Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Research

Private Sector Life Insurance Companies andthe Mutual Insurance Business of the Agricultural
Cooperatives (JA-kyosai)
1.

Introduction
This report is the 2003 edition of the analysis of the life insurance industry that the Japan

Center for Economic Research has been conducting since the year 2000 – the white paper of life
insurers. The bankruptcy of a life insurer is something that would have grave effects on not only
policyholders but also on the financial system as a whole. We, with the vision of reporting theaccurate current condition of the life insurance industry, examine the financial conditions,profitability and the business indicators of life insurers. Of the reforms made to the Insurance
Business Law in August 2003, we conduct a detailed analysis of the most controversial item, thescheme to lower the guaranteed rates, and make some suggestions as to what the supervisingauthorities of life insurers should be doing. Furthermore, in this report we analyze not only the large
private sector life insurers, but we also analyze the Japan Agricultural Cooperatives’ mutual
insurance business (JA-kyosai) that holds the greatest share by assets in the mutual aid business, abordering industry to life and non-life insurance.

2.

Financial Situation of Life Insurers

2.1

Comparison of Private Sector Life Insurers and JA-kyosai
JA-kyosai is the name for all the mutual insurance businesses in the Japan Agricultural

Cooperatives. Legislation in 1954 enabled them to expand throughout Japan and by June 1, 2003,
there were 941 agricultural cooperatives (JAs) that were engaged in this business. The central
organization for this business is called the National Mutual Insurance Federation of Agricultural
Cooperatives (Zenkyoren). By underwriting reinsurance from each JA, they are the true entities
responsible to the policyholders. In the year 2000, Zenkyoren absorbed the mutual insurance
federations that were established in the prefectures. The assets held by Zenkyoren total 40.9443
trillion yen in fiscal 2002. This is second to only the largest private sector life insurer, Nippon Life
Insurance Co. with 43.6865 billion yen (Figure 1.) . In principle, only those members of thecooperatives can use the services of JA-kyosai.

However, besides the regular members (4.54

million people engaged in agriculture and bought shares of JAs and their families) there are also
people who can become associate members only by buying a share of the agricultural cooperative(currently 3.87 million people). Moreover, even if no share is bought by the person, thesenon-members can be insured respective up to 20% of the policy amount of the normal members andassociate members, and so there is practically no restriction on who can use the service. Furthermore,regarding the insurable amounts or the content of the insurance, there is no noticeable difference
between private sector insurers and JA-kyosai. Also, JA-kyosai can offer both life and non-life
insurance under the Agricultural Cooperative Society Law, on the other hands, private sector insurers
is prohibited from doing the same by the Insurance Business Law.
29

Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Research

Figure 1.

Market Share of Life Insurance Business(Fiscal 2002, Based on Assets)

JA-Kyosai

Nippon

12.6%

8.4%

Dai-ichi

Other Private life insurers

Postal Life Insurance Service

Fiscal Year
2002

11.8%

30.9%

36.3%

Total of Private Life Insurers 51.9%

2001

11.2%

12.9%

8.5%

31.2%

36.2%

Total of Private Life Insurers 52.6%

2000

10.6%

12.5%

9.0%

33.0%

34.9%

Total of Private Life Insurers 54.5%

1999

10.6%

12.6%

8.7%

34.0%

34.1%

Total of Private Life Insurers 55.3%

Source: Disclosure Materials of each company, 2003
2.2

AssetsThe breakdown of assets of the top ten life insurers and JA-kyosai according to their financial

statements of fiscal year 2002 (ending March 31, 2003) is given in Table 1. If we look at the averageof the top ten insurers, 64% of their investment assets are in fixed yield assets; deposits , public andcorporate bonds , loans and other fixed yield. Since most of the liabilities of life insurers are liability(or policy) reserves – that are accumulated over the long-term to be paid out in future insurance
claims -- the investment of their assets should be in instruments that provide a stable income over the
long-term, and thus the share of their assets in fixed income investments are large. As for JA-kyosai,
this share is 91.1% and much higher than that of the private sector life insurers. Since there is little
difference with private insurers in the legislation dictating the amount of stocks JA-kyosai can hold,we view this preference for fixed yield instruments as an active choice on the part of JA-kyosai.
Although not all ten insurers are the same, on average, the share of public and corporate bondsin their investment assets has risen on average by 3.2 percentage point over the previous year. The
outstanding bonds held have also risen over fiscal 2001. The yield on 10-year bonds (newly issued)
has fallen from 1.39% at fiscal year end 2001, to 0.7% at fiscal year end 2002. Thus, we believe
the portion of bonds evaluated at market value has caused unrealized gains to rise. The share of
public and private bonds in the investments of JA-kyosai has grown to 78.6% and risen over fiscal
2001. We believe this is due to their further buying Government Bonds with tenure of over ten-years.
We also see that for JA-kyosai, their share of Local Government Bonds is 23.3% and higher than the
average of the major ten insurers of 14%.

30

Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Research

Table 1.

Share of Asset Types in Total Assets(End of Fiscal 2002)％

Cash and
Deposits
NipponDai-ichi
Sumitomo
Meiji
YasudaMitsui
Asahi
Taiyo
Daido
FukokuAverage
JA-Kyosai

Bonds

StocksForeign
Foreign
Currency Currency
Bonds
StocksOther
Securities

Loans

Real
EstateOthers

Total

1.2
(0.0)
2.3
(0.2)
1.3
(-1.6)
3.5(-0.6)
4.1
(1.1)
4.7
(-3.6)
4.0(-1.8)
2.6
(0.4)
6.7
(0.9)
7.7
(-2.2)
2.7(-0.5)

32.4
(3.1)
36.4
(0.5)
28.8
(4.8)
33.2
(5.0)
21.5
(2.2)
27.8
(1.0)
31.2
(10.6)
37.3(-0.2)
52.0
(0.7)
38.6
(6.3)
33.0
(3.2)

13.5
(-4.2)
11.9(-4.4)
6.4(-4.0)
12.3(-4.4)
8.6(-2.5)
8.4(-3.1)
8.3(-4.2)
6.0(-2.6)
3.5(-1.7)
8.1(-1.8)
10.3(-3.8)

10.0
(1.7)
15.4
(3.9)
17.4
(4.2)
6.2
(-0.1)
5.1(-3.0)
14.6
(5.7)
9.3
(0.2)
9.6
(2.3)
3.6
(-1.9)
3.8
(0.6)
11.1
(2.0)

3.1
(-0.8)
1.5
(0.2)
3.0
(-0.5)
2.6(-0.8)
6.9
(0.4)
3.9
(1.0)
1.6
(-0.7)
2.3(-0.3)
2.4(-0.1)
1.7
(0.1)
2.8
(-0.3)

2.4
(0.5)
0.8
(0.3)
0.8
(-0.2)
0.2(-0.0)
1.2(-0.1)
0.8
(0.2)
0.6
(-0.1)
0.6
(0.2)
3.4
(1.2)
0.5
(-0.0)
1.3
(0.2)

28.1
(-0.9)
22.9(-0.0)
28.0(-1.2)
31.6
(0.1)
38.1
(1.2)
30.6
(-1.3)
31.3(-5.1)
34.4
(0.2)
20.2
(0.1)
29.7
(-1.4)
28.4(-0.7)

4.5(-0.0)
4.9(-0.5)
5.0(-0.1)
6.3
(0.1)
4.2
(-0.2)
5.6(-0.1)
9.4
(1.2)
3.0
(0.2)
3.0
(-0.1)
4.4(-0.1)
5.0(-0.1)

4.7
(0.5)
4.0
(-0.2)
9.4(-1.4)
4.1
(0.7)
10.4
(0.8)
3.5
(0.2)
4.3
(-0.1)
4.0(-0.2)
5.3
(0.8)
5.4
(-1.4)
5.5
(0.0)

100.0

2.4
(-1.6)

78.6
(1.8)

1.3
(-0.4)

3.2
(0.3)

0.6
(-0.0)

0.6
(0.1)

10.2
(0.4)

0.4
(-0.0)

2.7(-0.6)

100.0

100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0

Fixed
ReturnAssetsForeign
Currency
Assets

61.8
(2.2)
61.5
(0.7)
58.0
(2.1)
68.3
(4.5)
63.7
(4.5)
63.1
(-3.8)
66.5
(3.7)
74.3
(0.4)
78.9
(1.7)
76.0
(2.7)
64.0
(2.0)

12.1
(0.6)
13.9
(3.3)
10.0
(4.1)
7.8
(-1.3)
11.2(-1.6)
13.4
(4.9)
6.4
(-1.5)
11.9
(2.8)
3.3
(-2.0)
4.0
(0.7)
10.8
(1.4)

91.1
(0.6)

3.8
(0.4)

Notes:
１） Figure in parentheses show the percentage point change in their share of total assets based on
fiscal 2001.
２） In the “Others” category are Money in trust, Monetary Claims Purchased, Trading Securities,
Deferred Tax Assets and Loan Loss Reserves.
Source: Disclosure Materials of each company, 2003
Regarding assets held by the life insurers, restrictions on their holdings of domestic stocks andforeign securities, etc. exist. As holdings of domestic stocks fell by 3.8 percentage points to 10.3%,
holdings of foreign public and corporate bonds rose by 2.0 percentage points to 11.1%, overtaking
the size of stock holdings. The reason the share of stock holdings has declined for the third
consecutive year is the stock market had seen a downturn (25.6% decline in TOPIX), and because
life insurers have been selling their stocks because the prices have been too volatile. From JCER’s
calculations, the 3.8 percentage point decline in the share of stock holdings to assets is: 3.3 points
due to the decline in prices, and 0.5 points due to disposal of holdings. For JA-kyosai, their stock
holdings total only 1.3% of their assets, extremely low proportion. Thus their asset structure is muchless likely to be affected by fluctuations in stock prices.
Furthermore, the rise in the foreign public and corporate bond holdings of the ten major life
insurers is likely due to their active investment in foreign bonds seeking higher yields, since thedomestic market interest rates were so low in fiscal 2002. Moreover, if the exchange risk of thisinvestment in foreign bonds is hedged by derivatives, the cost of the hedging is not reflected in the“basic profits” of the insurer ; consequently, the basic profits are inflated by this amount.
In order to examine the real assets and the real profitability of these companies, we need to
conduct an analysis that reflects the unrealized losses in the assets. Table 2. outlines the unrealized
31

Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Researchgains and losses of the ten major life insurers at the end of fiscal 2002. The data shows that due tothe sluggish stock market and the decline in land prices, four companies have overall unrealized
losses, whereas JA-kyosai has overall unrealized gains of over 3 trillion yen at year-end fiscal 2002.
The unrealized gains on their public and corporate bonds that account for almost 80% of their assets
were boosted by the ultra-low interest rates in fiscal 2002, whereas the fact that their stockholdings
are so low kept them unaffected by the decline in the stock market.

Table 2.

Unrealized Gains on Asset(End of Fiscal 2002)
Securities

Real
EstateStocks

Bonds

100 million yen
Total of
Unrealized
Foreign
Gains
Securities
4,279
19,328
1,609
3,639
1,010
-469
1,539
4,029
-360
-314
651
-2,575128-2,095
120
300
50
1,651
85
908

NipponDai-ichi
Sumitomo
Meiji
YasudaMitsui
Asahi
Taiyo
Dido
Fukoku-1,344-1,308
-477
-642
-113
-1,574
-468
-59
-128
739

20,671
4,946
8
4,670
-200
-1,001-1,627
359
1,779
169

6,690
-1,514-3,04137-558-2,180-2,133
-629
36
-503

10,280
4,992
2,350
3,090
735
652
434
891
1,768
616

Total

-5,37429,775-3,79525,807

9,111

24,401

JA-Kyosai

227

31,263525

30,041875

31,490Note: NIKKEI 225 Level is NIKKEI 225 that unrealized gain on stocks is 0
Source: Disclosure Materials of each company, 2003
2.3

Liabilities
The amount paid on a life insurance policy will generally rise as the insured person becomesolder. As a result, in the first half of the insured period, the benefits paid will be less than theinsurance premiums, whereas in the latter half, the benefits paid will be higher. However, insurance
premiums are calculated so that if the death rates and interest rates follow their expected paths when
the premiums are calculated, the balance over the insured period should be zero. Thus, life insurers
must accumulate liability reserves at every fiscal year end to ensure that they are able to fulfill their
obligations according to the insurance policies.

Insurance premiums are calculated using

1)expected mortality rates, 2)guaranteed rates, and 3)expected operating expense ratios. Of these, theguaranteed rates are the rates by which the insurance company will discount the premiums based on
their expectations of what the investment returns on their assets will be. In Figure 2. we see theguaranteed rates of the private sector life insurance companies. These peaked in the late 1980s at
about 6%, and this fell gradually to 1.5% by fiscal 2002. From the figures we were able to obtainfrom JA-kyosai from 1990, it is obvious that JA-kyosai’s guaranteed rates are also gradually32

Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Research
declining, but as a whole, their rates are about 0.25% higher than those of the private sector
insurance companies. And for fiscal 2002, the rate was 1.75%.

Figure 2.
7.00

Change of Guaranteed Rates％

Private Life Insurers
JA-Kyosai

6.00
5.00
4.00
3.00
2.00
1.00
0.00
1970 72

74

76

78

80

82

84

86

88

90

92

94

96

98 2000 02
Fiscal Year

Source: Financial Services Agency and Zenkyoren
Table 3. shows, for the ten major life insurers, the share of liability reserves by year policies
were sold. In fiscal 2002 the policies with high guaranteed rates are 68.7%, whereas those after 1996
are 31.3%. Policies entered into in the past with the high guaranteed rates have hardly been reduced,
whereas the more recent policies with the lower guaranteed rates have more policy cancellations.
Even the case of JA-kyosai, although their liability reserves are not published, we believe that as in
the case of private life insurers, they also have a large number of policies from when the guaranteed
rates were high. As the guaranteed rates continue to be at a high rate, and actual interest rates havebeen very low for an extended period, the life insurers and JA-kyosai are in a “negative yield”
situation in which their interest income every year is insufficient to cover their guaranteed rates.
This is the main factor deteriorating their business.

Table 3. Liability Reserves by Year Policy Sold
Fisical Year Policy
Entered into

Guaranteed
Rate

Up to Fiscal 1980
4.00〜5.00
Fiscal 1981-1985
5.00〜6.00
Fiscal 1986-1990
5.50〜6.00
Fiscal 1991-1995
2.25〜5.75
Total, Up to Fiscal 1995
Fiscal 1996-2000
1.50〜2.90
Fiscal 2001
1.50〜1.85
Fiscal 2002
1.00〜1.50
Total from 1996 and after
Grand Total

Fiscal 2001
69,338101,335
235,860
275,670
682,203
225,629
39,533
265,162
947,365

100 million yen, %Total for 10 Major Life Insurers
Change in AmountRate of
Share of
Share ofFiscal 2002
over Previous
Change
Total
Total
Period
7.3
63,1606.7-6,178
-8.91
-3.77
10.7
97,51910.3-3,816-1.03
24.9
233,42624.7-2,434-7.08
29.1
256,163
27.1-19,507-4.68
72.0
650,26768.7-31,936-4.72
23.8
214,972
22.7-10,657-0.98
4.2
39,146
4.1-387
41,596
4.4
41,596
11.52
28.0
295,71431.3
30,552-0.15
100.0945,982
100.0-1,38433

Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Research
Notes:
1)

For the amount of liability reserves, these are the liability reserves for individual insurance andfor individual annuity insurance.

2)

For guaranteed rates , these are the major guaranteed rates corresponding to the liability reserveby fiscal year that policy was sold.

Source: Disclosure Materials of each company, 2003
2.4

CapitalThe capital of private sector life insurers is composed of such items as surplus notes ,subordinated loans and subordinated bonds , etc. that are contributed mainly from banks and otherfinancial institutions. At end of fiscal year 2002, banks had been the source of surplus notes andsubordinated loans to the ten major life insurers to the order of 9.1 trillion yen. At the same time, theten life insurers held 1.8 trillion yen in bank shares at market value, and had extended to the banks
4.4 trillion yen in subordinated debts and bonds. Here, we examine the cross-holdings of capital for
fiscal 1999-2002. In Figure 3., we see that the ten major life insurers are reducing their exposure tobanks gradually year-by-year. Although the value of bank stocks held by the life insurers has fallen
by 1.4 trillion since fiscal 2001, this is likely due to the decline in stock prices. At the same time, theten life insurers have reduced their subordinated loans by 1.2 trillion yen over fiscal 2001. This isprobably because the subordinated loans that matured in fiscal 2002 were not rolled over.

Figure 3.

Double Gearing with Banks
Banks→Life Insurers

trillion Yen
3
2
1
0

0.8
1.1
1999

1.2
1.2

0.8
1.2
2000

2001

0.9
1.0
2002

FY

0
4.4

2
5.7

4.6

5.1

4
6

3.3

8
10

7.4
Surplus Notes,Equities
Subordinated Debts

12trillion Yen

1.9

5.4

Life Insurers →Banks

Source: Disclosure Materials of each company, 2003
However, regarding life insurance companies that do not have adequate capital accumulation,
as their exposure to banks continues to be great, if the banks record large losses, the risk that theeffects it would have on the insurance companies would be enormous. The issue with the cross34

Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Researchholdings between banks and life insurers of each other’s capital is that if there is uncertainty in theconditions of one business, the risk exists that it will shake the entire financial system. It is necessarythat each life insurer continue to reduce their exposure to banks.
Zenkyoren is owned by members of such organizations as Japan Agricultural Cooperatives,
Norin-chukin Bank and the Federation of the Japan Agricultural Cooperatives Group. Zenkyoren
does not have cross holdings of capital with banks as the private life insurers do.
2.5

Profit/Loss Situation
Figure 4. shows that of the amount insured of the policies in force has declined in the past five

years for most life insurers. From Figure 4., we observe that the surrender and lapse ratio is at a highlevel and there is not enough new business to compensate for the loss, so the amount insured ofpolicies in force has been declining. The main reason for this is that since Daihyaku Mutual Life
Insurance Company went bankrupt in May 2000, several other life insurers also went under and theoperating environment of all life insurers has been deteriorating. However, for JA-kyosai, theamount insured of the policies in force (for individuals), although shrinking, is declining at a lessrapid rate than it is for private life insurers. Because the majority of those buying policies of
JA-kyosai are members and associate members, the surrender and lapse ratio is kept at a relatively
low level.

Figure 4.

Sales Results in 5 Years％

1998=100
105

12
10

100

8

95

6
90

4

85

2

80

0
1998

1999

2000

2001

2002

Fiscal Year
Ａkyosai
Policy Amount in Force Ｊ

Policy Amount in Force Private Insurers

Ａ kyosai
Surrender & Lapse Ratio Ｊ

Surrender & Lapse Ratio Private Insurers

Ａ kyosai
New Policy Ratio Ｊ

New Policy Ratio Private Insurers

Source: Disclosure Materials of each company, 2003
The yield on asset investment -- that reflects the changes in market price of asset holdings -- isshown in Table 4. The market-value yield for seven out of the ten life insurers was negative. In
addition, the weighted average of the ten companies was negative for the third consecutive year. The
decline in unrealized gains on stocks and land is reducing the market value yield.
35

For JA-kyosai,Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Researchon the other hand, the share of stocks in their total assets is lower than of the private life insurers,
and since the unrealized gains in public and corporate bonds have risen, their market value yield is apositive figure.

Table 4.

Market Value Yield%

NipponDai-ichi
Sumitomo
Meiji
YasudaMitsui
Asahi
Taiyo
Daido
Fukoku

1.69
0.51
0.25
0.13
0.99
2.46
0.90
0.03
2.35
0.29

1.29
2.09
1.33
0.64
1.39
0.18
1.19
1.13
2.27
2.72

5.04
4.73
3.94
2.43
4.73
4.94
4.40
3.89
2.82
3.52

-1.00
-0.65
-0.60
0.58
-1.03
-1.74
-1.76
0.45
0.58
1.06

-1.27
-1.43
-1.07
-1.04
-0.21
-1.19
-1.92
-0.55
0.08
-0.61

-0.89
-0.50
0.18
-0.38
-0.76
-0.72
-0.68
1.11
1.57
-0.47

Average(6 years)
0.79
0.77
0.66
0.39
0.83
0.63
0.33
1.00
1.61
1.07

Weighted
Average

0.96

1.42

4.04

-0.41

-0.92

-0.15

0.81

FY1997

FY1998FY1999FY2000FY2001

FY2002

Source: Disclosure Materials of each company, 2003
In Table 5., we estimated the Economic Profit of the companies from their published Income
Statements. Economic Profit is defined as the increase or decrease in net assets on a market value
basis, assuming no dividends were paid out, no increases in capital and no buying back of capitalstock. This measure shows the real profitability of the companies for one business year and when the
figure is negative, this means that real capital is being reduced. Insurance Income is defined as the
profits earned from insurance policies when Operating Expenses are zero and the market value yield
is equal to the average guaranteed rates. This is equivalent to the total of the life insurers’ mortality
profits and additional premiums. Investment Gains/Losses are defined as investment profit on an
income basis, with market value assessed investment profits reflected. This reflects all
investment-related profits and losses such as the amount of the negative spreads (yields) as publishedby life insurers, plus the changes in the unrealized gains and losses on assets and capital gains andlosses. When this is a negative number, this means that they company is in a negative spreadsituation on a market value basis.

36

Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Research

Table 5.

Economic Profits of Private Life Insurers and JA-kyosai Federation
100 millions yen, % in parentheses

Insurance Income
Operating Expenses,
Other Gains/Losses(-)

Investment-Related Gains/Losses
Economic Profit

Total for 10 major life insurers
JA-Kyosai
FY 2000
FY 2001
FY 2002
FY 200261,711
59,96956,625
12,023(3.72)(3.79)(3.73)(2.94)
28,53030,233
26,6931,455(1.72)(1.91)(1.76)(0.36)-57,526-62,092-45,733
7,563(-3.47)(-3.92)(-3.01)(1.85)-26,342-32,599-16,127
17,715(-1.59)(-2.06)(-1.06)(4.33)

Notes:
1) Figures in parentheses are shares of total assets
2) Insurance Income= Mortality Profits+ Equivalent Amount to Additional Premiums-= Basic Profit + Negative Spread Amount + Operating Expenses

3) Investment Gains/Losses =Negative Spread Amount + Changes in Unrealized
Gains/Losses on Assets + Capital Gains/Losses + Other Investment
Gains/Losses
4) Economic Profit= Insurance-Related Income + Investment-Related Profit/Loss –Operating Expenses + Other Gains/Losses – Corporate Taxes etc. –External Outflow Amount

Source: Disclosure Materials of Life Insurers and Zenkyoren, 2003
In Table 5., we showed the total of each type of profits/losses for the ten life insurers and theweighted averages of the shares of total assets. The Insurance Income to Total Assets is quite steadyat the 3.7-3.8% level. However, the total of Operating Expenses and Other Gains/Losses as a shareof Total Assets was around 1.7-1.9%.

When we deduct the Operating Expenses and Other

Gains/Losses as a share of Total Assets from the Insurance-Related Income to Total Assets, we findthe Negative Yield Ratio that the company can bear on a market-value basis. If this rate can be kept
to about 2%, the Economic Profit will be zero. However, when we look at the Investment
Gains/Losses over the past three years, the Negative Yield Ratio on a market value basis has been
above 3%. As a result, the weighted average amount of economic profit for the ten major life
insurers has been negative for the past three years. This would mean that the real capital of thesecompanies has been declining year-by-year.
However, when we estimate the economic profit for JA-kyosai in fiscal 2002, we found it was
roughly a positive 1.7 trillion yen (Table 5.). We believe this is due to four main factors: 1) the lapse
and surrender ratios are relatively low compared to the private insurers because the JA-kyosai
37

Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Researchorganization is a cooperative, 2) their structure is much less sensitive to changes in stock prices
because 90% of their assets are held in fixed return type investments, 3) income related to their
non-life insurance business is also included in the economic profit for JA-kyosai,

and 4) the

Operating Expenses of Zenkyoren are reflected, but not of JA Cooperatives that are the main sellingbody of the policies.

3.

Analysis of Financial Health of the Sector

3.1

Net Assets of Private Insurers
The indicators that the supervising agencies use to measure the health of the business ofprivate insurers are Net Assets and Solvency Margins. Standards were introduced so that thesupervising agency can monitor the health of private life insurers before they fail, and if they findsome companies are less than sound, then supervising agencies can issue an administrative order tothat company.
To attain this figure, we take assets at market value and then subtract from this. When this is anegative figure, or can clearly be expected to mark a negative figure, then an administrative ordercan be issued. We look at the net asset amount of the ten major life insurers (Table 6.), and we seethat at end of fiscal 2002, none had a negative asset amount. However, we do see that for all thecompanies, this figure is on a declining trend.

Table 6.

Mar-00Net Asset Ratio
Mar-01Net Asset Ratio
Mar-02
Net Asset Ratio
Mar-03Disclosed Net Assets of Private Insurers

NipponDai-ichi

Sumitomo

82,73739,40019,300

Meiji

YasudaMitsui

21,697

11,040

7,300

Asahi

Taiyo

Daido

Fukoku10,510

8,200

7,281

5,220

19.1%

13.1%

8.1%

12.9%

11.0%

7.2%

9.3%

11.6%

12.7%

11.3%

72,11431,505

15,20019,368

8,550

3,791

5,710

6,800

6,189

4,710

16.4%

10.0%

6.4%

11.1%

8.3%

3.9%

5.1%

9.4%

10.5%

9.8%

59,67624,0999,800

16,283

7,022

2,778

3,936

4,556

4,712

3,748

13.2%

8.1%

4.3%

9.5%

7.2%

3.4%

5.1%

6.7%

7.9%

7.9%

50,774

20,6168,444

13,623

5,896

1,176

2,363

3,412

5,154

3,161

Net Asset Ratio

11.6%

7.1%

3.9%

8.4%

6.2%

1.5%

3.6%

5.2%

8.6%

6.7%

Y-Y change
Change of Net
Asset in 4 Years
Deferred tax assets
in Mar-03-14.9%-14.5%-13.8%-16.3%-16.0%-57.7%-40.0%-25.1%

9.4%-15.7%-38.6%-47.7%-56.2% -37.2% -46.6% -83.9% -77.5% -58.4% -29.2% -39.4%

6,757

3,984

2,622

3,206

1,516

764

991

795

876

536

Source: Disclosure Materials of Life Insurers, 2003
Some of the problems regarding this net assets measure is that 1) deferred tax assets are notincluded, 2) estimated contribution to the Life Insurance Policy Protection Corporation – a certain
expense in the future -- is not deducted from the figure, 3) profits/losses from derivatives trading are
not reflected, and 4) evaluation standards for land are too lax. In this exercise, we adjust for these
problems and put forth a more rigorous adjusted real excess debt. After recalculating eachcompany’s adjusted net assets, we found that they were at least 20% lower than the published net
asset amount for all the life insurers. Furthermore, for one company, the adjusted net assets were
negative (Table 7.). We find that for net assets of life insurers as well, there is a great dependence on
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Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Researchdeferred tax assets, an “asset” with few asset-like qualities.

Table 7.
Adjusted Real Net Asset
Ratio

Distribution of Adjusted Net Asset (Mar-2003)
Under 0%

Number of insurers(total 10)
Attrition Rate from
Disclosed Net Asset
Number of insurers(total 10)

0〜4%1

Under 20%

4〜8%

8〜10%

Over 10%

4

4

1

0

20〜30%

30〜40%

40〜50%

50〜60%

Over 60%

4

2

1

1

2

0

Source: Disclosure Materials of Life Insurers, 2003
3.2 Solvency Margin Standards for Private Sector Insurance Companies
The solvency margin ratio is the standard by which the Japanese supervising agency monitors
life insurers, and can be determined as follows:
Solvency Margin Ratio = (Amount equivalent to shareholder’s equity / Total risk * 0.5) * 100
In Japan, when this ratio falls below 200%, the Financial Services Agency (FSA) will
implement their Early Corrective Measures.
Solvency Margin Standards, however, have some deficiencies: 1) recent volatility in stock andland prices inadequately reflect the risk of losses caused by price fluctuations – a component of“Asset Management Risk”, and 2) The standard assumes that the insurance company is a ongoing
concern.
With these issues in mind, we make some corrections to the publicized solvency margin ratios
and calculate some “adjusted” solvency margin ratios. In order to give the corrections some
objectivity, we adopt the RBC (Risk Based Capital) Standard philosophy.
(1)

Objective of finding Adjusted Solvency Margin Ratios.
We attempt to bring the Japanese solvency margin ratios as close as possible to the RBC

standards. We assess market values for such assets as securities and for land as much as possible andby doing so adjust the numerator, the solvency margin, for unrealized gains and losses. In addition,
for the rate of reserves for bad loans, we impose the average rate of the major Japanese banks overthe entire sample. As for the denominator, we raise the risk coefficient of the risk of losses caused byprice fluctuations up to RBC standards so that changes in asset prices are captured. Furthermore,since we are focus ing on the solvency of the company in the event of failure, we remove all items
that do not have any liquidation value, and correct the solvency margin ratio to liquidation standards.
(2)

Results of Analysis of Adjusted Solvency Margin Ratios
As we are using RBC standards in the US for our adjusted solvency margin ratios, we take theestimation results and classify them using the government intervention guidelines for RBC ratios.
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Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Research
There are two major points whereby these standards differ from the implementation rules of Japan’s
Early Corrective Measures. In Japan, if the solvency margin ratio is above 200%, then the life
insurer is viewed as being healthy. However with the RBC standards in the US, even if it is over
200%, if it is 250% or under, then a trend analysis must be conducted. If the analysis shows thatshareholder’s equity is on a rapidly declining trend, then the same measures will be taken for thecompany as if the ratio were under 200%. Furthermore in Japan if the solvency margin ratio is below
0%, then the supervising agency can issue a reconstruction or liquidation order, but in the US, thiscan be done when the ratio is below 70%.
From Table 3-8, we see that one company has an adjusted solvency margin ratio of below 0%,
and one whose ratio was under 70%. Under RBC standards the authorities would be taking controlof the companies and either reconstructing or liquidating them. Further, by RBC standards, only fourout of the ten major life insurers have ratios above 250% where no action would be required by thegovernment. Compared to the US standard, the FSA’s solvency margin ratios are still inadequate.

Table 8. Distribution of Adjusted Solvency Margin Ratios (Mar-2003)

Number of
insurers(total 10)

Under 0%0〜 70%

70〜 100%

100〜 150%

150〜 200%

1

1

0

1

1

200〜 250% Over250%
2

4

Source: Disclosure Materials of Life Insurers, 2003
3.3 Indicator of Financial Health of JA-kyosai.
Solvency Margin standards are also used as indicators of the financial health of the JA-kyosai.
These are applied to Zenkyoren. Unlike for the private life insurers, this is enforced by theadministrative directive of the Ministry of Agriculture, Forestry and Fisheries that basically follows
that of the Insurance Business Law. As the JA-kyosai is involved in both life and non-life insurance
businesses that are prohibited under the Insurance Business Law, the methods of calculation have tobe adjusted. However, because no standards by which an administrative order such as theimplementation of the Early Corrective Measures would be issued, the standard is very uncertain.
This measure has the same problem as it did for private life insurers by allowing for all
deferred tax assets to be included. Thus, applying the same method we did earlier, we find theadjusted solvency margin ratio for the JA-kyosai, using the liquidation standard. However, as it
difficult to remove the effects of the non-life insurance businesses from the numerator, we do not
conduct a comparison with the private life insurers.
Table 9. shows the adjusted solvency margin ratios as found through this calculation. In fiscal
2002, their published solvency margin ratio was at 753%, but after our corrections, it rose to 862.8%.
This is because when public and corporate bonds were assessed at market value, a huge unrealized
gain resulted and the solvency margin increased. Even after the large deductions of the deferred tax
assets and the equivalent value of the tax effects, and even after the risk coefficients in the
denominator were corrected, the solvency margin ratio rose. Also, JA-kyosai is exempt from being amember of the Life Insurance Policy Protection Corporation and making contributions to thecorporation. Thus the solvency margin ratio was not pulled down by the deduction of this figure as it
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Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Research
was for the private life insurers.

Table 9.

Disclosed and Adjusted Solvency Margin Ratios of JA-kyosai%Disclosed
Adjusted

Fiscal 2000
589.0
657.4

Fiscal 2001
696.9
666.4

Fiscal 2002
753.0
862.8

Source: Disclosure Materials of Zenkyoren, 2003
Next, as the published Zenkyoren net asset amount is measured by the same standard as theprivate life insurers, we calculated the adjusted net asset amount using the JCER adjustment method(Table 10.). As a result, the published net asset amount was adjusted downwards by about 9.5%, but
the adjusted net asset amount was 6.6821 trillion yen and 16.32% of total assets.

Table 10.

Disclosed
Adjusted

Disclosed and Adjusted Net Asset of JA-kyosai
Fiscal 2000
60,804−

Fiscal 2001
57,675
51,141

100 million yen
Fiscal 2002
73,862
66,821

Source: Disclosure Materials of Zenkyoren, 2003
From the above, we see that JA-kyosai appears to be highly solvent. In other words, we cansay that JA-kyosai is in good financial health. We believe that the stability of JA-kyosai is
attributable to a number of factors: 1) Because they are a mutual insurance organization, there is nosudden or large-scale inflow or outflow of members and so the policies in force are quite steady; 2)
because they are permitted to engage in both life and non-life businesses, a deterioration in businessin one arm may be compensated by the other; and 3) because 90% of their assets are in fixed income
instruments, their asset composition allows them to have a stable income, and they are not affectedby stock prices.
However, this financial health is judged only by the financial conditions of Zenkyoren.
JA-kyosai is made up a two-tiered operation of the Japan Agricultural Cooperatives (JA), andZenkyoren, so it would be important to know the financial conditions of JA as well before making
this kind of statement. Unlike Zenkyoren, JA’s financial statements are not disclosed and so
management lacks transparency. Therefore, although Zenkyoren appears to be in “good financial
health”, their relative health could be lost in the JA Mutual Insurance Business as a whole. For thisreason, JA needs to compile their own financial statements under the recognized accounting
standards in Japan. Then, the financial statements of JA-kyosai as a whole should be released
including the financial conditions of the mutual insurance operations of JA as well.
Moreover, with less than transparent evaluation standards, the stability of JA-Kyosai’s
management cannot be guaranteed. For this end, the Ministry of Agriculture, Forestry and Fisheries
needs to take actions: establish strict standards for JA-kyosai’s disclosure (penalizing any
misstatements), establish standards for indicators to measure their financial health, and take action
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Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Research
and make administrative orders when these measures indicate trouble.

4. Scheme to Lower Guaranteed Rates of Interest under Revised Insurance Business
Law
4.1

Revision of the Insurance Business Law
Life insurance companies continue to be in negative yield situations as the low interest rateenvironment continues, and they have large amounts of policies in force with high guaranteed rates.
In August of 2003 the Insurance Business Law was revised to accommodate life insurers who were
finding it difficult to continue their business. This is a scheme that would allow life insurers to lower
their guaranteed rates and change the terms and conditions of their policies if the life insurers
requested. As we will see, this kind of change in terms and conditions of policies could have also
been executed under existing bankruptcy proceedings under the Insurance Business Law or the
Bankruptcy Law.
4.2

Effectiveness of Lowering Guaranteed rates
Figure 5. depicts a lowering of guaranteed rates, taking the case of endowment life insurance.

Life insurer will build up their liability reserve to pay on claims from policyholders. The source of
these reserves is the premiums from policyholders discounted by the guaranteed rates, etc. Therefore,
as a result, as we see in Figure 5., changing the terms and conditions of the policy is equivalent to
reducing the amount of the refund upon termination of the policy (when a policy is terminated before
it matures), or to reducing the amount of the policy that was promised to the shareholder that would
be paid upon death (or maturity). From the perspective of the life insurer, changing the conditions of
the policy such as the guaranteed rates, may improve the negative yield for the company. However,from the perspective of the policyholder, if the amount insurance amount is to be reduced, then they
are in effect bearing the burden of the negative yield.
According to the supervising agency, the objective of this arrangement is to protect thepolicyholder. However, from the perspective of policyholder “protection”, there are still many issues
that would need to be resolved.

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Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Research

Figure 5. Diagram of Lowering Guaranteed rates（For Endowment Life Insurance）
Insurance payment upon
death or maturity of policy① Case where life insurer does
not fail② Case where life insurer lowers
guaranteed interest rates③ Case where life insurer lowers
guaranteed interest rates,andcuts liability reserve by 10%

Amount of liability
reserves should be built

Time of entering
into policy①③

Maximum coverage when life
insurer fails (90%)

Day when standards change(Day when guaranteed interest rates are lowered)②Time when policy
matures maturity

Note: The day the standards change in ③ is when the insurer fails.
Source: Financial Services Agency
4.3 Issues with the Revised Insurance Business Law
This scheme of lowering guaranteed rates has some of problems: 1) only those policyholders
who own policies that have high guaranteed rates of interest would be affected; 2) whether thecompany is a mutual company or a stock company, it is difficult for the interests of the policyholders
to be reflected in this arrangement; 3) There is a high likelihood that rather than the surplus notes
and subordinated debt contributed by banks be written off, the amount insured and the refund upon
termination of the policy will be reduced. These are examined in-depth below.
4.4

Comparison of Procedure under Existing Bankruptcy Law and with Revised BusinessInsurance Law
1) From the preceding paragraph, under the Revised Insurance Business Law, only thosepolicyholders whose policies promise high guaranteed rates will be subject to changes in theirpolicies. If the life insurer fails under the existing Bankruptcy Law all policyholders will be subject
to the same changes made to the terms and conditions of their policies, and all creditors of the samepriority will be treated equally.
2) Under the scheme of the Revised Business Law, changes in the terms and conditions of theinsurance policies will be determined by, in the case of a mutual company, their Policyholders’Representatives Meeting, and in the case of a stock company by a special resolution of theStockholder’s meeting. In the case of a mutual company, representatives of policyholders that makeup the Policyholders’ Representatives Meetings often have interests in the company outside of their
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Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Researchpolicies such as through cross shareholdings and lending to the company, and are likely to be moreconcerned with these matters than their policies. On the other hand in the case of stock companies,
the stockholders -- whose interests generally differ from those of policyholders -- will be the ones atthe stockholders’ meeting determining the changes in the terms and conditions of the policies. In
either case, the interests of the actual policyholders will not likely be adequately reflected. On theother hand, procedures taken through the Bankruptcy law, which are legal proceedings, will have theinvolvement of the Courts and will entail a strict inspection of assets. Those that have claims inreorganization , etc, will form a creditors meeting and decide on the changes to the terms andconditions of the policies.
3) With the Bankruptcy Law, the credits will be classified by priorities as determined by law.
Normally, claims from policyholders will be of higher priority than other general claims such as
surplus notes and subordinated debts, and so these will all be written off. When Chiyoda Life andKyoei Life failed and went through these proceedings according to the Bankruptcy Law, all surplus
notes and subordinated debts were written off. This system is designed to have surplus notes , stocks,
and subordinated debts act as a cushion for the policyholders and lessen the loss on them, and is seen
as a scheme that protects the policyholders. Moreover, as the Courts will conduct a thoroughexamination of the reorganization plans made in this process, there is little risk of disputes about
exemption from claims, etc. However, under the Revised Insurance Business Law, it is likely that the
surplus notes (or stocks, for stock companies) and subordinated debts will not be written off, and thechanges in the terms and conditions of the policies will be take precedence over these write-offs.
4.5

Bankruptcy Proceedings from the Perspective of Policyholder Protection
With the scheme to lower the guaranteed rates under the legal revision, it is likely that the

surplus notes and subordinated debts of the insurance company are left untouched with the amountinsured of the policyholder being reduced to take priority. Thus this measure is far from one toprotect the policyholders and more than one to protect the banks and other financial institutions thatare large contributors to the surplus notes and subordinated debts of the life insurance companies.
From the perspective of policyholder protection the proceedings under the Bankruptcy Law would
be more appropriate. The Bankruptcy Law allows for surplus notes, stocks and subordinated debt to
act as a cushion for the policyholders and will be written off before the insured amounts will be
reduced, and so serve to protect the policyholders.
We see no additional advantage to the policyholder of the legal revision allowing insurers tolower their guaranteed rates. For those life insurers that need to lower their guaranteed rates, it would
be less of a burden on the policyholder if the Bankruptcy Laws were to be applied instead. Moreover,it should go without saying that in order to avoid this kind of bankruptcy, the FSA needs to review
their standards for implementing Early Corrective Measures, and their practical standards for cash
flow analysis, and strengthen their supervision framework so that they can more quickly identify
those life insurers that are in financial trouble,

5.

Conclusion
The real profitability of life insurers has been largely reduced these past few years due to avery severe external environment with low interest rates, a stagnant stock market, and the decline in
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Japan Financial Report No.9, October 2003
“The Profitability of Japanese Industries: Non-financial Sectors, Banks and Life-Insurance
Companies” Japan Center for Economic Research
asset values such as for land. Economic profits, which measure the real profitability of thesecompanies, were negative for nine out of the ten major life insurers in fiscal 2002. If we do not see
an improvement in the business environment, the situation is so serious that there may be further life
insurers going under.
In August 2003, the Insurance Business Law was revised. This scheme allows those insurersthat are expected to have trouble continuing their business, to make a request and change many of
their basic rates of their policies in force. Under this revision, surplus notes, stocks and subordinateddebts will likely not be able to function as a cushion to policyholders when the life insurers are in
financial trouble.
What is desired of the FSA is not a revision of the Business Law such as this one, but to bettersupervise the life insurers by tightening up the current standards used for measuring solvency
margins, and real excess debt. Furthermore, it is very difficult to know the real financial health fromthe information in their disclosure material of life insurers. If they are requiring the insurers to be
responsible to their policyholders then it should be a condition for each of the life insurers to release
more detailed, relevant information about themselves.
From this analysis, we have found that the JA-kyosai that is allowed to also engage in the
non-life insurance business is very strong compared to the private sector life insurers. Their lapse
and surrender ratios are very low compared to those of life insurers, and the policies in force arestable at high levels. Their assets are over 90% invested in fixed return vehicles, and their financial
situation is not easily affected by changes in stock prices. However, some issues remain with
JA-kyosai: 1) financial statements are not released for the JA Cooperatives, and 2) no clear standard
by the supervising agency (Ministry of Agriculture, Forestry and Fisheries) to supervise Zenkyoren
exists.

45