Japan Life Insurance: APAC Focus: Focus on medium-term growth opportunities

We initiate coverage of Japan’s life insurance sector. Our sector preference is non-life insurance over life insurance. Key points for our sector assessment are 1) the near-termimpact of higher US interest rates, 2) the medium-term impact if we assume a change in the Bank of Japan’s (BoJ) monetary policy, and 3) long-term growth potential in protection insurance for longer lifespans (the third-category insurance field). Chiefly due to factor one, we identify a risk of a decline in near-term earnings, although this appears to be priced in based on the low valuation multiples.

Higher US interest rates could lead to lower capital earnings due to sharp increases in hedging costs and weakness for stocks and bonds. Based primarily on these factors, we place the very defensive on-life insurers above the life insurers in our preference order for the financial subsectors. That said, most of the negative impact looks to have been factored into share prices. Furthermore, we think that from FY3/24 the market could increasingly focus on positives such as higher interest and dividend income accompanying yen weakness, prospects for higher interest rates on super long-term Japanese government bonds (JGBs), and easing of hedging costs alongside a decline in hedged foreign bonds.

Our base case assumes no change in BoJ monetary policy through end-2023. However, debate about a change could intensify. In that situation, we would expect the spotlight to fall on life insurance stocks. We consider the potential share price impact using a regression analysis reflecting advances in P/EV and EV.

Alongside the decline in Japan’s population and low interest rates, the outlook does not look particularly bright for traditional savings-type policies that offer whole life cover or endowments. In contrast, the third-category insurance market that addresses risks associated with longevity is expanding.