Japan’s Kyoei Life collpases with $ 41.57 bn debts

The failure of Kyoei, with debts of 4.5 trillion yen ($ 41.57 billion) at the end of March, eclipsed the previous record-holder for bankruptcy debt, Chiyoda Mutual Life Insurance Co, which went under just 11 days earlier with 2.94 trillion yen in debt. "The recent series of failures at life insurers fanned fears about our credibility, resulting in poor sales of new policies and cancellations of old ones," Kyoei Life said in a statement.

Kyoei Life president Shoichi Otsuka told reporters the company had a negative net worth of 4.5 billion yen at the end of September, while its solvency margin ratio, a key gauge of its ability to meet claims, had neared the 200 per cent warning level.

He also submitted his resignation on Friday. The government played down the likely effect of the recent insurer failures on Japan’s struggling economy, but acknowledged they could undermine corporate confidence. "There is a safety net system for life insurers, so they won’t have a big impact on the economy," economic planning vice minister Takashi Nakanomyo told reporters. "But they could hurt corporate sentiment, so we cannot say there will be no impact."

Japan’s bankruptcy debt was already at a post-war high of $ 101 billion in the April-to-September period, up nearly 50 per cent from a year earlier, as a growing number of firms are swept away by the economy’s rush to restructure.

News of Kyoei Life’s failure triggered a drop in the yen and trimmed some of the Japanese stock market’s robust gains, but traders said the news was little surprise after months of rumours about trouble at several life insurers.

The Tokyo stock market’s benchmark Nikkei average of 225 leading shares ended the day up 2.6 percent at 15,198.73, after having risen as much as 3.4 percent during the session. "Its (Kyoei’s) weak financial health had been talked about for two years or so and it was a only matter of time before we heard something like this," said Kenji Kobata, managing director at Ace Securities’ research department.

Kyoei Life, Japan’s 11th largest life insurer in terms of assets, is the sixth postwar failure in the battered sector, reeling from a triple blow of falling premium income, low investment returns and weak share prices.

The company was pressed to seek court-led rehabilitation after it was unable to rebuild its business through an alliance with Prudential Insurance Co of America, which agreed in June to take a minority stake in it.

Prudential said on Friday it was ready to provide financial help for Kyoei’s court-led rehabilitation, following in the footsteps of American International Group (AIG), the world’s biggest insurer by market value, which was appointed to help rebuild Chiyoda Life. "We had been aware that Kyoei had a comparatively weak financial base," said Runa Ichihari, associate director of insurance ratings at credit rating agency Standard & Poor’s.

"I don’t think the industry has seen the worst in terms of falling policies and total assets," she said, adding there was a growing gap between major insurers and frail, smaller ones. More than 90 percent of Japanese households hold life insurance policies, a popular means of saving for retirement, but there is growing wariness about insurers’ financial health.

Particularly worrisome is the wide gap between relatively generous payments promised on policies, especially those taken out during an asset-price bubble a decade ago, and returns on insurers’ investments, which tumbled in recent years as the economy entered a prolonged recession and interest rates slumped.

Powerful foreign players have also rushed to enter the sector to take the advantage of a deregulatory drive that began in 1998, further heightening competition in a shrinking market.