EUR 850.00 For Business Accounts Only

Morningstar | Initiating Coverage of Japan's Four Largest Listed Insurers

We are initiating coverage of Japan's four largest listed insurance companies by market capitalization. Our fair value estimates are JPY 5,600 for Tokio Marine (1% above the current share price), JPY 4,600 for MS&AD Insurance (30% upside), JPY 5,500 for Sompo (28% upside), and JPY 2,400 for Dai-Ichi Life (48% upside). We rate all four as no-moat companies, but we expect the three nonlife companies to generate returns near their cost of capital (Tokio Marine highest, followed by Sompo and then MS&AD), while we see Dai-Ichi generating only about a 4% return on its embedded value. Dai-Ichi has the largest upside to our fair value estimate with its low current valuation of 0.30 times embedded value. Relative to book value adjusted for aftertax catastrophe, contingency, and price fluctuation reserves, unrealized gains on securities not marked to market, and the value of in force life insurance, the three nonlife companies currently trade at 0.85 times for Tokio Marine, 0.52 times for MS&AD, and 0.61 times for Sompo, so our fair value estimates place fair value at 0.86 times, 0.68 times, and 0.78 times, respectively. Our fair value estimate for Dai-Ichi puts its fair value at 0.46 times embedded value.

Japan is the third-largest insurance market in the world, accounting for around 10% of global premiums, compared with around 30% in the U.S. and slightly over 10% in China. Penetration of life insurance is rather high in Japan, with premiums amounting to nearly 10% of GDP, as life insurance products play a major role in household savings. Conversely, penetration of property and casualty insurance is relatively low relative to many other developed markets, with nonlife premiums of around 2.4% of GDP, reflecting cultural factors such as relative absence of corporate litigation and economic factors such as a high degree of self-insurance. This means that Japan's life insurance industry is about 3 times larger than its nonlife industry in terms of revenue and profits.

Japan's most valuable listed insurers are not life companies, but nonlife. The two subindustries were strictly separated by regulation until 1996. The bursting of Japan's asset bubble severely affected many life firms, leading to insolvencies of more than a half dozen firms by the turn of the millennium (mostly purchased out of bankruptcy by foreign insurers after policyholders were forced to take a haircut) as well as negative spreads between guaranteed yields and asset returns until around 2010. Today, the industry remains fragmented and most of the big players are mutually owned rather than listed. Dai-Ichi, the second-largest private-sector player after mutually owned Nippon Life, is an exception, having converted to a stock company and listed in 2010.

Conversely, the nonlife industry was always amply capitalized and has benefited from the consolidation of roughly 15 firms into just three major players with combined market share of more than 85% by 2011. The return on assets of the nonlife industry, which had been below 1% until about five years ago, has since doubled to around 2% in the past four years, reflecting the survivors' improved market power. This, combined with strong capital positions, has allowed the nonlife companies to boost shareholder returns significantly while pursuing overseas acquisitions and penetrating the domestic life market by cross-selling through their nonlife sales channels. Going forward, we expect the domestic nonlife business to grow in line with nominal GDP at around 2% and the nonlife companies’ domestic life business to grow at around 4%-5% as they continue to slowly expand market share, but we think overall revenue and profits can grow at around a 5% pace thanks to organic and inorganic growth overseas. We think shareholder returns in the form of dividends and buybacks can sustainably grow at a 6% compound annual growth rate, if not higher, as the firms increase their payout ratios and gradually free excess capital.