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Nearly 90 per cent of all Japanese households have some form of life insurance, one of the highest rates in the world. A record $8.2bn overseas acquisition by Japanese insurer Nippon Life, announced on Wednesday, underscores the sector’s long-running struggle to find growth opportunities in its domestic market. Aggressive expansion outside Japan is starting to pay off.
Nippon Life will acquire all of the shares it does not yet own in Bermuda-based Resolution Life Group Holdings for about $8.2bn in an all-cash deal to expand in the US market. Nippon Life already owned about 23 per cent of Resolution Life, a closed-book insurer specialising in acquiring existing policies from insurers in the US and other markets.
The life insurance market in Japan had once been a lucrative industry. In the 1990s, it became the world’s second-largest life insurance market, accounting for more than a quarter of all premiums across OECD member countries. As a result, life insurance accounts for about three-quarters of the total gross premiums written in the country today.
Yet for investors, the industry has long been considered an unattractive one, marked by extended periods of negative return on equity, particularly in the early 2000s. Japan’s ultra-low interest rates have suppressed yields on bonds, which are central to insurers’ investment strategies. A declining population poses another hurdle.
Compared with Japan, the US insurance market is both significantly larger and offers higher returns on investment. US insurers are expected to generate a gross written premium of about $3.8tn this year, more than 10 times Japan’s total. Given this gap, the obvious choice for Japanese insurers has been to pursue aggressive overseas expansion.
That strategy is reflected in sector deals by the country’s biggest insurers, such as Dai-ichi Life’s acquisition of Protective Life and Sumitomo Life’s purchase of Symetra, both involving US companies. More recently, local peer Meiji Yasuda’s US unit StanCorp Financial Group — the US insurer it had acquired in 2015 — bought American Heritage Life Insurance in August.
Shares of Dai-ichi Life are up 40 per cent this year, peers Japan Post Insurance and T&D Holdings are up about a fifth, reflecting improving core insurance profit at Japanese insurers in recent years. Exposure to the US market, where there have been continuing premium increases and higher investment returns, has provided a boost.
Yet even after those gains, shares of Dai-ichi Life trade at 1.6 times tangible book value — around a 40 per cent discount to US peers such as MetLife. Further overseas expansion, including into fast-growing emerging markets, should help narrow the gap.
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