Few casual observers would have thought that this year the biggest IPO globally would occur in Japan. Fewer still that it would be an insurance company making its debut on the stock exchange. That is however exactly what transpired this March when Dai-ichi Life Insurance raised USD 11bln as it listed on the Tokyo Stock Exchange, transforming itself from a mutual corporation, owned by its policyholders, into a public stock company with a non-policyholder shareholder base. One would have to trace back to March of 2008 when Visa went public in the biggest ever IPO in the USA to find a similar sized deal in the global stock market. It reflects the fact that despite the continued lackluster performance of the Japanese economy, its main insurance companies remain formidably sized players, looking after vast pools of assets aiming to provide for the financial well-being of its rapidly aging population. The eternal behemoth in the market remains Kanpo, the life insurance operator of the nation’s recently privatized post office with assets of over USD 1trillion. In comparison, Nissay, the largest private company, is less than half its size but still ranks in the top 10 of insurers worldwide..

The Japanese are famous for their appetite for insurance products. Some calculations indicate that households hold an average of 4 policies with one or more life insurers. 90% of Japanese households own at least one life insurance policy giving the country one of the world’s highest market penetration for life insurance. Premiums amounted to USD 363bln in 2006, surpassed only by the United States’ USD 480bln.

This is not to say that the industry is as profitable as it is big. Ever since the Japanese stock market bubble burst in 1990, investment returns have been poor, not least because of the prolonged period of ultra low interest rates. This has led to the “gyaku-zaya”, or negative spread, phenomenon where the investment returns required to make good on the promise to policyholders had become unattainable due to declines in interest rates. Typically, life insurance and old-age benefit insurance policies assume a return on the invested premiums of around 3%, with long term interest rates at around 1.4% this forces the insurers to take risk in credit or equity markets, something that has not always paid off. Several medium sized insurers have not survived the turmoil in capital markets of the 1990s and 2000s. Larger insurers have coped via very conservative estimates of mortality rates and costs associated with their policies. Over time, the size of the negative spread between average required return and long term risk free yields has decreased and with actual mortality and costs outperforming initial estimates, the industry has been able to show modestly black figures of late. Solvency has been strengthened by demutualisation (Dai-ichi Life was preceded by smaller rivals, Daido, Taiyo and Mitsui Life), increases in retained earnings and issuance of subordinated bonds, all measures that became possible after deregulating previously stifling restrictions imposed on the industry.

Clearly the large players are in search for growth to stem the shrinking of their core domestic business in a saturated and over-insured market. As the economy deteriorated, new sales of policies took a dive and early redemptions by policyholders trying to save on their premium-bill increased. A scandal about inappropriate denials of benefits and other non-payments did not help to raise the esteem of the industry in the public eye. One growth sector however has been the so-called third sector of insurance products. With pure life-insurance product defined as first-sector and pure damage insurance products classified as second sector, the third sector bracket includes hybrid products such as medical insurance including cancer, insurance for long term old-age care or accident cover. Until 2001 life insurers were prohibited from offering these products but have since scrambled to gain a foothold in competition with foreign players who took a head-start when the market was liberalized. The same goes for variable annuities, a segment with USD 125bln in assets, where foreign players built aggressive market positions after market liberalization in 2002, but where recently domestic players such as Sumitomo Life and Dai-ichi Life have gained market share as foreign competitors are pulling back.

The offering documents of the Dai-ichi Life IPO make much of its international ambitions and indeed one of the stated purposes of turning into a public stock company, with the potential for more effective capital raisings going forward, is to fund its future growth strategy in Asia. Over the past four years the company bought stakes in several local insurance players in India, Vietnam, Australia, Taiwan and Thailand but, as with the other Japanese life-insurers, Dai-ichi is a long way from making its international business a significant contributor to overall results.

Speculation is now rife as to which of the remaining mutual companies will be next in taking the step towards demutualisation. The industry will certainly be watching with interest how Dai-ichi fares in “public life”.

Oscar Volder CFA is an Investment Specialist at BNP Paribas Investment Partners in Tokyo