Dai-Ichi Life Earnings: Benefit From Higher Yen Interest Rates Offset by Countervailing Factors

We are maintaining our fair value estimate of JPY 2,700 for Dai-Ichi Life Holdings 8750 after its first-quarter earnings for the fiscal year ending March 2024. This estimate is equivalent to 0.35 times the embedded value and is nearly equal to the current share price.

Historically, Japanese life insurers’ share prices have shown a strong correlation with long-term interest rates. When rates rise, life insurers’ share prices tend to benefit, while declining rates often lead to suffering prices. However, though we expect yen long-term interest rates to rise somewhat, we believe Japanese bank shares have more upside at present than Dai-Ichi Life (see our Aug. 2 note: “Japan Banks: We Raise Our Fair Value Estimates After Monetary Policy Change, but Normalization Will Be Slow.”)

Higher yen interest rates should have a positive effect on both Dai-Ichi Life’s domestic value of new business, or VNB, and on some components of its earnings, but the positive impact on earnings may be offset by other negative factors, such as increased currency hedging costs amid higher U.S. dollar interest rates and a weak yen. The company revised its guidance for these to JPY 80 billion from JPY 70 billion after first-quarter hedging costs came in above plan. Although first-quarter adjusted profit of JPY 82.5 billion exceeded 30% of full-year guidance of JPY 270 billion —thanks to removal of COVID-19 losses that hurt results last year and upside at Australian unit TAL in part related to an accounting change—we do not see annual adjusted profit rebounding to the JPY 296 billion seen two years ago, because in addition to rising hedging costs, there are other headwinds as well, such as potential credit losses on regional bank debt at the Alabama-based Protective unit and a slowdown at Dai-Ichi Life Vietnam due to stricter regulations on bancassurance sales. Broadly, we expect Dai-Ichi Life to meet its guidance but do not see much further earnings upside this year.