Sumitomo Life Insurance Company

1907–2003

In order to boost its financial market, Japan began laying the groundwork for deregulation in its finance and insurance sectors, believing that looser regulations and new competition would remedy the problems facing these industries. In 1996, Sumitomo was given the nod to enter its competitor's markets. The company worked diligently to develop new products and services that would give it an edge during the liberalization process, which continued into the new century. In 1999, it launched a long-term care insurance package called Kaigo no Sumisei, becoming the first insurance firm in Japan to offer long-term care insurance options. It also acquired a stake in Taiheiyo Securities and Taiheiyo Investment Trust Management in order to gain a stronger foothold in the financial services market. In 2001, the firm developed Live One, a cutting-edge insurance product that allowed customers access to both life insurance and a variety of financial services.

Meanwhile, Japan's insurance industry continued to be bogged down with problems, and deregulation had yet to prove that it would bring about positive change. In 2000, four life insurance companies in Japan ceased operations, which left many analysts and industry watchdogs expressing doubts with respect to the health of Japan's life insurance companies. Sumitomo forged ahead while low interest rates, and lackluster stock prices wreaked havoc on the firm's bottom line.

Troubles continued in 2003, forcing Sumitomo to restructure in an attempt to shore up earnings. The company also sought out ways to reduce its exposure to risk; these included reducing its equity holdings and lessening the percentage of its high-risk equities to just 6.4 percent of total assets. Sumitomo also set forth a strategy designed to strengthen its position in both the long-term care and medical care insurance fields. As the company worked to restore consumer confidence within the insurance industry as a whole, its fate rested on a turnaround of the Japanese economy. While Sumitomo's longstanding history played in its favor, it faced distinct challenges in the years to come.

Sumitomo Life Insurance Company operates as one of Japan's largest life insurance concerns along with competitors Nippon Life Insurance Company and Dai-Ichi Mutual Life Insurance Company. Through its subsidiaries, the company offers individual, group life, and long-term care policies, as well as pension plans, asset management, and accident, fire, and auto insurance. Sumitomo Life and its peers in the insurance industry have struggled since the mid-1990s as a result of bad loans, competition brought on by deregulation, low interest rates, and a sluggish domestic economy. The company is part of the Sumitomo keiretsu, or business group, which can trace its history to the early 17th century.

Early History

The Hinode Life Insurance Company was founded in 1907 and, from the start, established close business ties with the Sumitomo zaibatsu, or conglomerate. By 1925, these ties had become such that the Sumitomo zaibatsu took over the management of Hinode. Because Hinode was a mutual company, however, it was not owned outright by the Sumitomo zaibatsu but rather by its policyholders. Hinode was certainly a member of the conglomerate, and since much of its business involved other branches of the zaibatsu, those branches, in effect, owned a large part of Hinode.

In 1990, the realty operations had assets of $1.5 billion in office buildings, hotels, and shopping centers.

1926–1990

In 1926, to signify this close relationship, Hinode became The Sumitomo Life Insurance Company. Sumitomo Life continued to expand its business until after World War II, when the Supreme Commander for the Allied Powers ordered Sumitomo and all other zaibatsu to disband.

Like other former zaibatsu, however, the Sumitomo companies--each operating independently--began to come together again, even before the end of the occupation of Japan in 1952. Japanese law prohibited the huge zaibatsu, and the postwar keiretsu were held together by a looser arrangement than were the zaibatsu.

The companies were connected partly by relationships between executives who grew up in the zaibatsu tradition, but financial links between the companies and cross-ownership of stocks were often more important and became stronger as time went on. The Sumitomo Corporation, which operated as the leader of the keiretsu, "has fostered trade among companies within the group, expanded the financial interrelationships, and strengthened formal management ties among companies at the core of the group," stated Business Week (March 31, 1990).

Beginning in the 1950s, the life insurance business in Japan grew and expanded along with both the Japanese economy and the increase in assets of individuals. As the Japanese economy underwent a tremendous expansion in the 1970s and 1980s, the country's life insurance business also went through a transformation of products and markets in the same period. Sumitomo Life's portfolio was continuously adjusted to take advantage of opportunities, such as those presented by changing regulations, which determined what type of products could be offered.

In the 1980s, most life insurance companies fundamentally changed their investment strategies, which meant a decrease in loans to large corporations and an increase in stock purchases. Prior to the 1980s, 20 percent of asset increases were invested in securities and real estate, with the remaining new money used for long-term loans. In the 1980s, the loan market changed and Sumitomo Life had favorable results making loans to small and medium-sized companies. The market had then become more competitive, and with changes in laws regulating the Japanese insurance industry, the majority of funds were reallocated to overseas investments.

Changes Lead to Diversification

1982–1992

The factors affecting the Japanese life insurance business in the late 1980s that in turn guided its operations for the 1990s were the deregulation of Japan's financial industry, which created competition from banks and securities firms; an aging Japanese society in which 13.8 million people in 1990 were 65 or older, with the number increasing steadily; globalization of markets in which Sumitomo Life could offer a variety of services worldwide; unification of the European Economic Community in 1992; the strength of the yen; rising interest rates; fluctuations in the stock market; and the changing lifestyles and values of the Japanese.

Sumitomo Life had responded by providing timely new products and services, by strengthening its internal operations to improve sales and efficiency, and by strengthening its presence and visibility in communities in which it did business. A three-year "New Challenge" plan, instituted in 1989, was aimed at increasing profitability, competitiveness, and efficiency.

A subsidiary, Sumitomo Life Insurance Agency America, was established in 1986 with offices in New York and Los Angeles to provide employee benefit assistance and to act as an insurance advisor concerning overseas employee benefit schemes for Japanese companies around the world. Reinsurance agreements were signed with 17 major life insurance companies in 13 countries. One example was a 1989 agreement with a Mutual of Omaha affiliate, United of Omaha, to market group life, health, dental, and long-term disability contracts to Japanese-owned businesses in the United States and to share in the profit and losses of such a venture. While still new, the program was expected to be highly profitable.

One of Sumitomo's goals during this time period was to be a total life insurance planner and financial advisor to individuals at various stages of their lives. The new products developed in response to a changing society were directed toward two broad categories of the life insurance market: death-benefit policies and survivor-benefit policies. Japan's aging society and large rise in personal assets called for increased single-premium endowment policies, savings policies, and individual pension policies. Sumitomo Life saw a growing need for medical insurance and group pensions for the aging population to supplement the public pension system. In 1990, individual pension policies made up one of the fastest growing areas in the Japanese life insurance industry. Other trends included variable insurance (first introduced in 1986), group life insurance for small companies through their unions and cooperatives, and welfare plans and supplementary packages for medium-sized companies. Since 1988, life insurance companies were allowed to sell government bonds over the counter, and Sumitomo Life was offering new products that combined life insurance with government bonds.

One of the most important ways for a life insurance company to invest its assets was through loans to corporations, government agencies, homeowners, and consumers. In addition, assets could be allocated to capital market activities such as investments in securities and real estate. Sumitomo Life had been strengthening its foreign operations and global investments, as well as diversifying its assets, to remain profitable and competitive in the 1990s. It had learned about employee benefit and social security systems in other countries and had formed relationships with insurance organizations around the world. Sumitomo Life had 13 subsidiaries licensed to invest in securities. Ties with international financial institutions were strengthened with a 1990 agreement forming a new investment advisory firm with Security Pacific Corporation, a California bank, called Sumisei Secpac Investment Advisors. The company also established ties with the Sedgewick Group PLC, the third largest insurance broker in the world, according to which Sumitomo Life would introduce Japanese firms to the Sedgwick Group, which would then advise on insurance matters. In 1982, Sumitomo Life Realty in New York was established to invest in real estate in major U.S. cities. It bolstered its overseas real estate efforts with offices in London and Australia. In 1990, the realty operations had assets of $1.5 billion in office buildings, hotels, and shopping centers. The company also focused on real estate investments in public works and urban development projects.

Sumitomo Life contributed to corporate good-citizenship in 1990 by financing, along with Yamaha Corporation, a musical center in Poland in memory of Polish composer Frederic Chopin, and Izumi Hall, a concert hall at Osaka Business Park, designed for classical concerts, among other such efforts.

1996

A significant move during the early 1990s to increase profitability and reduce risk in rapidly changing financial markets was the development of a computer system to set forth the difference in the fund management techniques used by life insurance companies compared to those of other financial ventures. Users were able to evaluate Sumitomo Life's overall risk level, giving the company a new level of expertise in the industry.

Overcoming Hardships in the 1990s and Beyond

By the early 1990s, Japan's banking sector, along with the insurance industry, was experiencing difficulties brought on by a plethora of bad or non-performing loans and a faltering stock market. During the prosperous years of the 1980s, many banks and insurance companies, including Sumitomo, invested significantly in both real estate and stocks. This investment strategy, however, came back to haunt many companies when the Japanese property market collapsed in the early 1990s.

While better off than many of its counterparts, Sumitomo still felt the pains of its exposure to poor investments. In 1996, the company wrote off $4.58 billion in bad loans--the largest write-off by a life insurer in a single year. To make matters worse, Japan's economy was weakening, its banks were in financial disarray, interest rates were reaching record lows, and, for the first time since World War II, individual life insurance and pension policies were on the decline.