Tokio Marine: volatile profitability but continued upside potential (OTCMKTS: TKOMF) [Boss Insurance]

Tokio Marine’s vision is “to be a good company”, and has been for a century and a half now. But not that good, the group is a true blue blood of Japanese insurance. Japan’s leading non-life insurer, underwriting in London, Paris and New York only a year after its founding, although serious expansion into Europe and the United States began in more modern times about 15 years ago. At that time, its specialty insurance business in emerging markets was already booming. Today, Tokio Marine derives more than half of its profits from international subsidiaries that manage risks largely uncorrelated with national insurance.

Despite the uncertainty surrounding the global economic outlook, the high interest rate environment – ​​and the resulting improvement in investment returns and underwriting – bodes well for a positive year for the insurance industry. Tokio Marine should be able to improve its profitability in the near future and, as it has always done so far, should continue to reward its shareholders generously.

Financial performance

The latest results for the 3rd quarter of fiscal 2022 were solid: thanks to price increases in foreign markets, net premiums increased by 9.6% and life insurance premiums by 3.6%, excluding exchange gains. For reference, global premiums are expected to increase by 6.1% in 2022 due to the ongoing hardening or tightening of underwriting practices by risk-aware institutions, in non-life lines.

Adjusted net income at the group level is in line with expectations and no revision has been made to the annual projection of 400 billion yen (ROE 12.5%). This will be a downgrade from FY2021’s record 578 billion yen (ROE 14.4%), but it would also be more in line with the overall balance sheet of the past decade. The medium to long-term objective is to permanently maintain earnings above 500 billion yen (ROE 12%) through organic earnings growth above 5%.

Achieving sustainable profitability depends not only on high-growth emerging markets, but also on the reform of outdated products, including loss-making fire insurance in Japan, although current claims cost inflation makes the task difficult . Fortunately, the financial health of the group makes it possible to meet such challenges at a comfortable pace. Total debt is exceeded by cash and largely covered by operating cash flow. Investment Grade ratings – A+ from S&P and Aa3 from Moody’s – back up the case.

Market

For an industry as old as the company itself, insurance continues to grow and is poised to reach a milestone of $7 billion in global premiums. More than 50% of these come from the three major markets, and although Tokio Marine has significant operations in two – the United States and Japan – it is apparently outclassed in China, the largest emerging market.

Operating network: Japan and 46 other countries

The performance is stable in Japan, the home base, but the group is much more animated on the prospects for growth in the United States and Europe. Yet it is in emerging markets that most of the growth is occurring both for Tokio Marine and for the industry as a whole. India, for example, where the group ranks just outside the top ten insurers, is expected to become the fastest growing market over the next decade.

Strategy

Tokio Marine may be old, but it’s not dated. And this is evident not only in the way he focuses on emerging markets and high growth sectors, but also in the way he approaches management practices. Unlike a traditional Japanese organization, it avoids the strict hierarchy of uniformly Japanese administrators. The globally minded management structure leverages local talent and is more responsive to local needs.

In another effort to stay relevant, the group has embraced the latest technological innovations to measure and predict risk. By feeding proprietary data to machine learning algorithms, it produces risk detection and mitigation solutions for areas such as mobility, disaster management and healthcare.

Tokio Marine also opportunistically exploits other research conducted by specialized companies or startups. The acquisition of GCube made it capable of underwriting renewable energy projects; its latest investment in Axelspace will enable it to develop new products for the space market.

Assessment

After a wild debut on the Tokyo Stock Exchange in 2002 (TSE: 8766), Tokio Marine fell into a prolonged lull in the aftermath of the financial crisis and only restarted its upward trajectory in 2012, gaining more than 300% since then. during. On February 13, the price hit its all-time high at ¥2.90k.

A good portion of total returns has been consistently contributed by dividends – which have increased every year since listing. An 18% increase is expected for FY2022, resulting in a dividend of ¥300 per share (before last October’s stock split). The current yield is 3.9%, which places Tokio Marine in the first quartile of Japanese dividend payers. Dividends aside, the group also buys back its shares on a regular basis – every year since FY 2016; up to 100 billion yen has been approved for fiscal year 2022.

In terms of valuation, Tokio Marine looks slightly expensive compared to both its Japanese counterparts in insurance and its competitors elsewhere. TKOMY, traded over-the-counter, is currently selling at a P/E of 16.04 against the financial sector median of 9.44. Allianz (OTCPK:ALIZY) and Chubb (CB) – among other stocks that Tokio Marine often likes to compare themselves to – are also slightly cheaper at 13.36 and 15.62 respectively. Analysts, however, expect the stock price to rise about 22.4% in one year to around ¥3.11k.

Risks

Tokio Marine believes that being geographically diversified is a natural hedge against systematic risk. However, the global expansion also brings a lot of additional exposure. Like everyone else, Tokio Marine has to worry about inflation, its persistence and its lingering effects. Current economic growth forecasts look particularly bleak for the developed markets in which the group has invested resources. The short- and medium-term impact of the war in Ukraine could affect niche specialist insurance revenues.

Conclusion

Tokio Marine ticks many boxes as a high quality stock with a good and growing dividend. Certainly, reducing profitability volatility is a work in progress. Higher interest rates will help boost yields in the immediate future. More importantly, the company is working towards more sustainable solutions. In addition to AI-powered operations, new revenue streams could emerge as the group expands to cover businesses such as renewable energy and space.

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