EUR 850.00 For Business Accounts Only

Morningstar | MS&AD Company Report

We think Japan’s nonlife insurance sector has more appeal as a long-term investment than most other areas of Japanese finance because industrywide return on assets, or ROA, has roughly doubled after the last round of industry consolidation in 2010. Three firms--Tokio Marine, MS&AD, and Sompo--control more than 85% of the market, and only three others (AIG, the nonlife unit of an agricultural cooperative insurer, and Sony Assurance) have even 1% shares. Top-line percentage growth in the industry is only in the low single digits, but nonlife premium penetration as a percentage of GDP is lower than most other countries and the nonlife companies--unlike Japan’s banks or life insurers--did not suffer from the burst of Japan’s 1980s bubble. On the contrary, conservative Japanese accounting and regulatory requirements to make provisions for large catastrophes and other reserves have left them with available capital, which they are now allocating to increased shareholder returns and overseas acquisitions that boost top-line growth.Among the three insurers, MS&AD has the smallest amount of excess capital, in our view, and the most exposure to fluctuations in Japanese stock prices. However, it trades at a lower multiple of its adjusted net worth and has more potential to improve domestic and overseas profits than its rivals. Tokio Marine and Sompo have both integrated most of their domestic nonlife operations into a single unit, which in Tokio Marine’s case has resulted in a lower-than-peers expense ratio (in Sompo’s case the full integration has only happened recently, so benefits may come in future). In contrast, MS&AD has not fully integrated its merged operations, because rather than having one firm acting as “first among equals” like Yasuda Fire has done for Sompo (or Tokio Marine did all along), it is the product of a three-way merger in 2010 combining Mitsui Sumitomo Insurance with insurers related to Toyota and Nippon Life. If these can be merged without disrupting the benefits of the Toyota connection, we see upside. Also, MS&AD’s 2017 acquisition of Amlin got off to an inauspicious start but could improve.