Rising Domestic Interest Rates Will Boost Appeal Of Life Insurance Products

Key Takeaways

• Growth in future revenue driven by increased sales and domestic interest rates enhances the attractiveness of life insurance products.
  
• Strategic rebalancing and divestitures improve capital efficiency, risk management, and shareholder returns, aiding financial stability.
  
• Rising surrenders, capital gains decline, and increased expenses may pressure revenue, earnings, and profitability amid yen weakening and interest rate challenges.

Catalysts

Through its subsidiaries, provides insurance products and services primarily in Japan.

• The upward revision of the value of new business and sales results for new policies across all three life insurance companies suggest strong growth in future revenue, driven largely by favorable sales and increases in domestic interest rates which improve the attractiveness of life insurance products.
  
• Strategic divestiture of equity holdings and bond replacements are set to enhance the company’s capital efficiency and risk management, thereby potentially improving net margins over the long term.
  
• The ongoing reduction in FX hedging costs as detailed in the IR explanations is expected to result in better positive spreads, thereby positively impacting earnings through improved investment returns.
  
• Continued efforts to reduce strategic shareholdings and rebalance the portfolio imply future improvements in financial stability and capital allocations, potentially boosting earnings and facilitating shareholder returns.
  
• Expected improvements in interest and dividend income from reinvestment due to higher interest rates, combined with the company's advancement in investment activities and divestitures, should contribute to future earnings growth.

T&D Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming T&D Holdings's revenue will grow by 8.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.6% today to 4.2% in 3 years time.
• Analysts expect earnings to reach ¥147.6 billion (and earnings per share of ¥316.7) by about May 2028, down from ¥153.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, up from 10.1x today. This future PE is greater than the current PE for the JP Insurance industry at 11.6x.
• Analysts expect the number of shares outstanding to decline by 2.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.59%, as per the Simply Wall St company report.

T&D Holdings Future Earnings Per Share Growth

Risks

• The increase in surrenders and lapse rates, especially related to foreign currency-linked products due to yen weakening, could negatively impact revenue stability and future earnings.
  
• Capital gains decreased at Daido Life due to bond sales, which may lead to a decline in investment returns affecting net margins and overall profitability.
  
• Impairment losses on commercial mortgage loans are expected, which could lower earnings and adversely affect net margins.
  
• Rising U.S. interest rates may lead to equity losses, which could impact the company's overall earnings and financial stability.
  
• Challenges in managing operating expenses, such as increased personnel costs and retirement liabilities, may pressure net margins and hinder future profitability growth.

Valuation

• The analysts have a consensus price target of ¥3526.0 for T&D 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 ¥4600.0, and the most bearish reporting a price target of just ¥2100.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥3545.5 billion, earnings will come to ¥147.6 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 4.6%.
• Given the current share price of ¥3031.0, the analyst price target of ¥3526.0 is 14.0% higher.
• 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.