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

Securities In This Article
Tokio Marine Holdings Inc

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.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Michael Makdad

Senior Equity Analyst
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Michael Makdad is a senior equity analyst for Ibbotson Associates Japan, Inc., a wholly owned subsidiary of Morningstar, Inc. He covers financial and real estate firms. Makdad is a Team Leader for the Japan team.

Before joining Morningstar in 2018, Makdad worked in equity and credit research in Tokyo and Hong Kong since 2005 for Lehman Brothers, Nomura, Moody’s, and Haitong Securities. He worked as a sector analyst and in roles where he supervised the research product content and presentation for other analysts across the Asia region.

Makdad holds bachelor’s and master’s degrees in business administration from Washington University in St. Louis. He also holds the Chartered Financial Analyst® designation.

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