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

Okay. Hello, everyone. Thank you very much for your patience, who joined by Zoom. It is a great pleasure to welcome you all to the special IR meeting by Tokio Marine Holdings. My name is [ Hiro Sugimoto ], and I will be serving as your moderator for this meeting today. All Tokio Marine representatives were highly looking forward to meeting you in London, and we are very pleased to be able to welcome you here today in person and also connecting via Zoom. As I understand, the special IR meeting provides a unique and ideal opportunity for the Tokio Marine senior management and investors to interact with each other, and we will address a range of timely and important issues in this meeting. Please note today's conference will be recorded and is scheduled to be uploaded on Tokio Marine's website. Now let me confirm whether everyone has a presentation in front of you titled, Tokio Marine Presents Special IR Meeting. We will share the same material on your display during the presentation. We also have a simultaneous interpretation system. For investors in the meeting room, you can hear Japanese on Channel 1 and English on Channel 2. For investors on Zoom, you can choose your preferred language on your monitor by pushing the interpretation button. For English speakers, please choose English. For Japanese speakers, please choose Japanese. As a kind reminder for video meetings, we appreciate to mute yourself when you are not speaking so as the meeting can be conducted seamlessly. Regarding today's meeting, we will start off with a 30-minute presentation from the Tokio Marine Group's senior management team, followed by a Q&A session. We intend to conclude the meeting at around 3:30 p.m. London Time today. Now please kindly let me introduce the attendees from the Tokio Marine Group. First of all, I am happy to introduce President, Group Chief Executive Officer and Group Chief Culture Officer, Mr. Satoru Komiya.

Hello. Thank you for coming.

Vice President, Executive Officer, Group Co-Chief Investment Officer, President and Chief Executive Officer of Delphi Financial Group, Mr. Donald Sherman.

Hello. Thank you for coming.

Vice President, Executive Officer, Co-Head of International Business; Group Co-Chief Retention and Strategy Officer; Mr. Christopher Williams.

Hello.

Senior Managing Executive Officer, Group Chief Financial Officer, Mr. Kenji Okada.

Hello. Thank you for coming.

Senior Managing Executive Officer, Co-Head of International Business, Mr. Kichiichiro Yamamoto.

Hello. Nice to meet you.

Executive Officer, Chief Executive Officer, HCC Insurance Holdings, Ms. Susan Rivera.

Hello. Nice to see you.

Executive Officer, Chief Executive Officer of Tokio Marine Kiln Group, Mr. Brad Irick.

Nice to meet you.

And last but not least, Executive Officer, President and CFO of Philadelphia Insurance Company; Mr. John Glomb.

Hello, everyone.

Without further ado, moving along to our presentation, I would like to hand over to the Group CEO, Mr. Komiya. Mr. Komiya, please.

Okay. Thank you. Hello, everyone. I'm Satoru Komiya, Group CEO of Tokio Marine Holdings. And thank you for joining this special IR meeting. I'll focus on our international business. Last year, we were forced to switch to remote the last minute due to COVID. So it has been 4 years since we last held this meeting in London. I'm very thankful for this opportunity to exchange thoughts with our valued investors. So firstly, many of you may have seen media reports on an incident about the Tokio Marine Nichido Fire employee, who inappropriately acted to control rates on coinsurance policies of a corporate account. Tokio Marine Holdings takes this matter very seriously, and I apologize for any concerns you may have regarding this issue. Let me just highlight that as holdings, we have zero tolerance regarding such issues. We will take all actions necessary and make sure that this does not happen again. And I also want to be clear that this incident will not affect our financial results nor our share buyback policy and this will not stop our efforts to improve profitability of property insurance in Japan. With that being said, please allow me to discuss about our business. So this May, we announced our earnings along with this year's projection. Based upon our underlying strength to grow, we set our profit target to JPY 670 billion for fiscal year 2023. This on normalized base is 9% increase year-on-year, and I believe this continues to be a world-class growth. On the backdrop of the strong EPS growth, we expect 21% increase in DPS, and I am very pleased to be able to share this outlook with you. But this is only our checkpoint in our journey to deliver sustainable growth. Despite a volatile business environment coming from inflation, interest rate movement and increased nat cat, we will be responsive and enhance our existing business and nurture new pillars of business and manage our earnings volatility to achieve a world-class EPS growth and further improve ROE. In this context, today, we will deep dive into our known Japanese business, which continues to be our growth engine and driver. And first, I will have our Co-Heads of international business, Christian and Kit, to give the overview. They will be followed by the CEOs of PHLY, Delphi Group, TMHCC and TMK. John, Don, Susan and Brad, respectively, will explain each group company in detail. Lastly, we will wrap up with approximately 50 minutes of Q&A session. As you know, our management team and myself have always valued discussion with our investors. We would like you to better understand our robust management and sound business and our equity story for Tokio Marine in the future. At the same time, we would like to better understand your views as investors and your advices and feedbacks for us to further strengthen our management and business. And therefore, I welcome any questions about our business, strategy or vision. So please do challenge us with difficult questions and give us your candid feedback. Through this meeting, we aim to convey our high-quality franchise, our views of what lies ahead and our commitment to sustainably increase shareholder values. Thank you. And let me pass the mic to Kit.

Thank you very much, Satoru-san. So I will cover the first 3 slides, which are intended to give you an overview of our international business. Starting with Slide 3, this shows the historical growth of our international business. 10-year CAGR of 14% between 2012 and 2022 is on normalized basis. which means that this excludes factors such as the impact of COVID-19 and other one-off items. This growth rate surpasses our global peers, as shown in the left side of the slide. The main driver of this growth has been the series of successful M&As in Lloyd's in North America. Now around year 2000 when we started this journey of expansion of international business, international business only accounted for about 3% of our group profit. Now after the series of international M&As and if we achieve the 2023 business plan target, international will now account for 57% of our group's total profit. Now this 2023 business plan target of JPY 376 billion is actually, when we started this current midterm plan in 2021, we were expecting a number which was much less than that. And actually, this JPY 376 billion is over 30% above the initial target, which we set for the midterm plan back in 2021. Now let's turn to Slide 4, which shows the overview of our North American business, which is the core of our international book, accounting for over 80% of the total profit. I will leave the details of each companies to be explained by respected CEOs later. But one thing I want to say here is that our North American book as a whole is a combination of different specialty business run by each company with excellent skills and expertise, particularly in underwriting concerning their business. So this means that this is a very well-diversified book of business with low correlation among the business, which results in high degree of diversification, low volatility of the entire book and stability of the profit stream. Now let me touch on emerging markets, turning to Page 5. In addition to North America, our group also tapped into promising high-growth markets and established firm foothold in such countries noted in this slide, accomplishing the growth higher than the overall market. As you can see, our group companies are leaders in many of the key countries in the emerging markets. I would like to just touch on a couple of markets from this slide. First one is Brazil, TMSR, which is now the biggest contributor to our group's profit among the emerging market entities. Market share is #4, but its bottom line is one of the best in the country. The second one is Thailand. Here, we had a long history and we had an entity mainly focusing on Japanese commercial-related business since the 1960s. But in 2018, we acquired a company named Safety which was then owned by an Australian company, AIG, which has a strength in motor and other local business and then subsequently merged the 2 companies. This enabled us to build a very big size and a very well-balanced portfolio comprising of Japanese commercial business and good local business. And the merged entity is now #4 in terms of market share, with very good combined ratio and bottom line. And actually, it is the largest foreign-owned insurer in Thailand. We aim to create the next pillars in the emerging markets, which will allow us to have more diversity. So as I said at the -- when I spoke about North America, we are very comfortable about the diversity we have in North America because it's a combination of different specialty companies. But ideally, we would like to have further geographical diversity by expanding the non-American business as well. Now next, I would like to pass it over to Chris to talk about our M&A strategy. So Chris?

Thank you, Kit. And it's nice to see some familiar faces here, and I think it's ironic that I jump off with M&A because I'm sure that will be about 57% of the questions. So what I would like to highlight is that we've actually, I think, maintained terrific discipline through this period. There's certainly been opportunities that have been out there, but I think the terms and conditions that have been going recently are not something that we're particularly comfortable with, but I would highlight the fact that we've seen just about everything that's gone across the transom and I think we're quite happy with where we're at. Those of you that have been in this presentation before will recall the 3 principles of our M&A and the cultural fit being at the very top of that list. We've always spent considerable time of that getting to know the management, getting to know how the business is ran. We're looking for a highly profitable business. Not surprisingly, you'll hear from all of my colleagues here today who are running terrific businesses that are highly profitable and obviously, a sound business model. The metric that we look is to clear our cost of capital, which we -- is at 7% plus the risk premium and then obviously, the country's interest rate spread. You'll see as I get into this deck further that we've exceeded that quite significantly. As Kit mentioned, we were contributing 3% of our -- of the profits through the international business a mere 20 years ago. And as he said, that's now climbed to 57%. I'm not going to touch on all of the businesses that are here because people will talk about those. But I think it's important that you know that just because we have a business on the books, it doesn't necessarily mean it will be there forever. And I think what we've demonstrated is a good ability to be flexible to get out of businesses if the market changes against us or if circumstances warrant us not continuing. If you could turn to the next slide, please. I think this is a great snapshot of where we're at. I think last year, 4 of our group companies had record earnings in the history of those companies. And you could say 1 or 2 of them was lucky. I think when you're getting 4 or 5 of them, obviously, we're doing something right. So I think our focus on the bottom line is where we really put our attention that top line is interesting, but we are far more interested in the bottom line. And if you look at the ROI that we've achieved with these businesses here at 17.2%, we're obviously considering exceeding our cost of capital at 7%. Page 5 gives a more detailed breakdown of some of these bolt-ons that we've been doing. When I mentioned that we've been quite patient in terms of major acquisitions, I think that's right. We have, however, been doing some smaller bolt-ons. Our friends at Safety took on a book of business in 2021. We've had a number of other businesses that we've added. And then likewise, as I said, some of them we've exited, Bail USA, LifeTrac and the construction business from Highland. I think one of the advantages we have is that we have group specialists within each of our group companies, and chances are that some line of business will fit within one of our group companies. So as a result, we do see most of the things that become available. And as I said, some of them have simply elected to take a pass on recently because of pricing and terms and conditions. But as we all know, markets change and there will be a time when that's a little bit different. Turning to Page 9. I think one of the things that we are very proud of is the synergies that we're achieving. That profit number was $470 million in 2022, up from $390 million in the prior year. And quite a lot of these are areas where our group companies, quite frankly, are just getting more comfortable working together with each other. On the revenue side, there are areas that some group companies may have a specialty in that others don't, so they can lend their services there. On the investment side, Don and his team at Delphi have done an outstanding job with our group companies, and I think have been a real engine for a lot of those profits. Costs, obviously, we were able to eke out some costs. And then obviously, with the balance sheet that we've got, we're able to maximize our reinsurance. Just as an example, we have established a reinsurance center of excellence here in London. We've moved 3 people over from the U.K., headed up by one of our terrific business leaders who runs HCC International, and I think that's giving us a much better lens to what's going on in the reinsurance world. So the cross-selling and the items are all listed there where we're having these successes. And as I said, they are things that when we start an acquisition and when we look at a business, we don't necessarily factor in the #4 synergies, but it's something that we expect to develop over the years, and that certainly happened. So with that, I'll turn it over to John, who can tell you all about Philadelphia.

Thanks, Chris. It's great to be here. I'm going to talk about PHLY. PHLY is a niche writer. The circle, the pie chart shows that we are in 6 segments. We like, we're committed to the niche. We hire specialists. We enjoy pricing power, terms and conditions in those niches. Our largest niche is human services. And then the other segment is broken up. And so there's 6 segments that are shown, and the other is made up of E&S environmental, farm and ag as well as surety, which are newer product segments that we've added over the last number of years. Every year, we lay out very clear initiatives to all of our team because we expect a high level of execution. This is an example. And many of those in a hard market that we've enjoyed now for the last several years, these have been consistent year-over-year. But rate increases, we obviously target rate increases that are well above loss cost inflation. We always focus on continuous improvement of our underwriting book of business and try to churn more underwriting profit out of the book of business. We did that by curing our products using the old 80-20 rule where 20% of the products weren't achieving the targeted rate of return that we want, underwriting rate of return. We've also been very focused on reducing our capacity because of the nuclear verdicts that we've been exposed to in the United States. And we've executed at a very high level and that showed up in favorable reinsurance terms in a very difficult reinsurance market. During the early days of COVID, our claims team took the initiative to identify about 1,500 claims and work to really settle those claims while the courthouses were closed for a net savings of about $75 million on reserves that were already up against several hundred million dollars. And that's something that's a gift that will continue to -- that we will continue to recognize. And then in 2019, as we saw signs of social inflation, we took a significant action and boosted our results -- our reserves rather by $273 million on primarily accident years '17 through '19. On the bottom of the page is just one example of something that we're also trying to -- while it's a once-in-a-generation property market, really try to protect ourselves against winter weather losses, pipe bursts, something that's happened in Uri with Elliott as well, is to partner with an outside third party for weather or for water monitoring devices so that we can get people into the locations, if it's a school, a daycare, a nonprofit and prevent something that could otherwise be much worse. On the right side, the results do speak for themselves. The rates have exceeded the market rates. Our revenue retention even during -- as we've continued over these last 4 years to push rate, we've continued to retain more of the business and you show that our, with the exception of 2019, which I've already spoken to with the combined ratio and the action that we took by boosting our reserves by $273 million, our combined ratio continues to come down. Let's go to the next slide, Slide 11. Again, that progression of rate increases and the desire to exceed loss cost inflation, which we evaluate with our actuaries every year based on trends, we're enabled though to do that. If you look in the middle, our strength, we trade with our preferred agents and our preferred agents are those that have the ability to receive a profit share. They now -- when we were acquired by Tokio Marine in 2008, they represented 35%, mere 35% of our premiums. Now they're close to 60% of our premiums. We pride ourselves on delivering, especially in this market, difficult messages very far in advance so that we have an opportunity, a better opportunity to retain but also can get buy-in by our trading partners. And then if you continue to go to the right, it showed we track, we're fanatical about tracking our feedback from our agents. So whether you had a claim, whether you're an agent, we always want feedback so we can continue to improve and very proud of the Net Promoter Score that we've been able to achieve at just under 70%. Let's go to the next slide. I talked a little bit about the tiering, but this is just a visual of the tiering. When we started tiering our products now 7, 8 years ago, again, 20% was in the third tier. Tier 1 being the best and the most profitable, the ones that we're generating the most underwriting profit; Tier 2, next most; and then Tier 3, let's try to have a corrective action plan. So all of our products have a strategy, those that are most profitable, how can we write more, how can we really get more submission growth and those that are the least profitable that have the lowest returns, how can we squeeze a little bit more return. And sometimes that means we have to be a little bit more comfortable with letting that business go even if it is a profitable segment overall. So with that, I will look forward to questions, and I'll pass it to Don.

Thank you, John. If you look at Page 14, you can see in the chart on the upper left, the breakdown of the products that we write at Delphi. It's both life, predominantly employee benefits, which are led by the group life insurance and group disability, both long and short term. And the right-hand side gives you a feel for the product breakdown in our non-life business, which is led by excess workers' compensation. Our company, Safety National, has the #1 market share in excess workers' comp in the U.S. And the other non-life are large deductible workers' comp and auto and general liabilities that we package together. And many of the customers in that non-life business are very large multi-location corporations, a number of the Fortune 500. The last time we counted through the various product forms, Safety writes the workers' compensation insurance mostly on an excess override basis but writes the workers' compensation insurance for about 9% of the U.S. labor force. If you look at the chart on the bottom left side, it gives you the breakdown of the investment portfolio. And you can see it's led by our loan allocations. We run the insurance businesses we run because we think they offer us very long-duration liabilities. And while there is some underwriting volatility in those product lines like all insurance lines, there are risks. The cash flow patterns are actually highly predictable. Even if it's in a poor year, it bleeds out cash over long periods of time. That gives us the ability to run an investment portfolio that focuses on where we think we get the best return for long-term credit risk and an ability to carry a higher-than-peer average of liquidity or illiquidity risk, and that's a major component in what drives what we're doing. And I might point out that, that chart focuses on the Delphi-only portfolio. As it says in the footnotes, we're also managing U.S. dollar assets for other group companies. If you look at it at that aggregate level, the 43% of loans is closer to 30% as we've got the other group companies focused in somewhat more traditional asset classes. So the current focus for us is to enhance our underwriting and to respond to changes in the environment due to rising interest rates. On the underwriting side, we've had success in increasing both the rate and the insurance or the deductible amount, if you want to think about it that way, the self-insurance retention for our excess workers' comp business. And we've been able to focus in this market turmoil of finding opportunities in the investment market. The last few years when we thought the Fed was behind the eight ball, we thought owning variable rate assets was a very attractive thing to do. That still has some opportunity to run yet as we've seen the curve price out the cuts that everybody expected. But we think we're now late in that transition, and we're moving toward other asset classes, much driven by interesting investments we're finding in the residential mortgage space in the U.S., among other things. You can see our long-term track record in the bottom middle of that slide, something that we work very hard at maintaining. On a combined ratio basis, we're not just an investment shop, we also run a set of underwriting businesses. And we've had some success in driving those businesses forward. We had a little bit of a setback in '20 and '21 because of COVID, predominantly out of our group life business, created some very high claims rates, much higher than you expect over the long term. And we've seen a little bit of benefit in 2022 as the COVID impact has reversed. So you might flatten that line out in your mind's eye, '20 and 21 are elevated and '22 might actually be slightly benefited. But we definitely think the trend without COVID is going in the right direction. And you can see in the bottom chart on the right, the profit growth that, that has created. On Page 15, you can see the business expansion from 2012 to 2022, both measured in income and AUM. And the far right-hand chart shows the higher-than-index income return, and we've got the track record of both in terms of total return volatility and sharp ratio down at the bottom of the page, both 5-year and 2007 to 2022, the 15-year time period. We focus very strongly on looking at the right long-term results, but we also worry obviously about total return on a year-by-year basis. So the focus is actually bilateral. So that's a very quick tour through Delphi and look forward to your questions. And with that, I will turn it over to Susan.

Thank you, Don. So Tokio Marine HCC, we are a specialty insurance underwriter, very focused on the bottom line. And we truly are a global leader. About 2/3 of our business is underwritten in the U.S. and about 1/3 outside of the United States. So when you look at our portfolio of specialty products, we were basically built our portfolio through acquisitions, a lot of merger and acquisitions as well as greenfield. And our portfolio really were not overweight in any one line of business. So that diversification gives us stability in our results. So we're underweight in nat cat. And when you look at our product composition on the left-hand side there, about half of our portfolio is less dependent on the traditional P&C marketplace. So again, that gives us less cyclicality and more predictability of results. The good news about those, the 51% as well as medical stop-loss, crop and surety are very short-tail. So we know the ultimate outcomes on those lines of business. Again, very predictable, and we can modify our pricing very quickly on those. And when you look at our current focus, we're going to continue our current focus to look for bolt-on acquisitions. Our product mix is very diversified and very complete right now. But when you look at the last group of M&A that we've done, 2 of them, the GCube and the NAS, which are in renewable energy and cyber are really good, significant growth opportunities when we look at it. So we are very happy to be able to add those specialty niches and acumen to our product mix. And then we also did a small bolt-on for our crop business. Similar to John Glomb, we look to get rate increases in excess of our loss cost trend. We are now in our sixth year of positive rate environment. We're very happy with where rates are trending this year. And hopefully, that will continue to come through in the results. When you look at the results on the upper right-hand side, we have a track record of stable profitability, and that is really driven by our diversified portfolio. And really where you want to be is in the upper right-hand side of the quadrant, where basically, we enjoy one of the lowest combined ratios with the lowest volatility. Again, that's driven by our product mix and also driven by the fact that half of our business is in really short-tail lines of business. And then when you look at the bottom right, we've enjoyed a favorable combined ratio. John had his blip in 2019. We had our blip in our results in 2020. That was really driven by COVID, where we are a market leader in event cancellation. And event cancellation was one of the lines of business that was hardest hit by COVID, and that added 6 points to our combined ratio in that year. Excluding that, we would have been at an 87% combined ratio, basically in line with our target. And if you go to the next slide, Slide 17. Again, you can see how our rate increases have been compounding to be above loss cost trends and hopefully above our peers. And really what our strength is, is our long-tenured management team that has deep technical expertise. So they're very specialized, and we are consistent players in the market. We know the niches, we know them well. We've seen the good, the bad and the ugly. And so we're a consistent player that's been really continuously looked to. And most of the places where we'll play is going to be in the primary or first layer excess where they're looking to our underwriting expertise, but they're also looking to our claims expertise. They trust us that we'll be a great partner with them and be able to get the best outcome for them. And with that, I would like to hand it over to Brad Irick, who will give you a brief introduction into Kiln. Brad?

Thank you, Susan. TMK is in its 61st year of operation and is one of the largest managing agents in Lloyd's with over GBP 2 billion in gross premiums in 2022 and over GBP 2.2 billion expected in 2023. Since our acquisition in 2018, TMK has been both a profitable business for the group, but also a key access point for innovation within the TM Group through our Lloyd's presence. We expect that access to innovative new products will deepen in importance as the world transitions away from carbon and new companies and threat technologies are developed. We are a leader within the Lloyd's Innovation Lab, which seeks to identify new products and bringing them to market. We access business through our desks on the Lloyd's open market as well as through coverholders, which are managing general agencies primarily in the U.S., Canada and Australia, including our wholly owned US MGA, Tokio Marine Highland. These 2 access points both represent roughly 50% of our premiums. TMK, like HCC and PHLY is a specialty business with nearly 65% of our business in North America, of which 18% is in Canada. We have a growing book of diversified business in Asia through our Lloyd's branch in Singapore. Since 2019, TMK has been focused on building a portfolio of businesses that are consistently profitable and diversified. The best indication of our progress in this area relates to our largest line of business, property. Currently, roughly 35% of our business is property coverage in the U.S., and that's down from just over 50% just 3 years ago. While the property book has continued to grow in absolute terms over this time, the reduction in the percentage of the portfolio was intentional. We invested in and grown diversifying lines, including non-U.S. liability, aviation and cyber. The strategy of diversification has been core to reducing the overall volatility of our business, and we target a consistent low 90s combined ratio and ROE greater than 10%, which we have achieved for the last 3 years, excluding COVID in 2020. Over that same 3-year period, we've also taken action to remediate certain lines that were not performing, with a keen focus on data and analytics to inform our decisions. In fact, I believe TMK punches well above its weight in the quality and granularity of our analytics, which is a crucial area for the future that we continue to invest in. I'm pleased to say with our exit of the Highland U.S. construction business and the runoff of our treaty reinsurance business, remediation efforts are complete. And with a hard market and/or rate sufficiency in virtually all lines, we expect to continue profitable growth going forward. I should add that with a changing portfolio, we have also strengthened our reinsurance program to better manage volatility and retain more of our most profitable lines. As you can see from the graph on the right hand of the page, TMK has consistently outperformed the Lloyd's market, and in recent years has returned to the position of a top performer in the London market. That performance, combined with strong supporting operations has earned us outperforming status with Lloyd's. This status allows us the flexibility needed to grow in a market that we believe has many attractive opportunities currently. I'd like to end with a focus on culture. Any presentation at TMK begins with a reflection on our purpose and our values, which are fully aligned with Tokio Marine's powerful good company principles. We must be grounded in the value we provide for our customers and our people through our purpose, and know that how we achieve success is as important as the success itself. It's no surprise that our intense focus on culture is directly tied to our improved financial performance. With a highly motivated team at TMK with a clear focus on purpose and who we are as a company, I have great confidence in our ongoing performance. Thank you.

Mr. Komiya and the Tokio senior management team, thank you very much for your presentation. Now I would like to open the floor to questions. Tokio Marine would like to have an open 2-way dialogue with you today, and we intend to candidly respond to as many questions that are on your minds. As we have a sizable audience today, we do -- we would like to provide investors an opportunity to ask questions. May we ask each investor to have a maximum of 2 questions per time? Now for the investors with questions, if you can raise your hand physically or for those on Zoom, if you can push the raise hand button, it would be very much highly appreciated. To avoid the traffic jam between the in-person and Zoom participants, we'll ask for the questions from the people in-person first, followed by the Zoom participants. Any questions from the floor? A microphone will be passed out, so if you can speak into the microphone.

Two questions, if I'm allowed. The first one, you got this chart on Page 30 with the breakdown of the inflation for the American business. Is that 30% all Philadelphia? Or does it sit elsewhere within the group? And can you sort of explain what actions you've taken outside Philadelphia? And then the second question is just one on M&A to keep Chris happy. Agriculture, obviously, is being consolidating in the U.S. You've become quite small. Is there sort of a time frame to resolve that? Or you're happy where you are?

Well, let me tackle the easier one first, on the agriculture. Look, that's a line of business that we would like to continue to grow. You will have recently seen that the AIG book changed hands for what we felt was a very full and fair price, to put it mildly. That's a book of business that have made money on out of the last 10 years. And I think our pricing expectations works considerably apart from there. So our intention is very much to continue to grow that business, but it's got to make economic sense. The crop business is driven by a couple of components, and one of them is commodity prices. Not surprisingly, commodity prices were through the roof last year for all the reasons we know. And our expectation is that when those commodity prices return to perhaps a more realistic level, the economics of that may not make as much sense. So yes, we like the business, but that one, that wasn't a fit for us. In regard to the inflation question, I'm not sure who wants to tackle that one.

I'd be happy to. It is not just PHLY. This is a combination of all the U.S. operations. So it is working from the bottom, the cost of goods sold, the medical inflation and social inflation. That's -- we look at the trend lines. Most of PHLY's business is general liability, but we also do have about $900 million of property, and property has significant social inflation, I'll say. So in the case of a building that burns down, replacing that building now cost much more than it did 5 short years ago. So we've seen inflation across all lines of business, general liability, and the actions that we're taking to actually address that are -- I spoke to the reduction in limits. Just an example, in 2019, we had roughly 1,500 policies that were greater than $10 million in limit. We now have 57 policies that have greater than $10 million in total limit. So this is a -- right now for our 2023 plan, our expected total inflation with all of these components at PHLY is 6%. So we endeavor to get as high above that as possible.

Kenji, do have any comment to that?

No. Actually, there is the mix of all U.S. companies. So each company has its own line of business impacted by these 3 types of inflation.

Next question.

Just two very quick questions. First is a difficult FSA, the fixing of the premium, that FSA regulation, the rulings? What do you think of the impact on your business? And second is the rate increase in Japan, assuming BOJ change or 10-year government bond, how will affect your fundamentals of your business?

I really hope that you are okay with me speaking in Japanese. [Foreign Language]

[Interpreted] Yes. Let me answer your second question about JGB. First, our domestic P&C business is very short-tail. So there is no impact by any interest rate fluctuation in Japan. For our domestic life business, we have a long-duration liabilities from the wholesale product, but we have conducted a very strict asset liability management. Currently, our duration of assets, mostly, we are holding the JGBs. Long-term JGB are matched with duration of liability. So any fluctuation with respect to the 10-year or beyond longer JGB will not affect our business or economic solvency. And that's why we don't need to change our pricing for life business. Thank you very much.

Just going back to Page 30. I was wondering for the U.S. business, you said you're expecting 6% total inflation this year. Are you seeing that slowing? What are your projections beyond this year? Do you have any thoughts? And are there any parts of the market where you think hardening on rate hikes will be sort of become tougher to pass on or not?

So I'll answer for PHLY. Our expectation is that we see it only going up. So 6% is '22 -- or '23, '24, I would expect that it would only increase. Property, Susan and I were talking about this before. I think we can always -- we share the feeling that we can always be pushing harder on property. And given the way the reinsurers are pushing on us, we have to do a better job. I think we can be doing a better job. We're getting more rate on the property line of business than any other line of business, but that is for certain. In terms of what our indications show, general liability would be where our actuaries say we need the most rate increase, not property. And D&O for us is the most competitive, and I know Susan shares that. We write together, we really do service the entire directors and officers liability market. But we do not -- we work -- we go out of our way not to compete against one another.

Susan, do you want to touch on the medical inflation, specifically on the stop-loss because I think that would be of interest.

So medical stop-loss, again, it's -- the pricing every year trends really based on the leverage trend. So we've been getting actually 2% higher rate in medical stop-loss this year than the prior year because it was really, there was really a lull for 2 years given COVID, where people really weren't getting treatment done. But now we see treatment going back to normal and the rise in the frequency of severe claims coming back. So I do think the rate environment there is strong, and it's going to continue to get stronger as the severity of losses demanded. I agree with John that D&O is a competitive rate environment. Cyber has also come down from the peak where it's at, but the good news about cyber, it is short-tail. As people see ransomware frequency come back to normal, then you can modify your pricing again pretty quickly on that. I do think liability property is super hard, liability continues to be hard. And then I would say the other main street lines of business are still seeing positive rate increases but not as positive as last year, but really in the low single digits.

Yes. At our Safety National excess workers' comp business, we're seeing similar trend in the severe losses. Our policies typically have $1 million self-insured retention. So the costs incurred on a workers' comp case have to get to $1 million to get to our layer typically, which means we're on the most grievous kinds of injuries. And we're seeing every day sort of development that eats into that happening less, but the really severe cases seem to be happening more. And so we're driving that off of raising the self-insured retention and raising rates. And the other reason why I brought it up is it's another example of synergies among the group. So Susan's group on medical stop-loss and the group at our Safety National company have found that there is a real value in sharing information and sources around who's best at treating what, what are the best treatment options, how can we lower the cost of these claims. So every day, it seems like we find another opportunity where there's some synergy being part of the group.

The only thing I'd add is our liability business unlike PHLY and -- or partially unlike PHLY anyway, is Canadian bases because most of it is in Canada. That's where we'll see -- we've seen good profitability rising rates for a long time. That's where you see a little bit, I wouldn't call it a soft market, but certainly slowing down in the Canadian market.

I should just add one brief thing about Canada there. We've obviously got a great representation in Canada through Kiln, some of our group companies. We have capitalized our own company in Canada. We've been in the Canadian market since 1956, but we took the view that we wanted to establish our own company there. It's getting going. It's quite early days, but we're very excited about that. We've hired a very seasoned CEO. And I think there's some terrific potential for not only North American or U.S. clients that have need for paper in Canada, but indeed just to grow in the Canadian market, which is a terrific one. So I should have mentioned that in my M&A part, it wasn't an M&A, it was an expansion.

Sorry, just one follow-up. It's just reinsurance is obviously seen -- reinsurance has seen higher rate hikes than almost everywhere else. And is your group policy in terms of managing your own risk versus using reinsurance changing at all? Any reaction to that?

Yes, I'm happy to jump in on that one. The answer is very tough, April 1 renewal this year. Fortunately, the Japanese market over the last couple of years has had fairly benign experience. We did see some pricing increase. I do think it's a competitive advantage to have a company that's as well capitalized as Tokio Marine. We are seeing some very early signs of some of the smaller companies that have been relying on reinsurers capital that is now drying up that may now become potential M&A opportunities for us, again, provided they get some reality about the pricing. But yes, our retentions went up a bit. Our pricing went up a bit, but it's all -- it was within what we budgeted, I guess, is how I'd answer the question. But I don't think all of the companies would be able to make that statement because I think some of them have been going through a significant amount of pain at the moment. Because as you know, prices have doubled in certain situations and more.

I will have a comment to add, so I will speak in Japanese, please. I'm sorry. [Foreign Language].

No one's going to correct the CEO.

And it was right.

And I was right.

Satoru, I'll add. We're a specialty underwriter. We're not -- we don't really write a lot of nat cat. So we are the pretty girl at the dance. So a lot of reinsurers have pulled out of property cat, so they're looking to basically grow in the specialty line. So they have a lot of interest in the Tokio Marine HCC portfolio. So for us, with a long-term track record of profitability, we see a lot more interest in our reinsurance programs.

Okay. Let us jump to some questions for the participants on the Zoom.

So my question is on M&A. Could you talk more about areas of interest? So what products lines or geographies you'd be the most interested in? And then conversely, areas that you'd like to avoid going forward. And then if you could also talk about maximum potential deal size, would you be willing to do anything at a larger scale?

So I'll answer the first two, which I think you asked these questions to me a couple of years ago. So I'm trying to remember what I said.

Yes. Exactly. Just looking for the update.

Our area of interest, to be serious for a second, has not changed appreciably. A perfect world for us are bolt-ons where we have already the expertise in the business and we can attract those. I would expect that you'll see some of those this coming year. The last acquisition that we did, which was kind of a variation or an entry into a new line of business was Pure. That was a high-net-worth business that provides homeowners and auto insurance for high-net-worth clients. That business has grown very, very nicely since we've taken that over. So in North America, that is almost the only personal lines business we do. So it would be very unlikely to see us delving into becoming a big personal lines carrier competing with the Travelers and Chubbs of the world. So I think that's an area that we're -- unlike a path that we're unlikely to go down. But as I think you've heard from the group here, we've got considerable expertise in multiple lines of business. And if we can bolt it on, that would be great. If it's an area that we're going to get the appropriate return, we'd certainly look at it. But I think it's unlikely to see us going down the personal lines path in North America. Kenji, I'll let you answer the maximum deal size question.

Yes. Chris, thank you very much. Could you look at Page 29? This shows our ESR, economic solvency ratio. The gap between net asset and risk is JPY 1 trillion. This is a base for our demand and capacity. And in relation to that, when we acquired Pure, we issued hybrid securities. Compared to our global peer, I think we have capacity to issue hybrid security around JPY 500 billion. So in total, JPY 1.5 trillion will be the current capacity for [ amount debt ] reduction.

Do you want to ask another one?

Yes, if no one else has any other questions right now. So in commercial lines in North America, particularly on the property side, we've seen tremendous rate hardening. Has that changed your appetite at all for property?

I think the answer is we are very comfortable with the book we've got. As you will remember here that we exited the reinsurance business in 2018 or '19?

'19.

'19, '19.

'19, 2019. And our thesis at the time was that we were just not getting rewarded for the capital that we're deploying. I think up until this year, I think that was a very good decision. I still think it was a good decision. There was a lot of blood on the streets after the -- up until this last increasing that's occurred. I think the -- where we need to be cautious is to make sure that we are able to pass on the pricing increases that we're getting as a result of increased reinsurance costs. And I think for the most part, we've been able to do that. It varies a little bit around the world. But I think for the most part, we've been able to pass that on. We have a very, very small reinsurance account that we still write, which is a legacy business, but it's all primary, the majority of our business is primary. So we -- it's a good time to be a property writer. I think the market is expecting, certainly in North America, everyone's expecting significant rate increases, and we are able to pass those on.

I'm going to switch back and forth here between the Zoom and in-person. Any questions from the room?

A couple on Delphi. Can you just talk us through, obviously, there's some economic sensitivity with workers' comp and employee benefits. What's the plan if those businesses roll over, particularly workers' comps seem to get less profitable, being super profitable, it's getting less profitable. So how does that come through to the excess business you do? And then secondly, can you just talk us through how you manage the tail risk of the social inflation? What -- how do you buy the reinsurance? How does it work? Is there some limit you cut everything off at?

So the -- on the workers' comp side of the business, the trend that you're discussing about how workers' comp had been profitable and is diminishing is the first dollar primary market, which is very much incidence-driven. Our business, because we're at the excess level, is very much severity driven. So the trend of the declining incidents that seems to be reversing, that's sort of driven what's in the primary market hasn't had that much impact on us. What we have seen, as I mentioned earlier, when we were talking about catastrophic medical is we have seen the basic claims that get to our level come in at a lower incidence even for us. But the level of catastrophic claims once they're on, the size has gone up. So we've been doing some on rate, but mostly trying to drive the self-insured retention is that's what the policyholder has to take before it gets to us. So we think the combination of rate, but predominantly on self-insured retention, it's giving us somewhere between 4% and 8% of additional cushion. And we're starting from what's been a very good book. The book has a good profitability in it, so we feel like it's in good shape. The other element that makes a difference in both of our employee benefits business, whether you're talking about the excess workers' comp or the disability and life business, they're all payroll driven. And we've had a long period of time in the states where payroll increases have been behind fundamental inflation rates. We're finally on the good side of that equation from our point of view because as the wages go up, our premiums go up, as a matter of course. It's not -- we don't have to change the price, it just comes with the wage increase. And so that's created some favorable momentum in both of those lines of business in the last year or so. So we feel like the book is actually in pretty good shape right now. If you saw a major recession, what typically would happen in our businesses is we'd see the excess comp business pretty stable because those short term, even if it's a significant recession, doesn't really change catastrophic workplace accidents that much. It does change the claim in what you might call soft claims. And if we had a big recession, we probably see some uptick in our disability, long-term disability loss rates. Right now, that book is at very high profitability. We have some room to absorb some negative trend. We don't see the current recession potential as being large enough to really change the profitability of that business in a dynamic way. We're thinking more soft to moderate as opposed to a very large recession. I hope that answers your question.

Maybe this is kind of just a question to anyone. But does -- I mean we've heard a lot about AI in different industries this year. Does AI influence or change the kind of the analytics of underwriting it all for you guys? Is it a leveling event? Or do you have proprietary data where you can actually utilize that and it's strengthening kind of factor for you? So just generally for anyone who wants to take it.

Well, I'll jump in being the least qualified. So it's probably the best way to start answering. We've put together a group within Tokio Marine of our "tech experts" that have already been meeting to determine the effect of AI on the businesses. I think the answer is it's going to be very different depending on the line of business. And there are clearly some areas that as AI develops, one would assume that we can become more efficient as to how we are underwriting or adjudicating claims. So I think the answer is yes. It's clearly going to impact our business, and I think probably more so depending on lines of business. And perhaps start with Susan or John to say where you see the potential opportunities, changes, whatever.

Yes. No, we're excited about it. So we've been pretty analytical up to date, but we think the ability to accelerate the use of third-party data in our underwriting workbench and our analytics will just arm our underwriters with more information. So they're spending their time thinking about the risk rather than gathering the data. So we think underwriting workbench is going to be big. As Chris said, processing efficiencies, when I think about our crop business. And I'm sure when John thinks about ISO, where we have to go through all of the manual updates, code them into our system, backtest to make sure it's correct to be able to use AI to be able to do all of that processing efficiency. So I think really what you're going to see is more time on the intellectual side, less time on the processing side, which will drive down expense ratio and hopefully improve loss ratio. So we're pretty excited about it, and we have a couple of proof of concepts underway right now.

Yes. And I'll just -- I'll add on the PHLY side, I pointed out Net Promoter Score. I think there's a huge opportunity for us to make it all for all of us to make it easier for our trading partners to do business with us because we can answer a lot of the information, a lot of the questions that are in long-form applications that they've always complained about where we can answer the questions for them. And it makes it a lot easier to turn things around and qualify or disqualify certain opportunities quicker.

Brad?

Sorry, yes just agree with all that. I think it's more opportunity than anything. We're really focused on gathering more data so that we can improve analytics, both through AI and otherwise. The other thing I'd say is looking across the whole value chain of the insurance company and operations. AI is going to be something that we'd look at there as well. But I agree with all what Susan and John said.

Kenji?

Yes. This AI or generic AI is kind of worldwide initiative. So not only each group company, we have our intragroup meeting called digital roundtable. Every company from Japan and U.S. and U.K. get together and sharing the best practice and a lot of the proof of concept of type of experiments. In Japan case, we think there's a huge potential for the efficiency in Japanese P&C business. So in Japan, Tokio Marine & Nichido Fire started this company-wide sort of approval concept initiative in Japan as well. But we always share any findings in each group company to share that to the group-wide strength for our utilization of generic AI.

A quick one on the domestic non-life insurance business. So in the midterm plan, you have JPY 100 billion in sales in different areas in SME, cyber insurance and so on. Just wanted to see, where do you see sort of the biggest pocket of opportunity in these new areas.

Yes, let me answer it. We have planned to the JPY 100 billion sales increase for this midterm plan as you pointed out. So the biggest element is SME market. It's a small- to medium-sized market. It's a broad range of product include not only for the culture, it's more like product property. And the second area is health care. This is the area where the domestic specialty business has a very huge potential. So beyond this year, the next plan starting in 2024, this specialty business in Japan will be the next -- again, to contribute the period of our profit growth in the P&C business. Thank you.

I think it may be a good opportunity to shift gears a bit. Actually, before starting this meeting, Mr. Komiya actually asked me to pick him as part of this Q&A session. I'm guessing or believing he may want to put himself in your shoes and ask some tough questions to the Tokio Marine senior management. Mr. Komiya?

I'm sorry, I will speak in Japanese. [Foreign Language].

As Satoru said, I've been a part of the Tokio Marine Group since 2012 and before I look forward, I'm going to at least spend half a minute looking backward. There have been some real significant advantages Tokio Marine brought to our company, Delphi, as it existed when we folded in with Tokio Marine. The capital strength is important, but the standing in the insurance and the global financial community was also important. We have a couple of large-ticket businesses. I mentioned our excess workers' comp business is significantly focused on large employers is workers' self-insurance workers' comp that we write the excess over. appeals to very complex organizations. And as a stand-alone company, some of our larger partners were concerned about Delphi have the standing to be writing claims that have a potential to run for 70 years. Despite the fact that we have the longest track record in that industry of excess workers' comp, they worried about it. We also have a retirement services business that offers annuity products. And so particularly those 2 segments of our business, the standing and stature of Tokio Marine were a big driver for us. The other thing I would mention is we thought we ran a very powerfully managed, well-organized business, and Tokio Marine brought their risk management system that helped us think about risk in a more integrated way. And so I feel like we have both a better opportunity set and a better risk management set of tools as a part of being -- part of Tokio Marine. So when I think about Tokio Marine and how I would evaluate it, those attributes that I saw in the past, I think, are still the pillars that we'll want to build on. We have a company of great strength, real standing in the community and a real interest in helping people. Whether it's our employees and my group of people that I brought with Delphi, there's a sincere interest by all of our colleagues at Tokio Marine about how we're building careers for our people, how we're handling the business issues of our stakeholders. So that sort of standing and combine that with the risk sort of culture they had, how do you manage risks, I think are elements that will continue to be very strong drivers for our growth. People have this stereotypical image of a Japanese company being very thorough, very well organized, but not being able to make decisions. And there are days, I would tell you, I have the same concern. But when I think about it, objectively, if I made a list of the 10 things I most wanted to get done in the 10 years I've been at Tokio Marine, I think we've gotten all of them done. So when it really matters, we get to the right answer in the right way and with the benefit of that standing and risk control. So Satoru, that would be my assessment. There are some days I wish for slightly shorter meetings, but I would stand on the overall assessment.

There was a talk at one stage of changing our name to the Tokio Meeting Company Marine. But being serious for a second, I echo what Don said. I mean we're a company that's been around for closing on 145 years. That would tell me they've been doing some things right for sure. I think it was a very bold decision in the early 2000s to undertake the international expansion that we've had. And as Satoru said, that number today is at 57%. My guess is that number will get bigger over a period of time, not smaller. With that occurring, does that mean that we need to look at our business as to how we're doing and where we're doing it? We will clearly always be a Japanese company with a Japanese culture, but I'd make a couple of observations, too. I mean I have been involved since 2015. And Satoru constantly reminds us that you cannot communicate too much. And what I would say is post-COVID, the communication within our company has never been better. And it was a strange phenomena because I think everyone is normally off in their offices doing whatever they need to do. When COVID occurred, we wanted to make sure that we're consistent in terms of our approach to claims and how we're dealing with people and offices and all the rest of it. And so I think that communications opened up significantly. I think the other thing that we started with Nick Nagano by Satoru's predecessor and Satoru has continued it, is that there are now several non-Japanese people in very senior positions within our group. And I often joke with Satoru that we were a domestic Japanese company with some interesting international business. I think we have truly evolved into an international insurance company. And I think that's quite important. And I think you can only achieve that by bringing in not just Japanese views, and there's nothing wrong with the Japanese views but it's a much more inclusive environment. In my opinion, that bodes very well for our future. So I don't know if that answered your question but that's how I feel. I wish you give me a hands up.

Chris, Don, thank you very much. Any further tougher questions from the floor?

Could your successor be non-Japanese?

No.

How about that?

Yes, I'm considering about that but I did not decide that. But I think it will be possible.

That gets the award for the tough question of the day. Yes, that was a good question.

Any other questions from either through Zoom or in-person? We're starting to run out of time, but happy to floor further questions. If not, maybe if we can take a few minutes of your time, it's a good opportunity to directly address the group CEO and senior management on your views towards Tokio Marine. We just heard Chris and Don on their candid evaluation of Tokio Marine Group. But if I may, I would appreciate any comments or ideas on Tokio Marine's business strategy, operations, stock price performance or any other areas that the management team should focus on going forward to increase your ownership in Tokio Marine. Anyone who would like to share initial thoughts or feedbacks? By the way, all messages informed today will be received constructively by the Tokio Marine senior management. So please feel free to speak freely as you wish.

or you can send an anonymous e-mail.

They don't want to give away the secret sauce here.

I think we've got the Zoom.

My question, just back on the M&A kind of area. I guess my question is more about the U.S. industry, P&C industry. Do you see further consolidation is inevitable in the near term on the commercial side? And then maybe just more going back to Heather's question about potential M&A for you guys specifically, you mentioned not really much interest in pursuing personal lines further. I guess on the commercial side, what might be some areas of interest that would be a good fit for you for your portfolio and you see as potentially attractive in the near term?

Well, that would be our secret sauce here, wouldn't it? So look, we -- first of all, in regard to the consolidation, I do think that, that's likely to continue. I mean we're in a business that goes through cycles. When it's soft, you get a bunch of MGAs and MGUs started because there's an abundance of reinsurance support. They go out, they write business like crazy. Some of them make money, the majority of them don't. Reinsurers pull back as they are at the moment. And I think that may be our greatest area of opportunity at the moment where you've got MGAs, MGUs that have been reliant on insurance companies' paper, and that paper has disappeared or more likely, the reinsurance that sat behind that paper has disappeared. So I think we watch that space. We have a very active list that we monitor for our different group companies depending on the lines of business. As I mentioned earlier, personal lines ex what we're doing in the high-net-worth area is probably not something that's on the top of our hit parade. But there's plenty of other specialty areas that we can poke around the edges of. I think Susan and Kiln have done an outstanding job in the cyber market. I think you'll see some fallout there because I think there's going to be some reinsurers probably stepping back from some of those MGUs that they've supported. So I think that's the more likely scenario than rather having some game-changing acquisition that comes about tomorrow. But as we know, we're in a strange world and things happen and all of a sudden, a property that you may not thought it'd be available all of a sudden becomes available. And as Kenji mentioned, we've got some firepower to do that if and when that comes along. Thank you.

Yes. My apologies, I didn't catch your question earlier. I know you were raising your hand. Thank you very much to everyone in-person and on the Zoom. Understanding you may have further thoughts and comments to Tokio Marine, please feel free to provide your comments to your Tokio Marine representatives, Mr. Ishiguro, Mr. Sakurai or Mr. [ Okajima ] directly. Tokio Marine will happily welcome constructive comments and ideas that lead you to further investing to them. Thank you for your participation today. And before concluding today's meeting, I would like to hand over to the group CEO, Mr. Komiya again, for his closing remarks.

Yes. Thank you. Let me make a quick final remark. So thank you so much again for joining today's session. Over the last couple of years, we were faced with various challenges, including COVID, large nat cats, war in Ukraine. However, I believe that we were able to finally and diligently overcome those ordeal, evidencing our underlying capabilities to deliver the results. As discussed, we will execute on our strategy and achieve world-class EPS growth and improved ROE while controlling for volatility to match global peers. This is how we aim to meet shareholder expectations and mandates. Business environment continues to be volatile and unpredictable, but we have the track record to be responsive and management confidence to deliver on our commitment. I kindly ask for your continued support to our business. We will take back all of the comments and insights you have given us today, and I'd like to host such interaction from time to time. And I look forward to returning to London with strong results and future strategy. Thank you so much.

Thank you, Mr. Komiya for a strong statement. On behalf of Tokio Marine Holdings, thank you very much once again for your time today. If you have any further questions, please feel free to contact your Tokio Marine IR representatives, whom are also here in the room today. If you wish to engage with any of the Tokio Marine Group management team utilizing this opportunity, they will also be in the room for the next several minutes. So please feel free to introduce yourselves directly. Thank you again, and we hope today's meetings have given you a further understanding of Tokio Marine Holdings. Thank you very much.