PUK - Tokio Marine: High-Quality Business Aiming For Sustained Growth

Summary

• Tokio Marine is a high-quality insurance business, delivering stable dividend growth to shareholders.
• It aims to compete successfully against global market leaders with dominance in its domestic market, and targeted global diversification.
• With the shares trading on PBR FY3/2023 at 1.1x versus global peers at 1.5x, we rate the shares as a buy.

Investment thesis

Tokio Marine Holdings ( TKOMY ) is a high-quality franchise, executing a growth strategy via its core domestic stronghold in the non-life market and global diversification. With a strong track record of increasing shareholder returns and trading on PBR FY3/2023 1.1x, we rate the shares as a buy.

Quick primer

Tokio Marine Holdings is a multinational insurance company based in Japan. It is the largest property/casualty insurance group in its domestic market and is also a key life insurance provider. With a growing global footprint via organic growth and M&A, the company operates in developed markets such as the US and UK, as well as emerging markets such as Thailand, Malaysia, and Brazil. Key overseas acquisitions have been Kiln (the underwriting division within Lloyd’s China), Philadelphia Insurance ((US)), Delphi Financial Group ((US)), HCC Insurance Holdings (specialty insurance player in the US), and PURE Insurance ((US)). Profits are split 50:50 between Japan and overseas.

Key domestic peers include Nippon Life, Japan Post Insurance ( JPPIF ), Dai-ichi Life ( DCNSF ), JA Kyosai, and Meiji Yasuda ( MEJHF ) in life insurance. Key global peers include Zurich Insurance ( ZURVY ), Prudential Group ( PUK ), and Aegon ( AEG ).

Key financials with consensus forecasts

Our objectives

Tokio Marine is a challenger to the larger multinational insurance companies, but its shares have been resilient over the last 12 months. We want to assess the outlook for the company, given lingering concerns over COVID-19 in Asia, and the company's ability to maintain an uptrend in dividends.

Demonstrating high-quality earnings

During Q1-2 FY3/2023, there were large insurance claim payments related to domestic natural catastrophes, floods in South Africa, and COVID-19-related cases in Taiwan. Consequently, reported FY net income guidance (hence not adjusted for transient factors) fell from JPY550 billion/USD4.2 billion to JPY400 billion/USD3.1 billion (a decline of 27%) ( page 29 ).

Like any insurance business, Tokio Marine will experience a host of unexpected events. However, the goal is to demonstrate that when performance when normalized for transitory factors, it remains on a positive trajectory. Q1-2 FY3/2023 results exemplify this, with normalized guidance for FY3/2023 adjusted income being fractionally raised by 2% ( page 30 ) through strong underwriting in overseas markets.

Factors that make Tokio Marine a quality insurance business stem from the following three areas. Firstly, for the domestic non-life business, the combined ratio (incurred losses and expenses as a percentage of earned premiums) was at 104.6% for Q1-2 FY3/2023, above 100% denoting a loss-making business ( page 18 ). However, premium growth was firm at 7.6% YoY, which is a positive indication that the combined ratio should drift lower over time and should go back to below 100% for the FY (company guidance is at 99.6%). Secondly, the company has a global business which gives it a diversified income stream, and a combination of rate increases and underwriting expansion resulted in international premiums growing strongly at 12.7% YoY. Thirdly, the economic solvency ratio (proportion of capital base to the corresponding risk-based capital requirement) of 122% remains within the target range between 100% and 140% ( page 42 ).

A stable business with underlying growth enables the company to continue raising dividends, as we investigate next.

Shareholder returns are a key goal

The company is aiming for consistent growth in dividends underpinned by EPS growth. For FY3/2023 the company is guiding dividends at JPY100 per share, with an implied payout ratio of 48.5%. This year the company has conducted a 3-for-1 stock split and is committed to a JPY100 billion/USD0.7 billion share buyback.

With the market expecting stable dividend growth, consensus forecasts (see Key Financials above) have earmarked dividend payments to increase for the next 2 years - and the company has stated in principle that dividends will not be decreased going forward. FY3/2023 dividends see 11 years of consecutive growth - quite rare in Japan, and a trend that management appears keen to continue. The company actively allocates excess capital to either M&A or shareholders, conducting a disciplined capital policy.

Valuation

On consensus forecasts, the shares are trading at PBR 1.1x for FY3/2023, which is significantly below its global peer average of 1.5x. The estimated dividend yield of 4.1% for FY3/2024 is low compared to its global peers of 5.8%. Tokio Marine's reported ROE is not high at around 10% but is comfortably covering its stated cost of capital of 7% ( page 7 ) to generate returns.

Risks

Upside risk comes from conducting high ROI M&A transactions, as previously seen with overseas expansion. With the company focused on global risk diversification, there could be more earnings accretive bolt-on deals to come.

Continued stable execution should result in increasing shareholder returns, through a combination of increasing dividends and buybacks.

Downside risk comes from the inability to fully offset cost inflation challenges that impact claims for medical, wages, and social inflation challenges.

Rate increases for premiums do not exceed market rate growth, which will make it harder to maintain earnings growth as well as to cover its cost base.

Conclusion

We view Tokio Marine as a high-quality franchise, running an established domestic business as well as expanding into specialist overseas markets providing a competitive edge. Valuations do not look demanding and although not quite reaching the top league of global insurance companies, is making significant inroads to establish itself as a strong challenger. On PBR 1.1x and a strong capital base, we rate the shares as a buy.

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