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UPDATE 2-Japan's Yamato Life fails with $2.7 bln in debt

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TOKYO, Oct 10 (Reuters) - Japan’s Yamato Life Insurance Co, an unlisted midsized insurer, failed with $2.7 billion in debt on Friday, the first Japanese financial institution to collapse due to global market turmoil stemming from the subprime crisis.

But Japanese ministers and market participants said Yamato, which pursued higher risk investments, was not typical of Japan’s insurance sector and that its collapse did not mean other financial firms would follow.

“It didn’t fail because Japan’s financial system wasn’t working right, or liquidity in Japan stalled or anything like that,” said Masanaga Kono, a strategist at Societe Generale Asset.

“I doubt that other companies were taking as much risk.”

Economics Minister Kaoru Yosano said there was no other problem insurers.

“It is the smallest company in our nation’s insurance sector,” he told reporters. “The incident is a failure of a company that had a unique business model.”

Yamato's collapse came amid a 8 percent tumble in Tokyo's Nikkei stock average .N225, as investor fears grew that intensifying market turmoil heralded a global recession.

The firm’s bankruptcy was the fifth-largest this year in terms of debt, and the latest insurer to go bust since Tokyo Life in 2001, research firm Teikoku Databank said.

Yamato said it had been actively pursuing investment returns to cover high operational costs, allocating a relatively big proportion of its investments to alternative assets, including hedge funds and REITs.

“The worldwide drop in asset value triggered by the subprime shock was unexpectedly large,” Yamato president Takeo Nakazono told a news conference.

Tokyo-based Yamato said its half-year net loss was estimated at 11 billion yen and its negative net worth -- the amount by which its debts exceed its assets -- is likely to have totalled 11.5 billion yen at the end of September.

Yamato filed for court protection earlier on Friday, which authorises the court to prohibit the insurer from taking policy cancellations and selling new policies.

Most of the more than 170,000 individual contracts will be protected by the Life Insurance Policyholders Protection Corporation of Japan, but insurance money and pension benefits payable to the policyholders may be cut, a Yamato spokesman said. (Additional reporting by Sachi Izumi and Yuzo Saeki; Editing by Hugh Lawson)

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