Insurance sector
INITIATION
Remarkable relation between non-life stocks and equity
market
■  Initiate coverage of non-life insurance sector: We initiate coverage of the non-life
insurers as a subsector within the insurance sector. The features of the non-life
stocks are described below. Non-life stocks represent equity investment trusts with
solid long-term performance, and their performance against TOPIX is closely
correlated with the relative performance of the shares in their portfolio against TOPIX.
On the other hand, within the financial sector, non-life stocks are positioned as
defensive core stocks. Currently, prices in the sector appear neither inexpensive nor
expensive, so we set our sector weighting against TOPIX as MARKET WEIGHT.
However, if we expect a turnaround in the downward trend in the Japanese equity
market over the medium term, there is a strong possibility that the outperformance of
the non-life stocks, which has continued since 2007, could come to an end.
■  Initiate on three companies with NEUTRAL ratings: In this report, we initiate
coverage of three companies in the non-life insurance sector:
Mitsui Sumitomo Insurance Group (8725, ¥2,535, NEUTRAL, TP ¥2,400)
Sompo Japan Insurance (8755, ¥646, NEUTRAL, TP ¥680)
Tokio Marine Holdings (8766, ¥2,670, NEUTRAL, TP ¥2,400)
■  The biggest factor creating differences in performance between individual stocks in
the sector has been supply/demand. When TOPIX is rising, it makes it easier to
accumulate Sompo Japan, which has a relatively small market value, while Tokio
Marine tends to underperform. Sompo Japan is exposed to event risk, but if we
assume the equity market has bottomed out, we should be able to expect a positive
supply/demand development. The difference in valuations among stocks is shrinking,
and we do not expect a major differentiation in performance, but if we were to select a
top pick, it would be Sompo Japan, in view of its slightly inexpensive valuation and
positive supply/demand situation.
■  Points to monitor from now: The biggest event in the near future will be the
announcement of the stock exchange ratio for the expected merger between the
members of Mitsui Sumitomo Group and the Sompo Japan Group. Past cases
indicate exchange ratios are generally based on share prices immediately prior to the
merger. We believe there is a strong possibility there will be no difficulty in setting the
exchange ratio at Mitsui Sumitomo Group, since the share price has been relatively
stable both before and after the announcement of the proposed merger. However, in
the case of the proposed Sompo Japan Group merger, Nipponkoa’s share price has
been volatile and as there are several major shareholders there is a risk the merger
could be disrupted. From a fundamental viewpoint, the most important factors to
consider at the two groups with proposed mergers is the potential for cost reduction
and the expected time scale. As associated market share in insurance premiums
have tended to be volatile at around the time of a merger, we shall be watching
carefully to see to what extent market share shifts due to the coming mergers. It will
also be interesting to see to what extent Tokio Marine, which will not carry out a
merger, will be able to gain market share.

Table of contents
Investment summary 3
Initiate on subsector with a MARKET WEIGHT stance 3
Characteristics of non-life stocks 7
Analysis of long-term performance relative to TOPIX 7
Position of the non-life stocks within the overall financial sector 11
View of sector valuations 14
Share price performance of individual issues 19
Consideration of valuation of individual stocks and TPs 24
Examination of the merger ratio for previous mergers 26
Conditions in the domestic non-life market 31
Automobile insurance 32
Fire insurance 35
Past market share trends 36
Evaluation of the recent business combination 37
Shareholder return policies 41
Risk factors 42
Common risk factors 42
Risk factors by individual company 42
Mitsui Sumitomo Insurance Group Holdings (8725 / 8725 JP) 44
Stable performance 44
Investment stance 45
Valuation and TP 45
Business overview 46
Overview of main businesses 47
Earnings trends 50
Forecasts 52
Risks 52
Sompo Japan Insurance (8755 / 8755 JP) 56
Positive supply/demand driver > event risks 56
Investment stance 57
Valuation and TP 58
Business overview 58
Overview of main businesses 59
Earnings trends 62
Forecasts 64
Risks 64
Tokio Marine Holdings (8766 / 8766 JP) 68
Leading company in the sector but already on a premium valuation 68
Investment stance 69
Valuation and TP 69
Business overview 70
Overview of main businesses 71
Earnings trends 74
Forecasts 76
Risks 77