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Tokio Marine Group

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FY2008 Results Conference Call
May 20, 2009

I will explain the financial results of Tokio Marine Holdings for the fiscal year 2008 that we announced today.
Please make sure you have all the materials that are available on our website. Please use the link and go to TOPICS section for the materials.

Now, please refer to the information about major subsidiaries' business results and go to page 5, the summary of consolidated results.
 
Ordinary income was 3 trillion 503.1 billion yen, down by 5.6% or 206.9 billion yen year on year.

Out of the ordinary income, the net premium written from our non-life business inside and outside of Japan was 2 trillion 134.2 billion yen, down by 4.9% or 110.8 billion yen from a year ago.

The Kiln Group in the UK was certainly a new contribution to our performance, as they were consolidated to our profit and loss from FY2008.

However, the premium income in our two non-life insurers in Japan declined materially. They struggled to expand the voluntary automotive business in terms of the number of policies. Premium rates of compulsory automotive insurance or CALI were revised down substantially, and premium income from foreign currency-denominated policies went down due to a stronger yen.

Life insurance premium income was 746 billion yen, down by 5.4 % or 42.3 billion yen compared to a year ago. Although Tokio Marine and Nichido Life successfully increased the total in-force amount and life insurance business in the Asian region increased their sales, contributions from new variable annuity contracts went down.

So, we posted an ordinary loss of 15.1 billion yen, down by 194.1 billion yen.

There are primarily three factors behind this negative growth:

First, losses attributable to the turbulent financial market.

The simple sum of the valuation losses of the securities posted by our consolidated companies was 98.8 billion yen, including 66.1 billion yen posted by Tokio Marine and Nichido Fire.

From the consolidated accounting perspective, we have to add 63.3 billion yen to the simple sum as the difference between purchase method and the pooling of interests method.

In addition, the valuation loss of asset-backed securities, or ABS, was 38.4 billion yen, for credit default swaps, or CDS, it was 14.2 billion yen, and 17.9 billion yen of losses were incurred for financial guarantee reinsurance treaties.

The second factor is in our financial service subsidiary, Tokio Marine Financial Solutions. They incurred losses with their currency derivatives due to a sharp increase in exchange rate fluctuations. As a result, their income declined by 7.6 billion to record an ordinary loss of 13.4 billion yen.

The two factors hit our ordinary profit by 246.2 billion yen, which is down by 186 billion yen on last year. These are the major factors behind the decline in ordinary profit.

The third factor is in our overseas insurance business.
Profit in our reinsurance subsidiary declined due to the frequent occurrence of major accidents as well as the impact of hurricanes in the US.

Also, our subsidiaries in Brazil and Asia made losses due to intensifying competition in markets and confusion in the financial market.

In total, ordinary profit went down by 287 billion yen to 14.1 billion yen.

Net income declined by 85.6 billion yen, but we still maintained the positive bottom line of 23.1 billion yen, since there was a drawdown from price fluctuation reserves in the wake of major valuation losses recognized by Tokio Marine and Nichido Fire and Nisshin Fire.


Please refer to Summary of Consolidated Business Results of Tokio Marine Holdings and find the consolidated balance sheet on page 16.

On the asset side, assets held by Tokio Marine and Nichido Life increased by about 600 billion yen, and Philadelphia Consolidated in the US, for which we completed acquisition in December last year, added approximately another 500 billion yen to our balance sheet. However, values of domestic stocks held by non-life subsidiaries such as Tokio Marine and Nichido Fire went down materially due to the fall in the stock market. As a result, total assets on the consolidated basis declined by about 2 trillion yen to 15 trillion 247.2 billion yen, as indicated in the middle of the table.

Total liability, on the other hand, went down by about 1 trillion yen to 13 trillion 607.7 billion yen. Tokio Marine and Nichido Life increased its liability reserve by about 200 billion yen based on the expansion of their in-force policies. However, guarantee deposits for bond loan transactions of Tokio Marine and Nichido Fire were reduced, as they reduced short-term investment.

This led to a net asset of 1 trillion 639.5 billion yen, down by about 900billion yen, as shown in the second from bottom line on page 16 of the summary report.

Please refer to page 1 of the summary report.
As indicated in the second table from the bottom, we intend to maintain a dividend of 48 yen per share for the fiscal year ended March 2009. Total dividend payout would amount to 38 billion yen.

This concludes the explanation on consolidated results.

I would next like to discuss results by company, based on the information about major subsidiaries' business results.

Let me start with the non-life subsidiary, Tokio Marine and Nichido Fire. Please go to page 1 after the agenda page of the information about major subsidiaries' business results.

The net premium written which is indicated in line 1 on the right hand side of the table was 1 trillion 813.4 billion yen, down by 5.2 % or 98.7 billion yen year on year.

If we exclude the impact of the material rate revision of CALI that took place in April last year, we estimate that the net premium written would have declined by 1.6%.

Let me explain the major reasons behind this change.
Please refer to page 11 of the information about major subsidiaries' business results and find the table in the middle of the page. A breakdown of net premium written, by line of business, is shown in the right half.

In other lines of business, which is the second line from the bottom, the premium grew by 0.8% due to increased sales of general liability insurance and business continuity policy. However, the other lines of business grew negatively.

Premiums from fire policies denominated in foreign currencies went down on a Japanese yen-equivalent basis, due to rapid appreciation of the Yen.

A 2.7% decline is explained by materially smaller premiums from policies based on overseas coverage. Premium rates in overseas markets fell.

Marine business went down by 11.7% due to a much stronger yen, losses of some major contracts as well as the global recession since November.

Personal accident business went down by 1.1% due to simplification of products and revision of premium rates in August 2007.

Voluntary automotive business went down by 1.7%, mainly because the number of policies acquired decreased.

CALI went down by 22.1% due to a major rate revision.

Please go back to page 1 of the information about major subsidiaries' business results.

Line 2: net claims paid was 1 trillion 144.8 billion yen, up by 42.8 billion yen year on year.

As indicated in line 22, this increased the total loss ratio by 5.9 points to 67.4%.

For a breakdown of the loss ratio by line, please turn to page 11 and refer to the right half of the bottom table.

Losses from fire business increased by 13.1 billion yen due to losses paid for major accidents both inside and outside of Japan, and premiums which serves as a denominator to calculate loss ratio went down.

The loss ratio increased by 6.4% to 46.1 % from 39.6% from a year ago.

For the marine business, while losses increased by 4.1 billion yen, due mainly to major accidents, premiums went down.

The loss ratio went up by 12.8points to 65.6%.

In the personal accident business, losses for death and permanent disability indemnity and hospitalization increased, and there was also an outflow of money accompanying the switchover of contracts in the overseas market.

The loss increased by 5.5 billion yen and the loss ratio also went up by 4.8 points to 59.8%.

For the voluntary automotive business, losses paid increased by 10.7 billion yen. Payment for automotive physical damages increased in the wake of torrential rain in August last year, and reserves that we were adding at the end of FY2007 for outstanding automobile bodily injury liabilities claims and personal injury claims were actually paid last fiscal year.

The loss ratio went up by 2.7 points to 68.3%.

Losses for CALI went down by 800 million yen, but due to the lower premium based on the materially revised rates, the loss ratio was 99.4%, up by 21.3 points.

However, as a public business by nature, CALI business is operated so that its profit or loss does not affect the profit/loss of a private insurer.

For the other lines of business, loss payment increased due to major accidents around general liability insurance and insurance for assembling risks. Claims paid for financial guarantee reinsurance treaties also went up.

As a result, claims paid went up by 10.5 billion yen, with a loss ratio of 59.8%, up by 3.8 points.


Please refer back to page 1 of the information about major subsidiaries' business results

Line 4: commissions and collection costs went up by 400 million yen to 314 billion yen. A rate revision for CALI led our customers to buy bridge loans, which increased the number of contracts that we had to handle in April 2008.

Line 5: underwriting and general administrative expenses increased by 24.7 billion yen to 313.6 billion yen.

This is primarily due to a 24.8 billion yen increase in our business renovation project cost, as the first phase of the project went on line in April last year.

Business expenses, which are the total of commission and collection costs and underwriting and general administrative expenses, rose by 3.1 points to 34.6%.

As show in line 6, reserves for outstanding losses went down by 69.1 billion yen year on year, and 26.9 billion yen was reversed back.

At the end of FY2007, we provided more funds in outstanding claim reserves to reflect the longer duration that we now have until the completion of automotive claim payments, as well as the occurrence of major fire accidents.

In FY2008, some of the claims were actually paid, and since we had fewer new accident occurrences, we had a reversal of 26.9 billion yen in the outstanding claim reserve.

Line 7: liability reserve went down by 151.1 billion yen from a year ago, and 115.8 billion yen was reversed back.


To give you the breakdown of the liability reserves of FY2008, the unearned premium reserve which is the reserve for the unearned period went down by 16.5 billion yen and 13.7 billion yen was reversed back due to smaller premiums from private policies.

Catastrophe reserves increased by 34.8 billion yen, since the claims paid during the fiscal year increased, and conditions for the drawdown were met.

Also, the provisioning amount for the catastrophe reserve went down by 12.3 billion yen from a year ago, since we met the target reserve level for fire loss provision defined under the policy reserve requirements against natural disasters.

So, the additional provisioning amount went down by 47.1 billion yen in total.

If we deduct expenses, line 2 to 7, from line 1, net premium written, which is equivalent to sales for insurers, we arrive at an underwriting profit.

While premium income declined and paid claims, as well as business expenses, increased, as indicated in line 8, underwriting profit increased nicely by 34.4 billion yen to 73.8 billion yen, thanks to a much smaller provisioning to outstanding claim reserve and catastrophe reserve.

Lines 9 through 13 explain our investment results.

Line 9: interest and dividend income declined by about 45 billion yen year on year, because alternative investment results were strong during FY07, and in FY2008, some losses were incurred due to the cancellation of some funds.

Line 10: sales gains/losses of securities increased merely by 5.6 billion yen compared to last year. While there was an approximately 30 billion yen gain from the sales of Aozora bank shares, sales gains of securities went down due to the fall in the stock market, and some losses were incurred from the sales of ETF.

Line 11: the valuation loss of securities increased by 52.4 billion yen compared to a year ago, to 66.1 billion yen at Tokio Marine and Nichido Fire. This is because financial markets were aggravated materially since the subprime loan issue surfaced in the summer of 2007.

Line 12: profit/loss of derivatives went down by 4.6 billion yen year on year, to 12.9 billion yen. Loss related to credit derivatives deteriorated by 4.3 billion yen.

Line 13: other investment expenses declined by 34.5 billion yen to post a loss of 36.6 billion yen mainly because the valuation loss of 35.9 billion yen was posted related to ABS, categorized under payable monetary claims bought.

On page 9 of the information about major subsidiaries' business results, please find the profit and loss statement for Tokio Marine and Financial Fire on the stand-alone basis.

After deducting the investment expense of 145.8 billion yen from the investment income which was 175.7 billion yen, the investment profit stands at 29.9 billion yen, down by 146.2 billion yen year on year.

So, if we add the underwriting profit, 73.8 billion yen, and investment profit, 29.9 billion yen, and adjust the sum with administrative expenses not related to underwriting and other ordinary profit/loss, then we arrive at ordinary profit, which is on line 14 of page 1 of the information about major subsidiaries' business results.

Ordinary profit was 69.6 billion yen, down by 114.3 billion yen compared to a year ago.

After netting out line 15, extraordinary income and line 16, extraordinary loss, the extraordinary profit stands at 57.1 billion yen, which is an improvement of 68 billion yen from last year. This is mainly because we took down the price fluctuation reserve by 62.1 billion yen on net, due to large valuation losses that the company posted.

If we add extraordinary items, which are in lines 15 and 16, to line 14, which is ordinary profit, net income is calculated. As indicated in line 17, net income declined by 51.8 billion yen from a year ago to 71.1 billion yen.

Pages 7 and 8 of the information about major subsidiaries' business results show the company's balance sheet.

Total assets declined by 2 trillion 476 billion yen to 8 trillion 413.3 billion yen. The value of securities held by the company went down due to lower stock prices, and the value of commercial paper went down as the company reduced its bond loan transactions.

On the liability side, borrowing for the acquisition of Philadelphia Consolidated in the US, that we completed in December last year, increased by 250 billion yen. Meanwhile, guarantee deposits for bond loan transactions the company used to have for its short-term investments went down by about 1 trillion 200 billion yen.

As a result, total liability declined by 1 trillion 584.9 billion yen to 6 trillion 977.9 billion yen, which came to net assets of 1 trillion 435.5 billion yen, down by 891 billion yen.

Please refer back to page 1.

Line 32: the solvency margin ratio declined by 261.0 points to 696.8%, mainly because of the lower market value of securities held by the company.

This is the overview of the financial results for Tokio Marin and Nichido Fire.

Next, I will give you the main points of Nisshin Fire.
Please refer to page 2 of the information about major subsidiaries' business results.

For underwriting, line 1, net premium written was 135.9 billion yen, down by 4.1% year on year because the number of vehicles covered as well as the unit price of our voluntary automotive policies went down, and premium income from CALI dropped due to the rate revision.

On the other hand, paid losses, line 2, declined by 1.8 billion yen to 77.8 billion yen, due to fewer automotive accidents and fewer incidences of major losses covered by other lines of business.

For catastrophe reserves, the company took down the reserve more than last year, reflecting the increased loss ratio of personal accident policies; and in line with the change of the provisioning rate for automotive policies, the company provided less to the reserve. Therefore, the provision to the catastrophe reserve is smaller than last fiscal year.

Due to these factors, underwriting profit, line 8, improved by 3.8 billion yen compared to a year ago, to 3.2 billion yen.

On the other hand, the investment side was tough. The valuation loss of securities came to 12.9 billion yen, which led to the investment loss of 16.7 billion yen, down by 21.3 billion yen year on year.

As a result, as shown in line 14, the company posted an ordinary loss of 16.1 billion yen, down by 18.8 billion yen from a year ago.

For extraordinary profit/loss, the company posted a net extraordinary profit of 4 billion yen, thanks to the net drawdown of 3.8 billion yen from the price fluctuation reserve, reflecting the lower capital gain/loss performance.

As a result, as line 17 states, the company recorded a net loss of 10.3 billion yen, down by 12.2 billion yen year on year.

Next, let us look at Tokio Marine and Nichido Life. Please refer to page 25 of the information about major subsidiaries' business results.

This page shows you the total in-force amount as well as new policies acquired. Please refer to the first line which describes our core business of individual insurance policies.

Starting from the top of the table, individual insurance business grew by 11.7%, in terms of the total number of policies, and by 8.4% in terms of total in-force amount.

As shown in the second table, this is underpinned by the strong growth of new policies by 30.4%, in terms of the number of policies, and by 16.4% in terms of the amount. Whole life policy with long-term discount and insurance to support cancer treatment sold particularly well.

The annualized net premium of the total in-force book grew by 5.6%, and newly acquired business grew by 21.3%, as you can see from the 3rd and 4th tables respectively. Thanks to the successful acquisition of new policies, total in-force business continued to grow.

Please refer to page 23 of the information about major subsidiaries' business results, which shows the profit and loss statement of Tokio Marine and Nichido Life.

Based on the sales performance that I just mentioned, premium and other income, 2nd line from the top, grew by 7.4% to 29.9 billion yen, reflecting the expansion of the company's in-force book.

Although this is not included in the information about major subsidiaries' business results, however, net income before tax, before additional provisioning to standard liability reserves came to 11.5 billion yen, down by 8.5 billion yen year on year.

This is because compared to FY2007, FY2008 had a smaller profit contribution from the so-called increasing-type term policies, where the payable death benefit increases over time with a smaller cancellation return, that sold very well particularly in the second half of FY2006.

Also, outlay to support business platform expansions, such as system development costs, increased.

This is the reason why profit declined, while the sales performance of policy sales was relatively strong.

Lastly, net income:

As has been the case conventionally, the company made additional provisions to the standard liability reserve to the extent possible with the profit generated in the fiscal year, in order to achieve the reserve level the company is striving for.

As a result, as before, the net income of the company came to almost zero.

We still have about 15 billion yen to go before we achieve the target level of the standard liability reserve. The company is aiming to reach this level by the end of the current medium-term business plan in 2011.

Now, as shown on page 28 of the information about major subsidiaries' business results, the solvency margin ratio dropped by 170.0 points from the end of FY2007, but continues to remain at the high level of 2596.7%.

Next, please turn to page 33. I will now discuss the results of Tokio Marine and Nichido Financial Life, which specializes in the variable annuity business.

Please take a look at the second line on the table to find the results of its core variable annuity business.

While the total in-force policy amount increased, as indicated in the second table from the top, due to the financial fiasco, new business acquired went down by 1.6% in terms of the number of policies, and by 12.5% in terms of the yen amount.

Now please turn to page 31 for the profit and loss statement.

Premiums shown in the third line from the top amounted to 450.9 billion yen, down by 13.1% or 67.8 billion yen year on year.

The investment environment was aggravated, which in turn led to decreased premium income. So, certainly the business environment was very difficult.

However, in FY2008, the company advanced the risk control initiative by ceding contracts whose risks were retained by the company as of the end of FY2007, and there was 1.7 billion yen reversal made from the liability reserve for minimum guarantees. There was another reversal of 4.3 billion yen from the contingency reserve as the outstanding deposits exceeded the maximum limit.

As a consequence, the company turned the net income into a positive figure for the very first time since its inception in 1996, and recorded 10 billion yen positive net income, up by 16.5 billion yen year on year.

Now, the majority of the minimum guarantee risks have been controlled by utilizing reinsurance, and part of the risks have been hedged with options.

Page 35 shows you the solvency margin ratio.

While net income came to 10 billion yen, there was a reversal from the contingency reserve for the excess reserve, and investment performance deteriorated. As a result, the amount that is allowed to be included in the solvency margin went down, which led to a reduction in the solvency margin by 10.9 billion yen.

Also, while minimum guarantee risks were reduced by transferring more minimum guarantee risks to reinsures, investment risks increased due to the unfavorable investment environment.

So, the total risk was reduced by only 500 million yen.

For your information, in order to account for credit risks of counterparties that we are ceding the risks to, part of the provision to the liability reserve, which is not necessarily any longer due to the reinsurance arrangement, is recognized as part of the investment risks.

Also, due to the weaker investment environment, we do not need to provide as much funds to the liability reserve as we used to. Therefore, the investment risk has increased.

All in all, the solvency margin of the company was 1057.5% as of the end of FY2008, down by 100 points year on year.

Lastly, let me touch upon investment in securitized products.

Please refer to page 6 of the information about major subsidiaries' business results or the supplementary material, which can be found on our website.

To give a breakdown of the loss of investment in securitized products, we posted on our profit and loss statement a loss of 14.2 billion yen from our investment in CDSs, 36.1billion yen fro ABS, and 1.2 billion yen from SIV, totaling 51.6 billion yen.

Compared to the end of December, the loss increased by 9.4 billion yen. This is because fair values of some of the ABSs went down large enough to be impaired.

The total loss, including the loss on our P/L and unrealized losses, increased by 2.2 billion yen.

For the financial guarantee reinsurance treaty, a new loss of 3.2 billion yen was incurred in the fourth quarter.

This is because while the slowdown of the US housing market continued, we reviewed default scenarios of US RMBS other than subprime loans, which led us to make additional provisioning to outstanding loss reserves.

These losses are posted reflecting the confusions in the global financial market. However, even though we have posted valuation losses, none of the underlying assets have defaulted.

Since we can expect to recover these losses to a certain extent, upon maturity of the contracts with redemptions, I'm sure you agree that none of these losses are large enough to impact our company's management.

Next, I would like to give you the financial guidance for FY2009 on the consolidated basis.
Please refer to page 5 of the information about major subsidiaries' business results.

To start with the outlook of Tokio Mario and Nichido Fire on the non-consolidated basis, net premium written is expected to go down by 0.5% year on year.

Excluding the impact from the rate revision of CALI, the net premium written is expected to grow by 0.8% positively.

Meanwhile, losses incurred by natural disasters are assumed to total 25 billion yen, and taking into account the increased provision to liability reserve, underwriting profit is expected to show negative growth.

On the investment side, while there is certainly a relative year-on-year impact in terms of the sales gain of Aozora bank shares, we assume the market environment to remain unchanged from the end of March this year, and expect no more impact from the confusion in the financial market.

With these assumptions, ordinary income is expected to be 120 billion yen with a net income of 80 billion yen.

Next on the consolidated Tokio Marine Holdings basis, ordinary income is expected to be 3 trillion 320 billion yen, since the sales volume of variable annuities at Tokio Marine and Nichido Financial Life is expected to fall, in addition to decreased income at Tokio Marine and Nichido Fire.

Ordinary profit and net income, on the other hand, are expected to be 125 billion yen and 80 billion yen respectively, thanks to improvements in investment income in the domestic non-life operations as well as improved stronger profit contributions from overseas subsidiaries.

Tokio Marine Holdings is planning to maintain its dividend at 48 yen per share

Today, we also announced our outlook for adjusted earnings, which is a unique indicator that we use to look at our profit. Let us lastly review the outlook based on the release paper.

The definition of adjusted earnings is given in the attachment to the release paper, but this is essentially an indicator to help us compare our results to those of international peer companies more easily by adjusting some of the uniqueness of J-GAAP and accounting rules unique to insurers to make things closer to US-GAAP.

The adjusted earnings of FY2008 came to a loss of 52.5 billion yen, which was far lower than the guidance figure of 24.2 billion yen that we announced in November 2008. This is due to the impact from the financial turbulence.

To break this down, Nissin Fire recorded a loss of 10.7 billion yen due to the redemption losses from foreign investment trusts.

The embedded value of Tokio Marine and Nichido Life fell by 6 billion yen, since they reviewed the assumptions for the mortality and morbidity rate as well as the surrender rate. They also took into account the impact of interest rate changes in view of the lower super long-term interest rate.

In Tokio Marine and Nichido Financial Life, hedge costs for minimum guarantee risks of new contracts acquired in FY2008 increased, reflecting the much aggravated market environment in the 2nd half of FY2008 due to the financial crisis.

Since investment performance for the separate account also was weaker than expected, the company now expects insurance fees that it will receive in the future according to the net asset value of the separate account, to be smaller. As a result, the embedded value went down by 51.2 billion yen.

For FY2009, since we do not expect to be impacted by the financial confusion as we did in FY2008, and Philadelphia Consolidated will be newly consolidated, adjusted earnings for the entire group are expected to be 106 billion yen.

This is all for my presentation on the overview of financial results in FY2008 as well as guidance for FY2009.
 
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These information materials are prepared based on the currently available information for us and described subject to our predictions and forecasts carried out at the time of preparation.
It must be noted that what is described therein does not guarantee our future business performance and carries certain risk of misjudgment or uncertainty.
Accordingly, you are kindly requested to bear in mind that there may be a possibility of sizable divergence between the actual business performance in the future and that of our predictions or forecasts described therein.



Copyright (c) Tokio Marine Holdings, Inc.