Japan Insurance: Earnings Strong as Expected, but Dual Scandals Pose Risks

We maintain our fair value estimates for Tokio Marine 8766, 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.

The companies’ economic returns on equity (based on economic earnings divided by economic book value) for the April-June quarter of 13.9% for Tokio Marine, 10.6% for MS&AD, and 12.7% or Sompo were consistent with our forecasts (which we leave unchanged) and management guidance for the year ending March 2024. Tokio Marine achieved 25% of its full-year guidance for economic profit of JPY 670 billion, MS&AD 32% of its guidance for JPY 350 billion, and Sompo 29% of its guidance for JPY 280 billion. If the companies could consistently generate economic ROE above 10% as we forecast for this year, we think they ought to trade above economic book value; however, we only assign a fair value above economic book value to Tokio Marine as it is the only one for which our midcycle economic ROE assumption is double-digit. The global nonlife insurance market is now benefiting from a hard phase in which insurers enjoy pricing power, after many years of a soft phase when abundant liquidity attracted capital into insurance in search of yield. Therefore, it’s possible or even likely that ROEs could normalize lower again beyond our forecast horizon, after a few good years.