For Japan's insurers, M&A patience is a virtue

Ian Brimecome, the most senior foreigner in Japan's insurance industry, says companies like Tokio Marine must look beyond the numbers when it comes to deals overseas.

When it comes to M&A, Tokio Marine has stuck to a strict philosophy: don’t buy companies that could embarrass or damage the company down the road.

“We start off with what is the business fit and cultural fit — many of our competitors look at the numbers first,” says Ian Brimecome, senior managing executive officer at Tokio Tokio Marine Holdings, Japan’s largest property & casualty insurer by revenue.

Brimecome, the most senior foreigner in Japan's insurance industry, has seen what can happen when his company's peers rush into the wrong deals: bankruptcies.

To ascertain whether the fit is right, Tokio Marine monitors potential targets from a distance, sometimes for years. “We have a long list of companies that we are interested in – HCC (the Boston insurer it bought in 2015) was on our target list for six years but it was never considered to be available,” said Brimecome in an interview with FinanceAsia.

When asked about Japanese insurers’ reputation for paying high prices Brimecome shrugged. “Each of the companies we’ve bought we’ve paid a relatively full price but for a very high quality business,” said Brimecome, who helped complete over 100 M&A deals in his previous career as a banker with Fox-Pitt, Kelton; Putnam Lovell Securities and Merrill Lynch. 

Despite its size Tokio Marine is seeking to pick specialist insurers rather than compete head on with big multi-line players such as Travellers in the US, Axa in France or Allianz in Germany. “In the US you can do very big business and still be in speciality insurance,” said Brimecome. 

“We continue to look at things in emerging markets as well – but frankly the prices paid are excessive,” he added. “We’ve deliberately missed out on deals in Asia because the prices have not been sensible or there has been something to fix.”

At home, Tokio Marine is trying to evolve to better manage its sprawling global empire. Executive meetings are nowadays conducted in a mix of Japanese and English. And in April 2014 Tsuyoshi Nagano, the group’s chief executive officer, relinquished his additional hat as president of the domestic P&C company, Tokio Marine & Nichido Fire Insurance, to focus on heading the entire group. It’s the first time the roles had been split since the company was founded in 1879.

Brimecome's warning

For Brimecome, who visits Tokyo around 20 times a year, these steps demonstrate the seriousness of Tokio Marine’s international engagement. They also underline just how key his role is to its future.

Uncertain times
But while foreign forays help boost income, they come with their own risks. Currency fluctuations make profits more volatile as Japanese life insurers generally do not hedge overseas investment income.

“All the ones that got into trouble [in the 1990s] tried to be very clever in making unhedged foreign currency bond investments, too much equity investment, too much real estate,” said Brimecome.

Each went under as a result of investments made to offset negative spreads, the gap between income and returns on guaranteed insurance policies, said Brimecome who advised Axa on its acquisition of failed Nippon Dantai Life Insurance in 1999 and AIG on its takeover of bankrupt Chiyoda Mutual Life Insurance in 2001. 

He sees parallels from the 1990s with Japanese insurers' behaviour in the current low interest rate environment. The industry’s forage for higher returns became frenzied when yields on domestic government bonds tumbled into negative territory after the Bank of Japan shocked the market with record dollops of quantitative easing and cut its deposit rate in January to -0.1% for the first time in its history. 

“Now even the riskiest investments are beginning to be very richly-priced and consequently I really question whether now is the time to be aggressive [when investing],” he said. “It’s probably a little bit late or very much too early [to be aggressively buying assets].”

US corporate leverage — using debt-to-Ebitda as the metric — now stands at least as high on a nominal basis as it was in 2007. Of course, interest rates today are far lower, but signs are rising that this will begin to change too and the extraordinarily benign credit environment is becoming to an end.

The Federal Reserve has signalled a rate hike is likely in December, and the consensus is that US president-elect Donald Trump’s economic policies will fuel inflation and lead to more rate hikes. That’s led US bond yields to rise to one-year highs, while 10-year gilts in the UK are at pre-Brexit levels.

Tokio Marine’s domestic units have kept hedging foreign security purchases, despite relatively high hedging costs.

But opportunities still exist, despite the choppy environment. One such area is illiquid assets. Richard Sega, chief investment officer at Conning, which specialises in asset management for insuers, said his group has helped Japanese insurers invest in US collateralised loan obligations because they offer a yield premium over high grade corporates up to about eight years of duration.

Brimecome agreed that illiquid instruments can be rewarding — if investors buy with their eyes wide open.

“If you don’t need to sell them urgently because you have a 15 to 20 year liability like we have in some of our US businesses — that’s fine,” he said. “The issue is not knowing what the risk is, or not being paid for it.”

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