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Nearly 90 percent of all Japanese households have some form of life insurance, one of the highest rates in the world. A record $8.2 billion overseas acquisition by Japanese insurer Nippon Life, announced Wednesday, underscores the sector’s long-standing struggle to find growth opportunities in its domestic market. The aggressive expansion outside of Japan is starting to bear fruit.
Nippon Life will acquire all the shares it does not already own in Bermuda-based Resolution Life Group Holdings for about $8.2 billion in an all-cash deal to expand in the U.S. market. japanese life It already owned about 23 percent of Resolution Life, a closed-book insurer that specializes in purchasing existing policies from insurers in the United States and other markets.
The life insurance market in Japan was once a lucrative industry. In the 1990s, it became the second largest life insurance market in the world, accounting for more than a quarter of all premiums in OECD member countries. As a result, life insurance accounts for around three-quarters of the total gross premiums written in the country today.
However, for investors, the industry has long been considered unattractive, marked by long periods of negative returns on equity, particularly in the early 2000s. Japan’s ultra-low interest rates have depressed yields on bonds, which are fundamental to insurers’ investment strategies. Population decline poses another obstacle.
Compared to Japan, the American insurance market is significantly larger and offers higher returns on investment. U.S. insurers are expected to generate gross written premium of about $3.8 trillion 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 sectoral deals by the country’s largest insurers, such as Dai-ichi Life’s acquisition of Protective Life and Sumitomo Life’s purchase of Symetra, both involving U.S. companies. More recently, StanCorp Financial Group, a US unit of local peer Meiji Yasuda, the US insurer it had acquired in 2015, bought American Heritage Life Insurance in August.
Dai-ichi Life shares are up 40 percent this year, those of peers Japan Post Insurance and T&D Holdings are up about a fifth, reflecting an improvement in core insurance profits at Japanese insurers. in recent years. Exposure to the US market, where there have been continued premium increases and higher investment returns, has provided a boost.
However, even after those gains, Dai-ichi Life shares trade at 1.6 times tangible book value, about a 40 percent discount to U.S. peers such as MetLife. Further expansion abroad, including fast-growing emerging markets, should help narrow the gap.