Thinking Points

First world Asian countries are not particularly crazy about pets.

That said, more Japanese pets are getting their insurance cards.

Anicom holds a 60% market share in a Japanese pet insurance industry that’s seen double digit growth over the past several years (at least).

More Japanese pets are getting their insurance cards

Anicom Holdings Earnings Presentation 2017/3

The picture above is a sample insurance card for a Japanese dog named “Sakura”.

That insurance card can be used over the counter in about 87% of Japanese pet hospitals, just like you would use your health insurance card when you go to a normal human hospital in the US (or Japan). The issuer of the insurance card is Anicom Insurance, a subsidiary of Anicom Holdings (TYO: 8715).

Anicom holdings holds a 60% market share in a relatively new Japanese pet insurance industry that has seen double-digit growth over at least the past several years. To give you an idea, here is a graph depicting the number of contracts Anicom has held over the past 3 years:

Source: Anicom Holdings Earnings Presentation 2017/3

Apparently, first world Asians aren’t crazy about pets

According to GfK (Japanese), Japan has one of the lowest percentage of population with pets (37%). This puts Japan only above S. Korea (31%) and Hong Kong (35%). The global average is 56% (22 countries included in the study).

That said, pet insurance is fairly new in Japan, with less than 7% of pet owners in Japan having insurance policies for their pets. At the same time, according to Pet Insurance Quotes, 25% of Britain’s and 30% of Sweden’s cats and dogs are insured. In contrast, less than 1% of American cats and dogs are insured.

Pet food for thought

Some of the broad thoughts I had:

Pet insurance revenue is probably less sticky compared to other forms of insurance.

The common forms of insurance I can think of are: Health, auto, life, and fire/flood/earthquake, etc. If the household budget comes under stress, I believe any reasonable household would let go of pet insurance before the more common forms of insurance. Unlike health or auto insurance, we will probably never see a day when pet insurance is mandatory.

Comparing Japan to Britain, really?

I’ve seen multiple websites (as well as Anicom’s 2017/3 earnings presentation) referencing Britain’s rate of pet insurance coverage. The Britain figures are then used to calculate the size of Japan’s pet insurance industry if it ever reaches comparable coverage rates.

I assume both cultures are quite different (I’ve never been to Britain). While the cookie-cutter, they-are-both-first-world-countries approach may be enough for some, I think a deeper dive here would be necessary before making an investment decision.

But then, Japan’s making it easier to own pets

Most apartments in Japan never used to allow pets. After a little bit of a nudge from the Japanese government, apartments started allowing pets. According to Speeda (Japanese), 9% of new apartments allowed pets in 2000, which increased to 86% in 2007. However, since 2007, the number of pet dogs has decreased, while the number of pet cats has remained stable.

Tearsheet

Now, Anicom’s P/B is far greater than any of the publicly traded major Japanese insurance companies. ROE is also the highest:

Source: Financial Times & Nikkei (data obtained 7/3/2017)

For a brief moment, let’s assume Japan’s pet insurance industry continues its explosive growth. Presumably, new competitors will enter the market. So what is Anicom doing to protect its lion’s share?

The short answer is: They are building infrastructure.

Anicom already developed an animal hospital management software. Next, the company is targeting its efforts on preventive care.

As a pet insurance company, these moves both make a whole lot of sense to me. At least in theory, both moves will allow Anicom to develop more sophisticated offerings like lowering insurance rates if a pet takes some sort of health shot periodically. At the same time, the company can turn a profit on health shots (or something like that, you get the idea).

In Closing

Combining surface level valuation with surface level qualitative assessment, it’s difficult to tell whether Anicom’s high P/B + high ROE combo is actually cheap, about right, or expensive.

With that said, I believe the three areas of focus here are 1. Whether Japan’s pet insurance industry would continue its growth to UK levels, 2. What Anicom does with its float (assuming actuaries are competent) 3. Which competitors are flooding in and how Anicom maintains its infrastructure lead (IT systems, widespread insurance network, preventive care, etc).

From a business performance perspective, I think Anicom is absolutely compelling. Now I just need to figure out a way to determine a good price for the investment. Perhaps someone with more knowledge in insurance can chime in?

For those who are inspired to read more about Anicom, I strongly suggest that you check out Shared Research’s report here (in English!).

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