Morningstar Equity Research Report 2013.12.19

Largest pet insurance group

Recommendation rating（12/17）

Anicom Holdings, Inc.（8715・TSE’s Mothers）
Stock Price

Unit of Investment

1,049yen（12/17）

100Shares

BUY

Market Cap

Year HighYear Low

PER（E）

18.10Bil yen

1,837yen（13/5/15）

687yen（13/1/4）（12/17）（12/17）

40.8

Profitability likely be back on the road to recovery after FY2014
Estimated Share
Price Range■Revenue grew but profit fell in 1H FY2014
Anicom Holdings Inc. reported its consolidated earnings for thesix months of fiscal year ending March 2014, with ordinary revenue
and ordinary profit coming in at \8,850 million (up 11.5% year-onyear) and \300 million (down 39.7%) respectively. Compared with thecompany’s forecast at the beginning of the fiscal year, actual ordinary
revenue was \200 million higher but ordinary income fell short ofit by \120 million. Of the components of ordinary revenue,￥1,000 ～￥1,300

Yen
2,000

1,837

1,750

13 Weeks Moving Avg.

1,500
1,250
1,000

net premiums written stood at \8,720 million (up 14.9%).
The revenue growth was largely due to an increase in newpolicies taken out at pet shop agents, particularly major
shops, as well as its successful maintenance of a high-level
insurance policy retention rate. Reflecting this, the total number

26 Weeks Moving Avg.

750
500 61213 Weeks Moving Avg.

Volumeof insurance policies in force rose to 477,952 (an increase of 31,538
from the end of March 2013).
On the cost front, insurance underwriting expenses marked a sharp
rise to \6,460 million (up 17.9% y-o-y). While selling and generaladministrative expenses (SGA) grew at a modest 8.8% to \1,980
million, ordinary expenses comprising these soared to \8,550 million(up 14.9%), resulting in a drastic reduction in ordinary income.
Higher insurance underwriting expenses were mainly attributable toan increase in net claims paid. The company initially anticipated thatthe loss ratio would decline thanks in large part to the withdrawal of
insurance policies that cover 90% of damages. However, the actual
loss ratio for the first half of the year remained at a higher level thanits projection. This was principally due to the delayed realization of
the positive effects of its earnings improvement measures and higher
than expected use of insurance claims. In addition, the gain on thereversal of catastrophe loss reserves recorded in the same period lastyear became a non-factor during this period, which also contributed
to a lower profit.

Month 1

2

3

4

5

6

7

8

9

10

100,000
Shares11

12

13 WeeksMoving Average

26 WeeksMoving Average

Volume（13 Weeks Average）￥1,146￥1,208235,862Sharesfrom the previous 88.5% to 89.0%. According to the recent
monthly readings, the total insurance policies in force andthe average policy retention rate at the end of November
2013 stood at 486,523 and 89.7% respectively, underlining a
steady increase in new insurance policies.
The company initially forecast that its net loss ratio for the year
would fall to 61.4% due in large part to the withdrawal of 90%
coverage policies. However in consideration of the actual ratio
for the first half of the year at 64.5%, it revised down the fullyear net loss ratio estimate to 62.0%. Nevertheless, it lowered its
projected net expense ratio from 28.8 % to 28.1%, leaving the
expected combined ratio (the sum of net loss ratio and net expense
ratio) roughly unchanged from the initial forecast. In conclusion,
we anticipate that Anicom will continue to struggle with thepressure from lingering claims on the 90% coverage policies forthe remainder of this year, but its medium-term profitability■Full-year ending March 2014 should see steady increase in
new insurance policies
Based on the results for the first half of the year, Anicom revised
its earnings forecast for the full year. It raised estimated ordinary
revenue from the previous forecast of \18,140 million to \18,220
million but revised down an ordinary income outlook from \1,010
million to \710 million. The revised ordinary revenue forecast figure
on steady growth in new insurance policies. On the other hand, thecompany revised down its ordinary income estimate having taken
into account of the amount the unmet forecast of the first half ofthe year. However, it expects the number of year-end insurance
policies in force to increase to 505,020 (up 58,606 from the endof March 2013) and the average policy retention rate to improveshould improve as both loss ratio and net expense ratio
are expected to decline over the period. We believe there
remains ample room for the pet insurance market to expand as
well as increasing pet insurance policies. In light of this, we are

maintaining our BUY rating. Our estimated share price is in
the range of ¥1,000 ~ ¥1,300.
(Tomoaki Fujii)

Revenue and Earnings Trend （As of December 17）
Ordinary Revenue（Yen Mil）

YoY（％）

Operating Profit

YoY
（％）

Ordinary Profit

YoY
（％）

Net Profit（Yen Mil）（Yen Mil）（Yen Mil）

YoY
EPS（％） （Yen）

2012-3

Past Results

13,845

24.7

－

－

337

▲ 1.6

465

10.4

28.2

2013-3

Past Results

16,186

16.9

－

－

837

148.4

640

37.7

38.1

Company est.

18,216

12.5

－

－

710

▲ 15.2443▲ 30.825.7

MS est.

18,200

12.4

－

－

720

▲ 14.0450▲ 29.726.1

MS est.

20,200

11.0

－

－

1,000

38.9

620

37.8

35.9

2014-32015-3This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on
the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding theaccuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.

（1/3）

Morningstar Equity Research Report 2013.12.19

Anicom Holdings, Inc.（8715・ TSE’s Mothers）■Company Overview

Anicomʼ s seamless network

Anicom is the largest pet insurance group. The company sells its
pet insurance policies primarily through pet shops, allowing its
customers to take out insurance on pets immediately after they
have commenced pet ownership. Further, in collaboration withveterinary hospitals across the country, the company introduced asystem that allows its customers to settle their medical expenses(i.e. payments for medical expenses after the deduction of insurance
claims) at the hospital counter by simply presenting the company’s
exclusive ‘Animal Health Insurance card’. Pet shops receive
commissions based on the number of acquired policies and animal
hospitals are able to use the company’s medical data management
system as well as expect an increase in patients with the help of
the business alliance with the company. This network provides thecompany with a sizeable edge over its competitors and high barriers
to entry.
Claims for pet insurance show the features of ‘small in amount’and ‘frequently filed’. This indicates that, compared with other insurance
products, the pace of increase in loss ratio (the percentage
of insurance claims paid to premium income) slows down as thenumber of acquired policies increases.
The current size of the pet insurance market in Japan is approximately\25 billion, of which Anicom holds about 64% (\16 billion).
By comparison, the market size in the UK, an advanced country in termsof pet insurance, stands at around \80 billion. However, Japan has twice
the number of pets than the UK, therefore it is anticipated that the sizeof the Japanese pet insurance market has the potential to grow greaterthan \160 billion.

Insurance Customer WEB
policyholders
Insurance soliciting
WEB tools(paperless, cashless)Receipt production
system for veterinary
hospitals

AnicomInsurance
Pet
shops

Veterinary
hospitals

・Insurance validity
confirmation system
・Online receipt
requesting system

Agency WEB

Growth of Insurance Policies in force and Ordinary Revenue（millions of yen）
20,000Ordinary revenue (left-hand scale)（No. of policies）
600,000
505,020

Insurance policies in force(at year-end, right-hand scale)

16,000446,414396,234
12,0004,000
0400,000

340,628
290,767

8,000
9,215

Mar 10

11,107

13,845500,000

18,216

16,186300,000
200,000
100,000

Mar 11

Mar 12

Mar 13

Mar 140Company estimates■Business Environment and Outlook
Driven by a rise in the number of pet owners and increasing pet longevity, demand for pet insurance is on an upward trend. There are an
estimated 21.28 million pets (dogs and cats) in Japan, of which those insured account for a mere 3.4%. On the other hand, 80% of owners thinktheir pets need to be insured, while 32% are either intending or considering taking out pet insurance. These statistics demonstrate the potential
expansion in the pet insurance market in Japan. There are approximately
7,000 veterinary hospitals across Japan whose treatments are coveredby pet insurance; of them Anicom forms a business partnership with
5,349 hospitals (as of the end of March 2013).In addition, among 4,000~ 5,000 pet shops in the country, the company deals with 1,390 shops asits distribution agent (as of the end of March 2013), securing a competitive and advantageous position in the market.
Over the medium-term period, we believe that the growth in insurance
policies in force and the improving loss ratio on the back of a modified
coverage policy mix attributable largely to the withdrawal of the 90%
cover products, together with a rising insurance policy retention rate anda lowering expense ratio should help the company enhance its profitability.

Risk Factors
If the company experiences a worsening loss ratio
reflecting a rise in the morbidity rate of the pets insured
by the company caused by infectious diseases, etc., it may
suffer a decline in its profit in the face of soaring insurance
claims. Also, its earnings will likely come under pressure
from decreasing insurance policies in-force, falling unit
price of premiums, rising agency commission expenses
and other negative factors, in the face of intensified
market competition triggered by the scale expansion in its
competitors or new entrants from different industries orlarge nonlife insurance companies.

Shareholder Return （As of December 17）■ Dividends■ Shareholder Special Benefits（Date of Right Allotment、End of June, End of December）

Dividend Per Share
Midterm

Year-End

Not Applicable

Annual

2012-3

Past Results

￥0

￥0

￥0

2013-3

Past Results

￥0

￥0

￥0

2014-3Company est.

￥0

￥0

￥0

This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on
the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding theaccuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.

（2/3）

Morningstar Equity Research Report 2013.12.19

Anicom Holdings, Inc.（8715・ TSE’s Mothers）（As of December 17）
Competitor Comparison（If the number is better than rivals, it's highlighted by red character）

Anicom Holdings, Inc.

（8715・TSE’s Mothers）
Stock Price
Basic Point

GrowthProfitability（8630・TSE）

Tokio Marine Holdings, Inc.
（8766・TSE）￥1,049￥2,751￥3,300

Unit of Investment

100Shares

100Shares

100Shares

Minimum Investment Amount￥104,900￥275,100￥330,000

Fiscal Year End
Share Price
Indicator

NKSJ Holdings, Inc.

March

March

March

PER（E）

40.8

15.8

PBR

2.3

Dividend Yield（E）

－

0.9
2.2%

13.7
1.1
1.8%

Ordinary Revenue Growth Rate（E）

12.5%

2.3%

-

Operating Profit Growth Rate（E）▲15.2%

31.7%

EPS Growth Rate（E）▲32.5%

65.4%
4.7%

37.4%

Ordinary Profit Ratio（E）

3.9%

ROE

8.6%

ROA（Ordinary income/Total
assets）
Net loss ratio (actual)

Management Net expense ratio (actual)indexesSolvency margin ratio (actual)

42.7%

-

3.8%

6.2%

5.2%

1.2%

1.2%

63.7%
28.5%

70.6%

68.7%

32.8%

31.0%

281.3%

645.6%

665.3%As industry peers, we selected two leading nonlife insurance companies – NKSJ Holdings (NHSJHD) and Tokio Marine Holdings (Tokio Marine). With regard to
Management indexes（ Net loss ratio, Net expense ratio and solvency margin ratios）for NKSJHD and Tokio Marine, we employed non-consolidated figures
for Sonpo Japan Insurance and Tokio Marine &Nichido Fire Insurance respectively.

■GrowthTop line continues to expand as thenumber of new policies written increases. Ordinary revenue for the year ended
March 2013 rose 16.9% year-on-year
to \16,190 million. Ordinary income forthe same period surged by 2.5 times
the amount posted in the previous year
to \840 million, as the company managed to cap a rise in ordinary expenses.
Ordinary revenue for the current year
ending March 2014 is expected to
grow by 12.5% to \18,220 million, on
the back of a solid increase in the number of new policies written. Notably,
NB (new born) policies have grown at
a steady rate over the recent period,
thanks to contributions from new pet
shop agents with which the company
concluded a distribution agreement
during 4Q of the previous year. For an
estimated year-on-year change in ordinary income, however, the company
revised its initial projection of positive growth largely in expectation of alower loss ratio to down 15.2% at \710
million. Nevertheless, we expect ordinary income to grow again in the year
ending March 2015.

■Profitability

Ordinary income as a percentage of ordinary revenue for the year ending March2013 came in at 5.2%, marking a significant improvement from the 2.4% logged in
the previous year. The year ended March2012 saw a deterioration of profitability as
Anicom was plagued by higher insurance
claim payments in the wake of its launchof insurance policies covering 90% of damages, among other reasons. In light of this,the company discontinued the sale of 90%
coverage policies. Despite this, payment
of insurance claims continued to increase
into the year ended March 2013, with the
net loss ratio for the same year rising fromthe previous year’s 57.3% to 63.7%. On
the other hand, the net expense ratio, thepercentage of operating expenses such as
marketing costs on net premiums written,
fell from the 30.9% to 28.5%, helping thecompany to improve profitability.
The company initially projected a lower net
loss ratio for the full year ending March
2014. But the ratio for the first half of theyear worsened to 64.5% (compared withthe 63.9% in the last year) due to the remaining impact from the 90% coveragepolicies. As a result, the company revised
upward its full-year loss ratio projection
from 61.4% to 62.0%. Subsequently, theestimated percentage of ordinary income toordinary revenue is expected to be revised
down from 5.6% to 3.9%. However for theyear ending March 2015, we forecast thatthe net loss ratio will decline, driving up thepercentage of ordinary income to ordinary
revenue to 5.0%.

■Management indexes

Anicom’s net loss ratio for March 2013 worsened to 63.7% as it suffered particularly from thenegative impact of insurance products offering
wider damage coverage. Nevertheless, its ratio
was still lower than that of its two competitors.
Anicom’s expense ratio was lower than its competitors’ as well. This indicates that it had a lower
combined ratio (see※ below) at 92.2%, comparedwith that of Tokio Marine & Nichido Fire Insurance Co., Ltd. at 99.7% and Sompo Japan Insurance Inc. at 103.4%, underlining the Company’s
higher productivity than its competitors. Although
we cannot simply compare the loss ratio of different sectors --- general casualty insurance and pet
insurance, given Anicom’s efficient control overits expense ratio, we are seeing the positive effects of its relatively lower loss ratio. Its solvency
margin ratio exceeds 200% level. Insurers with asolvency margin ratio at or above this level areconsidered to have sufficient ability to make payments for insurance claims; hence we have noparticular concern about its financial soundness.
※One of the management indexes that concerns
the level of insurance companies’ profitability. It is
computed by combining the net loss ratio and net
expense ratio. A reading of 100 indicates that thecompany is at a break-even point, while the lower
than a 100 the reading goes, the more profitable
the company is.
Morningstar Japan K.K.
Equity Research Group
Research & Analysis Department
Analyst Tomoaki Fujii
03-6229-0810 tomofuji@morningstar.co.jp

This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on
the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding theaccuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.

（3/3）

How to Read Morningstar Equity Research Report
Our Uniqueness（1）Emphasize Its Position as an Independent
Evaluation Organization

Morningstar emphasizes its position as an independent
evaluation organization and is committed to providing
objective comparison and assessment in the Morningstar
Equity Research Report. For all stocks covered by us, we
determine investment decisions, estimated share price range
and earnings forecasts based on expertise of an individual
analyst as well as the stock assessment committee consistingof several analysts.

（2）Universe of Covered Stocks
The stock assessment committee selects covered stocks basedon the following criteria.
【Stock Selection Criteria】● Domestic emerging companies that are rarely covered byanalysts●	Stocks that are popular among retail investors(refer to data from online security brokers)● Size of market capitalization (over about 5 billion yen)
● Exclude stocks which are liquidated or trade control, or
stocks with going concern and excessive debt

（3）Investment Decisions Classified intoThree Groups

We determine investment decisions for covered stocks after
consultation with the stock assessment committee based on
research, interview and analysis by each Morningstar analyst.

Each stock is classified into either of three groups according to
the following criteria.
BUY (Bull)：Forecasted to go beyond the current stock pricelevel by 15% or more in the next 6 months.
HOLD (Neutral)： Forecasted to fall into the range of － 15％~+15％ of the current stock price level in thenext 6 months.
SELL (Bear)： Forecasted to go below the current stock pricelevel by 15% or more in the next 6 months.
We flexibly respond to any changes of observations regarding
earnings forecasts, financial situations and stock price trends,
and change investment decisions accordingly. “Under Review”
status may be applied if any new information comes out andextra time is needed to determine investment decisions. Also
we don’t change investment decisions during trading hours.
“Suspension” status may be applied when an analyst leaves ourcompany.

（4）Estimated Share Price Range in
the Medium Term

It shows the price range for a stock price in the next 6 months.
We determine upper and lower range of stock price based onfair value estimates from share price indicator, technical factors
such as chart points, most recent high and low prices, trendline and moving average, trading volume in each price range
and such.

Analysis Points■ Analyst Comment■ Company Overview■ Growth

most recent earnings trend and businesscompany is engaged in and how revenue

the company’s forecasts of growthenvironment. It shows the most importantsources are defined. Also on the basis ofrates for sales, operating profit and EPS

information for stock investment suchour research, it discusses what businesses

with competitors, and evaluate past

as evidence for investment decisions,the company will focus on in years tobackground and growth potential of theperspectives on earnings forecasts andcome and how it carries out mid-term

main business.

business prospects. Also to make sure it

business plan.

Each analyst reports and evaluates theis easy to comprehend, we write in 2-4
paragraphs and use bold to emphasize
important texts.

It explains in detail what businesses the■ Business Environment and Outlook

For the current fiscal year, we compare■ Profitability

We compare the company’s forecast of

It discusses current circumstances andoperating margin for the current fiscal

growth potential of the industry to which

year, and return on equity and return on

the company belongs. A comprehensive

asset based on the past year result with

It reports earnings in past two fiscal years,

report on the industry from different

competitors, and evaluate profitability

company forecasts and our forecasts forperspectives is provided through research

trends over the past years.

the current and next fiscal year. We predict

interviews to competitors. Specific figures

earnings based on research as well as pastof the industry data are also introduced.

■ Revenue and Earnings Trend

quarterly earnings trend and analysis bysegments.

■ Risk factors■ Financial Health

We compare the company’s equity ratio,
debt equity ratio (=interest-bearing debt/

It shows the company’s risk factors andequity*100) and current ratio (=current

describes various aspects of risks such as

assets/current liabilities*100) for the pastbusiness, earnings and financials. Typicalfiscal year with competitors, and evaluate

stock market risks are also taken into

financial stability based on the amount ofconsideration.

cash and deposits and cash flow.

This report is for information purpose only, and should not be considered a solicitation to buy or sell any security. Final decision on which stock to choose and invest rests solely with the reader of this report. The opinions included herein are made based on
the knowledge at the time the report was created and are subject to change without notice. The opinions and data included herein are based on the data and other materials that we considered reliable, but we make no warranties whatsoever regarding theaccuracy, security and such. All rights of copyright and intellectual property right and such in the content are reserved for Morningstar Japan K.K. and Morningstar Inc. Redistribution is prohibited without written permission.