HSBC-Japan insurance.pdfVIP

abc Global Research Recovery in financial markets key near- term driver; business model main long- term differentiator Initiate coverage on Sony Financial with OW(V) and target price of JPY316,000 Retain OW(V) on Mitsui Sumitomo An aging and shrinking population is the key structural threat to the insurance industry. Therefore, companies need to improve efficiency to make domestic operations value-accretive to shareholders. Consolidation is a soft option, without real synergy benefits. More significant efficiency gains are expected from the two recent mergers – of Mitsui Sumitomo, AIOI and Nissay Dowa, and of Sompo Japan and Nipponkoa. Geographic diversification will be a critical long-term value driver. Japanese industrial companies have successfully moved beyond the domestic market. We believe insurers are following suit – Tokio Marine has expanded into North America, while Mitsui is targeting the growth markets of Asia. Strong balance sheet is a pre-requisite for expanding internationally. Less volatility in markets has helped balance sheets and should drive earnings recovery for the year ending 31 March 2010. TD Holdings, as expected, is raising capital to pay down debt and strengthen balance sheet. Sompo Japan will get protection from the stronger Nipponkoa balance sheet. Financial guarantee remains an issue, and its absence could deplete capital. Earnings recovery is not fully market-driven. Companies are raising guidance on the back of lower catastrophe losses, thereby better earnings. We reflect this in our forecasts, but are generally more cautious than both company guidance and the consensus. Initiate coverage on Sony Financial with OW(V). Retain OW(V) rating on Mitsui Sumitomo. FIG Japan Insurance Japan Insurance From consolidation to differentiation 27 November 2009 John Russell* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4321 john.russell@.hk Seewon Oh* Analyst