Fitch praises Tokio Marine's reinsurance units’ sale

Tokio Marine Holdings’ (TMHD)  sale of two European reinsurance subsidiaries is likely to streamline its holdings and boost operational efficiency in the group's underwriting businesses, Fitch Ratings says.

TMHD said it will sell Tokio Millennium Re AG (TMR) and Tokio Millennium Re (UK) (TMR (UK)) to Bermuda-based RenaissanceRe Holdings for approximately $1.5 billion.

TMHD will receive $1.22 billion in cash and $250 million of RenaissanceRe common shares. The transaction is likely to close in the first six months of 2019.

The sale by TMHD comes as reinsurance markets continue to be soft, Fitch noted. 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 US), and as a result, the contribution of reinsurance to the group's profit from international operations has fallen to below 10 percent from about 50 percent over that time, Fitch noted.

The agency expects the deal to reduce TMHD's total risk amount, including cutting catastrophe risks relative its available capital. It will also allow TMHD to focus on the more stable and more 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.

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