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

Ladies and gentlemen, thank you very much for being here. We appreciate your participation. This is Ishiguro from IR Group, Tokio Marine Holdings. We are pleased to host Tokio Marine Insights, a series on topics of interest to analysts and institutional investors, delivered to you by our frontline members. Last March, we presented D&I. And in June, Philly and Kiln's ability to overcome challenges. At this time, we would like to focus on Tokio Marine HCC from the perspective of overseas business. Tokio Marine HCC is also one of our great profit drivers. In today's presentation titled Global Leader in Specialty Insurance, we will discuss the high profitability of Tokio Marine HCC and why it is a sustainable key driver of our profits. The presenter is Ms. Susan Rivera, CEO of Tokio Marine HCC, who will provide live information straight from the ground. We'd like to proceed by first of all, delivering the presentation from Susan using the presentation deck that we have uploaded on to the homepage already. Then we would like to engage in Q&A. [Operator Instructions] We would like to end today at 10 a.m. JST. And if we get more questions, we can continue until 10:30. Without further ado, over to you, Susan.

Thank you. Hello, everyone. I am live here in Houston, Texas, on the ground, as we said. I am Susan Rivera, and I've been 35 years in the insurance industry. For your background, I am an actuary by training, and I've been intimately involved with Tokio Marine HCC for the last 10 years. I have the pleasure of being on the Board of Directors when Tokio -- when HCC agreed to be sold to Tokio Marine. And then I was on the U.S. statutory boards until actually joining them officially on April 1, 2018. So I'm coming up about finishing my fifth year with the company and almost 4.5 years as CEO. And it's my pleasure to share with you some insights about Tokio Marine HCC and what makes us special and unique? So if you go to Slide 2, what I'm going to do is really speak to why we are a global leader in specialty insurance, and give you a little bit of an insight into the strategies that we've been executing on since being part of Tokio Marine, and what really has differentiated us from our peers. So now I'm going to Slide 3. So when you look at Slide 3, as you can see, we've been a global leader in specialty insurance for over 48 years. And this slide is just an executive summary of what I'm going to be taking you through today. So I'm going to start with an overview of our company, then I will give you some insights into our performance and how we have compared to our peers. I'll show you how we've capitalized on the hard market over the last 5 years, and share with you how we've expanded our specialty product offering during that time period. Our results have not come without their challenges. So I'll talk a little bit about our challenges, but then also the power of our diversified portfolio and how that helps us overcome those challenges. And then I'll finish with a little on enterprise risk management, group synergies and the future for our organization. So on Slide 4, you can see we are a global leader in specialty insurance. We've been in the business of specialty insurance now for 48 years. We have over 100 product offerings. We finished 2021 with almost $7 billion in gross written premium. And when you think about that $7 billion in gross written premium, it is true specialty niche products. In that premium, we do not underwrite any workers' compensation, and we don't do any commercial auto. And those are 2 of the bigger specialty lines here in the United States, and we don't write any of those lines. We have about 3,800 employees. We are a company that was built on acquisitions. We have completed over 60 acquisitions. We write in 180 countries, and we carry some of the best financial strength ratings by our rating peers. So on Slide 5, which is next, 2021 was a record earnings year for Tokio Marine HCC. We were able to benefit from a fourth year of positive rate environment. So in 2021, we finished at an 87.9% combined ratio that generated $642 million of pretax earnings. Our expense ratio was world-class at 21.6%, and we were able to grow the top line by 23%, and that top line growth was fueled in part -- a large part by rate level increases. We achieved a 14% rate level increase in 2021. So now if I go to Slide 6, really what I'm going to do is just talk about our performance since 2016. Tokio Marine bought HCC in October of 2015. So this really gives you insight into what we've been doing as we've been part of the group. You'll be able to see our market-leading performance through the cycle. I do spend a lot of time going through our international results because the vision and the performance from our team out of the London market has been nothing short of superb. And then what you will see is, since I've come on board, we've really maintained our success factors that have been in place. They are fundamentals to our business that we really have not changed because it's working, we're going to continue to do what we do very well. So on Slide 7, what you see here on the chart on the left, we share with you the growth in our gross written premium and the history and the growth in our net written premium. So you can see, in 2016, we were about $3.6 billion in gross written premium, and in 2021, we finished at almost $7 billion in gross written premium. So that was a 13% 5-year compounded annual growth rate on the gross written premium side. When you look at the net written premium side, we had about a 10.3% compounded annual growth rate, where we went from about $3 billion in net written premium to almost $5 billion in 2021. But more importantly, what we really focus on is our combined ratio and our operating earnings. So if you look at the right-hand side, you can see how consistent we've been in delivering combined ratios close to our target, which is under 90%. So right now, based on our portfolio and our mix of business, our target combined ratio is under 90%, about an 88% combined ratio. So when you look at it, in 2018 is when really the rate environment started to improve across the property and casualty industry. When you look at 2020, you can see 2020 is an elevated combined ratio at 93.3%. That was really the year that COVID hit. We were a market leader in event cancellation. So we had a 6-point impact to our combined ratio because of COVID in 2020. So if you would have adjusted that 6 point out of 2020, we basically would have hit our target for 5 years of an 88% combined ratio. But when you look at those results and the consistency of those results over the last 5 years, we're very proud of the results we've been able to deliver for the group. Now I'm going to the next slide on Slide 8. On Slide 8, here we basically show how we performed over this time period relative to our peer companies. So when we look at our performance, we like to look at other specialty carriers that we think have similar strategies and similar line of business mix to what we have. So in the footnote here, our peer companies that we judge ourselves against are American Financial Group, Argo, Markel, Hartford, Old Republic, RLI, Travelers, Berkeley and the Hanover Group. And when you look here, over the last year, and over the last 3 years and the last 5 years, you can see we outperformed our peers by about 5 points on the combined ratio. And the way that we do this is we really do try to make sure that we're operating effectively and efficiently. And really, what we try to do is target to have a 5-point lower average expense ratio compared to our peers. We think it's hard to outperform our peers on a loss ratio perspective basis, but we think we can always do it on the expense ratio side. So for example, having our headquarters in Houston, Texas, obviously, lowers the expense ratio rather than being in high-rent district like New York City. So again, we've been able to outperform our peers over the last 5 years. And if you look at the chart on the right-hand side, we've also been able to deliver stable profitability without a lot of volatility. So the way that you look at that chart, over the last decade, we've had the lowest combined ratio compared to our peers with a volatility that's basically in the middle of the road compared to our peer companies. So now going to Slide 9. What I did want to highlight here for you is the performance of our International Business compared to the benchmark that we use in International, which is Lloyd's of London. So we've really had some phenomenal growth in our International Business through this last hard market. So when you look at the chart on the left-hand side, you will see that we've had a 5-year compounded annual growth rate on the gross written premium north of 25%, and we've been able to deliver a combined ratio of 82%. And you can see where we went from $700,000 of gross written premium to almost $2.2 billion in 2021. That's just phenomenal, and the orange diamonds basically show the combined ratio figures by each year. Then when you look to the right on the Lloyd's, Lloyd's over the same time period only grew 6% and had a 5-year combined average of 105%. This is tremendous outperformance by our International team compared to Lloyd's of London. And really, when you -- a little bit of a history on how we've been able to do this. If you recall, in 2018, Lloyd's undertook what they call the Decile 10 review, and they basically handicapped the lowest performing businesses and weren't allowing certain syndicates to be able to grow because of the underperformance. What we were able to do was basically been able to capitalize on that, and we were able to attract some of the best talent away from the Lloyd's market to come and join us at Tokio Marine HCC and really be able to drive profitable growth during that time period. So we're very pleased with the growth that we've been able to see on our international side. We think that has great continuing growth and profitability prospects as we move forward. So now if we go to Slide 10, what I will share with you is continue that message of what we saw on the international side. I'm going to share with you how we are able to really capitalize on the hard markets over the last number of years from a position of strength. And we were really able to do this because our underlying portfolio was profitable. Because we had confidence in our underwriting strategies, it really allowed us to out-execute the competition and really take advantage of the improved market conditions and market rates in the environment. So on Slide 11, what I'm showing you here is the rate level changes that we had across our portfolio by quarter starting from 2016 through the middle of 2022. When you look at it, as I mentioned, we are in a declining rate environment until 2018. So we started seeing some positive rate movement in 2018. So in 2018, the rate change wasn't very large. It was about 5% in the aggregate, but it was positive. This grew to a plus 9% overall rate increase in 2019. In 2020, we finished at a 15% rate increase. And as I mentioned, in 2021, we finished at a 14% rate increase. And as you can see right now, through 2 quarters of '22 -- 2022, we feel very confident that we will finish at another positive rate year this year. So when you look at this chart, there's a footnote on the bottom. We exclude our crop business, our accident and health and our surety and credit from this information. And the reason that we do this is these lines of business do not follow the traditional property and casualty pricing cycle. So for example, our crop business, the rate is set by the federal government. So it's not really subject to the property and casualty market cycle. On the A&H business, that's our medical stop-loss business. There, the rates are really driven by medical loss-cost trends. And then on short in credit, the rates are really more driven by the economy and the financial conditions. So really, what we're showing you here are the lines of business and the rate change for those that are subject to the traditional property and casualty market cycle. So now I move to Slide 12. In this slide, really what we want to show you is 2018, 2019, 2020 and 2021, we're demonstrating you here how much we grew in excess of rate level. So on 2018, rates were up about 5%, but we grew about 10%. So we were able to add additional growth to our portfolio and capitalize on the great rate environment and grow in excess of rate by 5.5%. Then if you go to 2019, we were able to grow our portfolio 18%. Of that, only 9% came from rate and the other 9% -- 8.5% came from increased market opportunities, growth in our portfolio. In 2020, you can see our rate and our overall growth level were about the same. We did not have a lot of growth in excess of rate level. Because if you remember, in 2020, it was a COVID year. Brokers were shut down. Basically, brokers were not marketing business. They were just basically keeping renewals with incumbents. And then some of our lines of business basically came to halt. So for example, travel business came to a halt, mergers and acquisitions came to a halt. So 2020 was a flat year in growth from a rate perspective only. So we only grew in terms of rate. And then in 2021, you can see how we capitalized again on the hard market. Our portfolio grew by almost 28%, 14% being from rate and 14% being from additional exposures we were able to bring to our portfolios. And then on the next slide, Slide 13, what I showed you here is our positions on some of our larger lines of business so that you can get a feel of where we stand relative to the rest of the marketplace. So we are a market leader in medical stop-loss. As you can see in this chart, we are #6 in the medical -- U.S. medical stop-loss field. We are a leader in the crop business, number 10. You can see U.S. D&O, we're #4. U.S. Surety, we're #6 position in the market. U.S. Cyber across the teams, we're #4. And then Renewable Energy, with our acquisition in GCube, we're probably #2 market in renewable energy. So again, because we are a specialty underwriting company, we focus on underwriting profitability and risk selection. We normally won't be #1 or #2 position, but hopefully, we can be a meaningful partner to the market and be in the top 10 position as you can see here. So now when we go to Slide 14, I want to talk a little bit about how we have expanded our specialty offerings. As you will see, over the last 5 to 6 years, we have continued to invest and really diversify and expand our portfolio of specialty offerings. And I think our actions have been really well timed, and we're able to bring great talent onboard and really take advantage of the hardened market cycle. So if you go to Slide 15 is next. So on Slide 15, what I outlined here for you is how we have been able to diversify our portfolio over the last 5 years. And we've been able to do that 4 ways. So we might have -- so the first column on the left, I'm outlining for you all the acquisitions that we've done that brought new underwriting specialties into our portfolio. Then on the purple, I'm showing you bolt-on acquisitions. These were acquisitions that we did that basically increased the size and scale of a specialty that we already had in our portfolio. On the greenfield operations in the orange column, this is showing you all of the new specialties that we started from scratch, which means we brought on underwriting talent and built the portfolio from scratch on our own. And then the last column on the right in blue is the operational investments. This was investments we've made into the infrastructure that allows us to have a growth engine moving forward. So you can see on the left-hand side, we did acquisitions of an organ transplant line of business. We acquired Qdos, which is out of the U.K. We acquired NAS, which was a cyber specialist out of the U.S. We did InsureMyTrip in the U.S., Million Dollar Media, and then we are able to acquire GCube Renewable Energy in 2020 as well. So those are the new specialties that we added to our portfolio. On the bolt-ons, our bolt-ons really came largely in our medical stop-loss business and our ProAg, our crop business, and also our public risk business was First Fire. And then on the greenfield operations, you can see we had water districts in the United States, surety in Mexico, global travel. But now the next couple here, when you look at marine liability, European surety, marine cargo, delegated property and marine war, those were all new greenfield operations and new talent that we were able to bring on in our international operations, and that really helped fuel the growth in the International Business that I shared with you a couple of slides ago. We continue to, in 2022, build out our greenfield operations with custom bonds in our surety business here in the U.S. and also a level-funded medical plan with our stop-loss team here in the U.S. So we continue to be busy on the greenfield operations front. And then on the operational investments side, we had a very big heavy lift. So we basically established Tokio Marine Europe in 2018 to address the Brexit. So that is really what we did there. And with that, we were able to assume oversight of the U.K. and European J business. Then we started in 2019, a business innovation journey, where we really try to work on our IT and our digitization, and then we just expanded in 2022 into Canada with InsureMyTrip. So we will continue to look for new opportunities, be it acquisitions of new specialties or bolt-ons where we can gain scale in an existing specialty or build from scratch or operationally invest where we need to. I go to the next slide, which is Slide 16. Slide 16 really just shows the history and it goes back even further so that you can see since 1974, HCC really started as an aviation underwriting company, and you can track the history of the new lines of businesses that were added over the last 45 years. When you look at this history, as also you can see the blue are new lines of business that we got into by acquisition. But the green are greenfields where we basically brought on underwriting talent and built the portfolio from scratch. So I think that gives you a really nice outline of the rich history that we've had within Tokio Marine HCC, adding specialty products and services for our policyholder base. So now moving on to Slide 17. On Slide 17 and on this next group, really want to talk to you about the power of our diversified portfolio. I showed you the combined ratios that we were able to deliver under 90% combined ratio over the last 5-year period. But there were challenges that we had to deal with, but we have a very experienced team, and we deal with challenges promptly and professionally. But because we have a diversified portfolio, these challenges are really offset by outperformance in some of our other lines of business. So if I go to the next slide, on Slide 18. On Slide 18, I outlined for you some of the bigger business challenges we did face in our portfolio since 2016. So stop-loss, as I mentioned, medical stop-loss is one of our larger lines of business. In 2019, we had to deal with changes in the Affordable Care Act. Basically what these changes entailed was it created an increased severity where now we had unlimited exposure on any one life, whereas before it used to be capped at implicitly $1 million limit per life. And really, what happened is the industry started seeing an increase in frequency of severe losses, of losses in excess of $1 million. So you can see there the loss ratio grew from 74% to 80%. So we had to really change our underwriting approach and try to take underwriting actions to address the increase of frequency and severity of claims that we had seen there. In 2019, we had a 1-in-20-year prevented planting event in our crop business. What happened there is we had significantly wet conditions and the farmers were not able to get the crops in the ground and that resulted in a 2019 combined ratio in excess of 110% on our crop business. So we had a push for rate increases across private products to make sure that we could address all aspects to drive profit improvement there. In 2020, 2020 was the year of COVID. We are a major writer, a lead underwriter in event cancellation business. So this resulted in us having a very large loss. So what we really had to do is react very quickly, limit the coverage to make sure that we were not going to cover pandemics going forward. We had to make sure that we were able to drive rates up and continue to have strong reinsurance support. So we dealt with that in 2020. Primary casualty, we had to deal with some construction defect issues across a number of years from 2018 to 2021. Again, specialty insurance, with this line of business, there is a long statute of limitations. So you can get claims for 10 years after finishing a project. So we had to evaluate that business, make sure it was reserved adequately. We engaged the actuarial. We brought onboard claims management and ultimately decided to exit that line in 2021. And then on the last -- another example of a challenge, the last one is cyber. Just like the rest of the industry, we were not immune to the increase in ransomware attacks. So with our acquisition of NAS, we saw an increased frequency and severity of cyber events that resulted in higher-than-expected loss ratios. So really what we needed to do is make sure we were requiring a minimum amount of cyber hygiene and resilience by our insurers. We've invested in doing technology scans and predictive analytics, looking at our claims data and monitoring systemic risk to make sure that we can address cyber and ransomware as we move forward. So we've been able to deliver really great results despite these challenges, and it's really because we have a diversified portfolio. So on the next slide, so now moving to Slide 19. On Slide 19, I did want to highlight for you the impact of COVID. As I mentioned, COVID had about a 6-point impact on our combined ratio in 2020. And the majority of that was driven by direct losses from event cancellation. We are a market leader there. So you can see we had about $230 million of direct COVID-19 losses, largely from event cancellation, but we had some business interruption on our international and specialty lines, and then some losses on our evacuation and medical. There was very minimal or no direct impact on major lines like medical stop-loss and D&O. But on the right-hand side, also in 2019, we had to deal with the impact of an economic recession. So we did see some profitability impacts that were indirect on our credit and surety, our guaranty and our D&O. And then we also saw some economic recession impact on our other lines of business there. So at the end of the day, really what we saw was a 6-point increase in our combined ratio. But what we are very happy with when we looked at the impact of this on our portfolio, it was within our risk tolerance for a 1-in-100-year event. We think we took swift actions to re-underwrite and address the COVID-19 exposed lines of business and really was a great event, all hands on deck that we emerged from, we think, very strong at the end of the day. And then on Page 20. What I wanted to show you here was despite the information shown on the prior 2 slides, during this time period, some of our lines of business had exceptional outperformance. So what I've done here is I show you all of the lines of business, and you can see there's a lot of them, that delivered below a 90% combined ratio over that time period. So it's really the power of the diversified portfolio. These lines of business had outperformance which basically offset the challenges that I went through with you that helped us to deliver our target 88% to 90% combined ratios. So now going to Slide 21, lessons learned, really what we'd seen with COVID and ransomware is that anything can happen, all risks need to be measured and managed, and there are continually new emerging risks that really require us to continue to invest in our deep technical expertise and really respond to the emerging risks that the world is facing. So on Slide 22, we are very proactive in the management of our risk tolerances. As you can see, we do target an ROE of 10% above the risk-free. Our target is to deliver a combined ratio less than 90% over the cycle. And as I mentioned, we want to outperform our peers by having a 5-point expense ratio advantage. We run a very conservative investment portfolio. The average rated is an A+. It's a 5-year average maturity. We maintain risk assets to be less than 15% of our portfolio, and the investment risk less than 40% of undiversified required capital. Then when you look at capital resources and liquidity, we want to make sure that we maintain surplus to hold our ratings at the high levels that they're at. We maintain our debt to capital under 20% and a minimum liquidity of 5%. And then on reinsurance, we only make sure that we trade with the highest quality of reinsurance partners. And when you look at our enterprise risk management platform, we are viewed by AM Best as being very strong, and it's an integral part of our financial management and our business framework. So now moving to Slide 23, over the last 5 years, we have derived enormous benefit from being part of Tokio Marine Holdings. So we've achieved significant synergies, and we work collaboratively with other group companies and with holdings. And really what we've been able to see at HCC is we've been able to really gain significant credibility from the global presence and the superior financial strength from being part of Tokio Marine Holdings. So on Slide 24, which is next, I outline here for you, we've realized $109 million approximately in annual profits and savings from synergies. And that's from using [ DELFI ] on our investment portfolio, changes in our ceded reinsurance structures, bank loans, IT, et cetera. And then on the right-hand side, we've probably added -- we estimate, we've added it north of $350 million in annual new premium by being able to take our specialty offerings to new corners of the world and leverage the relationships across our group companies, be it TMNF in Japan, or Philly out of Philadelphia, we've been able to really take our specialty offerings to new clients, new areas of the world. And you can see we really do contribute a lot in the revenue synergy on the premium side because of the global specialty diverse product offering that we have. So we're very pleased with that cross-selling initiative. And then on Slide 25, I just talked here about the type of revenue synergies. The first one that I mentioned is cross-selling. We do cross-sell to non-TMHCC entities, and some of the bigger lines that do that, our D&O line is very popular, the medical stop-loss. We've been able to grow our credit and our surety via cross-sell very significantly. We also take a joint approach to make sure that we seize new opportunities working with other group companies. We've been able to expand our regional network where we can write D&O in new countries that we weren't able to write before as well as transaction risk insurance and credit. We can use strategically the group's resources and capital and expertise. And then there's numerous other benefits of working together with the group. And then stable leadership, one of the unique characteristics of Tokio Marine HCC is we're a company that has been built on acquisitions, and we've really been able to keep the acquisitions and the leadership within those specialties engaged within the company. So we've been able to retain and empower the leadership team, and we think that we just have the best team of experts and deep technical expertise in the marketplace. And you'll see that -- I'm going to turn now to Slide 27, and what you will see here when you look at the years of service on the bottom, you will see a very tenured senior leadership team that is committed and very loyal to the organization. And when you look at the gray box in the middle, that is all of our line of business leadership. So this is the U.S. side here, and you can see the different business unit leaders that we have and how we break down and manage our business. We have a surety business, a casualty leader, an HCC credit leader, an agriculture, a global travel leader, guaranty, HCC specialty, U.S. D&O, stop-loss, aviation, public risk and cyber and professional liability. So you can see the tenure. You can understand now how we manage our portfolio and our business in the U.S. And then I'm going to go to the next slide, which is Slide 28, and this is a further breakdown of our international team. So you can see our international team is broken down into a special team and -- specialty team and a London market team. And you can get an idea of the number of business units that we manage there. So we have our surety and credit -- U.K. credit, our financial lines and professional lines under our specialty unit, and you can see Simon Button. Simon Button really benefited from the Lloyd's Decile 10 and really added a lot of the greenfield operations so we have a property treaty business, property D&F, A&H business, U.K. delegated property, energy business, marine hull, marine liability, marine cargo and then the addition of the global energy business. So again, that really makes us unique. We're unique in that we have great deep technical expertise that have committed and really enjoy working within this organization because we empower them, we give them the ability to be able to do what they're very good at and really trust in their deep technical expertise. So now just to wrap up and talk about the future. Our goal is to remain committed to the strategies that have really been successful for us as a group, but we want to make sure that we're always open and exploring new growth opportunities through data, technology and deep technical expertise. So on Slide 30, I think this is a really nice summary of what sets us apart and what our competitive advantages are as a group. At Tokio Marine HCC, we have a laser focus. We know that we are a specialty underwriting company. We focus on delivering profitable bottom line results over top line growth. And we know that, that comes from years and years of seeing the good, the bad and the ugly. So we have people with really deep technical expertise. We have a low expense ratio without sacrificing quality. People is really our key asset. Our leadership is respected and stable. They are entrepreneurial and accountable. We have the unparalleled talent. We have a very unique business model because we are built on acquisitions, we are flat, lean and decentralized so we can move quickly and rapidly adapt to changing market environments. We empower our team. Our interests are aligned. They enjoy global capabilities where they can take their product line to all areas of the world. I talked about the power of our diversified portfolio. We have lines of business that are not highly correlated. No one line of business dominates our risk profile. We have successful M&A strategy. We write small middle-market enterprises as well as Fortune 500, so we're diversified across size of insured. We also have different distribution approaches. We talked about our consistent performance, and it's that sound and the stable results that really -- and our strong enterprise risk management that give us those high ratings from AM Best, S&P and Fitch. And then culture is key. Culture is the reason that people stay or leave with the company. And I think that our culture is strong. You can see that in the tenure and the loyalty of our leadership team, but we focus every day to be a good company. We try to build superiority by working together and collaborating on technology, innovation and data and really always trying to look to provide support for our communities in which we work and live every day on environmental and social issues. So I think this really summarizes the key competitive advantages at Tokio Marine HCC that set us apart from our competition. And then as we go forward, on Slide 31, I've been talking about our results and how we are able to capitalize on the hard market over the last 5 years. But the P&C market cycle is cyclical, and we -- there is going to be a time where the rate environment is going to get more challenging. And core to being a specialty underwriting company, it really is important for us to focus on underwriting business that we are confident is going to be able to deliver the profitability that we want. So as you can see here, usually, the soft markets last longer than the hard markets. And during the hard market, I think we were able to exploit the favorable conditions and we were able to grow our portfolio. But as rates may start plateauing as we move forward, they're still strong, as I mentioned. But if rates start to plateau or start to come down, we really need to prepare for the next phase of the cycle where rates potentially soften. I know it will be challenging, but we may have to shrink our market share to maintain profitability. And we think core to our success is to protect profitability at the expense of market share. So it's easier said than done in the industry. A lot of people say they do this, they don't necessarily actually practice it. I think we've had a history at Tokio Marine HCC of really balancing 1 to put the -- 1 to shrink, and 1 to grow and 1 to accelerate going forward. So this is my last slide. I'm moving now to Slide 32. So when I talk about our ongoing priorities, we want to make sure we capitalize on opportunities. And I think there will be always the ability for us to focus on underwriting excellence and get better at our trade of underwriting by bringing in more value-added expertise, supporting our underwriters with more data and analytics. I think that we're very consistent in the market, and I think we can capitalize on our position in the marketplace, and the fact that we are consistent and we will continue to evaluate new opportunities to bolt-on acquisitions, greenfield operations and new specialties. And we're not afraid. We know that we're going to have challenges. We attack our challenges. We're very resilient. So we know how to deal with the softening rate environment. We dealt with ransomware trends. We can deal with loss-cost trends, ongoing pandemic effects, war on talent and competition from insurtechs. And then we want to continue to invest in our future. So we are always looking to improve our underwriting capabilities, investing in technology and digital, instilling a data culture and always empowering more people and accelerating analytics and addressing the war on talent. So that concludes my prepared material. Hopefully, that gives you a nice overview of what we've been executing on and our strategy here at Tokio Marine HCC over the last 5 years, and I'm happy to take any questions that you might have.

Thank you, Susan. [Operator Instructions] We already have a question. So let us start. From Mitsubishi UFJ Morgan Stanley, we have Ms. Tsujino asking her question. So I can see that GWP and NWP show a big gap. So that means there's a lot of ceding of reinsurance. But we know that this year, we know that reinsurance costs are going up even outside of natural disasters. What is the impact of this trend to HCC, please?

That's a very good question. Yes, I would say that the GWP to NWP gap will probably stay pretty consistent where it is. I do think that reinsurance is going to get more expensive, and we've seen it on certain lines of business, but I think that also translates into opportunity to get increased rates on the front side. So I think the reinsurance is helping to keep the pricing side higher and driving it higher in certain instances. So I don't know that the mix -- I think the net written premiums of gross written ratios will stay pretty consistent. But I do think that higher reinsurance costs will translate into higher gross written premiums for us as well. Just also for your information, we are very underweight in property. So what we do see is we actually see a lot of interest in reinsurers that are exiting the property cat market, wanting to really support specialty lines of business, especially those with proven track record. So I think that, for Tokio Marine HCC, the impact is not going to be bad at all. We'll be able to deal with it. And if we have increased costs, we'll be able to pass it on to our insureds.

Thank you very much. Next, we would like to take a question from Mr. Muraki, SMBC Nikko. His question is on Slide 8. On the right-hand side, you see the chart regarding combined ratio 10-year average and the volatility. Now the combined ratio 10-year average, the absolute amount is top class on the part of HCC. But when it comes to the volatility, up until 2014 -- 10 years up until 2014, you were top class. But from there on, you have come down to average or middle of the peers. Why have you come down compared to the decade up until 2014? And what is the forecast going forward in terms of your competitiveness?

So if you think about the history, and I showed you the lines of business, the history, probably up to 2014, we were a lot more medical stop-loss, and medical stop-loss is very short tail and it's basically medical expenses paid and incurred basically in the same year. And if you recall, the Affordable Care Act -- prior to the Affordable Care Act, the max payout there was $1 million. So what happened after the Affordable Care Act, that very stable medical stop-loss book now has a lot more volatility because there's no cap by life. So I think that's one area that's driving the increased volatility. It's just a mix change in that business. And then, prior to 2014, medical stop-loss was a much higher percentage of our portfolio than it is today. So we have added a lot of new specialties. So I think that's the combination of having more product and medical stop-loss being a smaller portion and medical stop-loss having more volatility. So the way that we try to manage our volatility as across our portfolio, and why you see that difference in net to gross, we do by line of business, try to protect volatility via reinsurance, if possible, if we think it makes sense. If it doesn't make sense, we are always a gross line underwriter. We are always happy to keep the business that we write 100% net if we have to, even if the reinsurance goes away. So hopefully, that gives you a little bit of insight of how the portfolio has changed and why the volatility is different.

Thank you very much. Next, we would like to hear from Mr. Watanabe from Daiwa Securities. This is regarding the expense ratio. So you talked about how superior you are compared to your peers. And you mentioned one point is that you reside in Houston compared to other places like New York City. But do you have any other examples that keep your ER down? And also, if you are so efficient in your operation, can you not share that know-how to other group companies in Tokio Marine Group? What kind of synergy can you pursue there?

Yes. So I've talked about -- again, we have a company built on acquisitions. So not just Houston and our home office being in low rent district. When you think about all of the acquisitions and all the 60-plus acquisitions, they were smaller companies and they're all very humble, and they are all mostly in real estate areas that have a savings. So it's across the whole portfolio that you see. The other thing that I also think a major competitive advantage for us is most of our distribution is direct through retailers, not through wholesalers. So wholesalers usually carry an extra 5 to 10 points on the commission side. So we actually try where we can. We actually spend the time and invest in getting the direct retail relationships rather than going to easy route of going to wholesalers. So that is also something that we undertake as our initiative. I think the other thing that we do is we have -- we talk about having our interests aligned with our underwriters. And we have a very strict formula where our underwriters and their bonus pool is compensated on a percentage of pretax operating income, so underwriting profitability. A lot of people and a lot of companies say they have formulas, but they don't necessarily stick to them. We do strictly stick to that. So every dollar that our underwriter save potentially increases their pretax operating income, which impacts the bonus pool, which I think generally impacts the overall focus on making sure they're delivering underwriting profit over top line growth without sacrificing profit. So I think those are some of the fundamentals that make us unique.

Thank you very much. Next, we have Ken Hung from Nuveen. And the question is, what is the latest -- what is the line of business that was most impacted with the war in Ukraine? And has this impacted pricing or risk selection? If any, please let us know.

So we have 2 lines of business that have potential for impact against the war in Ukraine. So we have -- as you could see, we talked about we have a big aviation portfolio. but we did not write any risks in Russia or Ukraine. We did not participate on aviation war, our underwriter just never felt that the rates were adequate. So we avoided all that. So we here on our core net portfolio, don't have any aviation exposure. So we avoided it, and that was really good underwriting decision to stay away from that. The other one that we have is we have a credit portfolio business. So we had some exposure on that. But interestingly as well, we have reduced our exposure to Russia and Ukraine over the last number of years because of the instability that we had seen there. So our maximum exposure there was very manageable. And the actual net exposure that we've incurred this year has been minimal. So for us, it's going to be impact -- it will be within a 1 point combined ratio impact across our portfolio. So very minimal for us. Again, I think it goes to showing good underwriting discipline by our credit team and our aviation team to avoid those areas of risk.

Thank you very much. So by the way, in Tokio Marine Group, the losses against this war, last year, in November, we explained that as a group, total, the impact is JPY 11 billion. This is our forecast. Yes. Let's go on to the next question. This is from Nomura Securities, Mr. Sakamaki. So between organic and inorganic opportunities, I have this question. The opportunities for making acquisitions. Well, the valuation seems to be going up quite high recently. So, in general, they say that there are less opportunities for acquisition. Is this case true for HCC as well? In the balance between acquisitions and greenfield, what will be the balance going forward, maybe more greenfield when we think that acquisitions are becoming more expensive? Susan, please?

So I do -- if you look at our acquisition track record over the last 2 years, 3 years, it's been very quiet because I do think valuations are very high. I hope, with rising interest rates, we're starting to see some change in that. So I do think there is going to be potential for acquisitions in the upcoming years. And I also think that MGAs that have -- might have problems keeping their capacity in their paper because of what happened with the property cat markets, I think that the first place where reinsurers pull capacity is from MGAs. And a lot of our acquisitions have been of MGAs. So I do think that there is going to -- I think the opportunities going forward are actually a little bit better for us now. And I think you're going to see potentially smaller acquisitions, and I think there are going to be more bolt-on acquisitions than they are new, new. When you look at our list of specialty offerings, there's not that many left for us to really get into new. So I think we'll see bolt-on acquisitions where maybe somebody try to set up a cyber business and they were able to get to $100 million but they can't get any further, that would be a nice addition for us to add to our portfolio. We're always looking for acquisitions on the stop-loss side, right? Is there a small MGA out there that we can bring onboard to add to our portfolio. So I -- but I think that greenfield is going to be potentially options as well. But I think that bolt-on acquisitions are probably going to be what we see the most. And interestingly, just so far in the last couple of months, more activity than we saw probably all of last year. So I do think that the interest rate environment, the environment with the reinsurers and capital in the marketplace and everyone trying to focus and really now trying to focus on profitability, that I think we're going to see some MGA opportunities as we move forward.

Thank you very much. So next is a question from Mr. Okada from UBS Securities. It's a question on Slide 9, please. So we're looking at the International Business here, HCC International, which is your growth driver. Can you explain a little bit more on this because you have the figure, 82.0% 5-year average combined ratio. On Slide 7, you have the figure for the entire company. So you can see that this combined ratio is different from the total HCC figure, 89.3%. What is the difference? And if possible, could you give us the breakdown of this 82%? Can you break down the combined ratio 82% by LR and ER, please?

Sure. So the difference -- Slide 9 is only our International Business. So that's the business that relates to the org chart that I show you on Slide 28. So it is a subset of our business. It's the business that's written by our international team out of our specialty team and our London team. So that's why the difference. Whereas on Page 7, you have the international team as well as North America P&C as well as our A&H business. And the reason that the international runs lower than the overall group is because in the U.S., we write medical stop-loss and we write crop. Those are our 2 short tail lines of business, and they traditionally run a higher combined ratio than the traditional specialty lines of business because of the short tail nature. So we don't have any of that real short tail nature business in the international. So our international target combined ratio is about an 85%, whereas our crop and our medical stop-loss target is more in the mid to low 90s combined ratio. That's why you see the difference. And then on the international side, let me see if I can find -- on the international side, the expense ratio is higher on the International Business than it is on the U.S. business as well because of the London market, but I don't have that breakdown in front of me, but I will tell you that it is definitely higher than the overall expense ratio.

Thank you very much. Next, again another question from Mr. Muraki, SMBC Nikko. It's a question on Slide 27, please. Oh, it's 10 a.m. in Japan, but we have a lot of questions, so we would like to extend until 10:30. So again, a question on Page 27. So this is some of the leaders and how long they have been with HCC. So how are you different in hiring or retention of your talent, the methodologies that you take? And how are the salaries different compared to your peers? Another question for Susan. So you have taken over the CEO position from Chris in 2018. And how was this succession actually executed? And -- or how was Tokio Marine Holdings involved in the succession of this leadership role from Chris to us, Susan. Two questions.

So I think our success, when you look at the years of service, if we acquire the talent via an acquisition, we count the number of years from the time that company started. So when you look at some of the people here, let's go to U.S. D&O, that's 25 years. We bought that entity 20 years ago. So last year they celebrated their 20-year anniversary with Tokio Marine. So the leader was with that organization that we bought 5 years prior, so 25 years. So when you think about our M&A strategy, normally, what we do is we look for businesses and leaders that we know and potentially have had interaction with before. But then we're also looking for deep technical expertise and leadership that wants to stay engaged, right? They want to join our group because they see the value of having HCC paper, and they want to stay and they want to grow the portfolio. That's really where we have success on the acquisition side that people want to join us, want to be part of this home, want to continue to drive the business forward. And what we do is we empower them. We allow them to continue to drive their business and do their thing, but they get to now do it under this great corporate umbrella of Tokio Marine Global, now HCC. And they get to drive their business forward because they have a passion and they love what they do. So when we do our mergers and acquisitions, we say, is the leadership engaged? Do they want to stay engaged? Are they committed to working with us, or do they just want to cash out and go retire? And we do those as well, but we take a different perspective on those. So that is really the difference. So it is amazing when you look at how many of this talent we actually got through acquisitions. They potentially got nice reward from selling their company, but they're still working with us 20 years later. So I think that's the success, right? There's a marriage. They saw the benefit of being part of HCC. We see the benefit of them being part of us. We trust in their talent. We empower them. We give them the ability to be able to drive their business forward. So that is a key ingredient, I think, to our success. When you look at our salaries, we don't want to be at the upper end of salaries. We like to be within the 50 to 75 percentile of base salary, and I would say probably closer to 50%, but we want to reward performance and our bonus pool is based on a percentage of PTOI, so that's where we try to reward them. So we would rather reward them more on the bonus side and let the -- but we want our salaries to be competitive, and we don't want to fall behind. So that's why we're within the 50% to 75% percentile on salaries. So hopefully, that gives you -- answers the first question. On the second question, from a succession planning standpoint, I was very blessed in that. I was very familiar with the company. Chris Williams and I knew each other from being on the Board together, and then he obviously took over that role. And so it was really easy for me since I already knew a lot of the leadership to really get engaged and get more into the details. And then when to get acclimated as part of the group, when Chris went up to assume his new role, the first person that I reported into was Satoru Komiya. So I was able to actually get first-hand experience and work with him and understand what's important to him and what was important to Tokio Marine Holdings. So he was the first person that I reported into in my role as CEO of HCC. And then the next person I reported into was Akira Harashima. So I got more insight into Tokio Marine Holdings. And then now I report into Chris Williams. So I've really been blessed with having guidance on a daily basis from Satoru, then Akira and now Chris. And I just have enjoyed every minute and I think really what Tokio Marine Holdings has done is really allows you to be able to drive the business. They're supportive. They want to make sure they understand the details, and, at the same point in time, they have a lot of confidence and trust in us and allow us to run our business and be able to make decisions for the best of the organization.

Thank you very much. So next, we have from [ Aberdeen, Mr. Oishi ], a question. So thank you very much for your presentation to understand HCC's strengths and outlook today. You talked about the cyclicality of specialty insurance rates, but how do you see supply and demand factors changing for major business lines? And of course, we're aware of the potential softening in the future. That is his first question. And the second question is, against that background, what are some of your M&A targets? How do you select your M&A targets? How do you create your long list or short list?

From a supply and demand perspective, I think actually, it's a really interesting time. If I look at where do I think the demand is going to be, you saw that we did the acquisition of NAS, who is a cyber specialist, and I think that was well timed. I do think you're going to see increasing demand for cyber. I think it's probably 1 line of business that has the greatest growth potential in the industry. So from that perspective, it's very important that we do everything we can to get really, really good at underwriting that line of business. But what's also interesting when you talk about what's the demand going to be, I don't think you can keep always driving price up unlimited, right? At some point in time, people are going to say, cyber premium is too high, I'm not going to pay it. So what you see now is really a change in that. I do think that risk management tools, loss mitigation, adding expertise and value of how people can prevent loss is going to be a very important tool in the toolbox that people didn't value as much in the past. So for example, if we are scanning your network, and we're telling you there's a critical open vulnerability, and we're notifying you, and you can shut it down and avoid a ransom attack, that's going to be invaluable going forward. So I think it's a really great time for the insurance industry to use technology and think outside the box on wearables to become true partners in the business with our insurers. And it's not always about driving premium up so high that demand goes away, right? So I think you need to have that balance is that if the premiums keep going high, you need to have risk management tools to control it. And then I think the world is just changing and evolving, and there are new risks to ensure every day. So we talk about the potential growth in renewable energy. Again, I think that was a well-timed acquisition for us. I think we're going to be able to benefit as new investments get made in the green territory. But as innovation is changing in the world, new risks are emerging, and there's going to be the next new product that develops. So I don't think there's been a better time to be in the world of insurance than there is right now because the potential for us to develop new products, insure new risks going forward is going to be potentially limitless and it's really only going to be limited by the innovation of the world that we're in today. But right now, I think that renewable energy, we're going to see great growth. We will see it in cyber. And on both of those lines, we need to do it well, we need to invest in data, analytics, deep technical expertise, risk management tools and really want to be the partner -- a leading partner of choice for our insurers.

Thank you very much. Next, we would like to get a question from Citigroup, Mr. Niwa. So regarding the [ DWP ], the top line, what is your evaluation on your past record, and what is your forecast for the future? So regarding the past track record, you have the actual record that you show on your slide CAGR for HCC total growth ratio of 13.2% in the past 5 years. HCC International is 26%. So how good was this? I mean, how good was this against your original plan? Was it an upside or a downside, what is the reason? The second question is about the future, your future forecast regarding the GWP. Looking at American business and International Business, maybe looking at 3 to 5 years ahead, what kind of growth ratio is your, well, target or your expectations to yourself? And if possible, please give us a breakdown of that growth ratio between organic and inorganic for the next 3 to 5 years, please?

To that, if I look at our history and how good was it, I think that generally, we would say we outperformed our business plans. And I think that's because we had new specialties that we added that we didn't foresee. Like we didn't foresee the Lloyd's Decile 10 and the ability to be able to attract talent that were handcuffed. So I think -- and then we like to look at our growth. We don't necessarily measure ourselves, but we look at our growth relative to our peers. So we think that relative to our peers, we've capitalized on the hard market similarly to the other leading specialty carriers. So I think our track record has been good. If I look at the future, right now in our business plan, we don't usually forecast new, new in acquisitions because we don't know of them. But I do think that the growth numbers that you see here of 13.2%, it was a hard market. You saw all the new specialties we added. So I don't necessarily think that number is going to be able to continue in the next 5 years. So if I were to throw out an estimate right now, I'd probably say, with our current portfolio right now, 5% to 10% largely organic growth would be what I would be estimating. And really on inorganic, I wouldn't really be putting anything in it right now, but I do think we will have bolt-ons. Bolt-ons aren't usually as big of an impact as doing a true independent acquisition. As you said, I do think organic growth is going to be strong driven by cyber, driven by renewable energy. So I think that potentially on the higher end of that range is not out of the question, depending upon how quickly those can grow.

Thank you very much. Next, we would like to hear from Ban from Jefferies. Mr. Ban have 2 questions. First of all, regarding the top line growth. In your presentation, you have talked about some of your major specialty products. And you said that the balance of the portfolio is very key rather than being strong in just a few specialty lines. I think that's what you mentioned. So in these key specialty lines, you already are a leader. You have very high positions in that ranking chart that you showed us. So wondering, going forward will you be growing at the same rate as the overall industry of that specialty line because you're a leader, will you be going along with the market average? Or, in the soft market, will you maybe recording a lower growth ratio than the market? Would that be your strategy? Second question is inflation, excluding social inflation because social inflation is irrelevant to HCC. So other inflation, do you have this under control? Is the inflation tracking at a rate that you have expected? Or are things going out of your expectations? Is there any impact that you are concerned about to loss ratio or expense ratio, please?

With respect to growth, I would say, if we go into a softening rate environment, I would guess that our growth rate will be lower than the rest of the market leaders because I do think that we have had a track record, and we have a history of really delivering on the fact and walking away if we do not think we can achieve our combined ratio target. So I think we're very disciplined in that regard. I don't think other competitors are necessarily as disciplined. So my general feel would be that we would grow less than our peers. With respect to inflation, the good news is when we look at our portfolio, we have specialty lines. So we don't have your traditional auto exposure. We're underweight in property I mentioned. So we don't -- we're not dealing with that. A lot of our specialty -- you think about D&O, directors and officers, which is one of our larger lines is really stock price drop, right? So it's not impacted by inflation. Medical stop-loss is impacted by inflation, but medical stop-loss is one line of business that has always priced in medical inflation into the line of business. That's why I exclude it. It's not traditional P&C. So that's always been priced into the pricing model. So I think, in general, inflation is under control in our portfolio. But again, we're specialty in nature. So we're a little bit different than your traditional people that are writing personal lines, auto, homeowners. So professional lines, for example, is going to be jury verdicts, right, or an economic loss not a, I hurt my property or I need to replace my auto. So we do think inflation is under control. We do manage it. We do take all of our loss ratios, and we have a trend factor that we apply so we don't put our head under the sand on it. We want to make sure that our rate level is exceeding our loss trend assumptions. And today, we feel very confident of that.

Thank you very much. So we would like to close the Q&A session and finish off with this Tokio Marine Insights presentation and Q&A for today. Thank you very much for your participation. Finally, we would like to ask you for your input going forward, if there's any theme that you would like us to talk to you about in the Tokio Marine Insights series, please let us know, if possible, please go ahead and type that in, in the chat box on your new screen. Thank you all very much for your participation today.