Tokio Marine Holdings, a major player in the global insurance industry, recently made a surprising announcement during their Q4 2024 earnings call: they are planning to completely divest from business-related equities within the next six years. This bold move, accompanied by their ambitious projected adjusted net income of one trillion yen for fiscal year 2024, has sparked debate and raised eyebrows in the financial world.

While the company anticipates a 300 billion yen gain from the accelerated sale of 600 billion yen worth of equities in the short-term, this strategic shift signifies a profound change in Tokio Marine's approach. The company is essentially placing an enormous bet on the strength and continued growth of its core insurance business.

CEO Satoru Komiya expressed unwavering confidence in the "underlying strength" of their insurance operations, stating that their business is "strong and its underlying capabilities are steadily improving." He highlighted the 11% year-on-year growth in normalized adjusted net income, a figure that excludes the influence of one-off events, as evidence of this inherent strength.

Tokio Marine's strategy hinges on their diversified underwriting portfolio and substantial investment income – a distinct advantage derived from their liability structure. They are aiming for an ambitious 8% CAGR EPS growth and a 14% ROE, excluding the gains from equity sales. This indicates a firm commitment to organic growth, a daring wager on their capacity to adeptly maneuver within a multifaceted global insurance market.

Organic Growth vs. Share Buybacks

Despite emphasizing organic growth, Tokio Marine's actions reveal a different growth catalyst: a disciplined capital policy coupled with substantial share buybacks. They have already initiated a 100 billion yen buyback, representing the initial step towards their projected 200 billion yen buyback for FY 2024. This maneuver, in conjunction with their extraordinarily high ESR of 140%, paints a portrait of a company aggressively prioritizing shareholder capital return.

"CFO Kenji Okada stated, "Our capital policy remained intact. In other words, capital generated through organic growth and/or portfolio change is first to be used for M&A and additional risk-taking that contributes to ROE growth of the company. In case there are no such opportunities, we we'll do share buyback since the company has no intention to build unnecessary capital.""

The central question is: Can Tokio Marine sustain this strategy without the safety net provided by their equity portfolio? Are they overestimating the robustness of their core business? What if interest rates decline, eroding their investment income, or a series of natural disasters depletes their reserves?

Consider this: Even incorporating equity sale gains, their projected FY 2024 profit growth (excluding gains) is a modest 2%, a conservative figure that already factors in a substantial tail loss and increased natural catastrophe budgets. This suggests that their organic growth, while commendable, might not be the powerhouse they portray.

Moreover, their transition to a zero-stock holding model could heighten their susceptibility to market volatility. Equities typically serve as a buffer, mitigating the effects of economic downturns. Tokio Marine is now embracing a leaner, more exposed model, raising concerns about their vulnerability to market fluctuations.

Projected Adjusted Net Income Breakdown

The table below illustrates Tokio Marine's projected adjusted net income for FY 2024, distinguishing between gains from equity sales and underlying profit growth.

Reference: Seeking Alpha - Tokio Marine Holdings Q4 2024 Earnings Call Transcript

Tokio Marine's Gamble: Success or Failure?

This audacious gamble could yield phenomenal returns, propelling their EPS and ROE to world-class levels and generously rewarding their shareholders. However, certain red flags merit attention. Are they overly reliant on share buybacks and capital policy manipulations to fuel their ambitious growth objectives? Are they sacrificing long-term stability for short-term gains? Time will be the ultimate judge of whether their trillion yen gamble will be hailed as a stroke of genius or lamented as a costly miscalculation.

Numbers to Watch

Tokio Marine's daring move has raised the stakes. The global financial community will be keenly observing the outcome of this high-stakes gamble.

"Fun Fact: Tokio Marine is one of the oldest insurance companies in Japan, founded in 1879. It has weathered numerous economic storms and natural disasters over its long history, demonstrating its resilience and adaptability."