Re-New Strategy And M&A Aim To Boost Growth But Face Risks In Japanese Insurance Transformation

Key Takeaways

• Transformation into a leaner organization and the Re-New initiative aim to enhance efficiency, profit growth, and underwriting profits.
  
• Expansion into solution offerings like disaster resilience to drive sustainable long-term revenue growth.
  
• Over-reliance on divesting equities and high M&A valuations may impact long-term earnings, strategic growth, and revenue streams amid volatile international investments.

Catalysts

Engages in the non-life and life insurance, and financial and general businesses in Japan and internationally.

• Tokio Marine Holdings plans to realize top-tier EPS growth driven by robust profit growth in each region, a well-diversified underwriting portfolio, and strong asset management. This is likely to positively impact revenue and earnings.
  
• The company aims to significantly raise ROE by divesting business-related equities within six years and reinvesting the capital in M&A and risk-taking opportunities, potentially improving net margins and earnings.
  
• Tokio Marine Holdings is undergoing a transformation to become a leaner, more competitive organization, which will enhance its efficiency and potentially improve net margins.
  
• The Re-New initiative in their Japan P&C business aims to achieve sustainable profit growth by increasing premiums and enhancing insurance solution offerings, potentially improving underwriting profits and net margins.
  
• The company is expanding its solutions business, such as disaster resilience, which could create new revenue streams and support long-term revenue growth.

Tokio Marine Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tokio Marine Holdings's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.2% today to 11.0% in 3 years time.
• Analysts expect earnings to reach ¥979.2 billion (and earnings per share of ¥536.35) by about July 2028, down from ¥1055.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥1161.0 billion in earnings, and the most bearish expecting ¥863.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.1x on those 2028 earnings, up from 10.9x today. This future PE is lower than the current PE for the JP Insurance industry at 14.3x.
• Analysts expect the number of shares outstanding to decline by 1.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.67%, as per the Simply Wall St company report.

Tokio Marine Holdings Future Earnings Per Share Growth

Risks

• There is a significant reliance on the divesture of business-related equities to improve ROE, which indicates current equity holdings are less profitable, potentially impacting long-term earnings if not managed well.
  
• The Japanese P&C business model needs substantial changes to phase out past non-insurance tactics, which may lead to short-term business disruptions and impact revenue stability.
  
• International investments, notably in North American CRE loans, have faced issues and required increased provisions, signaling potential volatility in investment income and risk management challenges.
  
• The transition away from traditional practices within the Japanese insurance industry might result in losing business or affect profit margins temporarily, suggesting potential vulnerability in revenue streams.
  
• M&A valuation remains high, requiring patience and discipline; this could delay or limit beneficial acquisitions, impacting strategic growth plans and EPS.

Valuation

• The analysts have a consensus price target of ¥6665.636 for Tokio Marine Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥7900.0, and the most bearish reporting a price target of just ¥5400.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥8888.8 billion, earnings will come to ¥979.2 billion, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 4.7%.
• Given the current share price of ¥6022.0, the analyst price target of ¥6665.64 is 9.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.