CFO Letter
Tokio Marine Group aims to lift the level of ROE by realizing strong profit growth in both insurance underwriting and asset management, while maintaining a disciplined capital policy. Despite increasing adjusted return on equity (ROE) to 15.1% in fiscal 2022, we acknowledge that this result has been influenced by factors such as the reduction in net assets due to rising interest rates, which is applicable to the entire industry. As such, we are not content with this figure alone and are determined to enhance ROE at its core, elevating it to a level that aligns with our global peers. In my capacity as Group CFO, I am devoted to leading these efforts, particularly focusing on capital policy considerations.
Our capital strategy is built upon a three-pronged approach. First, we will strategically review our portfolio based on organic growth and expedite the divestment of business-related equities to generate capital and funds. Second, we will channel the capital and funds into strong business investments. Third, if there are no favorable investment prospects, we will prioritize returning capital to shareholders, aiming to bolster ROE and maintain a balanced capital management cycle. In the following sections, I will provide a comprehensive explanation of each of these components.
Capital Management Cycle
Track Record of Disciplined Capital Management
- *1Combined only with the amounts disclosed (acquired from Refinitiv Eikon)
Organic Growth
Our approach does not align with the typical “shrink to grow” strategy. Instead, our key focus for boosting ROE revolves around molecular expansion, or “organic growth,” specifically aiming for the worldʼs top-class EPS growth. The characteristics of our portfolio are (1) a domestic market foundation that generates stable earnings, (2) growth of specialty companies in developed countries encompassing less correlated business lines, and (3) high growth in emerging countries such as Brazil and Asia.
In my role as Group CFO, I contribute to the growth of each business by actively engaging in the management strategies developed by each business, which are formulated based on capital allocation and other measures. For instance, I collaborate with the senior leadership of each business to address shifts in the business landscape, evaluate strategic advancements, and determine if any adjustments are warranted. Additionally, I play an active role in shaping the forthcoming Mid-Term Business Plan commencing next fiscal year.
In fiscal 2022, both domestic and overseas Group entities effectively executed their management strategies, achieving growth beyond market norms in appealing sectors. Consequently, on a normalized basis, adjusted net income surged to 617.1 billion yen, a year-on-year gain of 22%, and adjusted ROE rose to 15.1%, up 2.4 percentage points year on year.
- *2The breakdown of adjusted net income is the profit of each business unit.
- *3Domestic non-life insurance = TMNF
- *4Domestic life insurance = TMNL
- *5Other domestic non-life insurance, financial, and other businesses, and gains relating to sales of business-related equities, etc., that are not included in business unit profits
- *6The following one-time effects totaling +72.9 billion yen were excluded from the fiscal 2021 actual result of 578.3 billion yen: 1) Natural disasters: Approximately +17.0 billion yen, 2) North American capital gains, etc.: Approximately +24.0 billion yen, 3) COVID-19: Approximately +23.0 billion yen, and 4) Gains on the sale of business-related equities: Approximately +9.0 billion yen (on the portion of sales exceeding 100.0 billion yen)
- *7The following one-time effects totaling ‒173.1 billion yen were excluded from the fiscal 2022 actual result of 444.0 billion yen: 1) Natural disasters: Approximately ‒26.0 billion yen, 2) North American capital gains, etc.: Approximately ‒10.5 billion yen, 3) COVID-19: Approximately ‒134.0 billion yen, 4) Conflict: Approximately ‒14.0 billion yen, 5) South African floods: Approximately ‒4.0 billion yen, and 6) Gains on the sale of business-related equities: Approximately +15.0 billion yen (on the portion of sales exceeding 100.0 billion yen)
Portfolio Review/Business Investment
As an insurance company, we increase returns by taking risks in insurance underwriting and asset management as a key to our business. We have positioned Enterprise Risk Management (ERM) as the cornerstone of Group management. ERM takes into consideration our risk appetite, to what extent we undertake risks (risk strategy), whether return on risk is sufficient, and whether risks are appropriately diversified (see pp. 50‒53). We have also established the ERM Committee to discuss ERM strategy. As the Committeeʼs chair, I assess the growth potential and profitability of all businesses and the risks associated with each strategy in a forward-looking manner and formulate a capital allocation plan to optimize the business portfolio from a Group-wide perspective.
From the standpoint of business investment, we often receive inquiries during our dialogues with the capital market about “the next step in M&A.” However, for us, M&A is a “means” for risk diversification and profit growth, rather than being an ultimate “goal.” Therefore, we deliberately refrain from setting an “M&A budget” or a “profit plan dependent on M&A.” In the case of large-scale M&A opportunities, we generally perceive current valuations to be inflated. Consequently, we believe that exercising patience is crucial as we engage in Market Intelligence activities, constantly monitoring long and short lists of potential acquisition targets, and carefully selecting “promising companies” that offer a sufficient return on investment (ROI). Concurrently, we proactively seize opportunities for smaller-scale bolt-on M&A, capitalizing on the experience and insights within the Group to execute these initiatives consistently.
Under this guiding principle, we have pursued disciplined and strategic approaches to various entry (M&A, etc.) and exit (divestment, etc.) opportunities, considering risk diversification and future growth prospects. For instance, we have undertaken initiatives such as the acquisition of Pure Group, establishment of a local entity in Canada, and bolt-on M&A through Delphi Financial Group (Standard Security Life Insurance Company) and Tokio Marine HCC (Gulf Guaranty Employee Benefit Services, Inc.). Simultaneously, we have divested from reinsurance subsidiaries and Tokio Marine Kilnʼs subsidiary Highland, all aimed at achieving optimal capital allocation.
Following a review of our capital structure, we issued hybrid bonds when we acquired Pure in consideration of capital costs. In the future, we will also explore the use of hybrid bonds as necessary as one of the means for achieving the optimal capital structure while preventing equity dilution.
From a capital restructuring perspective, we have been consistently reducing business-related equities for over 20 years. Recently, we announced our intention to sell more than 600 billion yen worth of business-related equities over the next four years, to 2026. We intend to prudently utilize the capital generated from this accelerated divestment.
By following this approach, we have consistently enhanced our corporate value by effectively refreshing our risk portfolio. Looking ahead, we will maintain proper risk control while accelerating growth through well-considered capital allocation.
Achieving Growth through a Flexible Capital Strategy
- *1 The breakdown of profit is based on the profit of each business segment (yearly plan), except “Other businesses” are included in “Japan.”
- *2Profit on a financial accounting basis for TMNL
Shareholder Return
Tokio Marine Group regards dividends as the basis of shareholder returns and our basic policy is to sustainably increase dividends per share (DPS) in line with profit growth. Specifically, we calculate ordinary dividends based on our 5-year average adjusted net income to temper volatility and apply a dividend payout ratio that aligns with global peer standards. For fiscal 2023, against the backdrop of consistent profit growth, we have been steadily expanding the foundation for dividends, our 5-year average adjusted net income. As planned, by raising the dividend payout ratio to the targeted global peer level of 50%, we forecast a 21% increase in DPS compared with the previous year, marking the 12th consecutive year of dividend growth.
We use share buybacks as a means of adjusting capital levels and decisions will be made based on comprehensive consideration of economic solvency ratio (ESR), market conditions, opportunities for M&A, and additional risk-taking. Given our ESR of 124% as of the end of March 2023, well within the target range, our approach for fiscal 2023 is to implement a flexible share buyback plan of 100 billion yen throughout the year, with an initial resolution of 50 billion yen made in May.
Dividend Growth
- *1DPS = Five-year adjusted net income × Payout ratio / Number of shares
- *2Figures in parentheses are prior to the three-for-one stock split in October 2022.
Status of the Economic Solvency Ratio (ESR)
- *3Amount of risk calculated by a model using 99.95% VaR (AA-rated basis)
ROE
As a result of these initiatives, our adjusted ROE has been consistently above the 7% cost of capital. However, as mentioned earlier, we recognize that this level is not yet satisfactory. Our goal is to achieve the worldʼs top-class earnings per share (EPS) growth while executing disciplined capital policies, aiming to elevate our ROE to a level on par with our global peers.
Adjusted ROE Is Trending Above the Cost of Capital of 7%
Steady Improvement in ROE
Reference: Price-to-Book Value Ratio (PBR) Is Currently Above One
Enterprise Risk Management (ERM)
ERM*1 Framework
Finally, I would like to reiterate our commitment to Enterprise Risk Management (ERM), which serves as a pillar of management. In concrete terms, we always maintain a keen awareness of the interplay between “risk,” “capital,” and “profit” within the Group. By ensuring the adequacy of capital in relation to risks and achieving high profitability, we aim to sustainably enhance our corporate value.
- *1Enterprise Risk Management
Tokio Marine Group’s ERM Structure and Initiatives to Strengthen it
The risks surrounding Tokio Marine Group are becoming more diversified and complex due to global business development and changes in the business environment. In addition, in todayʼs uncertain and rapidly changing political, economic, and social climate, we must constantly watch for the emergence of new risks and take appropriate action. From this point of view, we are not limited to conventional risk management for the purpose of risk mitigation and avoidance, but are comprehensively assessing risk in qualitative and quantitative ways.
In addition, we are continuing our efforts to further strengthen the ERM structure. For instance, we are enhancing risk assessments to include risks that are difficult to quantify, such as cyber risks, and improving natural disaster risk management, including a review of our reinsurance schemes.
ERM Cycle
- *2Emerging risks are new risks that arise due to changes in the environment or other factors, encompassing those that were not traditionally recognized as risks and those that have increased markedly in severity. Specifically, these risks are identified through internal discussions, considering results from subsidiary assessments and information from external sources.
- *3Material risks refer to risks that could have a substantial impact on financial soundness, business continuity, and other critical aspects. Specifically, we focus on emerging risks as well as material risks from the previous business year within the Group. We assess the impact (evaluating economic, business continuity, and reputational impacts) and consider the frequency and likelihood to identify the most significant factors. We specify these risks using the following 5×5 matrix.
- *4For material risks, we formulate response measures (Plan), implement these measures (Do), assess the outcomes (Check), and make improvements (Act).
Reference: Qualitative Risk Management
In qualitative risk management, all risks, including risks that emerge due to changes in the environment, are identified and reported to management, while risks to the Group are discussed at the management level as needed. Risks identified in this manner are evaluated not only in terms of the economic loss or frequency of occurrence but also in terms of business continuity and reputation. Risks that have a large impact on the financial soundness and business continuity of the Group or of individual Group companies are identified as “material risks.” For identified material risks, we assess the sufficiency of capital through the quantitative risk management process described below, draw up control measures before the risks emerge and countermeasures*5 to be taken if the risks do emerge, and conduct PDCA management.
- *5Pre-emergence risk control measures include monitoring and risk management based on the market environment and regulatory trends, while post-emergence risk response measures include manuals (including business continuity plans) and mock drills.
Detection of Emerging Risks and the Process of Identifying Material Risks
Examples of Emerging Risks
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Material Risks for Fiscal 2023
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Reference: Quantitative Risk Management
In quantitative risk management, the Company measures risk amounts and conducts stress tests using risk models based on the latest knowledge available, verifying from multiple perspectives that its capital is sufficient relative to the risks it holds, with the aim of maintaining its credit ratings and preventing bankruptcy.
Specifically, the Company quantifies potential risks using a statistical metric called “Value at Risk (VaR)” on a 99.95% confidence level, which corresponds to an AA credit rating, and verifies its capital adequacy based on the Economic Solvency Ratio (ESR) arrived at by dividing net asset value*1 by risk capital. A 99.95% VaR is equivalent to the damage caused by an occurrence of a risk that happens once in 2,000 years. Although many insurance companies around the world use 99.5% VaR (once in 200 years), Tokio Marine Group uses a much more stringent standard to evaluate risk capital. The target range of the Groupʼs ESR is 100%‒140%, and as of March 31, 2023, the Groupʼs ESR was 124%, confirming that the Group is adequately capitalized.
We also conduct stress tests based on scenarios involving significant economic losses from material risks such as domestic and international economic crises, disruptions in financial and capital markets, loss of confidence in Japanese government bonds, major earthquakes, major wind and water-related disasters, and widespread outbreaks of new viruses. We also assess scenarios where multiple critical risks materialize simultaneously. Through these stress tests, we confirm separately that there are no issues regarding capital adequacy and liquidity.
- *1Calculated by adding the value of catastrophe loss reserves, deducting for goodwill, and making other adjustments to consolidated net assets on a financial accounting basis.
Status of the Economic Solvency Ratio (ESR)
- *2Amount of risk calculated by a model using 99.95% VaR (AA-rated basis)