Diversification: the name of the game
Tokio Millennium Re plans to expand and diversify its business in 2011, particularly outside the US. Tatsuhiko (“Tats”) Hoshina, president and chief executive officer, said that the Bermuda company will continue to de-risk its portfolio, with a movement towards higher frequency lines with less volatility. According to Hoshina, the company had grown to such an extent in property catastrophe exposure that a large catastrophe event could significantly impact its parent company, Tokio Marine Holdings. Tokio Millennium Re is therefore moving towards greater diversification and carefully evaluating the effects of this on their business.
“We are having to cut back on our existing catastrophe business due to the softening of the market, but we are compensating for this by diversifying our product line and expanding geographically. However, this approach requires us to place a greater focus on managing the cycle well,” Hoshina explained. Since its inception 10 years ago, Tokio Millennium Re has expanded from a capital base of $125 million to a present day shareholders’ equity of over $1.2 billion, while increasing its significance and influence within the Tokio Marine Holdings group. This has led to the need for Tokio Millennium Re to de-risk its portfolio, with a recent movement into non-catastrophe products. Hoshina said that the margins on non-cat business were “thinner” today, but that diversification away from the company’s traditional catastrophe business ties in well with its parent company’s strategic objectives.
The hub of Tokio Millennium Re’s business is located in Bermuda and the company is used as an “expansion vehicle” to roll out its international operations. Tokio Millennium Re now boasts offices in London and Zurich, and is set to launch an office in Sydney, Australia. Originally established in Bermuda to “diversify the geographical spread of its parent through the acceptance of natural perils outside Japan, enhance capital efficiency and enter into alternative risk markets”, Tokio Millennium Re’s movement into new jurisdictions suggests that further offices could be in the pipeline. “We have a large US cat book and have started writing non-cat US business from January 2010, so it makes sense for us to go onshore,” Hoshina says. And with 60 percent of its portfolio in the US, it seems that such a step is a logical move. And as Hoshina highlighted, “diversification remains the name of the game”.
Touching upon its international operations, Hoshina indicated that “Australia is a growing, if relatively small, region for us and we have been achieving good results there thus far. The majority of reinsurance is purchased within the market, so our presence and the ratings requirements set out by the regulatory authorities there suit us well.” Hoshina also explained that the business reasoning behind Tokio Millennium Re establishing an office in Zurich was similar to that of Australia, in that most European business is being placed on the continent. He also indicated that due to the capital requirements placed upon insurers by Solvency II, the company predicted “higherdemand for reinsurance cover in Europe” in the coming years, and that Tokio Millennium Re’s ‘AA’ rating from Standard & Poor’s would be “advantageous” in securing such business. In fact, Hoshina is aiming to grow the company’s Zurich operation to a size comparable with its Bermuda office.
The news from Monte Carlo
“Pleasantly boring” is how Hoshina described the recent Monte Carlo Rendez-Vous. “Chile was discussed, as were New Zealand losses and the impact of the Deepwater Horizon disaster, but there was a relative calm to the proceedings.” Despite the heaviest first half-year losses suffered by the industry in 11 years, for Tokio Millennium Re, there had been little cause for alarm as the company continued to enjoy “relatively good profits” despite the high cat losses and softening rates impacting the rest of the industry. With regard to the latter, Hoshina indicated that his company is “now holding up a bit better”, although he also said that “rates will continue to soften across the wider market without the intervention of a major cat event”.
Asked what kind of cat event might prompt a turn in the market, Hoshina said: “Following Chile, nothing moved. And Deepwater had only a limited and line-specific impact, with much of the liability still up in the air. Talking figures, I don’t believe that a $20 billion loss event in the States would be sufficient to turn the market. Even a similarly sizeable loss in a European region might not be enough to turn the market around.” It seems that the figure mooted in Monte Carlo of a massive $50 billion loss event or a sequence of events will be the only thing likely to effect a wider turn in the market. “It took a combination of Ike and the financial crisis to turn the market last time,” Hoshina observed.
Meanwhile, softening market conditions have led Tokio Millennium Re to focus upon “the client and those programmes with strong profitability”, prompting a “renewed focus on underwriting”. Hoshina indicated that “there will continue to be a lot of share buy-backs” moving forward, but warned that “everyone will want more capital if there is that market turning event”, evidently counselling against releasing too much capital from the market. “People are obviously looking to maximise return on equity, but they need to be cautious. We are fortunate that we can ask for capital from our parent company whenever we need it, but others aren’t as fortunate and need to be prudent, in terms of future risk, with the capital they have.”
Marine energy lines
Concerning one of the leading issues raised at the Rendez-Vous—the potential of marine energy insurance—Hoshina said that “at present, Tokio Millennium Re does not write such lines and has no intention of rushing in”. On such specialised lines, he observed that “you need to build up expertise over time” and although there was much interest in developing a platform whereby multiple players could co-operate in providing coverage on sizeable deals—as advocated strongly by Munich Re at the Rendez-Vous—Hoshina questioned “whether there will be much demand for such a facility”. He agreed that there was an interest in coverage within the oil industry, but questioned whether the willingness to pay would be sustained beyond Deepwater Horizon’s immediate aftermath. Hoshina said that “mandatory purchases or regulatory requirements would likely prompt an increase in demand”,but questioned whether without such pressures, demand would reflect the rising interest in marine energy lines.
Sidecars remain attractive
Concerning alternative vehicles, Hoshina indicated that the attraction of sidecars remains present. “Investors are finding that most reinsurers are trading below book value, providing little incentive to establish new players. For investors, it would be easier to create a sidecar, rather than build a completely new reinsurer from scratch.” He predicted that should a “big bang” occur in the market, there would likely be a focus on sidecars. Asked if there was likely to be a new class established in response to such an event, Hoshina said “perhaps, but nothing like those of 2001 and 2005. In property cat, there remains a lot of capital, but I don’t see there being a flow of new reinsurers springing up in response to future events.”
Bermuda: ahead of the curve
Zeroing in on Bermuda and the threats to it as a leading domicile, Hoshina said that there had been “no real change from five years ago. Yes, there are issues to address such as the Neal Bill and Solvency II equivalence, but no substantive threats to the Island have yet materialised…Bermuda will continue to be one of the core reinsurance markets in the world.” He also indicated that little would alter the situation beyond a major political or regulatory event.
Asked where he thought the Island stands in terms of regulation, Hoshina stated that it is “definitely ahead of the curve. The Island’s authorities are doing everything they can to cement Bermuda’s leading international position, whilst at the same time, drawing upon its existing strengths. The flexibility of establishing business in Bermuda—which in other jurisdictions can take months—the availability of capital and the abundance of human expertise, all place Bermuda in a strong position to deal with regulatory challenges.” Hoshina did indicate that Solvency II equivalence requirements would mean that the industry could “no longer establish and manage a reinsurer with only two people”—something that had been possible in the past on the Island—but was clear that regulatory requirements had “not caused Bermuda to lose any of its strong characteristics or its inflow of capital”. In fact, Hoshina indicated that the industry—and Bermuda-based players in particular—were well placed to comply with, and respond to, Solvency II equivalence.
With its plans to diversify, I asked whether Hoshina believed other Bermuda reinsurers would follow in Tokio Millennium Re’s lead. “I believe that there will be greater diversification in Bermuda. Diversification is the name of the game. In the past, property cat business was dominant, but it has been doing less well of late, with the industry looking increasingly to product and geographical diversification in order to de-risk portfolios and maximise return,” Hoshina said. “Gone are the days of monoline business.” It seems that diversification will be a key phrase on the Island.
Hoshina is a keen triathlete and so to conclude our interview, we asked him about his next big race. “My next race will be my first full Ironman—in Panama City, Florida, in November.” Pressed on the details, Hoshina said that this would involve a “2.4-mile swim, a 112- mile cycle, followed by a full marathon”. Impressive stuff. One has to ask how he finds the time.