The recent sale of Tokio Marine Holdings’ two European reinsurance subsidiaries is likely to streamline the firm’s holdings and boost operational efficiency in the group’s underwriting businesses, Fitch Ratings says.
Tokio Millennium Re AG and Tokio Millennium Re are both set to be acquired by Bermudian reinsurance company RenaissanceRe following an announcement last month.
Should the closing tangible book value be unchanged from 30 June 2018, Tokio Marine would get roughly $1.5 billion in total consideration for its reinsurance unit, with the payment made up of around $1.22 billion of cash and $250 million of RenRe common shares.
Fitch expects the deal to reduce TMHD’s total risk amount, including cutting catastrophe risks relative its available capital.
Furthermore, It will allow TMHD to focus on the more stable and profitable primary insurance business, especially specialty insurance, which requires high-quality underwriting expertise.
Fitch expects TMHD’s earnings to be less volatile after the deal.
The sale by TMHD comes as reinsurance markets continue to be soft. Premium rates in the reinsurance markets have not risen much despite severe catastrophes in recent years due to ample liquidity stemming from sustained monetary easing worldwide.
Fitch believes it does not really make sense for the Tokio Marine group to retain a sizeable reinsurance business, based on the potential material losses from severe catastrophes in the future relative to the continued weakness in reinsurance premiums.
The sale of the reinsurance business is also in line with TMHD’s strategy to focus on primary insurance, especially more-profitable and less catastrophe-related risks, such as specialty insurance, in developed countries as well as emerging markets.
Tokio Marine group has spent the last 10 years establishing a high-quality primary insurance business franchise outside Japan (especially in the United States), and as a result, the contribution of reinsurance to the group’s profit from international operations has fallen to below 10% from about 50% over that time.