Analyst Note| Michael Makdad |
We raise our fair value estimate for Dai-ichi Life Insurance to JPY 2,200 from JPY 2,100 after the company raised its guidance for adjusted profit in the fiscal year ending March 2021 from JPY 180 billion to JPY 210 billion. On a financial-accounting basis, it raised its bottom-line guidance for the year from JPY 184 billion to JPY 262 billion. The drivers of the upward revision are complex but mainly come down to the recent resilience of financial markets. The upward revision would have been larger but Dai-Ichi Life increased the size of its planned cession of negative-value liabilities this year from JPY 50 billion to JPY 300 billion (about 0.6% of its total underwriting reserves), on which it expects to book a special loss of JPY 83 billion. We think the larger-than-planned cession reflects not only that there was a counterparty willing to assume this size of liabilities for close to their embedded value, but also that Dai-Ichi Life had more cash available to pay the counterparty than originally budgeted thanks to strong financial markets. The fact that there are counterparties willing to take Dai-Ichi Life's liabilities at around 1 times embedded value when the whole company trades at only 0.28 times is evidence of undervaluation, in our view. Our fair value estimate of JPY 2,200 values Dai-Ichi Life at 0.34 times embedded value (versus our expected midcycle ROEV of around 4%) and represents 16% upside from the current share price.