Our Activities in September 2024

At Cadira Capital Management, our mission is "Connecting the Investment Chain and Beyond". Collaborative relationships with internal and external stakeholders are essential to achieving our mission. We therefore seek to deepen the relationship of trust with our stakeholders by disclosing specific details of our activities, including dialogue with the companies in which we invest.

This month, we'll report on the following activities. 

Our Dialogue with Tokio Marine Holdings, Inc.

Company Overview

Tokio Marine Holdings is a group of companies whose core business is non-life insurance. Founded in 1897 as Japan's first marine insurance company, the company has been a driving force in the Japanese insurance market, including the launch of Japan's first automobile insurance in 1914. For a long time, the company's business was concentrated mainly in Japan, but from the beginning of 2000 it began a major overseas expansion, with 54% of its most recent recurring profit coming from overseas sources. In general insurance, if underwriting is biased towards a particular region, the company runs the risk of having to pay out a large number of claims at once in the event of a major catastrophe. Expanding geographical reach is therefore not only a matter of increasing scale for insurers, but also has the benefit of reducing underwriting risk through diversification. Tokio Marine Holdings has achieved growth by controlling risk through mergers and acquisitions, particularly in specialty insurance in the U.S. Over the 10-year period from FY2014 to FY2024 forecast, profits from its core businesses have tripled from JPY 188 billion to 551 billion, but the amount of risk after diversification has increased by only 39%, from JPY 3.1 trillion to 4.3 trillion.

Dissolution of Shareholdings

M&A acquisitions have been financed with cash generated from operations and funds from the sale of shareholdings. In Japan, insurance prices were not deregulated until the 1990s, and companies have traditionally selected insurance based on shareholdings and other relationships. This is problematic because it has the potential to cause two adverse social effects: first, the decision-making process for insurance transactions can easily become opaque, and second, insurance companies as shareholders can loosen corporate discipline without fulfilling their role of supervising management. Tokio Marine Holdings has been selling holdings since the early 2000s, and the company's holdings on a book value basis were reduced by 72% between 2002 and 2024. In recent years, the company has sold more than JPY 100 billion annually and used the proceeds for strategic investments and shareholder returns. In May 2024, Tokio Marine Holdings announced a new policy to reduce its holdings of approximately JPY 3.5 trillion on a market value basis to zero by March 2030. The amount to be sold is expected to average approximately JPY 600 billion per year, a rapid increase from JPY 348.4 billion sold in the previous two fiscal years combined.

The acceleration of sales is due to holdings have been identified as the cause of price-fixing that has been uncovered in the non-life insurance industry. The major companies involved in the price-fixing, including Tokio Marine Holdings, have submitted business improvement plans to the Financial Services Agency, which clearly state their policy to sell all policy holdings. While the price-fixing action itself is very unfortunate news, it is hoped that the measures taken by the companies will lead to a healthier industry. In addition, the acceleration of sales is expected to increase the amount of profits for the foreseeable future, leading to increased investment in growth and shareholder returns. In addition, profits from these sales are expected to reach JPY 390 billion in fiscal 2024, accounting for 39% of total corporate profits, which is dramatically higher than the JPY 43 billion or 16% of total corporate profits 10 years ago.

Improving Disaster Resilience

Tokio Marine Holdings led the establishment of the Consortium for Disaster Prevention, or CORE, in November 2021. Its members include more than 100 companies and organizations, most of them major Japanese corporations. The idea is to address the problem that only about 30% of all natural disasters are covered by insurance, leaving a "protection gap" of about 70%. The remaining 70% can be seen as a business opportunity for the insurance industry, but on the other hand, there are limits to what private companies with limited capital can underwrite through insurance. Therefore, in an effort to prevent disasters, Tokio Marine Holdings has formed a consortium with companies that have expertise in this area and has itself started businesses related to disaster prevention. For example, in the aftermath of the Noto Peninsula earthquake in January 2024, Tokio Marine Holdings provided real-time distribution of weather warnings and ground fault location information, as well as consulting services to reduce liquefaction damage caused by earthquakes. Tokio Marine Holdings is also promoting efforts to quantify and disclose the social value created by this disaster resilience. Specifically, the company has identified items such as "avoidance of human suffering," "prevention of property damage," and "business continuity/early recovery”. While detailed quantitative data has not yet been disclosed, preparations for disclosure, including third-party perspectives, are underway.

Our Dialogue

Cadira Capital Management is in an ongoing dialogue with Tokio Marine Holdings. At our last meeting, we raised the issue of price-fixing and shared our understanding that the inappropriate business policy needed to be reviewed. We were able to confirm that the company is aware of the opportunity to add value to its business in light of the incident, which has raised our expectations for the future. We also exchanged views on Tokio Marine Holdings' efforts to win customer support, motivate employees, improve service levels and enhance the company's reputation with investors by quantifying social value, and confirmed the importance of clearly outlining a path that will lead to corporate value enhancement. The fact that a large company with a long history such as Tokio Marine Holdings is taking the lead in new initiatives such as quantifying social value is expected to provide significant impetus to all Japanese companies. We believe that corporate activities that lead to system-wide change should be viewed positively.

Our Dialogue with the City of Sapporo

In line with our mission to "connect the investment chain and beyond," Cadira Capital Management engages in dialogue with various stakeholders. Recently, we exchanged views with Sapporo City officials on their initiatives in the Special Zone for Financial and Asset Management. We would like to share the content of the discussion and the opportunities for growth by taking advantage of Hokkaido's geographical location.

The city of Sapporo, together with Hokkaido, has been designated a "GX Financial and Asset Management Special Zone" with the aim of promoting the entry of new domestic and foreign financial and asset management companies, expanding their operations, and increasing the supply of capital to growth sectors. Among other things, the special zone aims to leverage the potential of renewable energy to build supply chains and create jobs in the GX industry. Through these efforts, Hokkaido/Sapporo aims to establish itself as a financial center in Asia and the world, becoming a hub where funds, human resources and information from around the world converge.

GX is a renewable energy conversion initiative consisting of eight projects. In particular, Hokkaido’s potential for renewable energy, including offshore wind power, is the highest in Japan. The world's largest grid storage batteries have already been installed, new data centers are being built at a rapid pace, and Rapidus, a next-generation semiconductor manufacturer, has decided to invest a total of JPY 5 trillion in the region. In addition, the government intends to actively attract asset management companies to the region to strengthen the financial function that supports these investments.

This special zone is an innovative initiative that aims to achieve both sustainable economic growth and environmental protection by integrating green investment and financial functions. The Sapporo City official who spoke with us expressed a strong desire to make the most of the potential of Hokkaido and Sapporo, rather than simply ending the project as a mere concept. From the perspective of the asset management industry, we hope that unique asset management companies will enter the market, as this will help revitalize the capital market. However, it is difficult for existing asset management companies to move their headquarters to Sapporo, so we told them that it might be beneficial to establish a backup or sub-base. This is not only from a BCP perspective, but is also likely to contribute to attracting diverse human resources and employee well-being in the relatively cool environment of Hokkaido, especially considering the changing climate and intense summer heat.

We also visited an offshore wind farm, an onshore wind farm and a new Rapidus plant under construction in Hokkaido. Cadira Capital Management is focused on economic growth that leverages the strengths of local regions rather than the existing concentration in Tokyo. In particular, we believe that Hokkaido, with its vast area, climate and other geographical advantages, offers potential for future growth and we will continue to explore investment opportunities in the region.