Friday, October 10, 2008

Yamato Life Insurance First Casualty of Market Collapse

Earlier in the week, I told some Americans that the U.S. financial crisis had not directly impacted Japan. This morning, Yamato Insurance went into bankruptcy procedures under the Corporate Rehabilitation Act. Falling stock prices had already put its finances at risk. Subprime exposure plus the most recent stock market freefall pushed it over the edge. That’s about as close to a direct hit as it can get.

Will there be others? How many? Are going to have worry about the Japanese banks’ asset ratios again? Shades of the 90s.

I’ll be responding to comments on recent posts no later than tomorrow. Hope to make something out of the latest twists and turns in the Diet too.

7 comments:

Martin J Frid said...

With the US governemt giving massive support to AIG, why is Japan not even lifting a finger to help Yamato? I can't even find a single news article that compares the two cases. Strange.

Matt Dioguardi said...

I think it's kind of like this. (I'm not at all sure, but just as an attempt here to understand the situation.):

All the developed countries decided to have a big party called the sub-prime Jamboree.

However, Japan had been partying so hard the previous decade(s) that it was too hungover to go.

At the sub-prime Jamboree, things got a little out of control, all the participants drank so much alcohol (credit), they're nearly on life support now.

However, Japan, being already hung over, and having *missed* the party, actually isn't doing too bad now.

Japan's banks are in *relatively* good condition right now. Also, Japan still has factories and a lot of capital assets. America has got lots of debt and houses (which are a kind of consumable good).

Which country would you rather be in? ;-)

Jun Okumura said...

Martin: The all-purpose AIG is the biggest fish in the US insurance industry. Yamato Life is a relative minnow, ranked 33rd in the Japanese life insurance industry. Moreover, Yamato has very high overhead, which forced it to pursue a high-risk, high-return investment strategy that where it put a disproportionate proportion of its assets in subprime mortgage securities and other risky assets, and took on huge foreign currency risks. The other life insurance companies have been more conservative and are not in danger of collapse. The authorities didn’t see a systemic risk here, and it made sure that this would be the story that got out. It did not prevent the Japanese stock market from taking yet another major hit as the whole world went south.

Matt: That’s why it’s better to be lucky than good. Of course it won’t help to be on the top deck when the whole ship is going down. Let’s hope it’s not.

Martin J Frid said...

Jun, thanks for the clear explanation. Which is exactly why I keep coming back to this blog.

Jun Okumura said...

How nice of you to say that, Martin. You have seen how so many of my predictions have been refuted by the subsequent turn of events, sometimes literally overnight. On the other hand, the facts that I dig up hopefully are of more use to the people who regularly visit my blog and enable them to think and to collectively come up with more useful thoughts than I would ever have been able to on my own.

Now, having said that, a quick look at life insurance giant Nissay’s numbers and those of small-fry Yamato Life does appear to show that the former does take a more conservative approach to equities and non-yen assets than the latter. Moreover, Nissay’s documents tell us that the bulk of its exposure to real estate-backed securities consists of government-guaranteed issues coming from Fannie Mae, Freddy Mac, Ginnie Mae and the Japan Housing Finance Agency; whereas the Yamato Life documents are mute on that point. However, Nissay, like Yamato, took a huge hit on its equity holdings last fiscal year and will absolutely do so again. Likewise, the overseas equity profile of the two life insurance firms look eerily similar—heavily weighted towards Latin America. The herd instinct lives on. With sufficient manpower, I do not think that it will be that difficult to dig through the data on the life insurance industry made available online courtesy of the FSA and to give ballpark estimates of the impact of the ongoing financial crisis and how it affects the solvency of Nos. 2 through 32. In fact, I wish someone would pay me to do it.

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