Company Reports

MS&AD Insurance Group Holdings held an IR Day for investors and analysts. This event was notable as it marked Funabiki Shinichiro’s debut as group CEO, succeeding Hara Noriyuki in June. Funabiki and MS&AD are well positioned to discuss significant structural changes in Japan’s nonlife insurance industry that we believe will impact industry sales practices, competitive dynamics, and economic moats for the major players. Unlike rival Sompo Holdings, whose chairman and CEO resigned in March amid an industry scandal, and Tokio Marine Holdings, which may be seen as representing the industry as a whole due to its size and leadership role, Funabiki and MS&AD can offer a more candid perspective.

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 Insurance, 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

MS&AD Insurance Group reported an economic profit of JPY 197 billion for the June quarter, achieving 31% of its guidance of JPY 630 billion for the fiscal year ending March 2025 in the first three months. The core domestic nonlife business contributed JPY 103 billion, 24% of its full-year guidance of JPY 428 billion, as higher-than-expected investment returns, including sales of long-held equities, offset an increase in automobile insurance claims and losses from hail damage in April. The domestic life insurance business contributed JPY 26 billion, 55% of its full-year guidance of JPY 48 billion, as a large number of contracts previously sold by MS Primary Life reached their target prices, leading to a decrease in related policy reserve provisions. Overseas insurance contributed JPY 68 billion, 45% of its full-year guidance of JPY 153 billion. While improvement continued at Lloyd’s syndicate Amlin, whose profitability had been disappointing since shortly after MS&AD bought it in 2016 until 2022, the main drivers of the stronger-than-guided results overseas appear to be in MS&AD’s Asian businesses (where both Mingtai in Taiwan and First Capital in Singapore had quite strong results, supported by good investment returns) as well as a turnaround in Aioi Nissay Dowa’s European business after some issues last year.

MS&AD Insurance’s fiscal 2023 (ended March 2024) adjusted net profit of JPY 380 billion grew 71% year on year, helped by a broad-based turnaround in the domestic property and casualty, life, and overseas businesses. This exceeded revised April guidance of JPY 350 billion by 9%. Fiscal 2024 adjusted net profit is guided at JPY 630 billion, up 66% year on year and above market expectations, driven by 129% and 9.7% growth in the domestic P&C and overseas businesses.

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

Following a 1:3 stock split on March 28, 2024, our fair value estimate for MS&AD has adjusted to JPY 2,000. There are no changes to our view and earnings projections for the company ahead of its full-year results release in mid-May. We view the shares as relatively overvalued, with benefits from Japan's exit from negative interest rates largely reflected in its current share price.

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 around 88% of the market, and only three others (AIG, the nonlife unit of an agricultural cooperative insurer, and Sony Assurance) have even 1% shares.

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, which is also seen at Amlin.

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 around 88% of the market, and only three others (AIG, the nonlife unit of an agricultural cooperative insurer, and Sony Assurance) have even 1% shares.

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 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 around 88% of the market, and only three others (AIG, the nonlife unit of an agricultural cooperative insurer, and Sony Assurance) have even 1% shares.

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 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 around 88% of the market, and only three others (AIG, the nonlife unit of an agricultural cooperative insurer, and Sony Assurance) have even 1% shares.

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 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 around 88% of the market, and only three others (AIG, the nonlife unit of an agricultural cooperative insurer, and Sony Assurance) have even 1% shares.

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 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 around 88% of the market, and only three others (AIG, the nonlife unit of an agricultural cooperative insurer, and Sony Assurance) have even 1% shares.

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.