Japan P&C faces investor caution despite positive outlook

Jefferies anticipates a quicker unwinding of equity cross-holdings.

In a recent Jefferies report, the initiation of coverage on JP insurance sparked robust discussions among investors, largely aligning with the bullish thesis, notably favouring MS&AD as the top pick, it said in a research note yesterday.

The report notes concerns among domestic investors regarding near-term crowding but acknowledges the sector's promising medium to long-term upside potential. 

Overseas investors are showing increasing interest in the Japanese P&C insurance space, recognizing it as a compelling secular story alongside favorable macroeconomic factors.

Jefferies anticipates a quicker unwinding of equity cross-holdings by Japan P&C, potentially boosting ROE by 4-6 percentage points by FY29. A potential raise in ROE target by Sompo from the current 10% to the mid-teens could further validate this thesis.

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The report suggests that consensus might be too conservative on overseas earnings outlook, particularly concerning MS&AD's Amlin turnaround. Structural enhancements, including the elimination of loss-making policies and lower combined ratios (CoR), indicate stronger performance ahead.

Despite inflationary pressures, a positive auto premium hike indicates potential CoR improvement domestically, though investor caution persists due to past execution track records.

Japan's current CoR of 95-101% compared to global P&C averages of mid-80% to low-90% highlights potential improvement opportunities, especially given Japan's premium hike cycle. Despite crowding concerns, Japan P&C offers competitive total capital return yields of 5-8%, akin to HK/China insurance and surpassing the global average of 5%. 

Lower risk-free rates in Japan suggest a re-rating upside, especially with increased foreign ownership potentially driving the next rally.