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At the companyÆs last press conference held at the Bank of JapanÆs headquarters, Takeo Nakazono, president of Yamato Life in Tokyo, said the global financial market chaos and credit crunch caused a rapid fall in the value of YamatoÆs securities. He said the company had tried to strengthen its risk management capabilities, but the final outcome was beyond expectations and regrettable.
Nakazono was hired by Yamato with a mission to boost margins from the insurerÆs asset management unit. He was originally a senior investment banker at Nikko Securities which was then JapanÆs third largest securities brokerage and is now part of Citi.
In the end, YamatoÆs failure was blamed on NakazonoÆs push to increase the firmÆs overseas equities exposure and diversify into alternative assets, which, in the end, accounted for nearly one-third of YamatoÆs investment assets. As liquidity drained from the market, Yamato could not unwind its leveraged bets in Reits, which caused a fatal asset-liability mismatch of about Ñ11.49 million.
Shoichi Nakagawa, JapanÆs finance minister, says YamatoÆs bankruptcy is an isolated case, and had stemmed from its investment policy that favoured high-yielding securities. The present situation is regrettable, he says, but by no means an indication of the broader health of JapanÆs insurance industry.
According to YamatoÆs financial results for the year ending March 31, 2008, it had total assets of Ñ283.1 billion ($2.86 billion) û a figure already showing serious haemorrhaging compared to its 2007 figure of Ñ300 billion yen.
Footnotes in the financial report state that it had recorded a revenue of Ñ2.13 billion from its investments but lost Ñ106 million on the revaluation of securities and financial derivatives and another Ñ70 million from loan write-offs. These figures were later revealed to be understated and Yamato was forced to recalculate the losses.
Janet Li, a senior investment consultant at Watson Wyatt in Hong Kong, says the financial turmoil has made it necessary to re-examine long-held assumptions in the behaviour of asset classes and investment modelling principles. The past years of stability had led many clients to become misguided about risk controls.
She says Watson Wyatt had urged many of its clients to æde-riskÆ their portfolios earlier this year. But there were those who contested the advice, and went on to layer their portfolios with higher unnecessary risks that exceeded their liability requirements. The prevalent thought at the time was ôitÆs cheapö.
Yamato is not alone in its thinking to seek higher-yielding assets. It made its investment choices based on JapanÆs aging population and the low-yielding environment for domestic securities. These natural conditions breed asset-liability mismatches, which is a picture that Asian insurers in markets such as China and Taiwan are not unfamiliar with.
Most insurers in these markets complain that they do not have sufficient access to duration and yields.
The present crisis will be a major wake-up call for both insurers and local authorities in renewing the urgent need to deepen and broaden AsiaÆs domestic fixed-income markets. While an incomplete yield curve exists, insurers will respond to the inherent market inadequacies by seeking opportunities elsewhere, where regulations permit.
This can lead to unhealthy binges in high-risk, high-yielding asset classes. Binges like these should be nipped in the bud before YamatoÆs fate is mirrored elsewhere.
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