Tokio Marine Holdings, Inc. (8766) Earnings Call Transcript & Summary

[Interpreted] Ladies and gentlemen, thank you very much for gathering despite your busy schedules. This is Ishiguro from IR Group at Tokio Marine Holdings. So we are pleased to present Tokio Marine Insights, the series in which members of our frontline team provide real-life explanations on topics of interest to analysts and institutional investors. So just 1 year ago, we held a session on growth strategies in the renewable energy market. And then this March, we had one regarding D&I. This time, we will focus on PHLY and Kiln, our profit drivers in our overseas business, and talk about our power to overcome a challenge, which is really about transformation and execution. The presenters for today will be President and Chief Executive Officer from PHLY, John Glomb; and Chief Executive Officer of TM Kiln, Brad Irick. These 2 will be the presenters for today. We would like to share the features and strengths of both companies as well as the initiatives currently underway to provide you with firsthand feedback from the field. The way we like to proceed today is, first of all, we'll have a presentation from the 2 speakers I just introduced using the slides that we have uploaded onto our homepage today, and then we would like to take questions. [Operator Instructions]. Today, we would like to end in an hour or 90 minutes. Depending on how many questions we get, we will continue until 9 or 9:30 p.m. JST. Without further ado, John, you're on. Over to you.

Thank you. First of all, let me start by sharing that it is great to be here today with you to share the current state of PHLY, our financial results, key initiatives and actions taken by our team in recent years, which have required significant coordination, communication and support from our loyal distribution partners. Can we advance to Slide 3? We at PHLY have taken full advantage of a hard market that preceded the pandemic and has continued throughout the pandemic, and show signs of continuing for the foreseeable future. We established our rate goals to exceed what we see to be true claims inflation cost, that is the sum of both loss-costs and social inflation. Over the past 5 years, we have focused on taking an aggressive action on products and specific accounts that have historically been marginally profitable or even marginally unprofitable. Looking to the top right side of Slide 3, you will see that we have had exceptionally high execution in 2020. In 2020, we missed top line plan by $132 million. That was intentional to some extent. Roughly half of that miss came as a result of the pandemic, state-mandated refunds to insureds, automobile layups and exposure to decreases while our insureds were closed for business. The other half was as a result of PHLY actively managing our portfolio of what I referred to as marginal products or accounts with full knowledge that less premium would yield higher profit margins through a lower combined ratio. Our Claims team was extraordinarily creative and devised a claim settlement strategy early on in the pandemic in the second quarter of 2020, which I will speak more about in a future slide. And finally, PHLY has been very much in tune with the reality that loss-cost inflation plus social inflation was driving claim settlements and jury nuclear verdicts significantly higher. Again, looking to the lower right-hand corner of Slide 3, I will draw your attention to the 2019 accident year. In that year, we acknowledged the impact of social inflation and took aggressive action to increase reserves on primarily accident years 2016 through 2019 by boosting reserves by a total of $273 million pretax over that period of time. Let's advance to Slide 4, please. Our view is that loss-cost plus social inflation is 6%. In 2021 accident year, PHLY achieved 10.8% rate overall while achieving 20.5% rate when we offered umbrella capacity. That's very important, when we offered, because we offered umbrella capacity a lot less frequently. The rate we achieved compares favorably to the U.S. P&C market average. We were also focused on reducing overall capacity offered and had great success here. 90% to 95% of all inforce policies have $5 million or less in total umbrella. Almost all of the umbrella limits we offered are $10 million or less. In fact, we reduced total capacity by over $15 billion or close to 13% of total capacity, and due to the rate achieved, have more premium inforce on the umbrella line despite that $15 billion reduction along with a corresponding reduction in exposures. Regarding Sexual Abuse and Molestation, we took similar aggressive action to reduce capacity. While only 100 policies exceeded $10 million in 2018, that number dropped to fewer than 10 policies by 2019. Let's advance to Slide 5, please. This slide details the creative work of our Claims team. Early during the pandemic, the Claims team categorized claims into 3 groups while the court houses were closed due to the pandemic. One category, those claims and number of claims with a particular plaintiff firm, representing greater than 50 in total claims. The second category, those claims that had been reserved for $1 million or greater. And finally, a third category, those claims reserves between $500,000 and $1 million. As you can see from the slide, of the 1,360 subject claims from all 3 phases, 803 or close to 60% were settled for a net benefit of over $70 million pretax on final settlement versus carried reserves. That is a benefit that will pay off for years to come. Let's advance to Slide 6. This slide details another way of looking at our inforce book of business and are categorizing products into 3 distinct tiers. Tier 1 and 2 being the most profitable, and Tier 3 representing products that needed significant changes in either terms and conditions or pricing to achieve the targeted profitability or that they would simply be non-renewed. Tier 3 products today represent less than 7% of our inforce book of business. This strategy allowed for clear direction and alignment between underwriting and marketing and allowed us to communicate to our agent partners well ahead of renewal dates to ensure no surprises, which help to maintain the strength of these key trading relationships. Two other noteworthy underwriting strategies adopted in 2021 relate to Texas property following Winter Storm Uri in February 2021. That was followed by a targeted 25% rate increase on Texas property and a second strategy tied to Florida condominium business following the devastating collapse of the Surfside Condo in June of 2021. Following that collapse, PHLY quickly moved to non-renew any condo business that had property that was built more than 20 years ago, which compares to a zoning referendum passed in Florida that required renovations and upgrades on all condo property built 30 years or more ago. This resulted in PHLY non-renewing $26 million of condo premium. Let's advance to Slide 7, please. This slide details the strength that PHLY enjoys, the relationship that PHLY enjoys with our preferred agents and national retail distribution partners who placed 60% of PHLY's total new business in 2021, which is a typical year and does highlight the strength of this relationship. Let's advance to Slide 8. This slide highlights several key operational initiatives for 2021 that continue in 2022 and beyond. The pandemic caused us to reprioritize several large dollar transformational IT investments in favor of projects that enhance ease of doing business for agents who trade with PHLY. PHLY's culture is one of continuous improvement and high execution diversity, equity, inclusion and development of our future leaders continues to be a key priority for PHLY. Growth will come most likely organically in the segments we are currently offering, specialty niche products, as well as through bolt-on acquisitions, which likely will be MGAs who we currently compete against. We have a track record of successfully integrating such bolt-on acquisitions. We have intense focus on striking the appropriate balance of embracing the hybrid work model that was product of the pandemic. A deliberate and well-thought-out commitment to continuing our DE&I strategy, which includes senior management and investment in buy-in from senior management; a diversity council and partnering with external vendors and employee sourcing associations; success in the war on talent, which requires us to remain vigilant in our connectivity with employees who are seeking a purpose-driven career that provides upward mobility, flexibility, balance with competitive pay, maintaining our unique and vibrant culture; and finally, a keen focus on succession planning, with 15% of our employees reaching retirement age in the next 5 to 7 years. We also in close collaboration with Tokio Marine Home Office, have increased the prominence of ESG matters with a similar emphasis on continuous improvement in this area. Let's advance to next slide, Slide 9. This last slide before I pass it to Brad highlights our Net Promoter Score, which despite the pandemic, and what was well over 95% full-time remote workforce in 2021. We achieved our highest Net Promoter Score ever since we began tracking this metric over a decade ago. This underscores the success we had with improved communication, partnership with our agent partners and the benefits of our enhanced focus on ease of doing business. With that, I will pass it to Brad and look forward to answering any questions at the end. Thank you.

Thanks, John. It's a great story, and I hope to share a little bit about TMK. TMK is a company that I joined in 2018. At the time, there was some issues around deteriorating results. There were some regulatory cultural challenges the company was encountering, and it was my honor to come here to London from Texas and work with the company. What I found was a company with really great people and a real strong legacy. As you see, we're celebrating 60 years this year. So you find a company with really great bones that was something to work with and people that really care about the company. And I could see that early on, and I could see that this company had some great things in its future. What was needed most was some focus, some prioritization, and honestly, some confidence to build back on that strong legacy. On the focus side, we really focus on a, what I'll call, a laser focus on consistent bottom line profitability and diversification. So a lot of companies talk about that. It's easy to say, not that easy to get right. I will say that our underwriting teams that have been in place for many years went right to that. There wasn't -- it wasn't -- I didn't have to explain to them what that meant or anything. In fact, they had been working behind the scenes to do things like within the property business to move away from the coast in a rising rate environment and derisk in ways that we found really enhance the profitability of the company even before we started going deep into some other areas and everything. So you had a company and underwriters that really got it and understood and had the expertise to move forward. The other thing I'll talk about today is we do have a stable performing portfolio at this time that we're excited about. And we also have a favorable market in most of our lines, which is not a situation that you find yourself in that often. So we're excited about the rest of this year and into 2023, really having the opportunity to grow. And you'll see that we've managed that growth over the last several years for good reasons. But -- so it feels good to be in a position to grow the company but grow the right way profitably and furthering those diversification goals that I'll cover a little further than that as we go along. Culture and governance, as I said, there were some challenges in the past. But honestly, the culture of the company was really strong underneath. What really needed was refocusing, and I think if -- people that very much embraced change and wanted to hear about diversity and inclusion and be part of that so organically. So it's really become a strength for us. And I think from a regulatory side, we're -- we feel really good about where we are. And from the culture side, we feel good about that. So today, I want to spend a little more time about who Tokio Marine Kiln is, our purpose, vision and values. And then I'll talk a little bit about the change initiatives that we've had over the past 24 months. If we can advance to Slide #12, please. I won't spend too much time here. I expect you probably know some of this, but we're the fourth largest in premium size in Lloyd's. I think that might change. We will be somewhere in that top 4 pretty much in a year, so a meaningful player within Lloyd's environment. We operate under 3 syndicates, Syndicate 510, Syndicate 1880, and Syndicate 557. Now, some of you may have read that we're in the process of merging 557 with 510. 557 was a special-purpose reinsurance syndicate that we're discontinuing and merging. We got 800 employees in London, Singapore, and the U.S., and that's primarily through our 100% owned NGA, which is Tokio Marine Highland. I mentioned this, many well-known and experienced underwriters with a profitable portfolio. So the underwriting teams within TMK really haven't changed through this. So when I talk about changes over 24 months and so forth, it really is with an existing team of underwriters and other support people within the company. So we started with some strong people, and that's really been the story of how we've been able to improve things. We are recognized for our market-leading claims services. One that I wanted to touch on was robust factorial functions, which maybe doesn't sound that exciting when you say it, but we really punch about our weight from an analytics perspective and ability to make decisions using data and analytics. That's been a big part of the success that we found is really working together collaboratively with underwriters and our actuarial and data analytics teams to really improve the results over time. We have a strong and experienced leadership team. Matthew Shaw joined us in 2020. And during the pandemic, as our CEO, he's been a real game changer for us. Nick and [ Harman ] joined us from Tokio Marine HCC in 2019. Reeken Patel, our CFO, joined us in 2018 about the time I showed up. [indiscernible], who is our Chief Risk Officer, joined in early 2018, and [ Anne Nakamura ] is -- has been with the company for a long time. It actually balances out that, too. A lot of us are new to the company, but Anne has got a long background and love for this company, and has been a great support to us as we've moved forward. And Elisabeth Ibeson who joined as our Chief People Officer, back in 2020 as well. I think let's move to Slide 13. Again, I won't spend a lot of time on this slide, but really, when I took over as CEO, I wanted to focus on the culture. We really had to go back to basics and really remind ourselves of why we exist, what we're trying to accomplish, some simple messages around low 90s combined ratio and a return on capital of 10% or better and our values, and what do we stand for. These values really are unchanged from over the last 60 years. We've made some tweaks to them. We've made them, I think, more relevant to some of the realities of today. We've tried to bring it alive a little bit more in what we do, so they're not just up on the wall there. Basically underpin everything that we do. So that was really the importance of that is to get back to basics and remind ourselves how -- who we are and what we stand for, and will drive the company that way. If we can move to Slide #14, please. So some of the change initiatives since 2019. I mentioned the laser focus on profitability, that low 90s combined ratio focus and breaking that down into the attritional loss ratio, the CAT loss ratio and the various components of expenses and really talking about what was driving performance. And what we found was the attritional loss ratio was really the challenge. In a soft market environment, the company had grown pretty significantly and didn't have the line of sight to what was happening to the attritional loss ratio that we needed to. So the MI and analytics that we're able to pull together really were able to focus us on those parts of the portfolio that were performing well and move away from those areas that were not performing well. At the same time, rebalancing the portfolio, and the easiest way to describe that is when I showed up in 2018, the U.S. property book for this business was 65%, we'll call it the premium of the company. And while we like the business and it was performing, underlying all that, it just was a higher percentage of the overall portfolio than we thought was healthy from a sustainable basis going forward. And so we like that business, we want to continue to build it and sustain it. But we also want to build other lines of business around that, and we had some really strong lines of business to look at initially. The liability line is one that we -- that's very diversifying for us, and that we've had a favorable market environment that we were able to grow in. Aviation is another one of those lines that really kind of underpinned kind of early on where we were able to grow and diversify. So as we look at diversification, we looked for that property book to continue to grow, but to be less of a percentage, so more like 40% of the portfolio. And if you look at our plans in 2023, we're right at that 40%, so somewhere between 35% and 40% going forward, but still growing, but other lines of business growing alongside that is our focus. From an operational foundation perspective, the -- again, people and culture has been a primary focus, I said as the #1 focus of the company early on. I think the success that we've had as a company, coming along with success in our culture and our -- the premium culture is no coincidence. I think they're intrinsically related. And the better we are with our people and our culture, the better odds are that we're going to have good results. Governance, again, good governance in place and functioning. An operating model that we're still working on, but like a lot of companies really want to have a simpler fit-for-purpose operating model. Greater efficiency, greater timeliness of information and so forth, so we're well into 2 years into a target operating model process that's been successful as well. Like John said, ESG has been a major focus for us over the last several years, and especially since 2019. I'd say, beyond a company, there's kind of the top down where we want to focus on that, but there's a real bottom-up focus in this company with people who you want to see us focus on. Things like the climate and things like people issues, diversity and inclusion, the grassroots efforts from diversity inclusion that has really been amazing to me. And so that's something where we really want to be leaders here. We don't want to wait for regulators to tell us what we need to do. We want to define what we want to do as a company, and I think we're well on our way to being recognized for that. Innovation was something that if you were to go back in time to the acquisition of Tokio Marine Kiln, Tokio Marine was focused on the access to new innovative products that naturally made their way into the Lloyd's market. And so we're proud to continue that tradition and have that as one of our values, to be innovative but also be looking for those new innovative ideas to bring to you both Tokio Marine Kiln but also to the Group, and that's something that we'll continue to be focused on. Can you please advance to Slide 15? So these are the -- these are the results. And as you see, in 2020 is really where it was unfortunate with COVID that the underlying results were hard to see because of the losses with regard to COVID. So we do show you the ex-COVID numbers. So we could see this happening in the underlying portfolio and a movement towards the low 90s combined ratio. So we had quite a bit of confidence that we were making the right decisions and so forth. And you can see that in 2021, we really put a strong result, an 88% combined ratio. 2022 and '23 targeted right at, 91%, 90%, and I expect that we'll be able to be in that range for both of those years. Obviously, we're not through the CAT season, but we've prided ourselves in building a company that performs even when there are catastrophes. We are a catastrophe-exposed business, so it was important that we did build that into the company and our strategy. Again, people really dedicated -- the best thing I can say about this company and our people is that when you provide a clear direction to what we're trying to accomplish, people really go for the -- go for it and come up with new, interesting, exciting ideas for how we're going to get to those areas. So if you can provide some guidance, people can really run to those targets. And again, really, the core of the success we've had in these numbers is really managing and improving the attritional loss ratio. When I showed up, I think people focused on CAT and everything. Which certainly is an issue, but really that, with a strong attritional loss ratio, you can handle some CATs, and that's what we have build over time. If you can go to Slide 16, please. Again, this kind of just shows you the numbers and builds on what I've talked to you about the portfolio diversification away from that CapEx exposure, getting into and building on existing lines, liability, aviation and other lines that were strong for us. As you can see on the table on the right hand -- top right-hand side, from 2018, 2019 and 2020, there's very little growth. There's a lot of remediation going on there. There's a lot of -- there's -- within our U.S. property business, we were actually growing it during that time. Some -- and offsetting some of the remediation of the lines of business. In 2021 -- or '20 and '21, you see a drop off in premium, which is primarily impacted by construction, refocusing our cyber business and also reductions in our reinsurance business, and so those are really the drivers within that. So 2021, you see that the drop off, and then in 2022, with the portfolio that we had felt like we remediated to a level that we needed to. We see return to growth and expect to see that in 2023 and forward as well. I talked about in the combined ratio, you see the impact. This is exactly what we're hoping to do, which was bring the combined ratio down into the low 90s. And 88% was obviously a great performance for us in 2021. But most importantly, we feel like we built the portfolio, and we'll be able to have a sustainable portfolio that can perform in that low 90s range going forward. If we can go to Slide #17, just quickly on the cultural transformation. And importantly, I think we look at this really as BAU. It was really a lot about regular, consistent communication, transparency coming at the Quebec communication from multiple formats, but also from across the executive team and also our senior management team where I think if you were to talk to, really across our -- certainly, our executive team and our senior managers and our people and you ask them what are we about? What are we trying to accomplish? What are our goals? You get a consistent answer, and that was a real focus of ours to have that consistency and really kind of bring that comfort to people that there really is a strategy and a focus. And if they will help us with that, then good things are going to -- will come from that. And Slide 18, I'll finish here. This one I'm excited about because each year, I develop what are going to be our priorities for the next year. So what you see is, kind of in the middle there, are the key areas that we're going to be most focused on. And obviously, there's other areas of the company, but these are the ones that are the most impactful to the company. And what's -- I'm excited about with this is that it's really, people and culture stays at the top. As I said, more of a BAU, kind of constant improvement. But then the underwriting portfolio of the future, and combined with our underwriting analytics, was very future-focused. So for TMK, we've been really focused on getting to a point where we were ready to grow and really think about the future in an exciting way. And just happy to say that beginning in 2022, that's where we felt like we were, and that's really what those areas we're focused on. So really proud of the company and what we've been able to achieve, and more importantly, what we have to achieve in our future. With that, I'll hand it back over.

[Interpreted] Thank you very much, John, Brad. We appreciate your presentations. And now, we'd like to move on to Q&A. [Operator Instructions] So I would like to start from Mitsubishi UFJ Morgan Stanley, Ms. Tsujino. So this is a question to John at PHLY. So we announced on May 20 the top line for FY '22. In this, PHLY, on local currency base, is going to have 3.7% top line growth, as we understand. On the other hand, when it comes to your peers in America, they all announced their first quarter results. And for example, WW Berkeley have announced 15% increase in top line roughly. So I'm wondering if PHLY, in the full year, you have a 3.7% projection. So could you comment on this? And what is the trend that you already see in the first quarter, please?

Sure. I am acutely aware of where our competitors stand in terms of exceeding the growth that PHLY has achieved. One of the growth drivers was the integration of -- and acquisition of an MGA that closed on 12/31 of '20. That resulted in an additional $85 million of premium, which is roughly 2 points plus of growth. That will be reflected in the full year numbers. But the continued re-underwriting of some of the portfolio, while we have the benefit of a hard market and when we can get rate, is something that we continue to be focused on. So some of the items that both Brad and I have spoken to where there are certain products that we just don't believe over the long term are going to, year in and year out, achieve the profit targets that we need. We've taken aggressive action to dehydrate or to non-renew that business. If that ends up sacrificing a little bit of top line growth versus our peers, it is no doubt helping our bottom line and the bottom line growth over the last 2. So we, too, I was remiss in not highlighting, but Brad and I both happen to be leaders of 2 companies that are celebrating our 60th anniversaries here in this year. And it's 13 years since we've been a part of the Tokio Marine Group. I would expect that after we get through 2022, we will be back in growth mode whether that's through bolt-on M&A or growth in our core segment, the 9 core segments that we currently trade in.

[Interpreted] So moving on to SMBC Nikko, Mr. Muraki. So again, this is the question to John at PHLY. So currently, the inflation continues to go up. So when it comes to the long-tail liability management, which is going to be very important, I'd like to ask. Regarding the case reserve, the actual dollar amount in IBR, actual dollar amount, could you please let us know? And also, in the past accident years, how much is the figures? And CASE and IBNR, what is the duration for each of them? And finally, regarding these figures that I asked you about, you will give us an answer, and I would like you to also comment whether you're comfortable with those figures or not, please?

Sure. So the actions that we took in 2019 that I was referring to, by boosting our reserves in the 2015, '16, '17, '18 and '19 accident years, was something that we felt at the time was sufficient to get that behind us. We also had a benefit while the pandemic was ongoing that claims frequency in, really, all of our lines of business dropped dramatically. So 30% to 40%, we recognized 30% to 40% reductions. We witnessed 30% to 40% reductions in claims frequency in the GL, the professional, the auto liability and the auto [indiscernible] which in aggregate, make up about 80% of the premium that we write. Our carried reserves, total carried reserves, are about $3 billion in case and about $3 billion in IBNR. As we sit here today, I feel very confident with where our reserves are. The -- I don't have on that one slide, which I know part of your question is targeting, the total carried reserves of those 1,360 claims that we were attacking and trying to settle. I don't have the actual reserves, but they are a significant reduction. And those are because they are settled and closed, those are claims that will no longer be developing. So again, with the claims frequency in 2021, to a lesser extent in '22, with the actions that we took in 2019 that I believe we were ahead of many of our peers in addressing social inflation. I feel very strongly today that we are in a -- and our auditors, our auto partners would concur, that we are in as strong a position reserve-wise as we've ever been.

[Interpreted] So next from Morgan Stanley UFG Securities, we have Ms. Nagasaka. This is a question to Brad. So that's -- a week ago, June 20, so you have announced that you will sell Highland, your subsidiary. So if you can please give us a little color on the background to this event? Now, I would like to add that Tokio Marine is -- does not just buy. We actually do divestitures to manage our portfolio. So if you can talk about the background to this? And also, what is the result that you expect for from the optimization of your portfolio, Brad?

And yes, we did announce the sale of the construction business in the U.S. And going back over time, it has been a business that was -- it's a challenging business to make a hurdle rate return and consistently over time in which you need to be very committed to the line of business. And what we found was that from a return perspective, we had other lines of business that we thought we would rather put our capital towards. And given that, it was going to limit our support for that business to a point where we thought that the team in the U.S., because it was a -- it's a hard market environment for that construction business, and it's a great team that's running it. They were -- we were going to be constraining them. And we didn't feel like that was real sustainable from -- is a good thing for the people running that business and for us to be holding them back from what they could accomplish. So that was really the decision that we made is that from an appetite perspective, we just didn't have the level of appetite needed to keep up with the growth of that business over time. And we also saw that there was quite a bit of interest in the market for this business. And we just thought that there could be a better home for that business to allow it to grow the way that it wanted to and could and, that we wouldn't be able to support to a level that they wanted. So I'm really pleased to have announced that Intact is the buyer. A great home, a great company, a great home for that business, and I think they'll allow them to build the business and maximize it over time.

[Interpreted] Yes. Brad. So now, we'd like to move on to Robert [indiscernible] at Wellington. So this is a question to John at PHLY. So in FY 2019, basically, you have increased $273 million of reserves. And so for this one, what percentage of reserves is this to your total reserve? And what is the tail risk? What kind of tail risks do you foresee for these reserves? As you added these reserves, what was your assumptions regarding the claims inflation?

The assumption is the total loss cost inflation plus social inflation is a sum of both the consumer price index, which obviously has been going up, as well as social inflation. In 2019, 2020, that was a consistent number. That was approximately 3% for each for a total of 6%. The $273 million represents roughly 9% of total carried reserves, and it was really based on historically what we had been seeing as a spike in settlement -- court settlements with these nuclear verdicts that we have been seeing in some of the areas that we compete. So human service, in some of the sports and recreation business, in some of the real estate business, we had been seeing some nuclear verdicts that were larger than anything PHLY had seen before. Those were heavily reinsured. They did impact the price of our reinsurance treaties on renewal in '20 and in '21. However, it's the aggressive action that we took in '19, followed by the conservative action that we took in '20 and '21 by not recognizing all the good news that was tied to the reduced frequency in GL claims, in professional liability, in auto liability and in [indiscernible] in addition to the claim settlement initiative that I referred to that our claims team had undergone. The combination of all of those are going to be a benefit. But we are not going to be in a hurry to reduce or to release, I'll say, prior year reserves until that proves to be true.

[Interpreted] John. So now moving on to Mr. Watanabe from Daiwa Securities. We have a question for Brad at Kiln. So basically, it's 2 things here. One is when you think about -- think about the diversification of your products, I understand that you're focusing on the stability of the volatility for each company. But how about the diversification effect at Tokio Marine Group as a total? Do you think about that as well when you think about the diversification of your business lines? Or do you have any directions from the headquarter as well? The other thing is, currently, we have the conflict in Ukraine. And regarding this, what is the impact to Kiln? How do you measure the impact? And what kind of business lines are you concerned about? Maybe you cannot disclose the amount of impact, but basically, these 2 are the questions, please.

I'll take the first -- take in order diversification. Again, I think the focus has been bringing U.S. property down as a percentage of the overall portfolio, bringing other lines up with that and everything. And with regard to the Tokio Marine Group, the short answer is yes. But given our size, we're not going to move the ship a lot from the Tokio Marine perspective. So we're in constant communication with the Tokio Marine Group and understanding what we're doing. I don't get, and I think John would say the same thing, is there's not -- one of the beautiful things I think of Tokio Marine Group is they really want you to focus on doing the business and doing the best for your company, and that's what we're hard to do. Providing an understanding and guidance, and certainly, thoughts on that through our Board is something that happens, but not specific guidance on what to do. I think what I found is the Group has been incredibly supportive of everything that we've tried to do here at Tokio Marine Kiln and had been really important to the success that we've had. I hope that helps some. On the Ukraine conflict, we've had -- the main areas that we would have exposure are some of our political violence business, our trade and credit business. And then also, you've heard a lot about aviation business and not only in Ukraine but in Russia, so those are the main areas that we're focused on. As you said, I'm not going to be able to share specific numbers with you. I would say that my comments about what our results are expected to be for the year, which is in the low 90s combined ratio, it would include any reserving for the Ukraine conflict.

[Interpreted] Moving on to [ Mr. Oishi from Aberdeen ]. Again, this is a question to John at PHLY. So basically 2 points, one is about the bolt-on M&A. So today, you -- John, you touched upon M&A, the bolt-on M&A., in your presentation. And my impression is that when you execute M&As, you're looking at the short list of candidates. And you're looking at those who have, what, strong business models or high growth potential? What kind of companies are you looking at in terms of M&A appetite? This is the first question. And then the second question is regarding regulations in America, are there any kind of regulatory environment change that you are concerned about today?

I, too, will take it in order. As far as bolt-on M&A, we pride ourselves. We are a niche specialty insurer. We aim to be a top 3 player in all of the products that we write. When we look at M&A, we do not look to acquire a property that needs to be turned around. We look for a best-in-class. The acquisition of Worldwide that closed on 12/31 of '20 was an MGA that had -- has been around for 55 years. They were the largest in temporary staffing. We were the second largest. They had a -- at the time of the acquisition, as I said, roughly $80 million in inforce premium and then they place through outside 30 parties about another $30 million of workers' comp where we get risk-free fee income. As being the best-in-class, being known as the best-in-class is very typical of acquisitions that we've made in the past. Our acquisition of Allen J. Flood in the mid-teens, our acquisition of Gillingham in 2008 and our acquisition of Grundy Worldwide, a collector vehicle book, in 2006 have very similar characteristics. So it's best-in-class, but it's also a cultural fit where there is a desire to do right by the employees. That they're in a -- they want to outservice any of the competition, and there's a very entrepreneurial spirit and a will to win. So those are MGAs that would fall into targets. You're right, the list is not long, and it's very rare that we will talk to or actually execute on an acquisition, on an MGA that we have not already spoken to 20 times over the years. So our dialogue with Worldwide, that was not our first time, our first rodeo. That was not the first time we'd actually engaged with them. We had engaged with them for years. And for various reasons of the seller, the time was right for them to engage with us and it worked out beautifully. And so far, that has been an outstanding integration. The second part was any regulation that I'm concerned of. While this does not go back 6 months, it goes now back a couple of years. One of the issues that we have faced, we do ensure sexual abuse and molestation with the reviver laws in many states where essentially the statute of limitations was thrown away, and various windows for people to report that had already exhausted or passed the statute of limitations moved the goalpost. And therefore, the reserves and the pricing at the time of the policies was moot and was null and void. So a part of that strengthening of reserves that took place in 2019 was tied to those reviver laws and some of the change in statutes, but those are specific example. That's -- that's probably the most tangible, specific example. And generally speaking, this -- the desire for the juries to award these and the appetite for them to award these nuclear verdicts is something like we've never seen before in the insurance market. So while that is not regulatory per se, it's something that has a systemic impact, widespread impact on the insurance industry. And as a result, we will be -- we will continue to be very cautious in the way that we look at reserve releases. So I hope that answers both of your questions.

[Interpreted] Next, we would like to move on to Ms. Tsujino from Mitsubishi UFJ Morgan. And so this is a question to Brad at Kiln. So in Lloyd's agents, there's a culture of product mix and underwriting. But who are the peers who have good cultures, as you do? Ms. Tsujino is saying, maybe Hiscox is probably not similar in terms of product mix. And Beazley is big, but it looks kind of similar to you. So what do you think is a good respectable competitor for you? Next is Kiln top line growth. Last fiscal year, compared to your competitor, your top line growth seems to be a little bit lower. So could you explain to us why it was relatively modest? That was 2 questions for Brad.

Okay. Happy to take that. I think when you look at -- we said that we're one of the top 4 Lloyd's competitors, Lloyd's companies. So Beazley and Hiscox are in there, I mean, they're companies that we respect. I think the biggest difference, I would say, between us and both of those entities are that we are a pure Lloyd's play at the moment, we don't have a U.S. insurance company. John is nice enough in some areas to provide access to U.S. paper for some of our products, and we have some other good partners within the U.S. group of companies do that as well, but we don't compete on that basis. We're really a Lloyd's platform, and that's what we're focused on. So I would say Beazley would probably be the company that I'd say is probably most like us in -- from a culture perspective, from what I can tell in the market. I think Hiscox is a good company. I think it had some missteps through the COVID crisis that I think caused it from a culture perspective and so forth. But I'd say those around there was really what I would say. I might have said Atrium a few months back, but that's kind of changed a little bit here. But I'm most focused on doing what we can do to make this company the best that it can be. And I do believe that being recognized as a very strong player within the Lloyd's market both on a cultural and at a performance perspective, which we're proud of. The lower premium growth is similar to what John had to say. It is -- first of all, I would say that we are not a top line-focused company, so we'll take as much top line as we can that's consistent with our bottom line goals, in that low 90s combined ratio focus that we had. We still had in 2021 and -- some remediation to do. So while we had growth that is probably similar to our peers in some lines of business, we were also pulling back in some areas. I touched on cyber earlier. I mean, cyber's been an area when we talked about innovation earlier. Cyber was -- TMK was an early leader in cyber and continues to be an important part of the business, but it did need some work to move, to reposition the portfolio, move up a little bit in towers and be a little more focused on where we thought the profitability really was over timing. And also raise rates, which the market is cooperating with now, thankfully. And hopefully, it's enough rate, but we're happy to see that business. And as you look at it in 2023, we expect -- well, 2022 and 2023, returning to some really good growth, which again is also diversifying for the overall portfolio. I hope I've answered your question.

[Interpreted] So it is now 9 a.m., but we have some more questions, so we would like to continue. We have Mr. Muraki from SMBC Nikko regarding ROE. So also another question from Ms. Tsujino, about ROE, from Mitsubishi UFJ. So this is for both John and Brad. And the question regarding ROE is the following. At Tokio Marine Holdings total, we are currently looking at 12% plus tangible ROE and pulling it up a little bit further. This is something that we have announced on May 26. So when we break this down to the group companies, how do you position the ROEs at your entity? Basically, that is the question. And for example, in America, we have our peer, Chubb who is trying to achieve tangible ROE, 20% by 2023. And PHLY currently is pursuing your own ROE, but what is the actual numerical goal here? And how do you position ROE as your management KPI? How important is it? And how do you position ROE? Same question to Brad at Kiln as well. So again, first, John, and then Brad, please. Over to you, John.

Pleasure. So I will start by reminding everyone of the actions that I've spoken about a couple of times in 2019 that we took, and the $273 million pretax that we added to boost reserves over that roughly 4, 5-year period. As a result of that, we are very proud and there is not a liability that we would be one of 9 companies that had an A++ AM Best rating have we not been acquired by Tokio Marine Group over 13 years ago. We look very closely at our BCAR and our buffer capital. When we ended up boosting reserves, we ended up deferring, we ended up delaying and not dividending in 2020, 2021 and again in '22. So while we had an opportunity to chase ROE in those years, it was more important that from a rating agency perspective, we maintained our ratings and our financial strength, and there was absolutely no concern from both S&P as well as from AM Best. So I would tell you that even in 2019, with that $273 million charge, our ROE was 8%. The -- in 2020 and '21, we were closer to 12.5% and 13%. In '23, it is our expectation that we will go back to paying a dividend. That dividend is tied to 80% of our business unit profit, and as a result, why I would expect our ROE to be closer to the mid-teens, and that would be our goal. That metric has not been as important post-2019 until this year because of the actions that we took in 2019, and its prominence will again move up the priority list after we go through the 2022 year.

[Interpreted] Yes, it's your turn.

Yes. And I think the -- my philosophy is that return on equity and book value, building book value is what this business is all about. So it's incredibly important. And I'm really proud of where Tokio Marine Kiln sits in relation to that. It's a little bit more complicated question for Kiln and our capital situation, and I'll try to explain that to you. I mean, if you look at it from a pure capital requirement within the syndicate and what we're required to be able to demonstrate, we hold -- the return on capital that we had in 2021 was 12-plus percent that they are now. Half of that capital historically has been funded by Tokio Marine through a letter of credit. So you can really look at that as almost double that from a return perspective. And the -- going forward, we've introduced something called the third-party deposit trust, which allows Tokio Marine, for its interest in the syndicate, to fund virtually all of the capital into Tokio Marine Kiln through a trust with Japanese government bonds so that -- are already held on the balance sheet of TMNF. So virtually, no capital in that situation is there. So we've been returning capital and replacing that capital with the third-party deposit trust. So those -- then, you get to return on capital numbers or return on equity numbers that are really very high, and that's going to be our focus. But it is difficult, if you're -- when you're running a company, it's difficult to tell your people to go out and generate a return on capital of X percent. We've really -- the focus has been on the -- where we need the combined ratio to be. I happen to know that if we have a low 90s combined ratio that on a fully loaded capital basis will be between -- somewhere between 12% and 15% return on capital. And that's -- is an underlying focus. That's the goal is to deliver that return on capital. But when we're running the company and we're trying to motivate our people to deliver, it's really focused on the components of that combined ratio and how they can influence that. That will then drive that return on capital.

[Interpreted] Yes. John, Brad. So I would like to add some information on this. So ROE by company, group company, is also very important. But as holdings, we have the risk diversification effect across all group companies, so it is half. About 50% is the diversification effect. So again, if you focus on the capital allocation of Tokio Marine Holdings, you will understand how we are focused on lean company management. So that's the strategy that the holdings company is also considering. And at the same time, we're also looking at the group level, ROE as well, trying to pull it up from the 12% plus area to even further higher levels. So the next question is from Citigroup Securities, Mr. Niwa. So this is a question to John at PHLY. So this is about the long-term PHLY's combined ratio. What is your forecast? How will it proceed in the future? A more detailed question regarding this. So he's saying that I understand in the early 2000s, you were at a level of below 60%. And currently, it seems to be going up a little bit. So why is it going up a little bit, the loss and LAE ratio? And then as for the expense ratio, currently, we have inflation going up. So what is your forecast regarding the expense ratio? And ultimately, the combined ratio, what is the level that you're going to aim for in the future? John?

So I will answer this question in reverse order. Our goal on the combined ratio is a 92% or lower. The increase in our loss in LAE ratio since the acquisition 13 years ago has been a number of things. It's been loss cost inflation. When a building burns down today, it is much more expensive to replace that building. The same holds true with automobiles and physical damage, and really does then get exacerbated with the situation of social inflation which was not even a topic of discussion 7 to 10 years ago. So the combination, the confluence of those 3 influences have put upward pressure on the loss in LAE ratio. But the actions that we've taken in dehydrating the Tier 3 products that I referred to will no doubt pay dividends also coupled with the rate increases that we've gotten. So our long-term goal is to be 62% loss ratio or lower, and our goal is to start approaching a 30% expense ratio over the next 3, 4 years. Now, there's a couple of things that we're doing, a couple of actions that we are taking to help us in that endeavor. One, as we've had a very deliberate focus on reducing the total administrative staff and using business process optimization and partnering with an offshore partner as we've taken administrative tasks and move them onshore to offshore. That has cumulatively saved $41 million over the last 8 years, we only intend to increase that partnership going forward. In addition, while we've had offices that have largely been unoccupied or occupied by fewer than 5% of our staff, as leases have come up on expiration, we have handed in the keys and terminated those leases. Knowing that once we actually are welcoming our employees back to the office, that we will be doing so in a hybrid model that will require less square footage. That will have a significant savings on the expense ratio. Offsetting that is our very aggressive attempt in the war on talent. Many of our competitors are out taking aggressive action and offering 30% increases to some of our employees that have only been employed in the insurance market for 3 to 5 years. So this is something that we've got to keep an eye on that and make sure that, one, we're providing through our culture that Brad and I, I think, have both hit home is very, very important to our business model. Our company, our corporate is free to core. We have a purpose-driven mission and people that work at PHLY understand everything that goes into that, but there is also an element of making sure that we are paying competitively to help attract and retain talent. So the cost savings on the business process optimization, the efficiencies that we're gaining, the investment in technology that are gaining additional efficiencies, are well exceeding any of the cost increases that we have to incur in the war on talent. So 92% is our baseline, and I would expect that to continue to decrease as we exceed whatever loss cost inflation plus social inflation is as the market continues to be hard.

[Interpreted] Yes. John. So now moving on, this is from Mr. Watanabe at Daiwa Securities. This question is for both Brad and John. So first of all, to you, Brad, if I may. So it's one question, and so when you operate as a group company under Tokio Marine Holdings umbrella, when is the moment that you feel the biggest synergy with other group companies? So Brad and then John, please.

It's probably good to start with me. I mean, I'm sitting here, I guess, as a living, breathing example. I was with a group company at TMHCC and then had the opportunity to come here to Tokio Marine Kiln. I also brought over with me Nick Hutton-Penman. He was here in London working with Tokio Marine HCC. So that's -- I think that's incredibly powerful, not only things that we do from a product perspective, but also leveraging talent around the group. So I mean, it's a very tangible thing for me. It's a very empowering, exciting thing because it says that there's -- for our people, we can talk about career opportunities that go well beyond or maybe sitting at that moment. And that's not for everyone, but there's a lot of people that are out there that's a real motivating thing for them. Plus, we have regular meetings, and I've spent time with John last summer, and we've talked several times over various initiatives. And what I find is that the group companies and the CEOs are down, are -- when you come with a problem, they're really looking to help. How do I help you, and you really can understand that we're all trying to accomplish similar things and where we can work together? We're happy to do that. Even if there's not a great benefit to one company versus next, if it helps the group, then you have a kind ear to listen and to hopefully do something that's interesting. So I'll turn it back over to John.

Great. Brad. I think on the synergy front, there's really a way to look at it pre and post-pandemic. The way that many of us have been able to take advantage of Delphi's investment expertise. Tokio -- Philadelphia's investment portfolio has grown to $10 billion, 40% of our invested assets are managed by our sister company, Delphi. Cyber, Brad has talked about a number of times. This is the first time I've mentioned Cyber, but Brad, Kiln and PHLY have a more than 10-year relationship on Cyber, where Kiln, to Brad's point earlier, about trying to have increased distribution in the United States. PHLY holds very dear to us our distribution, especially with our preferred agent partners. And we have, for years, had a reinsurance quota share that's been in place with Tokio Marine Kiln. Tokio Marine Home Office has now, for more than 5 years, reinsured roughly 80% of our CAT reinsurance treaty. We purchased through the [ 1 in 250 ], and 80% of that is reinsured to home office and then reinsured to the market through a retro as are many of our other sister companies. At the beginning of COVID, the group company CEO, so Brad, myself, other group company CEOs in the U.S., were part of a McKinsey engagement that was focused on ease of doing business. I think that was really, in many ways, this pandemic has been a way to bring us together even more than we had been previously. We have a quarterly call that is the -- it's called -- it's referred to as the -- as the official title is the U.S. CEO call. But yes, Brad does participate in that call. We also have our colleague from Canada, our newer colleague and teammate from Canada that's a part of that call, and other European colleagues and many of our Japanese team members that joined that call. The way -- just the level of collaboration of the way that we are counseled to each other on how to communicate during these very difficult times at the last 28 months have represented and making sure that we're in touch and transparent with our employees, that level of engagement has really strengthened and deepened the bond that we -- the group company CEOs all have. So synergies have taken on a little bit of a different meaning, but they're all very, very important and very essential to us maintaining the culture that Brad and I continue to talk about each of our organizations enjoying.

[Interpreted] Yes. Brad, John. So we'd like to take 2 more questions, and then we would like to close. So the second one from the last is from Mr. Robert [indiscernible] at Wellington. This is for Brad. At Kiln, what did Kiln do to improve the attritional loss ratio because it has improved to a great degree? What specifically did you do? What kind of initiatives have you undertaken, please? Brad?

So I'd say some of it is just good nuts and bolts underwriting and the focus on that being an objective. And so we happen to be in a number of our lines of business over the last 2, 2.5 years in a favorable market environment. And I mentioned the U.S. property business within that business, they were able to move away from the coast while still improving rates and also look at where their exposures are and bring some aggregates down while still improving the -- still maintaining the book of business. So some of it was that, but I think probably the most transformational thing for us has been the collaboration of our underwriting teams with our analytics team. So being able to really drill into the portfolio and identify those areas, the portfolio that we're performing within not just in broad lines of business, but within lines of business, and focus on, stated simply, doing more in those areas that were performing and less in those areas that were not. We did some exiting of classes. There were -- some of you have heard of Decile 10 within Lloyd's. Most of our marine lines, the whole liability in cargo. We exited U.K. EL/PL, we exited U.K. Motor and the bodily injury part of that. We exited, I mentioned construction earlier. So all of those were designed to give -- not only give some benefit diversification and things like that, but also to improve the performance of the portfolio as a whole. So it was a -- if you look at that, the charge and everything, it's a good 3, 3.5-year process of just being focused on the attritional is something that we needed to impact. And then also, at the same time, hopefully growing and have the opportunity to grow, diversifying lines to balance out the portfolio, make the CAT risk a smaller piece of the performance in a given year. So again, I really credit the underwriting teams that, again, are the same people as when I showed up. But hopefully, we try a little focus and also provided some expertise from the analytics side to, again, increase the odds of focusing in the right areas.

[Interpreted] Brad. So the very last question here is from Ms. Nagasaka. This is a question to John. So regarding PHLY, you are able to realize rate up, increasing your rates that is higher than the market average. But can you explain to us a little bit more why you can do that? Because usually when you raise your rates, usually, your customers would go away to other peers and customers would want a higher ceiling, right? And so if you reduce the -- make the limit smaller, you would usually lose some customers, but why are you able to retain them, John?

So I think that is key to PHLY's, Philadelphia Insurance's distribution partners in the way that we're set up. So as Brad said, it really is nuts and bolts underwriting. This is what I referred to earlier the tier, the tiering of our products. We have very clear target rate goals that factor in the loss ratio since we started ensuring a particular account. The type of account product it is, the particular location it is, to the extent it is exposed to natcat perils, whether it be hail, tornado, brushfire, hurricane, unit flood, you name it. So very specific rate targets, by line of business, by product. And one of the things that we do at PHLY is we pride ourselves on being very far out in front of the renewal base to communicate our intentions on a particular renewal so that our agent partners are not caught off guard and can work with us to communicate that message. So if it requires us to get on the phone with a client, to meet with the client in person and to convey why we need the rate that we need and why we need to cut the capacity. One of the things when it comes to capacity is that in this litigious environment that we find ourselves in, U.S. generally is a more litigious environment than most countries, and that's why the U.S. market is the largest insurance market. But with social inflation in these nuclear verdicts, one of the very simple messages that many of our insurers and agent partners can grasp is that when you have a larger limit of liability, you become an easier target for the plaintiff [indiscernible] So in combination with rate and limit reduction, we end up saving them the pain of having increased insurance premiums in the future, and we also end up increasing the profitability to us. So it's something that, over time, we are roughly 65% of our premium comes from roughly 250 of our trading partners. We do business with over 10,000 independent agents, but 250 of them are our preferred agents, and it's that relationship with our preferred agents who are loyal, who understand our message, who we meet with frequently, and we convey any changes in our message so there are never any surprises. That's what they've come to expect from us, and that's the way that we've traded with them for now -- for years and years. So that's why we are successful, and I have no reason to believe that success will not continue.

[Interpreted] Yes, John. So now with this, we would like to close Tokio Marine Insights. The key point of today's webinar is that we wanted to focus on our overseas business entities and the strengths that they have, and we wanted to just help you so that you can reduce your analytics cost as much as possible. That is why we held this webinar today. So at the very end, we would like to ask you to continue to give us your support and also your feedback about today's webinar. And also, if you have any ideas about topics that we should present in the future, please share us your ideas. Thank you very much for today. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]