🏦 Evaluation Criteria for the Financial Industry (No. 3 Insurance Industry Edition) — What is a '💰 Cash Cow'?

Hello! I am Paponian🌹, an investor who loves roses, a corporate accountant.

I define companies that can be expected to see 'revenue growth, profit growth, and dividend increases' into the future as 💰 Cash Cows, and I score them using my own proprietary evaluation system.

📢 This time, I am announcing the 'Evaluation Criteria for the Financial Industry (No. 3 Insurance Industry Edition)'

Until now, I have evaluated all sectors among the 33 TSE sectors, excluding the financial industry, using the same criteria, but because the financial industry has a business model and financial structure that differ significantly from other industries, I have decided to revise the evaluation criteria specifically for the financial industry.

In this article, I introduce the reasons for this and the details of the changes.

📝 For those who feel it might be a bit difficult...

In this article, I introduce the reasons and details of the changes, but it does include some technical content.

However, please rest assured. The final scores and key judgment points are summarized simply, as always.

You are welcome to skip over any parts that you feel are 'a bit difficult'.

It is enough if you just understand that 'the financial industry cannot be accurately evaluated using the same criteria as other industries'.

🧐 Why can't the four financial sectors be evaluated correctly using the 'conventional evaluation criteria'?

Among the 33 TSE industry sectors,

☑️ Banking
☑️ Securities and Commodity Futures Trading
🟢☑️ Insurance (Evaluation criteria explained in this article) 🟢
☑️ Other Financial Services

for these four sectors, there has been a challenge where they cannot be correctly evaluated using conventional evaluation criteria.

🔍 Why can't they be correctly evaluated using conventional criteria?

The financial industry is a business model that generates revenue by increasing funds collected from others (deposits, insurance premiums, funds associated with securities trading, etc.) through lending and asset management.

In other words, while 'debt = risk' in other industries, in the financial industry, how efficiently one can collect and utilize large amounts of funds becomes the competitive edge.

✏️ Standard Business Models in the Financial Industry

☑️ Banking
　Lends funds collected through deposits, etc., to companies and individuals, and earns revenue from the difference between lending interest rates and deposit interest rates (interest margin). → The interest rate spread is the source of revenue, and it is greatly influenced by the scale of loan balances and interest rate levels.

☑️ Securities and Commodity Futures Trading
　In addition to commission income from brokerage of stock and bond trading, earns revenue through proprietary trading and asset management of investment trusts. → Since commission income increases as investor trading becomes more active, performance is easily swayed by market conditions such as stock price movements and whether the market is booming or stagnant.

🟢☑️ Insurance (Evaluation criteria explained in this article) 🟢
　Earns revenue from both insurance premium income and investment returns by investing premiums collected from policyholders. → For revenue stability, the balance between 'received premiums' and 'paid insurance claims' is important. If insurance claim payments surge due to disasters, etc., profits are squeezed, so insurance design and risk management are key.

　
☑️ Other Financial Services
　
Earns revenue through interest and fees received in exchange for lending money or goods through leasing (renting equipment), credit cards, consumer finance, etc. → While interest income is central, it is susceptible to risks such as the borrower's inability to repay (default risk) and a decrease in lending demand due to economic downturns.

💡 Differences in Financial Structure are the Reason Why 'Conventional Criteria Cannot Evaluate Them'

For example, the following financial indicators have completely different meanings in the financial industry:

• Current Ratio: Usually an indicator to measure short-term solvency. → However, in banking, because deposits are recorded as large amounts of short-term liabilities, there is no problem even if the ratio is low.
  

  
  

• Net Debt-to-Equity Ratio: → In the banking industry, since borrowing is a prerequisite, a high numerical value does not directly link to bankruptcy risk.
  

As described above, the financial industry differs significantly from other industries in both its business model and financial structure, so we determined that 💰 Cash Cow evaluation requires dedicated evaluation criteria.

🏦 Regarding evaluation criteria for the insurance industry

Among these, this time I will focus on securities and commodity futures trading businesses and introduce the changes to the evaluation criteria.

✅Growth Potential (60 points)
As before, we will evaluate based on the perspective of "increased revenue, increased profit, and increased dividends."

✅Safety (20 points)
☑️Solvency Margin Ratio (20 points)
→ This is an indicator showing how much an insurance company can withstand risks that exceed normal predictions, such as natural disasters or major accidents. If it falls below 200%, it becomes subject to early corrective action by the Financial Services Agency, so it can be said to be the minimum line for soundness. Generally, 300% or more is considered "sound," and the higher it is, the more capacity it is judged to have for paying insurance claims.

✅Profitability (20 points)
☑️Ordinary Profit Margin (10 points)
→ The ordinary profit margin is an indicator showing how efficiently profits are generated relative to insurance premium income (net premiums written) and investment income. In the insurance industry, since the stability of insurance underwriting profit and the skill of asset management are directly linked to profitability, companies that maintain a good balance between the two and keep profit margins high can be evaluated as having high "quality of earnings base." In particular, it is questioned whether they can control interest rate spreads and operating expenses even in a low-interest-rate environment.

☑️ ROA (5 points)
→ Profitability relative to total assets. An indicator that can also be used commonly in the insurance industry.
☑️ ROE (5 points)
→ Profitability relative to equity capital. An indicator that can also be used commonly in the insurance industry.

In this way, by switching to financial indicators suitable for the insurance industry, more realistic evaluation becomes possible.

🙇‍♂️ Other financial industries are currently under consideration.

Now, let's look at the details of the scoring criteria for the insurance industry's "💰 Cash Cow."

✅ What is a "💰 Cash Cow"?

First of all, I will briefly explain the "💰 Cash Cow" that I have in mind!

☑️ Definition:
Stocks of companies that can be expected to have increased revenue, increased profit, and increased dividends in the future.

☑️ Benefits:
You can earn stable dividend income through long-term holding.
→ It becomes a source of income to support future life other than a pension.

☑️ Points:
❗️ Do not choose just because the "dividend yield is high"!
→ Even if the current yield is low, if continuous dividend increases can be expected, the yield relative to the initial investment amount will be high in the future.
👍 Choose by emphasizing the company's profitability and safety!

✅ What are the scoring criteria for a "💰 Cash Cow"?

So, from what perspective should you identify companies? I will tell you the criteria next.

I decided to evaluate companies from the following two perspectives and quantify them on a 100-point scale.

1️⃣ Have performance and dividends grown over the past 10 years? (Allocation: 60 points)

Now, let's look at the specific scoring criteria.
We prioritize the growth of past 10-year performance and dividends, and evaluate a company's growth potential based on the following criteria.

☑️ Revenue Growth: (Points: 20)
The past 10 years are divided into the first 5 years and the last 5 years, with points added according to the growth rate of each.
📌 150% or more: +😄10 points, and thereafter -5% per -1 point

☑️ Profit Growth: (Points: 20)
The past 10 years are divided into the first 5 years and the last 5 years, with points added according to the growth rate of each.
📌 150% or more: +😄10 points, and thereafter -5% per -1 point

☑️ Dividend Growth: (Points: 20)
📌 Dividend increase: +😄2 points/year
📌 Dividend maintenance: +😄1 point/year
❗️Commemorative dividends are deducted from the evaluation.

2️⃣ Will performance and dividends continue to grow in the future? (Points: 40)

Future growth potential To evaluate this, it is important to check the company's safety and profitability. We evaluate each based on the following criteria.

📕(1) Safety (Points: 20)

Regarding safety, to accurately grasp the company's current financial situation, we evaluate it using the latest financial results.

☑️ Solvency Margin Ratio (Points: 20)
• Formula
　Solvency Margin Ratio = Total Solvency Margin (yen) ÷ (Total Risk Amount ÷ 2) (yen)
　What is the Total Solvency Margin?
　Surplus capital held by an insurance company to prepare for "what-ifs" (equity capital, policy reserves, contingency reserves, subordinated bonds, etc.)
　What is the Total Risk Amount?
　The sum of all risks (natural disasters, excess insurance claims, interest rate fluctuations, stock price declines, etc.)
• What does it represent?
　The Solvency Margin Ratio (SM Ratio) is an indicator showing how much an insurance company can withstand events that exceed normal predictions (i.e., sudden risks) such as natural disasters, pandemics, or large-scale accidents. It is a soundness indicator unique to the insurance industry that evaluates whether a company can handle "unexpected" losses with a margin, in addition to the expected payments from premiums collected from policyholders.
• Key Points
　200% or higher is considered the minimum standard by the Financial Services Agency, and falling below this triggers early corrective measures. Generally, 300% or higher is considered sound, and 500% or higher is judged to have significant leeway. A high Solvency Margin Ratio is directly linked to the depth of insurance payment capacity and the company's reliability.
• Scoring Criteria
　600% or higher📈 for 😄 +20 points
　Thereafter, 1 point deduction for every 30% decrease

📕 (2) Profitability (Points: 20)

Regarding profitability, to reduce the volatility of profit and loss for each fiscal year and accurately evaluate the company's inherent earning power, we use the average of the financial results for the most recent three years.

☑️ Ordinary Profit Margin: (Points: 10)
• Formula
　Ordinary Profit Margin = Ordinary Profit (yen) ÷ Ordinary Revenue (yen)
• What does it represent?
　An indicator showing how efficiently a securities company generates profit through its business activities (stock/bond trading, underwriting fees, asset management services, etc.).
• Key Points
　In the securities industry, where revenue volatility is high, companies that can consistently secure high profit margins may be successfully diversifying their business models and moving away from fee dependency.
• Scoring Criteria
　20% or higher📈 for 😄 +10 points
　Thereafter, 1 point deduction for every 2% decrease

☑️ ROA (Return on Assets): (Points: 5)
• Formula
　ROA (Return On Assets, Ordinary Profit on Total Assets)
　= Ordinary Profit (yen) ÷ Total Assets (yen)
• What does it represent?
　ROA indicates how efficiently a company is utilizing its total assets to generate profit.
• Key Points
　A high ROA indicates high asset utilization efficiency.
• Scoring Criteria
　1% or higher📈 for 😄 +5 points
　Thereafter, 1 point deduction for every 0.2% decrease

❗️ In the financial industry, ROA tends to be lower than in general companies, so the scoring criteria have been adjusted.

☑️ROE (Return on Equity): (Points: 5)
• Formula
　ROE (Return On Equity, Return on Equity)
　 = Net Income (yen) ÷ Shareholders' Equity (yen)
• What does it represent?
　ROE indicates how efficiently capital invested by shareholders has been used to generate profit.
• Key Points
　A high ROE indicates efficient utilization of shareholder capital. However, since ROE can sometimes be inflated by excessive use of interest-bearing debt, attention must also be paid to financial stability.
• Scoring Criteria
　12% or higher📈 with 😄 +5 points
　Thereafter, 1 point deducted for every 2% decrease

❗️The scoring criteria have been adjusted to be suitable for the financial industry.

Thank you very much for reading this far!🙇‍♂️
I hope this serves as a hint for your asset formation and portfolio design.😊

＼Follow & Like, it encourages me!💖／
Paponyan🌹Investor who loves roses🐾