Company Reports

We relaunch full coverage of Japanese insurers Tokio Marine Holdings, MS&AD Insurance Group, Sompo Holdings, and Dai-Ichi Life Holdings. The Topix Insurance Index has risen 38% in 2024, the best performance among 33 Topix sectors and versus a 7% rise in the broad Japanese stock market.

Market concentration is relatively high in Japan in property and casualty insurance. Three firms—Tokio Marine, MS&AD, and Sompo—together have 88% share, and only three others (including AIG, the nonlife unit of an agricultural cooperative insurer, and Sony Assurance) have even 1%. Despite this high concentration, we do not think the three leading firms possess economic moats in Japan, as they offer comprehensive nonlife insurance products to all customer segments, not merely focusing on the most profitable or most attractive. Moreover, auto and fire policies sold to consumers, while deregulated since 1996, still must reference historical loss cost ratios in their pricing. Nonlife insurance in Japan (including the traditional business sold through agencies and direct business sold online) accounts for around 48% of Tokio Marine's total earned premiums.

Tokio Marine reported economic profit of JPY 233 billion for the June quarter, 23.3% of its full-year target of JPY 1 trillion, a lower progress rate for the fiscal first quarter than the five-year average of 33%, as economic profit in its domestic nonlife business of JPY 10.3 billion was only 9% of that business’ full-year target of JPY 113 billion. This reflected losses of around JPY 34 billion from hail damage in Japan's Hyogo prefecture in April and a negative JPY 25 billion hit from foreign exchange. However, we regard Tokio Marine as on track to meet its overall full-year guidance thanks to continued strength in overseas insurance (whose economic profit of JPY 125 billion reached 27% of that business’s full-year target of JPY 455 billion, with strength in particular at Delphi Financial and HCC) as well as likely full-year upside to the international business from foreign exchange, notwithstanding recent strengthening in the yen.

Tokio Marine’s fiscal 2023 (ended March 2024) adjusted net profit of JPY 711.6 billion grew 60% from fiscal 2022, which was hit by losses related to covid-19 and natural catastrophes. This exceeded the company’s JPY 690 billion guidance by 3% on lower winter storm loss at Japan P&C and better-than-expected gains from shareholding reduction. The company introduced a new medium-term plan, targeting a 16% three-year earnings per share compound annual growth rate, driven by 15% and 1%-2% respective growth from adjusted net income and share buybacks, after considering capital gains from shareholding reduction, which is expected to boost growth by 8%. Thanks to strong earnings growth and share buybacks, we believe the company can achieve its adjusted return on equity target of over 20% to get on par with global peers starting in fiscal 2024. We believe the impact of accelerated shareholding reduction is factored in. We suggest investors pay attention to dividend yield, given earnings downside risk in capital gains caused by bond mark-to-market loss on higher domestic interest rates. The company's fair value estimate and ratings are under review pending the transfer of coverage to another analyst.

While we will continue to comment on key events, we are placing Tokio Marine's fair value estimate and ratings under review pending the transfer of coverage to another analyst. We should be reinitiating coverage by end-July, 2024.

The December-quarter earnings for Japan’s leading insurers Tokio Marine and MS&AD reflect a solid performance in their nonlife profit, and for MS&AD, a surprisingly strong performance at its overseas business Amlin. We think the impact of higher prices is flowing through to their bottom lines, and this is also now being seen at Amlin. We raise our fair value estimate for MS&AD to JPY 5,800 from JPY 5,000 and for Tokio Marine to JPY 3,400 from JPY 3,300. We think the positive trends are reflected in current share prices, especially for Tokio Marine, which continues to trade at 3 times price/book. MS&AD trades on 1 time price/book and the market is pushing its share price higher on the positive earnings surprise. We think both insurers are expensive at current share prices.

We think Japan’s nonlife insurance sector has more appeal as a long-term investment than most other areas of Japanese finance, such as banking, securities, or life insurance, because industrywide return on assets has roughly doubled after the last round of industry consolidation in 2010. Three firms—Tokio Marine, MS&AD, and Sompo—stably control around 88% of market share, and only three others (including AIG, the nonlife unit of an agricultural cooperative insurer, and Sony Assurance) have even 1%.

We've revised Japanese insurers’ fair value estimates as higher interest rates and a weak Japanese yen boost investment returns. Tokio Marine's climbs by 16% to JPY 3,300, MS&AD Insurance’s by 6% to JPY 5,000, Sompo’s by 7% to JPY 6,500, and Dai-Ichi Life’s by 11% to JPY 3,000.

We think Japan’s nonlife insurance sector has more appeal as a long-term investment than most other areas of Japanese finance, such as banking, securities, or life insurance, because industrywide return on assets has roughly doubled after the last round of industry consolidation in 2010. Three firms--Tokio Marine, MS&AD, and Sompo--stably control around 88% of market share, and only three others (including AIG, the nonlife unit of an agricultural cooperative insurer, and Sony Assurance) have even 1%.

We maintain our fair value estimates for Tokio Marine, MS&AD Insurance, and Sompo Holdings of JPY 2,850, JPY 4,700, and JPY 6,100, respectively, 9% below the current share prices of Tokio Marine and MS&AD and 1% below Sompo’s current share price. Our fair value for Tokio Marine puts it at a multiple of 1.04 times tangible book value adjusted for catastrophe, contingency, and price fluctuation reserves, unrealized gains on bonds not marked to market, and the value of in-force life insurance business, compared with its five-year average multiple of 0.89 times. Our fair value for MS&AD is 0.47 times its book value with the same adjustments, compared with MS&AD’s five-year average of 0.45 times, and our fair value for Sompo is 0.63 times its adjusted book value, compared with a five-year average of 0.58 times.

We lift our forecasts for Japanese insurance companies. Our fair value estimates rise by 19% for Tokio Marine to JPY 2,850, by 9% for MS&AD Insurance to JPY 4,700, by 9% for Sompo Holdings to JPY 6,100, and by 4% for Dai-Ichi Life to JPY 2,700. The changes mainly reflect increases in our assumptions for investment returns, as higher interest rates, the weaker yen, and favorable Japanese equity markets more than offset increased hedging costs. As a secondary factor, the changes also reflect increases in our assumptions for Tokio Marine’s and Sompo’s overseas underwriting returns. Exposure to U.S. commercial real estate, or CRE, is a concern for both Tokio Marine and Dai-Ichi Life, but our forecasts do not assume CRE-related losses would be large enough to derail the overall earnings growth trajectory.

We think Japan’s nonlife insurance sector has more appeal as a long-term investment than most other areas of Japanese finance, such as banking, securities, or life insurance, because industrywide return on assets has roughly doubled after the last round of industry consolidation in 2010. Three firms--Tokio Marine, MS&AD, and Sompo--stably control around 88% of market share, and only three others (including AIG, the nonlife unit of an agricultural cooperative insurer, and Sony Assurance) have even 1%.

We retain our fair value estimates of JPY 2,400 for Tokio Marine Holdings, JPY 4,300 for MS&AD Insurance, JPY 5,600 for Sompo Holdings, and raise our fair value estimate for Dai-Ichi Life Holdings to JPY 2,600 from JPY 2,500. Our estimates represent 0.96 times book value for Tokio Marine adjusted for catastrophe, contingency, and price fluctuation reserves, unrealized gains on bonds not marked to market, and the value of in-force life insurance business; 0.50 times book value for MS&AD with the same adjustments; 0.68 times book value for Sompo with the same adjustments; and 0.37 times embedded value for Dai-Ichi Life, reflecting the divergent midcycle returns on economic book value.

We think Japan’s nonlife insurance sector has more appeal as a long-term investment than most other areas of Japanese finance, such as banking, securities, or life insurance, because industrywide return on assets has roughly doubled after the last round of industry consolidation in 2010. Three firms--Tokio Marine, MS&AD, and Sompo--stably control around 88% of market share, and only three others (including AIG, the nonlife unit of an agricultural cooperative insurer, and Sony Assurance) have even 1%.

We maintain our fair value estimates of JPY 4,300 for MS&AD Insurance, JPY 5,600 for Sompo Holdings, and JPY 2,500 for Dai-Ichi Life Insurance, and round up our fair value estimate for Tokio Marine to JPY 2,400 from JPY 2,333 post-split (JPY 7,000 before its three-for-one stock split). These are equivalent to 0.97 times book value per share adjusted for catastrophe, contingency, and price fluctuation reserves, unrealized gains on bonds not marked to market, and the value of in-force life insurance business for Tokio Marine, 0.50 times book value per share adjusted on the same basis for MS&AD, 0.65 times the same for Sompo, and 0.36 times embedded value for Dai-Ichi Life. There is 13% downside from the current price to our fair value for Tokio Marine, 9% upside for MS&AD, and 6% upside for Dai-Ichi Life, while Sompo shares are trading very near our fair value.

We think Japan’s nonlife insurance sector has more appeal as a long-term investment than most other areas of Japanese finance, such as banking, securities, or life insurance, because industrywide return on assets has roughly doubled after the last round of industry consolidation in 2010. Three firms--Tokio Marine, MS&AD, and Sompo--stably control around 88% of market share, and only three others (including AIG, the nonlife unit of an agricultural cooperative insurer, and Sony Assurance) have even 1%.

We maintain our fair value estimates of JPY 7,000 for Tokio Marine, JPY 4,300 for MS&AD Insurance, and JPY 4,300 for Sompo Holdings after the three Japanese insurers’ results for April-June, the first quarter of their fiscal years ending March 2023. Shares of Tokio Marine fell 4.9% Monday, MS&AD shares dropped 6.4%, and Sompo shares were off 1.9%. Tokio Marine’s premium to our fair value estimate has thus narrowed to 5% and MS&AD now trades at a discount of 7% to our fair value. Sompo shares are 1% above our fair value.

We raise our fair value estimates for Japan’s three property and casualty insurers by 7.5%-7.7% and our fair value estimate for Dai-Ichi Life by 4.2% as we roll our forecast models forward a year and incorporate recently reported results. Our new fair value estimates are JPY 7,000 per share for Tokio Marine, equivalent to 0.89 times book value adjusted for catastrophe, contingency, and price fluctuation reserves, unrealized gains on bonds not marked to market, and the value of in-force life insurance business; JPY 4,300 for MS&AD Insurance, 0.47 times book value with the same adjustments; JPY 5,600 for Sompo, 0.60 times adjusted book value; and JPY 2,500 for Dai-Ichi Life, 0.36 times embedded value.

We think Japan’s nonlife insurance sector has more appeal as a long-term investment than most other areas of Japanese finance, such as banking, securities, or life insurance, because industrywide return on assets has roughly doubled after the last round of industry consolidation in 2010. Three firms--Tokio Marine, MS&AD, and Sompo--stably control around 88% of market share, and only three others (including AIG, the nonlife unit of an agricultural cooperative insurer, and Sony Assurance) have even 1%.

We think Japan’s nonlife insurance sector has more appeal as a long-term investment than most other areas of Japanese finance, such as banking, securities, or life insurance, because industrywide return on assets has roughly doubled after the last round of industry consolidation in 2010. Three firms--Tokio Marine, MS&AD, and Sompo--stably control around 88% of market share, and only three others (including AIG, the nonlife unit of an agricultural cooperative insurer, and Sony Assurance) have even 1%.