Tokio Marine exits reinsurance as profitability slumps

Tokio Marine is selling 100 percent of Tokio Millennium Re AG (TMR) and TMR UK - reinsurance businesses, both owned by Tokio Marine & Nichido Fire Insurance - to RenRe.

TMR (UK) has a focus on reinsurance runoff and was founded in 1990. TMR was established in 2000 to write overseas reinsurance risks. The contribution to group profits from TMR and TMR(UK) has diminished over the last 10 years, and the subsidiaries had also broadened their business written into non-catastrophe exposed classes.

In 2017 TMR had a combined ratio of 116.2 percent, up from 95.8 percent year-on-year. TMR UK’s 2017 combined ratio was 177.5 percent, up from 111.5 percent in 2016.

Against a backdrop of a continuing soft market environment in the global reinsurance sector, Tokio Marine said that this has been impacting the return earned from its reinsurance activities. The Japanese group has been re-focusing its strategy on specialty insurance for some time.

Since 2007, Tokio Marine has acquired Kiln, Philadelphia, Delphi and HCC, which it says has helped create a diversified portfolio focusing primarily on specialty insurance classes.

In this time, the contribution of the reinsurance business in profit terms to Tokio Marine’s international operations has reduced significantly from 50 percent to below 10 percent.

The divestment of the reinsurance activities will reduce volatility in its results and also unlock the capital that was held to support these operations, Tokio Marine says.

The strategic focus of the group now will be on primary insurance business in developed countries as well as emerging markets.

Tokio Marine also suggests this transaction will further strengthen its business relationship with RenRe, which it has had for many years. Tokio Marine and RenRe will enter a business cooperation agreement, which will enhance their business relationship and facilitate cooperation on a portion of the international reinsurance purchases of Tokio Marine and its affiliates.

Tokio Marine expects that the impact of the divestment on its financial results will be insignificant.

RenRe scales up

RenRe has agreed to acquire TMR for approximately $1.22 billion in cash and $250 million of RenRe common shares. The cash consideration will be funded through RenRe available funds and a potential pre-closing dividend from TMR.

As of Dec. 2017, TMR had total assets of $5.06 billion and net premium written of $1.30 billion, according to the annual report. The company reported a net loss of $158.93 million for 2017 after a net profit of $120.67 million in 2016.

RenRe held total assets of $15.23 billion as of 2017-end and net written premiums were $1.87 billion. The reinsurer reported a net loss of $244.8 million in 2017 after a net profit of $480.6 million in 2016.

“This transaction will increase our scale, broaden our reach and extend our ability to apply our core strengths to a deeper customer base,” says Kevin O’Donnell, CEO of RenaissanceRe.

“Our unique ability to capitalise on large, one-of-a-kind opportunities underscores our global reinsurance leadership, including in casualty and specialty lines, and our ability to execute on our successful, highly differentiated strategy.”

Stephan Ruoff, CEO of TMR, believes the deal will open new opportunities as TMR is integrated into RenRe - a much larger reinsurance organisation - and will be suit to meet the challenges of the reinsurance market.

In connection with the deal, Tokio Marine has agreed to provide RenaissanceRe a $500 million adverse development cover that will protect TMR’s stated reserves at closing, including unearned premium reserves.

Furthermore, State Farm Mutual Automobile Insurance Company (State Farm) has agreed to invest $250 million in RenaissanceRe through its purchase of RenaissanceRe’s common shares in a private placement.

State Farm will own around 4.8 billion of RenaissanceRe’s total common shares outstanding, reflecting a broader relationship with RenaissanceRe that includes State Farm’s investments in RenaissanceRe-managed vehicles Top Layer Reinsurance and DaVinciRe Holdings.

“We are also honoured that State Farm has agreed to broaden its relationship with RenaissanceRe by investing in our common shares and extending a long-standing partnership between our two firms,” added O’Donnell.

“Our acquisition of TMR and State Farm’s investment further enhance the relationship between our respective companies, which I am confident will prove equally beneficial to our shareholders. After these transactions close, we anticipate that we will continue to have the very strong capital and liquidity position you have come to expect from RenaissanceRe.”

The deal is expected to close in the first half of 2019.