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

Everybody, thank you very much for being here despite your busy schedules today. This is Ishiguro from Global Communications at Tokio Marine Holdings. Now before we start the seminar, we would like to express our sincere apologies for the concern caused to our customers and the capital market for the incident regarding a single employee that fixed the insurance premium rates as released by Tokio Marine and Nichido yesterday. Although, this case consequently did not result in underwriting with unreasonable premiums due to these fixed rates, we take this matter very seriously and we have reported the misconduct to the financial services agency. And thus, we have received an order to submit an official report. A special investigation committee with several outside attorneys have been formed to confirm the facts. We would like to submit to you that we are not aware of any similar cases as of now. However, we take this matter very seriously, and we will continue to investigate for similar cases. And if any appropriate cases are discovered, obviously, we will deal with them strictly. We will also analyze the causes and implement measures to prevent recurrence with thorough governance and appropriate employee behavior. If you have any questions regarding this incident, please send your inquiries to the IR team separate from today's seminar. Now regarding today's Tokio Marine Insights. This is one of the series of seminars in which our frontline members provide vivid explanations on topics of interest to analysts and institutional investors. Last year in June, we featured PHLY and Kiln, and this January, HCC. And this time, we will feature Delphi, one of our international businesses, which is also our profit driver. And we would like to explain the outline of its business, and why we are able to achieve such high profitability. The presenters are CEO of Delphi and also Vice President of Tokio Marine Holdings, Don Sherman; and also Delphi CFO, Stephan Kiratsous. We would like to share their real voices from the field. Today, we'd like to use the deck on the home page. It's already uploaded. Don and Stephan will guide you through the slides. [Operator Instructions]. We would like to go on until 10:30 JST, and if we have more questions, please allow us to overrun up until 11. Thank you, Don and Stephan, for being here. Over to you.

Okay, and thank you for your interest in Delphi. If we could go to the table of contents, please, on the slides. We'll be covering an overview of Delphi Financial and then Stephan will be covering our 3 segments, and then he'll hand it back to me to talk about the investments. If we could go to the next page of the overview, please. So at Delphi, we're a financial services company that focuses on specialty insurance, our core franchises in employee benefits-related insurance coverages. We also have a retirement services group that provides important diversification and a meaningful addition to our profitability. We are market leaders in specialty P&C niche markets that allow us to help drive the profitable results that we have achieved. We have a very experienced management team, as you will hear throughout the presentation in all of the segments. And we augment that with some what we think of as very strong investment performance with the investments managed here at the holding company as a core competency. We've always emphasized for our business, the importance of operating earnings growth and return on capital. Since joining the Tokio Marine Group, we've also increased our focus on risk management and the Tokio Marine risk management systems have been an integral part about how we think about our business for the last 10 years. If we could turn to the slide on the business segments, please. As you can see here on the chart, we have an investment function that sits with the Delphi Financial Group at the top of the company, we run the employee benefits business through Reliance matrix as well as employee benefits in our Specialty P&C business at Safety National, and we also have the retirement services functions as part of Reliance Standard. We can go to the next chart, please. It's really a dual focus for us. We think that we should be providing strong underwriting results as well as a highly predictable long-term cash flow, and it's that highly predictable long-term cash flow from the insurance underwriting businesses that provide the engine for what we can do from an investment perspective. We are focused on the long tail and predictable cash flows of our insurance businesses to allow us to invest in the somewhat less liquid parts of the investment markets where we think we find superior returns for the level of long-term credit risk we think we're taking. We run a diversified portfolio with both a professional team of inside investment experts as well as adding the expertise of a number of outside managers, which we will discuss in more detail as we cover investments. We can go to the next slide, please. You can see here we have a diversified set of sources of both cash flow or revenue as well as operating income. And for the purpose of the chart on the left, we have modified GAAP accounting. Here, we're not using GAAP revenues. We're showing the cash flows coming into our business where our retirement services annuity premiums are reflected in the revenue, and it gets a different treatment under GAAP accounting, but you can see where we get the cash flows that come into our investment portfolio, and they're well diversified across the employee business -- employee benefits business, the Retirement Services segment and our Specialty P&C business at Safety National. The right-hand chart shows you the operating income on a pretax basis, which 2022 was $1.4 billion. And again, it's fairly well diversified across the Employee Benefits segment, the Retirement Services segment, and in this case, the Specialty P&C segment, our Safety National business as the biggest contributor to that pretax operating income. That's not a surprise in the sense that among our businesses, while we like longer duration businesses in general, Safety National is the longest of the duration of our businesses. And so with that longer duration, there's a higher component of investment income that comes with that line of business. So if you go to the next slide, you can see the combined ratio, and we tend to think about operating ratio in part because many times, the market for long-tail businesses might have a more modest profit margin on a combined ratio basis because the market does, to some extent, price to the duration of the asset -- of the liabilities and the opportunity for investment income over the life of the portfolio of the liabilities. So we tend to think about operating ratio, which is the traditional combined ratio, including investment income into the calculation. So you can see the track record for our company since the acquisition of Tokio Marine -- of our company in 2012. We certainly had a few challenges from competitive market and some of our own execution issues in '16, '17, '18, and we feel like we have things back on an excellent track both achieving as good a set of combined ratios as we've had in our company's history as well as operating ratios that are falling toward the 70% ratio -- level for 2022. And if you could look at the next chart, you can see here the track record we have for the Delphi pretax operating income since the acquisition of our company by Tokio Marine with a 15% compound average growth rate, and we feel good about what we've been able to contribute to Tokio Marine, and we look forward to continuing this track record of successful results. So that's my very quick overview. And with that, I'm going to turn it over to Stephan, who can talk through some of our individual business segments. Stephan?

Sure. Thanks, Don. I'll start on Slide 11, employee benefits, and I'll discuss some of the details. Our employee benefits business is written through our primary life company Reliance Standard Life. Reliance Standard has been in existence since 1907. We, Delphi, bought the company in 1987, and it is headquartered in Philadelphia, Pennsylvania. We think Reliance Standard is a top tier carrier in the group employee benefits space. We would compare them favorably to any of our competitors in terms of effectiveness of execution and the ability to maintain profitable growth even in a generally stagnant operating or economic environment. Don mentioned, we write a diverse portfolio of group products. We're #11 in group long-term disability in force, #11 in short-term disability and #15 in group life in force. So we have a meaningful share, not a huge share, but a meaningful share. And we think that's consistent with our emphasis on specialty businesses that can offer attractive returns on equity. The next slide. We operate our businesses on a decentralized basis, as Don mentioned. To us, this means we leave day-to-day decisions to the leaders of each business, and we hold them accountable for the results. These professional managers focus on the growth profitability translated to underwriting results of each of their operations and exclude the investment results, which, as Don mentioned, our core competency of the holding company. We find this approach highly effective, but it really requires us to have highly talented employees in each of our units. As you can see here, this -- the benefits business is led by Chris Fazzini, who has 39 years of benefits experience, all of with RSL, and he is supported by key executives with multiple years of industry experience that have also had experience at other leading companies like Cigna, MetLife and Unum. What we believe is that this provides us both with the experience as well as an understanding of our competitors' strategy to allow us to execute better in our business. The next slide, Page 13. This slide shows our breakdown of our product mix in the employee for benefits business. As you can see, Blue is long-term disability, Gray is group life, yellow, other, which primarily consists of voluntary travel accident, dental insurance and limited benefit medical products purchased by employees on an elective basis at their work site. On the left side, you will see the diversity of our $1.7 billion of employee benefits premium. We are relatively evenly split among our 3 major offerings, long-term disability, short-term disability and group life. The 10% share of other is smaller but highly profitable and growing -- a growing part of our business. Given that our products are sold to employer groups, our revenue growth is highly correlated to payroll growth. On the right side, you will see the components of our 2022 operating income. These figures for '22 are a bit skewed due to the lingering impacts of COVID, which had a negative impact on group life, but a positive impact on long-term disability as claims have decreased with the ability of employees to work from home. And while the death claims will surely decrease with the passing of the pandemic, we are optimistic that some of the positive impact on the disability business will remain. Next slide. As I mentioned, we think we're one of the best underwriters in the space. Nevertheless, our business is highly competitive with growth -- in the U.S. with growth and profitability tied to the economy. Over the last 10 years, profits have increased by 7% and premiums have increased at a more modest 4% rate. So we have, over this time period, expanded our margin. Our target is to write this business in the mid-to-high 90s combined ratio. This, coupled with a duration of approximately 5 years, provides us with nice operating income over time and produces a high 80% operating ratio for this business segment. Next slide. The products in this business are highlighted here on this page. The underlying theme is that these products have relatively determinable and limited exposure per policy, very much unlike medical insurance that are offered by some of our competitors and some others in the U.S. markets. Our competitive peers are Cigna, StanCorp, Unum and Prudential. However, we differentiate by focusing on maintaining profit margin over premium growth. We market our products through independent agents to employer groups. We have a broad distribution among various industries with no large concentrations. Our employer groups tend to be between 2,000 to 5,000, although we tend to focus on the lower middle market, the 200 to 500 size where we believe the margins are wider and where we have a processing expertise. And while we focus on the small case market, we do have an offering through our subsidiary, Matrix, with an integrated employee benefits program that allows us to create profitable products for the larger employees as well. Next slide. Let me turn to Retirement Services. Our Retirement Services business is also written through Reliance standard. The products offered and the product offerings in this segment consists mainly of single premium fixed annuities and funding agreements. This is a somewhat larger business than our Employee Benefits business and generates roughly 62% of Reliance's $684 million of operating income during 2022. We sell through marketing wholesalers and tend to focus on target -- on banks and independent broker dealers, which, on a relative basis, contributed 69% of the book for banks and 31% for nonbanks. Most importantly, we do not sell variable annuity products nor do we offer riders or guarantees. Our products are very simple spread-based products. We maintain a low-cost infrastructure, which allows us to pursue an opportunistic approach to this business. And we focus very intently on spread. And if we can't get our price, we won't chase the volume. Our Retirement Services business, on the next page, is also headed by an experienced management team. Tom Burghart has a 43-year history in the industry and with Reliance Standard. Dave Whitehead, who heads up our distribution and maintains our marketing relationships with key financial institutions, has a 39-year tenure with Reliance Standard. Michael Higuchi runs our Investment Services operations and Kyle Ryan oversees our processing and our back office, all are highly talented professionals with significant experience. Next page, our product mix. You can see on the left-hand side, our year-end account value deferred annuities make up 45% of our account value followed by indexed annuities at 29% and funding agreements at 26%. Again, the theme here is a diversification. Both the deferred and the indexed annuities are sold to individual customers with an average account size of approximately $110,000. The funding agreements are institutional products. The chart on the right shows our profitability by product. We price our Retirement Services products based on the assumptions of prevailing and expected interest rates and other factors necessary to earn us a positive spread between our expected return on investments and the crediting rate. As you can see, the profitability by product closely follows the account values. This reflects the fact that as a general rule, we at Delphi try and price our retirement services products similarly in order to maintain a consistent cost basis. This allows our margins to be roughly the same across all products. Next page. We're really pleased to touch on this slide, which highlights the long-term growth of our retirement services business. Since the acquisition by Tokio Marine in 2012, we have been able to grow earnings in this segment at a compounded rate of 22%, which has been fantastic. This is the result of 2 factors. The first is the investment expertise resident within Delphi and our ability to generate strong and consistent investment returns, something which Don will touch on shortly. The second is the very real synergy created through the acquisition of Delphi by Tokio Marine. Becoming part of Tokio Marine, as you know, which is one of the strongest and most well-respected worldwide insurers, has allowed RSL to further develop relationships with banks and broker-dealers, and, in turn, significantly increase our sales volumes while at the same time maintaining a disciplined pricing strategy. To put some numbers behind this comment and reinforce our consistent level of profitability, we increased our profits, as you can see here, from roughly $70 million in 2012 to $427 million in 2022. That's a sixfold increase. Over the same time period, our account values increased from $2.3 billion to $15 billion in '22, also a sixfold increase. Again, we have maintained a similar margin in 2022 from that which we were deriving on a smaller book of business in 2012 and that has translated into the increased profitability. Now I'd like to turn the page and touch on the characteristics of our retirement products. Our primary product is a deferred fixed annuity, generally single premium. This provides for a single payment by an annuity holder to the company in exchange for a guaranteed crediting rate paid by the company to the annuity holder for a period of time. Interest is not currently cash pay, but accumulates tax deferred to purchasers in the U.S. At December 31, '22, the weighted average crediting rate on our fixed annuity products was 2.9%, significantly below our earned rate. We also offer an indexed annuity product. This provides for the annuity holder to earn interest based on the performance of an underlying index strategy and virtually all of our index production is linked to the S&P 500. Product design is extremely important to our success. Virtually all of our annuities are sold with a market value adjustment feature, which helps protect us in the event of surrenders during a period of high interest rates. This is in addition to our traditional surrender charges of 5, 7 or even 10 years, depending on the particular annuity. With our funding agreement, which is our third major product, we receive a lump sum deposit from an institution and in return, pay a fixed rate of return to the buyer over a specified period. With this product, there is absolutely no risk of early termination or any ability to withdraw the funds prior to maturity. And I think the overriding factor is what's consistent about all of our retirement services products is that they are relatively simple fixed rate products. We do not offer variable products nor do we offer riders or other guarantees, as I mentioned earlier. This allows us to more confidently predict the performance of our products and more easily manage the risk of surrenders and liquidity, which allows us to implement the investment strategy that has served us well. Now let me turn to our Specialty P&C business. It's actually our largest contributor, as Don mentioned. It was founded 70 years ago and acquired by Delphi in 1996, headquartered in St. Louis, and it's the oldest continuous provider of excess workers' compensation in the country. For those of you not aware, all employers in the U.S. are obligated to provide workers' compensation benefits. They can choose to ensure primarily from a low dollar exposure level or larger employers tend to self-insure. And these are the employers that we target through Safety National. Safety has the #1 market share in excess workers' comp with a level -- with a market share of 42%. And to give you some scope of our -- sense of the scope of our operation, we insure roughly 8% of the total U.S. workforce. Because of the unique nature of the accidents in the U.S. and the risks that we're underwriting, safety benefits from an extensive database developed over the 70 years. It's a deeper and wider database than any other underwriter has. And it is one of the key reasons why we have been able to maintain our position and our profitability. The management team and to be -- is shown on Page 24. To be successful in excess workers' compensation, it takes very strong broker relationships and trust. This is a very long tail business and the employer has to trust the insurer with this business. Safety has a reputation as being the premier underwriter in the specialty market and for providing consistency of coverage. A large part of this can be attributed to the longevity and strength of our management team. The management team is led by Mark Wilhelm and Duane Hercules. They both have been with safety for roughly 40 years. On an average, the top 7 managers have been with the company for 27 years. This is as high as I can recall for any insurer in the industry. Next slide. Safety's premium volume is split between Excess Workers' Compensation with a 46% market share, Treaty Re with a 21% (sic) [ 31% ] share and Large Casualty with 18%. And Operating income is primarily generated by the excess workers' comp book, which has a larger balance of outstanding reserves and helps us generate significant investment income However, all lines of business contribute nicely to profits. I will point out the Large Casualty book is a little bit less profitable, but that is not so much because of the Excess Workers' Comp component, but because these are clients that also require us to package auto liability and general liability together with their excess workers' comp and those policies tend to be more price competitive. Page 26. Next slide, please. We truly believe safety has an attractive business model. It's a true specialty business, and one we have been able to underwrite to a low to mid-90s combined ratio. However, there is also a 15-plus year duration on the liabilities, which creates large investable float as clients need to first pay out the underlying retention, which is generally $600,000 before Safety has a responsibility to start disbursing cash. Our investment income on this float provides significant additional profitability, which drives our operating ratio, translate to profit margin into the 45% to 55% range. We believe one of the highest in the industry. Importantly, this is also a business segment where Tokio Marine's ownership has helped create powerful synergies since this business is based on financial strength and stability. And frankly, while safety was a leader in this business 10 years ago before the acquisition by Tokio Marine. Tokio Marine's ownership has been very powerful in the marketplace with large sophisticated clients, and this has helped safety grow its business further. Next slide. In order to leverage safety's expertise and increased premium growth, safety continues to concentrate on 3 main product lines: Its core Excess Workers' Compensation book, Large Casualty and Treaty Re. The common theme in all of these is that safety tries to capitalize on its core competency, which is underwriting severe accidents in the workplace. In Large Casualty, we provide primary workers' comp policy, but the deductible is extremely large. So the economics mimic the economics of our self-insured retention business. The clients in the treaty reinsurance business, we do business with selected carriers, primary writers, small to midsize, where we're assuming treaties at a level that we think have similar economics to our Excess Workers' Comp book. It's been a very attractive business for us. And with that, I'll turn it back over to Don to speak about another pillar of our Delphi strengths, which is our investment portfolio.

Thank you, Stephan. If we can go to Page -- Slide 29, please. So the Delphi investment return over the past 10 years has outperformed Barclays Capital Aggregate Bond Index. The outperformance is in excess of 200 basis points, and the 2022 outperformance was 235 basis points. We manage the portfolio for cash flow and matching of assets and liabilities. We think of ourselves as primarily an insurance investor that is investing against the cash flow of a stream of liabilities that we have in our insurance operations. We try to focus on high-quality investments where we have a readily ascertainable value, and we're seeking high-yield assets with what we think are lower capital requirements and risk. The portfolio outperformance highlights the benefits of the diversification. As you'll see, we've moved allocations among various asset classes as we look for new opportunities and focus on the diversification. We -- as I mentioned in my opening comments, we have made excellent use, I think, of the Tokio Marine risk models in enhancing how we think about managing the risk in all parts of our operations, especially in the investment portfolio. In addition to managing the portfolio for Delphi, we manage U.S. dollar portfolios for other Tokio Marine group companies. If you go to Slide 30, similar to Stephan's comments about the experience of the management teams in the insurance operations, we have an experienced group of managers for our investment operation led by Vincent Kok, who is our CIO, and we look at the portfolio in different segments, where we have portfolio managers in the various segments, all of whom have significant experience both in the industry and many of them with the company. We've recently added James Clark who was at one time was the CIO for Goldman Sachs Asset Management to help us focus on alternatives and expanding further our reach into other outside managers. And I'll speak to that point in just a minute. If we go to Slide 31, you can see the dynamics of the asset allocation over the 10 years since 2012 in the various segments. And as we find opportunities, we try to allocate towards those opportunities. And as the market realizes opportunities and perhaps compresses spreads more than we would like in some of the segments, we tend to reduce those allocations. As you can see in the chart on the far right, we've been adding to the allocations in the loan portfolios, where we're finding what we think are better opportunities than we had been finding in the corporate bond market, particularly. So if you look at Slide 32, I gave you 2 pictures here of where we are at 2022. And I think both are instructional. We do, of course, look at our Delphi portfolio, and that's on the left-hand side of the page, which shows where we are on allocations at 2022, led by mortgage loans at 33% and municipals at 22%. And with meaningful allocations to the CLO debt and other commercial loans. We also think about this portfolio from our Tokio Marine perspective, what is our aggregate U.S. dollar portfolio. And while our different companies in the U.S. groups for Tokio Marine have different insurance liability composition it leads us to somewhat different asset allocations for those companies. And when we look at the total on the U.S. dollar portfolio, which is one of the ways I like to look at it, you can see the allocation is 23% to mortgage loans, and it's led by 25% in the municipal bond portfolio and some of the other elements follow along. We think both views are instructional in thinking about what we view as our risk profile against our liability profile as well as what we think about for the overall U.S. dollar portfolio for Tokio Marine. If you look at page -- Slide 33, you can see the breakdown between, and this is at the Delphi portfolio level, external managers versus internally managed. One of our key tenets in how we think about investments is to talk to as many smart people as we can find. And when we find people who we think are really able in their subcategories, and particularly if that asset subcategory is quite technical and the requirements for managing effectively are quite detailed and close to the ground if you will, we'll use outside managers. We oversee those outside managers by the portfolio manager in the relevant area. And that portfolio manager will also have his or her own portfolio and the internally managed function. We find the intellectual stimulation of always talking to outside managers as a key element in helping us find the next opportunity set and as a key part in us checking what is our thinking about asset allocation, and how does it compare to what other smart and able people are thinking about asset allocation? This percentage of internal versus external has varied somewhat over the years, but it's always looked pretty much like this and we expect that will continue as we look for new asset categories and new opportunities. If you go to Slide 34, you can see the net investment income since the time of Tokio Marine's acquisition of our company, which has a compound average growth rate of 13% and is a major contributor, both to our bottom line and the Tokio Marine bottom line. And if you look beyond Delphi on Slide 35, you can see the group synergies that we've been able to create in managing investments for other group companies in the Tokio Marine Group. We feel like that's an important element of what we do here, which is helping all of our sister companies come along to whatever level of performance they can get to, and we're happy to add to that accomplishment. So that's a very quick summary of Delphi, our businesses and our strategies. And with that, we'll see what sort of questions you may have for us.

Thank you very much, Don and Stephan. [Operator Instructions] And we've already received a lot of questions here. And the first one is regarding the CRE loan. This is from Mr. Muraki, SMBC Nikko Securities; and Ms. Tsujino, Mitsubishi UFJ, Morgan Stanley. The question is related to -- on the slides, Page 31, that Don had explained and said the portfolio has been dynamically renewed. And so focusing on the CRE loan that Delphi has been increasing in recent years. The question is, why is it that you started to increase the balance of CRE loans in the AUM? And as you increase the AUM, how are you getting these ideas? How do you source these investment ideas? And we'd also like to ask you, what are some points that you focus on or cautious about as you increase the CRE loan balance. So this is for you, Don.

So on the CRE loans, the elements that led us to focus on this as an element of growth for our company is that we feel like the manager we're working with gives us a lot of ability to manage the deals to the underwriting guidelines we like, and we feel that it's an opportunity to participate in a segment where in many markets, the best property is the newest one delivered. And so we're tending not to make loans against stabilized properties that have long been the standard in the market, whether it's office or multifamily. We tend to make loans against a business plan that will either construct or renovate properties such that when they're done, they have market-leading amenities and capabilities. And those types of properties well executed, tend to do very well in strong markets, but also tend to do very well in weak markets. So it was the opportunity to focus on controlling the underwriting process and guide the origination to the types of deals that we wanted that was attractive to us. We've underwritten this portfolio to a weighted average LTV of about 55%. There's only about 5% that has LTVs above 75%, and those tend to be loans that have recourse on them to a well-financed principal, who would make good on that. So we feel like it's attractive LTVs. We feel like it's attractive business plans. And we like the return for risk profile that comes out of that CRE space. I hope that answered your question.

Yes. Thank you very much. So in the same way, regarding CRE loan, we have a question from Ms. Tsujino. So we would like to ask you a little bit more in detail. So regarding the total CRE loan, it seems like there's a little bit of a stress on the office sector according to talks in the market. This might be difficult, but what is your expectation regarding the loss from this area going forward? And also, we would like to ask regarding the CRE loan component in Delphi, you have office, residential, hotels, et cetera. But I'm wondering, what is the attractiveness of your portfolio, please? And another one, regarding Delphi, you have CECL at the beginning of FY '23, injected capital $180 million have been accumulated here. And my question is, do you have talks internally to increase this -- correction, what is the reason? And what is the discussion that you had internally to bring it up to $180 million?

So there's a lot of elements to that question. I'll try to cover them all. So the CECL, we did that analysis based on outside information from a service called Trepp, which is, I think, one of the best recognized CRE data providers and use their analytic tools and our judgment to try to come up with what we thought was an appropriate CECL to record. In terms of the expectations about the losses on the portfolio, the CECL does represent our best estimate at this point in time about what we think the life credit loss exposure could be. And as the market develops and the data develops, we will, of course, be updating that based on what we see happening in both our portfolio in the market. But at this point in time, that's still our best estimate. You mentioned the office segment. Clearly, that has become the most challenged. We have about 1/4 of the portfolio is related to office. We think we're in a little better position than most because again, these will tend to be the newer properties either newly constructed or newly renovated and in most all of the major markets, the new properties are still maintaining a stronger leasing momentum than the average of the market. We happen to have a poster child for that, one block south of our building in New York. We're at 590 Madison and 550 Madison, the old Sony Building was just got renovated and some people wondered about the sponsors. We don't have an investment in that building. But some people wondered about the sponsors putting their money at risk into this market, but they've had very strong leasing momentum because it is the best-in-class property in that market. So we think we're going to see some challenges in the office portfolio. We are comfortable. We put the best CECL up against it as we can. And we believe we're going to be better than average in terms of the properties being somewhat newer, or recently constructed, recently renovated. I suppose the ultimate test will be what the market tells us as we watch this movie develop.

Thank you very much. So now moving on to the analyst Sato-san from JPMorgan. So this one, I think, is for Stephan. In terms of insurance underwriting, if there's any risk regarding inflation and competition, which product, which line of business is at risk? Stephan?

Well, competition is easy because that impacts all of our businesses. The insurance business in the U.S. is highly competitive. What we have tried to do is to maintain our focus on specialty product. As I mentioned, Safety National, which is our biggest contributor to profits is in a very specific segment of the market that has inherent competitive advantages and barriers to entry because it is not easy for a new entrant to come in and price that product. One key reason is that the underlying data that underwriters rely on is not published on excess workers' comp. So it is very difficult for a new entrant to participate in that market, which has very limited data, but very large potential risks on the Reliance Standard side of the house, both products are subject to competition. The retirement services business is very much determined on rating and crediting rate. And so we monitor those on a weekly basis -- daily basis. We review them weekly to see where our competitors are, and we price our business accordingly. But it's balanced between ratings and crediting rate. And then our employee benefits business a little bit less sensitive to rate but still competitive. In that business, as I mentioned, we try to focus not on the super large clients, which tend to have the most competition, but on the midsize to smaller accounts, which tend to have less competition and where our back-office expertise, our technology advantage helps us. With respect to inflation, our products are very much, while there is exposure to inflation, not so much on the Retirement Services business, but on employee benefits and in Safety National. We price -- reprice our business to an expectation of inflation, but there is also a limit, for example, on our long-term disability we have caps on the percentages that are paid out or on our excess workers' compensation it is tied to payroll as our employee as is our disability -- I should say, our disability is tied to payroll. And there, it's capped at 65% of payroll, our employee -- on our excess workers' compensation. Because the early dollars are paid by the underlying employer, inflation does have a role, but there our benefits cease at retirement age, age 65. So we're somewhat protected, not 100%, but we're somewhat protected from inflation if we do not price in appropriately.

Thank you very much. So next question is for Don. This is regarding the investment yield of Delphi, which is extremely high. But in this current interest rate environment, what is your forecast? So specifically, Delphi has a ratio of variable interest rate that is relatively high. What is the reason? And also, in terms of the Fed interest rate hike pace, what are you thinking regarding the asset allocation. And also the yield level, what is the expected yield level going forward?

So thank you for the question. The allocation was driven, first and foremost, by our judgment about what the spread we could earn versus the risk we were taking. And it led us to some of the variable rate assets where we felt like at that level of variable rates that were present when we started changing this allocation about 3 or 4 years ago, even though the variable rates, base rates were lower. At those levels, we felt like the spread was among the most attractive returns for the level of risk we thought we were taking. As a secondary consideration, we were of the opinion that the Fed was missing the incubation of inflation. They viewed it as transitory. We did not. And so we felt like that was an additional potential benefit to holding that allocation. It was only an additional benefit. We weren't trying to go find floating rate assets because we wanted to bet on the course of interest rates, we first started from what are the most attractive spreads at any given level of rates. What are the most attractive spreads you could earn against the risk, but there has been the secondary element of the rise in rates as the Fed realized their stake that has added to the Delphi returns. As we sit here today, we think the Fed is closer to right in thinking they're probably going to be in this level. They could have to raise one more time. I doubt it's going to be 2 more times even though the dot plots suggest that it will be 2 more times. And we'll probably be at this level of rates for a period of time, perhaps into mid-2024. It gives us some time to start to reduce the level at which we have floating rate assets, and I should say, net floating rate assets because we both think about the assets and the liabilities. It gives us some time to continue to reduce it. It's a process that we actually started about a year ago, and we expect to be in a position where that -- the idea that the Fed may end up lowering rates at sometime in late 2024 or 2025, we don't think that's going to be a major challenge for us. As to forecasting a specific level of yield, we're working on those plans now. So I don't have a specific forecast that I want to say what returns are going to look like. We do think we're going to be able to continue to drive the profit growth for Tokio Marine. That's our -- been our track record, it's our goal, and it's a goal we expect to hit.

Thank you very much for the very powerful comment. Next, this is from Shah from Redwheel. And this is for Stephan, I believe. So what is the interest rate sensitivity to the portfolio according to this market cycle today, especially we know that the reinsurance market is hardening right now. So where are we at the cycle? And where -- at what point do you think we will turn to soft market. Stephan?

Yes. Well, thank you for the question. I think what is very different in our business than for some of the other businesses within Tokio Marine is that we tend to not be as influenced by the reinsurance market in our business. We retain a vast majority of the risk, and so reinsurance pricing is not -- was not at all exposed to the cat market, which is where you are seeing significant increases. And as I said, our policies are generally taken much -- as much net as possible. Where do I see reinsurance pricing peaking, our reinsurers continue to make money on our policies. So I do not expect our rates to increase substantially further across our employee benefits, business or our excess workers' comp business. And then on our retirement services business, we do not utilize reinsurance to any significant degree that impacts our economics.

All right. Thank you very much. Next, we would like to take the question from Nagasaka-san from Morgan Stanley. So this is regarding investments. So I think this is for Don. So the question is, Don, you talked about the credit return and you said that it is overperforming Barclays. But the management team that realizes this great performance here. I'm wondering this investment is why is it better against your peers? Is it because of the risk management or how good your sourcing is, again, the differentiation point between others. Why are you getting such good alpha as Delphi, please? How do you evaluate it yourself, please? Don?

So thank you for the question. There are several answers that I think pertain. One is we have intentionally focused on insurance businesses that have relatively longer tails and relatively predictable cash flows on those tails of claims payments. We don't do -- as Stephan said earlier, we don't do catastrophic insurance. Not that we don't think that there is a place for that in the market. But we don't feel like that type of insurance, which requires you to own assets that are highly liquid because of the volatility of the claims won't allow us to exploit one of what we think is our competitive strengths, which is our ability to identify investment opportunities. So part of the answer is we're not just an investor, we're an insurance investor, and we are able to own less liquid investments because of the predictability of our liability cash flows. If we had a different book of insurance liabilities, we may have -- we would undoubtedly have a different investment performance track record. So we've specifically looked for opportunities in the insurance market, where it will allow us to capitalize on the investments. So beyond the insurance side, the liability side, I think that one of the things that has enabled us to perform at this level is the talent agency approach that I tried to describe earlier we're constantly interviewing new managers. We're constantly looking for new opportunities. One of the reasons we brought James Clark on board to run alternative investments was to give us another key executive who has significant available time just to be out in the market talking to investment managers looking for what might be the next good idea. So we think that focus of always looking for the opportunities in the market encourages us to think outside the framework of traditional CUSIP investing that you see in some of our peers. So I think that's the second element. And I think the third element is we have a very experienced management team. And what we really concentrate on is asset allocation. What do we think are the best relative rewards for risks that you're taking. And how can you size those opportunities in a way that would build a portfolio that has reasonable diversification and powerful returns. So I think those 3 elements help us get to the results that we've been able to achieve.

Thank you very much. So next, this also is a question to Don. This is from Citigroup and also Sakamaki-san from Mizuho. Asking about the group, Tokio Marine Holdings Group. So Don, you are not only the CEO of Delphi, but also Vice President of Tokio Marine Holdings. And so the question is regarding the ROE of Tokio Marine Group. You said that you will contribute to pull up the ROE, so how is Delphi going to contribute in doing this? Delphi's organic and inorganic growth, we'd also like to ask you your ideas regarding Delphi's growth. This is for Don and maybe Stephan also, if needed, please?

So thank you for the question. The ROE is a significant focus of Komiya-san, our group CEO, and he has made clear to all of us running businesses that we're all to be contributing in achieving that increase in the ROE, I think and others, perhaps Komiya-san himself could better speak to it than I could, but some of the critical elements of getting us to the ROE that we need to do is continuing the excellent performance of our insurance businesses, continuing what Komiya-san has been doing in reducing the business equities portfolio to allow us to deploy that capital either in growing our insurance business or in returning that capital to the shareholders, and focusing on where we can optimize investment portfolios against the insurance liabilities that we have. So I showed earlier in my presentation, the group synergies that we've been able to add in terms of helping some of the other group companies with investments that can raise their profits and their ROE. We think those will be continuing opportunities for us.

Thank you very much. So regarding the insurance underwriting and also Delphi's high investment management is also a reason why we have good profitability and good ROE. We have more questions, so we would like to continue. Next is for Stephan, again from Mr. Niwa from Citigroup. This is regarding bolt-on M&A. Delphi has acquired SSL. And so regarding these bolt-on M&A, going forward, what kind of target do you have? And what is the risk return target here? And also PMI as well because we know that, that's going on very well for the companies that you have already acquired. So for example, would you be acquiring some kind of asset management company as well? Is that also in the scope? Stephan?

Sure. I think for our business, I'll start with SSL, which is a small acquisition but it's in a key segment of the business that we think is growing the paid family leave business. That was a situation where we found a subsidiary of a larger company that in our view had been undermanaged, but yet in a very attractive part. That was a business that we purchased for substantially under $200 million. And at a single-digit multiple of earnings. That to us is attractive. We were able to underwrite that business. We maintain the management team. It's a business we already participated in. So we deemed it to be a lower risk business because we understood the products, we understood the market. And adding smaller pieces like that, you will see us look for to add on both to Safety National, where it becomes appropriate as well as in the Employee Benefits business. I don't believe you will see us looking to make any acquisitions in the retirement services business because we think we have ample room to grow that business. And the real limitation there is our risk budget and how much capital we choose to allocate to that business internally. On the asset management side, we currently do not manage third-party capital at Delphi. We manage the Delphi accounts, both for Safety National and Reliance Standard, and we manage for other Tokio Marine accounts. And that to participate in the asset management M&A, we would really need to think the strategy and determine as a group, whether we chose to expand into managing third-party assets. And that's a decision really, that would stem at the Tokio Marine Holdings level, not so much at the Delphi level.

Yes, thank you. So next, we would like to get -- take the question, which is probably for Don. This is from Watanabe-san from Daiwa Securities. So this is regarding the external managers that you talked about and your relationship with them. We understand that you use a lot of external managers, but regarding the relationship between Delphi and them, is it like an exclusive relationship, or are these managers managing some other company, non-Delphi companies? And then how would you describe the difference in the competitiveness. That's the first question. And the other one is regarding the CRE loan of Delphi, what is the appeal of the CRE loan because it's less -- it's a bit volatile right now. But going forward, -- what is your forecast about how attractive the CRE loan business will be in the future. Don?

So thank you for the question. With regard to the external managers, those relationships are seldom exclusive. And in some ways, we don't want them to be exclusive. By that, I mean, we want someone who is engaged in a market segment, heavily engaged in the market segment in which they're expert and who are themselves constantly getting feedback from other market participants. So no one has a monopoly on good ideas, not us, nor do our best outside external managers have a monopoly on good ideas. So we want to see them interacting with their market segment and improving not only through investing our money, but working with others that they do have superior capabilities in their asset class, which, yes, of course, means we are competing with other money to have that manager work for us, but that sort of competition, I think, is more healthy than unhealthy. And it is the most important element of us having the broadest net in how we think about asset allocation. So those are external managers tend to all have other -- and be investing money for other parties. And frankly, we tend to prefer it that way. It's not always that case, but we tend to prefer it that way. So as to the CRE loans, I mean, clearly, things have changed a lot in the market with the rise -- dramatic rise in interest rates and the turmoil that that's created in the real estate market. We thought rates were going to go up. We didn't think they would go up this far this quickly. And so it's created both some opportunities and some risk. In the CRE space, I think the risk is the market needs to find a new level at which asset prices will trade, and we're all trying to figure out what that new level is. I think the opportunity is, as that market restabilizes, you're going to see some potential opportunities that have even better risk reward profiles. The few loans that we've been working on recently have LTVs that are lower, have debt service coverage ratios that are higher, have document standards that are much stronger to favor the lender and spreads that are much higher. So where you can pick the most -- the best alternatives out of what's available to you in the market. I think right now, there are some very compelling opportunities in CRE space. And we expect that, that will expand as the market resets prices and assets start to clear at what I think could be lower prices than what we saw in 2021.

Thank you very much. So next is from Mr. Otsuka from SBI. This is regarding the succession plan. So I think this is maybe for Don or maybe Stephan, I will leave it up to you. But in your slides, you had a page -- several pages with these profiles of the talent in your company. So the management of Delphi and the business management leaders, we know that they are highly experienced. We do understand that. But how does your succession plan work? Because that is what I think is extremely important. Yes, you have good people today. But as Delphi Financial Group going forward, what is your succession plan? Please let us know your thinking, or what you are preparing as we speak. Don?

So each of the operating businesses have a very strong succession plans and Stephan could go into some more detail on that in just a minute. But each of the operating businesses spend a fair amount of time thinking about the succession plan and the fact that we have some people with 40 years' experience at the top of the chart doesn't mean that there aren't a lot of very strong people with 20 years of experience following on behind. From the investment and top management perspective, Stephan has recently taken on the Chief Operating Officer role as he can oversee the insurance operations quite well. And I have Vincent and James Clark, both focused on the investment side who can help take on those responsibilities. So we see lots of potential succession candidates in the pipeline. And we think we're in a good position on that. Stephan, did you want to address the insurance operations?

Sure, Don. I think the -- if you look at each of the management teams on the respective insurance operations, within those groups, you can -- we have identified potential successors in the event that those are necessary. It's constantly evolving, but they are very deep, strong and talented management teams, but we constantly think about succession, and we challenge our management teams to think about succession plans. So we have internal lists, and I have identified who might be a viable successor for each of our businesses. We clearly won't tell those successors yet, but we have them identified.

Thank you very much. Now we would like to take the last question. Regarding this, I think this is for Dan. This is from Mr. Oishi from Aberdeen. So we understand that your premiums are growing. And this means that Delphi's AUM is growing as well. So to this point, I want to ask you how much room of scale increase and -- do you have, and how will you be able to manage the volatility. So regarding the exposure to the credit managing, we have the boundary in the holdings company. But what we'd like to ask Don to speak to is that as our AUM expands, will you not sacrifice the yield? Will you be able to continue to make investments with the same yield level as today, Don?

Very good question. Thank you for the question. Investment markets are quite competitive. They're not perfectly competitive. So it's not necessarily true that any expansion of your AUM inevitably leads to a precise calculation number of what you're going to give up on yield. Having said that, I think at the scale that we're at, I mean, if we were to run instead of $50 billion across all the U.S. companies, if we were to run $70 billion, I don't think there would be that noticeable a change. If we were to be talking about growth rates much higher than that, there would be some reduction, I have to be honest about that, some reduction in the spread. I think it's manageable. So when we think about a low growth and a high-growth plan and try to stress that, we think there are some efficiencies in investment expenses in some other areas that would help us offset some of that yield reduction. So the growth trajectory doesn't feel like that big of a challenge to us. We think the bigger challenges would be being sure all the risk systems are up to date and keeping track of what would end up being a more complex portfolio. The yield itself, we think, is probably manageable. And as I said earlier, we think we have the room to continue to be an important source of growth opportunities for Tokio Marine.

Right, thank you. So with this, we would like to close today's Tokio Marine Insights. We would like to end this with a favor at the very end. If you can please communicate to us about your comments and opinions or questions regarding today's insights. And also your ideas about what kind of themes we should feature at Tokio Marine insights in the future, we would be delighted. Thank you very much for today.