the defined-benefit type, which promises to pay a certain amountof benefits in the future and collects premiums accordingly over the years. The
assumed return, which is one of the basic pension rates, was uniformly set at 5.5%.
This means that it was absolutely necessary for corporate pension fund managers tosecure an annual investment return of 5.5%.
Let us look at the investment returns for employee pension funds in the second half ofthe 1980s. Trust banks, which were rivals of life insurers, showed investment returns
ranging widely from 1% to 12% every fiscal year to year, while the returns for life
insurers’ general account were stable ranging from 7% to 9%. Life insurers in theirgeneral account guaranteed an assumed 5.5% rate of return and on top of that, paid a
dividend as well. All life insurers paid the same amount of dividend until three
midsize insurers dropped out in fiscal 1991. For corporate pension funds, life insurers
were something they should be very grateful for.
Life insurers could afford to do all this because, for one, they had a large amount oflatent stock profits and, for another, they managed personal insurance and group annuity
contracts in a pooled account without using separate accounts for different productcategories. Although personal insurance and group annuity are very different types of
products in terms of assets and cash flow characteristics, life insurers managed them
together in a slipshod manner. The newsletter “Pension Information” (issued by
Rating and Investment Information, Inc.) dated May 11, 1992 carried a comment that“many people still hold the view that ‘life insurers’ strength lies in their pooled account.
By lumping various assets together, they can spread out the risks of lending, investing indomestic stocks and investing overseas’.”With their accounting practice like this, it is most likely that life insurers moved moneyfrom personal insurance contracts to group annuity contracts to cover the shortfall in thelatter and achieve a high investment yield for group annuity contracts. This is because
the personal insurance business has a long history whereas corporate pension products-32-were introduced as recently as 1962 and it is reasonable to assume that life insurers
accumulated latent stock profits over a long time mostly from the personal insurance
business. Moreover, all life insurers paid the same amount of dividend regardless of
their investment performance. This means that life insurers who had poor investment
results must have been forced to turn to latent stock profits.
From the viewpoint of ALM also, general-account group annuity is a very risky productfor life insurers. A group annuity contract has no concept of “maturity.” It is
assumed that a fixed return is guaranteed unless the contract is canceled by the customer.
In and after 1994, the investment environment deteriorated so much that life insurers
were forced to lower the assumed investment return in a gradual manner from 5.5%.
All the same, they had to treat group annuity as a long-term yield-guaranteed productwhen they were entrusted with money. Group annuity has almost no other profit
source such as the expense profit and the mortality profit which accrue in the case of
personal insurance. Moreover, basically a contract can be cancelled at any time after acertain period of time has elapsed, and products back then could be cancelled without
any penalty clause. The ALM of debt-like products of this kind should be no easy job,
but it is unlikely that life insurers of that time were aware of this and operated the group
annuity business accordingly.
From the viewpoint of corporate pension funds, life insurers’ general account was a very
good thing. It guaranteed a certain return and, if good investment results wereachieved, paid a dividend as well. It was like buying a call option without paying theoption premium. For life insurers, however, their general account was not a good thing.
If they had a large balance of general-account annuity contracts, which may be canceledat any time without penalty on the part of customers, it meant that they carried theconstant risk of losing a significant portion of pension assets in addition to the burden of
paying the assumed interest rate.
(6)

The business environment in the 1980s (Part 4: Position of the regulatory

authorities)
As stated earlier, Japanese regulators adopted a typical “convoy-fleet” system inoverseeing the insurance industry. It adopted the concept of substantive supervision
which means that, under the former Insurance Business Law, the authorities give
specific instructions at every stage of management of an insurance business. The
Ministry of Finance laid out specific regulations and provided guidance on individual-33-

cases, including discretionary judgment, to insurance companies to help with theirbusiness management. Insurance companies could not have raised the assumed
interest rate or pay a policyholder dividend without the approval of the Ministry of
Finance.
<Administrative policy promoting net premium reserve>
Before the solvency margin standards were introduced upon revision of the Insurance
Business Law in 1995, the Ministry of Finance urged life insurers to set aside a policy
reserve based on the net premium in order to ensure their sound management.
Mutual companies dominated the life insurance market until the 1990s. Unlike joint
stock companies, they had no capital. Because it was believed that “there is no suchthing as the capital of mutual companies,” the idea of improving their capital base did
not occur to the regulators. The balance sheets of mutual companies of that time
showed that their “capital” was very small. The 16 mutual life insurance companies
had an average capital-to-asset ratio of only 0.02% at the end of fiscal 1990. Even if
capital-like liabilities such as the contingency fund and the price fluctuation reserve
were included, the capital-to-asset ratio was less than 3%.
For mutual companies, it was more important to pay dividends to policyholders than tobuild up internal reserves. In the 1980s, 99% of the net surplus went into the reservefor payment of policyholder dividends. Life insurers in the form of stock companies
such as Kyoei Life and Nippon Dantai Life were instructed to do business in the same
way as mutual companies and, like mutual companies, they were “undercapitalized,”
as was clear from the settlement data and testimony by the people concerned at thattime.
The Ministry of Finance was trying to ensure the sound management of life insurers byhaving them build up substantial policy reserves under the net premium method. There
are two typical ways of building up a policy reserve—the Zillmer method and the net
premium method. The most costly part of the life insurance business is when theinsurer acquires a new contract. Under the Zillmer method, the insurer initially sets asmaller reserve in step with the higher initial cost and amortizes assets over the periodof several years. Under the net premium method, the insurer does not allow for the
initial high cost but starts setting up a reserve on a par with the net premium in the-34-

initial year. When the Zillmer period (amortization period) has elapsed, the reserve
levels under the two methods would be the same.
Administrative guidance promoting the net premium method was started when the
Banking Bureau of the Ministry of Finance issued a notification about “how to improve
the policy reserve” in 1968. This principle was reaffirmed when the Report of the
Insurance Council to the Minister of Finance of 1979 was made to the effect that “toensure the ‘soundness of the life insurance business,’ the regulators should have life
insurers build up a reserve based on the net premium method as they have done.”
Under the “standard policy reserve system” introduced upon revision of the Insurance
Business Law in 1995, the net premium policy reserve was adopted and has been in use
to this day.
It is true that the net premium administrative principle demanded a high policy reserve
level of life insurance companies. However, for insurers who have a high percentageof existing contracts as compared with new contracts and who have already attained thereserve level commensurate with the net premium, the government principle gives no
incentive to enhance the soundness of their management. A review of the Report of
the Insurance Council to the Minister of Finance made in the past shows that more thanhalf of life insurance companies had attained the policy reserve level required under the
net premium method as early as 1975. To take major life insurers for example, Fukoku
Mutual Life was the first to attain the level, in 1962, Dai-ichi Life in 1971, and Yasuda
Mutual Life in 1974. In the early 1990s, 21 out of the 30 life insurers used the net
premium method while nine used the Zillmer method.
More importantly, the problem is that, if life insurers set a high assumed interest rate,
their policy reserves, whether built up under the net premium method or the Zillmer
method, would be insufficient. The currently required policy reserve level is calculatedby discounting it at the assumed interest rate as of the time of acquiring a new contract.
Even if the interest rate falls subsequently, the discount rate would be left unchanged(under the lock-in system). This means that, where contracts with a high assumed
interest rate are concerned, the policy reserve would be insufficient. The use of the net
premium method does not automatically ensure the soundness of a life insurer’s
management.
It is unlikely that the regulators had no knowledge of this mechanism of the policy-35-reserve system in the 1980s. All the same, they permitted life insurers to raise theassumed interest rate and pay special dividends by tapping latent stock profits. Allthey did about the policy reserve buildup was to recommend the use of the net premium
method. They did not urge them to secure internal reserves, either.
<Checking the policy reserve level>
A system that makes up for the drawback of the lock-in system for determining thenecessary policy reserve level is the cash flow analysis (also called cash flow test).
Under this system introduced after revision of the Insurance Business Law in 1995, each
insurance company’s actuary checks whether the company can secure a sufficient policy
reserve in the future under a certain stress scenario, and a copy of the actuary’s report is
submitted to the regulatory authorities. If the actuary concludes from his analysis thatthe policy reserve built up so far is not sufficient, he will present a written opinion
asking the company to set aside the necessary amount.
In the second half of the 1990s, some of the life insurance companies which were later
to fail were unable to eliminate the negative spread for each term simply by tapping theexpense profit and the mortality profit, so they broke into the latent profit on assets andthe internal reserve and even changed the policy reserve level required. They musthave been short of one year’s policy reserve, not to speak of five years’. We reviewed
the published reports but found no company that set aside an additional policy reserve inthis situation. Whether an additional policy reserve is needed or not is primarily amatter of judgment by the actuary. At any rate, the regulatory authorities did not pointout the insufficiency of the policy reserve, according to the parties concerned.
It is most likely that, before the cash flow analysis was introduced in 1996, theauthorities made almost no checks on life insurers’ policy reserves from the viewpointof ensuring their sound management. As can be seen, for example, in publishedreports on the inspection of life insurers which later failed (attachments in the 1990s),
the authorities assessed the insurers’ assets and noted the amount of latent profit or loss
on securities, but their only reference to liabilities was “excess or deficiency of the net
premium policy reserve.”
This clearly shows that the Ministry of Finance of that time inspected life insurancecompanies in the same way as it inspected banks as far as their financial affairs were-36-

concerned. Considering that these inspection reports came out after the negative
spread became an issue, it is unthinkable that the Ministry of Finance made a detailed
analysis of policy reserves in the 1980s. A person from Chiyoda Mutual Life testified
that: “the regulators (the Ministry of Finance) focused their attention on single-year
settlement results, assets, and the business details of each division. They did notinspect policy reserves until the Financial Supervisory Agency did it in 1999.”
Another person in the industry says that the Ministry of Finance (including the Financial
Supervisory Agency and the Financial Services Agency) had almost no actuaries who
attended to insurance matters until recently. Nikkei Business magazine dated October
6, 1997 says that: “there were only three people who majored in mathematics atuniversity and were hired as actuaries by the Ministry of Finance after World War II.
They joined the Ministry of Finance between 1951 and 1963.”
From the above, let us make an overall judgment of the behavior of the regulatory
authorities of that time. Although life insurers’ business environment and liability
structure underwent a major change in the 1980s, regulators continued to depend on the
net premium-based reserve and latent stock profit to ensure the sound management oflife insurers and allowed them to raise the assumed interest rate and pay a high dividend
to policyholders, and ended up exacerbating the life insurers’ crisis that ensued
subsequently.
(7) Impact of financial deregulation and globalization
Japan experienced the failure of as many as 180 financial institutions (deposit-taking
financial institutions) from the 1990s to early in the 2000s. This is ascribed not only tonegative factors such as the fall in post-bubble stock and land prices and deterioration in
the real economy but also to the impact of financial deregulation and globalization on
the management of financial institutions, as pointed out by many people.
“In and after the 1990s, the financial system was rapidly adapted to the global standard.
As a result, players were required to act individually, and each player had their lack ofinternational competitiveness exposed.” (Nishimura, 2003, P423)“When the bubble was forming in the second half of the 1980s, an optimistic view of
the Japanese economy spread and real estate and stock prices climbed, and banks
continued their pursuit of ‘volume.’ Before they had time to build a business model
suited for financial deregulation, banks entered the bubble period.” (Nikkei Research,-37-

2007)
Financial deregulation and globalization, on the other hand, generally did not have muchdirect impact on life insurers. The life insurance industry has become a member of the
Financial System Research Council since 1988, and expressed its opinion on the entryof banks, brokerages and insurers into one another’s field. However, little progress
was made throughout the 1980s in the deregulation of the insurance system under which
they operated. Whereas deposit interest rates were deregulated in stages in the 1980s(until the deregulation was completed in 1994) and regulations for each sector of thefinancial industry came under review in the second half of the 1980s (the Financial
System Reform Law was established in 1992), it was not until 1989 that the Insurance
Council launched a drastic reform of the insurance system. The reform was a
step-by-step process. The deregulation of the insurance system to permit the mutual
entry of life and nonlife insurers into each other’s field and to abolish the dividend
approval system had to wait for the revision of the Insurance Business Law in 1995.
The Report of the Insurance Council to the Minister of Finance of 1992 included acautionary note to the effect that, in reviewing the system, it is desirable to give a clear
direction, take appropriate mitigation measures if necessary, and promote changes instages.”As shown above, the reform of the life insurance system did not begin until the second
half of the 1990s. As the reform was a step-by-step process, it hardly had any direct
negative impact on the management of life insurers of that time.
<Concentration of money into life insurers>
This does not mean that in the 1980s life insurers were totally spared the influence ofthe financial deregulation and globalization. For example, as interest rates were
deregulated, consumers became selective about the interest rate level. When market
interest rates declined, life insurers’ single-premium endowment insurance as ahigh-return financial product had explosive sales, as stated earlier. The product was so
popular that in 1985 the Director of the Insurance Division I of the Ministry of Financesent out a memo asking insurers to refrain from selling it. Single-premium endowment
insurance remained popular until around 1989, when the market interest rate rose andthe product lost its appeal as a financial product.

-38-

As the sales of savings-based products such as single-premium endowment insurance
and individual annuity expanded, life insurers quickly gained a higher position among
financial institutions. Life insurers’ total assets increased at the rate of about 20% eachyear, more than quadrupling over a 10-year period. Their share in the financial marketrose from around 5% to nearly 10%.
In the meantime, the high-growth period came to an end, financial deregulation enabledbusiness companies to diversify their funding means, and the financial needs of large
companies dwindled. As a result, life insurers gradually shifted its money fromlending loans to companies to investing in securities. The percentage of loans in life
insurers’ assets remained above 50% until the early 1980s. In particular, in the final
phase of the high-growth period from 1970 to 1976, the percentage was more than 60%.
The figure dropped sharply during the 1980s, falling below 40% in the latter half of thisdecade.
During this period, the percentage of securities rose from about 30% to nearly 50%.
Life insures invested in such securities as government bonds, which were issued inincreasing volumes amid the nation’s fiscal difficulty, U.S. Treasuries from which they
sought gains on the difference between Japanese and U.S. interest rates, and domestic
stocks included in the money trust schemes. Life insurers transformed themselvesfrom marginal financial institutions into giant institutional investors.
As life insurers’ money grew rapidly and their asset structure changed, their
management risk increased. Up until 1980 or so, life insurers enjoyed a favorable
environment, raising funds at a low cost (assumed interest rate), and managing them inthe form of high-interest and stable lending to large companies. Their businessunderwent a major change in the 1980s, when the funding cost became higher and, as aresult, savings-based products increased. Moreover, life insurers started investing inpublic and corporate bonds amid the declining interest rate level and also in assets
carrying the exchange risk and the stock price fluctuation risk. All this should haverequired stricter investment risk management and asset liability management (ALM).
However, as stated earlier, managers of life insurance companies and administrative
authorities were rarely aware of the need for stricter risk control and were generally
defenseless against the growing risk.

-39-

3. Effects of scale expansion race, customer base, and constraints of company
type(1) Were there external factors peculiar to midsize life insurers?
So far we have reviewed external factors that must have negatively affected the whole
life insurance industry. Each of these factors should have had a considerable effect on
the management of life insurers.
However, is it possible to say with certainty that the failure of one life insurer after
another was due largely to structural problems rather than each failed company’s own
problems? If the failure had been structural, all life insurers would have failed. It
does not seem that structural factors alone can explain the “failure of life insurers in the
Heisei era” in which many but not all of long-established midsize life insurancecompanies went bankrupt.
Let us now focus on three external factors applicable to companies with specificattributes, such as “midsize life insurers’ scale expansion race,” “whether they had acustomer base such as the workforce of specific companies” and “constraints ofcompany type” and their relevance to business failure.
The “midsize life insurer” is not always clearly defined. In newspapers and businessmagazines, it was common to label large long-established life insurancecompanies—Nippon, Dai-ichi, Sumitomo, Meiji, Asahi, Mitsui, and Yasuda—as the“seven major companies” (in the 1990s these and Chiyoda were commonly called the“eight major companies”) and Chiyoda, Taiyo, Toho, Kyoei, Nippon Dantai, Daido,
Daihyaku, Fukoku, Nissan, and Tokyo as the “10 midsize companies” (or the “ninemidsize companies”). We follow this practice and call the 10 companies including
Chiyoda “midsize life insurers.”(2) Midsize life insurers vying to grow bigger
Let us first examine the hypothesis that the competition among midsize life insurers toincrease their total assets during the bubble period brought about a crisis.

-40-

Table 1-5 Midsize life insurers’ competition in total assets<FY 1985><FY 1989>
Total assets
Total assets(¥100 million) Share(¥100 million) Share(%)(%)
Nippon126,027
23.4
Dai-ichi
83,484
15.5
Sumitomo
69,88213.0
Meiji
45,661
8.5
Asahi
40,904
7.6
Mitsui30,662
5.7
Yasuda26,3744.9
Taiyo
23,5344.4
Chiyoda17,058
3.2
Toho
14,752
2.7
Kyoei
12,124
2.3
Daihyaku
10,5992.0
Fukoku
9,029
1.7
Daido
8,453
1.6
Nippon Dantai
7,975
1.5
Tokyo
4,049
0.8
Nissan3,680
0.7
Source: “Life Insurance Statistics”

NipponDai-ichi
Sumitomo
Meiji
Asahi
Mitsui
YasudaChiyoda
Taiyo
Toho
Kyoei
Nippon Dantai
Daido
Daihyaku
FukokuNissanTokyo

248,814173,608
148,617
100,856
79,54563,02854,20945,18944,00540,75930,00924,95024,556
23,613
21,62016,27010,091

21.4
14.9
12.8
8.7
6.8
5.4
4.7
3.9
3.8
3.5
2.6
2.1
2.1
2.0
1.9
1.4
0.9

Comparedwith fiscal
1985(times)
2.0
2.1
2.1
2.2
1.9
2.1
2.1
2.6
1.9
2.8
2.5
3.1
2.9
2.2
2.4
4.4
2.5

In the 1980s the life insurance industry was expanding its assets year by year by sellingsavings-type products such as single-premium endowment insurance. The competition
among midsize companies to expand their scale intensified particularly in the latter halfof the 1980s. The combined total assets of midsize life insurers grew 2.5-fold from theend of fiscal 1985 to the end of fiscal 1989, more than the twofold growth shown by theseven major companies.
At about this time, midsize life insurers as ranked in terms of total assets switched theirrankings frequently. Nippon Dantai Life ranked 15th at the end of fiscal 1985 and rose
to 12th at the end of fiscal 1989. Nissan Mutual Life rose from 17th to 16th at the endof fiscal 1987 and remained there. Chiyoda Mutual Life rose from 8th to 7th at the endof fiscal 1989. Even companies that remained in the same place or which fell in the
ranking saw their asset size grow 2.5- to 2.8-fold during this period.
One reason midsize life insurers rushed to expand scale in competition with one anotherwas that, with consumers learning to select products according to their interest rate andcorporations jumping on the zaitech investment bandwagon, the demand forsavings-type products increased and this made it easier for midsize life insurers to-41-

expand their business scale. Up until then, midsize life insurers who had adopted thesame business model used by larger insures fell behind in terms of sales strength,
customer base and the size and productivity of the sales force. Now, if they developed
a zaitech-oriented investment product, they could sell it because of its attractive yield.
Among them, Nissan Mutual Life developed and marketed, jointly with a bank, aproduct using a bank loan to pay the premium in a lump sum, and increased its assets
more than fourfold in just four years. This made a big impact on other midsize life
insurers, stimulating Nippon Dantai Life, Tokyo Life and Chiyoda Mutual Life to offer
similar products in cooperation with banks. Toho Mutual Life came up with aninvestment product called “Kenko Nenkin” (health annuity) and sold it to corporate
customers. Nippon Dantai Life actively promoted mutual-aid corporate pension plans
made up of contributions from individuals. Chiyoda Mutual Life and Tokyo Lifefocused their efforts on acquiring contracts of group annuity which was ahigh-yield-guaranteed product and which brought them a large amount of money atonce.
We may point out that life insurers of that time basically aimed at expanding their scaleof operation. As they were used to doing business for quite some time in a world
where the interest rates and dividends were uniform across the industry, they felt as if“we just need to grow bigger and then the profit will follow,” according to comments byseveral people in the industry.
This trend is seen, for example, in Nissan Mutual Life’s five-year plan started in 1985,
which set targets for indicators of scale such as the “total amount of insurance in force,”“premium income,” “total assets,” “number of sales employees” and “number of
non-sales employees.” Also in Tokyo Life’s “three-year plan for expansion and net
increase through reform and creation,” launched in 1987 ahead of its 100th anniversary,the basic goal was to “achieve a higher position in industry in terms of total amount of
insurance in force” and numerical targets were set for the “total amount of insurance inforce,” “value of new contracts,” “premium income,” “total assets” and “sales force.”
All midsize life insurers but two that expanded their scale of operation at about this time
eventually collapsed. One of the two companies that survived was Nippon Dantai Life,
which came under the control of AXA Group of France. The other was Daido Life,
which almost tripled its asset size in four years and maintained a high credit standing-42-

after the collapse of the bubble by cutting costs and reducing the weight of stocks in its
investment portfolio. Midsize life insurers such as Taiyo Life and Fukoku Mutual Life
maintained sound management without rushing to expand their business scale.
Meanwhile Daihyaku Mutual Life increased its assets only at about the same rate as theindustry average, but its negative spread was a serious problem that eventually brought
it down.
(3) The problem of customer baseLet us now review the hypothesis that failed life insurers had no solid customer base likethat of larger insurers, and that this impeded their operations.
Major life insurers had close relations with large corporations through mutualshareholding and corporate groupings and secured contracts for group insurance andannuity from these corporations and also contracts for personal insurance from theirofficers and employees. When we look at the roster of policyholders’ representativesof each major life insurance firm to get a glimpse of its customer base, we see the namesof heads of large corporations. According to disclosure materials for 2007, company
executives accounted for 43% at Nippon Life, 34% at Dai-ichi Life and 31% at
Sumitomo Life of policyholders’ representatives (including housewives who may berelations to executives of large corporations).
When Japanese corporations were not as sensitive to security matters as they are now,life insurers found a very attractive business base in the workforce of companies towhich they were close. They were permitted to promote sales on the premises of target
companies and achieved a higher sales efficiency than when selling products door todoor to individuals in homes and regional communities. Life insurers also had achance to corral customers who were still young. Better yet, the officers andemployees of large corporations are said to have a low death rate because they arehealthier than the average person.
In contrast, many midsize life insurers tried to change or expand their business base but
without much success because their target customers who were the workforce of large
corporations had been taken by major life insurers. Toho Mutual Life’s businessoriginated from military draft insurance of prewar years. Nissan Mutual Life’s corecustomer base was limited to people in Hitachi and Nissan groups. Daihyaku MutualLife was originally a unit of Kawasaki zaibatsu conglomerate, but had to look for-43-

customers in homes through door-to-door sales. Tokyo Life was a Nomura Group
member, but its contracts with affiliated firms dwindled through competition with rivals
paying better dividends. Midsize life insurers’ weaker customer base as comparedwith larger rivals’ must have been an indirect factor in failure to shed their low-profit
structure and growing dependence on savings-type products during the bubble period.
Fukoku Mutual Life does not hold as large a volume of shares as major life insurers but
has secured a foothold in the market serving the workforce of companies, a fielddominated by major insurers. Not all the customers of Fukoku Mutual Life are its
affiliated firms. Chiyoda Mutual Life was one of the big five life insurers in prewar
years. It had many close affiliates including Tokai Bank and Tomen and secured its
place in the market catering to the people of large companies before its failure in 2000.
Kyoei Life was a latecomer but built a solid customer base in a niche market that served
teachers and teachers’ unions. Still, it did not escape the crisis that hit the industry.
As seen so far, the quality of an insurance company’s customer base may have been an
indirect cause of its crisis but not a decisive factor.
(4) Constraints due to company type
The third factor to consider is the hypothesis that the mutual company system limited
the chance for survival. In fact, many of the failed midsize life insurers were mutualcompanies. Let us give consideration to “constraints on fundraising” and “governanceissues.”<Constraints on fundraising >Of the seven failed life insurers, five (other than Kyoei Life and Taisho Life) were
mutual companies. While joint stock companies can improve their solvency margin byincreasing capital, about the only way for mutual companies to improve their solvency
margin is to turn their earnings into internal reserves. A mutual life insurancecompany may increase net assets on the balance sheet by re-inviting subscriptions to its
fund (money from contributors under the Insurance Business Law). The fund is like afixed-term fixed-interest subordinated debt from an economic point of view and needs
to pay principal and interest to contributors. When returning the fund, the life insurer
is required to set up a fund amortization reserve equivalent to the amount returned, bytransferring money from each term’s surplus. Thus, there is a limit to the amount that-44-

can be raised.
Other options are using debt with a subordination agreement (such as subordinated loans
and subordinated bonds) and taking out financial reinsurance (ceding a certain block of
insurance contracts to get immediately needed funds in the form of a commission fromthe reinsurance company). These options are less effective than a stock company’s
capital increase because they make it necessary to repay the debt later or to break into
future profits.
Like many other life insurers that went under, Nippon Dantai Life (now AXA Life), a
stock company, was struggling under the burden of paying high assumed rates of returns
for savings-type products put on sale in the latter half of 1980s. It concluded a capitaltie-up with AXA Group of France in 2000 and, thanks to massive financial support fromthis group, improved its solvency margin and regained its credit standing in a short time.
Heiwa (now MassMutual Life), a small life insurer in the form of a stock company,
barely managed to retain its creditworthiness through a capital tie-up with Aetna Groupof the U.S.
Other failed insurers such as Toho Mutual Life and Daihyaku Mutual Life (both of them
are mutual companies) each concluded a tie-up with a foreign partner. Under thetie-up scheme, the Japanese insurer transferred its sales force to its partner and received
funds in return, and devoted itself to the maintenance and management of existing
contracts taken in the past. The two insurers sought to survive by selling the systemand functions of acquiring new contracts, but failed to improve their credit status andwent under only one year after the tie-up. Other mutual companies such as Chiyoda
Mutual Life and Tokyo Life had historically close relations with major banks, but wereunable to get financial assistance from them.
From these instances, it may seem that the view that the difference in company type wasa deciding factor in the survival or failure of a life insurer is convincing. We shouldnote, however, that Nippon Dantai Life, a stock company, had the option of adopting ascheme for separating existing and new contracts just as Toho Mutual Life andDaihyaku Mutual Life did. In fact, such a scheme was suggested to other midsize life
insurers who were stock companies.
When Equitable Life, a U.S. mutual company, fell into a crisis in the early 1990s, it-45-

sought investment from AXA Group on condition that it be demutualized. In Japan,
after the revised Insurance Business Law was put in force in 1996, a mutual company
had the option of being demutualized, although it may have had to sort out practicalproblems. In and after the latter half of the 1990s, however, not a single tie-up deal
was made in which a troubled mutual life insurance company was to turn itself into a
stock company and receive capital infusion from its tie-up partner. Instead, troubled
life insurers who found a tie-up partner adopted a scheme for separating existing andnew contracts, retaining business related to existing contracts, and transferring the restto their partner. It would be natural to conclude from this that Japanese midsize life
insurers failed to receive financial support not because their mutual company system
was a problem but because investors did not think that these insurers, unlike Equitableof the U.S., were worth demutualization and capital fusion.
In and after the latter half of the 1990s, major banks were struggling with anaccumulation of bad loans and capital shortfall. They could not afford to acquire evena closely affiliated life insurer and infuse it with a healthy amount of funds. As majorbanks were reorganized and regrouped, their historically formed groups underwent a
rapid change.
<Governance issue>
Another point of issue is the governance of mutual companies which are prone tomismanagement.
In the mutual company system, the company is managed
autonomously by policyholders who are its members (policyholders’ representatives
make decisions on important matters). The problem is that policyholders are rarely
aware of their role as participants in the management of the company. According totestimony by several industry people, the representatives of policyholders of an
insurance company are chosen practically by the company. This creates a structuralproblem of weak governance. To overcome this weakness, it is necessary to makeeach mutual company’s operations even more transparent than a stock company’s andeliminate the information gap between managers and policyholders.
much progress has made in this regard.

However, notThis does not mean that a stock company had no governance problem. In the latter
half of the 1990s, stock companies such as Nippon Dantai Life and Kyoei Life rushed toforeign securities investment which was no better than “gambling” as we look back now,-46-

and ended up with huge losses. If they had been listed companies (on a stock
exchange), something might have checked their reckless operation. There is noevidence that the shareholders’ checking system functioned effectively.
There is an insurer whose stock company status proved fatal. Taisho Life, a small life
insurer, saw its solvency margins decline in the latter half of the 1990s because of its
deteriorating basic earning power and bad loan problems. As things showed no
improvement for some time, the Finance Services Agency issued an order for prompt
corrective action in 2000, urging the company to take drastic measures such as a capitalincrease. Taisho Life found itself in a tight corner, so it concluded a capital tie-up with
the investment company Claremont Capital Holding, to which it issued and allocatednew shares to increase capital. As it turned out, President Yoshihiko Kokura of
Claremont, becoming the top shareholder, defrauded Taisho Life of a large sum ofmoney and was arrested for fraud. Taisho Life in effect fell into a negative net worth
and collapsed.
All things considered, we may say that the company type was a factor in bringing about
failure but was not a decisive factor.
(5) External factors alone cannot explain failure
We have examined external factors that brought about the failure of life insurers,
dividing them into factors applicable to the whole industry and factors applicable toindividual companies with specific attributes.
To be sure, the erosion of asset value and the decline in interest rates in the wake of the
burst of the bubble had a big negative impact on the earnings and financial situation oflife insurers. The raise in the assumed rates of return, payment of high dividends topolicyholders and dependence on the profit on sale of stocks in the 1980s had the effectof amplifying the impact of the burst of the bubble. While life insurers’ asset andliability structure changed amid financial deregulation and globalization, regulatory
authorities of that time relied so much on the net premium policy reserve and latent
stock profits as a means to ensure soundness that they were unable to control thesubsequent industry crisis. There is no denying that midsize life insurers’ competition
to expand in the latter half of the 1980s as well as the lack of a solid customer base andthe type of company, whether a mutual company or a stock company, played a part inbringing about the failure of life insurers.

-47-

All the same, these external factors serve only to explain superficially why one life
insurer after another failed. They may not be essential factors that unravel the true
nature of failure. In other words, external factors alone did not cause bankruptcy. It
is fair to assume that each failed company had some internal factors that may have led toits downfall and that these internal factors coupled with external factors have increased
the risk of failure.
4. Roles played by rating and disclosure(1) Disclosure of life insurers
To ensure the sound management of insurance companies, each company’s
self-discipline in the form of risk control and governance system and the institutionaland regulatory framework for ensuring soundness are not enough. It is necessary thatexternal audit, rating by rating agencies, and market discipline through disclosure should
function properly. Let us now change our perspective a little and see what kind of role
has been played by disclosure and rating, which may function as external checks on
management.
Life insurance companies are required to disclose information through the following twochannels.
For one, they follow the disclosure standards set up by the Life Insurance Association ofJapan. Since the LIAJ established the industry’s uniform disclosure standards in 1979,
its member firms have disclosed their business data voluntarily. In fiscal 1989, life
insurers started preparing financial statements which were supposed to contain as muchdetails as required to securities reports of listed companies, including “items to bedisclosed without fail” and “items to be preferably disclosed.” In fiscal 1990, they
began to issue first-half reports (corresponding to midterm financial statements of listedcompanies).
For another, life insurers disclose information under Article 111 of the revised Insurance
Business Law which came into force in 1996. With this law revision, life insurers’
disclosure changed its nature from industry-wide voluntary action to a legally required
procedure. Each insurance company assumed the duty of preparing documents
explaining their operations and financial situation and making them available to the
public at the head office and branches, in accordance with the provisions corresponding-48-

to Article 21 of the Banking Law introduced in 1981. Initially, there were no specificrules about the items to be disclosed, nor was there any penalty for failure to disclose
information. After the law was revised in 1998 to tighten control, items to be disclosed
were specified in a ministerial ordinance and the penalty was introduced.
Upon request to disclose information on these two fronts, each life insurance company
compiles a disclosure magazine, titled something like “The Present Situation of_______ Life Insurance,” each year after the annual meeting of policyholders’representatives or shareholders. The disclosure magazine is made available at thecompany’s head office, branches and website and also at the LIAJ’s website. Anyone,
not just policyholders, insured persons and creditors, can get information they needabout life insurers.
Granted that, before disclosure rules were introduced into the Insurance Business Law,
the LIAJ’s standards did much toward improving the disclosure level of life insurers, theindustry’s uniform standards had their limits. Take the market value of securities, forexample. It was not until fiscal 1995 that Nissan Mutual Life, which went under in
1997, started disclosing the latent profits on securities. In the year preceding its
collapse, Nissan Mutual Life disclosed the market value of less than 50% of securities it
held.
For reference, let us note that life insurance companies started disclosing their solvency
margin ratio in fiscal 1997 when Nissan Mutual Life’s failure raised growing concern
about the management of life insurers. It was not until fiscal 2000 that life insurers
began to disclose the negative spread under the industry’s standards and the “coreprofits” as an indicator of earnings.
(2) Disclosure of failed life insurers
As we have seen, life insurers’ disclosure improved gradually and legal requirementschanged. Given that the disclosure system was aimed at preventing bankruptcy
through market discipline, we cannot help feeling that the system was not developed fastenough.
By making a detailed analysis of how much information Toho Mutual Life, which failedin June 1999, and Kyoei Life, which failed in October 2000, disclosed several years
before their collapse, we will see in concrete terms how far it was possible to grasp their-49-

precarious situation before collapse and what was wrong with disclosure by the failed
insurers.
<Toho Mutual Life>
When going bankrupt (at the end of 1998), Toho Mutual Life announced it had anegative net worth of ¥198.6 billion (the amount eventually totaled ¥653.0 billion after
detailed investigations were conducted to check the firm’s financial conditions). With
respect to the insurer’s financial statements for fiscal 1998, an auditing firm pointed outthat “they broke laws and ordinances as well as the articles of incorporation, notaccurately showing the firm’s assets, profits and loss”. The insurer gave up continuing
its business as it was revealed that the firm would fall deep into the red if it addedchanges as pointed out by the auditor.
Changes mainly suggested by the auditor include (1) additionally setting aside loan-loss
reserves of ¥96.3 billion for receivables to be written off and loans with insufficientcollateral, (2) posting valuation losses on ¥100.1 billion worth of securities whosemarket prices drastically dropped with no possibility of recovery, (3) posting foreignexchange losses of ¥20.1 billion on foreign securities and foreign currency denominatedloans and (4) not allowing deferred tax assets of ¥9.1 billion because of insufficienttaxable income based on future earning capacity.
It’s difficult to grasp, from the disclosure (for earnings results in fiscal 1997) made justbefore the collapse, that Toho Mutual Life’s asset deteriorated so much. Surely, 80%of loans were extended unnaturally to “finance, insurance and securities,” “real estate,”and “service” sectors. However, the combined amount of disclosed “risk managementloans,” that is, the total amount of “loans to borrowers in legal bankruptcy,” “past dueloans in arrears by six months or more,” “past due loans in arrears by three months or
more,” and “restructured loans,” stood at ¥127.4 billion, only roughly 10% of generalloans, and the insurer also posted loan-loss reserves of roughly ¥30 billion. Moreover,the firm wrote off bad loans of more than ¥40 billion in fiscal 1997, mainly using ¥70
billion worth of profit from transfer of goodwill associated with its tie-up with U.S. GE
Capital Corp. It may be quite unthinkable that the insurer was asked to set aside
another ¥100 billion or so in just a year.
Information on securities’ market prices also shows that Toho Mutual Life’s latent-50-

losses stood at only ¥46.1 billion as of the end of March 1998, mostly losses on
stockholdings. However, market prices for a large number of securities were notdisclosed because only 34% of foreign securities and 22% of other securities were
subject to disclosure. A chain of failures of major financial institutions occurred in thelate 1990s, spurring anxiety about Japan’s financial system. Caught in waves of suchanxiety, Toho Mutual Life, deemed as “a risky life insurer,” faced a rush of policy
cancellations with its total assets decreasing to ¥3 trillion from the previous year’s ¥4.5
trillion. Assets with unrealized losses may have remained after the firm sold assets
with unrealized gains to deal with the outflow of funds. Even so, it is nothing less than
astounding that the insurer was asked to post valuation and foreign exchange losses ofmore than ¥120 billion in just a year.
The solvency margin ratio, which began to be announced officially in fiscal 1997, was154%, falling below the 200% line triggering government intervention, but not plunging
to less than 0%.
Toho Mutual Life’s earnings were even more unclear. While posting operating losses
for two consecutive years in fiscal 1993 and 1994, the firm secured a net surplus in both
years, and returned to an operating profit in fiscal 1995 and thereafter. However, in
reality, the insurer was in the state of being unable to cover losses from interest
differential (negative spreads) only with expense profit and mortality profit, according tomaterials distributed at a meeting of policyholders’ representatives on January 14, 2000.
The precarious financial state of the insurer is expressed well in the following citationfrom materials used for a meeting of policyholder representatives held after the insurer’s
failure: “The amount of negative net worth would continue rising if this situation
remains.”
In those days, the amount of negative spreads was already disclosed to the media, butwith data on basic profit not available, there was no clue for assessing the severity of thefinancial state of the insurer.
I, therefore, calculated “revised operating profits” for fiscal 1993 and 1994, when thefirm reported an operating loss for two years in a row, by excluding profit on sales of
securities and other temporary profits and losses from operating profits and losses.
The calculations led to strikingly different results with a loss of ¥53.8 billion for fiscal
1993 and a profit of ¥50.1 billion for fiscal 1994 despite the fact that an operating loss

-51-

was posted in both of the both years. Although the insurer’s “insurance benefit
payouts” did not increase so much in fiscal 1994, policy reserves shifted from“provision” to “reversal,” which implies that the firm abandoned a conservative way to
set aside policy reserves in order to post profit. Changes in revised operating profits
for the ensuing years suggest, though, that this index has its limits as a clue to measure
the severity of negative spread burden.
Table 1-6: Balance Sheet of Toho Mutual Life (as of the end of March 1999)
100 millions of yen

Cash & deposits

645

Difference
from theamount before
revision
025,3310
0

Policy reserves andother reserves
Policy reserves
Loans payable

Difference
from theamount before
revision0

Call loans
Monetary assets
held in trusts
Investments insecurities
Public andcorporatebonds
stocksForeignsecurities
Others480
554

24,715215

0011,486-1,162

Loan-loss reserves

1,204

963

1,368

0

Reserves for pricefluctuations

62

0

3,021
5,316

-245
-467

Total liabilities
Foundation funds

27,694
100

962
0

1,780

-451

12

0

Loans receivable
General loans

9,304
8,613

-40
-40

-2,098-2,112-2,236-2,236

Real estate &movablesTotal assets

1,953

0

Legally mandated
reserves
Surplus
Unappropriatedsurplus for the year
Total net assets-1,986-2,23625,708-1,27425,708-1,274After
revisionAfterrevision

Total liabilities and net
assets(Data) compiled from materials used for Toho Mutual Life’s meeting of policyholders’representatives in 1999

-52-

Table 1-7: Statement of income of Toho Mutual Life

Operating income
Income from insurance and reinsurance premiums
Investment income
Interest, dividends and other income
Profit on sales of securities
Other income
Reversal of policy reserves
Operating expenses
Insurance claims and other payments
Surrender benefits
Provision for policy reserves
Investment expenses
Loss on sales of securities
Loss on revaluation of securities
Operating costs
Operating profit
Extraordinary gains
Gains on disposal of real estate, movables and others
Extraordinary losses
Losses on disposal of real estate, movables, and others
Net surplus before taxes for the year
Net surplus for the year
Unappropriated net surplus for the year

100 millions of yen
March 1995
12,298
8,136
2,043
1,826
107
2,118
2,099
13,97812,746
9,826
10,208
4,884
3,493
1,775
35
1,148
1,361
577
307
463
932
1,107
1,033
-198
-449
615
671
615
620
73
29
18
26
345
194
233
134
234
135

March 1994
13,781
10,264
3,360
1,929
1,300
157

March 1994
March 1995
Operating profit
-198
-449
Profit on money trust
129
46
Profit on sales of securities
1,300
107
Loss on sales of securities
577
307
Loss on revaluation of securities
463
932
Foreign exchange loss
15
40
Provision for loan-loss reserves
110
Provision for contingency reserves
23-177
Revised operating profit-538
501(Data) compiled from materials used for Toho Mutual Life’s business results announcement-53-

<Kyoei Life>Let us look at the case of Kyoei Life next. The insurer had a negative net worth of¥185.9 billion at the time of its bankruptcy in October 2000 (an appraisal of property
proved that the firm’s losses was ¥293.8 billion). It ended up with a huge negative net
worth in just little more than six months from the end of March 2000 (when its assets
exceeded its liabilities by roughly ¥80 billion), probably due to expanding valuation
losses on securities holdings and costs for bad-loan disposals as well as the burden ofnegative spreads.
Kyoei Life was already saddled with ¥129.6 billion worth of latent losses on securities
holdings as of the end of March 2000, according to the firm’s disclosure materials (forfiscal 1999) released just before its business failure. Unlike Toho Mutual Life, which
disclosed information on only a limited number of securities, 99.8% of Kyoei Life’s
securities holdings were subject to disclosure. In fiscal 1997, the year when theregulatory authorities started allowing insurers to use the book value method, the firm’s
latent losses on securities holdings exceeded ¥100 billion for the first time ever. The
increase in latent losses is largely attributed to falling stock prices, a rise in acquisition
costs of stocks after gains on sales were posted and a failure in investment in foreign
securities. Latent losses appear to have expanded further following sagging stock
prices in fiscal 2000.
With respect to loans, Kyoei Life disclosed the breakdown of its risk management loans
and the classification of borrowers of such loans by type of business, and the amount ofclassified loans. The firm’s risk management loans accounted for merely 3.6% of its
general loans, but classified loans reached 13% of general loans, with loans inclassification II (assets requiring appropriate risk management on an individual basis)reaching about ¥200 billion. The then Financial Supervisory Agency conducted around of inspections to some midsize life insurers in the previous year. Therefore, data
disclosed by the life insurer appeared to be trustworthy because they were not just theresults of self-assessment.
As a result of latent losses on securities holdings and bad-loan disposals, the solvency
margin ratio of Kyoei Life went down to 210% at the end of March 2000. However,it’s questionable whether these data alone were enough to determine that the firm’s
financial state was so bad that it would go under in six months.

-54-

Kyoei Life’s earnings were as unclear as Toho Mutual Life’s. At that time, it was
struggling with huge negative spreads and depending on gains on sales of assets for the
portion that was not covered by its expense profit and mortality profit. However,looking at the firm’s revised operating profits, the figures calculated by excluding profit
on sales of securities and other temporary profit and loss from operating profit, inchronological order, I couldn’t obtain information implying such financial crisis. For
example, the figures extremely differed by year with a profit of ¥34 billion for fiscal
1998 and a loss of ¥36.5 billion for fiscal 1999. The insurer conducted financial
reinsurance transactions and posted ¥40 billion in reinsurance commissions received infiscal 1998, which may have inflated the revised figure. The result shows, however,the limits of the revised operating profit.
Table 1-8: Balance Sheet of Kyoei Life
As of October 23, 2000before the appraisal of property
Difference fromthe amount asof the end of
March
Cash & deposits
835
535
3,350
3,860

-4,212
3,160

Policy reserves andother reserves
Policy reserves
Loans payable

17,457-2,146

12,391-1,380

2,110
1,577
1,379

-855
10
78

Loans receivable
General loans

13,653
13,072-2,139-2,080Real estate & movables

1,445

-18

-198
40,848-52-5,252

Call loans
Monetary assets held in
trustsInvestments insecurities
Public and corporate
bonds
stocksForeign securities
OthersLoan-loss reserves
Total assets

100 millions of yen
Difference fromthe amount asof the end ofMarch
41,344-2,771
40,232455-2,7070

Retirement reserves

158

-15

Reserves for pricefluctuations
Total liabilities
Foundation funds
Legally mandated
reserves
Surplus
Unappropriatedsurplus for the year
Net unrealized gain on
available-for-salesecurities
Total net assets
Total liabilities and net
assets0042,707576
4-2,59002-1,541-1,647-1,766-1,778-897-897-1,85940,848-2,661-5,252(Data) compiled by the author from the rehabilitation plan-55-

Table 1-9: Statement of income of Kyoei Life
March 1999
11,777
7,265
1,981
1,348
428
2,531
2,452
11,567
9,320
2,349
25
954
538
31
1,149
210
100
100
27
12
117
41
180

Operating income
Income from insurance and reinsurance premiums
Investment income
Interest, dividends and other income
Profit on sales of securities
Other income
Reversal of policy reserves
Operating expenses
Insurance claims and other payments
Surrender benefits
Provision for policy reserves
Investment expenses
Loss on sales of securities
Loss on revaluation of securities
Operating costs
Operating profit
Extraordinary gains
Gains on disposal of real estate, movables and others
Extraordinary losses
Losses on disposal of real estate, movables and others
Net profit before taxes for the year
Net profit for the year
Unappropriated net profit for the year

March 1999
Operating profit
210
Profit on money trust
26
Profit on sales of securities
428
Loss on sales of securities
538
Loss on revaluation of securities
31
Foreign exchange loss
-56
Provision for loan-loss reserves
112
Provision for contingency reserves-42
Revised operating profit
340(Data) compiled from materials used for Kyoei Life’s business results announcement

100 millions of yen
March 2000
12,354
6,268
2,111
1,056
797
3,975
3,918
12,311
9,731
2,846
11
1,366
927
13
1,080
43
79
2
14
13
-2
-9
131

March 2000
43
54
797
927
13
-134
91
-454
-365

(3) Why did life insurers’ information disclosure system fail to function as it should?
We examined the operations of Toho Mutual Life and Kyoei Life, using information
disclosed by the two firms just before they collapsed. While experts may understandthat the insurers had barely been running their businesses if they make close analysis, we
couldn’t tell that the two firms had fallen into (or had nearly fallen into) negative net
worth. Thus, it may have been almost impossible for general consumers unfamiliar
with life insurance management to grasp, from disclosed information, how theirbusinesses were going.
The life insurance industry is not the only one providing inadequate disclosure.
Judging from information actually disclosed, however, factors unique to life insurers
appear to have played a significant role.
Such factors include thedifficult-to-understand financial statements of life insurers and disclosure that does not-56-reflect operational characteristics (in the first place, the insurance accounting does not
fully show the operational characteristics of the industry).
Life insurers’ disclosure has focused on asset-related information. To be sure, if theirpredicament was caused by the bad-loan problem, insurers must focus on disclosure ofasset components. The deterioration of asset components is just part of their problems,though. They, nevertheless, have disclosed little information that are deemed to beeffective for proper understanding of underlying problems, such as “if they have beenable to cover their negative spreads with insurance income and expenditure such as
expense profit or mortality profit” and “if they will be able to continue covering their
negative spreads with insurance income and expenditure in future even though thenumber of insurance contracts drops and historically low interest rates continue.”
Besides, in the first place, few people used information disclosed. Since the insurance
business deteriorated in the 1990s, main analysts of the industry had been limited tomass media, insurance critics and some insurance scholars. Some books and articles in
economic magazines written based on misinterpretation were found often times, andthey just revealed authors’ lack of basic knowledge about insurance management.
Such articles say, for example, “An insurer is in financial crisis if the figure obtained bysubtracting payments of insurance benefits, pension benefits, surrender benefits andothers from premium income is below zero,” while others propose to assess insurers’“durable years” by comparing the cumulative amount of disclosed negative spreads withthe broadly defined capital base (the amount of capital base to which unrealized gain orloss on assets is added).
The former doesn’t understand the relationship among premium income, provision forpolicy reserves, insurance claims and other payments, and reversal of policy reserves on
the statement of income at all. The latter’s proposal is also wrong as the amount ofnegative spread recorded in each accounting period is part of periodic profit and loss
and therefore is not a cumulative figure.
A book published recently also denies solvency margin ratios and rating, proposing toassess the financial soundness of life insurers with an index called “the ratio of set-aside
policy reserves.” It insists that “a company including (setting aside?) only a small
amount of their insurance income as policy reserves is risky.” As the author of the-57-

book says, life insurers are certainly obligated to set aside part of their premium income
to prepare for future insurance payouts. “Provision for policy reserves” on thestatement of income is the figure obtained by offsetting provision with reversal,
however, and “the amount of provision” tends to be low if an insurer pays insurance
benefits for a large number of savings-base products. With that said, the author’s
statement “Insurers must be facing severe financial constraints because they have usedfunds to be put aside despite the law requiring them to do so,” doesn’t explain thesituation accurately.
In no other industries, such misunderstanding on basic components of operations has
continued for years and kept a certain power of influence. The authors of these books
should be criticized for their lack of study, but such misunderstanding may also be partof the evidence that adequate disclosure has not been provided.
(4) Role of rating
Next, I would like to talk about credit rating (referred to as “rating” hereafter).
Rating is the assessment of the future claims-paying ability and financial power of eachfirm by a rating agency, or a group of experts in corporate analysis, using signs such as
A and B. As a complement to disclosure, it is playing the role of maintaining thesoundness of life insurance management via market discipline.
As we have seen by now, it is difficult for general policyholders to grasp, on their own,
how their life insurers are carrying out operations, and an analysis requires costs. The
solvency margin ratio can be used for reference, but as I said earlier, companies whosesolvency margin exceeded the 200% line triggering prompt corrective action went under
one after another, undermining the reliability of the index. Moreover, the solvency
margin ratio only shows the cross section of the financial condition of an insurer at aparticular point of time in the past and does not necessarily predict the firm’s futurefinancial condition. For example, suppose that Company A and Company B happen tohave the same solvency margin ratios at present. If Company A cannot cover its losses
caused by negative spreads with other profits and is eating up its claims-paying capacity
at every accounting period, while Company B is generating a stable profit at every
period due to a relatively small burden of negative spreads, a huge gap must occur in thefinancial soundness of the two firms in a few years.

-58-Meanwhile, because rating shows life insurers’ capacity to meet their insurance
commitments with simple letters, it is easy to understand and allows a cross comparison
among insurers. If you want to know just letter designations, it is available for free on
websites of rating agencies or through other means. Rating is not just simplification of
disclosed information, but an outlook on what an insurer will be like in the future basedon analysis of undisclosed information offered by the company requesting rating or
meetings with the insurer’s management. In other words, disclosure and solvency
margin ratios show facts in the past, while rating makes a projection of an insurer’s
future claims-paying ability and also holds confidential information.
There is a problem on how to judge the quality or reliability of rating, though. Rating
is an opinion of a rating agency regarding the certainty of a life insurer’s capacity tomeet its commitments, and whether the letter designation is right or not can only be
confirmed in the far future.
Major rating agencies doing their businesses in Japan are two Japanese firms including
Rating and Investment Information, Inc. (R&I) and Japan Credit Rating Agency, Ltd.
(JCR) and three foreign-affiliated firms including Moody’s Investors Service, Inc.,
Standard & Poor’s Financial Services LLC (S&P) and Fitch Ratings Ltd. Of theseagencies, two American firms Moody’s and S&P boast histories of more than 100 years
and dominate the U.S. and global markets. Rating agencies that have not been wellreceived by the market should be shuffled out, therefore the long histories of the two
firms may be a piece of powerful evidence showing the high quality and reliability of
their rating services.
Japan only has a very short history of rating of life insurers, however. The rating issaid to have begun in the 1980s, but it was not until 1996, when S&P released theratings of major eight life insurers (of that time), that Japanese institutions started thefull-fledged service of assigning ratings to Japanese life insurers and such rating began
receiving public attention as credit information. In other words, when it comes torating of Japanese life insurance companies, both Japanese and U.S. rating agencies
practically have experience of only 10 years or so.
Many rating agencies release their annual “default studies”, showing the relationshipbetween rating and default (legal bankruptcy or changes in conditions of debt
obligations). These studies indicate that a correlation exists between rating and default-59-rate with a company with a higher rating showing a lower default rate. These reports,
however, are based on the statistic of all companies around the world or “all issuers
incorporated in Japan that have a record of acquiring a rating from R&I”.
Unfortunately, no rating agencies release default studies that focus solely on Japaneselife insurance companies.
The use of rating information by administrative authorities can also be a measure ofassessing the quality and reliability of ratings. For example, the Financial Services
Agency recognizes R&I, JCR, Moody’s, S&P and Fitch as “external credit assessment
institutions (ECAI)” in Basel II. The five agencies are also designated as “designatedrating institutions” under the “Cabinet Office Ordinance concerning Disclosure of
Corporate Affairs and others,” and their ratings can be used in securities registration
statements and disclosure materials, including prospectuses. These things reflect the
government’s efforts to bring rating in their financial regulations, not administrative
regulations on such rating firms and can be evidence showing the credibility of rating
agencies.
(5) Failed life insurers and rating
In the U.S., the history of rating of life insurance companies extends back 100 years, andrating agencies including A.M. Best Company, Inc., a rating firm specializing in theinsurance industry, are releasing their default studies. Firms other than A.M. Best
don’t have much experience in the rating of insurance companies, though, as they only
entered the insurance field in the 1980s and thereafter.
Besides, when major and second-tier life insurance companies collapsed or fell into amanagement crisis in the early 1990s, U.S. rating agencies allegedly failed to find themismatch between assets and liabilities of those insurers until immediately before suchcrisis was revealed. For example, Executive Life, a second –tier life insurer that went
under in April 1991, was rated highly by A.M. Best, S&P, Moody’s and other major
rating agencies until 1990. Rating agencies also drastically downgraded their ratings
for Mutual Benefit just several months before the life insurer collapsed in July 1991.
In the failure of Japanese insurers, I found no case involving companies that had
maintained high ratings just before their collapse. In bond rating, BB+ (double B plus)
or lower is generally considered as a “speculative grade.” A total of five life insurers(Daihyaku, Taisho, Chiyoda, Kyoei and Tokyo) have failed since 2000. Ratings to-60-

these insurers by four rating agencies had remained at speculative grades, with some
exceptions, since April 1998 when R&I was launched.

Table 1-10

Changes in ratings of failed life insurers (R&I)

NissanToho
Daihyaku
TaishoChiyodaKyoei
Tokyo
199704 Failure (At this point, JBRI was not assigning credit ratings to life insurers)
10
BBop
BBop
BBBBB+
11
BB12
BBB9803
BBop
04
05
Bop
09
B+
Bop
BB
BB
BB+
9906
Failure
09
B+
B+
BB
11
CCC+op200005B
06
Failure08
Failure09
BBB10
FailureFailure0102
B03
Failure(Note)
Ratings assigned for March 1998 and before were given by JBRI. JBRI and NIS
merged into R&I in April 1998. “op” means voluntary rating.
(Source) Prepared by the author.

Iemori and Asai (2004) say, “We need to reserve our judgment on JCR, but theremaining three (R&I, S&P and Moody’s: the author’s annotation) appear to haveavoided mistakenly judging failed insurance companies as safe,” thus evaluating theserating agencies favorably. Meanwhile, some critics are scathing them. Kubo (2005)
says, “Many of the failed companies were rated B in the previous fiscal year. Only oneof the seven companies saw their ratings downgraded to C, the level of strong warning,
while the rating of one insurer was downgraded from BB to B just a month before it
went bankrupt, and even the rating cut may have not been enough.”Indeed, excessively conservative rating may allow rating agencies to ward off criticism,
but could only bring confusion instead. For example, when Moody’s downgraded its
ratings on major life insurers by two or three notches at once in March 2002, the thenChairman of the Life Insurance Association of Japan Ryotaro Kaneko (also thenPresident of Meiji Life Insurance Co.) stated, “I was surprised at such huge-61-downgrades” and “I must say that a three-notch downgrade is quite significant, but
Moody’s has failed to provide an adequate explanation despite the significance of its
announcement.” The ratings of eight major life insurers were upgraded by one or two
notches in May 2005, three years after the downgrades, and four companies also saw
their ratings upgraded by one or two notches in August 2006. Thus, Moody’s ended upchanging its ratings on life insurers again in just a short period of time. The relatively
small number of life insurers makes them less suitable for default studies, but more time
may be needed for the market to appreciate the quality and reliability of rating.
I have to add, in terms of a complement to disclosure, information sent by rating
agencies is not limited to rating letters. For example, R&I released a comment on
Kyoei Life and Tokyo Life on September 9, 1999, saying, “Their basic profitability
remains poor, forcing them to rely on profits on sales of assets,” thus offering morein-depth information suggesting that the two insurers had failed to cover their negative
spreads with other profits.
It is safe to say, at least, that the reliability of rating has increased in relative toadministrative authorities and solvency margin ratios. Every time a failed life insurer
was revealed, the authorities repeatedly announced in such a way as the Imperial
General Headquarters during World War II that “no company was in danger,” thus,
along with solvency margin ratios, losing public confidence.

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Chapter 2
Where did things go wrong? – Reviewing instances of failure
individually
1. Study of individual instances of failure(1) What was happening inside failed life insurers?
In chapter 1 we examined the relationship between business failure and external factors
by reviewing specific instances. Granted that external factors made a considerable
impact on the management of life insurers, we felt that they alone did no more thansuperficially explain the failure of life insurers.
Now let us delve into the internal workings of failed life insurers and examine the role
played by internal factors in the operation of each company. Specifically, we will
review each case of failure to find out about (1) behavior that was a direct cause of
failure, (2) reason the insurer behaved that way, and (3) the manager of the time and thecompany’s checking and monitoring functions and actual state of risk management
system, by drawing on each company’s disclosure materials and statistics, reports onnewspaper and business magazines of that time, inspection reports on failed life insurers
which were created by the Ministry of Finance and obtained by us through filing
requests for disclosure, and oral history data collected through interviews with theparties concerned under the first large-scale project of its kind in Japan. In this way wehope to unravel what really happened inside the failed insurance companies.
When we say “the party concerned” or use a similar phrase, we refer to someone who
once served as the company’s head or some other key person or someone who was close
to a key person, or an employee who was in a position to know the real situation of thecompany.
The objects of our study and analysis are six out of the seven life insurance companies
that failed during the crisis and do not include Taisho Life, a small insurer. We studied
the case of Taisho Life and interviewed its people, just as in the case of the six midsize
firms, but decided to present findings about it only as reference information, excluding
it from the scope of direct analysis in this book. This is because Taisho Life’s case isquite different from other cases in that the company fell victim to fraud after falling intoa crisis and also because we failed to gather sufficient information about the company.

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Table 2-1

Failure of Life Insurers

1995

Insurance Business Law revised (solvency margin standards and the disclosure system
introduced).
1996 U.S.-Japan insurance agreement reached (non-life insurance premium rates
deregulated).
1997 Nissan Mutual Life ordered to suspend business.
1998 GE Edison Life established (taking over business rights from Toho Mutual Life).
Insurers allowed to evaluate shareholdings on the cost method.
Life Insurance Policyholders Protection Corporation of Japan established.
1999 Early correction measures introduced.
Manulife takes over business rights from Daihyaku Mutual Life.
Daiichi Mutual Fire & Marine and Kyoei Life conclude a business and capital tie-up.
Toho Mutual Life ordered to suspend business.
2000 Daiichi Mutual Fire & Marine ordered to suspend business.
Daihyaku Mutual Life ordered to suspend business.
Claremont Capital underwrites shares issued by Taisho Life.
Insurance Business Law revised (rehabilitation procedures introduced).
Taisho Life ordered to suspend business.
Taisei Fire & Marine announces merger with Yasuda Fire & Marine and Nissan Fire &Marine.
Chiyoda Mutual Life applies for protection under the Act on Special Treatment ofCorporate Rehabilitation Proceedings and Other Insolvency Proceedings of Financial
Institutions.
Kyoei Life applies for protection under the Act on Special Treatment of Corporate
Rehabilitation Proceedings and Other Insolvency Proceedings of Financial Institutions.
2001 Tokyo Life applies for protection under the Act on Special Treatment of Corporate
Rehabilitation Proceedings and Other Insolvency Proceedings of Financial Institutions.
Taisei Fire applies for protection under the Act on Special Treatment of Corporate
Rehabilitation Proceedings and Other Insolvency Proceedings of Financial Institutions.
2003 Insurance Business Law revised (change of contract terms made possible).
2005 Insurance Business Law revised (safety net reviewed).
(The above table was compiled by the author.)(2) Oral history
Oral history, a method we used for our analysis, is the process of making a record ofwhat individuals and organizations went through by interviewing the people concernedand handing down the record to later generations. It has been established in recent
years as a method for study in the field of history and political science. Mikuriya(2002) described it as “an oral record of public figures by professionals for the generalpublic.” Oral history is very useful when published materials are scarce or when astatistical approach is difficult to adopt, such as this case.
A drawback of oral history is that testimony given by the parties concerned may notalways be credible. It is possible that an account given by the interviewee may be
twisted in his favor or the interviewee’s memories may be blurred. To remedy thisproblem, we interviewed a number of persons involved and cross-checked their-64-accounts wherever possible to ensure the reliability of information they gave. To makethings easier for the interviewees, we prepared a chronological table and the list of the
management team members and their profiles. Of course, the author’s experience as arating analyst (which does not mean undisclosed information) was put to full use in theinterviewing process.
Table 2-2
1.

2.

Key questions asked in interviews with the parties concerned

Relationship between your business model and failure(1)
Features of your business model
How was your management style different from that of other companies?
(2)
Managers’ behavior and judgment that brought about a crisis
What marked a turning point, and under what circumstances?
(sales policy, asset management, management organization, etc.)(3)Managers’ behavior and judgment when they were in a crisis
At what point of time did you realize you were in a crisis?
What kind of action did you take (or should you have taken) when you realized you were in a crisis?
What measures did you actually take?
Business monitoring and risk management system
With regard to 1-(2), 1-(3) above,
What system was in place?
Where did the problem lie?
Was there a system for restraining the top management?
- What role was played by regulatory authorities, policyholders’ representatives, affiliated financial
institutions, etc.?

At first we tried to arrange interviews on the understanding that what was said during
the interview would be disclosed, because the interview record itself was valuable
material for study. However, we found that only a fraction of the people concerned
would agree to give an interview under such terms, so we changed our tactics anddecided not to disclose the interview record or the names of the interviewees. We also
made sure that the interviewees would not be identified from the published material.
We decided to use such terms as “a member of the head office staff (including
executives)” and “an actuary” when quoting from the interview record. We decided todisclose the real names of only those who once headed the company in question. A
total of 33 people from failed life insurance companies alone agreed to give an interview
for our research (from January 2006 to August 2007).
Just for your information, Mikuriya (2002) has the following to say:“Today, everybody avoids talking about the financial crisis of the 1990s as if to say it isa thing of past that should better be forgotten. This may be because the matter is still
pending in court. It is imperative to analyze the situation to get clear answers toquestions such as how banks, brokerages and other companies acted in response to thecrisis and why they failed to respond properly to the crisis…. Oral history may help us
answer these questions. One of the academic challenges today is to unravel not just-65-human history but also the history of an organization.”
2. Rapid expansion of business scale was fatal – Nissan Mutual Life Insurance(1) Direct cause of failure
Nissan Mutual Life went under in April 1997. The biggest factor in the behavior of
Nissan managers that brought down the company was that they collected too large a
volume of individual annuity insurance contracts with a high assumed interest rate incooperation with financial institutions in the latter half of the 1980s. As the external
environment deteriorated, the company’s inappropriate measures taken in preparation
for term-end settlement of accounts made things worse.
Nissan Mutual Life was heavily dependent on Hitachi and Nissan groups because of its
historical background. Up until the first half of the 1980s, it had difficulty increasing
the number of individual insurance contracts. The company’s management of that time
tried to switch to an aggressive policy ahead of the 80th anniversary of its founding(1989), but their efforts to expand business by mobilizing the sales staff as in the case oflarger rivals did not go very far. Sometime after Nissan began looking for a new sales
channel, the frontline staff suggested a “premium loan,” an insurance product combinedwith a bank loan. The management jumped at the idea. Their primary concern was
how to expand the scale of operation and eliminate the loss from the difference between
actual and expected expenses. Nissan managers of the time were hardly aware of theburden of paying high assumed interest rate and the risk of becoming dependent on salesof specific products.
Nissan managers gave too much weight to single-premium individual annuity andquickly attracted a large amount of funds that guaranteed high interest rates topolicyholders. They invested these funds primarily in domestic stocks and foreign
securities which were susceptible to wide price fluctuations, and suffered severely fromswings in the stock and exchange markets. When settling accounts for fiscal 1991,
Nissan Mutual Life, burdened by a large appraisal loss on securities, broke into its
policy reserve and posted profits on sale of real estate. From fiscal 1993 onwards, thecompany failed to earn three types of profit because of the negative spread (that is, lostthe ability to earn core profit). If the unrealized losses on assets were taken into
account, the company was in effect in a state of negative net worth. Worse, in
preparation for accounts settlement, it rushed to invest in Nikkei Average-linked bonds
and other structured bonds and derivatives. The market downturn that came on-66-subsequently exacerbated the company finances. In and after fiscal 1992, the company
cut costs but this made little difference.
As we have seen, Nissan Mutual Life was in effect bankrupt in fiscal 1994 and had
broken into its policy reserve. It was not officially bankrupt until 1997 because thebalance sheet showed no excess of liabilities over assets and the Ministry of Finance
was not in a hurry to wind up the company. In those days, the safety net for
bankruptcy was not yet in place and the Ministry of Finance was under fire for the jusen(Note from translator: government housing loan corporation) problem.
Table 2-3
1909
1940
1947
1954
1967
1976
1985
1987
1988
1989
1992
1993
1994
1995
1997

Nissan Mutual Life’s brief history

Starts business as Taihei Life Insurance Co.
Comes under the wing of Nissan Group (changes name to Nissan Mutual Life).
Separates new and old accounts and makes a fresh start under the name of Nisshin
Mutual Life Insurance Co.
Changes name to Nissan Mutual Life (accepts capital and executives from seven
Nissan Group companies in the following year).
Masao Fujimoto (from Nippon Life) becomes president.
Yasunori Yazaki becomes president.
Medium-term management plan “Powerful 80” launched. Time deposit with cancer
insurance put on sale.
Sales of individual annuity with a bank-affiliated loan started. Ichirozaemon Sakamoto
becomes president.
Attains ¥10 trillion in total amount of policies in force.
Total assets surpass ¥1 trillion (up 90% over the previous term).
Current profit drops sharply to ¥900 million in fiscal 1991 (1/30 of the previous year’slevel).
Total amount of individual annuity policies in force begins to decline.
Practically in a state of negative net worth, with ¥96.1 billion liabilities in excess ofassets, in fiscal 1993 (undisclosed). Hiroshi Yonemoto becomes president.
Current loss in fiscal 1994. Accepts executive from Nissan Fire & Marine.
Ordered to suspend business.

(2) Launch of annuity insurance loan
Nissan Mutual Life had close ties with the Hitachi Nissan group. “Nissan Mutual Life
did business by selling group insurance to client companies and individual insurance totheir officers and employees. Most of its individual insurance contracts were madefrom the Hitachi Nissan group,” says a head office staffer of that time. The Insurance
Statistics shows that a greater weight was given to group insurance at Nissan MutualLife than at other companies and that the total amount of group insurance in force waslarger than that of individual insurance unlike in the case of most other insurers. (The
only companies that were like Nissan Mutual Life in this respect were Nippon Dantai
Life and Tokyo Life). “About 70% of our group insurance contracts came from the
Hitachi Nissan group,” says the staffer. Up until the latter half of the 1980s, the total-67-

amount of policies in force was slow to grow. While the total amount of individual
insurance policies in force grew at an annual rate of 8% in the whole industry in the firsthalf of the 1980s, that of Nissan Mutual Life grew at less than 5% a year. The numberof contracts in force was leveling off at above 600,000.
To break out of this situation, the company launched a medium-term five-year
management plan called “Powerful 80” in April 1985 under the leadership of President
Yasunori Yazaki and professed to do business aggressively with an eye on the 80th
anniversary of its founding. Under this plan, the company gave top priority to
expanding its sales force and strived to develop new sales channels, such as tie-ups withfinancial institutions to sell products. After the Ministry of Finance authorized insurers
to sell products combined with a bank deposit in March 1985, Nissan Mutual Life
developed and marketed such products as “time deposit with cancer insurance” and“time deposit with medical insurance,” but without much success.
In 1986, the company developed, jointly with financial institutions, a system for paying
the single premium (premiums for all terms paid in advance) with a loan. The first
product on this system was the “nursing insurance loan.” In 1987, this product wasincorporated into individual annuity insurance and put on the market as an “annuity
insurance loan.” As this product paid a high yield and was greatly beneficial tofinancial institutions, it drew the interest of banks across the country. Nissan MutualLife ended up concluding a business tie-up with more than 160 banks for sale of annuity
insurance loan.
Take, for example, “Hamashin annuity insurance loan,” a product of Hamamatsu
Shinkin Bank touted in The Nikkei’s local economic page (Shizuoka) on April 22, 1988.
The product had an annual yield of 7.14%, with a maximum loan amount of ¥10 million
and a loan period of at least one year and up to 10 years. The customer used this loan
to pay a single premium to Nissan Mutual Life and repaid the loan to Hamamatsu
Shinkin. “Because the premium is paid in a lump sum in advance and a discount ismade on the advance payment, the customer is to pay a lower premium and receive agreater amount of annuity than in the case of monthly payment. This product is
attractive in that the sum of the discount on advance payment and the extra annuity
amount is greater than the loan interest” (quoted from the Nikkei article).
A head office staffer of that time says that “a member of the group close to President-68-

(Ichirozaemon) Sakamoto brought up the idea of a bank-affiliated loan product.” The
product suited the needs of management personnel of the time who were looking forways to expand sales channels. “The frontline staff happened to suggest the insurance
premium loan product around that time and someone close to the president took the idea
to the president. The product was to pay an 8% interest plus a dividend to those who
paid the premium in advance,” says the staffer. Sakamoto’s predecessor Yazaki said in
an interview after his company failed, “(Midsize life insurers) cannot increase the total
amount of policies in force without using a new sales system. We thought thesuggestion a good idea and decided to adopt it on the spot and entered into negotiations
with financial institutions” (quoted from Nikkei Business dated October 13, 1997).
This product, marketed under the cooperation between Nissan Mutual Life and banks,
had explosive sales, not exactly because Sakamoto promoted it but rather because banks
were aggressively selling it. The interest on the bank-affiliated loan was 7% to 8% on
the average, and this generated a profit margin of around 4%, allowing for the funding
cost of banks of the time. Although the paid-in amount per contract was no more than
¥2 million-plus, the right of pledge was established for the insurance policy. Thismeans that banks had no risk of loan loss unless Nissan Mutual Life went bankrupt.
This was not the only thing beneficial to banks. Even though the product was actuallysold by the bank staff, banks were prohibited from directly selling insurance products
under the Law Concerning the Control of Insurance Solicitation (predecessor of thecurrent Insurance Business Law). Because of this (law), insurance agents handled theinsurer-bank affiliated products. Nissan Mutual Life paid commissions to these agents.
In many cases, there was an agreement between Nissan Mutual Life and a bank that theinsurer would deposit part of the premium at the bank for a certain period in return forthe bank’s cooperation in selling insurance products. Banks had a chance to earn a
profit margin from this kind of “cooperation deposit.” The insurer used to deposit, say,
“50% of the premium for one year,” according to the parties concerned.

-69-

Table 2-4

Changing in total assets

Nissan Mutual Life
Year-on-yearchangeFY19853,680
19.1%
FY19864,441
20.7%
FY19876,964
56.8%
FY198813,23090.0%
FY198916,27023.0%
FY199018,55514.0%
FY1991
19,443
4.8%
FY1992
20,285
4.3%
FY199321,0293.7%
FY1994
21,461
2.1%
Source: “Life Insurance Statistics”(in units of ¥100 million, %)Total for all life insurers
Year-on-yearchange538,706
17.8%
653,172
21.2%
792,684
21.4%
970,82822.5%
1,173,439
20.9%
1,316,188
12.2%
1,432,341
8.8%
1,560,111
8.9%
1,691,221
8.4%
1,779,655
5.2%(3) Was there no move to control the rapid expansion of assets?
The annuity insurance loan became a big hit and the premium income increased 2.35
times in fiscal 1987 and 2.19 times in fiscal 1988 over the respective previous years.
The total assets amounted to a little over ¥300 billion at the start of the medium-term
management plan. Five years later, at the end of fiscal 1989, the amount reached ¥1.6
trillion, far greater than the ¥600 billion target set for the later phase of the plan.
According to a survey by the Life Insurance Association of Japan, Nissan Mutual Lifeearned ¥1.4 trillion in premium income in three years from fiscal 1987, and nearly 60%of this or ¥800 billion came from individual annuity insurance contracts. Of thesecontracts, 90%, or about ¥730 billion, were contracts for single-premium products withan assumed interest rate of 5.5% to 6.0% and a period of 20 to 30 years. About ¥700
billion of these contracts bank loans. Moreover, the weight given to individual annuity
in the policy reserve was as much as 56% at Nissan Mutual Life as against the industry
average of 7%.
Wasn’t there any move to put the brakes on the rapid expansion of scale and excessive
concentration on a specific product?
A head office staffer of that time says, “In 1987 (when Sakamoto became president), ourfinance division and actuary division considered the payment of an annual 8% yield as aproblem, but they could not restrain the sales division… We had many discussions on
the advisability of expanding assets so fast. At around the time when the total assets
topped ¥1 trillion (in 1988), an actuary informally gave a warning to the management.

-70-

The warning fell on deaf ears… All the information that reached President Sakamoto
was ‘things are all right because ________’ or something like that.” In an interview
with Nikkei Business as mentioned earlier, Yazaki said, “I felt things were rather
imbalanced, but we had come too far to go back...”Table 2-5

Weight given to individual annuity in liability reserve

FY1986

FY1989NissanTotal for all life insurers

NissanTotal for all life insurers

12.3%

2.9%

55.9%

6.8%

Source:“Life Insurance Statistics”

Table 2-6

Changing amount of three types of profit

March
March
1988
1989
Expense profit-38
22
Mortality profit
104
154
Interest profit
80
78
Total
146
254
(Compiled from inspection reports)

March
1990
22
183
100
305

March
1991
-9
205
101
296

March
1992
-27
207
32
212

(in units of ¥100 million)
March
March
March
1993
1994
1995
15
13
37
208
230
242
-16
-241
-280
208
3
-2

Another factor that made it difficult to restrain the scale expansion was that thecompany showed good numerical data on the surface. Many midsize life insurers
including Nissan Mutual Life operated on a small scale and with low sales efficiency
and did not earn a premium income large enough to cover the actual costs. As a result,they suffered an “expense loss.” Wiping out this loss was a long-standing challenge
for them. With the amount of policies in force increasing dramatically in the latter halfof the 1980s, Nissan Mutual Life finally achieved an expense profit in fiscal 1988. It
enjoyed a stable interest profit and a growing mortality profit. However, the company
had to pay high assumed interest rates and took such actions as increasing cooperation
deposits at banks (a factor reducing the interest profit), realizing latent stock profits
under the money trust scheme and taking on the exchange risk in return for high interest
income. These actions resulted in a wide gap between the numerical data and theactual state of business.
In a way, banks took the initiative in selling insurance products and the insurer lost
control, as shown in a case reported by the weekly Toyo Keizai dated October 18, 1997.
When a certain regional bank was suspected of having violated the Law Concerning theControl of Insurance Solicitation in 1988, Nissan Mutual Life asked this bank to refrain-71-

from selling its products. The bank refused, and did not stop selling the insurer’s
products until the employees union raised objection and the matter became an issue inthe Diet. Other banks that had sold Nissan Mutual Life’s products under a similararrangement continued to sell them aggressively.
As the investment environment deteriorated, Nissan Mutual Life at last requested banks
to hold back on sales in fiscal 1990 and thereafter, but most of them refused to oblige.
When asked about this in an interview with Nikkei Business mentioned earlier, Yazaki
answered, “There were only two banks (who accepted our request without protest).”Sales began to decline only when the loan rate rose with the market interest rate and theaffiliated product became less attractive.
Table 2-7

Nissan Mutual Life’s asset structure
End of FY1986
4,441
100.0%
348
7.8%
138
3.1%
578
13.0%
775
17.5%
581
13.1%
37
0.8%
1,646
37.1%
223
5.0%

Total assets
Cash and deposits
Money trust
Bonds
StocksForeign securities
Other securities
Loans
Real estate andmovables
Source: “Life Insurance Statistics”(in units of ¥100 million)
End of FY1989
16,270100.0%
1,227
7.5%
1,111
6.8%
1,761
10.8%
3,501
21.5%
3,408
20.9%
71
0.4%
4,226
26.0%
587
3.6%

(4) Steps taken after the external environment worsened
When the investment environment deteriorated in the 1990s, the heavy burden of paying
guaranteed yields came to the fore. Earlier, when the company leaned toward stock
investment while its assets were expanding, it purchased stocks at high prices. These
stocks now incurred capital losses and valuation losses, making it difficult for thecompany to make a good showing when settling accounts. In fiscal 1991, the company
earned about ¥30 billion in the three types of profit while its valuation loss on securities
reached ¥90.3 billion and the current profit shrank to a thirtieth of the previous year’slevel. The value of individual annuity contracts as a percentage of the policy reserve
was above 50%. Most of such contracts had a high assumed interest rate and a highinterest rate for those who made advance payment. Even after individual annuity
products became less salable in the 1990s, the policy reserve continued to build up.
Meanwhile, latent stock profits were depleted. When settling accounts in fiscal 1991,-72-

the company cut dividends, booked a profit on sale of real estate and lowered the policy
reserve level.
The company reported an interest profit on the surface, but its interest and dividend
income was inflated by derivative-containing products designed to make a goodshowing when closing the books. The actual earning power was less than what it
appeared to be. The company record shows that “foreign securities” increased sharply
in fiscal 1991 and “other securities” grew noticeably in fiscal 1993. Part of thesesecurities were products designed to make a decent showing at the term end. “(Nissan
Mutual Life) initially earned high yields from Nikkei Average-linked bonds purchasedin the early 1990s, but their forecast of the stock market turned out wrong and theprincipal was eroded in the end… Investment in derivatives using foreign bonds
caused more losses. These were products whose yields were initially high but werereduced over time,” according to an analysis given in the weekly Economist dated June
17, 1997.
The company used the “net premium method,” the most conservative method forbuilding up a policy reserve (including a contingency fund), in fiscal 1986. However,“in fiscal 1991 we started to take measures to reduce liabilities before settling accounts.
We broke into our contingency fund, lowered the policy reserve level and cut
dividends… We initially adopted the 10-year Zillmer method, so it was as if we justreturned to the previous state. The discounts for advance payment put a heavy burden
on us, though,” says a former head office staffer.
The Nikkei Financial Daily dated March 7, 1994 carried an article titled “The plight ofthree life insurers in Shibuya (Toho Mutual, Nippon Dantai and Nissan Mutual).” It
was reported that “the three companies whose asset quality had deteriorated took alast-resort measure. They broke into the policy reserve (reserve to prepare for
insurance payouts) to make a good showing when closing the books… Nissan MutualLife’s reserve decreased so much that it fell even below the minimum reserve level the
Ministry of Finance had instructed insurers to maintain. According to a generally
agreed view, it is difficult to further relax the method of setting up a reserve from an
actuarial point of view.” Actually, the company’s reserve level was brought down
further in fiscal 1994.
What was worse, most of Nissan Mutual Life’s individual annuity products were of the-73-

type in which the premium was paid in advance. The insurer guaranteed a yield evenon the prepaid and unearned premium, but “was not conservative in setting up a policy
reserve for unearned premiums (that is, the yield guarantee was not properly reflected in
the reserve amount)” as pointed out by an officer of a major life insurer.
The Ministry of Finance, during its inspection of Nissan Mutual Life in 1991, realizedthat the company was going into deep water and ordered it to submit a profit improving
plan on several occasions in fiscal 1992 and thereafter. Nissan Mutual Life started cost
reduction in fiscal 1992. It set the goal of cutting operating expenses by 10% andclosed the New York office and reduced new hires. However, all this “did not amountto drastic restructuring,” says a former head office staffer.
Inappropriate measures taken to prepare for book closing exacerbated Nissan MutualLife’s business condition, bringing the company practically to a state of negative net
worth in fiscal 1993.
Table 2-8

Breakdown of liabilities in excess of assets at Nissan Mutual Life

Term

March 1994

March 1995

Unrealized profit/loss-961
Securities-1,218Loans-5Real estate262
Net profit/loss
0
Liabilities in excess of assets-961
Source: Yomiuri Shimbun dated April 27, 1997

-1,482-1,571-15
104
0-1,482(in units of ¥100 million)
March 1997
March 1996
(Projection)-1,314-1,328
-982
-897
-143
-136
-189
-295
0
-525
-1,314-1,853(5) Managers of that time
President Yazaki worked his way up from the sales field. His successor Sakamoto,who became president in 1987, was from the personnel field and became representative
director and vice president in 1981. Sakamoto was in charge of drawing up anddirecting the medium-term management plan from 1985. According to a head office
staffer of that time, Sakamoto “was not the autocratic type, but a group of four or fivepeople in the financial and other fields, led by Sakamoto from the personnel field, had
influence within the company… President Sakamoto was not much of a salesperson(in the company where the sales division carried a lot of weight). He publicly admitted
that ‘I cannot take on sales work.’ He was very pleased to see banks aggressively-74-

selling affiliated loan products.”
In the 1990s, the company found itself falling into difficulties. However, “thepresident didn’t take the leadership in starting efforts to reconstruct business. He justtold others to ‘do something about it’ and did not act on his own initiative… When we
received a notice from the Ministry of Finance pointing out our problem and an order totake remedial action, and informed the president about the matter, he just said ‘wecannot possibly do such a thing.’ He saw the problem not as something the company
should address but as a disaster that fell upon him… He was not like a manager but was
rather like someone merely holding an honorary post. The principle of competition did
not work in a mutual company of that time. One who stayed in this environment for
decades would end up as a manager like that,” says a former head office staffer.
President Sakamoto resigned in July 1994, and actuary Hiroshi Yonemoto took over aspresident. At this point of time, Nissan Mutual Life was practically in a state ofnegative net worth. It was not as if the new president could do something about it.
(6) Lack of ALM
In the latter half of the 1980s, Nissan Mutual Life saw a sharp increase in its fund whichguaranteed high assumed interest rates. This put a heavy burden on its asset
management. The company “overstrained itself in investment activities,” says a head
office staffer of that time. There are related newspaper and magazine interviews.
“Nissan Mutual Life doubled its total assets in one year (fiscal 1988) by selling premiumloan products and diverted the increased assets to high-yield foreign-currency deposits
during that term. However, it suffered a loss from mismanagement of exchange
forward contracts and ended up covering the loss by capital gains from stock trading,”
said the economic newspaper Nikkei dated December 23, 1989. “(After incurring loss
from exchange speculation) the company shifted the weight of asset allocation to stocks
and tripled the stock investment balance over three years from fiscal 1986. Moreover,it scrambled to buy stocks under the corporate investment fund scheme. As a result,the balance grew 4.5-fold in three years to the end of fiscal 1989,” reported the journal
Nikkei Business dated October 13, 1997.
Annuity insurance loans were enjoying growing sales at that time. The company’s
management as well as the actuarial division and the finance division were hardly awareof the interest rate risk (ALM risk). “If they had taken a severer stance on the interest-75-

rate (fluctuations), the liabilities would not have ballooned to this extent. In those days
no one realized that ‘the assumed interest rate equals the cost of liability.’ All theycared about were stock prices. It never occurred to them to reduce the assumed interest
rate earlier than other companies,” says a head office staffer of that time.
In those days the company had no system for having a future cash flow analysis made byan actuary. “To calculate the target figures for the medium-term management plan, thecompany made projections by postponing reporting expenses on the profit & loss
statement. It was assumed (too optimistically) that stock prices, interest rates andexchange rates would be unchanged while the amount of policies in force would
increase. Despite the increasing mortality profit, a review of the figures alone showedthat the company was not in good condition. Even so, the latest figures (such as three
types of profit) were good enough and there was no alternative that would keep the sales
division in check,” says a former head office staffer.
The finance division and the actuarial division were not in good terms with each other.
“The finance division made no effort to gain an accurate grasp of the liabilities (ofwhich the actuarial division was in charge). The actuarial division dared not try to getfinancial details… We didn’t hear of any fund manager going overboard, but it was
not until 1994 or so that the finance division and the actuarial division came tocooperate with each other,” says a former head office staffer.
(7) Meeting of policyholder representatives, affiliated corporate groups
Nissan Mutual Life was a mutual company. It was at a general meeting ofrepresentatives of policyholders that decisions were made on managerially importantmatters. The trouble was that such meetings had almost no checking functions.
Reporting on the meeting of policyholders’ representatives where they decided on thecompany liquidation procedure in July 1997, Mainichi Shimbun dated July 31, 1997
noted, “About 60% of representatives were people from member firms of the Hitachi
Nissan group which was close to Nissan Mutual Life. The issue was decided by theoverwhelming majority.” Obviously, a meeting of policyholders’ representatives had
become a mere formality.
When Nissan Mutual Life was practically bankrupt, its part-time directors and auditors
were from eight companies of the Hitachi and Nissan groups.. Instead of fulfilling
their role as a watchdog, these part-time officers “did not take their role seriously but-76-felt they had simply taken over an executive post that had been handed down from theirpredecessors. Frequency of their attendance at board of directors meetings was low…
There is no evidence that part-time directors or auditors were deeply involved in the
management of Nissan Mutual Life,” as reported in Nikkei Sangyo Shimbun dated June9, 1997. At the time of the company’s failure in 1997, a director from Hitachi, Ltd.
was angry because “we had little information,” according to a party concerned.
Nissan Fire & Marine was the only exception among Hitachi Nissan group firms. At
the request of Nissan Mutual Life in July 1996, it contributed a ¥1 billion fund and sent
in a former chairman and a senior managing director to support the life insurer. Nissan
Mutual Life and Nissan Fire & Marine concluded a business tie-up under which theirproducts combining life and non-life insurances were sold by Nissan Fire & Marine’s
affiliated agents. Nissan Fire & Marine was so supportive because, when it became agreenmailer’s target sometime in the past, Nissan Mutual Life came to its rescue.
The executive sent from Nissan Fire & Marine to Nissan Mutual Life as its director andadvisor sought the support of the Hitachi Nissan group and “worked hard to carrythrough reforms including the introduction of revenue analysis for each branch. He
was the first manager who was really like a manager. Nissan Mutual Life had not had
this kind of manager before,” says a former head office staffer. All the same, thesituation was already very serious. Nissan Mutual Life sought financial support frommajor companies of the Hitachi Nissan group from the summer of 1996 onwards, but all
it got was Nissan Fire & Marine’s support. It never received any support from othercompanies. Nissan Mutual Life collapsed before achieving the results of reform.
In an interview with Nikkei Business mentioned earlier, Yazaki admitted, “We wereself-indulgent and thought that the Hitachi Nissan group would come to our rescue inthe end.” Actually, the group companies gave Nissan Mutual Life the cold shoulder.
(8) Ministry of Finance“Before concluding tie-ups (Note from translator: tie-ups to sell annuity insurance loan
products), Nissan Mutual Life informed the Insurance Division 1, the Insurance
Department, the Ministry of Finance about its desire to handle a bank-affiliated product(insurance premium loan). The Ministry of Finance answered that they would ‘decide
whether to approve the product or not after making sure that the product will notrecommended as a zaitech investment product and its sales will not cause trouble with-77-

consumers’,” reported by the weekly Toyo Keizai dated November 8, 1997. The
company put its product on the market with the approval by the Ministry of Finance.
As the affiliated product was actually sold as a bank’s financial product and became ahit, the Ministry of Finance requested the life insurance industry in 1988 to “refrainfrom tying up with banks to sell zaitech products like insurance premium loans. Sucha product defeats the real purpose of insurance,” but this request was largely ignored.
During its inspection in 1991, the Ministry of Finance began to realize that Nissan
Mutual Life was sinking into deep water, as mentioned earlier. Subsequently it
ordered the company to improve earnings. The inspection by the Ministry of Financeof that time “primarily consisted of assessment of assets on the financial side. On therevenue side, the inspectors looked only at three types of profit on a single-year basis,”according to the parties concerned. It is most likely that the Ministry of Finance wasunaware of Nissan’s interest rate risk (the loss will increase if the interest rate drops).
The Ministry of Finance may not have been aware, either, of the tactics used by thecompany to keep loss from appearing on the books.
Given that life insurers needed the approval by the Ministry of Finance to cut down thepolicy reserve level or to pay policyholder dividends, the Ministry of Finance shouldhave known that Nissan Mutual Life’s business was deteriorating year by year. From
Nissan Mutual Life’s behavior and witness accounts of the parties concerned, however,it seems unlikely that regulators of the first half of the 1990s strongly urged thecompany to improve its operations.
The company fell practically into the state of negative net worth in fiscal 1993. It did
not collapse until three years later. During this period the Ministry of Finance did notstart the liquidation procedure. Under the Insurance Business Law effective at thattime, the Ministry of Finance might have taken drastic action such as forcible transfer ofthe whole business. However, it dared not do so in the absence of established rules forclosure of the insurance business or a safety net.
Nissan Mutual Life’s liabilities in excess of assets increased during this period. The¥200 billion fund put up by the Life Insurance Policyholders Protection Corporation ofJapan, a newly established safety net, was not enough to cover the insurer’s debt.
Policyholders had to bear the remaining burden of debt. In contrast to bank deposits
which were fully protected at that time, policyholders’ assets were only partially-78-

protected. This exacerbated consumers’ anxiety about life insurers with low credit
standing.
3. Inappropriate management by top executives—Toho Mutual Life Insurance(1) Direct cause of failure
Toho Mutual Life collapsed in June 1999. The collapse was triggered by an adverse
opinion issued on the firm’s fiscal 1998 financial statements by Deloitte Touche
Tohmatsu LLC. Asked by the auditing firm to additionally book latent losses on
securities holdings, bad loans, and others worth a total of roughly ¥231.3 billion, theinsurer was found to be falling into negative net worth of about 200 billion if theyrecorded the entire amount.
Toho Mutual Life entered into a business partnership with U.S. major nonbank GE
Capital in the year before receiving the adverse opinion. By taking advantage of“goodwill” earned through the transfer of its marketing force and other revenue worth
up to ¥120 billion, the insurer was supposed to “have recovered its financial strengthand built up substantial internal reserves (according to the insurer’s disclosure materials
for fiscal 1998),” but it failed to survive even the first fiscal year when it formed analliance with GE.
The management crisis of Toho Mutual Life is largely attributed to volume sales ofhigh-return asset-based products in the late 1980s and massive non-performing assets
following the bursting of the bubble, resulting from growing dependence on realestate-related investments and loans and other high-risk high-return investments.
Besides, as a distinguishing factor for Toho Mutual Life, we may have to point out the
inappropriate way of management taken by the top executives and people close to them.
With its top executives clearly pursuing an expansion strategy in the late 1980s, Toho
Mutual Life accelerated its efforts to sell asset-based (savings-based) products. It
aggressively sold high-yield mutual aid pensions, single-premium endowment insurance
which was a symbolic product for money management technique (zaitech), loan
products offered in tie-ups with financial institutions (single-premium individual
annuities), “zaitech” insurance “kenko nenkin (health pension)” and others. As a result,its total assets as of the end of fiscal 1989 expanded by 280% from the level as of theend of 1985. The firm sold these products, touting their high yields, and the sales were-79-

based on the premise of tapping into unrealized gain on its assets.
Table 2-9: Brief History of Toho Mutual Life
1898
1909
1947
1975
1977
1978
1984
1987
1988
1990
1992
1994
1995
1996
1997
1998
1999

Established as Japan’s first “military service insurance company”.
Seizo Ota became President (Management by the Ota family began).
Restarted as New Nippon Life Insurance Co. (renamed as “Toho Mutual Life” in thefollowing year).
The head office building in Shibuya, Tokyo was completed.
Seizo (Shintaro, before renamed) Ota became President.
Started marketing whole life annuities.
Assisted failed Riccar Co.’s restructuring efforts.
Dispatched its managing director to Kaken Pharmaceutical Co. to have him assume thepresidency of the firm.
An affiliated firm of President Ota became a major shareholder of Nippon Lace Co.
Stepped up sales of “zaitech” insurance “kenko nenkin (health pension).”New online system “Toho-System 21 Plan” put into operation.
Reported an operating loss for fiscal 1993.
Reported an operating loss for two consecutive years. Ridai Sakogawa became
President. A management advisory committee was launched.
Entered into a business partnership with Mitsui Marine and Fire Insurance Co.
Started marketing “Pegasus,” insurance exclusively for healthy people.
Formed a tie-up with GE Capital and became a company only managing existing
contracts.
Received a business suspension order.
(Honorifics omitted)

The insurer increased investments in soaring stocks and a variety of structured bonds toearn yields for surging savings-based products. The firm’s assets appear to have alreadysubstantially worsened in the early 1990s, although the details were unclear due tolimited disclosure. It posted massive losses on sales of foreign securities for two
consecutive years in fiscal 1993 and 1994 when it posted operating losses.
Moreover, the insurer was saddled with massive bad loans after the bubble burst. Manyof those loans are said to have included problematic deals executed by the then president
and people close to him.

(2) Leaning toward asset-based products
Toho Mutual Life was a military service insurance company in the pre-war periods.
Military service insurance was a kind of endowment insurance and had a feature ofsavings-based products by adopting a scheme where people took out insurance when
their children were still young and received insurance benefits when the children werecalled up for military service. The insurer was weak in sales of coverage-based products
in urban areas as it developed its operations mainly through sales forces in regional rural
areas. Being unable to keep up with the rapid economic growth and the trend toward-80-population concentration in large cities in the 1970s and thereafter due to theseweaknesses, the firm struggled with slow growth in earnings and its financial standing
gradually deteriorated. Moreover, without affiliated firms, the insurer had a hard time
penetrating into the market serving the workforce of companies.
President Ota, who assumed the position in 1977, set up the “business development
department” to strengthen the firm’s sales in urban areas, which were weak comparedwith those of other industry players. Thus, he tried to rebuild the firm’s operations
targeting the market for large companies and exploit new customers such as government
offices and their neighbors, labor unions and others. Initially, Toho Mutual Life
expanded its earnings by exploiting markets not served by major players and offering abroad range of products without focusing on particular policies or markets. It graduallyturned to asset-based products, however, because such products made it easier for thefirm to exploit new customers. The sales of high-yield products raised the firm’s
fundraising costs, leading to deterioration of its revenue structure. Ota clearly set out an
expansion strategy in the late 1980s, and the firm’s goal at that time was to “exceed
Chiyoda Mutual Life (which was increasing its presence as a major life insurer) in termsof asset scale.”
Of asset-based products, “mutual aid pensions” were high-yield products created by
improving individual contribution-type corporate pensions and introduced to exploit
markets for labor unions and corporate customers. They were not designed primarily tosatisfy pension needs, but rather to meet the investment needs of customers having
surplus funds. With the number of strikes falling, labor unions of that time had surplus
strike funds to invest. “The entry into the labor union market was successful, in terms ofmarketing. Sales were based on the premise of tapping into latent stock profits to offer
high returns, however, as we made a sales pitch, saying, ‘The product will generate areturn of 8% or so’” (according to a head office staffer of that time).
Toho Mutual Life also stepped up sales of individual annuities using tie-up loans withpartner financial institutions, although not as aggressively as Nissan Mutual Life. Suchpolicies were a type of insurance requiring policyholders to make an advance premium
payment for all periods. These policies also brought a heavy burden of policy reserves tothe insurer later.

-81-

Table 2-10: Profit or loss on securities relative to surplus for the year
March
1985
528
76

Surplus for the year
Profit or loss on
securities
proportion
14.3%
Proportion (all6.2%
companies combined)(Data) “Life Insurance Statistics”

March
1986
541
234

March
1987
730
411

March
1988
715
398

(in units of ¥100 million)
March
March
March
1989
1990
1991
792
949
875
305
195
199

43.3%
11.0%

56.4%
42.7%

55.7%
32.4%

38.5%
27.4%

20.5%
22.8%

22.7%
16.5%

Around 1989, the firm started marketing “kenko nenkin (health pension),” an individual
annuity with an extremely short period of deferment (mainly three years). The productalso served as a “zaitech” product that offered high-returns by devising payment
methods. “It was initially developed as a door opener. We sold policies worth hundredsof billions of yen, though, because we could earn loading from the product. Somepolicies sold were large-lot contracts where annual premiums paid by one company
reached ¥20-30 billion” “The effective yield was 8%. We sold the product as aninvestment vehicle for surplus funds of manufactures and their affiliated companies”(both comments made by head office staffers of that time).
Toho Mutual Life at that time was desperate to eliminate expense losses and realize
dividends on par with the levels of major insurers, as well as to expand the scale of its
assets. “Management often said ‘Having strong potential, Toho can beat major insurers
if offering the same levels of dividends as those major players do’” said a head office
staffer of that time. The firm earned loading (part of insurance premiums that cover aninsurer’s costs) by expanding sales of kenko nenkin and other savings-based products
and finally realized dividends on par with the levels of major insurers in financial results
for fiscal 1989. “We were all excited that our company realized the same levels ofdividends as major insurers offered, but in order to achieve the levels, we bit off morethan we could chew. As a result, we were forced to struggle with the burden of offeringhigh-yields and the high book values of shareholdings. Moreover, our sales rather
worsened as we ended up lowering dividend payouts again in financial results for thefollowing fiscal 1990” (said a person in charge of actuarial works).
(3) Top executive’s behavior
Since the Meiji era, the Ota family had assumed the position as President of Toho
Mutual Life for generations. When Seizo Ota, who became President in 1977, joined the-82-insurer as auditor in 1953, he was promised the presidency of the company. Ota was
known as a unique manager rather than as president of a life insurer, because he showed
enthusiasm for reconstructing other businesses and called for the construction of aworldwide free trading area. However, the “Weekly Diamond,” in its issue dated
October 27, 2001, shows its view that “Ota, who would only dabble in shady deals,
happened to be President when Japan was in the midst of the bubble economy. That was
unfortunate for both employees and policyholders of Toho.” Several head office staffersof that time say, “Ota liked PR activities, but he had no management principle. We were
not allowed to run our business properly as a financial institution”, “With money andstatus in his pocket, he wanted to earn his place in history” and “He had many grandideas, but they were all expansive delusions. We wanted him to come up with viable
plans.”
There is a media report that “Ota saved a failed company, invested in speculative stocks,
had a friendship with Kyo Eichu (Heo Young Joong), the defendant of the Itoman fraudcase; he thus ran the business in an erratic way” (“Weekly Diamond” dated October 27,2001). A head office staffer of that time admits the report is true and reveals there are anumber of stories that have not been reported. “Ota apparently went out into deeper
water to recover his loss and lost his fortune. He diverted Toho Mutual Life’s funds intoa family-run enterprise to eliminate its debts and as a result, became unable todifferentiate the company’s funds from his personal funds,” according to a staff memberin the planning department.
Ota didn’t seem to be very interested in the life insurance management. A head office
staffer of that time admits, “the president said to us, ‘I don’t know much about
management, and so I just want to have the power to shuffle personnel,’” In fact, he had
a great interest in personnel issues. For example, he surrounded himself with yes-men,eliminating influential figures such as Mr. A, who supported the accounting departmentof Toho Mutual Life in the post-war period, and Mr. B, who was responsible forrebuilding Kaken Pharmaceutical (and also became a member of the managementadvisory committee set up by the insurer in 1995). Rather than his being autocratic,
people around him stopped saying anything to him. He also “tended not to appoint wise
men as board members” and “the tenure of board members were usually short”.
(4) Behavior of those close to the top executive
Under the leadership of President Ota, the life insurer is said to have been divided into a-83-

pro-president group and an ultra-conservative force (a kind of people who areunenthusiastic and only handle work at hand) with no moderate force growing. Those
who had assumed the position of branch manager largely occupied the posts of board
members. A staff member in the planning department recalls, “None of them took any
action even when we faced the possibility of falling into the red in fiscal 1993. In thefirst place, they didn’t understand the severity of the problem. Even though we said,“The Ministry of Finance will never protect us,” their stance was: ‘there will be no waythat the Ministry won’t protect such a big insurer like us.”’Regarding Ridai Sakogawa, who became the first president not coming from the Ota
family in 1995, head office staffers of that time say, “He was a nice person, but was notfamiliar with any field,” “The only thing we can appreciate about him is that he didn’t
disturb young employees.” When still serving as vice-president, Sakogawa said in aninterview, “I feel we didn’t have enough courage to speak up in front of the president.
Come to think of it, we hesitated to express our opinions probably because he had astrong presence in the company (according to Nikkei Business magazine dated August 1,
1994).
However, it can be also said that people close to Ota overly flattered the president inorder to do whatever they wanted to do. For example, a man close to President Ota
induced him to invest in speculative stocks and have a friendship with Kyo Eichu. The
man left the company in 1983 after launching the business development department that
I mentioned before, became an advisor, and then set up “Toho Kikaku,” a firm engaging
in insurance agency and management consulting operations. As a major shareholder, hebecame the president of Nippon Lace and is said to have gotten involved in the tradingof speculative stocks and the case of overissue of notes. “He and his father worked for
Toho Mutual life, achieved outstanding sales performance in Osaka and other places
and won the favor of Ota. However, he would withdraw the company’s funds forlending and gain contracts in return for such funds” (according to a head office staffer ofthat time). Even after his retirement from Toho Mutual Life, the man allegedly withdrew
funds from the insurer and carried out shady investments and loans.
Besides, an executive in charge of investment at that time took control of the financial
affairs department having the president’s trust at his back and was called “Emperor”
within the company. A staff member in the planning department says, “The power tomake final decisions was meaningless if the president said “OK,” which eventually-84-

drove us into high-risk investments.” Another head office staffer of that time says, “Theexecutive completely mixed up public and private matters so that he personally used thehotel owned by the company in Hawaii and took a round-the-world trip every year byusing the company’s money.… He is believed to have gotten involved in the president’s
own loans and investments. So, the president couldn’t get rid of the executive no matter
what he did.”(5) Steps taken after business turned worse
Even when being directly hit by a fall in stock prices in the 1990s, “We were in themood to “go ahead” by around 1992. For example, a new online system (Toho-System
21 Plan) was launched in 1992. However, some people had already realized the situation
we were facing and had been trying to take control of it,” a person in charge of actuarial
works recalls.
The insurer incurred huge valuation losses when share prices started sliding in the 1990s
and thereafter mainly due to increased investment in stocks in the bubble period andheavy reliance on capital gains to generate dividends for savings-based products. Itsvaluation loss on securities holdings amounted to ¥162.2 billion in fiscal 1991, reaching
more than 20% of its total stock holdings. Severe financial results continued in theensuing periods, and the insurer ended up with an operating loss in fiscal 1993 for the
first time ever (maintained a net profit, though, by covering losses with profits on salesof real estate).
Savings-based products, which greatly contributed to the surge in assets in the late1980s, provided little mortality profits, usually put the heavy burden of ensuring highyields, and squeezed the insurer’s earnings immediately when market interest rates went
down. Looking at the three sources of profits and losses, we see that Toho Mutual Life
started incurring an interest loss in fiscal 1992 and that it had become unable to cover its
interest loss with its expense profit and mortality profit since then. Moreover, theinsurer’s latent stock profits shrunk from ¥390 billion as of the end of fiscal 1989 to ¥16billion at the end of fiscal 1991. Then-vice president Sakogawa said in an interview,“We incurred latent losses on foreign securities held in the form of investment trusts infiscal 1991 and 1992. They were high-return funds, but types of products generating
losses later…. The company was already saddled with huge latent losses on securities
holdings and latent losses on off-balance assets in 1992 and was operating in the red dueto these losses as well as high assumed interest rate,” according to a staff member in the-85-

planning department.
Table 2-11: Valuation losses on securities holdings (as of the end of March
1992)
Valuation loss
Nippon4,510
Dai-ichi
3,891
Sumitomo
4,109
Meiji
2,382
Asahi
1,810
Mitsui
1,627
Yasuda1,178
Chiyoda
1,219
Taiyo
251
Toho
1,622
Kyoei
1,251
Nippon Dantai
1,290
Daido
468
Daihyaku
465
Fukoku489
Nissan
903
Tokyo
125
(Data) “Life Insurance Statistics”(in units of ¥100 million, %)Balance of stocks
Proportion
67,507
6.7%
49,614
7.8%
41,26410.0%
29,6048.0%
23,1197.8%
19,383
8.4%
13,782
8.5%
12,906
9.4%
7,418
3.4%
7,484
21.7%
6,027
20.8%
5,123
25.2%
4,926
9.5%
6,892
6.8%
4,330
11.3%
2,744
32.9%
2,498
5.0%

Therefore, Toho Mutual Life lowered the standards for setting aside policy reserves at
early stages to get through its earnings results announcement. In an effort to handle its
massive valuation losses in fiscal 1991, it first shifted from the net premium method(including contingency reserves) to the Zillmer method to generate profits, according toparties involved. Later on, the firm lowered its standards several times, including infiscal 1994, and as a result, its policy reserves came to the levels under the 10-year
Zillmer method or lower.
Toho Mutual Life already received a variety of suggestions regarding its assets andothers at the time of the inspection by the Ministry of Finance in 1990, but steps takenby the insurer were obviously aimed to turn things around in just one shot, rather than tocarry out management reform. A person in charge of actuarial works admits, “We once
tried to post profits from reinsurance transactions with a struggling U.S. life insurer, but
the firm eventually failed, and we ended up with additional losses.”
Materials attached to the inspection report for 1993 reveal that the insurer’s classified
assets (on a basis of assessment by the authorities) rose to 13% of its total loans
receivable from 1% in 1990. It had ¥70 billion worth of latent losses on securities-86-holdings as of May 1993 and the levels of its policy reserve also plunged. All of thesedata suggest that the company was stuck in serious financial condition. Moreover, its
statements of income for the early 1990s showed little sign of the insurer speeding up
disposal of bad loans. It was not until fiscal 1995 that the company wrote off a large
amount of bad loans.
(6) Management reform by a group of junior staff
A “group of junior staff” began gaining control of management around the time that the
Finance Ministry of Finance inspected the insurer in 1993 and that the company posted
an operating loss in fiscal 1993. Later, President Ota resigned to take responsibility forthe company’s two consecutive years of operating losses, and the group of junior staff
started a “new management plan” under the leadership of President Sakogawa, who took
up the position in July 1995. They introduced an early retirement plan and otherrestructuring measures, formed a partnership with Mitsui Marine and Fire Insurance Co.
(at that time), strengthened its agent network, developed a new product (launched in
1997 as “Pegasus”, insurance exclusively for healthy people) and took other steps one
after another.
At the same time that the new management plan was launched, the group of junior staff
set up a “management advisory committee” as an advisory body to the board of directors.
Members of the committee included the representative of Milliman and Robertson Japan,
the Japanese unit of a U.S. consulting firm specializing in actuarial science, andpresident of Kaken Pharmaceutical Co. (a former member of Toho Mutual Life
Insurance) with a former employee of the Ministry of Finance assuming the post of
Chairman of the committee. Another former employee of the Ministry became an
outside auditor.
At this point, the group of junior staff was already thinking that the insurer wouldn’t beable to survive on its own and therefore, their management reform was based on thepremise of a capital alliance with an outside party. For example, they apparently
expected the representative of Milliman to calculate the corporate value of the insurer
and introduce a possible partner to them.
The president and new management members are not said to have interfered with thereform by the group, but they were considered as a secret body within the company.
They are believed to have received criticism later from people saying “they abandoned a-87-

self-restructuring plan in the first place.”(7) Tie-up with GE Capital
The group of junior staff initially visited major life insurance companies to talk about apossible partnership, but couldn’t sit at a negotiating table. Instead, they found theircompany’s main market targeted by those major players and “had a terrible experience”(according to a head office staffer of that time). The group started negotiations withforeign-affiliated companies around the beginning of 1997, but due to the collapse of
Nissan Mutual Life, public trust in the life insurance industry deteriorated, leading to anincrease in policy cancellations.
Moreover, large-scale companies such as Hokkaido Takushoku Bank and Yamaichi
Securities Co. went under, setting off a new round of financial unrest and forcing theinsurer to receive a record number of cancellation requests. A person in charge ofactuarial works says, “We never faced a funding crunch. We still had assets to cash in,”but in order to deal with massive cancellations, the company had no choice but to sell its
prime assets. With the insurer’s corporate value falling day by day, negotiations didn’t
go smoothly. Loans that turned sour, in addition to bad loans held by its affiliatednon-bank, rose to the surface one after another. The assumed interest rate was also high;the average rate was 4.79% at the time of the insurer’s failure (in fiscal 1998) and therate for individual insurance and individual annuities alone reached 5%.
A plan to form a partnership with major Dutch insurance group Aegon N.V. fell apartright before implementation. “The proposed framework was to separate the sales
network from Toho and create a new life insurer with Aegon with Toho becoming themanagement company for existing contracts. The two insurers had already reached abasic agreement and were about to make an official announcement. However, Aegon
became reluctant to invest in Japan and other Asian markets after the Asian financial
crisis in 1997 and pulled out of the plan at the last moment” (according to The Nikkei
Financial Daily dated February 5, 2003).
Although negotiations were once suspended, the company eventually formed apartnership with GE Capital under the scheme of splitting itself into a new one and an
old one, the same method considered in tie-up talks with Aegon. The adopted scheme
put Toho Mutual Life at a disadvantage because it required the Japanese insurer totransfer its new marketing force to GE Edison Life Insurance Co., a firm jointly set up-88-

by the two companies, and to become a company specializing in maintaining andmanaging insurance policies acquired in the past. GE Capital not only blocked Toho
Mutual Life’s financial risk, but also demanded that part of the consideration for
goodwill be paid on a fee-for-performance basis. Regarding financial reinsurance
contracts, a person involved in the tie-up deal of that time says, “They were also very
unfair contracts”.
Therefore, head office staffers at that time and people in charge of actuarial works ofthat time say, “The partnership was a complete failure” or “Some of our personnel
executed an unfavorable contract in a short period of time.” Management members andthe group of junior staff of that time insist, however, that “We were already unable to do
our business under the name of Toho Mutual Life,” “With our weakness well known tothe partner, we just had to accept various conditions, but we had no better option (aside
from a bankruptcy),” and “Without a safety net, we had to avoid the worst situation”(according to several head office staffers at that time).
(8) Corporate management checking and risk management system
Under the leadership of Ota, the insurer’s internal control system and risk management
system barely functioned. For example, as long as the president gave a green light, thepower to make final decisions was apparently meaningless.
An executive in charge of investment at that time, who took control of the financial
affairs department having the president’s trust at his back, “stopped submitting thedetailed report of asset management to meetings of managing directors in the late 1980s.
He also stopped presenting data needed to calculate solvency margin ratios to theactuarial department in the early 1990s, saying, ‘We will make a calculation on ourown.’ He later started showing data when the company really got in trouble, though.
Initially, the planning department was telling to the investment department about theceiling amount the investment department was allowed to handle. The ceiling wasremoved at a certain point, however, and the investment department started hiding theirinvestment data. At any rate, the executive took control of everything. I feel pity for his
subordinates,” says a staff member in the planning department.
In the late 1980s, a “young employee” explained about the issue of a mismatch between
assets and liabilities to the executive at many times, but the executive is said to havepushed the employee away from him, considering the young worker to be among the-89-critics. An administrator says, after examining the results of investigations following thecollapse (undisclosed), “The insurer only had an inadequate internal management
system and carried out inappropriate asset management.”
Meanwhile, no coordinated efforts were made to hold down rapid expansion of assets inthe late 1980s. “Even if actuarial personnel showed their concern, their opinion never
got through because of powerful influence exerted by the president and people close tohim. Some employees left the company in an unexplained manner”…. “Even theactuarial department lacked the idea of ALM. The actuarial and financial affairs
departments didn’t work together, but listened to each other and just used the results
reported by the other department,” said several parties concerned.
Toho Mutual Life’s actuaries are said to “have been granted certain power because they
were involved in drawing up measures for financial results announcements anddeveloping products” (according to a person in charge of actuarial works), but a staff
member in the planning department says, “As early as 1992, actuaries found thecompany’s liabilities exceeding its assets, but they failed to properly convey the resultsof their analysis to the management”…. “Actuaries were respected in Toho Mutual Lifeand also had certain influence on the industry until Ota became President. Theirstandards then dropped, and they basically became the president’s puppets,” a head
office staffer of that time reveals.
(9) Role played by external discipline
Managerial check from external parties barely functioned. Toho Mutual Life took theform of a mutual company as Nissan Mutual Life did, and its meeting of representatives
also did not seem to function well as the president chose people he liked as
representatives (according to a head office staffer of that time).
It is said that President Ota was not appreciated by his family either. Nevertheless, thefamily took no concrete action to kick him out of the president’s chair. Ota’s cousin,
who served as president of Kyusyu Kangyo Co., an asset management firm for thefamily, once became vice-chairman of Toho Mutual Life (during the period from 1988
through 1995), but there was no sign indicating that he played a certain role in terms ofgovernance. Ota’s uncle, his predecessor, “presented opinions on the management of
Toho Mutual Life even after he retired from his position as president. He eventually
stopped doing that because Ota didn’t listen to him at all. There was also a feud between-90-the two over the timing of when Ota assumed the presidency, according to a head office
staffer of that time.
The labor union didn’t take any major actions either. President Sakogawa once served as
vice-chairman of the executive committee of the insurer’s labor union, and one of thevice-presidents who resigned in 1994 also had a close tie with the labor union.
Meanwhile, the Ministry of Finance questioned the management of Toho Mutual Life at
relatively early stages. However, President Ota consistently took an adversarial standagainst the Ministry (he offered positions to several ex-employees of the Ministry, on
the other hand).
As I mentioned earlier, the Ministry of Finance already raised a question over the
insurer’s assets when it conducted an inspection in April, 1990. However, no major
action was taken until the next inspection (in 1993). The Ministry allowed the company
to cut its policy reserves standards for fiscal 1991, but whether it was already aware of
the liability issue is questionable.
In the inspection of 1993, the insurer’s net capital base in a broader sense (the amount of
capital base after taking into account latent profit or loss on securities holdings, 50% ofclass III classification loans and 100% of class IV classification loans) dipped to minus¥65.9 billion, compared to the positive ¥495.0 billion in 1990. Assets classified as class
II also rose to ¥200 billion.
However, the Ministry of Finance focused its efforts on urging the insurer to change its
top management rather than urging them to improve the soundness of their assets,according to a head office staffer of that time and others. “The inspection by the
Ministry in 1993 lasted roughly three months, much longer than its ordinary inspection(which usually takes less than one month). The Ministry viewed bypass loans extended
to a family-run corporation as a problem and demanded that the president and theexecutive in charge of investment step down,” says a head office staffer at that time.
Unfortunately, the results of the inspection themselves were undisclosed, but it may be
exceptional for the Ministry to demand resignation of a company’s top management
when conducting an inspection. A staff member in the planning department says, “TheMinistry of Finance took a firm stance of not allowing us to issue financial statements
until resignation of our top management.” Nevertheless, President Ota didn’t resign-91-

soon, and finally stepped down in 1995.
The Ministry of Finance is said to have generally taken a cooperative attitude toward the
management reform by the group of junior staff. A former employee of the Ministrybecame the chairman of the “management advisory committee,” and the Ministry
approved of the insurer’s partnership with GE Capital in 1998. The scheme adopted
under the partnership was to split Toho Mutual Life into new one and old one, which
wouldn’t necessarily enhance the insurer’s credit, and the cash flow plan itself wasbased on the premise that stock prices and long-term interest rates would gradually rise.
Thus, “It was like walking on an extremely narrow path,” says a head office staffer ofthat time. Besides, if a bankruptcy occurs after the execution of a partnership, thescheme would virtually require the failed insurer to comprehensively transfer insurance
policies to the partner company, putting the insurer in an obviously disadvantageous
position during negotiations on liquidation procedures.
The Ministry’s personnel involved in the tie-up deal on a practical level were very
reluctant to approve the proposed scheme, according to people concerned in those days.
Nevertheless, the Ministry issued a notice lifting a ban on financial reinsurance inDecember 1997 to support the tie-up deal and finally gave its approval to the deal.
Behind the Ministry’s decision lies the fact that after funds worth a total of ¥200 billion
set aside as a safety net got used up for the liquidation procedures for failed Nissan
Mutual Life in 1997, no safety net had existed until the establishment of the Life
Insurance Policyholders Protection Corporation of Japan in December 1998. The
Ministry’s decision is also attributed to growing public concern over the nation’s
financial system spurred by a series of large-scale bankruptcies in the fall of 1997.
4. Fettered by low earnings structure – Daihyaku Mutual Life Insurance(1) Direct cause of failure
Daihyaku Mutual Life failed in May 2000, one year after Toho Mutual Life’s failure.
Faced with an increasingly severe business environment, Daihyaku Mutual Life
concluded a tie-up with major Canadian life insurer Manulife Financial in 1999 andstrived to improve the quality of assets and add to its internal reserves by drawing on
funds secured through the transfer of business rights and financial reinsurance.

-92-

Soon thereafter, cancelations increased markedly in the wake of the failure of Toho
Mutual Life, which had teamed up with GE Capital in almost the same scheme(separating new and old contracts and taking over only old contracts while transferring
new contracts to its partner). Moreover, Daihyaku Mutual Life incurred loss fromhigh-risk foreign securities investment started shortly after concluding the tie-up. Also,
the company had obtained a subordinated loan in an inappropriate manner in March
1999, as was revealed by the Financial Supervisory Agency’s inspection in January
2000. When the company was advised by its audit corporation against posting deferred
tax assets in fiscal 2000, it followed this advice and as a result fell into the state ofnegative net worth and gave up continuing its business.
Daihyaku Mutual Life fell into a crisis not because it had a major specific problem, butrather because various smoldering factors erupted all at once. The bad loan problem“was not fatal” (according to a head office staffer at that time) and there was no manager
whose arbitrary behavior caused a problem.
The company mainly sold pure endowment insurance (saving insurance) from prewar
years, so it was slow to break dependence on the unprofitable saving insurance business.
In postwar years, the company endeavored to develop new products but the proportionof small-lot security-type contracts increased. As a result, the company ended up with an
unprofitable structure.
What was worse, the company sought to adopt the same business model as that of larger
insurers by half measures. As a result, they became dependent on latent stock profits tosecure funds for dividend payment. “The company’s strategy was to do everything larger
insurers did, such as handling products like variable insurance and group pureendowment insurance. It adopted an all-around policy without selection or focus,” says ahead office staffer at that time. In the latter half of the 1980s, the company began effort
to increase its total assets in competition with others in the industry, a little later thanother midsize insurers. As part of this effort the company promoted sales ofsingle-premium savings-type products. The high assumed interest rate on these products
became a burden in the 1990s, and drove the company to become even more dependenton latent stock profits. In 1990 and subsequent years, the falling stock prices depressedthe value of assets at the company.
The management team was not quick to recognize this problem while Daihyaku Mutual-93-Life’s business was deteriorating, and therefore failed to take remedial action. The
company had the task of reducing strategically held shares, but made little progress inthis regard. “(The company was) slow to take notice and take action after the bubble
period. It was not that a big problem brought down the company, but various factors
came together at once to finish it off,” says a head office staffer at that time.
(2) Not much improvement in earnings structure
Daihyaku Mutual Life was a company affiliated with the former Kawasaki conglomerate.
Its customer base consisted of individuals in homes. Mainly handling saving insurance,
the company showed a lower profitability than life insurers whose main sellers weresecurity-type products. The company had switched to a two-pronged policy based on“saving insurance and life insurance (security-type product) by the 1970s, but the sales
staff had difficulty switching to the sales of security-type products. Most of the
security-type products they sold were small-lot contracts that did not require medical
examination of the insured.
Saving insurance reaches maturity at intervals of, say, three years or five years.
Insurance companies, if they had a number of customer registration cards, achieved
certain results automatically, so there was no need to try to find new customers forsaving insurance. This was not the case with death security products, which insurers
could not sell to customers without giving consultation. It took a considerable time forthe sales staff, who had mainly dealt in saving insurance, to learn to handle security-type
products: The proportion of small-lot security-type contracts increased and somesalespeople rushed to gain contracts from young people who had no need for suchproducts. They persuaded people to sign a contract out of a sense of obligation and letthem cancel the contract soon thereafter…. Daihyaku Mutual Life’s successful
salesperson had as many as 500 customer registration cards. With death security,
salespeople could not have collected so many cards. Their sales power was weak…. The
company hesitated to drop the saving insurance business, after all. Despite its limited
size, the company sought to sell both ‘saving insurance and life insurance in balanced
proportions’ and ended up without achieving much in either area,” according to witness
accounts of the head office staffer.
Although the company made great efforts to develop new products and introduced
first-in-the-industry products one after another, saving insurance still accounted for asmuch as 73% of the premium income for individual insurance in fiscal 1980. In fiscal-94-

1985, nearly 60% of the premium income came from saving insurance.
Table 2-12: Brief History of Daihyaku Mutual Life
1914
1941

1947
1962
1965
1967
1973
1976
1977
1987
1989
1993
1995
1996
1998
1999
2000

Nikka Life Insurance Co. founded (by Kawasaki conglomerate).
Kawasaki-affiliated Nikka Life, Fukutoku Life and Kokka Chohei Life merge (to become
Daihyaku Seimei Chohei Insurance Co.). Survivor’s insurance (saving insurance)
becomes one of the main products.
Starts afresh under the name of Daihyaku Mutual Life Insurance Co.
Starts selling “new life insurance.”
Daijiro Kawasaki becomes president.
“Full-package insurance” becomes a hit.
Minoru Kawasaki becomes president.
The life insurance division and the survivor’s insurance division are integrated.
Head office relocated to Chofu.
Katsuo Fukuchi becomes president.
CI (Corporate Identity) started (announced publicly in 1991).
Information system management outsourced to Nomura Research Institute.
Current loss for fiscal 1994.
Yoshio Komori becomes president.
Nonsmoker insurance “Suimasen” put on sale. Shinjiro Kawasaki becomes president.
Teams up with Manulife and becomes a company devoted to management of existing
contracts. Mitsumasa Akiyama becomes president.
Ordered to improve business. Ordered to suspend business.
(Honorifics omitted)

With this tight earnings structure, the company continued to incur an expense loss andearned only a small mortality profit. Up until the 1980s, the mortality rate, the expense
loading and the dividend rate were set practically by a committee of the Life Insurance
Association of Japan so that even inefficiently operated companies were able to stay inbusiness. “Daihyaku Mutual Life with its low earning capacity represented thebenchmark on this,” according to a person from a major life insurer.
The company held discussions on its profit-earning structure many times. “Around 1980,
several section chiefs were given special assignments to make proposals on various
managerial issues (such as problems of savings companies, large number of small-lot
contracts concluded without medical checkup, low operating cost efficiency,
diversification of business, etc.). These proposals, including raising collection fees, were
not entirely ignored, but changes came only slowly,” says a head office staffer at thattime. “Eliminating the expense loss was a pending issue for ages, and this wasinvariably included into every management plan. They made a plan but did not execute
it. As we had a large interest profit and a large latent stock profit, failure (to eliminate
the expense loss) did not matter very much,” says another head office staffer at that
time.

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The company’s actuarial staff sounded the alarm on several occasions. The actuary whoserved as managing director and retired in 1996 made a future cash flow analysis in theearly 1990s and became seriously concerned. “When he called for a review of thecompany’s profit structure at a management meeting around 1992, the management
came up with measures to ‘cut costs,’ ‘expand sales of security-type products,’ ‘restrict
stock investment’ and ‘restrain the corporate pension business.’ They could not carryout the proposed measures other than to restrain the corporate pension business,” says amember of the actuarial staff.
(3) Difference from Taiyo Life
Just like Daihyaku Mutual Life, Taiyo Life, now a member of T&D Group, catered toindividuals in homes and mainly sold savings-type products until recently. This waslargely because Magodayu Daibu, who was working for a then Kawasaki conglomerate,
was hired away by the Nishiwaki family who owned Taiyo Life at that time, and thisman introduced Daihyaku Mutual Life’s saving insurance into Taiyo Life. Because of
close connections between the top executives of the two firms, a merger was proposed
in 1962 (but the idea was later dropped).
Taiyo Life followed an independent path, streamlined operations to the utmost andprovided products different from what its rivals offered. Although its profitability was
not high, Taiyo Life became a profit-earning company through its efforts, adopting aunique sales style such as a couple of women employees making unsolicited visits toprospective customers, simplifying the sales organization and developing products
whose actuarial assumptions were different from those of rivals. The way the company
cut down on expenses was “astounding” to Daihyaku Mutual Life’s head office staffer
at that time. Taiyo Life adopted a product strategy of its own and did not draw on latent
stock profits to generate money for the payment of special dividends.
Daihyaku Mutual Life tried to bring its business model closer to that of larger life
insurers, but failed to reduce costs to the utmost, and they were still trapped in a
low-profit structure that depended on latent stock profits. The company “spent a
considerable sum of money transferring its head office to Kokuryo (in 1977). It was
financially weak,” said a head office staffer at that time. It was not until 1976 that thethree divisions of the sales unit – the life division (handling life insurance contracts withannual or semiannual premium payment), the monthly payment division (handling life-96-

insurance contracts with monthly premium payment) and the thrift and saving insurance
division (handling saving insurance contracts) – were integrated. Previously, the wage
rules and the business structure of the three divisions were different from each other.
This meant lack of efficiency.
(4) Steps taken after business turned worse
The problem of the profit-earning structure came to the surface in the 1990s when theinvestment environment worsened so much that the company was no longer able to earn
an interest profit. The company began to suffer a negative spread in fiscal 1992. The
sum of the expense profits and the mortality profits was not large enough to cover theinterest losses in and after fiscal 1993. In this year, capital gains from the sale ofsecurities came close to ¥100 billion.
In fiscal 1994, the company suffered a large valuation loss from a drop in stock prices aswell as three types of loss, and posted the first current loss in postwar years. It broke
into the reserve under Article 86 and lowered the required policy reserve level from theone based on the net premium method to the one based on a five-year Zillmer method.
The members of the management team were not particularly alarmed. “The budget
division once presented the results of its future cash flow analysis to the management,
pointing out that ‘the company will not stay afloat according to several scenarios’ andthat ‘there is a 20% to 30% chance that the company will go bust.’ Half of themembers did not take the matter seriously, saying ‘when such a scenario becomes reality,
Japan itself would be in a mess,’” says a staff member of the actuarial division.
After reporting red-ink results, the company announced a three-year plan in April 1995
in which it set out to improve services for individual policyholders and rebuild thesystem for sales to corporate clients in order to increase the total amount of policies inforce. “We tried but were unable to cut costs as much as we wanted to. The sales
division complained, ‘We can’t do business if costs are cut down to this level,’” says ahead office staffer at that time.
The profit-earning structure was weak, business results depended heavily on stock
prices and the latent stock profits were almost depleted. “Even when Nissan Mutual Life
failed in April 1997, our people talked as if ‘it was something that occurred to Nissan(and had nothing to do with us),’” says the head office staffer.

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Table 2-13: Change in three types of profit over the years
March
1987
-49

March
1988
-36

March
1989
16

ExpenseprofitMortality
159
182
176
profitInterest
199
167
161
profit
Total
309
313
353
(Data) compiled from inspection reports(in units of ¥100 million)
March March March
1993
1994
1995
25
39
36

March
1990
105

March
1991
53

March
1992
17

189

268

296

318

331

353

262

232

141

-161

-552

-624

556

554

454

181

-181

-235

Under the medium-term management plan from fiscal 1997, drawn up under theleadership of then vice-president Mitsumasa Akiyama (who became president in 1999),
the company made various attempts to “strengthen its managerial base” and “build astable profit-earning structure.” It received ¥19 billion in contributions to the “fund” orthe capital of a mutual company, from four affiliated banks including Joyo Bank. On thesales front, the company launched a “campaign to visit all policyholders” and sent
employees tasked with preventing cancellations to all parts of the country. It also put
effort into product development and became the first in Japan to sell nonsmoker
insurance, called “Suimasen (Note from translator: sumimasen means I don’t smoke),”in March 1998.
With major financial institutions going under one after another, the insurer found itself
in an increasingly severe business environment. A rating agency gave Daihyaku MutualLife a credit rating as low as BB. The surrender/lapse ratio (for individual insurance
contracts) rose to 19.1% in fiscal 1997 from 13.3% in the previous year. In fiscal 1997,“the interest and dividend income decreased sharply while the loss from sale of foreign
securities and the cost of disposing of bad loans increased. In this situation, the company
could not balance the books even under the full-term Zillmer method,” says a head
office staffer at that time.
Under the circumstances, the company concluded a financial reinsurance contract withmajor U.S. reinsurer RGA and received a ¥10 billion commission, and added thisamount to the policy reserve. It also obtained ¥38 billion in subordinated loans from
Westdeutsche Landesbank and others (of which ¥30 billion was from this bank) in a bid
to “strengthen its capital base.”-98-

The subordinated loan obtained from this bank did not qualify as capital. While
receiving this subordinated loan, Daihyaku Mutual Life acquired a credit-linked note
linked to its own credit risk from Westdeutsche Landesbank Group for a priceequivalent to the subordinated loan. This means that, if Daihyaku Mutual Life fell into
financial difficulties and became unable to repay the loan, the credit-linked note would
become worthless. The insurer made it look as if its capital base had been strengthened,but this was not really the case.
(5) Reducing strategically held shares
Table 2-14: Changing weight of shareholdings (as a percentage of total assets)
March
March
1990
1991
Daihyaku
23.6%
22.8%
Daido
18.9%
19.5%
All firms
21.8%
22.1%
(Data) “Life Insurance Statistics”

March
1992
23.7%
14.8%
21.7%

March
1993
23.5%
11.3%
20.3%

March
1994
23.8%
11.5%
19.7%

March
1995
20.7%
10.8%
18.8%

March
1996
16.2%
9.7%
17.2%

The percentage of shares held by Daihyaku Mutual Life in its total assets was around
23% in 1990, a little higher than the average for all life insurers. As the stock prices
slipped in the 1990s, the risk of holding shares came to the fore. However, life insurers
hesitated for some time to sell shares. The balance of shareholdings reached a peak infiscal 1993.
Daido Life, an insurer about the same size as Daihyaku Mutual Life, sold shares in fiscal
1992 and 1993 and reduced the percentage of shares in the total assets from a peak ofnearly 20% to close to 10% in a short time. Daihyaku Mutual Life decided to sell sharesat a management meeting around 1992. “It was Katsuo Fukuchi (who was the firstpresident chosen from outside the Kawasaki family) who decided to sell shares.
Actually, the company did not sell shares until fiscal 1994, because the sales division
put up opposition and the Kawasaki family’s Daijiro and his son were fond of shares….
After the company sold whatever shares it was able to sell, all that remained unsold
were bank shares,” says a head office staffer at that time. The shares of financial,
insurance and securities companies accounted for over 50% of all the shares held by
Daihyaku Mutual Life at the end of March 1996.
In or after 1997, the company tried to sell strategically held shares and “decided ‘howmuch to sell’ at a meeting of managing directors. But little progress was made because-99-‘we cannot get the approval of our cross-shareholders.’ In our company, the sales
division was powerful while the management was weak,” says a head office staffer atthat time.
(6) Steps taken around the time of tie-up with Manulife
In April 1998 the Kawasaki family’s Shinjiro (Daijiro’s son) was named president tobring a greater unifying force to the business management. Meanwhile, the management
team began looking for a partner, around the fall of 1997, on judgment that the company
would not survive without an outside partner. “At first, we approached affiliated banks
to ask for support, but did not even get subordinated loans. In the spring of 1998, we
appointed an investment bank as our advisor and explored the possibility of a tie-up
with a foreign partner. There were several prospective partners, and we settled on atie-up with Canada’s leading life insurer Manulife Financial…. Our tie-up with
Manulife was modeled on Toho Mutual Life’s scheme. We thought this was the only
way for a mutual company to obtain funds from an external source,” say several head
office staffers at that time. Daihyaku Mutual Life announced in February 1999 that it
would form a comprehensive tie-up with Manulife and establish a new company towhich it would transfer business rights as part of the tie-up scheme.
As in the case of the tie-up between Toho Mutual Life and GE Capital, Daihyaku
Mutual Life adopted the method of “separating new and old contracts.” This method
involved the transfer of business rights including the sales force to the new company
and the infusion of over ¥80 billion into the capital of the new company throughfinancial reinsurance to improve the quality of assets and replenish internal reserves.
Daihyaku Mutual Life turned itself into a company devoted to the maintenance andmanagement of existing contracts as well as asset management.
Shortly after this tie-up, Toho Mutual Life collapsed, in May 1999. Cancellations
increased sharply at Daihyaku Mutual Life, whose tie-up scheme was similar to that offailed Toho Mutual Life. As a result, “the surrender ratio rose and, at the end of lastSeptember, our figures reached the level where a review of our contract (with Manulife)
was necessary,” then President Akiyama told the press at the time of the failure. The
company incurred several tens of billion yen of loss from ill-advised hedging of
high-risk foreign bond trading and “most of the money we obtained through the tie-up
was gone by summer,” says a head office staffer at that time.

-100-

In the Financial Supervisory Agency’s sweeping inspection of life insurers started inAugust 1999, Daihyaku Mutual Life was instructed to reassess its own assets and makea significant change to the previously announced figure. Its subordinated loan obtained
from Westdeutsche Landesbank as mentioned earlier was found to be problematic, andthe company received a business improvement order in February 2000. The company’s
people explained at a press conference following the finding: “The loan was purchased
without the approval of the decision-making body, which was the board of directors.
(The management of Daihyaku Mutual Life) was unaware of the purchase of this debt.
Shinjiro Kawasaki, then director of asset management, and two executives in charge offinance at that time were aware of the matter,” reported The Nikkei Financial Daily
dated February 15, 2000. The truth of the matter remains unknown. The solvency
margin ratio fell (from 304%) to less than 200% after the effect of the subordinated loan
was discounted.
After an administrative action was taken against the insurer, cancellations increased
further. The audit corporation demanded additional amortization of owned assets andexclusion of deferred tax assets from the balance sheet. As a result, the company fell
into a state of negative net worth and was ordered to suspend business by the Financial
Supervisory Agency.
The company failed only one year after the tie-up. The failure was due not so much to
the tie-up scheme but to the following circumstances, as recalled by the head office
staffer at that time: “The authorities refused to recognize the validity of Westdeutsche
Landesbank’s subordinated loan, and a large loss was incurred from exchange trading.
This killed the plan for merger with Manulife five years later. It had been agreed thatmerger would not take place if the insurer’s financial strength was short of a certain
level. Moreover, cancellations increased so much that the additional goodwill value
became uncertain…. Manulife was cooperative until an exchange loss was incurred andWestdeutsche Landesbank’s problem arose, but withdrew its cooperation when theseissues came to the surface.”(7) Managers
Daihyaku Mutual Life was a Kawasaki family-affiliated company. Everyone who served
as its president was a member of the Kawasaki family until Fukuchi became president in
1987. Daijiro Kawasaki (who was president from 1965 to 1973) was known as a person
who restored prosperity to the family business. Daihyaku Mutual Life came to be called-101-“a pioneer in new-type insurance” when he was president. After retiring as president, heremained a director until 1987 and retained influence over management. “His son
Shinjiro was working at the company. He was seen as a future president from the time
he joined the company. The management team had to keep Daijiro always in mind when
making decisions. They could not make bold decisions such as ‘giving up saving
insurance’ or ‘selling off bank shares,’” says a head office staffer at that time.
The company began to expand its scale of operation around 1987, according to a head
office staffer at that time. Some people in the company said, “We are shifting fromsavings to life insurance, so we need not get upset when our place on the ranking list of
insurers in terms of total assets drops.” Some people close to Daijiro, known as the
person who restored prosperity to his family business, strongly insisted that “it isnecessary, after all, to expand the size of assets by selling savings-type products.”
Accordingly, the company promoted sales of individual annuity insurance combinedwith a bank loan and single-premium endowment insurance. “It is not that we promoted
sales of single-premium products. To be more accurate, the products sold much morethan we had expected,” says another head office staffer at that time.
Fukuchi was the first president (from 1987 to 1996) chosen from outside the Kawasaki
family. He had a strong sales background. Yoshio Komori, who joined the company atthe same time as Fukuchi (and became president in 1996), was in charge of asset
management. “President Fukuchi was willing to listen to others’ opinions but had few
brains to turn to for advice, so he was unable to come up with a large-boned policy,”
says a head office staffer at that time. For example, “he became involved in CI(corporate identity) at Daihyaku Mutual Life in 1989, but ended up making superficial
changes to the logo, contrary to the original intentions.”
Among Daihyaku Mutual Life managers including Fukuchi, there were few who
exercised strong leadership in the company. “A warning was issued in the company
from time to time. But a life insurer’s business management was not very visible and it
was difficult for some officers to share their concerns with others. They would end up
going along with a majority view. The management did not have a strong will to
exercise authority,” says a head office staffer at that time.
The management made one plan after another to change the low-profit structure, but had
no system for analyzing the results of change and modifying the plan accordingly. “An-102-easy-going atmosphere pervaded the place…. Whenever we sat down to discussion, thesame old themes such as “expand sales of security-type products,” “reduce costs” and“sell shares” came up. But we did not discuss whether the idea was feasible or not. As
soon as we got down to work, the idea would turn out unrealistic,” according to several
head office staffers. As the company enjoyed a large interest profit and a large
unrealized profit from shareholdings up until the 1980s, failure to achieve managerial
objectives did not matter and no one was held responsible.
(8) Actuary
Actuaries were given important posts at Daihyaku Mutual Life. This was partly because,
as “a pioneer in new-type insurance,” the company put much effort into productdevelopment. “Actuaries were respected in our company. People outside the company
said Daihyaku Mutual Life had an excellent set of actuaries. We once had an actuary
who served as the president of the Institute of Actuaries of Japan,” says a member of theactuarial staff.
In the 1990s an actuary was promoted to managing director (serving from 1991 to 1996).
He had quite an influence in the company. He made a future cash flow analysis andbecame strongly concerned about the company’s financial state. He expressed his
opinion many times at managing directors’ meetings. “Daihyaku actuaries did a goodjob in involving themselves in management, but the business details were not shared bymembers of the management team. Figures alone did not tell everything about what lay
behind them. The managers often told us that ‘actuarial matters were difficult tounderstand.’ They were therefore slow to take action. They depended too much on
administrative authorities and did not take the initiative in operating business…. Theycame up with a compromise before accomplishing the initial goal. They did not follow
through with their opinion and ended up going along with the majority view,” according
to the head office staffer at that time.
(9) ALMUp until the 1980s, Daihyaku Mutual Life had neither culture nor technology to deal
with risks. “In the latter half of the 1980s, the only thing actuaries saw as a negative
factor was operating expenses. The company’s goal was to achieve a policy reserve
required under the net premium method, and assets did not enter the picture…. It was allvery well that an ALM committee was set up in 1990 or so, but a bank’s ALM was not
fit to be applied directly to the insurer. The company had no idea what to do, after all,”-103-

says an actuarial staffer at that time.
Then, in 1994, the company matched its assets with its liabilities in some accounts in the
ALM process. “We adopted segment accounting, but there was so much old money thatmatching was almost impossible,” according to the staffer.
The finance division and the actuarial division did not cooperate with each other. “Theactuarial division said shares should be sold. The finance division sold what they could
sell easily. It is not that the finance division hid something. As the two divisions did notinterfere with each other, the company ended up accumulating bank shares. This was notwhat they had initially intended,” says the staffer.
(10) Role played by external discipline
There was almost nobody outside the company who kept an eye on its business
management. The meeting of representatives of policyholders of a mutual company was“almost like a ceremony.”
Asahi Shimbun dated July 18, 1988 described the meeting of policyholders’representatives of Daihyaku Mutual Life: “The company people seemed to be
determined to ‘make the meeting a success because all the attendees were our valued
customers’…. The meeting took 38 minutes, seven minutes less than expected…. No
questions were raised. It was assumed from the beginning that there would be noquestions to answer. It was just as well…. The Ministry of Finance instructed insurers toraise the attendance rate. The number of attendees an insurer managed to attract to its
meeting of policyholders’ representatives was a measure of its commitment.”
Governance had no place in that meeting of policyholders’ representatives.
Daihyaku Mutual Life sent trainees to Mitsubishi Bank and Joyo Bank with which it
historically had close relations. The two banks did not get involved in Daihyaku’s
business. All they did for this insurance company was to make contributions to its fundand provide subordinate loans (this became difficult in and after 1997).
The Ministry of Finance was the only one that played the role of external discipline.
Even so, it is unlikely that the Ministry of Finance singled out Daihyaku Mutual Life for
special monitoring, even in the mid-1990s. When the company consulted the Ministry of
Finance about the possibility of lowering the policy reserve level in the fall of 1994-104-

because it anticipated poor business results for fiscal 1994, the Ministry of Financeofficial in charge asked back, “Why is it necessary for a well-managed company likeyours to lower the level?” (according to a head office staffer at that time). The Ministryof Finance raised almost no objection to the insurer’s tie-up with Manulife, perhaps
because Toho Mutual Life’s case provided a precedent.
After the Financial Supervisory Agency took over as the watchdog body, “We received
no visible backup. We had the feeling that the regulators thought ‘the failure of several
companies would be necessary’…. Our company made a fresh start with official
approval to continue our business in 1999, but the authorities now applied new rules tous,” say several head office staff members.

5. Investments and loans during only two and a half years proved fatal—Chiyoda
Mutual Life Insurance(1) Direct cause of failure
Chiyoda Mutual Life filed for corporate rehabilitation proceedings and collapsed in
October 2000. The insurer’s bad loan problem already came to the surface in around1993 and it often received media exposure as a representative of “risky life insurers.”
As a way to overcome the problem, the company started seeking an opportunity for acapital tie-up with a foreign-affiliated firm around the end of 1997 and at the same time,received assistance, including contributions to funds, from close financial institutions.
However, it failed to turn itself around.
Factors leading to the management crisis can be summarized as follows: (1) rapid
expansion of assets via sales of high-yield, high-dividend savings-based products(especially group annuities) in the late 1980s, (2) growing dependence on risky asset
management such as real estate- and nonbank-related investment to secure high-yieldsand (3) bulk buying of stocks in return for insurance contracts with large-lot corporate
customers (so-called the problem of “strategically held shares”).
Factors relating to management activities taken after the company fell into a crisis
include, in addition to severe external environments, (4) a delay in disposal of bad loans
and sales of strategically held shares, (5) a delay in drastically overhauling the existing
business model and (6) follow-up measures taken after credit concerns came up to the-105-surface.
Unlike other failed life insurers, Chiyoda Mutual Life was able to cover its periodic
losses arising from negative spreads with its expense profits and mortality profits evenin and after the mid-1990s, because it had a prime customer basis, including the market
catering to the people of large companies. However, the company struggled withmassive bad loans that occurred after the bubble burst. Such bad loans increased to ¥550
billion at the end of March 1993, accounting for around 20% of its total loans
receivable.
Besides, via sales to lock in profits, the acquisition cost of strategically held shares rose,
damaging the company’s management. The insurer was required to have “finances that
could contribute to sales results” in the late 1980 and therefore often made investments
and loans in return for contracts entered into by corporate customers. The insurer’s
growing dependence on loans to large-lot problematic deals was largely attributed to thispolicy, which was called “unified activities of sales and finance departments.” As aresult of stock purchases made in response to requests from the corporate sales
department, the balance of stocks as of the end of fiscal 1989 tripled from the level as ofthe end of fiscal 1986. The insurer couldn’t accelerate its sell-off of these stocks evenafter its business deteriorated and became saddled with latent stock losses worth morethan ¥100 billion, starting at the end of fiscal 1997.
(2) Leaning toward savings-based products
Chiyoda Mutual Life was one of the five biggest life insurance companies in the pre-war
period. However, it was late to shift its marketing method from regional agents (theKeio University network) to the channel based on sales personnel in urban areas andalso failed to keep up with the trend in product strategy toward “term insurance” (shift
from endowment insurance to endowment-with-term insurance). Losing its customers toother companies using sales forces for their marketing activities, the insurer saw its
position in the industry gradually decline, as a person of a major life insurer says,“Sumitomo Life Insurance Co. (which got into the business late) went on an offensive,
targeting Chiyoda Mutual Life’s customers.” The insurer’s efficiency of operating costs
was substantially lower than those of major companies, and the difference in dividendlevels widened. The company took a product strategy that was difficult to compare withthose taken by other players, but the strategy impeded the company’s sales activities. In
financial results for fiscal 1978, the amount of policy reserves “would have fallen below-106-the level under the 5-year Zillmer method if our reserves had been just ¥5.4billion shortof the amount,” says a head office staffer at that time.
Table 2-15
1904
1928
1948
1950
1961
1970
1978
1982
1984
1992
1993
1995
1996
1997
1998
1999
2000

Brief History of Chiyoda Mutual Life

Chiyoda Mutual Life Insurance Co. was established (as Japan’s second mutualcompany. Ikunoshin Kadono of Keio University became the first president).
Achieved the No. 2 position within the industry in terms of insurance-in-force.
Became the industry’s first to sell “group term insurance.”
Became the industry’s first to sell “group annuity.”
Became the industry’s first to sell “group credit life insurance.”
Formed a group called “Satsuki Association” with Chiyoda Fire and Marine InsuranceCo., Tokai Bank, Chuo Trust & Banking and Tomen Corp.
Masao Nakajima became president. A “three-year reform plan” began in the following
year.
Yasutaro Kanzaki became president.
Started marketing “medical insurance” and launched a “three-year plan to achieve a netincrease in insurance-in-force.”
The issue involving Hotel New Japan surfaced.
Disclosed ¥231.6 billion worth of bad loans.
Reported an operating loss for fiscal 1994.
Reiji Yoneyama became president.
Raised funds worth ¥50 billion.
Announced a sales partnership with U.S. major nonlife insurer Unum Group.
Raised funds worth ¥50 billion and drew up a new “management reform plan” (selection
and concentration strategy).
Conducted financial reinsurance transactions and filed for corporate rehabilitation
proceedings.
(Honorifics omitted)

Table 2-16

Breakdown of policy reserves<FY 1986>
ChiyodaAll
companies
combined
74.8%

Individual
63.1%
insurance
Individual
3.5%
2.9%
annuity
Group
0.5%
1.2%
insurance
Group
32.7%
20.2%
annuity(Source) “Life Insurance Statistics”<FY 1989><FY 1995>

56.0%

All
companies
combined
67.0%

41.9%

All
companies
combined
55.8%

7.8%

6.8%

8.2%

9.5%

0.3%

1.1%

0.3%

0.4%

35.6%

24.2%

49.3%

33.2%

ChiyodaChiyodaMeanwhile, President Masao Nakajima stepped up the insurer’s sales activities andreduced operating costs under the “three-year reform plan” launched in 1978 to rebuild
its management. When the plan started bearing fruit, Yasutaro Kanzaki became
President (in 1982) and took the stance of aggressive management, setting up a target of“returning to a major insurer.” Under the leadership of a stern executive in charge of-107-

sales activities, the company made steady efforts to strengthen its sales personnel andalso started selling medical insurance policies in 1984 (these policies contributed to the
expansion of mortality profits later). However, the insurer’s sales personnel generally
accepted funds that businesses held to invest in “zaitech” products and focused onmarketing of savings-type products, which gave them instant sales results.
Especially, Chiyoda Mutual Life leaned toward group annuities. The insurer had
maintained a strong presence in the group annuity market from the very start as it had
focused on the corporate market. The company achieved its five-year target in just one
year partly because it “succeeded in acquiring contracts with corporate customers of
Tokai Bank, members of the medical association and others by using top executives’personal connections” (according to a staff member in the planning division). Armedwith cross shareholdings and high-dividends, it continued increasing contracts, which
accounted for 50% of its policy reserves at its peak.
With respect to the market for individual customers, head office staffers at that time andothers say, “We never set a target or made organized efforts for sales of savings-type
products, although some sales employees focused on such products. Rather, we justnaturally leaned toward them”…. “Unlike other midsize life insurers, we didn’t give
incentives to sales employees to step up sales of savings-type products to retailcustomers.”
Regarding savings-type products designed for individual customers, the insurer“changed its reward scheme so that products would not sell well in order to prevent its
sales force from getting weakened” and “unlike Nissan Mutual Life, neversystematically encouraged financial institutions across the country to step up sales. We
rather tried to put a brake on such sales” (according to a staff member in the planningdepartment). Nevertheless, the company eventually sold a massive number of lump-sum
savings-type insurance policies in the market for individual customers as well. The
rehabilitation plan reveals that premium revenues from lump-sum insurance products
accounted for nearly 40% (the average for the industry was around 25%) of thecompany’s total premium revenues in around 1989, when the insurer most heavily
depended on sales of lump-sum insurance.
Of those insurance policies, lump-sum endowment insurance policies happened to havevarious maturities (an insurer usually sold 5-year and 10-year maturity products), and-108-

6-year maturity endowment insurance started attracting a lot of attention as a tax-saving
product at a certain point in time with customers lining up in front of branch counters to
buy the insurance, according to parties concerned. Head office staffers at that time say,“Media advertised the insurance on their own” “This was the first and last time that wesaw customers standing in line in front of sales windows to buy our insurance products.”
Department heads or those in higher positions at that time were desperate to “regain lost
ground.” “Since Kanzaki became president, our major performance indicators such as
insurance-in-force, total asset and premium revenue had recovered, and external parties
started calling us one of the ‘eight life insurers,’” says a staff member in the planningdepartment. Kanzaki was very popular among sales personnel. However, “the insurer’s
comeback as a major player happened to coincide with the beginning of the bubble
economy, which probably resulted in significant impact on the company,” according toanother staff member in the planning department.
(3) Going ahead with high-risk investments and loans
While selling a large volume of high-yield, high-dividend savings-type products in thelate 1980s, “the company increasingly leaned toward loans to real estate-relatedcompanies and nonbanks, stock investment, and other risky investment instruments suchas tokkin specified money trust and structured bonds to secure high-yields” (quoted fromthe insurer’s rehabilitation plan). During a two-and-a-half-year period from 1988
through 1990, the company executed a substantial number of large-lot problematic deals
including those with the Yokoi group, Aichi, Matsumotoyu Shoji, Aijishi and GGS Co.
Looking back, many say, “These things all happened just in a short period of time”“We suddenly realized that it was too late.”Those close to President Kanzaki largely got involved in investments and loans thatturned nonperforming later. Several head office staffers at that time say, “Kanzaki was
not a type of person who directed someone to do something or made proposals on hisown”…. “He was not a sort of person who could act arbitrarily on his own authority. In
the first place, he was not able to do anything on his own”…. “These investments andloans were largely executed by people called ‘President Kanzaki’s right-hand men’including Mr. A in charge of financial affairs, Mr. B in charge of sales and Mr. C incharge of real estate deals.”-109-

Table 2-17

Problematic deals that received media coverage(1) “Toyo Yusen K.K.” and other group firms led by Hideki Yokoi = outstanding loans worthroughly ¥80 billion(2) Moneylender “Aichi” (special liquidation) group = outstanding loans worth roughly ¥80 billion(3) Moneylender “Matsumotoyu Shoji” group = outstanding loans worth roughly ¥37 billion(4) Real estate firm “Aijishi” group = outstanding loans worth roughly ¥35 billion(5) Golf club membership sales company “GGS” (virtually failed in 1991) group = outstandingloans worth roughly ¥20 billion(Source) “THE MAINICHI NEWSPAPERS” dated on December 10, 2000

Table 2-18 Deals for which the administrator sought damages from Mr. D and others(1) A redevelopment project in Shinagawa Ward in which the company used a dummy
corporation to raise land prices (in violation of the Insurance Business Law)
(2) Additional lending to Golf club membership sales company “GGS”, which the insurer had
known from information obtained by a bank was about to go bankrupt(3) Lending to a group firm of nonbank “Aichi” despite insufficiency of collateral(Source) “Asahi Shimbun” dated on March 24, 2001

Of those people, Mr. A, who was put in charge of financial affairs in 1987, appears tohave played a significant role. Many head office staffers at that time say, “Kanzaki madea big mistake in personnel changes (staff deployment). That is, his mistake was to put
Mr. A in charge of financial affairs”…. “While assets were surging, Mr. A was assigned
the task of managing financial affairs and injected massive funds into problematic deals.
Several years later, most of such deals turned nonperforming.”
Mr. A, who took charge of financial affairs, made his mark after Kanzaki becamepresident, but had no experience in finance at all, according to staff in the planning andfinancial affairs departments at that time. He advocated “aggressive finance (positively
speaking)” after pushing away an executive in charge of financial affairs, his
predecessor, and taking power. He was a self-confident person and apparently didn’t
think that others would deceive him. As a result, he executed fishy deals introduced byyoung employees in the corporate insurance department one after another. Mr. A is said
to have started directly meeting men cashing in on the bubble economy later, but inreality, “he was more like being deceived by these men” (according to a staff member inthe financial affairs department).
Chiyoda Mutual Life’s financial affairs department used to be considered mostconservative in the industry. However, “the company was so conservative that it tended
to be susceptible to those who tried to exploit its nature” and “the company had nochoice but to highly treat people who can acquire contracts because its sales were-110-

weak,” according to head office staffers at that time.
(4) Why was it possible to make high-risk investments and loans?
The same person took charge in both executing investments and loans and inspecting
finances, enabling the insurer to carry out these problematic investments and loans. A
staff member in the planning department at that time says, “The two operations were
initially overseen by different persons, but starting in the late 1980s, Mr. A took chargeof screening operations as well as execution of investments and loans. The person
previously responsible for the screening operations objected to this personnel change,
but he was eventually excluded from the business by Mr. A and others.” The press also
reports as a comment by a former executive, “A financial expert who objectively
examined a borrower’s credit risk was removed, and a layman close to the president was
put in charge of screening operations. As a result, our traditional solid investment style
was lost” (The Yomiuri Shimbun, dated January 8, 2001).
Settlement rules also had flaws. For example, the Yokoi group, which had ten or sounits under its umbrella, could easily receive a huge amount of loans as a group because
authorization for settlement was not granted on a group basis, according to head office
staffers at that time and others. Moreover, even if loans were effectively long-term
lending, a settlement by an executive was still enough to extend the loans as long as they
were taking the form of three-month short-term lending. Besides, deals could beexecuted via a nonbank affiliated with Chiyoda Mutual Life. These rules are also
believed to have been loosened in the late 1980s. “Changes to the existing rules weremade at a managing directors’ meeting. Because none of the members of the meetingknew about financial affairs, however, they failed to put a brake on unfavorable changes
by Mr. A,” according to a head office staffer at that time.
All of the personnel in the financial affairs department initially participated in meetings
on the insurer’s asset management policy, but “the number of participants gradually
dropped to reduce criticism, leading to the system in which a person brought his plan
directly to Mr. A”, says a staff member in the planning department. The press also
reports, “The head of the financial affairs department, a close ally to the president, went
to the president’s office beforehand and decided on everything. Managing directors alljust agreed with what Mr. A said at a meeting because they knew that everything would
be over if they raised any objection” (the evening edition of The Yomiuri Shimbun,
dated January 10, 2001), thus supporting what the previously-mentioned staff member-111-testifies. “I didn’t know what Mr. A and several others were actually doing even though
I was also in the financial affairs department,” says a staff member in the financial
affairs department. “In many cases, President Kanzaki learned about deals only after
they were already executed. He stepped in sales activities, but when it came to financial
matters, he apparently thought that it would be OK to just rely on Mr. A,” says a head
office staffer at that time.
A staff member in the financial affairs department admits, “After all, nobody could stop
what Mr. A did. Employees within the department who expressed their opinions to Mr.
A were transferred to other departments or removed from their positions. We had
traditionally had few employees going against their bosses (in turn, the company is said
to have been good to work for). None of us interfered with Mr. A because we knew that
he was supported by President Kanzaki and saw several people ousted after actuallyraising objections.”(5) Occurrence of the bad loan problem
Following the bubble burst, these high-risk investments and loans developed into amanagerial problem in and after the summer of 1991. The financial affairs department
was completely renewed in April 1992 with Mr. A, the executive in charge of thedepartment, demoted. Reiji Yoneyama, who took the company’s presidency later, wasput in charge of the lending department, sorted out problematic loans receivable anddecided on how to deal with those loans. Head office staffers at that time and others say,“Yoneyama received advice from several lawyers because he had no experience infinances”…. “He worked as hard as he could to recover claims. However, paintingspledged as collateral were only sold gradually, and there was no way left to sell golfcourses.”
Yoneyama failed to take drastic accounting measures, though. He appears to havethought about setting aside reserves by using latent stock profits, but “he worried about
the risk of rumors resulting from the provision of large reserves” and “the bad loan
problem was recognized as a failure caused by the financial affairs division, not as aproblem of the whole company” (according to head office staffers at that time).
However, the amount of bad loans surged later, reaching around 20% of the total loansat the end of March 1993.
Initially, only a limited number of people knew about this problem even within the-112-

company. In 1993, however, a former executive (Mr. A’s predecessor who retired fromthe executive position in 1990) leaked the insurer’s information out of resentment
against President Kanzaki and Mr. A, and many of the insurer’s employees came toknow about the bad loan problem from media reports. Head office staffers at that timeand others say, “We eventually won a civil suit, but the incident easily became a factor
spurring credit worries”…. “I learned about the problem first from a weekly magazine.
Until then, many of us had thought that our problem lied in foreign exchange losses.
When Mr. A was demoted in 1992, we realized that something had happened, but we
had no idea about what actually happened at that time.”(6) Public disclosure of bad loans
In June 1993, the major eight life insurance companies disclosed the amounts of badloans (loans to borrowers in legal bankruptcy and past due loans in arrears by six
months) they had as of the end of fiscal 1992 for the first time ever. While Sumitomo
Life Insurance, which was known for its aggressive style of management, reported badloans of ¥36.7 billion, Chiyoda Mutual Life’s amount was a staggering ¥231.6 billion.
The announcement did not lead to immediate cancellations of large-lot contracts, but
provided great impact on the company. “Until then, when a weekly magazine reported
that ‘Chiyoda’s loans worth ¥500 billion had turned sour,’ our public relations
department answered that ‘the figure was one digit different (that is, the actual figure
was smaller).’ So, I was really shocked by the fact that the figure reported by themagazine was closer to the reality. I thought that nobody would believe us even when
the company said, ‘No problem’”, says a head office staffer at that time. “We
implemented an expansion strategy and just achieved dividend levels equivalent to thoseof major insurers. Suddenly knowing that we had a negative net worth of hundreds ofbillions of yen, I just felt compelled to drink”, says another head office staffer at thattime. Since then, the public increasingly viewed Chiyoda Mutual Life as a “company
struggling with bad loans.”
The actual amount of bad loans was more than ¥400 billion, roughly twice the disclosed
data, though. Because the disclosed amount did not include loans with waived or
reduced interest payment, it is believed to have failed to accurately reflect the actual
amount of bad loans (the media reported after the company’s collapse that its bad loans
amounted to ¥550 billion, but judging from what parties concerned say and inspection
reports, the amount was more like ¥400 billion or above).

-113-

Table 2-19: Changes in profit or loss on three profit sources
March
March
1988
1989
Expense profit
111
153
Mortality profit
415
495Interest profit
315
345
Total
840
993
(Data) compiled from inspection reports

March
1990
214
622
523
1,359

March
1991
216
655
524
1,395

(in units of ¥100 million)
March
March
March
1992
1993
1994
199
236
309
672
779
767
229
-62
-881
1,099
952
195

The insurer’s financial state deteriorated further. It reported an operating loss of ¥41.1
billion and was forced to change its way of setting up policy reserves in fiscal 1994,
although it managed to achieve a current surplus by posting gains on disposal of realestate and others. In an inspection conducted by the Ministry of Finance at around thesame time (in February 1995), the insurer’s net capital base in a broader sense (theamount calculated by adding to capital base, latent profits or losses on securities
holdings, 50% of class III classification loans and 100% of class IV classification loans)dipped to a minus ¥236.0 billion.
Nevertheless, the management was slow to respond to the problem. They carried out
restructuring and cost-cutting efforts including scaling down the administrative
department of the head office and transferring extra personnel to the sales department.
However, the management did not do anything to drive out the corruption that had been
festering inside the company at once” and “only made disclosure (of bad loans) without
showing any roadmap,” according to head office staffer at that time.
Chiyoda Mutual Life had a larger expense profit and mortality profit than other failed
life insurers had and therefore did not end up with a loss on three profit sources. The
insurer saw its net business profit (a unique management benchmark close to the total
profit or loss on three profit sources) expand to ¥72.4 billion in fiscal 1996 from theprevious year’s ¥22.9 billion as the assumed interest rate for group annuities dropped
from 4.5% to 2.5% in April 1996. Head office staffers at that time and others say, “I
thought we could overcome the bad loan problem if we took some time because we still
had an aggregate profit on three profit sources”…. “We ended up with an operating loss
in financial results for fiscal 1994, but I still thought we had enough cash flow to deal
with the problem. Even when Nissan Mutual Life failed, I considered their problem wasdifferent from ours.”-114-

No one took any action to change the existing business model either. Head office
staffers at that time say, “Our earnings results were not seriously bad until around 1996,
so we only felt that ‘we just returned to the original state’”…. “Ahead of the scheduled
enforcement of the revised Insurance Business Law and introduction of separate
accounting and solvency margin ratios, we knew that we would not be able to continue
relying on latent profits any more. Although young employees in the planningdepartment discussed the issue and reported their opinions, the management did nothing.
Their go-go attitude continued.”(7) Selling strategically held shares
After Kanzaki became President, strategically held shares increased further in response
to growing calls for finances that could contribute to sales results. “The financial affairs
department conducted a screening for each issue after receiving an investment requestfrom the sales force, not just accepting the request without examining each deal.
Nevertheless, investment in bank shares especially increased, distorting the balance ofour portfolio,” says a staff member in the planning department.
In the mid-1990s, the insurer discussed the need to sell its strategically held shares, butwith people in the sales department strongly objecting to the idea, only ¥100 billion
worth of shares were sold. Although the management discussed the issue from time totime later, every member is said to have been “for the idea in principle, but against thedetails.”
Faced by a surging number of policy cancellations following the collapse of Nissan
Mutual Life in 1997, the financial affairs department proposed, out of a sense of crisis,that “the company sell most of its shareholdings, buy government bonds, use capitalgains to step up disposal of bad loans and at the same time, boost the liquidity of assets
to prepare for cancellations,” according to a staff member in the financial affairs
department. The total assets at that time were worth ¥6 trillion. The liabilities side of thebalance sheet was occupied by more than ¥4 trillion worth of contracts that might leadto an outflow of money such as group annuities and lump-sum endowment insurance,
while the assets side included loans receivables and real estate with low liquidity worth
as much as nearly ¥3 trillion with its liabilities exceeding its assets. People making theabove-mentioned proposal thought that the company, which still had more than ¥200
billion worth of latent stock profit, would have to give up sales to corporations, butwould still be able to survive.

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“Although President Yoneyama favored this proposal, other executives severely
criticized it, saying, “Stop fooling around!” The proposal was turned down because
Chairman Kanzaki objected to it and other executives went along with him. Shares inmember companies of Satsuki Association, Keio University-related businesses, theMitsui group and the former Okura group (Kadono family) are among the insurer’s
shareholdings. Executives said, “Our company may collapse”…. “We won’t be what
Chiyoda Mutual Life has been”…. “We’d better go bankrupt than sell shares in X
company,” according to staff in the financial affairs department.
(8) Credit uncertainty and outflow of policies in force
While the insurer’s latent stock profit recovered to ¥200 billion with the rebound of thestock market in fiscal 1995, its deteriorating financial standing became well known tothe public, triggering withdrawals of group annuity contracts. When U.S. affiliatedrating agency S&P released the ratings of major eight life insurers in January 1996, thecompany was rated “B,” the lowest among the eight insurers.
After Nissan Mutual Life went under in April 1997, Chiyoda Mutual Life becametargeted by the media as the “life insurer likely to fail next.” Moreover, policy
cancellations further rose amid growing concerns over the financial system. “Each time
the burned-out site of Hotel New Japan was covered by TV as an icon of a risky life
insurer, a large number of contracts were withdrawn. Major insurers also spread harmful
rumors against the company when marketing their products. The mass media obtained
stories about the insurer from the information leak incident, and their coverage hadsignificant impact on the company’s business,” according to head office staffers at thattime.
However, the management is said to have shown no clear policy. In 1996, Yoneyama
assumed the company’s presidency, while Kanzaki stepped down and became Chairman.
A head office staffer at that time says, “Grasping the whole picture of the financial
condition of the company after he became president, Yoneyama said, ‘I have neverthought that our financial standing is as bad as what I’ve just found.” However, hedidn’t show any plan to consolidate the company’s operations yet. “As a restructuring
measure, the president simply said, ‘Cut costs by 10% at every department.’ The
message given to us from President Yoneyama and other top management was only
‘Hang in there’. We could do nothing about the situation,” says another head office-116-

staffer at that time.
Table 2-20: Changes intotal assets
Chiyoda Mutual Life
Year-to-year basis
FY 1990
51,54414.1%
FY 1991
56,214
9.1%
FY 1992
59,8296.4%
FY 1993
63,166
5.6%
FY 1994
63,963
1.3%
FY 1995
64,4250.7%
FY 1996
58,163-9.7%
FY 1997
50,282-13.5%FY 1998
43,599-13.3%FY 1999
35,019-19.7%(Data) “Life Insurance Statistics”(in units of ¥100 million, %)All companies combined
Year-to-year basis
1,316,188
12.2%
1,432,341
8.8%
1,560,111
8.9%
1,691,221
8.4%
1,779,655
5.2%
1,874,925
5.4%
1,886,590
0.6%
1,901,110
0.8%
1,917,684
0.9%
1,900,329-0.9%

Nevertheless, “President Yoneyama took the stance of setting aside policy reserves
under the level premium reserve method and cleaning up bad loans, hoping to narrow
down the company’s problems to latent stock losses only,” according to a staff memberin the planning department. The insurer posted a latent stock loss of roughly ¥100
billion in fiscal 1997 as a result of changing its stock valuation method from thelower-of-cost-or-market-valuation method to the book value method, while raising ¥50
billion in funds and ¥77.5 billion in subordinated loans from Tokai Bank and other close
financial institutions. It also applied the level premium reserve method to policy
reserves drawn down for the announcement of earnings results for fiscal 1994 anddisposed of bad loans worth ¥138.9 billion. The company raised ¥59.6 billion by
subordinated borrowings and wrote off ¥92.7 billion worth of bad loans in fiscal 1998 as
well.
In reality, however, “the insurer barely managed to report a net profit and maintaindividends to policyholders by posting capital gains from cross transactions of shareswith unrealized gains, generating profits from structured bonds ahead of schedule andposting profits on sales of real estate (with unrealized gains) to affiliated firms” (quoted
from the insurer’s rehabilitation plan). The lapse and surrender rate remained high at
around the middle of 10-20% with the value of group annuities in force shrinking to¥1.2 trillion at the end of fiscal 1998 from its peak level of ¥3 trillion. Several head
office staffers at that time say, “Policyholders stood in line each time the company wascovered by the media”…. “Annuity contracts were cancelled by member companies ofSatsuki Association and other very close companies.”-117-

(9) Tie-up negotiations with outsiders“Around the end of 1997, when concerns over the nation’s financial system emerged,
the company started seeking a capital tie-up with another firm as a way to overcome thecrisis, judging that ‘there was nothing the company could do on its own,’” according toparties concerned at that time. Full-fledged negotiations didn’t begin until 1998, though.
“In November 1998, when the Long-Term Credit Bank of Japan failed, we judged that
our company needed to find ways to alleviate credit risk concerns. We immediately
started negotiations with a foreign company at the end of the year, but the negotiating
partner eventually rejected tie-up talks. The corporate value assessed by us was different
from the foreign company’s assessment by hundreds of billions of yen and the huge gap
hampered the negotiations”…. “We negotiated with several others later, but the talks
didn’t proceed smoothly because we were unable to fill the gap in calculations ofcorporate value,” say staff in the planning department and others.
With tie-up talks with external parties making little progress, Chiyoda Mutual Life spenta year drawing up a new “management reform plan” that centered on drastic businessrestructuring measures. Under the new plan compiled in September 1999, the insurer
narrowed down operations, through corporate split-ups and outsourcing, to its corebusiness such as coverage products and medical insurance for retail customers, whilesubstantially reducing its operating costs by carrying out a personnel cut. Financial
institutions close to the insurer are said to have gotten involved in drawing up the plan.
In January 1999, Chairman Kanzaki, who held a representation right even after leaving
the position as president, stepped down and became an advisor to the insurer.
Besides, following the inspection by the Financial Supervisory Agency in 1999, thecompany set aside huge loan-loss reserves further and strengthened its kikin, or fund. It
didn’t raise new money for these purposes, but rather used money transferred from
subordinated loans, though. Parties concerned at that time say, “We successfully
implemented measures to buck the downhill trend that had continued since the failure of
Nissan Mutual Life. This marked the only turning point in a positive direction we’d everexperienced”…. “I thought we would be able to barely survive as we had done all ofthese things.” In the meantime, a head office staffer at that time recalls those days,
saying, “Having already gone through tough situations for years, employees were all so
exhausted because we still had no idea how long the hardship would continue”“Handling few positive works, employees had been worn out.”-118-

While the prices of shares held by the insurer again plunged, full-fledged tie-up
negotiations with a foreign company resumed in the second half of fiscal 1999. Amid
extremely severe external environments, “the insurer found its business results
worsened every time data was updated,” according to a staff member in the planningdepartment. After all, the company failed to form a partnership with the foreigncompany partly because it was unable to obtain additional financial assistance fromclose financial institutions. It filed for corporate rehabilitation proceedings with Tokyo
District Court on October 9, 2000. A head office staffer at that time explains the
background leading to the failure in negotiations, saying, “In the tie-up negotiations, theforeign company sought to eventually form alliances with financial institutions close tous, along with a partnership with us. The realignment of the financial sector upset theplan.”(10) Managers at that time
Kanzaki, who served as Chiyoda Mutual Life’s president from 1982 through 1996, had along experience in sales and even after he became president, he got only involved insales issues. Head office staffer at that time say, “Kanzaki is not the type of person who
directed someone to do something or made proposals on his own”…. “Our problem did
not lie in abuses of power by an autocratic president, but rather our failure to takecontrol of actions made by people around the president”…. “Investments and loans that
became a big issue later were not directed by President Kanzaki. His biggest problem,
however, was to appoint a person having no experience in finance as the executive incharge of financial affairs and allow him to make risky investments and loans. Kanzaki
made a big mistake in personnel affairs.”
President Kanzaki “had the power to shuffle personnel for a long period of time andeven got involved in appointing branch managers when it came to staff deployment in
the sales department”…. “He had a service-minded personality, which in turn createdfactions within the company”…. “He had no management capability. The previous
president would say, ‘I don’t need people who present no opposing arguments’, but noone disagreed with Kanzaki. He had authority over personnel issues, and his approachfor personnel allocation was based on whether or not he liked a particular person. This
represents an adverse effect of Kanzaki’s long-term regime”…. “Kanzaki’s resignationin 1996 was his own decision, not forced by internal and external pressure. It was
President Kanzaki who appointed Yoneyama as next president,” according to head
office staffers at that time.

-119-

President Yoneyama, Kanzaki’s successor, tried to revive his company, but with theinsurer’s credit risk already well known to the public, he was busy dealing withcustomers and the media, drawing up measures to raise solvency margin ratios and otherjobs to clean up the mess created in the past. A staff in the planning department says,“President Yoneyama had a strong sense of justice and was also a passionate man”
“We had done what we could do, but the mass media was looking for a life insurer thatwas likely to go bankrupt next, and we could do nothing about it.”(11) Actuary
During the time when Kanzaki served as president, a business monitoring function
within the insurer didn’t work well. Actuaries, experts in actuarial science, were no
exception.
Actuaries were not considered as important within the company at that time. The insurer
did not have an independent actuarial department as other companies did and its
actuarial division was put within the planning department. This is a piece of evidence
suggesting that the actuarial operations were not valued within the insurer. “We werecalled ‘mere calculators’ by the management. They apparently thought that actuaries
were ‘only needed to satisfy the requirement set forth under the Insurance Business
Law’ and that ‘the monitoring by the regulatory authorities would be enough,’” says astaff member in the planning department. The management is said to “have talked about
their actuaries as convenient, but unreliable people,” according to a head office staffer atthat time. The company’s actuaries are said to have lost the management’s trust as aresult of failing to well respond to inquiries made by the Ministry of Finance in the
1970s, when the insurer was struggling with a business slump. “In the 1980s, thenumber of actuaries was small for the company’s size and its actuaries especially had
little power against the sales department,” many staff members in the planningdepartment admit.
(12) ALM and attitude toward risk management
Chiyoda Mutual Life conducted institutional reform in 1983, dividing its financial
investigation division into “the finance division” and “the financial inspection division”
in an effort to strengthen the function of its financial affairs department. As I said earlier,
however, since Mr. A took charge of screening operations as well as execution of
investments and loans, the company’s check and balance system had been lost. Various-120-

loopholes were also created in the settlement process.
The idea of risk control did not exist in the 1980s, but “Each department was aware of
the risk of incurring losses. Then an inexpert (having a strong authority) came in andmessed up everything” “The company’s structure was based on ‘the belief that humannature is fundamentally good’. Our problem largely lied in people,” say head office
staffers at that time.
Yet I can’t help but wonder how far the management at that time understood thefinancial conditions of their company. A head office staffer at that time reveals an
episode, saying, “We submitted a profit/loss report every month to the management.
One day, President Kanzaki complained, ‘I don’t really understand these figures.’ In
response to his complaint, the executive in charge rushed to us, demanding that we
explain about the figures to him. We then decided to stop submitting our profit/loss
report.”Also, some people within the company at least raised concerns about the rapid
expansion of assets. “When a trading house brought its surplus funds worth more than
¥1 billion to us in the mid-1980s, our accounting department objected to theunderwriting. However, the sales department brushed off the opposition”…. “Actuaries
and others in the planning department again tried to put a brake on the sales growth ofsavings policies in around 1988, but the sales department didn’t listen to concerns raisedby the planning department at that time as well, and the company failed to stop the salesof such products”…. “Employees in the planning department and actuaries talked aboutsome of our insurance contracts, concluding that ‘load charges for certain contracts
should be retained because they came in by a fluke.’ Thus, we tried to reduce costs, but
didn’t stop selling those products,” according to head office staffers at that time.
The financial affairs department hired those who learned math and science at college to
conduct research on ALM (asset-liability management). However, “The company, as awhole, effectively failed to implement ALM to the last”…. “Nobody had an idea ofstrengthening internal reserves to prepare for risks associated with holding contracts
with high guaranteed yields for a long period of time, although this also applied to otherinsurers, not only to Chiyoda Mutual Life,” say head office staffers at that time.
Moreover, the company had constantly relied on capital gains to generate dividends
since the Insurance Council released Report of the Insurance Council to the Minister of-121-

Finance of 1975.
(13) Role played by external discipline
Chiyoda Mutual Life took the form of a mutual company. Many former employees saythat a mutual company is subject to very little checking by external parties. “Bothrepresentatives and outside advisors are chosen by the company. It’s better than nothing,but everything depends on who will serve as representative or outside advisor. In fact, aword of warning was never given to Kanzaki at meetings of representatives”…. “A
meeting of representatives was held like an event with important customers. We paid
travel expenses and car fares for them, held a convivial party at a hotel after the meetingand prepared hospitality gifts,” several head office staffers at that time say. However,“After the bankruptcy of Nissan Mutual Life, the company started receiving questions
like ‘Is Chiyoda Mutual Life O.K.?” from representatives, according to the head office
staffers.
The company’s labor union used to be very active, and its member once served as headof the National Federation of Life Insurance Worker’s Unions (the ruling body of eachlabor union of life insurance companies). However, “That person was appointed as aboard member later and since then, leading the labor union had become part of the
career track at the company,” according to a head office staffer at that time.
Financial institutions close to the insurer didn’t step in on its management very much
until 1997. After the insurer’s financial standing started deteriorating, however, they not
only contributed to the company’s fund and provided subordinated loans, but also
became thoroughly involved in the insurer’s business including drawing up a
management plan and holding tie-up talks with foreign-affiliated firms (they eventually
gave up providing assistance).
(14) Ministry of Finance
The supervisory authorities did not play a visible role in the bankruptcy case of Chiyoda
Mutual Life.
In its inspection in November 1990, the Ministry of Finance didn’t raise any specificconcerns about large-lot deals that the insurer got involved in. Loans worth ¥28.2 billion,
only 1.5% of the total loans, were determined as classified loans during the regulatory
assessment, according to materials attached to the inspection report.

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Chiyoda Mutual Life is said to have informed the Ministry of Finance of its bad loan
problem in 1992. Several employees in the planning department say, “By around 1992,
the Ministry of Finance became aware of our bad loan problem and requested us to draw
up a business improvement plan. Since then, we had often visited the Ministry to seek
instructions whenever we came across problems, even those unrelated to inspections”….
“Employees had a feeling that the government would do something for the company
because it had stepped in the company’s management very much.”
The insurer is said to have faced extremely severe inspections in 1995 and 1999, but
unlike in the case of Toho Mutual Life, the resignation of its top management was notdemanded by the supervisory authorities. “The regulatory authorities didn’t specificallyplay an active role in the management of the company” and “only showed their interestin earnings results and soundness of assets for a single fiscal year and operations of eachdepartment,” according to head office staffers at that time. A member in the planningdepartment says, “The Ministry inspected our policy reserves while assessing our assets
in the inspection of 1999. This was the first time that the regulatory authorities checked
our policy reserves.”

6. “Managerial vacuum” caused failure – Kyoei Life Insurance(1) Direct cause of failure
Kyoei Life collapsed in October 2000. Its negative spread put a heavy burden on thecompany. Its profit earning structure was such that the company had become dependent
on the gains on the sale of assets by the latter half of the 1990s. Around 1999 thecompany started negotiating with Prudential of America. for a capital tie-up. Chiyoda
Mutual Life’s failure on October 9, 2000 triggered a rush of cancellations at Kyoei Life.
Kyoei Life applied for the commencement of the company rehabilitation procedure on
October 20.
Kyoei Life did not get involved in high-risk real estate investment and loans during the
bubble period. Its managers and people close to them did not go to extremes. What
proved fatal was a large negative spread incurred each year as the company soldsingle-premium endowment insurance from the latter half of the 1980s to the 1990s.
Kyoei Life initially took an independent path, but it later followed the footsteps of other-123-

insurers and began aggressively selling single-premium endowment insurance. The
company continued to sell it until the mid-1990s, even after its rivals stopped doing so.
Failure in asset management made things worse. In the latter half of the 1990s thecompany rushed to high-risk securities investment in a bid to shore up the three types of
profit, but ended up with a large loss each year.
A managerial vacuum may be another factor. Saburo Kawai, founder and a competentactuary, had such a big presence in the company that everyone depended on him foreverything. After Kawai practically retired from the company, the management teamlost its unifying force so it was unable to join together and face up to the crisis. It wasstated in Kyoei Life’s rehabilitation plan that “people who joined the company
sometime from the late 1950s to the early 1970s benefited from a favorable environment
for so long that they were slow to take bold measures to improve business.”
Still another factor was that the members of the management team did not shareaccurate details of the company’s affairs. Only a handful of members were aware of thegravity of the situation even as late as the mid-1990s. A considerable perception gap
emerged between members of the management. They were unable to decide in which
direction the company should be steered until it went under.
(2) Unique management strategy
Kyoei Life was established as a reinsurance company before World War II. After thewar, it made a fresh start as a direct life insurance company. It did not belong to aparticular corporate group, so it had no ready-made market. This was why Kyoei Life
tried to cultivate a niche market left untouched by other insurers where there wereunmet needs for coverage. The company formed tie-ups with various trade associations
having a nationwide network and offered unique products to members of such
associations under the mutual aid system, thereby expanding its business base.
Specifically, it sold group term insurance combined with endowment insurance named“Kyoko Hoken” to members of a teachers group called the Japan Educational Promotion& Teachers Mutual Benefit, and group term insurance named “Jieitai Hoken” tomembers of the Defense Agency’s mutual aid society.
Endowment insurance was a mainstay product in the life insurance market at that time.
Kyoei Life’s main product was group term insurance, which offered coverage at a low
premium. “Our idea was to become one with the market to develop products,” says a-124-head office staffer at that time. In the 1960s, it became an established practice for thesales staff to sell endowment insurance combined with term insurance (the first of its
kind in the industry) as a complement to group term insurance. “Unlike other insurers,
our company gave its sales employees a target customer base so that anyone could be a
successful salesperson. They did not have to turn to their relatives and friends as initial
targets…. Our sales employees were instructed not to sell products to someone theyknew. Our company did not hire people who had sold insurance at other companies,” hesays.
Kyoei Life was known for the strategic steps it took in anticipation of an aging society.
It was one of the first to sell individual annuity insurance, in 1963, and opened “Kyoei
Annuity Home” in 1965, using the lump-sum payment of premiums of individual
annuity. The company became the first in the industry to sell adult disease insurance, in1971. It adopted the separate death rates for men and women and offered discounts onlarge-amount policies ahead of other companies.
Kyoei Life’s unique strategy proved a success. In terms of the total amount of individual
insurance in force, the company ranked 10th in the mid-1970s and rose to eighth in the
mid-1980s, coming after the seven major life insurers.
(3) Launch of single-premium endowment insurance
Kyoei Life sold security-type products through groups with which it had formed
partnerships. With this unique business model, the company achieved growth. It
promised to pay an assumed interest rate of 3.75%, lower than that offered by otherinsurers. “Our company was constantly looking for a niche market…. Other companies
said that ‘Kyoei Life’s insurance is hard to understand,’” said the head office staffer atthat time.
In the mid-1980s, “The sales staff began demanding, ‘let us sell single-premium
endowment insurance (like other companies).’ Kawai, who had been reluctant to sellthis insurance, changed his policy in 1987. The company belatedly started aggressively
selling this product and raised the assumed interest rate to 5.5%, about the same as
offered by other companies,” say the actuarial staff at that time. In this connection, there
were conflicting witness accounts. One said, “We started with a low assumed interest
rate but various things pressured us into raising it to the level of other companies.”
Another said, “The actuary at that time recommended raising the assumed interest rate

-125-

and even brought in an actuary from another company to persuade Kawai.”
Table 2-21: Brief History of Kyoei Life
1935
1945
1947
1948
1951

1952
1961
1965
1967
1969
1971
1972
1986
1992
1994
1995
1999
2000

Kyoei Life Reinsurance Co. established (receives capital from private life insurancecompanies).
Absorbed into the Central Life Insurance Council.
Kyoei Life Insurance Co. established (with a vacant president post).
Saburo Kawai becomes president.
Underwrites group insurance for the National Police Reserve (predecessor of the
Self-Defense Forces). Gains contracts for the teacher’s mutual aid system in Shizuoka
Prefecture.
The total amount of direct insurance in force becomes greater than that of reinsurance.
Kyoei Computer Center (now INES Corp.) established.
“Kyoei Annuity Home” opened using individual annuity insurance.
Oriental Life Insurance Cultural Development Center established.
Brazil Kyoei Insurance established.
Masayuki Kitoku (former Ministry of Finance official) becomes president.
Receives the transfer of Okinawa Life contracts in block.
Yoshio Tayama becomes president.
Saburo Kawai retires as director.
Shoichi Otsuka becomes president.
Current loss, and ¥104.1 billion stock valuation loss, for fiscal 1994.
Forms a business and capital tie-up with Daiichi Mutual Fire & Marine Insurance.
Daiichi Mutual Fire & Marine ordered to suspend business. Applies for protection underthe Act on Special Treatment of Corporate Rehabilitation Proceedings and Other
Insolvency Proceedings of Financial Institutions.
(Honorifics omitted)“Kawai did not like the idea of assets decreasing five years later. To get a volume effect,
he permitted sales of only products with a 10-year maturity,” according to a head office
staffer at that time. Kyoei Life ranked high in terms of total amount of policies in force,but ranked low in terms of asset size because its main sellers were security-type
products. “Amid the intensifying race for scale expansion in the life insurance industry,
Kawai must have judged that ‘we need assets to become a big company,’” says a head
office staffer at that time. Kawai did not think of making his company a large life
insurer. Some say that he was already senile and “lacked judgment ability” or that
“Kawai thought he was already a retiree.”Anyway, the drive to sell savings-type products at this time became a burden on thecompany later. “The turning point came in 1987. It was a year when Kyoei Life, which
had followed an independent path collecting high premiums and paying high dividends,
abruptly raised the assumed interest rate to the level offered by other insurers. Kawai’s
brainchild Annuity Home was mentioned in the Insurance Council’s report. This madehim and his staff very happy temporarily. Then things changed for the worse so that thecompany was in no position to demonstrate its uniqueness…. Kyoei Life had a unique-126-

management style and encouraged employees to try something new. As Kawai’s
influence waned, the company lost its uniqueness and began to imitate others,”
according to the actuarial staff at that time.
(4) Delay in discontinuing sale
The negative spread became a serious problem not only because single-premium
endowment insurance had a long maturity of 10 years but also because the company did
not quickly stop selling the product. While the growth in the total assets of othermidsize life insurers, or of the whole industry, slowed down to a single-digit figure from1990 onward, Kyoei Life’s total assets continued to grow at a double-digit pace until
fiscal 1993. As a result, the average assumed interest rate did not come down even in thesecond half of the 1990s. Even after other insurers began to hold back sales, Kyoei Life
continued sales by giving incentives to the sales staff, according to the actuarial staff atthat time.
Table 2-22: Changing total assets
Kyoei Life

FY1985
FY1986
FY1987
FY1988
FY1989FY1990
FY1991
FY1992
FY1993
FY1994(Data) “Life Insurance Statistics”

12,12415,037
18,996
24,601
30,00935,034
39,34344,80350,64154,357Year-on-yearchange
20.5%
24.0%
26.3%
29.5%
22.0%
16.7%
12.3%
13.9%
13.0%
7.3%

(in units of ¥100 million)
All life insurers
Year-on-yearchange538,706
17.8%
653,172
21.2%
792,684
21.4%
970,82822.5%
1,173,439
20.9%
1,316,188
12.2%
1,432,341
8.8%
1,560,111
8.9%
1,691,221
8.4%
1,779,655
5.2%

One reason Kyoei Life was several years behind other life insurers in discontinuing thesales of single-premium endowment insurance was that the product was targeted not at
new customers but at members of associations with which the company had formed
partnerships, who were the core customer base. Single-premium endowment insurance
was seen and used as a receptacle for teachers’ retirement money, and Kyoei Life wasunder strong pressure from the associations to sell the product. The sales divisionstrongly resisted the idea of discontinuing sales, partly because it became heavily
dependent on savings-type products and its sales power was waning. “Most of Kyoei
Life’s contracts were made with a specific group of customers such as teachers. Many-127-

said single-premium endowment insurance was a good product for investing andincreasing teachers’ retirement money. We discussed the possibility of reducing theassumed interest rate, but had difficulty going ahead with the idea, fearing that our
relations with customers might be affected. We could not turn down requests (Notefrom translator: requests for the high-yield product) from the associations through which
we got new businesses…. The sales staff’s power to sell security-type products was
weakening. To achieve a 10,000-person system, they rushed to sell single-premium
endowment insurance…. It was very easy to sell single-premium endowment insurance
when other insurers had stopped selling it…. The executives in charge of sales had a big
say and did not let others put a brake on sales,” say the head office staffers at that time.
“The actuarial division started a future cash flow analysis around 1990 at Kawai’s
instructions. It became obvious that ‘disastrous results’ lay ahead. However, in the
expectation that ‘the external environment will change in 10 years’ time,’ the company
did not take drastic action such as discontinuing sales. Kawai merely showed
displeasure when this matter was brought to his attention. He must have thought that, as
the product had a 10-year maturity, things should improve during the life of the
product,” according to the actuarial staff at that time.
“In 1992 or so, even salespeople began to ask ‘is it all right to continue to sell in thisway?’ The executive in charge of sales (who was one of those close to Kawai)
opposed to the discontinuation of sales, and there was no way to put a brake on the sales
drive,” says an actuarial staffer at that time. The chances are that the executive in chargeof sales had a poor grasp of the precise details of the company. As described later, Kyoei
Life was quite secretive about its own affairs and made sure that its real situation was
visible only to a few executives. A certain actuarial staffer of the time says that Kyoei
Life was far from restraining the sales of savings-type products and sold a large volumeof group survivor’s insurance with high assumed interest rate in 1993 or so.
The company finally stopped selling single-premium endowment insurance in 1994, theyear when it posted a current loss. “It was too late,” said a head office staffer at thattime.
(5) Steps taken after the external environment worsened
The company’s negative spread first appeared in fiscal 1992. In fiscal 1994, thecompany suffered a securities valuation loss of more than ¥100 billion due to the stock-128-

market slump and, accordingly, lowered the required policy reserve level and booked
profit from the sale of real estate to cover the valuation loss. In fiscal 1995 or so, thecompany fell into a situation where the expense profits combined with the mortality
profits were not large enough to cover the interest losses. Its earnings structure became
even more dependent on the profit from the sale of stocks and other assets. “When thecompany suffered a current loss owing to the stock price drop and the yen’s appreciationin fiscal 1994, it tried to reduce the investment risk. Even though a large loss wasincurred amid the stock market slump, the company still had net assets of ¥150 billion.
The interest rate was low and the company became unable to pay high assumed interest
rates. In an effort to fill the gap between the actual interest rate and the assumed interest
rate, the company again began taking risks. It was trapped in a vicious cycle,” says ahead office staffer at that time.
A big factor that led to this situation was that the main insurance product had a long
maturity of 10 years so that the assumed interest rate did not come down for a long time.
“The company was slow to change its strategy. Because the problem lay in the interest
loss, I suggested switching to different instruments and starting a campaign to promote
cancellations. At first (the management) blasted ‘You fool!’ It took two years to getthem to do these things,” says an actuarial staffer at that time. The company went too far
in selling real estate just to realize latent profit. “In 1995 and 1999, the company madeloans to its affiliate Sanei Building Co., to which it sold off real estate holdings, andposted the profit from the sale as extraordinary profit. The loans totaled some ¥70.4
billion at the end of last March,” reported Yomiuri Shimbun dated December 25, 2000.
“An actuary would ask the finance division to generate a certain amount of profit in aparticular year, and the finance division was free to do anything. If the company was
unable to make both ends meet at the end of year, it resorted to selling off assets torealize profit,” says a head office staffer at that time.
As the business environment deteriorated further, the company “fell into real difficulties
and entered the world of gambling,” says a financial staffer at that time. “As we initiallyadopted the lower-of-cost-or-market method for evaluating stocks, we took a chance on
foreign bonds, which could be retained at a loss even if they incurred latent loss. Thiswas spearheaded by the head office manager who saw Nippon Dantai Life achieve
success in foreign bond investments. Sometimes our company did well, but in 1999 wewere hurt severely in Range Forward Trade. We had to sell prime loans to realize
profits…. For several years prior to bankruptcy, we annually had an interest loss of ¥100

-129-

billion, a mortality profit of ¥65 billion and an expense profit of ¥20 billion, whichboiled down to a shortage of ¥15 billion. To cover this shortage, the company rushed togamble on foreign bonds and stocks,” says a head office staffer at that time.
As a result of all this, the company continued to post large losses from the sale ofsecurities from fiscal 1997 onwards. The record for the second half of the 1990s showsthat the losses from the sale of securities (on the general account) increased from ¥18.5
billion in fiscal 1996 to ¥47.7 billion (including ¥31.8 billion from the sale of foreign
securities) in fiscal 1997, ¥52.3 billion (including ¥40.3 billion from the sale of foreign
securities) in fiscal 1998 and ¥90.8 billion (including ¥72.5 billion from the sale offoreign securities) in fiscal 1999. “If the negative spread was the only problem we had todeal with, we had a means to survive. If we had avoided incurring a large loss year after
year like this, we would not have fallen into a crisis,” says an actuarial staffer at thattime.
It was not that the company made no reform efforts. In 1996 it took measures to cut
costs and shift to more profitable products, but these measures “did not go far enough....
The management reform made little progress, and the board member who spearheaded
the reform retired,” according to the then actuarial staff. In March 1998 the company
raised about ¥25 billion capital by issuing shares to affiliates such as Sanei Building Co.
and INES Corp. as well as Toda Corp.
(6) Tie-up negotiations with outsiders
With Nissan Mutual Life collapsing in 1997 and one major financial institution after
another going under around that time, the business environment deteriorated further.
The surrender/lapse ratio of individual insurance leaped to 14% from 10% in theprevious year.
Several directors including Mr. A realized that their company could not survive without
outside help, so they started full-scale efforts to negotiate for a tie-up. Most board
members were not seriously concerned. “Mr. A proposed to start negotiations for atie-up, saying, ‘let us go about this just in case,’ but had a difficult time getting things
started in the face of strong opposition from other board members…. Most members ofthe management wanted to rebuild business on their own, but they thought it may
become necessary to get outside help and therefore started negotiations under Mr. A’sleadership…. The first one they approached was a major U.S. life insurer who suggested-130-

a method of separating new and old contracts. Negotiations with this insurer made little
progress. Our company talked also to other insurers based in the U.S., Canada andSwitzerland and major Japanese life insurers,” according to the former head office
staffers and others concerned.
It was after the failure of the Long-Term Credit Bank of Japan in 1998 that Kyoei Life
seriously started negotiations with others. Investments and loans to LTCB-affiliatednonbanks became irrecoverable and this was a serious blow to the company. Although
Kyoei Life had specific customer bases and was a stock company, which lent itself
easily to a capital tie-up, there was an unfilled gap in the perceived corporate value
between the negotiating parties. The negotiations made little headway.
“Most directors and advisors were unaware that their company was in critical condition.
Members of the management were divided into those who pushed for a tie-up and those(majority) who insisted on reconstructing business without outside help. The two sides
did not come together until the end. Those who favored self-reliant reconstruction had
no specific measures but continued to say such things as ‘the stock average will surpass
20,000’ or ‘education and military are the most important to the nation, so theadministrative authorities would not permit the collapse of our company which has close
relations with the government,’” according to a head office staffer at that time. “We canonly say that they didn’t want to do anything,” says another head office staffer.
Under these circumstances, an unthinkable thing happened. In 1999, while those who
favored a tie-up were in negotiations with Prudential of America their opponents who
preferred self-reliant reconstruction proposed and carried out the idea of forming acapital tie-up with Daiichi Mutual Fire and Marine Insurance, which was in trouble.
“The tie-up with Daiichi Mutual Fire was not promoted by a group negotiating withforeign institutions. The idea was outrageous to this group, but it raised great hopes
among the majority of the management that ‘money will flow into our company,’” says
an actuarial staffer at that time.
When Claremont Capital Holding approached Kyoei Life and offered to put up capitalin March 2000, those who favored self-reliant reconstruction warmed to the idea.
Claremont President Yoshihiko Kokura took an equity in Taisho Life and gained control
of its management at around this time, but defrauded this company of a large sum ofmoney and was arrested by the Tokyo District Public Prosecutor’s Office in August-131-2000. “Many members of the management almost jumped at Claremont’s proposal to
put up ¥100 billion. Fortunately, they were advised in time by an investment bank that
Kokura was a dangerous person. They would have most certainly gone along with his
proposal if negotiations with Prudential were not making progress,” says an actuarial
staffer at that time.
Daiichi Mutual Fire, with which Kyoei Life had formed a business and capital tie-up,
collapsed in May 2000, and the ¥30 billion fund contributed in the previous year was
lost. This loss, combined with a huge loss from exchange trading, sapped the strength of
Kyoei Life. Meanwhile, the company negotiated with Prudential of America. for acapital tie-up and announced a basic agreement in June 2000. “Kyoei Life announced
the basic agreement because its audit corporation refused to ‘endorse the financial
statements without a tie-up agreement.’ Our company was negotiating with several
Japanese firms at the same time,” according to the actuarial staffer.
The negotiations for a tie-up continued for some time. “It was agreed that the tie-up
would not come into force unless the stock average reached 20,000,” according to theactuarial staffer. “Upon receiving a due diligence report from Prudential at the end of
September, we considered whether the initial reconstruction plan was feasible. For
reasons such as the stock market slump, the plan became difficult to carry out. In
October we started discussing what we should actually do,” then President Otsuka said
at a press conference shortly after his company’s failure. Chiyoda Life’s failure on
October 9 triggered cancellations at Kyoei Life. Kyoei Life had no choice but to apply
for the commencement of the corporate rehabilitation procedure on October 20.
(7) Presence of the founderFounder Kawai played a big part in nurturing the latecomer Kyoei Life into a company
comparable to major life insurers in terms of contract volume. Also, he was largely
responsible for failing to guide the company out of its crisis. “The company rose and fellwith its autocratic leader,” as a head office staffer at that time put it.
Kawai was an actuary and served as the chairman of the Institute of Actuaries of Japan.
He not only managed Kyoei Life, but he involved himself in a broad range of activities,
such as drawing up a plan for the national pension system as a committee member of the
Ministry Health and Welfare and establishing the Oriental Life Insurance Cultural
Development Center to nurture the life insurance business in Southeast Asian countries.

-132-

He was the first Japanese to receive the John S. Bickley Founder’s Award Gold Medal
for Excellence from the International Insurance Society, in 1995. An actuarial staffer
who was close to Kawai says, “He was a man of ability, but most of his ideas led
nowhere. Kyoko Hoken (teachers’ insurance) developed into something as he continued
to have a say in it. Other ideas blew up before getting anywhere. If he started something
but left it to someone else after a while, it did not grow into a good business.”
It seems, from the comments made by the parties concerned, that Kawai was the only
person who made important business decisions until shortly before his death in 1998.
He was replaced as president in 1971 by Masayuki Kitoku, a former official of the
Ministry of Finance. Kitoku’s stance was that “my job is to make the company bigger
and I would like Mr. Kawai to make decisions.”
The third and fourth presidents, Yoshiro Tayama (1986-1994) and Shoichi Otsuka(1994-2000), were close to Kawai and left him to make decisions. It is not known
whether this was what Kawai wanted. At any rate, the company continued to depend on
Kawai even after his resignation as president. It was Kawai who chose presidents andboard members. “At Kyoei Life, Mr. Kawai was the only real manager and others were
cogwheels. He still had a big influence after resigning as president in 1971,” says aformer officer. “Mr. Kawai and members of the management were like a parent andchildren. Members were just like a group of good friends. Mr. Kawai did not train
anyone to become his successor. He went to great lengths to discourage the challenging
spirit in his staff, so board members became yes-men who were eager to please theirboss,” says a head office staffer at that time. “Mr. Kawai was very strict with his
successors such as Mr. Tayama and Mr. Otsuka who were as young as his children andwas often heard yelling at them. These men had an obsessive idea that ‘if I don’t dowhat I am told to do, I would be fired,’” according to another head office staffer.
(8) Managerial vacuum“Mr. Kawai had become old and lost his youthful energy by the second half of the 1980s.
He retired from the director’s post in 1992. Even after his retirement, the management
was unable to make decisions without consulting Mr. Kawai. Mr. Kawai should nothave been fit to make proper judgment at that time, but the managers were unable to get
together and address important issues of the company as they were supposed to do. Even
when Mr. Kawai was close to death, the managers went to the hospital where he stayed
to seek his approval,” says a head office staffer at that time.

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Another head office staffer says, “In the mid-1990s, the managers belatedly agreed thata change of generations was necessary and tried to rejuvenate the board of directors in
1996. As previous members of the board remained with the company as advisors, theoverall situation changed little…. From the latter half of the 1990s the board of directors
frequently held a meeting but mostly ended up with a weasel-word resolution.”“Mr. Kawai thought he had retired from active duty in 1992. When his successors asked
him for advice, Mr. Kawai merely expressed his feelings. Kyoei Life’s managers
interpreted Mr. Kawai’s words in any way convenient to themselves…. They madedecisions based on their guess about Mr. Kawai’s intentions. So they made an incredible
blunder such as getting a large volume of contracts that would instantly create a negative
spread. Mr. Kawai himself should not have known that things were as bad as this,” says
an actuarial staffer at that time.

(9) ActuaryFounder Kawai was an actuary and made judgment about anything by looking at figures
and going into details. The numerical data was prepared by another actuary—Mr. B,
Kawai’s protege. According to the parties concerned, Mr. B was described as “Kawai’sarms” and “Kawai’s electronic calculator” from the early 1980s onward. He was incharge of not only actuarial matters but also personnel affairs and general affairs. Kawai,
Mr. B and an executive in charge of finance (another favorite of Kawai) were the trio
who practically operated the company.
It is questionable whether Mr. B fulfilled the role of an actuary after things got worse at
the company. From the mid-1990s onward, anyone who made a future cash flow
analysis should have realized that the company was in a real mess. But it seems from thecomments of the parties concerned that the actuary did not inform the management of
his findings. “Mr. B was secretive. He exercised control in such a way that the realsituation was visible only to a few executives. He was worried about the impact of
disclosure of the truth…. Mr. B concealed the truth by saying that ‘this would be
misleading for nonprofessionals,’” according to the actuarial staff at that time. “Theavailable data did not reveal what was really going on. No explanation was given. I wasshocked when I learned the truth around 1998,” a head office staffer at that time says.
“Mr. B was aware of the reality of the business from early on and must have had real-134-

concerns. But he was no help (when it came to a tie-up with an outside partner),” says
another member of the actuarial staff.
(10) Attitude toward risk management
Kyoei Life basically had no planning division until 1998 or so, according to the parties
concerned. It had no place for discussion about managerial issues. A head office staffer
at that time says that the planning division was set up temporarily for personal reasonson several occasions but it was not like a typical planning division. Most of the officers
were accustomed to the company’s culture so that no one suspected anything was
wrong.
Kawai and actuaries close to him made decisions. Other board members followed them.
Up until the mid-1990s, a board of directors meeting was a mere ceremony without
substance. When a head office staffer tried to explain the financial situation to an
executive in charge of sales, the executive refused to hear, saying, “I need not know
about it.” He apparently thought that he had only to carry the banner for sales eventhough he didn’t know business details. “We may say the illusion that things were allright was planted in our mind,” says an actuarial staffer at that time.
“In the mid-1990s, the actuaries calculated real net assets, the solvency margin ratio andthe figures of the future cash flow analysis according to five different scenarios. They
presented several scenarios excluding the worst-case scenario to the Ministry of Financeand presented only an optimistic scenario to the board of directors,” according to thethen actuarial staff.
Even if assets under management increased too fast, the finance division did not become
concerned. The finance division was “a place where money coming from the outside
was managed,” as a financial staffer at that time put it. It did not interfere with theaffairs of other divisions.
The concept of ALM was alien to the company. The company sought something thatgenerated as high a yield as possible, be it loans to bank-affiliated nonbanks, loans to athird sector, or foreign bonds (such as sovereign bonds). It dabbled in few investments
or loans typical of the bubble years, but the loan amount of each deal became larger.
(11) Role played by external discipline-135-

Kyoei Life was a stock company but was unlisted and its major shareholders were thefounder’s relatives. “It was difficult to get the shareholders to attend a shareholders
meeting. Former officers of the company were the only shareholders who spoke up at
the meetings,” says a head office staffer at that time. The groups with which thecompany had formed tie-ups such as teachers’ mutual aid group made no demands inparticular. Rather, they offered to put up capital after the company fell into difficulties,
according to the head office staff of the time.
It was the labor union that made the most reasonable demands where governance wasconcerned. “From 1996 onward the labor union pressed for resignation of advisors or
made other demands,” a head office staffer at that time recalls. In 1999 the labor union
became Kyoei Life’s shareholder and tried to perform watchdog functions. The
company “reluctantly created a labor union at the urging by the Ministry of Finance tobegin with. No union official climbed the corporate ladder to a high post. The company
did not treat the union decently…. The union told the management to ‘just make surethat the company will not go under,’” according to an actuarial staffer at that time.
The Ministry of Finance hardly checked the company’s status or provided any guidance.
“The Ministry’s inspection 1995 revealed that the company’s negative spread had growneven more serious. And yet the company was not severely reprimanded, perhaps because
the ratio of bad loans to the total loan balance was no more than 4%,” says a head office
staffer at that time. The Ministry of Finance took the position that, if Kyoei Life was toteam up with a partner, the partner should be “a domestic company if possible.”
An executive who was a former official of the Ministry of Finance was on the payroll of
the company until the year preceding its bankruptcy. He was cooperative in concluding atie-up with an outside partner but had not much influence inside the company. He was“treated like a guest” and “kept out of the loop” until the end, according to the head
office staffer.
7. Is it true that “rumor caused the failure?” —Tokyo Life Insurance(1) Direct cause of failure
Tokyo Life filed for corporate rehabilitation proceedings in March 2001. Chiyoda
Mutual Life and Kyoei Life Insurance failed in October 2000, resulting in a surge inpolicy cancellations at Tokyo Life. To cope with the situation, the company sought-136-

demutualization to pave the way for a future tie-up with a foreign-affiliated firm. Daiwa
Bank, a close business partner, had shown its willingness to assist the insurer, but
eventually gave up providing financial assistance mainly because the financial standingof the insurer worsened due to sagging stock prices. As a result, tie-up negotiations fell
apart.
“A series of bankruptcies of life insurers (Chiyoda Mutual Life and Kyoei Life
Insurance) spurred credit concerns and created false accusations, leading to an increasein policy cancellations” President Kenichi Nakamura said in a press interview following
the bankruptcy (according to the Yomiuri Shimbun dated March 24, 2001), thus
implying that the impact of harmful rumors was partly blamed for the company’s
failure.
However, comprehensively judging from a variety of materials and verbal evidence
provided by the parties concerned, even without the increase in policy cancellations
resulting from rumors, the company is deemed to have already been struggling withdeteriorating finances when it sought a tie-up with an external party in 2000. Many
employees at that time say, “Unfavorable rumors indeed hastened the failure of theinsurer, but at any rate, the company would not be able to escape from bankruptcy
without forming an alliance with a bank or others”…. “The company had a big
structural problem and would go under anyway without the consecutive bankruptcies of
Chiyoda and Kyoei.”
Tokyo Life fell into a management crisis without a big, specific problem. One factor
pushing the company into a crisis was that a variety of problems such as a low-profit
structure, rapid expansion of assets and inappropriate asset investment came to thesurface at once in the 1990s. Another factor was that even after the company’s financial
standing started deteriorating, the management failed to take the matter seriously enoughand was slow to deal with the situation. “There was no single specific cause leading to
the failure. Rather, we just did what we normally did and suddenly found ourselves indesperate trouble,” says a head office staffer at that time.
The company was part of the Nomura Group firms, but its business scale was small.
“The insurer saw its share in the market serving the workforce of companies graduallyshrink largely because its dividend levels were substantially lower than those of major
insurers. As a result, sales personnel couldn’t help but turn to blood and territorial bonds-137-when marketing products. The retention rate of sales personnel worsened, and adverse
effects of mass hiring and mass dropout became conspicuous. A low-profit structure
took root, forcing the company to struggle with chronic expense losses,” according to ahead office staffer at that time.
He also says, “Because the company used to be ranked high in the industry, its burden of
paying special dividends at the time of lapse of a contract was large relative to its size.
The dividends were paid out of latent stock profits, and therefore the profit structureheavily depended on latent stock profits that took root in our company.”
The insurer apparently didn’t seek investment vehicles that caught on in the bubble era
during the late 1980s when its assets expanded, according to parties concerned at thattime. However, it’s undeniable that in order to cover surging costs, “the company leaned
toward investment in stocks, foreign currency-denominated bonds, structured bonds andother high-risk high-return vehicles”(quoted from the insurer’s rehabilitation plan).
(2) Decline in market share
Tokyo Life (Nomura Life) was a prominent life insurer counted as one of the fourzaibatsu-affiliated companies (Sumitomo, Mitsui, Yasuda, and Nomura) following thefive-largest players (Nippon, Dai-ichi, Meiji, Teikoku, and Chiyoda) in the prewar
period. In around 1960, it entered the market for monthly individual insurance in
response to industry trends and gradually established its sales forces. The company’smarket share started falling, however, as it failed to expand its coverage products.
The company’s market share of insurance in force (including group insurance) stood at
1.7% in fiscal 1963, around the same level as those of Fukoku Mutual Life and Daido
Life. In fiscal 1977, however, its share dropped to 0.9%, half the share of Fukoku
Mutual Life and one third the level of Daido Life, which succeeded in implementing atie-up strategy with small- and mid-sized businesses. Its share of total assets also fell
from about 1.5% in the mid-1960s to 1.0% in the mid-1970s.
Contracts earned from the workforce of the former Nomura Group firms, close business
partners with the insurer, accounted for about 30% of its total insurance in force until
the mid-1970s. According to a head office staffer at that time, however, “the company
was unable to break away from the structure generating expense losses, and the gap in
dividend level widened between the company and larger insurers. As a result, the insurer-138-

failed to attract the workforce of companies and started losing group insurance contracts
with its share gradually declining in the market related to its partner business groups as
well.”
Consequently, Tokyo Life’s sales forces couldn’t help but target local markets and sell
products to members of “Tsutanokai”, a nationwide sponsor organization based on sales
personnel’s blood and territorial bonds. Each branch office had a “Tsutanokai” bodymade up of policyholders and agencies as members, and the body referred customers
and sales personnel to Tokyo Life. The company stepped up sales of coverage products,
and the average size of policies issued gradually rose. According to a head office staffer
at that time, however, “sales personnel increasingly sought contracts from their relatives
and friends first, and its employee turnover rose.” The company’s rate of policy
cancellation and termination exceeded the average rate for the industry, while its
business efficiency worsened. The downward trend in the industry share also continued
with its share of individual insurance in force and share of total assets dropping to 0.6%
and 0.7%, respectively, in the mid-1980s.
Table 2-23:
1895
1934
1947
1977
1986
1988
1989
1994
1995
1996
1997
1998
2000
2001

Brief History of Tokyo Life

Started business as Shinshu Shinto Life Insurance Co.
Renamed itself as Nomura Life Insurance Co. (Nomura Group).
Restarted as Tokyo Mutual Life Insurance.
Toshio Shibayama became President.
Masakazu Yougai became President. Shiba Building was completed.
Started marketing individual annuities via tie-up loans.
New head office building was completed. The total assets topped ¥1 trillion.
Kenichi Nakamura became President. Otemachi Nomura Building was completed.
thCelebrated its 100 year in business. Launched the Corporate Identity (CI). Reported an
operating loss for fiscal 1994.
Started a “new three-year management plan.” Entered into a business partnership with Asahi Fire
& Marine Insurance Co.
Increased its fund to ¥15 billion.
Formed a product development partnership with U.S. Reinsurance Group of America Inc.
Requested Daiwa Bank to provide financial assistance. The real net asset value shrank to ¥500
million.
Filed for court protection from creditors under the Act on Special Treatment of Corporate
Rehabilitation Proceedings and Other Insolvency Proceedings of Financial Institutions.
(Honorifics omitted)(3) Leaning toward savings-based products
The three goals set up by President Masakazu Yougai, who assumed the post in 1986,
were to “strengthen sales abilities,” “pursue aggressive and flexible asset management,”
and “improve the efficiency of clerical work.” In fiscal 1987, the company also drew up
a “three-year business plan to expand assets and increase policies in force under reformand creation ahead of its 100thanniversary,” thereby focusing its efforts mainly on-139-expansion of operations.
As part of its aggressive sales policy, the insurer started selling individual annuity
insurance “Premium Loan” via partner financial institutions in January 1988. The
product required policyholders to pay their premiums of individual annuity in a
lump-sum by receiving loans from financial institutions. Nissan Mutual Life had alreadybeen selling a similar product that used a loan scheme for premium payments since 1986
and had succeeded in expanding sales. “Tokyo Life’s management was shocked by the‘incident’ that Nissan Mutual Life had surpassed the company in terms of asset size,”
according to a head office staffer at that time.
The incident apparently prompted the insurer to follow suit. Tokyo Life created a special
division within the corporate business department and began aggressive marketing in
tie-ups with banks close to the company and many regional financial institutions in aneffort to catch up with Nissan Mutual Life. As a result, the insurer’s growth rates of total
assets were substantially larger than the industry’s average rates during the four-year
period that started in fiscal 1988. Its total asset value almost doubled in just three years
from ¥530 billion at the end of fiscal 1987 to more than ¥1 trillion at the end of fiscal
1989. With the assumed interest rate and the guaranteed rate for premium prepayment
set at as high as 5.5%-6.25% and 6%, respectively, however, “the corporation in need ofrehabilitation shouldered large liability costs for a prolonged period of time, while its
total asset had rapidly expanded” (quoted from the insurer’s rehabilitation plan).
In and after fiscal 1990, when loan rates rose, the number of premium loan contracts
plunged. To make up for the drop in premium revenues, Tokyo Life focused its efforts
on sales of group annuity insurance, a high-yield coverage product that could bring alarge number of funds to the company. The value of group annuity policies in force
surged to ¥500 billion in fiscal 1993 from ¥230 billion in fiscal 1989.
In the first place, group annuity contracts accounted for a large percentage of thecompany’s total policies in force because Daiwa Bank, a financial institution close to
the insurer (and also a major commercial bank exceptionally allowed to conduct trust
banking operations), referred small-scale corporate groups to the insurer when it
couldn’t serve those groups on its own due to its small corporate size. According to ahead office staffer at the time, however, “group annuity contracts undertaken around thistime did not necessarily come from close corporations, but consisted mainly of large-lot-140-

contracts with government offices, labor unions, and others seeking high-returninvestment vehicles for their surplus funds.” With the levels of interest rates already
dropping, the insurer struggled with high yields promised to policyholders and tried tocope with the problem by selling stocks with unrealized gains, thereby losing its
financial strength.
Table 2-24: Changes in total assets
Tokyo Life
Year-to-year basis
FY 19854,049
12.1%
FY 19864,593
13.4%
FY 1987
5,334
16.1%
FY 19887,782
45.9%
FY 1989
10,09129.7%
FY 1990
11,41613.1%
FY 1991
12,512
9.6%
FY 1992
13,5088.0%
FY 1993
14,6298.3%
FY 1994
15,116
3.3%(Data) “Life Insurance Statistics”(in units of ¥100 million, %)All companies combined
Year-to-year basis538,706
17.8%
653,172
21.2%
792,684
21.4%
970,82822.5%
1,173,439
20.9%
1,316,188
12.2%
1,432,341
8.8%
1,560,111
8.9%
1,691,221
8.4%
1,779,655
5.2%

Table 2-25: Breakdown of policy reserves<FY 1986>
All companies
Tokyo Life
combined
Individual insurance
66.8%
74.8%
Individual annuity
3.9%
2.9%
Group insurance
0.8%
1.2%
Group annuity
28.1%
20.2%
(Data) “Life Insurance Statistics”<FY 1989>
All companies
Tokyo Life
combined
44.6%
67.0%
30.1%
6.8%
0.4%
1.1%
24.6%
24.2%

(4) Inappropriate asset management

As described earlier, Tokyo Life “leaned toward investment in stocks, foreign
currency-denominated bonds, structured bonds and other high-risk high-return vehicles(in order to cover surging costs)” (quoted from the insurer’s rehabilitation plan). The
insurer didn’t turn to high-risk investments and loans that caught on in the bubble era,but increased investment in foreign securities to earn interest and dividend income andalso purchased structured bonds. Several head office staffers at that time say, “Ourinvestments and loans were mostly deals referred by Daiwa Bank. Investment in
structured bonds was mainly recommended by securities companies affiliated with the
Nomura Group”…. “We had never experienced a surge in assets until then. So, we
thought of these investment vehicles as just an extension of conventional investment
options and made investments without paying particular attention to their liability
profiles”…. “We shouldn’t have purchased stocks and real estate, using funds from-141-

products guaranteeing a yield of 6%”…. “Stocks, real estate and other less-marketableassets remained after fund outflows occurred as a result of allocating increased funds inaccordance with the traditional investment portfolio.”
They also say, “The company posted a capital gain of about ¥20 billion for every period
to pay special dividends in the late 1980s. The acquisition prices of stocks were inflated
because such capital gains were recorded via cross transactions (in which latent stock
profits are realized by selling stocks and buying them back at the same time) rather than
one-time sales” and “We had a huge burden of paying special dividends as the businessscale of our company used to be relatively large.”
The insurer also invested a massive amount of money in real estate. It held a relatively
large percentage of its portfolio in real estate and possessed good-quality, large-scale
properties. In the early 1980s, it launched plans to rebuild its aging head office building
and set up a business center to handle clerical work. The center (named Shiba Building)and the head office building were completed in 1986 and 1989, respectively. “It isstrange indeed that a hotel was one floor down from our head office, but President
Shibayama had long insisted that the company rebuild its head office and he promised toinclude Daiichi Hotel (a close business partner with the insurer) in the new building,” ahead office staffer at that time reveals. The insurer also rebuilt the former Marunouchi
Nomura Building and turned it into the Otemachi Nomura Building jointly with Daiwa
Bank. The posh fitness club on the top floor of the building was run by Tosei Sports
Club, a company affiliated with the insurer.
The rehabilitation plan points out the insurer’s investment in these properties, saying,“Amid surging premium revenues and expanding assets, the corporation in need ofrehabilitation had become less aware of incurring long-term liabilities through theseinvestments and drawn up plans to construct large-scale buildings, invest massive funds
to upgrade its computer systems (*the plan was referred to as Ivy 21 system plan andstarted in 1989: the author’s annotation) and other business projects in anticipation of
future expansion of operations, thereby gradually losing management consistency.”(5) Management in the first half of the 1990s

With the levels of interest rates following a downward trend in the 1990s, the insurer’s
negative spread first came to the surface in the financial results for fiscal 1992.
“Considering it as a temporary problem, the management didn’t take any particular-142-

measure, and the insurer’s dependence on capital gains further increased,” according to
the rehabilitation plan. The company also failed to break away from chronic expense
losses. It temporarily posted expense profits from sales of lump-sum insurance productsin fiscal 1989, but continued logging expense losses from the following year due to theheavy depreciation burden coming from investment in real estate and computer systems.
Meanwhile, internal strife came to light, and the company’s top officials tookproblematic actions around this time. In April 1993, Mr. A, who served as executive
director and was also deemed to be a rival of President Yougai, was demoted forallegedly being involved in creating a document that accused the insurer of hiding asexual harassment problem within the company, according to “Asahi Shimbun” datedon June 27, 1993. It was also revealed that a bugging device was planted in Mr. A’s
home.
Chairman Toshio Shibayama (who served as president until 1986) paid a large amountof compensation to directors at his own discretion, while extending loans to a foodcompany experiencing funding difficulties. The bankruptcy trustee sought damages forthese incidents after the company failed. At a meeting of representatives in July 1990,
Tokyo Life raised its ceiling on the overall amount of compensation for board members
and also decided to discuss on the amount of compensation paid to each board member
at a board of director’s meeting. Chairman Shibayama decided on the amount on his
own without consulting with other board members and auditors, however, and continued
providing compensation worth a total of ¥220 million to board members over three
years starting in July1991.
(6) Pretax loss and steps taken laterWith interest rates continuing to fall, the insurer became unable to offset its negative
spread with three profit sources in fiscal 1994. Moreover, its latent stock profits weredepleted due to stock sales in the past to lock in profits or cover foreign exchange losses
as well as a plunge in stock prices, forcing the company to report a pretax loss in fiscal
1994. To cope with the situation, the insurer lowered its standards for setting aside
policy reserves by shifting from the net premium method to the 10-year zillmer method
and also logged ¥13.3 billion worth of valuation gains (gains on stock valuation) inaccordance with Article 84 of the Insurance Business Law.

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Table 2-26: Changes in profit or loss on three profit sources
March
1988
-29

March
1989
-25

March
1990
12

ExpenseprofitMortality
123
143
156
profitInterest
70
60
119
profit
Total
165
178
287
(Data) compiled from inspection reports(in units of ¥100 million)
March March March
1994
1995
1996
-22
-36
-24

March
1991
-15

March
1992
-34

March
1993
-30

153

157

139

164

168

186

95

66

-18

-141

-216

-275

233

189

91

2

-85

-113

After reporting the pretax loss, the company drew up an earnings improvement plan
centered mainly on cutting operational costs, closing unprofitable business bases, andreducing stockholdings in its portfolio. According to a head office staffer at that time,“The plan was basically designed to expand our business to mark the company’s 100th
anniversary. Nevertheless, it also represented the first restructuring plan drawn up by thecompany, and the management at that time thought they included drastic measures in theplan.” However, “with the plan being created on the premise that insurance in force
would expand, the company was not fully aware of the need to implement crisis
management measures” (quoted from the insurer’s rehabilitation plan). Although theclosing of unprofitable business bases was included in the plan, “inefficient bases wereleft untouched as long as they managed to acquire new contracts, and therefore things
didn’t change so much,” according to a head office staffer at that time.
He also talks about the company’s failure to scale down its shareholdings, saying, “Evenif we wanted to reduce the impact of a stock market downturn, we were unable to easilysell those shares because our shareholdings were mostly made up of those in Daiwa
Bank related companies. We first planned to lower stockholdings in our portfolio from
20% to 15%, but eventually revised our target to 18% as many of our top officials
voiced concerns that a drastic reduction would have an adverse effect on our prospect ofbusiness expansion.”
The insurer’s business standing further worsened in the late 1990s. With its latent stock
profits being depleted, the company started recognizing unrealized gains on real estatein fiscal 1995. Although a cut in the assumed interest rate for group annuity insurance
helped lift its earnings, the company incurred huge valuation losses due to a fall in stock
prices and barely got through its business results announcement for fiscal 1996 by-144-

posting capital gains and others. Its loans receivable also deteriorated markedly. The
insurer’s classified loans rose to nearly 10% of its total loans receivable in 1996 from
3% in 1991.
(7) Distortion of asset structure

The collapse of Nissan Mutual Life in 1997 spurred policy cancellations at Tokyo Life,
leading to drops in insurance in force and total assets. Less marketable assets remained,
thereby distorting the company’s asset structure, while the weight of stocks and otherrisky assets, which were relatively high in the first place, increased further in theinsurer’s investment portfolio. The total value of stocks, foreign and other securities,
and real estate reached 48.6% of the company’s general account assets as of the end of
fiscal 1998. Head office staffers at that time say, “Amid fund outflows, the company
started selling assets that could be easily sold, and as a result, stocks, foreign securities
and real estate remained. People in charge of financing and budgeting had long insisted
that the company sell stocks, but sales people objected to the idea, saying, ‘Partners
would be upset about us selling their shares’. Because the management also disagreed
with the proposal, the company sold few shares”…. “We gambled on foreign securities.
A manager at that time saw his friend, who was the president of a midsize life insurer,
succeed in foreign exchange transactions. He engaged in similar investment andscrewed up on it” “The company even recognized gains on public and corporate bondsthat were not reflected in solvency margins in fiscal 1998.”
The authorities allowed insurers to use the cost method in assessing their shareholdings,
starting in fiscal 1997. The regulatory change made it easier for Tokyo Life to getthrough its business results announcement, but the company also became saddled withmassive unrealized losses on securities holdings. The insurer had maintained its
solvency margin ratios at more than 400% as financial institutions close to it helped
boost its fund and offered subordinated loans. Being rated as low as BB (by Rating andInvestment Information), however, the company was unable to ease credit concerns andcontinuously struggled with high levels of policy cancellations. The value of group
annuity insurance policies in force plunged to ¥230 billion at the end of fiscal 1999 fromits peak of ¥550 billion at the end of fiscal 1995 with total assets dropping to ¥1 trillion
from its peak of ¥1.5 trillion.
The insurer’s rehabilitation plan points out the impact of policy cancellations, saying,“In response to a surge in cancellations, the company was forced to raise cash by selling-145-

foreign securities and domestic stocks with latent losses. As a result, its investment
balance deteriorated.”
Table 2-27: Tokyo Life’s portfolio (as of the end of fiscal 1996)
Tokyo Life
Total assets
Cash and deposits
Monetary assets held in trusts
Public and corporate bonds
StocksForeign securities
Other securities
Loans receivable
Real estate and movables(Data) “Life Insurance Statistics”

14,685
1,033
357
1,680
2,864
2,081
233
4,908
1,036

100.0%
7.0%
2.4%
11.4%
19.5%
14.2%
1.6%
33.4%
7.1%

(in units of ¥100 million, %)All companies
combined
1,858,323
100.0%
65,695
3.5%
45,534
2.5%
425,71222.9%
317,749
17.1%
168,551
9.1%
19,6691.1%
650,92935.0%
98,3255.3%(8) Delay in handling the problem

Looking at the developments leading to the failure, we see that the management ofTokyo Life didn’t necessarily properly recognize the company’s financial standing andoften took actions that third parties would find it hard to understand.
For example, as described earlier, the insurer focused on marketing of group annuity
insurance that guaranteed high assumed interest rate to policyholders amid plunging
sales of “Premium Loan” in the 1990s and bolstered its efforts to expand contracts until
fiscal 1993. The management at that time was “simply delighted that they succeeded in
making up for the fall in contacts for Premium Loan with group annuities,” according toa head office staffer at that time. However, interest rates were apparently following adownward trend in 1991, and the insurer’s negative spread already became obvious asearly as fiscal 1992. It nevertheless leaned toward group annuity insurance around thistime, thereby increasing its dependence on capital gains to secure high guaranteedyields.
Moreover, a head office staffer at that time says, “Even after business conditions started
deteriorating, the company never reconsidered its construction of Otemachi Nomura
Building, which began in 1991.” The building was completed in 1994, while thesecond-phase of construction ended in 1997. “I don’t know why we constructed thebuilding during that period. Generally, a company must scale down or suspend its
project if operational environments or business conditions have changed. However,Tokyo Life was in a corporate culture where a project would never lose steam once-146-

being started.”
Even when its business worsened in the mid-1990s and thereafter, the management was
little aware of the crisis faced by the company because “there was a sense of security
that the company had the backing of the Nomura Securities group and the Daiwa Bank
group in addition to massive unrealized gains on real estate,” according to a head office
staffer at that time. In fact, unlike other failed midsize life insurers, the company never
had difficulties finding someone willing to provide it with funds or subordinated loans
and was also able to maintain its solvency margin ratios at more than 400% thanks to
procurement of funds from other parties and its ample unrealized gains on real estate. It
was in fiscal 1999 when the company finally reviewed its business expansion strategy.
However, its financial standing at that point was already so deteriorated that it wouldn’t
be able to survive on its own. A head office staffer at that time says, “Our business was
too dependent on Daiwa Bank.”(9) Management reforms and tie-up negotiations with outsiders

Tokyo Life set up a “business strategy meeting” under the leadership of managing
director A in fiscal 1999, while people at the department head level spearheaded
restructuring measures such as early retirement plans and consolidation of operationalbases. The company formed an alliance with U.S. reinsurance giant RGA in productdevelopment, reviewed its full-line strategy and started focusing its managerial
resources on the fields of death coverage and medical insurance. A head office staffer atthat time says, “We finally began wondering if we should continue pursuing the
expansion strategy”…. “The company had never undertaken drastic reform other thancost-cutting measures until then. Members of the business strategy meeting discussed
how the company should be one or two years later, but the focus of the latter part ofthese discussions was on how much the company should scale down its business tosurvive.”
In the general inspection by the Financial Supervisory Agency in 1999, the insurer wasordered to additionally write off ¥15.7 billion worth of loans receivable. Its negative
spread showed little sign of improvement, and “the company was deeply dependent on
gains on asset sales with its basic profitability being inferior to other insurers’” (quoted
from the news release of RandI dated September 9, 1999). A head office staffer at thattime says, “Actuaries conducted a future cashflow analysis in light of the financial
results for fiscal 1999 and ended up issuing an opinion that the company would face a-147-

shortfall of policy reserves in five years if taking no measures.”
The failures of Daihyaku Mutual Life in May 2000 and of Chiyoda Mutual Life andKyoei Life in October 2000 spurred concerns over the credibility of Tokyo Life. In
November, the company released a new business strategy centered on such measures as
cutting the number of office workers by 20%, outsourcing asset management operations
and selling its head office building, but it had already faced difficulty turning itself
around on its own. The scheduled enforcement of the market-price method in evaluating
the value of financial instruments was also coming up. “Daiwa Bank employees joined
the company’s business strategy meeting and together drew up restructuring plans.
President Nakamura excluded managing director A, who opposed forming a partnershipwith an external party, from the meeting members and sought a tie-up opportunity”,
according to a head office staffer at that time.
Daiwa Bank set out a policy to assist Tokyo Life, including contributions to theinsurer’s fund, and came up with a scheme, proposing that the insurer survive under theumbrella of a foreign-affiliated firm after switching to a stock company. “We received
four offers for assistance from a total of four companies. At least two of them showed us
plans worth considering,” President Nakamura said in an interview (according to Nikkei
Business dated April 2, 2001).
Daiwa Bank eventually gave up providing assistance to the insurer due to a fall in stock
prices as well as its own weak financial strength, resulting in a failure of the tie-up
scheme. President Nakamura commented on the termination of assistance from Daiwa
Bank as “a bolt from the blue” in a press interview held after the insurer’s bankruptcy. A
head office staffer at that time says, “This scheme may have succeeded if Daiwa Bank
had had more financial power. A plan to increase the amount of Tokyo Life’s fund was
voted down at a board meeting of Daiwa Bank, leading the insurer to declarebankruptcy.”(10) Managers at that time

At Tokyo Life, the “management” meant “sales”. Shibayama, who maintained strong
power within the company for a long time, had great interest in sales, and even after heretired from the post of president, people having sales experience continued assuming
the position. The sales department held power within the company. “Many of the top
management were unfamiliar with financial figures. Only those who had sales-148-experience moved up the corporate ladder,” says a head office staffer at that time
Shibayama, who became president in 1977, was a person related to the Nomura group in
the prewar period. He started serving as a board member in 1957 and had held arepresentation right since 1969. “Shibayama was very autocratic”…. “President
Shibayama led the company in an autocratic way. He made forceful remarks when it
came to sales and even said to employees, ‘Create an operational base in …’”, parties
concerned at that time reveal. He failed to put a brake on the prolonged downward trendof operations, however. The Yomiuri Shimbun dated July 20, 2001 quoted a former top
official as saying, “Shibayama liked visiting regional branches and providing sales
forces with encouragement. He was, therefore, popular among sales representatives, but
his management philosophy was not clear”…. “The president bears a huge responsibility
for having failed to raise his successor and pushed the company to doldrums,” a memberof the committee set up to investigate the causes for the insurer’s failure also gave acomment to the same article on the newspaper.
Yougai assumed the presidency of the company in 1986 (Shibayama became
representative director and chairman). He joined the insurer as a sales employee in 1954.
He later became an office employee, which represented an “extremely rare case” for thecompany (according to a head office staffer at that time), but was engaged in the sales
department throughout his career. Although Yougai became president, Shibayama
appears to have effectively maintained power, and as described earlier, paid a large
amount of compensation to executive officers at his own discretion and extended loans
to a food company struggling with a cashflow problem.
Nakamura, who became president in 1994, “had also been in the sales field for about 40
years since he joined the company in 1955” and said in a press interview, “To survive
hard times, we first need to strengthen our sales ability rather than come up withdifficult plans”…. “I expect everyone, including those in management positions, to havethe feeling that they are part of the front-line sales force active in the sales field. Even
people in charge of investment and others outside the sales department should always
think about how to contribute to the company’s sales results during their work”(according to Asahi Shimbun dated August 3, 1994).
(11) Internal management checking functions

Tokyo Life’s management was shocked when Nissan Mutual Life had surpassed the-149-

company in terms of asset size in 1987 and tried to catch up with the rival insurer. The
accounting department at that time is said to have objected to the attempts made by the
management, saying, “Why do we have to do such (unprofitable) things?”…. “We will
suffer from the burden of paying high levels of assumed rates of return in the future,”
but failed to persuade the management. The corporate sales department created a special
division to expand tie-ups with banks, and the management endorsed the move.
Sales of the company’s stockholdings didn’t go smoothly either. A head office staffer atthat time says, “The financial affairs and budgeting departments both insisted in the
mid-1990s that the company sell its strategically held shares, but the sales department
objected to the idea, and management also didn’t accept the proposal. The board
members wanted to expand the number of insurance contracts and therefore couldn’t
assert the company’s intention to cut down on the Daiwa Bank group-related shares tothe bank.”
At Tokyo Life, people having a sense of crisis often expressed their concerns about thecompany’s management conditions, and the insurer held across-the-board discussions todeal with the problems, but always ended up with taking only half measures, according
to a head office staffer at that time. For example, around 1973, the insurer set up a
special committee in response to growing calls from employees insisting that “thecompany use the net premium method (for policy reserves) to prevent its business fromturning sour.” As a result of discussions, the committee proposed that the company“improve the efficiency of sales” and “shift its focus to products generating mortality
profits,” but effectively failed to change the existing situation. The insurer was also
unable to change the status quo when the issues of improving sales efficiency andexpanding mortality profits were raised on another occasion. “At each phase, someone
always appeared expressing a sense of crisis about the company’s management. In
response to such arguments, the company held across-the-board discussions, but always
took the easy way out by implementing halfway measures and often left the problems
unchanged” says the head office staffer.
He also reveals that the company focused its attention on the number of new contracts
acquired for each period, overlooking the achievement of the mid-term business plan.
The insurer was little aware of the importance of risk management as well. A head
office staffer at that time says, “We set up an ALM strategic committee to conduct-150-

comprehensive risk management across the company in 1996. In reality, however, risk
management operations were centered on the assessment of loans, and we were notreally aware of the asset price volatility risk and the risk of ending up with negative
spreads.” While other insurers were reducing risky assets in the late 1990s, Tokyo Life
was taking risks, going against the industry’s trend. The insurer created its mid-termbusiness plan, but it merely served as a simple simulation of its future operations, andthe company only looked at a profit or loss on three profit sources for each fiscal year.
For the company, the management meant sales, and therefore the management andactuaries are said to have been generally opposed to each other. A head office staffer atthat time says, “Nakamura, the company’s last president, listened to actuaries’ opinions,but he did so on the premise that actuaries didn’t interfere with the company’s
relationship with Daiwa Bank.”(12) Role played by external discipline

Tokyo Life’s management was subject to very little external checking partly because it
took the form of a mutual company. Meetings of representatives went smoothly until
just before the insurer went under. Nevertheless, the concerned parties say, “We felt thelimitation of a mutual company when considering a tie-up scheme.”
The Ministry of Finance started realizing that Tokyo Life’s business was deterioratingaround the times when the company drew up an earnings improvement plan in 1995 andit conducted an inspection of the company in 1996. After those events, the Ministry
appears to have continued collecting information on the insurer, but never gave strong
instructions to the company because the insurer didn’t have much influence compared toother failed companies.
Meanwhile, Daiwa Bank played an important role for the insurer. Of the former Nomura
group firms, Daiwa Bank was the closest partner of the company as several head office
staffers at that time say, “Tokyo Life wouldn’t have existed without Daiwa Bank”….
“Our business deeply depended on Daiwa Bank.” While Nomura Securities kept acertain distance from the insurer, Daiwa Bank maintained a close bond in sales activities,
referring employees of its corporate customers and businesses seeking group insurance
or corporate pension products to the insurer. The bank also often referred asset
management deals to the company.

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Amid worsening business conditions, “the relationship between the two parties had beenstrengthened further since Nakamura became president (in 1994). There appeared to be
a common understanding among employees that ‘Tokyo Life could only exist with
Daiwa Bank,’” says a head office staffer at that time. Daiwa Bank contributed to theinsurer’s fund and provided subordinated loans in 1997 and 2000. Funds provided by
the bank up to the insurer’s bankruptcy reached a total of ¥32 billion. Meanwhile,
Tokyo Life was also a major shareholder of Daiwa Bank and offered subordinated loans,
thereby strengthening a cross-shareholding relationship with the bank.
Moreover, “Daiwa Bank had increased its support since it realized the financial crisis ofTokyo Life through the business results announcement for fiscal 1999. Not only did thebank expand its sales support to the insurer via increased customer referral, but it alsojoined the company’s ‘business strategy meeting,’ together drew up a turnaround plan,and discussed a possible tie-up with external parties, seeking a way to rebuild thecompany’s business,” according to a head office staffer at that time.
Their close relationship was also reported by the media as follows: “Daiwa Bank has
referred a total of roughly 1,000 corporate customers to the insurer since last spring (in2000), and as a result, Tokyo Life has successfully executed insurance contracts with
about 200 companies. The bank was just afraid of bringing trouble to the corporate
customers it referred to the insurer and therefore couldn’t abandon the ailing company.
There was also a strong feeling within the bank that ‘financial institutions affiliated withthe former Nomura group had to support each other’” (“Nihon Keizai Shimbun” dated
March 24, 2001).
8. Role played by internal factors in the management of failed life insurers
Looking at the failures of six midsize life insurance companies, we see that they had anumber of common internal factors that increased their bankruptcy risk, although directcauses leading to their collapse varied.
First of all, their expansion strategy that started in the late 1980s resulted not just frombetter external environments or growing popularity of financial engineering products;that was largely attributed to the traditional business model they had built up or theprocess they had gotten through until then. Nissan Mutual Life was largely dependent on
corporate groups close to it and its earnings were slow to grow for a long period. Toho-152-

Mutual Life was desperate to eliminate expense losses and realize dividends on par withthe levels of major insurers. At Chiyoda Mutual Life, the top management and thoseassuming managerial posts were eager to “make a comeback as a major player” and“expand their business scale” as the company experienced a downfall from being aleading life insurer.
Most of all, the decisions and actions of top officials largely contributed to theircompanies’ failures. The pattern of each bankruptcy case differed. At Toho Mutual Life
and Chiyoda Mutual Life, top executives and people surrounding them implemented
inappropriate management practices. In the case of Daihyaku Mutual Life, theleadership of the top management was weak, while at Kyoei Life, “the management wasleft blank” following the effective retirement of its top official.
These management-related problems became more visible after the companies’ businessconditions worsened. For example, concerned parties say, “The management couldn’tchange the traditional expansion strategy even after the company’s business conditions
worsened”…. “Top officials failed to sell the company’s strategically-held shares,
although we decided to do so”…. “The management considered the company’s negative
spread as a temporary condition and didn’t take a specific measure to address it.” These
insurers’ management just resorted to makeshift measures, thereby exacerbating theirbusiness conditions further. They also often gambled on asset investment, aiming for adramatic reversal to get through their business results announcement.
The management of these insurers was subject to very little internal and external
checking, and their risk management system barely functioned. The sales department
generally held a strong voice within their companies. Although actuaries and people in
the financial affairs department raised an alarm, they were hardly able to impress top
officials because the management was close to the sales people. Even at a company
implementing a certain risk management structure, the risk control function was
rendered ineffective on the back of the significant influence of top officials. External
discipline barely functioned at these insurers, whether they were mutual or stockcompanies.
When conducting research, I paid great attention to actions taken by actuaries, who areresponsible for actuarial matters, because the life insurance business can only be carriedout with their work. The influence of actuaries varied according to the company. Some

-153-

companies like Chiyoda Mutual Life didn’t place much value on actuaries’ work, whileothers, including Daihyaku Mutual Life, valued them in running their business. At
Kyoei Life, actuaries played an important role. The power of Daihyaku Mutual Life’s
actuaries was not strong enough to change the decisions of its management, and Kyoei
Life’s actuaries didn’t share its information with the management, thereby failing tokeep the company afloat.
The Ministry of Finance at that time had great power in terms of its management
checking function, allowing the top officials of these insurers to harbor the illusion that“the Ministry would eventually help us.” In reality, however, the Ministry hardly
intervened in the businesses of struggling life insurers, which suggests that it didn’t haveenough leadership to prevent the insurers from going under.

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Chapter 3
Sorting out cause-and-effect relationships in business failures
1．Sorting out internal factors in failure
When we examined case studies of the six failed midsize life insurance firms in detail in
Chapter 2, we found that, although the impact of external factors such as sudden change
in the financial markets and the deterioration of the business environment could not beignored, internal factors specific to each failed firm such as its business model,
managers, and management structure had significance as factors leading to corporate
failure.
We are now taking a closer look at factors that led to the failure of midsize insurers inthe Heisei-era financial crisis. We will first extract internal factors inherent in eachcompany that increased the risk of failure and categorize these internal factors. Based on
our analysis made so far, we will next present the relationship between external factors
and internal factors by way of specific examples.
(1) Sorting out internal factors

To better understand the failure of life insurers due to their own problems, we extracted
internal factors inherent in each failed firm that led to its failure, and categorized them.
Specifically, we took the following steps. First, we extracted nearly 400 business-related
events that the author judged to be internal factors, which increased the risk of failure,from oral history obtained from concerned parties of failed life insurers. Next we tried tofind features common to these events. After repeatedly studying them, we classified theevents into 19 subcategories, which we put into three categories. We will now explain
each category.
Category 1 covers internal factors related to the business model. It includes six
subcategories: “role played by historical background,” “impact of past experience,”“problem of corporate culture,” “founding family’s influence,” “problems ofmanagement strategy/business model adopted,” and “other structural problems.”“Problems of management strategy/business model adopted” may have been put into
Category 2 (internal factors related to managers), described later. Considering that not
all such problems arose from specific managers or their managerial behavior during a
specific period, however, they were put into Category 1. Nearly half of the events in-155-

Category 1 fell into this subcategory. Examples of events put in each subcategory are
given below.
Examples“Role played by historical background”
 The company was originally weak in sales, so it had to give favorable treatment tothose who had worked as the sales staff.
 The company was founded after World War II, so the book value of shares it held
was higher than that of larger insurers.
 The company was once a large-sized insurer, so it had the heavy burden of paying
special dividends on contracts concluded in the past.
“Impact of past experience”
 The company began to wane after World War II.
 When the company was falling into difficulties in the past, its actuary failed to deal
with the Ministry of Finance properly and lost the confidence of the management.
 The company initially specialized in conscription insurance and had a weakcustomer base in urban areas. It gradually lost its business base as the population
flowed increasingly into urban areas.
“Problem of corporate culture”
 The corporate culture was such that employees were not supposed to question what
their superiors said or did.
 Employees were so accustomed to the founder making decisions on everything thatno one suspected something was wrong with this corporate culture.
 The corporate culture was such that once the company began to move in a certain
direction, there was no way to stop it.
“Founding family’s influence”
 Every decision was made with the founding family in mind. The management wasincapable of making bold decisions such as to “discontinue sales of savings
insurance” or “sell bank shares.” The company was owned by a certain family, so everyone knew that Mr. A fromthat family would be the president in the future.
“Problems of management strategy/business model adopted”
 President B adopted “regaining a leading position in the industry” as a slogan andswitched from conservative management to aggressive management.
 The company with a weak sales force tried to regain lost ground by quick means.
 The company was anxious to keep up with others and paid as high a dividend aslarger insurers in the hope of becoming “mini-Nissay” or a miniature version of
Nippon Life, the largest life insurer in Japan.

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(The company tried to shift from savings-type products to security-type productsbut) the number of small-lot contracts increased, with a small expense loading ofpremium. Eliminating the expense loss was a constant challenge.

“Other structural problems”
 Saving insurance has maturity (so that policyholders are expected to renew
contracts upon maturity), which means they did not need to call on new potential
customers as long as the company’s sales staff had a number of “customer
registration cards.”
 Midsize life insurers had no loan customers, so they had to use their money mostly
for investment in stocks and other securities.
 The company was unable to emerge from dependence on latent stock profits.
Category 2 covers factors related to managers. About 60% of all the events were in thiscategory, which has eight subcategories: “top executive’s competency problem,” “topexecutive’s influence,” “inappropriate behavior of those around the top executive,”“lack of checking functions within the management,” “lack of management awareness,”“weak management,” “slow or inadequate recognition of the situation,” and “error inbusiness judgment.” Events in Category 2, unlike those in Category 1, were notconcentrated in particular subcategories.
Examples“Top executive’s competency problem”
 The top executive had the power to shuffle personnel. Someone’s position in thecompany was determined by whether he was favored by the top executive.
 President C failed to see that someone had a questionable character.
 The top executive told others to “do something about it” but did not take theinitiative.
 The top executive mixed up the company’s money with his own money.
“Top executive’s influence”
 The president had absolute power and those who lost favor with him could not staywith the company.
 Every president of the company was picked by Chairman D.
 Only someone like the president’s henchman had a chance to survive as a board
member.
“Inappropriate behavior of those around the top executive”
 It was not that the autocratic president went to extremes, but it was rather that noone had control over the behavior of those around President E.
 The actuary close to the top executive was very secretive and exercised control in

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such a way that the real situation was visible only to some of the board members.
Whatever an executive in charge of investment (who was close to the top
executive) did, there was no way to remove him. As a result, he hardly made any
distinction between his professional duty and his personal matters.

“Lack of checking functions within the management”
Members of the board of managing directors did not know much about financial
matters, so they acquiesced to what the officer in charge of finance told them.
 The board had the same members for such a long time that they felt like a group of
good friends and were too relaxed about business matters.
 When President F said OK, the decision-making rule was meaningless.
“Lack of management awareness”
 The management had no strong determination to exercise its authority.
 The founder made calculations and made decisions on everything. Those aroundhim were accustomed to this cultural climate.
 The management lacked the idea of “discontinuing something that should be
discontinued.”.
“Weak management”
 Decisions made by the board of managing directors were rejected by salespeople
who said “they are unacceptable unless the customer’s approval is obtained.” The members of the board did not become one to the end.
 The managers said the right thing but failed to accomplish anything.
“Slow or inadequate recognition of the situation”
 Hearing the news about Nissan Mutual Life’s failure, the company’s people felt as
if “that’s what happened to Nissan (and has nothing to do with us).” Most members of the board believed until the end that “(the stock average) will
surpass 20,000” or “a divine wind will blow.” It was not until 1999 that the management questioned whether expanding business
was the right thing to do.
“Error in business judgment”
 The president made an error in choosing the right person (for a particular executivejob).
 The company tried to sell everything from variable insurance to group survivor’s
insurance that larger insurers handled.
 The company raised the assumed interest rate for single-premium endowment
insurance from 3.75% to the industry-wide level of 5.5% at once.
 Even after premium loan contracts started decreasing, the company rushed to invest
in high-risk investment products in a bid to increase total assets.

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Category 3 covers events related to management structure and has five subcategories:“problems of communication functions,” “inadequate checking functions within theorganization,” “poor risk management system,” “sales division’s strong voice,” and“lack of interdivisional cooperation.” “Inadequate checking functions within theorganization” and “poor risk management system” account for two thirds of events in
Category 3.
Examples“Problems of communication functions”
 Only information such as “things are all right because _____” reached top
management.
 Financial statements showed pretty good figures, but the company did something to
make the three types of profit bigger than they really were.
 The results of cash flow tests around 1992 were not reported to the board ofmanaging directors at its meetings.
“Inadequate checking functions within the organization”
 Mr. G was in charge of both financial planning and financial examination.
 Actuaries were treated simply as human calculators.
 About 60% of policyholders’ representatives were people from the Hitachi Nissangroup, which was affiliated with Nissan Mutual Life.
“Poor risk management system”
 Various systems were built on the assumption that “human nature was good,” sothey had loopholes which were taken advantage of on many occasions.
 Capital gains had become like income gains in the course of the dividend race. As aresult, the management became blind to what was really a profit
 The management was concerned only about the stock prices and was not aware thatthe assumed interest rate equaled the debt cost.
“Sales division’s strong voice”
 (The planning division) tried to reduce strategically held shares but failed to do so
because it met the opposition of the corporate sales division.
 As the sales division gained power, it became difficult to change the direction of thecompany.
 The corporate (sales) division set up a special section to get contracts from banks
despite the opposition of actuaries, but the management gave its approval.
“Lack of interdivisional cooperation”
 The finance division made no attempt to accurately grasp the debt situation (ofwhich the actuarial division was in charge). The actuarial division made no attempt

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to get the financial details.
There was an unwritten rule that the finance division and the operations division
should not interfere with each other. The finance division simply invested money
collected by other divisions.
The actuarial division and the finance division learned each other’s findings andsimply used them.

(2) Consideration on results of categorization

The internal factors we extracted as ones leading to corporate failure were not divided
equally into Categories 1, 2, and 3. Category 2 (factors concerning managers) accounted
for about 60% of all the events extracted. Category 2, together with Category 1’s
subcategory “problems of management strategy/business model adopted,” accounted forabout 70% of all. Category 1 (factors concerning the business model), and Category 3(factors concerning management structure) accounted for 20% each.
The internal factors were extracted from witness accounts of concerned parties who
voluntarily agreed to give an interview in this survey. They were selected on theauthor’s judgment, so the data would not stand up to a statistical analysis. Even
discounting this, it is obvious from the results of categorization that managers played amajor role in causing the failure of their company. Interestingly, a breakdown of factors
in Category 2 varied from one company to another.
Nissan Mutual Life“Top executive’s competency problem,” “slow or inadequate recognition of thesituation,” and “error in business judgment” accounted for 80% of Category 2.
Toho Mutual Life“Top executive’s competency problem” was the largest subcategory accounting for 40%
of Category 2. This was followed by “error in business judgment,” “inappropriate
behavior of those around the top executive,” “top executive’s influence,” and “slow orinadequate recognition of the situation,” in this order.
Daihyaku Mutual Life
“Weak management” was the largest subcategory accounting for over 40% of Category
2. This, together with “slow or inadequate recognition of the situation,” accounted forover 70%. There were no internal factors categorized into “top executive’s competency
problem,” “inappropriate behavior of those around the top executive” and “lack ofchecking functions within the management.”-160-

Chiyoda Mutual Life
“Inappropriate behavior of those around the top executive” was the largest subcategory
accounting for 30% of Category 2. This was followed by “slow or inadequate
recognition of the situation,” and “top executive’s competency problem.” These threesubcategories accounted for 70% of Category 2. This company had many factors under
the subcategory of “problems of management strategy/business model adopted” ofCategory 1.
Kyoei Life
The three subcategories with the largest number of internal factors were “inappropriate
behavior of those around the top executive,” “error in business judgment,” and “weakmanagement.” Other large subcategories were “lack of management awareness” and“slow or inadequate recognition of the situation.” More than 80% of internal factors
extracted at Kyoei Life were in Category 2.
Tokyo Life
Unlike in the case of Kyoei Life, only a little over 40% of all internal factors at Tokyo
Life were in Category 2. All these internal factors in Category 2 were concentrated inthree subcategories: “slow or inadequate recognition of the situation,” “error in businessjudgment,” and “weak management” with no other subcategories in Category 2. In
Category 1, there were many factors in the subcategory of “problems of management
strategy/business model adopted.”
When we speak of internal factors concerning managers, the idea of the top executive
going to extremes may come to mind. At Daihyaku Mutual Life and Tokyo Life, there
were no internal factors put into the subcategory of “top executive’s competency
problem,” but many factors put in the subcategories of “weak management” and “slowor inadequate recognition of the situation.” It seems that the weak presence of the top
management led to the corporate failure.
At Nissan Mutual Life, Toho Mutual Life, and Chiyoda Mutual Life, there were manyfactors in the subcategory of “top executive’s competency problem.” At Toho MutualLife and Chiyoda Mutual Life, there were many factors also in the subcategory of“inappropriate behavior of those around the top executive.” This suggests that thebusiness crisis was not triggered by the errant top executive alone. When we speak of-161-

the top executive’s competency problem at Nissan Mutual Life, the problem was thatthe top executive did nothing (when something had to be done) rather than that he didsomething wrong. This is somewhat different from the cases of Toho Mutual Life andChiyoda Mutual Life. Many companies had a large number of internal factors in thesubcategories of “slow or inadequate recognition of the situation” and “error in businessjudgment.”

2. Undoing the chain of internal factors and external factors
As seen so far, all failed midsize life insurance firms, without exception, had something
we may call internal factors that increased the risk of failure. Each firm had not a single
factor but a number of internal factors. These internal factors, combined with external
factors such as a change in the business environment, gave rise to premonitory signs of acrisis such as the deteriorating financial structure going forward.
If the firm noticed such signs at this stage and took appropriate action, it may havemanaged to avert a crisis. As it was, some internal factor was at work again, and thefirm either continues to be unable to take appropriate action or takes inappropriate
action. Then the business environment changed further (which was an external factor atwork). In this way, the internal factors and external factors came one after the other,
eventually driving the firm into bankruptcy.
Based on the results of categorization as explained earlier, we will give specificinstances to show how internal factors and external factors came into the picture andplayed their parts at a major turning point of each failed midsize life insurer. (I, II and III
refer to Categories 1, 2 and 3, respectively.)(1) Launch of annuity insurance loan (Nissan Mutual Life, 1986)

External factors
 High assumed interest rateChange in the financial structure (financial surplus at large corporations, zaitech
high-risk investment boom, etc.)
 The Ministry of Finance authorized insurers to sell products jointly with financial
institutions.
Internal factors
 The company was historically heavily dependent on an affiliated corporate group

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and had difficulty increasing the total amount of policies in force. The persistency
ratio and the turnover of sales employees were not good, either. (I. Historicalbackground, past experience)
The management tried to turn aggressive shortly before the 80th anniversary. (I.
Management strategy)(2) Rapid expansion of high-cost funds and overconcentration on specific products(Nissan Mutual Life, 2nd half of the 1980s)

External factors
 Rise in the prices of assets during the bubble period

Scale expansion race among midsize life insurers
Financial institutions’ aggressive sales stance (financial institutions benefited
greatly by teaming up with insurers)
 Regulatory authorities’ stance (They hardly saw the liability side.)Internal factors
 Inhouse discussion was held a number of times and the actuary gave an informal
warning to the management. All this did not keep the sales division from goingaggressive. The warning fell on the deaf ears of the management. The president was
informed only of such matters as “things are all right because _____.” (II. Error in
judgment, III. Sales division’s influence)






The company showed good performance in terms of three types of profit, but there
was a gap between the reported figures and the actual business situation. (III.
Communication functions)
Financial institutions took the initiative in sales. Sales went out of the control of theinsurer. (II. Weak management)
The management, the actuarial division, and the finance division were barely awareof the interest rate risk (ALM risk). (III. Risk management)
The Ministry of Finance requested the life insurance industry to “refrain fromforming tie-ups to sell zaitech products like premium loans whose purpose is notwhat insurance is supposed to serve,” but this had little effect. (III. Checking
functions)(3) Leaning toward asset-based products (Toho Mutual Life, 2nd half of the 1980s)

External factors
 Rise in the prices of assets during the bubble period
 Scale expansion race among midsize life insurers-163- Regulatory authorities’ stance (They hardly saw the liabilities side.)Internal factors
 The company started business as a conscription insurance firm before World War II
and was not strong in sales of security-type products in urban areas. It had nocorporate affiliates, so it had difficulty approaching and winning contracts fromcompany employees at the place where they worked. The company set up thedevelopment business division but gradually inclined toward savings-type products
for which it was easier to cultivate a market. (I. Historical background, pastexperience) The company sold high-yield mutual-aid annuity, single-premium endowment

insurance, bank-affiliated loans (individual annuity insurance), and a kind of
so-called zaitech insurance named “health annuity,” emphasizing the attractive
yields of all these products. The company offered high-yield products like those on
the premise of selling assets to generate unrealized profits. (II. Error in judgment)
The company’s long-cherished desire was to expand its asset size, eliminate theexpense loss and pay as high a dividend as larger insurers. To eliminate the expense
loss, the company leaned toward single-premium products with a high expense
loading of premium. (II. Error in judgment)(4) Inappropriate behavior of the top executive and those around him increased the
management risk (Toho Mutual Life, 2nd half of the 1980s)

External factors
 Mutual company system (lack of checking functions)Internal factors
 Every president of the company was picked from the founding family. Mr. A fromthat family was supposed, from the time of joining the company, to becomepresident in the future. President A removed one competent person after anotherand surrounded himself with yes-men. Only someone like Mr. A’s henchman had achance to become a board member. It was not exactly that Mr. A was autocratic. It
was just that everyone around him stopped speaking up to him. (II. Top executive’s

competency)
The top executive became involved in a corporate scandal and an economic scandal.
He tapped into Toho Mutual Life’s funds to pay off the debt of his relative’s
company. He mixed up business with his personal affairs. (II. Top executive’scompetency)
Those around the president exalted him and did as they pleased. President A

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

dabbled in speculative stocks and became associated with a questionable character.
The person who led the president to do these things drew money from Toho MutualLife and used it for questionable investments and loans. (II. Behavior of thosearound the top executive)
A board member in charge of investment gained President A’s trust and took
control of the finance division, so much so that he was called the “emperor.” Heblatantly mixed business with his personal affairs. He was presumably involved in
President A’s investments and loans. Whatever he did, there was no way to get ridof him. (II. Behavior of those around the top executive)
Internal controls and risk management were not functioning. If the president said
OK, the question of who had decision-making authority was meaningless. (III.
Checking functions)(5) Failure to shed the low-earnings structure (Daihyaku Mutual Life)

External factors
 Convoy-like protective administration (The company was able to keep itself afloat
even if its profit was small.)Internal factors
 The company’s main product was saving insurance whose profitability was low.
The company switched to a two-pronged policy of balancing savings (-type
products) with life (security-type products), but the sales force had difficulty
switching to sales of security-type products. The company continued to suffer an
expense loss with only a small mortality profit. This was an unsound earnings
structure. (I. Historical background and structural problems) The management came up with one plan after another, but there was no mechanism
for examining and modifying such plans. Even if they failed to achieve the goals set
out in the plans, they were not called to account. (II. Weak management) The company was affiliated with the Kawasaki family and its staff included
members of this family. In this situation, the management dared not make bolddecisions such as to “discontinue sales of saving insurance” or “sell bank shares.”(I. Founding family’s influence)(6) High-risk investments and loans by those close to the president (Chiyoda Mutual
Life, 1988-1990)

External factors
 Rise in the prices of assets during the bubble period
 Change in the financial structure (financial surplus at large corporations, zaitech
high-risk investment boom, etc.)-165-Internal factors
 In the second half of the 1980s the company sold high-yield and high-dividend
savings-type products in large volumes, putting pressure on the finance division to
generate high returns.
 The president picked his right-hand man who had no financial experience and put
him in charge of finance, and tried to get the finance division to earn profits in thesame way as the sales division would. (II. Top executive’s competency, error in
judgment) The top executive saw the finance division as too conservative and tried to cultivate
a new field. He was self-confident and thought he was not a man to be deceived. (II.


Behavior of those around the top executive)
The finance division’s employees who expressed their opinion to Mr. B weretransferred to a lower post or removed from their current positions. The president
was behind all of this personnel shuffling. After several people who opposed Mr.
B’s policy were removed, no one dared to speak up. (II. Behavior of those aroundthe top executive)
Mr. B was responsible for both examining and implementing investment plans.
Loopholes in the decision-making rules were created over time. To lessen criticism,the number of those who attended an investment policy meeting was gradually
reduced. The rules changed further so that anyone who had an investment plan was
supposed to take it directly to Mr. B. (III. Checking functions)(7) Launch of single-premium endowment insurance (Kyoei Life, 1987)

External factors
 Rise in the prices of assets during the bubble period
 Change in the financial structure (financial surplus at large corporations, zaitech
high-risk investment boom, etc.)
 Other companies were aggressively selling the product (so the sales people wanted
to handle it).
 Scale expansion race among midsize life insurers
Internal factors
 While the scale expansion race was intensifying in the life insurance industry, Mr.
C thought that “we need more assets to become a big company.” (II. Error in
judgment) By the second half of the 1980s, Mr. C (born in 1908) had become old and lost his
youthful energy. Still, he was the only person who made important business-166-

decisions. (II. Lack of management awareness)(8)

Delay in discontinuing sale of single-premium endowment insurance (Kyoei Life,
1st half of the 1990s)

External factors
 Scale expansion race among midsize life insurers
Internal factors
 The cash flow test showed that the situation was very serious, but the management
thought that the external environment would change in 10 years’ time, so it did nottake drastic measures such as suspending sales. (II. Slow or inadequate recognition)

There was no way to put a brake on the sale of the product in the face of opposition
from the executive in charge of sales. As the sales force leaned toward savings-type
products, their power to sell began to wane. (II. Error in judgment)
There was a managerial vacuum. Mr. C thought he had retired from active duty in
1992. When asked for advice, he merely expressed his feelings. Board members
interpreted his words in a way that was convenient for them, and went ahead with
their plans, thinking that, “this must be what the chairman would have liked to do.”(II. Behavior of those around the top executive)
The actuary close to the top executive did not correctly report the actual situation to
the management. He was very secretive and exercised control in such a way that thereality was visible only to certain members of the management. (II. Behavior of
those around the top executive)(9) Inappropriate measures to prepare for book closing made things worse (Nissan
Mutual Life, 1st half of the 1990s)

External factors
 Fall in the prices of assets upon the collapse of the bubble (which led to thedepletion of latent stock profits) Decline in interest rate levels (which led to a negative spread)Internal factorsEven after the company fell into difficulties, the president did not take theleadership to reconstruct business. He just told others to “do something about it”
but made no moves on his own initiative. He saw the company’s problem as adisaster befalling him. (II. Top executive’s competency)
The company started cost-cutting efforts in fiscal 1992 at the urging of the Ministryof Finance, but this did not lead to drastic layoffs because of the expectation that an-167-

affiliated corporate group would come to its rescue in the end (II. Slow orinadequate recognition)
The finance division concerned itself only with asset management and made no
attempt to accurately grasp the debt situation (of which the actuarial division was incharge). The actuarial division made no attempt to learn how the finance division
managed assets and what results it obtained. (III. Lack of interdivisional
cooperation)



(10)

Inappropriate steps taken by the management (Daihyaku Mutual Life,

1990-2000)

External factors
 Fall in the prices of assets upon the collapse of the bubble (which led to thedepletion of latent stock profits) Decline in interest rate levels (which led to a negative spread) Revision of the Insurance Business Law (to introduce solvency margin standards)
 Failure of Nissan Mutual Life and major financial institutions
Internal factors
 The company tried to sell cross-held shares and decided “how much to sell in total”
at a meeting of the board of managing directors. As it turned out, few such shareswere sold because “we cannot get the other party’s approval so we cannot sell




(11)

shares,” as the sales division put it. (II. Weak management)
The budget division presented the management with the results of cash flow tests
indicating that “the company will not stay afloat according to several scenarios” andthat “the company has a 20-30% chance of going under,” but half of members of the
management did not take the matter seriously. (II. Slow or inadequate recognition)(Shortly after concluding a tie-up with Manulife) the company incurred a loss ofseveral tens of billion yen from hedging high-risk foreign bond transactions. A
subordinated loan the company obtained from Westdeutsche Landesbank was notrecognized as such by the authorities. (II. Error in judgment)
Inappropriate steps taken by the management (Kyoei Life, 1990-2000)

External Factors
 Same as (10) for Daihyaku Mutual LifeInternal factors
 Upon falling into the red with a current loss, the company reduced the investment
risk. It became unable to pay high guaranteed returns and had to take risks again.

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

(12)

The company was trapped in a vicious cycle. As a result of rushing to invest in
stocks and foreign securities, the company ran up a huge investment loss for every
term and was sapped of its strength. (II. Error in judgment)
Most of the directors and advisors (who were previously directors) were still
unaware that the company was in a crisis. Members of the management split into
those who pushed for a tie-up and those who insisted on reconstruction without
outside help. The two sides failed to become one to the end. Those in favor ofreconstruction without outside help said until the end that “the stock average will
exceed 20,000” or “a divine wind will blow.” (II. Weak management, slow orinadequate recognition)
The solvency margin ratio was calculated and a cash flow test was conductedaccording to five different scenarios, but only optimistic results were reported to theboard of directors. (II. Behavior of those around the top executive)
Inappropriate steps taken by the management (Tokyo Life, 1990-2000)

External factors
 Same as (10) for Daihyaku Mutual LifeInternal factors
 As “policy loan” contracts decreased sharply, the company strived to boost sales ofgroup annuity with a high rate of return, for which contracts kept on increasing at a•fast pace until fiscal 1993. However, it had become obvious by 1991 that theinterest rate level was trending downward. In fiscal 1992 a negative spread came tothe surface. (II. Error in judgment)
Upon falling into the red with a current loss, the company drew up a profit
improvement plan consisting of such measures as cutting operating costs, closing
unprofitable offices and reducing the weighting of stocks. The scenario of the plan
was based on the assumption that the total amount of policies in force would go on
increasing. The managers/management lacked a sense of crisis management. The
company was slow to reduce its shareholdings because the management wasconcerned that doing so might undermine business expansion efforts. It was not
until 1999 that the question arose whether it was desirable for the company tomaintain its expansionary policy. (II. Slow or inadequate recognition)
The finance division and the budget division called for sales of strategically held
shares, but the sales division objected. The management forestalled sales. (III. Sales
division’s influence)-169-Chapter 4
What was the crucial difference?―The difference in the life insurers that survived
1. How were life insurers that survived managed?

We have explored internal factors leading to the failure of midsize life insurancecompanies in the time of the Heisei financial crisis, including factors that drove theminto a management crisis, actions taken under crisis situations, internal and external
checking of management, and risk control structures. Our examinations reveal that at
failed insurers, the top management played an important role and that the businessmodels those companies had built until their business turned sour or their pastexperiences more or less contributed to their failure. It was also revealed that the
management of these insurers was subject to very little internal and external checking.
What about life insurers that managed to escape from bankruptcy around the same time,then? Didn’t they have any of these internal factors that increased the risk of failure, or
did they have only a few such factors?
(1) Managerial reform of Asahi Mutual Life

Asahi Mutual Life Insurance Co., which used to be one of the major life insurancecompanies, was severely hit by the impact of falling stock prices, growing concerns
about the financial system, and a series of bankruptcies of midsize life insurers inaround 2001. The failure to reach a final agreement in merger negotiations with former
Tokio Marine and Fire Insurance Co. also accelerated customer churn, driving thecompany into a management crisis. The value of individual insurance policies in force
fell to ¥65 trillion at the end of fiscal 2002 from 77 trillion at the end of fiscal 2000 injust a two-year period. The total assets plunged to ¥6.6 trillion from ¥11 trillion. The
company’s credit rating dropped to the B zone (in a rating by Rating and Investment
Information), or the level suggesting that “the insurer’s ability to meet insurance claims
is questionable” and that “some factors require constant attention.”
To deal with these problems, Asahi Mutual Life launched large-scale management
reform projects named “Project R” and “Success A.” It conducted restructuring
measures such as reducing shareholding risk, cutting personnel expenses, andwithdrawing from the corporate insurance field. Moreover, the company departed frommajor life insurers’ traditional business model—designed to seek an increase in newcontracts through expansion of the number of sales personnel. It set out unconventional
measures to drastically change its earnings structure such as “shifting from-170-

benefit-based insurance management (emphasizing death coverage products) topremium-based insurance management (emphasizing the third sector insurance
market),” “placing emphasis on maintaining policies in force rather than on acquiring
new contracts,” and “tightening the hiring process for sales positions and carefully
training sales personnel.” Nevertheless, the harsh conditions didn’t improve for a while,
forcing the insurer to cancel interest payments to providers of the company’s foundation
fund and suspend dividend payments to policyholders. The insurer has gotten over thecrisis, thanks largely to a stock market upswing that began in 2003, and its downgradedcredit standing has been on a recovery track.
(2) Effectiveness of loose tie-up

In around 2001, Mitsui Life Insurance Co. also saw its financial condition deteriorate
amid growing uneasiness of policyholders following a series of bankruptcies of midsize
life insurers. The company tried to overcome the rough times by fully announcing
strengthened partnership with close financial institutions. In autumn in 2001, thecompany released its decision to form a “comprehensive alliance” with Sumitomo
Mitsui Banking Corp. (SMBC), Sumitomo Life Insurance Co., and Mitsui Sumitomo
Insurance Co.(Note from translator: Mitsui Sumitomo Insurance Co. is a non-life
insurer), while revealing its plans to procure funds from SMBC to bolster its foundation
fund and convert to a stock company (it was demutualized in April, 2004). The allianceof these four companies was a “loose business tie-up” rather than a “comprehensive
alliance,” but concerns about the credibility of the insurer were eased later.
Why did Asahi Mutual Life and Mitsui Life fall into a management crisis and pull out of
the crisis? Unlike many failed life insurers, the two companies were able to make up for
their negative spread with other profit sources (in other words, they posted a basic profit
for every period), and a stock market recovery from 2003 largely helped the companies
turn themselves around. However, these were probably just part of the factors
contributing to the business recovery of the two insurers, and moves taken within thecompanies are considered to have been largely related to the recovery.
For example, the failure to reach an agreement with Tokio Marine and Fire Insurance on
business integration and the launch of reform projects in 2003 to depart from major
insurers’ business model are believed to have become a turning point for Asahi Mutual
Life, and some internal factors probably played an important role at each of these phases.
“Merely reducing costs by cutting jobs was not enough for us (to survive in the changing-171-

life insurance market). We had to bolster our earnings power by shifting to a businessmodel designed to cope with new environments,” then-President Yuzuru Fujita said in
an interview with an economic magazine (the Nikkei Business dated December 15,2003).
In reality, however, it is extremely difficult to explore the internal factors of existing
companies. There is a limit on looking for internal factors from officially releasedmaterials, and such factors are closely related to confidential information within thecompany. I therefore have to give up making further analysis on these companies thistime, but hope that related parties will give us an overview on the management crisis oflife insurers and ways to pull out of such crises in the medium term.

2. Midsize life insurers that did not failTaiyo Life Insurance Co., Daido Life Insurance Co., and Fukoku Mutual Life InsuranceCo., although being midsize life insurers, did not face a major managerial crisis, andtheir credit ratings stayed in the A zone or better (in the rating by Rating and Investment
Information) even when credit concern spread to some major life insurers as well. It’svery interesting to know how the internal management of the three companies differedfrom that of failed midsize life insurers.
Fortunately, officials of the three companies have cooperated with my research.
Therefore, I will look at the inside of these midsize life insurers as much as possible toexamine the roles played by the internal factors of these companies and highlight thedifferences between the three companies and failed life insurers.
(1) Taiyo Life Insurance

Taiyo Life mainly serves the household market in big cities and major regional cities,
and many of its customers are middle-aged and elderly people as well as housewives(males account for a larger percent of customers for the life insurance industry as awhole). For example, 76% of the company’s new contracts for individual insurance andindividual annuity insurance came from female policyholders in fiscal 2001. While
major life insurers mainly sold large-scale death coverage products in the market serving
employees of major companies, Taiyo Life offered special endowment insurance chiefly
via house calls and secured its customer basis by taking thorough retail strategies. Likeother companies, its sales channel was sales personnel, but sales people worked in pairs,
marketing short-term savings products (the insurer’s mainstay products have recently-172-been shifted to middle-sized death coverage insurance as well as medical and nursing
care products).
Taiyo Life, whose mainstay products were savings policies, had a lower profitability
than major insurers. Because it also focused on individual annuity insurance in the
mid-1980s, the company ended up struggling with a huge negative spread in the 1990s
amid falling interest rates. Moreover, the prices of major bank shares held by thecompany dropped in around 2002 and 2003, weighing heavily on the insurer’s earnings
as well.
However, Taiyo Life never fell into a management crisis even under such severebusiness conditions because (i) its earnings were propped up by profits coming from themorbidity margin for “Kenko Himawari,” a ten-year special endowment insurance
product, (ii) its unique investment style helped reduce the impact of the bubble burstingand (iii) the company had built financial buffers as represented by an “unallocatedportion of reserves for policyholders’ dividends.” I would like to also point out that (iv)
Mr. A, a manager having wielded the real power over a long period of time, played an
important role.
In January 1999, a year and half after Mr. A died, Taiyo Life announced its plan to form
a comprehensive alliance with Daido Life, revealing the management’s decision to seekbusiness integration with the company in future. The announcement came just before
many midsize life insurers went under and therefore can be considered to have helped
the insurer escape credit worries.
(i) Profits coming from lower-than-expected disease rates for “Kenko Himawari”

Until the mid-1990s, Taiyo Life had basically marketed monthly-premium special
endowment insurance “Himawari Hoken” (five-year term) and “Kenko Himawari
Hoken” (ten-year term) via house calls by female sales employees.
Endowment insurance pays death benefits or maturity benefits and has a strong nature ofsavings. However, “Kenko Himawari Hoken” launched by Taiyo Life in 1974 provided
hospital confinement indemnity and surgical coverage, which enabled the insurer to earn
profits from lower-than-expected disease rates. This is similar to the earnings structureof postal life insurance, which has been supported by mortality profits generated from
hospital confinement riders. “We focused on marketing of “Kenko Himawari” in around-173-

1980. The product helped boost our earnings by generating profit fromlower-than-expected disease rates,” says a concerned party.
(ii) Unique investment style

Stocks and real estate accounted for only small percentages in assets held by Taiyo
Insurance, and most of the assets were denominated in yen. The company’s weight ofstocks (to total assets) was around 15%, while the industry’s average was around 25%.
The relatively low weight of stocks in the company’s portfolio was largely attributed to
the following facts. First of all, Taiyo Life had no need to hold corporate stocks for sales
purposes because it mainly targeted the household market. Faced with the heavy burdenof paying interest dividends to policyholders of savings products, the company also
shied away from investing in low return stocks. Moreover, the company was not
required to pay special dividends, using latent stock profits, as its mainstay products
were short-term policies.
Unlike other companies, Taiyo Life didn’t extend loans for the purpose of boosting its
insurance sales either. It adopted the policy of “lending a large amount of funds to agood company,” according to a concerned party, and didn’t turn to real estate collateral.
The insurer’s borrowers were mostly large corporations. Although some of them,including the group firms of Nippon Shinpan Co., struggled with deteriorating earnings
later, the bubble burst had a relatively small impact on the businesses of Taiyo Life.
Taiyo Life suffered a huge loss from the collapse of major U.S. securities holding
company Drexel Burnham Lambert Group Inc. in 1990, which prompted the insurer tostrengthen its control of investment risk. It decided not to resort to a “dividend capture”
strategy (an investment method designed solely to pocket dividend income in the shortrun) and investment in structured bonds that failed midsize insurers often turned to andliquidated all related investment vehicles at loss in 1991.
(iii) Accumulation of financial buffers

Until the mid-1990s, life insurers had been asked to reward their policyholders withdividend payouts rather than to accumulate internal reserves. However, Taiyo Life
ended up accumulating large internal reserves, and they were largely made up of the“unallocated amount of reserves for policyholders’ dividends.” Even though thecompany maintained the highest level of dividend payouts in the industry, ample
reserves for policyholders’ dividends still remained because the company’s asset-174-

portfolio tended to generate higher returns than other companies’ portfolios did.
Taiyo Life pursued unique business strategies, and therefore its product line-up was
different from those of other insurers. As a result, the company didn’t get involved in
the dividend competition waged in the late-1980s (competition over the levels of special
dividends and dividends for group annuities), which largely contributed to the insurer’s
success in building up its reserves for dividends to policyholders. “Taiyo Life was the
only midsize company whose premium rates were unknown,” an actuary of anothermidsize life insurer revealed.
(iv) Role played by Manager A

Mr. A is the “leading figure who had rebuilt Taiyo Life.” He had served as president for
16 years starting in 1962 and continued holding substantial power as chairman andhonorary chairman until he died at the age of 96 in 1997.
Recruited by the Nishiwaki family after the World War II, “Mr. A joined the insurer on
the verge of collapse, becoming the largest contributor to turning it into a midsize
insurer” (according to the Nikkei Business dated June 3, 1991). With trial and error, hemanaged to develop special endowment insurance policies and adopted a sales method
requiring sales people to work in pairs, thereby creating a business organization suited
to sell savings products. He didn’t change these business strategies even though otherinsurers rushed to sell large-lot coverage products during the period of rapid economic
growth.
Taiyo Life started focusing on individual annuity insurance in the mid-1980s.
Meanwhile, the insurer marketed few lump-sum insurance policies for which rival
companies were stepping up their marketing efforts because it was afraid of the risk
involved in those products and Mr. A also objected to selling those policies. The
company also stopped offering variable insurance products right after Mr. A judged that“sales of such products would cause trouble to policyholders later.” When the sales
department signed a corporate annuity contract during the bubble period, Mr. A orderedsales personnel to cancel the contract, saying, “It won’t bring us a profit, so return it”
and the contract was actually declined.
He was also well known for being strict about costs and thoroughly pursued efficiency
in management. “When visiting the company’s office, I found small rooms and bare

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shelves. With lights turned off for saving purposes, the rooms were dim. I was shocked
to find Mr. A checking the company’s pay slips on his own for any wasteful spending,”
said a head office staffer at Daihyaku Mutual Life of that time.
This unique investment style was also implemented by Mr. A, and he made final
decisions by himself on large-scale lending to corporations. Taiyo Life invested a
relatively large amount of funds in bank stocks because “the manager of former Meiji
Life Insurance, a close friend of Mr. A, recommended bank stocks as good investment
destination,” according to a concerned party. When the company further lowered theweight of stocks in its asset portfolio in the mid-1990s, it also obtained approval from
Mr. A for sales of stocks.
Looking at these things, we see that Mr. A’s pursuit of different strategies from major
insurers, high efficiency and unique investment policies greatly contributed to what
Taiyo Life is today. However, the insurer would have faced difficulties correcting its
business if Mr. A had made wrong decisions in steering his company. For example, “thecompany aimed to earn expense profits from sales of individual annuity products, butinstead incurred a negative spread, which weighed on the company’s earnings,” said aconcerned party.
(2) Daido Life Insurance

Daido Life Insurance has a strong business base in the small- and midsize-businessmarket and sells individual term insurance to employees of smaller businesses. Its sales
personnel work together with partner organizations such as “Zenkoku Hojinkai
Sohrengo,” which is known as “Corporation Association,” and the Federation of Tax
Payment Associations to market a large-scale comprehensive insurance coverage
package to member corporations of those organizations. The insurer also markets its
products via members of TKC Corp., a major body of tax accountants, and other tax
accountants and experts working as agencies for the insurer to client companies of thoseaccountants. Daido Life was demutualized in April 2002, becoming the first company to
do so among major and midsize life insurers, and went public.
The company maintained a high solvency margin ratio and solid earnings power as well
as a good credit rating even after the bubble burst, mainly because (i) it shifted its focus
to individual term insurance in the 1970s and (ii) drastically reviewed its asset portfolio
in the early 1990s.

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(i) Shift to individual term insurance

Daido Life used to take the strategy of selling life insurance products to individual
customers via sales personnel as major insurers did. Its business performance had beenpoor until around 1970, however. “We were even unable to build enough policy reserves,
and reserves for dividends to policyholders were so scarce that they were depleted in the
middle of a fiscal year,” a concerned party reveals. Faced with desperate situations, thecompany took the strategy of specializing in individual term insurance which placed alesser burden of building policy reserves.
The insurer was initially able to acquire only small-lot contracts from neighborhood
associations and others, but the circumstances changed when it formed a partnershipwith Corporation Association and started providing an insurance coverage package tomember companies of the body. The company also built on the momentum by
individually receiving an official endorsement in tax affairs “allowing the insured
corporation to write off the entire amount of premiums for a type of products requiring
little accumulation of policy reserves.” Daido Life formed a partnership with TKC Corp.
in 1974 and designated TKC’s member tax accountants as its agents. This way, theinsurer established the business model of offering term insurance with a high-end
coverage via its partner entities to small and midsize companies, which was different
from the model adopted by major insurers. A concerned party says, “We offeredcoverage products more purely than now. The idea of selling life insurance to small andmidsize companies did not exist in those days, and no company had entered into thismarket.”Daido Life also expanded its asset size during the bubble period, but it sought expansion
mainly in the group annuity field. The company kept focusing on term insurance in theindividual-insurance field, aiming to expand the amount of policies in force, and it neversaw its business model collapse. Looking at Nissan Mutual Life’s success in drasticallyincreasing contracts for individual annuity insurance via tie-ups with financial
institutions, it thought about following suit. However, President B raised a red flag not
because he was concerned about deterioration of the company’s ALM, but because hethought that “those products would be sold without efforts of sales personnel, hence
weakening the strength of its sales force.” His decision eventually played a big role forthe insurer.

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(ii) Drastic review of the asset portfolio

Daido Life mainly sold highly profitable large-scale individual term insurance in the
1980s, while paying one of the industry’s highest levels of dividends to policyholders byusing capital gains of stocks as funding sources. Despite having established its uniquebusiness model, the company still thought it had to maintain the highest level ofdividends in the industry to protect its customer basis from larger life insurers facing thematurity of the death coverage market.
The insurer shifted its asset holdings from stocks to public and corporate bonds in theearly 1990s because the investment department strongly insisted on sell-off ofshareholdings out of concern that the company depended too much on unrealized capitalgains of stocks. Domestic stocks accounted for nearly 20% of the company’s total assets
at the end of fiscal 1990, but the weight fell below 10% at the end of fiscal 1995.
“Looking at the situations in the U.S., we came to know about the idea of ALM. We had
generated capital gains to pay dividends, but realized that we would be in trouble once a
stock market upturn came to an end,” a concerned party said.
What the insurer did sounds easy. No life insurer took such a move in those days,
however, and the proposal of selling stocks met objections within the company for anumber of times. It was people at the section-head level of the investment departmentthat strongly insisted on stock sales, according to concerned parties. Unlike othercompanies, the management of Daido Life eventually accepted the proposal made by its
investment department largely because the company’s core customer basis and businessmodel were not related to its shareholdings. The weight of group annuities was
relatively large at Daido Life. Those policies were not acquired from general companies,
however, but were “sold individually” to member companies of its partner institutions.
Nevertheless, the company put off discussing the investment department’s proposal
because the sales department strongly opposed the idea, and the president was from thesales department. The planning and actuarial departments didn’t show their objections,while also not supporting the investment department. However, the investment
department is said to have finally succeeded in persuading the top management after
making the proposal over and over.
The success is partly attributed to the fact that the board member in charge of theinvestment department was from outside the company (the Ministry of Finance). He
listened to opinions of his subordinates and brought the proposal of selling the-178-

company’s stockholdings to managing directors’ meetings for a number of times. “If he
had been an internally-promoted board member, he wouldn’t have been able to make thesame proposal for so many times,” said a concerned party.
President B eventually decided to sell the company’s stocks. He assumed his post whileinternal strife among the management was rising to the surface. In March 1988,
then-President C, who served as president for 10 years, was replaced by Mr. D, anactuary. Following the sudden resignation of Mr. D in March 1990, Mr. C concurrently
served as chairman and president in an exceptional move. Mr. B became president inJuly, keeping the mess within the company under control. The insurer invited the board
member from the Ministry of Finance mentioned earlier when Mr. B assumed thepresidency.
(3) Fukoku Mutual Life Insurance

Fukoku Mutual Life mainly sold protection-based products via female sales employees
to workers at government offices and large corporations. Its business model appears tohave been as same as one adopted by major life insurers. However, under the policy of
being independent, the company had been pursuing the goal of achieving a “net increasein policies in force” as its basic principle since the 1970s. While other insurers focused
all their efforts on “how to win new contracts,” Fukoku Mutual Life didn’t force itself tomarket policies and instead devoted its efforts to acquiring high-quality contracts andoffering follow-up services to policyholders after executing contracts. Its surrender andlapse rate (compared with policies in force at the beginning of the year) had been far
lower than those of other insurers. It never faced a bad loan problem even after the
bubble burst and had maintained financial soundness.
The company was different from other life insurers mainly in that (i) it didn’t turn tosavings-based products and that (ii) it separated investment and sales activities.
Moreover, (iii) the characteristics of its corporate culture were different from those ofothers.
(i) The company didn’t lean toward savings-based products

With its predecessor being a military service insurance company, Fukoku Mutual Life
had mainly marketed savings policies until around 1970. However, the company shifted
its focus to coverage products as its management agreed to the opinion of the budgeting
department that the profitability of saving insurance was low. “It was not an easy task.

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We chiefly marketed annual premium insurance to customers living in regional areas,
but set up the department specializing in selling monthly-premium insurance in big
cities and created an atmosphere suggesting that ‘selling savings products is a sin,’” said
a concerned party.
The management focused on earnings more than anything and set up a goal of attaining
the level of policy reserves required under the net premium method (in 1962, thecompany became the first player in the industry that attained the level) and eliminating
expense losses.
What differentiated Fukoku Mutual Life from other life insurers was that it aimed to
improve its earnings by lowering its surrender and lapse rate as well as reducing costs,
rather than seeking an increase in new contracts. The company judged that acquiringhigh-quality contracts and not losing existing contracts would be important if it aimed toachieve profitability as high as that of major insurers. “The Ministry of Finance called
for life insurers to maintain a profit in each of the three profit sources. In order for
Fukoku Mutual Life, a small-scale life insurer, to eliminate its expense losses, themanagement spearheaded an initiative to lower the company’s cancellation andtermination rate, which stood at 20% at that time, to zero,” a concerned party revealed.
The sales department shifted its focus to the market serving employees of companies.
The market enabled the insurer to visit customers effectively and maintain a highpersistency rate, while helping the company eliminate its moral hazard risk. Thanks toefforts by sales people, the insurer was able to gradually tap into the market, astronghold of major players. Fukoku Mutual Life especially strengthened its marketing
efforts for the government and public sector market because shareholdings and loan,
sales weapons of large insurers, were not effective in this particular market, allowing thecompany to evenly compete with those major players. Concerned parties said, “Being
subject to severe penalties for contracts terminated or lapsed, sales employees turned tothe market serving employees of companies because the surrender and lapse rate waslower compared to the household market” “We had some connections with major
businesses, but such connections did not contribute to our sales. The market serving theworkforce of companies was not introduced by our company, but sales employees
exploited on their own.”
Competition over total asset levels intensified in the late 1980s, putting Fukoku Mutual-180-Life at a disadvantage in terms of the scale of assets. However, Mr. E, then-President,
didn’t change the company’s stance at all, saying, “It’s fine as long as we are generating
profits.” Unlike other life insurers, Fukoku Mutual Life didn’t see a surge in the numberof contracts for single-premium endowment insurance and loan products offered intie-ups with financial institutions (individual annuity insurance requiring policyholders
to make an advance premium payment for all periods), because the actuarial andfinancial affairs departments raised their concerns soon after the launch of those
products, prompting the management to order the sales department to halt sales of thepolicies. Under heavy pressure from the Ministry of Finance, the company developed avariable insurance product, but never marketed it. “Some people viewed that Fukoku
Mutual Life was able to ensure soundness because they did nothing, but doing nothing
was the most difficult thing in those days,” says a party concerned. “It was tough todecide not to market variable insurance under the circumstance of that time. In themeantime, however, we made bold decisions to spend a relatively large amount of funds
for the size of our company to construct a new head office building and establish arevenue base with tenant income,” “stick to our own rules,” Mr. G, then-President, tolda press interview (according to Asahi Shimbun dated on August 29, 1998).
Being unable to increase its business scale, Fukoku Mutual Life saw its employees
losing their motivation in the late 1980s. There were also growing calls on the company
to “aim for profit expansion rather than a better balance in its three profit sources.”
However, the idea of being the highest quality company rather than the largest company
was continuously upheld by the top management, and the company kept emphasizing
opinions of experts such as actuaries and those in the investment department, while
making fewer efforts to meet the complaint of sales people.
(ii)Separating investment and sales activities

In the life insurance industry, the sales department usually had a strong voice within
their companies. The asset management department had a strong presence at Fukoku
Mutual Life, however, and promising employees were assigned to the investment
department. Many of its presidents also had experience in investment operations. The
company had an established system of separating investment and sales activities, andhardly purchased stocks for the purpose of exploiting the market serving employees ofcompanies.
The company had the experience of succeeding in stock investment and could attain the-181-level of policy reserves required under the net premium method largely due to stock
investment profits. Having a corporate culture of hating following other companies,
however, Fukoku Mutual Life managed to avoid engaging in unreasonable investment
during the bubble period. It took a dividend capture strategy and also invested in
Nikkei-linked bonds as recommended by securities companies, but in the meantime, it
had a culture of not doing things once hearing that “other companies did them as well.”“The company’s stock investment was based on a thought that following someone
would bring no profit” “There was also a thought within the company that stock andland prices would always go up and down,” said a concerned party.
(iii) Characteristics of the insurer’s corporate culture

The common factor seen in (i) and (ii) is the culture where the top management places
much value on management indexes and experts. None of its top management camefrom the sales department, and “people having a strong interest in the company’s data
took charge of running the business,” according to a party concerned. Actuaries didn’t
gain a big promotion, but were highly valued as experts in the company. There appears
to have been a culture where the management listened to what actuaries said. Moreover,the company had an established idea of emphasizing earnings on the bedrock of its
business, and therefore it can be said that the company had rigorously done what it had
to do.
The top management is said to have held strong power. Mr. E, the sixth president of thecompany, had served as president for 20 years until 1991. Mr. F, the next president, wasthe eldest son of a businessman called as the “leading figure who had rebuilt thecompany” (a prominent figure in the business circles serving as the third president of theinsurer and also the first president of former Japan Development Bank) and joined thecompany on the premise that he would become president in the future. President G
started his career at Fukoku Mutual Life, but he had a long experience of working as asecretary at the business office of the above-mentioned businessman. He served as headof the financial affairs department and held other prominent positions after returning to
the insurer.
3. How were they different from failed life insurers?

Limits resulting from difficulties in looking for internal factors of existing companies
cannot be denied, but our examination of the businesses of the three surviving midsize
insurers has still revealed, in terms of differences from the businesses of failed life

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insurer, the following three points that the three companies had in common:(i) All of the three companies grew, using unique business strategies different fromthose of major life insurers. They didn’t turn to single-premium savings-based products
and drastically change their strategies either during the bubble period.
(ii) They didn’t lean toward high-risk investment during the bubble period or succeededin reducing their risk at an early stage of the post-bubble period.
(iii) The management exercised leadership. They possessed their unique business model,
managerial principle and investment philosophy. The companies’ management
strategies were little affected by changes in external environments or moves taken byother insures, and they “seldom followed what other companies did.”(iv) While the management meant sales for many life insurers, the management of thethree surviving insurers distanced themselves from the sales department, or thesurviving companies’ unique business models allowed the management to think of theirsales and financial affairs departments in separate terms.
Looking at these things, we see that, as in the case of failed life insurers, themanagement played a significant role in the three midsize companies. Taiyo Life refinedsavings insurance that generated only a small profit and established its business base by
developing a marketing method suited to its products and taking extensive cost-cutting
measures. Daido Life exploited the coverage insurance market for small and midsize
businesses untouched by major players, thereby establishing a solid business base.
Fukoku Mutual Life entered into the market for government workers where it could
evenly compete with major companies and secured profits by acquiring good-quality
contracts and reducing its surrender and lapse rate. None of the three insurers followed
what other major and midsize companies did. Instead, they followed their own uniquestrategies, succeeding in getting through times of radical changes in businessenvironments from the late 1980s through the 1990s and thereafter.
At these three companies, the leadership of the management went in the right direction.
To put it the other way around, however, these surviving companies employed anauthoritarian management style. If the management had wandered from the right path,whether surrounding people could have expressed their opinions to the management-183-

remains to be unknown. Moreover, the centripetal force of the management was reduced
at both Taiyo Life and Daido Life in around 1990 when managerial troubles wererevealed. The three companies don’t appear to have been subject to greater internal andexternal checking functions than failed life insurers either. While the idea of ALM
existed in Daido Life, Taiyo Life and Fukoku Mutual Life were scarcely aware of theneed for implementing ALM.

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Chapter 5
Was Japan an anomaly? – Comparison with failures overseas
This chapter will focus on the failure of life insurers overseas and look for points
common to or different from instances of failure of midsize life insurers in Japan. Our
purpose to make a comparison with overseas instances is to gain a deeper understandingof the factors leading to the failure of midsize life insurers in this country.
Many countries experienced the failure of life insurers. We took up cases of Equitable
Life of the U.K. and Korea Life. With regard to Equitable Life, the Penrose report(mentioned in the Introduction) made a detailed analysis of the circumstances andexplored the causes of the de facto bankruptcy. The author drew on the techniques usedin the Penrose report. It would be worthwhile to compare the results of analysis in thePenrose report and my report. In this chapter we will describe the circumstances that led
to the failure of Equitable Life and contributing factors in reference to the Penrose
report and compare the case with similar instances in Japan.
We took up the failure of a Korean insurer because, historically, the South Korean
insurance system was strongly influenced by the Japanese system and also because, as in
the case of Japan, Korean life insurers failed on a large scale as their external businessenvironment put them under great stress. We studied written materials and heldinterviews with many people in February 2006, including those of Korea’s Financial
Supervisory Service, which is the competent authority, Korea Deposit Insurance
Corporation, which manages the safety net of insurance companies in South Korea, andthink tanks such as the Korea Insurance Development Institute and the Korea Institutefor International Economic Policy.
1. Inappropriate management – Failure of Equitable Life of the U.K.
(1) U.K. life insurance market
The U.K. life insurance market is the world’s third largest after the U.S. and Japanesemarkets. Unlike in Japan, where traditional dividend-paying products such as death
protection have a dominant position in the market, single-premium savings-type
products (especially annuity products) form the core of the British market. These
products are widespread among the people. “Insurance, pension” accounts for over 50%
of all personal financial assets in Britain (less than 30% in Japan).

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Products are classified into three groups—non-linked products (traditional
dividend-paying products and non-dividend products), AWP, and linked products(whose dividend is linked to the actual investment return). AWP and linked products are
more common types.
AWP is a scheme intermediate between the linked and the non-linked schemes and is a
dividend-paying insurance plan in which each individual’s share can be determined at
any time. AWP came into being in the second half of the 1980s, when traditional
dividend-paying products were losing out to linked products in the market. AWP
became popular, particularly in 1988, when the government introduced tax-qualified
personal pension plans. In Britain, unlike in Japan, pensions (before payment is started)and annuities (after payment is started) are treated as different products.
On the investment side, the high level of the stock weight to total assets is the mostnotable feature of British life insurance products. The percentage of stocks in total assets
was over 30% in the 1980s and rose to 60% in the 1990s. No upper limits were placedon shareholdings. Unlike in the case of traditional dividend-paying products, the face
amount or the maturity proceeds amount of AWP is not definitely fixed at the time of
conclusion of a contract. Generally speaking, AWP does not put a heavy burden ofguarantee on the insurer, making it easier for the insurer to invest in risky assets. With
AWP, yearly investment returns are leveled out in the “smoothing” process before being
paid as dividends. (With a linked product, the actual performance of investments isdirectly reflected in the contract value.)(2) Corporate profile of Equitable Life
Equitable Life started business in 1762 as the “Society for Equitable Assurances on
Lives and Survivorships.” It used the death rates calculated from London’s mortality
statistics. Equitable Life was the world’s first life insurance company that adopted thelevel premium rate for each age. It was a mutual company.
Equitable Life was a relatively small company until the first half of the 1970s. Most ofits business concerned the FSSU (Federated Superannuation System for Universities,
which was the pension system based on endowment insurance for university faculty
members). When the pension tax system was revised in 1970, the company found it
impossible to continue the FSSU business.

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Table 5-1
Year
1762
1913
1957
1973
1975
1988
1991
1993
1994
1995
1997
1998
1999
2000
2001

Equitable Life’s brief history

EventsBusiness launched.
Starts selling annuity products.
Launches sales of annuity rate-guaranteed pension (later called GAR).
Terminal bonus introduced.
Guaranteed yield raised from 4% to 7% (10.5% in real terms).
Sales of dividend-paying retirement annuity product (GAR) discontinued.
Roy Ranson becomes representative director (concurrently serving as an appointed
actuary).
Adopts the terminal bonus discrimination policy (reducing the terminal bonus payment
to GAR annuity policyholders).
Posts future profit when settling accounts.
Negative spread emerges.
Issues a subordinated bond. Ranson replaced by Alan Nash as representative director.
Negative spread and the situation of dividend-paying contracts reported in the media.
Takes out financial reinsurance. Wins a case in the first instance.
Loses a case in the second instance and in the Court of Appeal. Stops offering to makenew contracts (practically bankrupt).
Sales network sold off. Contract terms changed.

Earlier, in 1957, the company developed a dividend-paying retirement annuity productwith a guaranteed annuity rate. This did not grow into a leading product for some time.
To cultivate a new market in place of the FSSU business, the company stepped up thesales of dividend-paying retirement annuity with a guaranteed annuity rate (GAR) to
wealthy individuals as target customers. It expanded its own sales force and branch
network, calling attention to the low cost and the high policyholder dividend that weremade possible in a mutual company system.
Equitable Life also reviewed its product lineup. In 1971 customers were allowed theoption of receiving part of the benefits in cash. The company raised the assumed interest
rate in 1975 and enhanced the flexibility of switchover to an annuity contract in 1978.
As a result of these efforts, the company gained a larger market share and grew into asecond-tier company in the 1980s.
As it continued to pay high dividends while the interest rates were falling in the 1980s,
the company became burdened with an “excess dividend” and its financial situation
deteriorated. It discontinued sales of GAR annuity in 1988 and switched to individual
annuity without a guaranteed rate.
Since the company used a single fund for management of both old and new products,
the negative spread of GAR annuity affected other products which had no guaranteed-187-

rate.
(3) Developments leading to failure
The market interest rate turned up from around 1988 but began to decline in the early
1990s. In 1993, the market interest rate temporarily fell below the GAR (7%). Thismeans that the guaranteed annuity rate fell into the state of “in the money” of option
trading.
Equitable Life changed its dividend policy. According to its new policy, policyholders
who received annuities at a guaranteed rate would receive a lower terminal bonus thanthose who chose to receive annuities at the market rate. As for accounting, new contract
costs were subjected to quasi-Zillmer adjustment (that is, deferred) in the 1990s. At
book closing for 1994, future profits were entered in the books. The company came toadopt accounting standards that were not conservative.
The long-term interest rate declined after rising in 1993. The guaranteed annuity rate
was again in the state of “in the money” in 1995. The GAR-related liabilities became anincreasing burden on the company. The negative spread was estimated at a maximum of
1.6 billion pounds a year, which was about half of the premium income at that time. The
company issued a subordinated bond in 1997 to maintain the required solvency marginlevel. In 1998, the media began to report the company’s situation and customer
complaints about the discriminatory bonus payment policy. The HM Treasury got agrasp of the problem and warned the Financial Services Authority (FSA, which acquired
the power of supervision in 1999) about Equitable Life’s GAR problem.
Equitable Life maintained its measures to reduce the terminal bonus for GAR.
Policyholders who did not like having their bonus amount reduced sued the company. In
the first instance in 1999 the company won the case with a ruling that “Equitable Lifehas discretionary power to cut the bonus amount.” In the second instance and the Courtof Appeal (supreme court), the company lost the case with the ruling that “bonus cuts
are illegal because policyholders had reasonable expectations for terminal bonus
payments.” To finance bonus payments, the company needed additional 1.5 billion
pounds. It gave up reconstructing business on its own and offered itself up for sale, but
found no buyer because, with the stock prices and the interest rates falling, the total
amount of payment liabilities ballooned more than initially expected. At the end of 2000
the company was unable to pay guaranteed annuities to about one million policyholders-188-

(including about 90,000 GAR policyholders), stopped offering to make new contracts
and ended up practically bankrupt.
(4) Cause of failure
The main and direct cause of the failure of Equitable Life was that the company, which
had grown directly by selling GAR annuity products with a high-level and flexible
guarantee option, became burdened with a negative spread as a result of decline ininterest rates from the 1980s onward. In 2000 the court said no to the insurer’s practiceof cutting the terminal bonus amount to lessen the burden of the negative spread of
GAR. This ruling drove the company to bankruptcy.
Let us first explain the mechanism of GAR annuity. GAR is the rate guaranteed when
the policyholder shifts to an annuity contract. The policyholder has the option ofchoosing the market rate or GAR, whichever is higher. The policyholder is allowed tobring external funds to the annuity contract within the limits of the tax law (theguaranteed rate of GAR is applied to the funds). Moreover, the policyholder can flexibly
choose the starting age for annuity payment. The significant point is that the power toexercise GAR right was held not by Equitable Life but by the policyholder.
Let us also explain the dividend (or bonus)-paying system. Under the GAR plan, the“ordinary dividend” is paid on the pension reserve contract and the “terminal dividend(bonus)” is paid when annuity payment is started. Terminal bonus is determined in theform of settlement of surplus remaining after the termination of the contract. Bonus
payment is not guaranteed under the contract. When Equitable Life made a new contract,
however, it presented the customer with the record of bonuses paid in the past. Further,every year the insurer informed policyholders how much they would receive in total(including bonuses) once the annuity payment was started. The court judged that thesethings had inspired policyholder’s reasonable expectations and ruled that it was illegal
to set the terminal bonus amount at different levels depending on whether thepolicyholder chose the GAR option or not.
The Penrose report lists the following 11 factors leading to the failure of Equitable Life.
The report notes, among other things, that, “the most important factor among recognizedfailures lies in the heart of Equitable Life” and sees a problem in Equitable Life’s
corporate governance. The report also points out problems about the appointed actuarysystem and the audit corporation in addition to the 11 factors.

-189-1) Adjustment of guarantee cost by using terminal bonus
As of 1983 the management had decided to adjust the guarantee cost by using theterminal bonus. This led to a “discriminatory terminal bonus policy” for which thecompany was sued later. This decision was not reported to the board of directors until
1993. The policyholders were left in the dark until 1995.
2) Dividend payment policy unchanged in 1988
When the company stopped selling GAR annuity in 1988, it did not adopt a new bonus
policy but continued to indicate the same high bonus for a product that came after GARannuity. The bonus resources for old and new contracts were combined and this resulted
in a heavy burden of high guaranteed rates.
3) Reducing liabilities by increasing terminal bonus
From the 1980s onward the company raised the proportion of terminal bonus payments
as against ordinary bonus payments. Equitable Life was not the only one to do so. In the
British life insurance industry, the weight of stock investment increased and how to pass
capital gains on to policyholders was a point of issue. There was a competition with
unit-linked insurance. There was also a general view that “the terminal bonus is notguaranteed and does not need to be recognized as liability.” The company interpreted
this view in an extreme way to suit its own purpose and deliberately reduced thefinancial resource it should have saved for future benefit payments.
4) Excessive bonus from the second half of the 1980s onwards
Equitable Life was a mutual company and as such maintained the policy of rewarding
policyholders with distributions of as much surplus money as possible and offered ahigh level of ordinary bonus payments as a means to win a larger market share. In thesecond half of the 1980s, weight was shifted to terminal bonus payments and, in theabsence of a consistent bonus smoothing policy, bonus payments became excessive andundermined the financial condition of the company.
5) Artificially raising solvency margin
In the 1990s Equitable Life used a liability assessment method whose actuarial value
was questionable and tried to improve the apparent solvency margin. It is pointed out,for example, that the company made quasi-Zillmer adjustment for single-premium
contracts, underestimated its liabilities (the discount rate for liabilities was higher thanthe estimated bonus rate), postponed revising the mortality rates, used future profits,-190-

obtained a subordinated loan and used financial reinsurance (which led to inappropriate
deduction of liabilities).
6) Malfunctioning board of directors
The board of directors lacked sufficient knowledge or skill and was incapable of raising
an opposition to the management in important areas such as product development andliability assessment. Information passed to the board of directors was fragmentary, soboard members were in no position to grasp the situation clearly. Most directors were
unaware of the negative spread of GAR annuity until about the autumn of 1997.
7) Overdependence on appointed actuary
Supervision of business operations was heavily dependent on the appointed actuary. In
the critical period from 1991 to 1997, the appointed actuary concurrently served as chief
executive officer (CEO). Accordingly, the board of directors fully depended on theappointed actuary’s information and advice to grasp the financial situation anddetermine the bonus payment level. The appointed actuary had the responsibility ofgiving technical and expert actuarial advice to the board of directors, but gave nowarning, for example, about the risk of raising “policyholders’ reasonable expectations”
for terminal bonus payments.
8)

Inappropriate solvency margin standards

The solvency margin standards laid down by the authorities were out of line with theindustry trend. While the industry shifted its weight to terminal bonus payments and“policyholders’ reasonable expectations” assumed greater importance, future liabilities
necessitated by terminal bonus payments were left out of account on the financial
statements. The aggregate value of all contracts reflecting the cumulative final bonus
payments was greater than the available assets as of 1987 and remained so to the end.
Even so, the authorities focused their attention on the legal solvency margin calculatedon the assumption that no reserve was set aside for terminal bonus payments, so theyfailed to assess the company’s actual financial situation correctly.
9) “Policyholders’ reasonable expectations” as reflected in liabilities
In the 1990s the regulatory authorities understood what “policyholders’ reasonable
expectations” were, but failed to build a system that made it necessary to earmark
money for cumulative final bonus payments in the future.
10) Use of financial reinsurance to inflate solvency margin-191-

The regulatory authorities did not give full consideration to the fact that Equitable Life’s
solvency margin ratio was based on future profits. It is not clear, for example, on what
grounds the company was allowed to deduct liabilities by using financial reinsurance.
11) General failure of supervision
The regulatory authorities and the Government Actuary’s Department generally failed indoing a follow-up on problems that arose in the process of supervision over Equitable
Life and giving it management guidance.
(5) Rating trends
The Penrose report states that the Department of Trade and Industry paid excessive
attention to external ratings by S&P and others. According to S&P, Equitable Life washigh rated at AA from 1993 to May 1999. The rating fell to A+ in May and remained
unchanged until December 2000, when the company wanted to sell itself but found thisdifficult. At this point the rating slipped to BBB at once. It slipped further to BB when
the company ceased to make new contracts. The rating changed quickly in a short time.
Moody’s rating of Equitable Life came down from Aa3 (AA- according to a common
rating system) to A1 (A+) in September 1999. It dipped further to Baa1 (BBB+) in July
2000, when the company lost the case in the Court of Appeal, and Baa3 (BBB-) in
December 2000, when the company was ordered to stop making new contracts. There is
no doubt that both rating agencies saw Equitable Life as a perfectly sound company inthe 1990s.
In the second half of the 1990s S&P praised Equitable Life as “a leading company inpension products” and for its “low expense ratio” and the “high productivity of its sales
unit” and saw nothing particularly wrong with its capital strength and bonus payment. In
reality, the insurer had suffered a negative spread of GAR since the latter half of the
1980s and the situation got worse in the latter half of the 1990s when interest rates
declined further. The chances are that during this period the rating agency either failed
to grasp the problem or underestimated “policyholders’ reasonable expectations.” S&P
did not take the GAR problem so seriously even in October 1998. Unfortunately, ratings
played a very limited role in bringing the problem of the life insurance business to light.
(6) Comparison with failures in Japan
We have seen the case of failure of Equitable Life in reference to the Penrose report.

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Finally, let us see in what respects the failure of Equitable Life is similar to or different
from the failure of midsize life insurers in Japan.
A product like GAR annuity did not exist in Japan. It is unlikely, at least in Japan today,that insurers take account of “policyholders’ reasonable expectations” and recognize theestimated amount of dividends to be paid in the future as liabilities. Some time ago, it
was common practice to indicate the total amount of insurance the customer would
receive in the future, including the estimated dividend amount, in the sales promotional
materials. Japanese insurers have dropped this practice. In Britain until some time ago,
insurance companies had far more discretionary power than their counterparts in Japan.
A notable difference between British and Japanese cases lies in external factors. In
Japan, the life insurance business was no doubt affected much by the surge in stock
prices in the second half of the 1980s and the drop in stock prices and interest rates in
the 1990s. In contrast, the failure of Equitable Life was not preceded by an asset bubble
to speak of. Britain was emerging from the economic stagnation that lasted until 1980 orso, and inflation was subsiding. The continued decline in the interest rate level was an
unexpected change in the external environment for Equitable Life. Among leading andsecond-tier life insurance companies, Equitable Life was the only one that leaned toward
GAR annuity and fell into a crisis. In Japan the external factors played such a big part in
the failure of life insurers so that it was difficult to see what the problem really was. In
the case of Equitable Life, external factors merely amplified the internal factors of thefailed life insurer.
Failed Japanese and British life insurers had many things in common where internal
factors were concerned. The reason Japan’s midsize life insurers took an expansionary
policy in the second half of the 1980s was that their past experience and businessmodels built up over time influenced them to do so. In the case of Equitable Life, thetermination of the FSSU business forced the insurer to drastically review its existing
business model, and this led to the expanded sales of GAR annuity.
In both Britain and Japan, the management’s judgment and behavior were largely
responsible for the failure of the life insurance business, and internal and external
checks and risk management measures did not function as they should have. Equitable
Life also had difficulty reversing its expansionary policy even after it became financiallytroubled (it did not change its bonus payment policy even when discontinuing sales of-193-

GAR in 1988). It superficially inflated the solvency margin ratio and made things worse
later. Although the actuary was at the center of management, “the board of directors
depended entirely on the appointed actuary’s information and advice when trying tograsp the financial situation and determining the dividend level” and “information thatreached the board of directors was fragmentary and board members failed to grasp thesituation clearly.” This situation bears a striking resemblance to the case of Kyoei Lifein the 1990s.
Equitable Life was not a listed company, but a mutual company, and the regulatory
authorities were the only ones that kept a watch over its management from the outside,
just as in the case of midsize insurers in Japan. The solvency margin standards were outof line with reality and the authorities provided no appropriate guidance, either in
Britain and Japan.
2. Undisciplined management proved fatal—Failure of South Korean life insurers(1) South Korean life insurance market
Let us now study cases of failure of South Korean life insurers in the latter half of the
1990s.
The South Korean life insurance market is the world’s sixth largest and the second
largest in Asia after Japan in terms of premium income. The penetration rate forhouseholds of life insurance has been rising rapidly, from around 40% in the latter halfof the 1980s to 90% more recently. The ratio of the total insurance premiums to the
GDP in South Korea is not as high as that of Japan or Britain but is higher than that of
the U.S. and France. Life insurance is widespread in South Korea as it is in Japan.
For a long time after the Korean War, South Korea had six life insurance companies.
After the Korea-U.S. insurance negotiations were successfully reached an agreement in
1986, the South Korean market was opened up to domestic and overseas insurers in thelatter half of the 1980s. As a result, 33 life insurance companies were in operation at one
time. The financial crisis that came at the end of 1997 drove 14 companies tobankruptcy. The Korean life insurance industry experienced a severe structuraladjustment. As of 2007, 22 life insurance companies were doing business. Of these, thetop three firms—Samsung Life, Kyobo Life and Korea Life—had a dominant share in
the market, accounting for 60% of the premium income and 70% of the total assets.
Foreign-owned life insurers have had a growing presence in recent years.
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In South Korea until the mid-1990s, life insurance was almost equated with savings.
Endowment insurance was the most popular product, and was sold mostly bysaleswomen (called solicitors) in the same way as in Japan. During the reconstruction
period following the Korean War, South Korea modeled its life insurance system after
the system of its neighboring country, Japan. Mass hiring and mass staff turnover was a
feature common to the life insurance industry in both countries. In South Korea thenumber of solicitors has decreased to some 100,000 after peaking at 350,000 in 1996.
With sales of insurance by banks permitted in stages from 2003, sales channels havebecome diversified.
South Korea’s insurance supervisory system preceding the financial crisis was largely
modeled on Japan’s three former insurance supervision laws. Just like Japan, South
Korea adopted a convoy-like administrative approach. After the financial crisis, thenation began to adapt various Western systems. It integrated different sectors offinancial administration (putting all financial institutions under the general supervisionof the Financial Supervisory Commission and the Financial Supervisory Service),
reviewed insurance accounting, introduced early correction measures and liberalized
products and sales channels.
All South Korean life insurers (except branches of overseas insurers) have been joint
stock companies and none of them has ever been listed. South Korea has regulations
that permit an industrial capital including conglomerate to own an insurance company
but not a bank.
(2) Structural adjustment
In South Korea one conglomerate after another went under from 1997 onward, leading
to a serious financial crisis. This had a big impact on the life insurance industry, driving
14 life insurers, most of them midsize and smaller firms whose managerial base was
weak from the beginning, to de facto bankruptcy and throwing some major insurers intoa crisis. With the exception of Samsung Life whose group had a number of good-quality
companies, and Heungkuk Life which received support from its parent firm, practicallyall life insurance companies were in trouble.
The financial crisis made a great impact on the South Korean economy. In 1998 the real
GDP growth rate fell sharply, the unemployment rate rose to nearly 8% from the-195-previous 2% range, and banks’ nonperforming loans increased steeply. It was difficult topredict this rapid deterioration in the business environment and the failure of one life
insurer after another was inevitable, say some people.
Even so, a review of failed life insurers reveals that factors that drove them into a crisis
include the unchecked expansion of the scale of business, high-cost structure,investment in and loan to high-risk assets and inappropriate behavior of managers andthat external factors alone cannot account for the crisis of life insurers.
We will review the cases of failed insurers, most of which were newcomer companies
established in or after the latter half of the 1980s but which included Korea Life, one of
the three major life insurers, and identify the managerial problems of these companies
and their similarities to and differences from failed Japanese life insurers.
(3) Structural adjustment of newly established companies
Most of South Korean life insurers that failed during the financial crisis were
established after the market was opened up in the latter half of the 1980s, unlike their
Japanese counterparts, which were mostly long-established midsize life insurers. South
Korea’s Financial Supervisory Commission ordered 18 life insurance companies tosubmit a “business normalization plan” in May 1998 and closed four life insurers(Kukje Life, BYC Life, Taeyang Life and Coryo Life) in August. It carried out astructural adjustment (liquidation) of one company in 1999, five in 2000 and four in andafter 2001.
Incidentally, structural adjustment took the form of transfer or sale of contracts
involving the use of public funds (such as capital infusion by the Korea Deposit
Insurance Corporation and loss compensation for rescuing insurance companies). There
was no reduction of policy reserves or change of contract terms as exercised by Japaneselife insurers. Insurance contracts as well as bank deposits were fully protected. Insurance
was equivalent to savings in South Korea, as mentioned earlier. The government dealt
with banks and insurers collectively in order to overcome the financial crisis. “Since thenation was in an unusual situation (under a financial crisis), the public raised few
objections,” says a government official.
The failure of life insurers was triggered by the serious financial crisis, to be sure, but
this was not only the cause. Newly established companies had various problems to deal-196-

with, such as the large number of competitors, nondescript management strategy,
high-cost structure, and deterioration of group management. We will take a closer lookat (1) nondescript management strategy, (2) high-cost structure and (3) tightenedsound-business regulations.
1) Nondescript management strategy
In South Korea, newcomers entered the life insurance business one after another fromthe end of the 1980s and thereafter, as stated earlier. The number of life insurancecompanies leaped from six to over 30 in a country with a population of 47 million.
Although the life insurance market was growing, sales competition became very intense.
The business model adopted by the newly established companies was largely the sameas that of the six existing life insurers. An exception was Prudential Life Insurance Co.
of Korea (established in 1989), which had a unique management strategy and hired
highly educated men as consulting sales employees who offered security-type products.
Most life insurance companies hired a large number of female sales employees andmobilized them to sell savings-type products whose appeal was maturity benefits. The
penetration rate for households of insurance products like this was below 50% at thattime. The biggest goal for a life insurer was to expand its business scale and win a large
market share. In fact, the entry of newcomers into the market stimulated the industry andthe penetration rate rose year by year.
While the existing life insurers mainly handled products with a short maturity,
newcomers promoted sales of fixed-interest products with a longer-term (say, 10-year)
maturity in order to gain a large market share. In South Korea the interest rate remained
high and there was no cause for concern about asset management. Every company
devoted its effort to selling products. They began to suffer a negative spread when theinterest rate declined in the latter half of the 1990s. “Overemphasis on the‘outward-form strategy’ was to blame. Insurance companies were intent on increasing
their premium income and were too aggressive in sales. As a result, the persistence rateof contracts declined,” says a government official.
Their purpose of entering the life insurance business was to “make investments in andloans to group companies,” “launch the asset management business” and make the mostof the life insurance business which they saw as a “money-growing tree.” Many
managers are said to have been uninterested in the scheme of products they offered or-197-the risk of the life insurance business.
2) High-cost structure
The life insurance business involves a high initial cost. “It generally takes about 10 years
to reach a break-even point” in South Korea, according to an insurer-affiliated thinktank. Newly established companies had a very low earning power due partly to
excessive competition. They spent an enormous sum of operating expenses to expand
the organization and secure personnel to win a market share. The amount of expenses
became so large that there was no way to eliminate the expense loss and the policy
reserve remained at a low level. “They failed to achieve economies of scale. From the
beginning they were not making profit by underwriting insurance. They collapsed when
the currency crisis eroded their investment returns,” says a government official.
Newcomer life insurers “put more emphasis on scale than on profitability and resorted
to the strategy of mobilizing a large workforce. Each company had a powerful sales
division and kept on trying to get a market share even at great cost,” according to an
insurer-affiliated think tank.
The high-cost structure of newcomer life insurers became even more pronounced
because they had deferred assets. Under the system revised in the latter half of the 1980s,
newcomers were allowed to record a maximum of 50% of the operating expenses asdeferred assets until their fifth year from establishment. They needed to write off
deferred assets over the next five years, but, thanks to these assets, they found it easier
to use operating expenses and ended up developing a high-cost structure.
The shortage of the policy reserve was another problem. The net premium method was
the rule in South Korea as in Japan. As of the end of the 1980s, Samsung Life, Kyobo
Life (both major life insurers) and Heungkuk Life (then ranked fourth) were the only
ones that attained the required level of policy reserve under the net premium method.
Insurers that failed to attain the required level were permitted to adopt the seven-year
surrender value method (provided that the K ratio [the ratio of the surrender value-based
reserve to the net premium-based reserve] did not fall below the previous year’s K
ratio).
3) Tightened sound-business regulations
Life insurers saw their business deteriorating amid the financial crisis. The fact that thesound-business regulations were tightened in a short period of time was a blow to-198-newcomers.
As South Korea sought the financial support of the IMF (International Monetary Fund)when it was hit by the currency crisis, the nation was forced to carry out economic
reforms in all fields of activity. Insurance was no exception and various systems wereadopted to ensure the sound operation of the insurance business. For example, thesolvency margin standard was introduced and the required capital was quadrupled fromthe previous level (the standard was introduced in stages in consideration for smallerfirms). An insurance company whose solvency margin ratio fell below the required level
received a warning or an order for business improvement. In and after 2000, South
Korea adopted other systems including the standard policy reserve system and the
CAMEL rating system (which was the U.S. Federal Deposit Insurance Corporation(FDIC)’s overall CAMEL rating as applied to insurance companies).
Troubled newcomer insurers were pressured to increase capital, but it was difficult toraise capital in a short time when the economy in general was under strong stress. Somegave up and closed business. Some established a joint venture with a foreignorganization which, however, refused to put up additional capital in view of theuncertain future of the South Korean market.
(4) Structural adjustment of Korea Life
Korea Life is the third largest South Koran life insurance company in terms of asset size.
Its business crisis came to the surface when the owner’s suspected illegal loan was
exposed in 1998. The company explored the possibility of concluding a tie-up with anoutside partner such as MetLife of the U.S. Meanwhile, the company was found to havewindow-dressed its financial statements and concealed a huge amount of loss. It was
declared bankrupt in August 1999 and received an infusion of public funds (andcontinued to do business as usual, unlike failed Japanese insurers).
Factors that led to the business crisis included the expansion of scale through sales ofshort-maturity products with low profitability, failure in investments and loans such as
investing in the construction of the head office building and lending to group companies,
and inappropriate management by the top executive.
Korea Life adopted basically the same business model as that of other major life
insurers. Its business style was such that female sales employees were hired to sell-199-

savings-type products. In the 1980s, the company promoted sales of short-term(three-year) savings-type products and enjoyed a sharp increase in the premium income
but was unable to eliminate the expense loss.
Governance or lack of it played a greater part in the business failure. Inappropriate
management by the top executive, for example, was a cause of failure. Korea Life was amember of a midsize conglomerate called Shindonga Group. Chairman A made full useof Korea Life for the benefit of the group. He established a trading firm overseas andfinanced its operation with funds drawn from Korea Life. He also supported a groupmember firm that had no prospect of repaying its debt. In the 1980s he built “Korea
Insurance Life 63 Building” (head office building), the tallest building in South Korea.
The book value of this building was said to reach 400 billion won as against thecompany’s total assets of less than 1 trillion won at that time. Excessive investments andloans to group members turned sour and depressed the company’s finances. “The causeof failure was loose management by the top executive,” says a government official.
Further, Chairman A misappropriated the company’s money for his private use. He wasa devout Christian and built a number of fine churches with Korea Life’s funds. The
funds flowed also into political circles.
The board of directors did not function properly. The atmosphere was such that anyone
who spoke up would be fired. As a result, there were only quiet members left in theboard of directors and they remained in the position for a long time. The company’s
regulations were in place but were easily ignored because the top executive had thepower to shuffle personnel and no one dared to contradict him.
Korea Life was not a listed company and the regulatory authorities were the only one
who checked the company’s operations. Even the authorities failed to grasp what was
really going on until Chairman A was arrested and the prosecutors raided the company
in 1999. Before the financial crisis occurred, the government had a system for rating
insurance companies and the ratings were publicly disclosed. The rating system did notfunction well, however, as shown by the fact that the high-rated Korea Life was put
under state control. “The supervision of insurance companies was not as good as thesupervision of banks and securities houses,” says a former employee of a major Korean
life insurer.

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(5) Comparison with instances in Japan
There are important points of difference between cases of failure of Korean andJapanese life insurers. Most of the failed life insurers in South Korea were newcomers
while failed life insurers in Japan were long-established midsize firms. Most of Korean
life insurers struggled with the deteriorating business amid the serious financial crisis. In
particular, newcomers with a weaker business base and lower profitability as comparedwith larger insurers were hit hard. In Japan, the number of newcomers began to increasein the mid-1990s, and the total number of life insurance companies doubled fromaround 20 to over 40, but none of the newcomers failed (some withdrew from thebusiness).
The failure of Japanese life insurers was due largely to the rapid expansion of assets inthe latter half of the 1980s and their tendency toward high-risk investments and loans.
Newcomers got a boost in sales from the existence of their struggling rivals.
Another big difference lies in the existence of banks. In South Korea, financial capitaland industrial capital are clearly separated from each other, and a conglomerate(industrial capital) is prohibited to own a bank. Banks and insurance companies do nothold each other’s capital, so banks do not come to the rescue of a failing life insurer. In
Japan, banks and life insurers came to hold each other’s capital when financial
institutions were losing their creditworthiness in the mid-1990s and after. This amplified
the financial system uncertainty.
All the same, there are many background factors common to both Korean and Japanese
insurers which brought on their crisis. Life insurers in both countries gave top priority to
expanding their business scale and were intent on strengthening their sales unit. It did
not occur to them that assets and liabilities should be managed in an integrated manner.
Historically, life insurers were regarded as the financial source for industrial capital inboth countries. Perhaps for this reason, it seems that they focused attention on “how tocollect premiums” and gave scant weight to the interest rate risk of assets and liabilities(ALM risk).
It has become clear that managers’ judgment and behavior played a big part in causingbusiness failure in South Korea as it was in Japan. Newcomers were more interested insecuring immediate funds and a market share than in stabilizing operations, and failed to
put their life insurance business on track. In the case of Korea Life, we may say that the-201-top executive’s loose management brought down the company.
In both countries, the regulatory authorities were the only ones that kept watch on theoperations of life insurers. Failed life insurers were not listed companies and theirinformation disclosure was insufficient. It was easy for the top executive to keep control
over the management of such a company for a long time. The regulatory authorities may
have not fully functioned as a form of external discipline. In Japan, the authorities
inspected insurers in the same way as they inspected banks. In South Korea, theauthorities were not competent enough and merely made perfunctory checks.

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Conclusion
What did we learn from failures?—Lessons for the future(1) What changed and what did not change after the failure of life insurers
Over seven years have passed since the failure of Tokyo Life in March 2001, and morethan five years have already gone by since the management crisis of Asahi Mutual Lifein around 2001 and 2002. The total number of policies in force has been on the decline,
but the crisis of life insurers has become a thing of the past thanks to the end to the Bankof Japan’s zero interest rate policy (quantitative easing policy) in 2006 as well as a stock
market rally that began in 2003.
As we examined earlier, the self-discipline of failed midsize life insurers in the form ofrisk control and governance structures didn’t function well. Moreover, measures takenby the government in the 1980s ended up exacerbating life insurers’ risk, and the steps
taken to cope with the crisis in the 1990s gave an impression that the government was
rather too late addressing the problem. The market discipline didn’t function well either.
Business monitoring function from outside parties hardly existed at that time, andneither mutual companies’ meetings of representatives nor stock companies’
shareholders’ meetings effectively had management oversight function.
How have these things been changed?
Learning from a series of bankruptcies of rival companies and their own deteriorating
creditworthiness, life insurance companies tried to retain periodic profits as much as
they could in the form of contingency reserves or reserves for price fluctuations ofinvestments in securities in order to improve their abilities to meet insurance payment
obligations. Mitsui Life, which converted itself from a mutual company into a stockcompany in 2004, drastically increased its capital through a third-party allocation ofshares, while all four major life insurers additionally set aside massive policy reserves tocover negative spread. As a result, the credit standing of each insurer has improved withmajor companies receiving high ratings, from AA (the third-highest) to A-plus (thefifth-highest), from R&I. As I will mention later, however, I consider that the current
risk management and ALM (asset liability management) structures of life insurers still
have plenty of room for improvement. Insurers’ unpaid claim scandal has also revealed
defects in their internal control systems.

-203-

Table-Conclusion 1: Changes in ratings of major life insurers (R&I)
NipponLife
DaiichiLife
Meiji Life
YasudaMutual
Life
Sumitomo
Life
Taiyo Life
Daido Life
FukokuMutualLife
Mitsui Life
Asahi
Mutual
Life

March
1998

March
1999

March
2000

March
2001

March
2002

March
2003

March
2004

March
2005

March
2006

March
2007

March
2008

AAop

AAop

AAop

AAop

AAop

AA

AA

AA

AA

AA

AA

AAop

Aop

A+op

A+op

A+

A+

A+

A+

A+

A+

AA-

AAop

Aop

Aop

Aop

Aop

Aop

AA-

AA-

A+

A+

A+

A

A

A+

A+

A+

A+

A+

A+

A

A

A-

BBB+

BBB+

A-

A-

A

A

Aop
AAop

Aop
AAop

A
AA-op

A
AA-op

A
AA-

A
AA-

A+
A+

A+
A+

A+
A+

A+
A+

A+
A+

AA-

AA-

A+

A+

A+

A+

A+

A+

A+

A+

AA-

A-

A-

BBB+

BBB+

BBB-

BB

BB

BB

BBB-

BBB+

BBB+

Aop

BBBo
p

BBB+

BBB+

BB-

B+

B+

B+

BB-

BB+

BBB-

*“op” represents unrequested ratings (the use of plus and minus signs began in March 2000).
Ratings for March 1998 were granted by the former Japan Bond Research Institute (JBRI).
*Meiji Life and Yasuda Mutual Life merged into Meiji Yasuda Life insurance Co. in 2004.
(Data) compiled by the author

Even after 2001, the government was busy handling liquidation procedures of failed life
insurers and rebuilding a safety net. In 2003, the revised Insurance Business Law finally
took effect, enabling insurers to lower their assumed rates of return for existing policies.
With concern about the financial system gradually easing, the financial authorities havebeen implementing a variety of rules to ensure the soundness of life insurers since then.
They have just started reviewing the solvency margin standard, the “core” measure offinancial health of life insurers.
(2) Efforts to strengthen governance
The most important internal factor revealed in research and analysis this time was “oneconcerning managers.” That is, the inadequate corporate governance of failed life
insurers is believed to have eventually increased their failure risk.
As I mentioned in Chapter 1, mutual companies have a structural weakness ingovernance. In the first place, policyholders are not much aware that they have a role ofautonomously managing their company as one of its members, while representatives
chosen among members don’t always act in the interests of the entire company either.
Therefore, managers tend to steer their business in the interests of themselves. However,unlike the times when most major and midsize life insurers were mutual companies,-204-

only six insurers have still taken the form of a mutual company (among such insurers,
Dai-ichi Life has shown its intention to demutualize itself).
Even insurers in the form of a stock company may also choose “someone inappropriate
for the top position,” “someone lacking a sense of management,” or “someone making a
number of errors in judgment” as their top executive. The president has the power toshuffle personnel, and the management is required to have a leadership. In that case,
isn’t it possible to create a system that reduces failure risk arising from internal factors
associated with managers?
The first step necessary to be taken to strengthen governance is to review a businessorganization. As analyzed in Chapter 3, the number of internal factors classified into
Category 3 (those regarding business organizations) was only one third of the total
number of internal factors, well below the number of factors classified into Category 2(those regarding managers). A large part of internal factors were classified into Category
2 probably because efforts to increase checking function and risk control structure
within organizations wouldn’t work as long as managers have a problem. However, if
insurers are able to reduce internal factors classified into Category 3, in other words, tocreate an organization where governance can work more easily, they may be able toreduce their failure risk associated with their managers.
For example, Category 3 has an item called “problem of information communication
function.” At failed life insurers, the management’s failures to have a proper
understanding of the financial standing of their companies often led to their
misjudgments. Managers of that time only focused on measures of scale such as“insurance in force” and “premium income” and at best, profit or loss on three profit
sources. Unfortunately, managers of some insurers also falsely recognized theircompanies’ financial standing based on these measures, failing to make appropriate
management decisions. It may sound discriminatory, but if a manager is from the sales
field and also doesn’t emphasize experts’ work, he wouldn’t have any chance ofproperly grasping the financial standing of his company.
This also relates to the issue of insurance accounting. Japan’s insurance accounting does
not fully reflect the actual business conditions of life insurers, and grasping the life
insurance management solely through accounting information was and still is almost
impossible. For example, we cannot assess an insurer’s current financial results without-205-

looking at how much profit will be generated over future years from contracts acquired
during the current year, other than changes in value of new insurance policies andpremium income. It is also wrong to think that a negative spread problem is welladdressed as long as a current loss arising from negative spread is covered by profits
from any of its three profit sources. Rather we have to understand how the company’s
negative spread will weigh on its business over future years, which means we have tounderstand the company’s effective amount of policy reserves under certain premises,
which is different from the amount of policy reserves released in its financial statements.
First of all, it is important to make the true business conditions of the life insurer visible
and create an environment that enables managers to make proper judgments.
Unfortunately, I still cannot say that these ideas have already fully penetrated into thelife insurance management.
(3) Making management “transparent”
There is also a sign of change, though. Many life insurers, especially those in the formof a stock company, have recently been using and disclosing “embedded value (EV).” It
is a measure of assessing the shareholder value and earnings of a life insurance businessand calculated by adding “the adjusted net asset” and “the value of policies in force.”“The value of policies in force,” one component of EV, refers to the present value
obtained by subtracting certain capital costs from the future profits that the insurer’s
policies in force will likely generate and discounting the resulting figure by the rate thatincorporates the risk premium of the life insurance business. To put it more boldly, thevalue is designed to make the insurer’s business “transparent” beyond the framework of
insurance accounting.
The calculation method of EV has plenty of room for improvement. However, it can stillserve as an effective tool to change life insurers’ management goals from just producing
good results in terms of changes in insurance contracts and premium income, or simply
pursuing profits in accounting perspective.
During my research on bankruptcies of midsize life insurers, many people I met said,“Despite concern raised from actuaries and other experts, the sales department had astrong say, and the management took no action.” Things will surely change if actual
business conditions are properly presented within the company, and business targets are
given based upon such conditions. In other words, at midsize insurers of that time, “the-206-scale” was the only measure recognized across the companies. Therefore, I assume, eventhough some experts had presented numerical values other than the scale measure, they
couldn’t persuade either the management or the sales department.
Table-Conclusion 2:

Embedded value of Taiyo Life and Daido Life
Taiyo Life

7,386
5,749
1,637

5,749
4,847
902

Increaseanddecrease-1,637
-902
-735

334

182

-152

March
2007
EV (Embedded Value)
Adjusted net asset
Future value of existing
policies
Portion of EV belonging
to new policies

March
2008

(in units of ¥100 million)
Daido Life
Increase
March
March
and
2007
2008
decrease
12,6309,907-2,723
7,280
5,329-1,951
5,349
4,577
-772
552

462

-90

<Major factors responsible for changes in EV observed over the previous fiscal year>
Taiyo Life
Daido LifeEV at the end of March 2007
7,386
12,630
Dividend to shareholders-61-99
Changes in preconditions of insurance
-165
-150
Estimated earnings
407
554
Differences in preconditions and actual results for-32-155
the year ended March 2008
Differences in earnings from investment-1,969-3,324
EV for new policies acquired during the year ended
182
462
March 2008
EV for the year ended March 2008
5,749
9,907
<Impact of changes in preconditions on EV>
Changes in EV of the T&D Life Group
Sensitivity 1
0.5% increase in risk free rate
1,640
Sensitivity 2
0.5% decrease in risk free rate
-2,036
Sensitivity 3
10% fall in value of stocks and real estate-1,570Sensitivity 4
10% decrease in cancellation and termination rate594
Sensitivity 5
10% reduction in expense ratio
418(Data) compiled from materials used for T&D Holdings Inc.’s business results announcement

If the business conditions become “more transparent,” the management of life insurers
cannot help but change their goal to expanding their surplus and controlling its volatility.
In this case, the term “surplus,” if I am allowed to use the concept suggested byProfessor Mitsuru Iwamura of the Graduate School of Asia-Pacific Studies, Waseda
University, refers to the amount left by subtracting the gross basic rate (that neither
reflects the credit risk of the company itself nor contains safety loading) and thereplacement value of insurance policies calculated based on market interest rates fromthe market value of assets. That change, if it actually happens, will enable us to assess-207-the competence of managers at earlier stages than we are currently able to do, thereby
helping to prevent the top management and surrounding people from taking
inappropriate actions.
(4) Upgrading the risk management system
I’ll now discuss insurers’ risk management system. As I explained in Chapter 1, major
managerial risks of life insurance companies include insurance underwriting risk
(insurance risk and interest risk of assets and liabilities), asset management risk (pricevolatility risk, credit risk and real estate risk), liquidity risk and operational risk. Of suchrisk, interest risk of assets and liabilities and asset management risk came up to thesurface at failed midsize life insurers, with no exception, driving them into amanagement crisis.
Advanced technology as well as increased implementation of risk control measures has
recently enabled insurers to carry out sophisticated ALM and integrated risk control.
Things have changed drastically from the 1990s. Nevertheless, I think that life insurers’
risk control structure still has plenty of room for improvement. For example, not a few
companies consider the absolute amount of ability to meet insurance payment
obligations as their management goal even now. Above all, insurers had to break the
chain of bankruptcies before sophisticating their own risk control. Therefore, they firstplaced top priority on bolstering their abilities to meet insurance payment obligations.
A study group hosted by the Financial Services Agency (I also participated in the groupas a member) referred to this point in its report titled “Regarding Solvency Margin Ratio
Calculation Standard” released in 2007.
In the report, the group showed its sense of crisis over the current state of life insurance
management, saying, “There is a concern that life insurers’ efforts to bolster solvency
have become solely dependent on the criteria required under regulations” “Themanagement of life insurers themselves have to fully recognize the trend of solvency
assessment and substantially raise awareness of efforts to make their risk control
systems more sophisticated.” Thus, group members encouraged life insurers’
management to carry out reform.
Aside from the trend of regulations to ensure soundness, major insurance groups in the
U.S. and Europe are preparing to establish highly sophisticated integrated risk control-208-

structures that are far beyond the levels required by regulations. Some of them havedisclosed the details of their risk control structures in an effort to expand their corporate
value in a stable manner by communicating with the market. I hope that the
management of Japanese life insurers will reform their mentality.
By the way, it’s not that midsize life insurers were not aware of “risk” at all in the late1980s. For example, as far as interest risk was concerned, the financial affairs andactuarial departments of many companies questioned rapid expansion of high-cost funds,
even though they didn’t implement ALM. At Daihyaku Mutual Life and Kyoei Life,
actuaries conducted future cashflow analysis at relatively early stages, and people incharge of actuarial work knew the risk associated with a drop in interest rate.
The problem is that such information was not used for running the companies. Chiyoda
Mutual Life, which was saddled with massive bad loans, had implemented a ruleconcerning asset management risk and a checking function before the bubble period.
However, people close to the president watered down the rule and made the checking
function ineffective on the back of the president’s authority. Moreover, a former
employee of Toho Mutual Life reveals that the power to make final decisions wasmeaningless if the president said OK.
However perfectly structures are put in place and numerical values are calculated, risk
control wouldn’t work as long as such structures and values are not used for the
management of companies. The instances of failed midsize life insurers suggest theimportance of efforts to enhance the effectiveness of risk control. In order not to renderrisk control ineffective, the management are required to strengthen their own checking
function and build a framework where discipline by the government or the market works
as well as to boost their own awareness of risk control. This means governance is highly
important.
Insurers will not be able to completely avoid risk associated with their insurance
business because companies are required to take a risk. One thing I can say is that
failure risk will likely increase if a company seeks rapid expansion or leans towardcertain products too much. Nissan Mutual Life, for example, saw individual annuities
rapidly increase in a short period of time to account for more than 50% of its policy
reserves. Situations like this should be considered as a problem in terms of policyholder
protection.

-209-

(5) Change in business environment
In the meantime, in a few years since a series of failures of life insurance companies,business environments surrounding life insurers drastically changed. The contraction of
the death coverage market has continued with the values of new policies and policies inforce for individual insurance plunging to one third and two thirds of the levels seen 10
years earlier, respectively. In addition to failed life insurers, many major and midsize
life insurers with long business histories have continued relying on the business modelof marketing large-scale package products mainly including death insurance coveragethrough frequent visits by a large female sales force called “sales lady.” However, suchmarketing methods have been showing their limits year by year. Therefore, insurers are
shifting their focus to the third-sector products such as medical and nursing coverage,
individual annuities and other promising sectors that offer “coverage during
policyholders’ lifetime.”
Changes have also been seen in the aspect of sales. A ban on sales of insurance products
by banks was fully lifted in December 2007, following the lifting of a ban on bank salesof individual annuities in October 2002. Japan Post Network Co. has started sellinginsurance policies other than Kampo, or postal life insurance, after privatization of
postal services in October 2007. The number of shops marketing products to customers
visiting their premises (so-called “insurance shops”) has also increased. These shops
don’t specialize in products of one particular insurer, but rather handle products offeredby several life insurers, thereby serving as a shared marketing channel.
In the wake of these changes, life insurance companies have started facing business riskthat they were scarcely aware of before. For example, whole life medical insurance
products to ensure hospitalization and other coverage for a policyholder’s entire life
such as “Ever” offered by American Family Life Assurance Co. of Columbus and“Cure” of Orix Life Insurance Corp. have become core products among the third-sector
insurance in Japan. However, it is more difficult to reasonably assess future risk inmedical and nursing care fields than in the field of death coverage. Thanks to advancesin medical technology, patients who would have died if having lived in older times
could be cured with inpatient treatment, while an early diagnosis of cancer has become
increasingly popular, both resulted in a surge in cancer insurance payouts. The risk offacing such unexpected events has emerged. Therefore, medical insurance that offers
coverage for an extremely long period is not popular in the U.S. and Europe.

-210-

Sales of individual annuities have also surged since the lifting of the ban on bank sales
in 2002, leading to the launch of life insurers specializing in offering individual annuity
policies via financial institutions. Many of those policies are lump-sum variable
individual annuity that guarantees minimum payouts to policyholders, forcing life
insurers to make up for a loss when investment performance falls below expectations.
Insurers have recently released products that allow policyholders to step-up the amountof guarantee from their initial amount of principal or lock in profits when investment
performance reaches a predetermined level and other types of products that are deemed
to require extremely complicated risk control.
Moreover, in bank branches and other shared marketing channels, life insurers face
greater difficulty managing sales than in traditional specialized channels, as sharedchannels put life insurers in a position to be chosen by sales companies. Competition
over fees or product development also tends to intensify in shared channel. However, inthe case of failed Nissan Mutual Life, financial institutions (to be more precise, theiragents) took the lead in sales, thereby making the company unable to control its sales,
resulting in deterioration of the insurer’s business conditions. Thus, it can be said that
this is a new yet old problem.
At present, life insurance companies face these new kinds of risk, in addition to risk thatwas highlighted as a problem of failed life insurers such as price volatility risk, credit
risk and risk of having negative spread resulting from mismatch between assets andliabilities. It is probably essential to step up restructuring of a business model that
corresponds to changes in the insurance market and distribution. At the same time, life
insurers also urgently need to upgrade their risk control structures, break away fromexisting management practices of pursuing scale expansion in the short term anddevelop their management into one aiming to steadily expand corporate value.
(6) Lack of transparency of policyholder dividends
I would like to also talk about the issue of policyholder dividends as an example ofshowing the inadequacy of governance.
Under the former Insurance Business Law, life insurers’ financial buffers wereachievement of the level of policy reserves required under the net premium method andlatent stock profits. Life insurers, especially major ones where both of the buffers had
been substantially built up, paid high levels of dividends to policyholders in the late-211-

1980s. Many life insurers had been trapped into earnings structure depending on latent
stock profits partly because the government called on life insurers to “reward theirpolicyholders with dividend payouts rather than to accumulate internal reserves.” Due todifferences in scale, customer basis, product strategy and others, profit or loss of failed
midsize life insurers from three profit sources often looked inferior to that of major
companies, and therefore failed insurers depended on “sales to lock in profits” morethan major companies did to pay dividends.
Such management does not succeed unless stock prices keep on going higher. Midsize
life insurers saw their latent stock profits depleted at early stages amid a stock market
downturn in and after 1990, partly because stock acquisition prices were relatively highin the first place. They then turned to makeshift measures to get through their businessresults announcement such as “purchasing investment trusts to receive dividends,”“lowering the standards for setting aside policy reserves” and “using financial
reinsurance,” which gradually weakened the financial strength of these insurers.
The management dependent on latent profits was not an exclusive feature of life
insurance companies, but was rather adopted by a variety of Japanese businesses.
However, the structure where the amount of financial buffers largely swings according
to changes in stock prices is not much favorable for corporate management even if there
are enough buffers to cover stock holding risk at present. Do policyholders really expect
insurance companies from which they have bought their policies to provide returns (inother words, policyholder dividends) while holding a great degree of price volatility risk(in other words, allocating a large amount of capital to stock investment)? Furthermore,
it would be acceptable if insurers adopt a performance-based dividend policy, but they
may not be able to gain understanding of policyholders if they maintain the unclear
dividend policies currently taken.
In the meantime, “products offering interest dividends every five years,” which, inprinciple, provide no expense dividends and mortality dividends, have become themainstream of insurance contracts since the late 1990s, and the primary characteristic ofdividend payouts, that is, post-settlement of insurance premiums, has substantially faded
away. Insurers say that they can reduce insurance premiums for such products because
the level of dividend payouts for such policies is low, but these policies return no
income other than one coming from investment performance to policyholders, inprinciple. It especially puzzles me that mutual companies consider these policies as their-212-

mainstay products.
At any rate, payouts of policyholder dividends currently depend too heavily on
discretion of top managers. It cannot be ruled out that insurers may fall back into
management fully dependent on latent profits again. They also may not be able to gain
policyholders’ understanding if they continue charging a high amount of insurance
premiums just to ensure safety and return their surplus, if any, to shareholders (or simply
retain them). Some companies are now touting their levels of policyholder dividends,
while the soundness of life insurers is getting on a recovery track and latent stock profits
are gradually increasing. They should be aware of dividend payouts as a potential risk
factor, however.
(7) Actuary’s role
Bolstering internal and external business monitoring functions is essential forstrengthening the governance of life insurers. It is insurance actuaries who play animportant role as an internal checking function. In the first place, life insurance
operations cannot be performed without actuaries, experts in actuarial science.
However, at failed midsize life insurers, opinions of those engaged in actuarial work andactuaries were not necessarily valued by the management, and voices from the sales
department tended to be heard more. As I said earlier, managers from the sales
department would not be able to make proper management decisions without receiving
support from experts, but such management was still possible probably because theeconomy kept growing until the 1980s and the management meant sales. Fostering theculture of valuing experts is essential for future management, which also holds true inother Japanese companies. To do so, insurers need personnel- and salary-related
measures.
On the other hand, Daihyaku Mutual Life and Kyoei Life placed relatively high value on
those engaged in actuarial work, and actuaries often participated in management asboard members. However, in the case of Kyoei Life, actuaries failed to disclose accurate
managerial information to the management, while the company was facing a managerial
vacuum, causing the company’s executives to make various errors in judgment.
Confirmation work of policy reserves and others as an insurance actuary sometimes
conflicts with judgment as a manager. In the case of Equitable Life Assurance Society of-213-

the U.K., an adverse effect was generated when an appointed actuary also served as
CEO, effectively becoming one of the causes for the life insurer’s failure. It can be said
that actuarial work has certain limits because insurance actuaries are, after all,employees of the life insurer. In the meantime, they are able to conduct an accurate
analysis based on ample in-house data, which is also a big merit for the company.
Insurers have to clarify the status and responsibility of insurance actuaries within theircompanies and at least avoid having them serve also as executive managers.
(8) Administrative discipline
External checking functions for life insurance management didn’t exist very much, notjust at failed companies, but also at life insurers as a whole. A mutual company’s
meeting of representatives was like a “ceremony” or an “opportunity to entertain
important customers.” Labor unions, for the most part, didn’t have a strong presence
either. Auditing firms gained access to internal information of life insurers, but they
only exerted a strong presence at final stages (of instances at Toho Mutual Life,
Daihyaku Mutual Life and Kyoei Life). Under such circumstances, the regulatory
agencies existed as the only body to supervise the management of life insurers andplayed a certain role. The Ministry of Finance had extremely strong authorities at thattime, and many people said that “the managers of life insurers were the Ministry of
Finance.”However, having looked at the instances of failed life insurers, I don’t think the Ministry
properly directed life insurers as their administrative authorities. For example, on-site
inspections by the Ministry were conducted as an extension of inspections to banks anddesigned to assess the asset management risk (especially, credit risk) of insurers andconfirm their ways of running operations. No checks are believed to have been
conducted for risk unique to life insurance companies, except methods for building
policy reserves. Regarding policy reserves, the Ministry apparently only focused onwhether the level of policy reserves required under the net premium method had beenachieved.
The insurance regulatory authorities didn’t have any actuaries until recently, and thisfact suggests the authorities didn’t emphasize earnings and risk structures unique to life
insurers. Administrators showing their concern over the risk of having negative spreadare said to have existed from time to time, but they couldn’t create a big trend due to ashort rotation period. With many companies falling into a management crisis in the-214-mid-1990s and thereafter, the authorities were unable to expedite the establishment of asafety net and had no choice but to place top priority on helping insurers get throughupcoming business results announcement for the time being.
While the administrative body for the life insurance industry shifted from the Ministryof Finance to the Financial Supervisory Agency and then to the Financial Services
Agency, the position and methods of the administration have drastically changed. The
administrative authorities traditionally adopted an actual oversight approach (themethod where the administrative authorities hold power and specifically oversee theoverall business of life insurers), but appear to be gradually shifting to a rule-based
approach (the method where the administrative authorities set certain rules and only
oversee whether insurers have violated these rules). Nevertheless, the authorities shouldstill take on a great role. With few personnel appearing to be well versed in theinsurance field, concern remains over whether they will be able to perform their
expected role by just sticking to the current personnel rotation system.
Regarding a framework to ensure the soundness of insurance companies, discussions areunderway toward introducing economic value-based solvency margin standards in lightof the report released in 2007 called “Solvency Margin Ratio Calculation Standard,”
which was described earlier. I’m looking forward to ongoing efforts to ensure thesoundness of life insurers, hoping that new regulations will fully reflect the earnings andrisk structures unique to insurance companies.
(9) Role of disclosure
As already discussed, it is not too much to say that checking functions from outside
parties other than the administrative authorities little worked at the instances of failed
midsize life insurers. Life insurers’ disclosure of that time was extremely inadequate, asconfirmed in Chapter 1, with no listed companies operating, only a limited number ofpeople were using disclosed information. As a complement for disclosure, rating has
been playing the role of maintaining the soundness of life insurance management via
market discipline, but it was not until the late 1990s that domestic and foreign rating
agencies started the full-fledged service of assigning ratings to Japanese life insurers.
In the wake of bankruptcies of many midsize insureres, life insurers’ disclosure has
improved in terms of both quality and quantity. Toho Mutual Life of that time excluded
most of its foreign and other securities holdings from the scope of market-price-215-

valuation, but such disclosure would never be allowed now. The improvement in
disclosure has enabled experts to carry out detailed analysis on the quality of an
insurer’s ability to meet insurance payment obligations and asset investment risk.
Insurers’ disclosure can be said to have reached adequate levels to respond to a
managerial crisis caused by asset deterioration, thanks partly to their efforts to bolster
self-assessment.
Analyzing the assets and solvency margins of life insurers, however, is not enough to
grasp their managerial conditions. Existing policies held by insurers will generate profit(or loss) over future years, and therefore we wouldn’t be able to grasp the true
conditions if we fail to assess their existing policies.
I will discuss some indicators related to existing policies that have been currently
disclosed. Core operating profit and the amount of negative spread have been released
as the industry’s common indicators since fiscal 2000, while some companies,
especially major insurers, have been disclosing the breakdown for profit or loss of theirthree profit sources since fiscal 2006.
Core operating profit and profit or loss of three profit sources mostly come fromexisting policies because life insurers’ new policies do not immediately contribute totheir profits. If we look at such data in chronological order, we will be able to broadly
grasp the recent profitability of insurance. Substantial revisions to core operating profit
are required to grasp the profitability of existing policies, however, because the figure issubstantially lifted by mortality profit from group insurance, interest profit from group
annuities, investment in foreign bonds, investment trusts and others.
Furthermore, on the back of the shrinking death coverage market and growing concern
over social insurance, companies have been increasingly focusing on the third-sector
products such as medical and nursing care insurance since the 1990s. Annualized
premiums on the third sector products have been disclosed since fiscal 2004, and claim
incidence rates on earned premiums have been announced publicly since fiscal 2007.
However, the amount of data is still insufficient to estimate the third sector’s
contribution to insurers’ profits.
Regarding policy reserves, insurers have started disclosing the balance of reserves by thecontract year (the total amount of reserves for individual insurance and individual-216-

annuity insurance), in addition to data that once caught market attention including theway of building up reserves such as the Zillmer method and net premium method andthe rate of reserve funding. The disclosed data suggest that policies acquired during theperiod from the 1980s through the mid-1990s with high assumed rates of return stillaccount for a large part of insurers’ policy reserves. Without any clue to the remaining
periods of insurance contracts, however, we cannot tell how long the impact ofhigh-return policies will last.
Having looked at disclosure concerning existing policies, we now know that adequate
data have yet to be disclosed.
(10) Disclosure beyond the framework of insurance accounting
As described earlier, that the current insurance accounting does not fully reflect the
managerial conditions of life insurers should be partly blamed for inadequate disclosureof existing policies and insurers’ overall businesses. Not surprisingly, there are limits tograsping the life insurance management from information disclosure based on suchinsurance accounting.
The insurance accounting currently adopted in Japan is a halfway standard thatcombines supervisory accounting with financial accounting. The supervisory accountingof insurance companies is essentially designed to maintain soundness of life insurers,
but some rules are apparently contrary to this objective. For example, one rule allows
insurers to choose book value in assessing their stock holdings, while another has
introduced deferred tax accounting (allowing insurers to book deferred tax assets). On
the other hand, the first objective of financial accounting is to offer information toinvestors. However, financial accounting tends to generate a case where profits are
squeezed when the number of new policies is growing and profits improve when thenumber of new policies is slow to grow because insurance premiums are recognized ona cash basis, while expenses are recognized on an accrual basis, resulting in a gap in thetiming of reporting income and expenses.
In addition, under insurance accounting adopted in Japan and many other countries,
policy reserves are calculated based on the interest rate at the time of contract execution(a lock-in method), and the impact of changes in market interest rates that happened
after the contract execution is only reflected as changes in interest profits or losses forthe period. Assets (securities) are assessed at fair value, and therefore managerial-217-conditions improve at a company holding massive long-term bonds when interest rates
are rising. Nevertheless, assuming an extreme case, the company may still show anegative net worth in an accounting perspective.
To overcome these problems, efforts to disclose information beyond the framework of
insurance accounting, as represented by the move to disclose EV mentioned earlier,have recently begun. There is a time lag between acquisition of a new policy andrecognition of profits in an accounting perspective under the current insurance
accounting, but in the case of using EV, contribution to future profits is recognized at
the time of acquisition of a new policy. Thus, by disclosing EV, insurers can reinforce
their financial information based on insurance accounting. EV is information originallydesigned to help grasp potential shareholder value, but it can also be used to determine
an insurer’s ability to meet insurance payment obligations in future and its probability offluctuation. Insurers have disclosed not only EV but also the preconditions forcalculation, revisions to the preconditions, and the impact on EV when thepreconditions are revised, and such information can serve as an important clue.
Yet, looking at EV actually disclosed by each company, we also see that a big problem
still remains. For example, EV is drastically changed when an investment yield andother preconditions are revised, and it is hard to tell such changes from an increase or
decrease in EV caused by insurance operations. Risk is only incorporated into thediscount rate, leading to a calculation problem in which EV increases as an insurer takes
a greater risk in asset management. Moreover, it’s difficult to make a comparison among
companies because preconditions set by each company differ.
A review of insurance accounting itself is also in progress. The International AccountingStandards Board (IASB) is considering applying international accounting standards toinsurance policies. Since the IASC, the predecessor of the IASB, took up the issue in1997, discussions have been underway toward assessing insurance liabilities (policy
reserves) at fair value. The review has been dragging on with the Life Insurance
Association of Japan and others showing their objections. The IASB issued its
discussion paper in 2007, aiming to complete creating a framework in 2009 or
thereafter.
(11) What to learn from instances of failure
We have reviewed lessons learned from a series of bankruptcies of life insurers, ensuing-218-improvements in governance and risk control structures of the life insurance industry
and changes in external discipline including insurance administration and disclosure.
Top executives appear to still have clear memories of the life insurance crisis and be
more aware of risk and abilities to meet insurance payment obligations than they were
before the crisis.
However, looking at the current life insurance management, I feel that the issue ofcorporate governance, which was highlighted as the most important internal factor that
increased failure risk in our review on instances of failure, still remains as a relevant
challenge. The recent scandal over benefit nonpayment cases and companies’ responses
to the problem also imply life insurers’ strong inward-looking orientation rather thantheir willingness to carry out management reform. Their attitude of management
information disclosure too shows no signs of their effort to improve governance. The
disclosed information suggests insurers’ intention to make their information look goodas much as possible, or to avoid disclosing information that may be misleading, rather
than their determination to convey information accurately.
Yet, a change in governance structure is expected to occur through a change in the formof business at some companies including Dai-ichi Life, which has officially announced
its plan to turn itself into a stock company in March 2008. Review of solvency margin
standards has also just begun. Maybe instead we’ll see life insurers’ changes from now.

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Chronological Table of Life Insurance Company Failures
Year
1975

Month
Apr.

Life insurance business

June

The Insurance Council’s report “Insurance
business as it should be in the future.”
Assumed interest rate raised from 4.0% to
5.5/5.0%.

1976

Mar.

1978

Mar.

1979

Jan.
Apr.

1980

Mar.

Financial business in general
Official discount rate lowered from 9.0% to
8.5%.

Official discount rate lowered from 4.25% to3.5% (rock-bottom during this period).
Second oil crisis.
Official discount rate raised from 3.5% to4.25%.
Official discount rate raised from 7.25% to9.0% (peak during this period).
The price of government bond with a 6.1%
yield plunges.
Official discount rate lowered from 9.0% to8.25%.

Apr.
Aug.
1981

Apr.

1984

Jan.

1985

Mar.
Apr.

1986

Sept.
Mar.
Oct.
Nov.

1987

Assumed interest rate raised from 5.5/5.0% to
6.0/5.5%.
Nikkei Stock Average tops 10,000 yen for
the first time.
Domestic life insurers allowed to sell insurance
products combined with deposits.
Assumed interest rate raised from 6.0/5.5% to
6.25/6.0/5.5%.
Life insurers allowed to give greater weight toforeign securities in the investment portfolio.
Twelve life insurers start selling variableinsurance.
Nissan Mutual Life starts selling individual
annuity with a bank-affiliated loan.

Jan.
Feb.

1988

Oct.
Dec.
Apr.

1989

Dec.
May
June

Nikkei Stock Average tops 20,000 yen.
Official discount rate lowered from 3.0% to2.5% (rock-bottom at that time)
Black Monday.
Dollar hits 120 yen range.
Life insurers start selling Japanese government
bonds at their branch counters.
Nikkei Stock Average tops 30,000 yen.
Official discount rate raised from 2.5% to3.25%.
Life insurers’ combined total assets surpass 100
trillion yen.

Dec.
1990

Nikkei Stock Average hits 38,915 yen(historic high) at the final session of the year.
Nikkei Stock Average falls below 30,000
yen.

Mar.
Apr.

Plaza Accord.
Dollar hits 174 yen at one time (all-time highat that time).

Assumed interest rate
6.25/6.0/5.5% to 5.75/5.5%.

loweredAug.

fromOfficial discount rate raised from 5.25% to6.0% (peak during this period).
Nikkei Stock Average falls below 20,000
yen at one time.

Oct.

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1991

June

Securities houses found to have compensatedcustomers for loss.
Official discount rate lowered from 6.0% to
5.5%.
The Soviet Union’s disintegration (end of
the cold war).
Official land prices for 1991 (national
average) fall for the first time in 17 years.

July
Dec.
1992

Mar.
June

The Insurance Council’s report “New insurance
business as it should be.”

Sept.
1993

The Ministry of Finance announces theamount of bad loans at 21 major banks.
Official discount rate lowered from 3.25% to2.5% (same as historic low).

Feb.
Apr.

1994

Apr.

1995

June
Jan.
Apr.

June

Assumed interest rate lowered from 5.75/5.5%
to 4.75%.
Assumed interest rate lowered from 4.75% to3.75%.

Cost method adopted to assess domestic listedbonds.
Seven life insurers suffer current loss in fiscal
1994.

Aug.
Sept.

Hyogo Bank liquidated.
Official discount rate lowered from 1.0% to
0.5%.
Daiwa Bank’s scandal in New York.
Plan for liquidation of Jusen housing loan
firms approved by the Cabinet.

Dec.
1996

Jan.
Apr.

S&P announces ratings of eight life insurers.
Revised Insurance Business Law put in force.
Assumed interest rate lowered from 3.75% to2.75%.

June

Oct.

1997

Nov.
Dec.
Apr.

May
June

Act on Special Measures Concerning
Promotion of Disposal of Claims and Debts
of Specific Jusen Companies established.
Life and non-life insurers start entering eachother’s field.
“Japanese Big Bang” in planning stage.
Japan-U.S. insurance negotiations concluded.
Nissan Mutual Life ordered to suspend
business (the first case of life insurance
business failure after World War II).
S&P announces ratings of 13 life insurers.
Liquidation of Nissan Mutual Life decided(with policyholders bearing some of theburden).

Nov.
1998

Mar.
Apr.
June
Oct.

Dollar hits 100 yen for the first time.
Great Hanshin-Awaji Earthquake.
Emergency measures to control yen’s riseand stimulate the economy.
Official
discount rate lowered to 1.0%.

Toho Mutual Life forms a tie-up with GE
Capital (with old and new contracts separated).
Cost method adopted to assess domestic listed
stocks.
Solvency margin ratios announced.

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Sanyo Securities, Hokkaido Takushoku Bankand Yamaichi Securities failed.
Public funds injected into major banks.

The Financial Supervisory Agency launched.
Long-Term Credit Bank of Japan put under
special public control.

Dec.

1999

Life Insurance Policyholders Protection
Corporation of Japan (with compulsory
membership) established.

Feb.
Mar.
Apr.
June

Assumed interest rate lowered from 2.75% to2.00%.
Toho Mutual Life ordered to suspend
business.
Plan to integrate three banks into “Mizuho”
bank announced.
Tokai and Asahi banks announce businessintegration plans.
Sumitomo and Sakura banks announce
merger plans.

Aug.
Oct.

2000

Nov.
Mar.

AXA of France acquires Nippon Dantai Life.
Toho Mutual Life contracts transferred in block
to GE Edison Life.

May

Daihyaku Mutual Life ordered to suspend
business.

July
Aug.
Oct.

2001

Apr.

June

Sanwa, Tokai and Asahi banks announce
business integration plans (Asahi withdraws
in June).

The Financial Services Agency launched.
Taisho Life ordered to suspend business.
Chiyoda Mutual Life and Kyoei Life apply
for protection under the Act on Special
Treatment of Corporate Reorganization
Proceedings
and
Other
Insolvency
Proceedings of Financial Institutions.

Jan.
Mar.

The Financial Reconstruction Commission
started.
Nippon Credit Bank put under special public
control.
The Bank of Japan adopts zero-interest
policy.
Public funds injected into 15 major banks.

Tokyo Life applies for protection under the
Act on Special Treatment of Corporate
Reorganization Proceedings and Other
Insolvency
ProceedingsofFinancial
Institutions.
Taisho Life contracts transferred in block to
Azami Life (Yamato Life).
Daihyaku Mutual Life contracts transferred inblock to Manulife Century Life.
Chiyoda Mutual Life makes a fresh start as
AIG Star Life under AIG of the U.S.
Kyoei Life makes a fresh start as Gibraltar Life
under Prudential of America.
The Financial System Council allows life
insurers to change contract terms.

Sept.

The Financial Reconstruction Commission
dissolved.
The Bank of Japan decides on quantitativeeasing.

Terrorists attack on the U.S.
Nikkei Stock Average falls below 10,000
yen at one time.

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About the author
Nobuyasu Uemura is chief analyst at the Credit Rating Division of Rating & Investment
Information, Inc. (R&I).
He was born in 1967.
In 1990, he graduated from the Department of Occidental History, Faculty of Letters of
The University of Tokyo and joined Yasuda Fire & Marine Insurance Co., Ltd. (nowSompo Japan Insurance Inc.).
In 1997, he joined The Japan Bond Research Institute (now R&I) and was in charge ofrating of financial institutions, particularly life and non-life insurers.
In 2008, he received a Doctor of Philosophy degree from Waseda University.
His books (in Japanese) include “The Future of Seiho” (Nikkei Inc., 1999), “Sompo
Will Change” (R&I, 2001), and “Seiho’s Business Model Will Change” (Toyo Keizai,
Inc., 2003).

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This book was published by Nikkei Publishing Inc. on September 11, 2008.

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