Tokio Marine Holdings: Poised To Benefit From Emerging Markets

seekingalpha04-26

Tokio Marine Holdings has a strong track record as a global insurance company, with a strong underwriting and share price performance.The company is well diversified across the global economy and has ...

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I believe the company is well diversified across the global economy and its emerging market exposure will allow it to continue to deliver strong profits going forward. In particular, I like its exposure to Thailand and other Asian economies as they are seeing growing economies, which will likely bring more underwriting opportunities to Tokio Marine. With strong financial strength and continued growth, I believe Tokio Marine is a buy. Company Overview The company has a mission \"to be a good company\" according to its main website. Headquartered in Tokyo, Japan, the company boasts a storied history going back all the way to 1879. Investors can see the company has been resilient and has survived many ups and downs, giving me some confidence in the long-term stability of the business. According to their website, they aspire to be \"a global insurance group that delivers sustainable growth by providing safety and security to customers worldwide\". As a group holding company, they have 4 groups: non-life insurance companies, life insurance companies, international insurance companies, and other businesses. Their underwriting portfolio is 56% international and 44% domestic, while being #1 in Japan according to their website. Their latest Q3 2023 results show consistent growth, with underwriting income increasing 4.5% from 4.4 Trillion JPY to 4.6 trillion JPY for nine months ended December 31, 2023. Investment income went from 651 billion JPY to 885 billion JPY, a 36% increase YoY. Overall, ordinary profits went from 361 billion JPY to 590 billion JPY, increasing by 63% YoY. (Investors should note the fiscal year for Tokio Marine ends in March 31, so the quarters are off by one.) Investors can see the company achieving very strong growth as profits, investment income, and underwriting income are all up significantly. Q3 2023 FY results Most of their net premiums written comes from voluntary automobile, which accounted for 35.6% of all the net premiums. The next highest is fire and allied lines, (which covers fire, lightning, explosions, etc.) makes up 19.6% of total net premiums. Investors can see that Tokio Marine primarily writes auto and fire insurance, which totals up to around half of their net premiums written for nine months ended December 31, 2023. Q3 2023 FY Results The simple way I like to think about Tokio Marine is that it's a massive Japanese insurance conglomerate, with diverse operations in 40+ countries and primarily focused on property and casualty insurance. As always, the core of any insurance company is underwriting and investing, and based on Tokio Marine's track record I think they have the resources, culture and experience to continue to grow profitably and be \"a good company\". Emerging Markets Is A Growth Opportunity What attracts me to Tokio Marine is their growing exposure to emerging markets, which are seeing solid growth and demanding more insurance to cover their risks. In particular, Thailand looks very attractive to me and the company has recently discussed its growth opportunities and prospects in a Tokio Marine insights on their IR site. According to Insurance Asia, \"The general insurance industry in Thailand is anticipated to experience a compound annual growth rate of 5.7%, rising from $8.1 billion in 2023 to $11 billion in 2027 in terms of gross written premiums, according to GlobalData.\" The vast majority of this growth comes from motor insurance, which makes up \"54.8% of the GWP in 2022, is expected to grow by 5.6% in 2023\". I believe as emerging markets grow in terms of population, GDP, disposable incomes, businesses and individuals are more concerned about covering themselves and thus want insurance. For Tokio Marine, that's good news, as they have a strong balance sheet and a liquid investment portfolio to support increased underwriting capacity in emerging markets. One of their main strengths in Thailand is that they have \"quick onsite survey arrangements\" which allows them to streamline their claims process fast and give customers strong satisfaction. I like their \"diversified distribution channel\" between dealers, brokers, and businesses because it gives Tokio Marine the flexibility to adapt to market changes. I see the motor insurance growth in Thailand as one example of how EM growth can lead to more underwriting profits for Tokio Marine, as they have the resources to do strategic M&A deals to capture global growth opportunities. Investor Presentation I believe in the future, the vast majority of insurance premium growth will come from places outside the USA, as the USA is very saturated with intense competition. So, I see in the future a lot of insurers may start to look internationally for growth. In particular, I see growth in insurance in Asian countries to be a major catalyst for Tokio Marine, as Swiss Re comments, Advanced economies are expected to grow by 0.8% this year. For emerging economies overall, premium growth is forecast at 4.5%. Non-life premiums for China and emerging Asia are forecast to expand by 6.8% and 6.6% respectively. In sum, Tokio Marine should be able to capitalize on its growing exposure to emerging markets. It's #1 in Japan, #4 in Thailand, and #2 in South Africa, according to its website. I see this as strong evidence of delivering value and successfully adapting to the culture of other countries, giving Tokio Marine a nice tailwind. Generous Shareholder Return Policy Sometimes Japanese companies can be difficult to invest in because management can sometimes prioritize running the business for the employees, not the shareholders, in my opinion. But in the case of Tokio Marine, I am glad to see that this management team is incredibly focused on delivering EPS growth, strong ROEs, and attractive dividends. According to a message from the CFO, For fiscal 2023, against the backdrop of consistent profit growth, we have been steadily expanding the foundation for dividends, our 5-year average adjusted net income. As planned, by raising the dividend payout ratio to the targeted global peer level of 50%, we forecast a 21% increase in DPS compared with the previous year, marking the 12th consecutive year of dividend growth. The company has proven to be extremely adept at capital allocation, as management has continuously pushed buybacks and dividends to improve shareholder returns. Savvy M&A deals have added value, with acquisitions like Delphi, HCC, and Pure Insurance to name a few. Based on these actions, I see management as very shareholder oriented and determined to grow profits while reinvesting carefully in savvy acquisitions to grow. What this means for shareholders is that they should continue to reap the benefits of excellent capital allocation going forward. Financially speaking, the adjusted ROEs have consistently been very strong at double digits, growing from 11.5% in 2020 to 17% in 2023. They continue to earn strong ratings from Moody's, S&P, and AM Best with A ratings for all 3. This insurance behemoth has a clean financial track record and I expect this to continue due to growing exposure to emerging markets, improved operational efficiency through better use of data analytics, and future savvy acquisitions. The strategic priorities of Tokio Marine are also very much aligned with shareholders, according to the CEO's Letter,  1.) Continue to achieve world-class EPS growth (currently at approx. +5‒7%) through organic growth 2.) Raise ROE to be on a par with European and American peers, and expand equity spread 3.) Increase shareholder returns as a result of the above  Ultimately, investors can see the company is shareholder focused with generous returns through dividends and buybacks. They aspire to be a world-class leader in global insurance and have the track record to prove it. I expect their growth to continue and shareholders to reap solid returns. Valuation - $45 Fair Value Starting with TTM revenues of around $50 billion, I think revenues can grow at a CAGR of 5%, which is the sector median for FWD revenue growth. By 2027, I see revenues reaching at least $58 billion. Assuming profit margins get to around 10%, I expect earnings to be $5.8 billion by 2027. I think net margins can get to 10% due to improvements in operational efficiency from technology and better underwriting performance from emerging markets. Divide $5.8 billion by shares outstanding of 2 billion gets me EPS of $2.90. Apply a 15x earnings multiple gets me around $45, rounded up. I chose a 15x earnings multiple given the incredible track record of EPS growth and high ROEs, so I felt 15x P/E is warranted, which is a premium to the sector median of 10x. I feel that management's plan to improve ROEs to match their American and European counterparts suggests that their earnings will improve dramatically, so a 15x FWD P/E is actually attractive given robust growth in profitability. Compared to its peers, Tokio Marine has grown ROE YoY at 96%, compared to the sector median of -8.73%. It expects to continue to grow ROE at 10% compared to the sector median of -3.35%. While the sector median suggests ROE maturation and limited growth for peers, Tokio Marine's exposure to emerging markets should allow its ROEs to match its American/European peers, justifying a premium in the FWD P/E multiple. At 1.3x forward sales, the stock is still cheap compared to the sector median of 2.5x. I believe the market is still underestimating this Japanese insurance behemoth, mainly because it's foreign and looks comparably expensive. However, paying 15x FWD P/E for a company with consistent growth, strong profitability, and dividends seems like a good deal to me. In particular, Seeking Alpha estimates the FWD long-term EPS growth to be 31.35% for the next 3-5 years. I believe this stock is growth at a reasonable price, and thus the valuation is still very attractive. Seeking Alpha Risks The risks for insurance companies like Tokio Marine can come from increased climate risk and natural disasters, which could negatively affect underwriting profitability. Since so many of the net premiums are fire and auto, global warming could cause intense heat waves to start more fires around the world. On the automobile side, more deadly accidents could increase the severity of claims and also hurt the loss ratios of Tokio Marine. Insurance companies have sometimes faced fraudulent claims, and the company is working hard to mitigate these fake claims to improve performance. Ensuring that the accident was legitimate is central to Tokio Marine's claim application policy, but identifying dishonest claims can remain a challenge for Tokio Marine. A lot of the investment portfolio Tokio Marine has is tied up in Japanese government bonds, which are volatile, and these bonds could plummet in value. According to their Risk Factors website, \"The value of the Group’s assets may fall substantially as Japanese government bonds plummet in value due to a decline in the government’s creditworthiness or the emergence of hyperinflation\". I see this as problematic as Japanese interest rates are still historically low, and potential rate increases can decrease the value of Japanese government bonds. Finally, a lot of emerging markets are suffering from record high inflation and adverse currency exchange fluctuations can make doing insurance business difficult for Tokio Marine. Getting paid in the local currency can be difficult to translate into profits as some emerging markets are going through a currency crisis. Buy Tokio Marine I think this is one of the most solid insurance companies in the world, and that it too should rally due to its exposure to emerging markets. Management has been incredibly generous with their capital allocation and shareholder returns, and I feel this trend will continue with hard insurance markets increasing net premium growth. With strong credit ratings and a resilient track record, I see Tokio Marine as a steady stalwart that provides investors growth at a reasonable price.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.0","shortVersion":"4.29.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2430268037"}