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October 25, 2000

Insurer's Collapse Could Signal Start Of Shake-Out
By Michiyo Nakamoto, The Financial Times

Insurance Companies Just The Beginning ... Weiss comments

TOKYO - The abrupt collapse on Friday of Kyoei Life, Japan's largest corporate failure, raises the question of how many more skeletons linger in the life insurance cupboard.

Less than two weeks ago, Chiyoda Life collapsed and, in spite of repeated assurances by the authorities that Chiyoda was the last big problem company in the sector, Kyoei then filed for court protection with Y4,529.7bn (Dollars 41.5bn) in liabilities. Officials are once again at pains to convince worried policyholders that the worst is over.

The problem companies all sold policies with very high promised returns during the bubble years, explains an official at the Life Insurance Association of Japan. "But most companies have completed those payments so the burden is falling," he says.

Nevertheless, doubts remain.

David Threadgold, head of research at ING Barings in Tokyo, says: "I think it would be premature to assume that there will be no more failures."

He thinks this is because the sector's problems are systemic. "Some companies can weather that storm better than others, but they are all in it. And it doesn't appear to me that the storm is over," he says.

The life companies have been hit by a combination of low interest rates, weak stock markets, increasing bad loans and poor investment returns. This has resulted in a negative spread between the returns life insurers promised to policyholders and the returns they make on their investments.

An immediate problem is the effect of recent failures on policy cancellations. For example, Kyoei was forced to seek court protection after Chiyoda's collapse led to a surge in policy cancellations. Other insurance companies could face a similar run.

"There is a risk of the domino effect," says Mr Threadgold. "That way you can actually bust otherwise solvent businesses."

In the longer term, even life insurers that are safely above the danger zone face a bleak future as deregulation and consolidation threaten their survival.

The string of failures is only part of an industry shake-out that has just begun.

The collapse of two big insurance companies in Japan is the beginning of a full-scale implosion of not just the insurance sector, but of the entire Japanese economy. The government in Japan has been slow to institute any reforms of its financial services sector -- the Big Bang that was supposed to take place in 1998 and 1999 was just a whimper as the government put most of the reforms on hold.

Without these reforms, Japan's insurers and banks are heading into a tailspin. Near-zero interest rates and a plummeting Nikkei result in no revenues and terrible returns on investments. Plus, despite low interest rates, Japanese businesses can't pay back loans and banks are forced to swallow bad debts. On top of that, the government routinely calls on the banking sector to prop up failing industries, such as construction, in order to keep constituents happy. The banks just sink further into debt.

Ahead, the horizon looks even darker. The government is counting on consumers to pull businesses out of a 10-year recession and turn the economy around, but retail sales fell for the 42nd consecutive month in September. The recession is quickly turning into a depression in Japan and there is little that can be done to stop it.

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