Japanese Insurance: Hard Market Benefits P&C Insurers’ Returns, but Share Prices Look Fair

We lift our forecasts for Japanese insurance companies. Our fair value estimates rise by 19% for Tokio Marine 8766 to JPY 2,850, by 9% for MS&AD Insurance MSADY to JPY 4,700, by 9% for Sompo Holdings NHOLF to JPY 6,100, and by 4% for Dai-Ichi Life DCNSF 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.

Our fair value estimate for Tokio Marine would put it at a multiple of 1.12 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, 6% below its current multiple of 1.19 times but well above the five-year and 10-year historical averages of 0.87 and 0.79 times, respectively. Our fair value estimate for MS&AD puts it 0.52 times book value with the same adjustments, near its current multiple of 0.53 and slightly above five- and 10-year respective averages of 0.45 and 0.48 times. Our fair value estimate for Sompo puts it at 0.63 times adjusted book, 4% above 0.61 currently and versus five- and 10-year respective averages of 0.58 and 0.55 times. Our fair value for Dai-Ichi Life puts it at a multiple of 0.36 times market consistent embedded value, above its current multiple of 0.32 and its five-year average of 0.33 times but in line with its 10-year average. We therefore see the sector in general as fairly priced, with Dai-Ichi Life somewhat attractive with 12% upside to fair value.