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FY2009 2Q Results Conference Call
November 19, 2009
 
I will give you the overview of FY2009 2Q results of Tokio Marine Holdings that we announced today. Please click on Topics on our homepage.
(For English: Please access to: http://ir.tokiomarinehd.com/en/IRPresentation/FY2009.html)
You will go to the page where the materials for today's conference call are listed. Please make sure you have five materials with you; 1) FY2009 2Q Summary Report 2) Information about Major Subsidiaries' Business Results for the six months ended September 30, 2009 3) Revised forecasts of business results of Tokio marine Group for the fiscal year ending March 31, 2010 (“FY2009") (Adjusted Earnings Basis) 4) Supplemental material for FY2009 2Q Conference call and 5) Status of investments in securitized products as of September 30, 2009.

Please also note that our presentation is going to take about 40 minutes today. In addition to the 2Q financial results, I will also briefly touch upon the full-year guidance. Although this is going to be a relatively long presentation, I hope you will stay with us until the very end.

Now, let me start with the overall picture on the consolidated basis. Please refer to Supplemental material for FY2009 2Q Conference Call. I will discuss the results of our main subsidiary companies later, so let us first review the main factors that contributed to the consolidated results.

Ordinary income amounted to 1,870.8 billion yen, down by 4.5% or 88.3 billion yen on the year on year basis.

To break down the ordinary income, consolidated net premiums written in our non-life businesses inside and outside of Japan in total was 1,182.7 billion yen, up by 2.2% or 25.6 billion yen from a year ago. As shown in the table, net premiums written of Tokio Marine and Nichido (TMN) and Nisshin Fire went down respectively primary due to the major rate revision of CALI (compulsory automobile liability insurance). However, Philadelphia in the USA was consolidated to our P/L starting from this fiscal year and contributed to grow our income.

Life insurance premiums, on the other hand, declined by 53.7% or 254.2billion yen to 219billion yen. Tokio Marine and Nichido Life (TMN Life) grew its insurance premiums and others by 7.5% or 14.5billion yen backed by the steady sales of new business, meanwhile, insurance premiums and others of Tokio Marine and Financial Life (TMNFL) declined significantly since the company took a restrictive sales approach so that it would not assume risks more than it can properly control, given the market environment.
Now, if you add premium income and others of TMN Life to that of TMNFL, the sum exceeds the consolidated life insurance premiums. This is because the non-consolidated numbers are calculated based on the life insurance formula, while the consolidated number is restated to match the non-life insurance formula.

Next, I will discuss international business including both non-life and life insurance business. To be consistent with our past communication, here I will refer to the total international insurance premiums which include contributions from overseas branch offices of TMN, affiliated companies on equity method as well as non-consolidated companies. Please find the International business total shown under the ordinary income table as reference.

The total insurance premiums of our international business amounted to 308.3 billion yen, up by 8% or 22.8billion yen thanks to Philadelphia which is consolidated to our group from this fiscal year.
For your information, the cumulative net premiums written of Philadelphia as of the end of 2Q were 86.2 billion yen. Without their contributions, the international insurance premiums total would have been down by 63.3 billion yen versus a year ago. The biggest factor behind this is the major decline in life insurance premium income. We sold our life insurance operation in Brazil, and in Asia, we shifted our focus from single-payment products to installment-payment products in order to improve profitability.

Next, ordinary profit was 104.6 billion yen on the consolidated, as stated in the middle of the supplemental material. This is a major increase from a year ago, up by 640.6% or 90.4 billion yen.

The biggest driver behind this is TMN whose profit grew significantly.
In the same period last year, TMN saw its mainframe system go live under the business renovation project and posted the system cost which was not repeated this year. Contrary to the weak trend a year ago, Japanese yen was strong in the first half of this fiscal year that, in turn, reduced the company's provisioning amount for denominated-foreign-currency outstanding claims. Also, damages caused by natural disasters were small in the first 6 months this year. As a result, underwriting profit of TMN improved significantly, and its ordinary profit increased by 62.5 billion yen to 81.2 billion yen on the non-consolidated basis.

All the other operations recorded positive growth, including Nissin Fire, TMN Life, international insurance business, and financial and general business, with the exception of TMNFL which posted a big drop in their profit. TMNFL recorded the ordinary profit of 600 million yen, down by 13.5 billion yen from a year ago. This is mainly because in the same period last year, the company ceded earned policies to reinsurer and there was a major reversal from the underwriting reserve accordingly and that was not repeated this year.

Next, please refer to net income in the bottom table.
The consolidated net income amounted to 71.2 billion yen, which is another major increase by 294.6% or 53.1 billion yen due to almost the same reasons as behind the increase in ordinary profit. Please confirm the details at your convenience.

That is all for the consolidated results.
Next, I would like to give you the highlight of non-consolidated results by following Information about Major Subsidiaries' Business Results.
To start with TMN, please refer to page 1.

All the lines are numbered at far right. First, as shown in the first line, net premiums written (NPW) dropped by 58.1 billion yen to 870.2 billion yen. Percentage-wise, this is a decline by 6.3% (Line 18).
To analyze this by line of business, NPW of fire insurance went down by 8.3% (Line 19), primarily because of slowdown in housing market as well as weaker sales outside Japan partly due to economic setback in the U.S. Voluntary automobile insurance sales went down by 2.0% (Line 20). Unit price trended almost flat year on year, thanks to the price revisions in July, however, the number of policies sold went down. Similarly, NPW of personal accident went down by 1.3% (Line 21). The business grew positively in Japan, but the company stopped assuming new risks from primary insurers outside Japan in this line of business. For more details, please take a look at page 11. I should just note that NPW of marine business dropped as much as 30.2%. This is attributable to the significant slowdown of logistic demand in the wake of recession as well as stronger Japanese yen. Similarly, premium income of CALI went down by 20.4% owing to drastic rate reduction in the last fiscal year. So, the company on the whole struggled at the top line.
For your reference, if the impact of CALI rate revision were to be excluded, total NPW across all the lines would have dropped only by 3.7%.

Next, net claims paid were 534.7 billion yen, down by 22.6 billion yen from a year ago (Line 2). However, loss ratio went up by 1.5 points to 66.0% because premiums or the denominator in the calculation became smaller (Line 22).
To look at this by the line of business, loss ratio of fire insurance went down by 4.3 points to 40.4% (Line 23) since the company did not have to pay a large claim for a major accident unlike last year. In the meantime, the ratio for voluntary automobile insurance went up by 0.9% to 67.9% (Line 24) due to the weaker policy sales and increased claim payment for automobile physical damages. For the other lines of businesses, please refer to page 11 later.

Combining all the lines of business, net incurred losses related to natural disasters were 5.6 billion yen, down by 8.1 billion yen year on year (Line 26). Typhoon No.18 is not included in the 2Q results as it occurred in October.

Expense ratio was 33.8%, down by 2.0 points from a year ago (Line 29). The biggest factor behind this decline is the mainframe system. The system was launched in May last year under the business renovation project and the company posted about 27 billion yen in the same period last year as non-personnel cost that was not repeated this year.

In addition to the factor above, Japanese yen was stronger by approximately 8 yen in the 1H of this fiscal year from a year ago, that reduced the provisioning amount for foreign-currency-denominated outstanding claims. Compared to the FY08 1H when Japanese yen trended 3 yen weaker from the previous year, the provision became smaller by approximately 22 billion yen this year. Further, the company reached the provisioning target for catastrophe reserve for the fire insurance, and the actual provisioning amount became smaller by approximately 16 billion yen versus a year ago. All in all, underwriting profit increased by 85.4 billion yen to 53.3 billion yen (Line 8).

Let me next explain to you the investment side.
Interest and dividend income went down by 36.7 billion yen to 57.2 billion yen (Line 9). Due to the weaker corporate performance, dividend income from our domestic stock holdings dropped. The company also realized some losses when they canceled poor-performing hedge funds.

Gains on sales of securities decreased by 38 billion yen to 20.5 billion yen (Line 10). Different from this fiscal year, the company posted approximately 32 billion yen as sales gains of Aozora bank securities in the same period last year.

Gains and losses on derivatives improved by 25.9 billion yen versus a year ago (Line 12). While Japanese yen was weak during the first half last year, it appreciated during the first 6 months this fiscal year that improved performance of foreign exchange contracts and currency swap contracts. Also, due to the tightening of credit spread, the company recognized valuation gains on credit derivatives.
Other investment losses improved by 13 billion yen (Line 13) since the company do not need to post valuation losses on ABS which they did in the same period last year.

Combining all of these factors, although this is not written on the material, investment income totaled 44.6 billion yen, down by 25.3 billion yen year on year.

As a result, ordinary profit became 81.2 billion yen, up by 62.5 billion yen (Line 14) and net income was 56.3 billion yen, up by 35.7 billion yen (Line 17).


Let us now look at Nisshin Fire. Please refer to page 2.

First, NPW declined by 5.1% from a year ago (Line 18).
Just to touch upon major lines of businesses, NPW of fire insurance went down by 7.4% (Line 19) due to the weak housing market, and that of voluntary automobile insurance went down by 0.4% (Line 20). While the new car registration was slow, the number of voluntary auto policies sold grew positively from a year ago. However, the unit price went down.
Nisshin Fire was also hit by the impact of CALI rate revision from the previous year. Without this impact, NPW of all the lines of businesses in total would have just declined by 3.9%.

Loss ratio was 60.9% which is almost flat on the year on year basis (Line 22). This is because although numerator or net claims paid decreased, premiums in the denominator declined, too. Similarly, expenses in absolute yen term dropped, but NPWs also declined. As a result, expense ratio increased by 1.3points to 39.1% (Line 29).

In addition, provisioning amount for underwriting reserve became smaller due to slower policy sales, and claims incurred went down mainly in the voluntary automobile and fire lines of businesses. As a result, underwriting profit increased by 1.1 billion yen from a year ago to 1.4 billion yen (Line 8).

Investment income increased by 5.3 billion yen to 3.8 billion yen (Line 9 and below). Reflecting the recovery of stock markets since April, the company did not have valuation losses on securities to post unlike last year, and gains on sales of securities increased.

As a result, ordinary profit went up by 6.8 billion yen to 4.7 billion yen (Line 14) and net income increased by 2.4 billion yen to 2.9 billion yen (Line 17).

Next, let me explain to you the performance of TMN Life.

Please refer to page 29 to review the in-force policies and new policy acquisition.
As far as new business is concerned, policies in the first sector including whole life policies with long-term discount as well as plans in the third sector such as medical and cancer treatment support insurance policies sold well. As indicated on the right side in the second table from the top, the number of new individual insurance policies sold went up by 17.1% and the sum newly acquired increased by 20.4% year on year. Annualized premium income of new business also went up by 12.5% as shown on the right of the bottom chart.

Based on the favorable new business, the total in-force business grew positively in terms of the number of policies in force, sum insured and annualized premium income, as you can confirm on the left side of the first and third table from the top.

Next, let us look at the P/L on page 27.
Out of the ordinary income, premium income and others increased steadily by 14.5 billion yen to 208.9 billion yen in line with the growth of total in-force book.

On the investment income and expenses, what was noteworthy was the movement in the foreign exchange gains and losses.
With regards to the US dollar-denominated bonds that the company holds to match their dollar-denominated insurance products, as of the end of FY08 1H, the company posted the foreign exchange loss of 8.1 billion yen due to weaker yen. The loss was turned into gain of 19.5 billion yen owing to the stronger yen this year.
Having said that, the impact of this change to the company's bottomline is limited since the underwriting reserve for dollar-denominated products was deflated reflecting the stronger yen.
If you could take a look at provision for underwriting reserves under ordinary expenses, you can confirm that the provision amount decreased by 23.8 billion yen from a year ago.

In addition, operating expenses which are also under ordinary expenses increased from a year ago, but only by 700 million yen. This increase is rather marginal given the rate of top line growth. The company's efforts including reduction of non-personnel cost paid off. As a result, ordinary profit increased by 5 billion yen versus a year ago to 13.2 billion yen, and net income increased by 2.1 billion yen to 5.9 billion yen.

Please also note that the company is planning to make additional provision for underwriting reserve at the end of the business year, like they have done every year so far, in order to meet the reserve requirement. Therefore, net income at the end of this fiscal year is expected to be close to zero.

Next, TMNFL.

Please turn to page 36.
The overall variable annuity market continues to decline. As indicated on the right in the second and bottom tables, new business of individual annuities went down to 25% or so of the actual a year ago in terms of the number of policies sold, sum acquired and annualized premium income.
However, this is in line with our original business plan. As I explained earlier, the company is running its business with a restrictive sales strategy so as not to assume risks more than it can properly control.

Now, let us go to page 34 for the P/L.
Premium income and others went down by 243.2 billion yen to 87.3 billion yen, reflecting the weaker sales that I just mentioned.
However, investment environment improved compared to the end of the last fiscal year and asset under management in the separate account increased. As the company receives a certain percentage of the outstanding asset under management as its fee, the fee income increased accordingly. The company also reduced operating expenses by reviewing distribution costs. As a result, TMNFL managed to keep positive profitability with the net income of 500 million yen.
This net income is 13.5 billion yen down from a year ago. This is because in the same period last year, the company ceded policies that were acquired in previous years and retained by TMNFL. As a result, there was a major reversal from reserve for minimum guarantees that contributed materially to the income last year.

I just explained the highlight of 4 major subsidiaries' performance on the non-consolidated basis.
As far as E.design Insurance Co., Ltd. is concerned, its financial statements are included from pages 20 to 25. However, this is still a new company which was just established on June 13th as you may recall. So, NPW in the first half is marginal, meanwhile upfront investment for the start-up is made already, for instance, in IT systems. Therefore, the company is expected to make losses for the time being.

Next, I will briefly discuss the performance of international business. Please go back to the Supplemental Material that we referred to earlier for the consolidated financial performance.
As indicated in the middle of net income chart as International business Total, net income increased by 12.6 billion from a year ago to 23.6 billion yen.
Now, we manage the international insurance business based on the adjusted earnings, which is calculated by adding to statutory income of 23.6 billion yen such factors as profit generated in overseas branch offices of TMN, affiliated companies under the equity method as well as Embedded Value to reflect contributions from life insurance operations.
In order to give you the real picture of our international insurance business overall, I would like to explain this business segment based on the adjusted earnings which have been used in IR materials as well.
Please refer to the table at the very bottom of Supplemental Material.

Total adjusted earnings of international business went up by 17 billion yen to 27.8 billion yen, which is a significant growth from a year ago.

The biggest driver behind this growth is Philadelphia whose P/L was consolidated to our group from this fiscal year and added 11.3 billion yen of adjusted earnings newly. In addition, Asian non-life insurance operations recovered its profitability. Their profitability was poor last fiscal year due to some major accidents. However, they pushed up our profit by 3 billion yen this year. Life insurance operations also improved their profit by 6.1 billion yen due to the recovery of stock markets in Asia.

As far as Kiln is concerned, their NPW showed significant positive growth thanks to stronger sales and rate increase. Weaker UK Pound against US dollar also helped since a big part of Kiln's premium is denominated in US dollar. Moreover, as of the end of the 1H, UK pound was appreciated compared to the beginning of this fiscal year, which in turn reduced the provisioning amount for the outstanding claims denominated in US dollar. As a consequence, underwriting profit increased by more than 5 folds to exceed 4 billion yen.
Meanwhile, our consolidated subsidiary in the UK posted the loss of more than 4 billion yen, and their adjusted earnings went down by 4 billion yen to the adjusted loss of 100 million yen. The company posted all the valuation gains and losses of securities they hold, and because UK pound got appreciated compared to the beginning of the year, market values of their US dollar-denominated investment assets went down sharply.
This company invests in foreign currency-denominated assets to mach liabilities in foreign currency to hedge foreign exchange risks. When UK pound appreciates like in the 1H of this fiscal year, this approach incurs some losses on the accounting basis.
This is because under the accounting standard, the underwriting reserve for a certain liability is calculated using the exchange rate at the time of the transaction, whereas assets invested in to match the same liability is calculated using the exchange rate on the book-closing date. Because the company is required to use different exchange rates to do the conversions, there is a mismatch of timing in the applicable exchange rates between assets and liabilities.

There is also a gap between the total adjusted earnings which is 27.8 billion yen and statutory net income of consolidated overseas subsidiaries which is 23.6 billion yen. The reason for this gap is that the adjusted earnings do not take into account the 6.3 billion yen of depreciation of intangible fixed assets which occurred in Philadelphia at the time of acquisition.

To wrap up my presentation on the 2Q financial results, let me also discuss our investment in securitized products. Please refer to Status of Investments in Securitized Products.

The top slide on page 1 indicates how our investment in securitized products impacted our P/L as of the end of 1H. For CDS, we posted the valuation gain of 9.2 billion yen on the P/L since credit spread for CDS was tightened.
For ABS, on the other hand, we recorded valuation loss of 1.3 billion yen because market value of some of our ABS holdings went down to reach our impairment criteria. However, unrealized loss of our entire ABS holdings has become smaller. The total market value improved by 8 billion yen compared to the end of June.

Let me also stress that, as it has been the case so far, none of our CDS or ABS holdings has defaulted. As the current holdings reach the maturity dates to be redeemed, we expect to recover losses to some extent.

Lastly, concerning financial guarantee treaty reinsurance, we took down reserve for outstanding claims in the 2Q, and incurred losses went down. As a result, impact of securitized asset holdings to our P/L became a positive 2.8 billion yen.

For more details on these investments, please refer to pages 2 and 3 respectively.

That's all for the overview of FY09 2Q results.

Next, let me briefly touch upon our full year guidance for FY09.

Please refer to Supplemental Material for FY2009 2Q Conference Call once again. I will first of all walk you through consolidated guidance on the statutory basis. Revised guidance for FY09 is provided in the second column from the right on the material.

Ordinary income on the consolidated basis is expected to be 3,460 billion yen, up by 140 billion yen from our original forecast. Although this is not written in the material, TMNFL is expecting to make investment gain in the separate account since investment environment is picking up compared to the beginning of the year. However, this does not impact our P/L because provision to underwriting reserve will be increased by the same amount as the investment gain.

To break down the ordinary income, consolidated NPW of non-life business is expected to go down by 55 billion yen to 2,299 billion yen.
TMN is expected to see positive effects of auto rate increase from July throughout the entire 6 months in 2H. Other lines of businesses are expected to grow, centered around liability insurance, like in the 1H. And although marine insurance has been greatly impacted by economic recession and declined sharply since FY08 2H, the slowdown is expected to run its course in the 2H this year. Hence, if we just single out 2H, private insurance business in total is estimated to show positive growth. However, given the decline in top line in the first half, full-year NPW is forecast to amount to 1,754 billion yen which is down by 51 billion yen compared to the original forecast and by 3.3% on the year on year basis.
Should there have been no impact from CALI rate revision, we estimate the net premiums written would decline by 2.1%.

Similarly, given the situation in 1H, Nisshin Fire is expected to make 133.1 billion yen at the top line, which is down by 6.8 billion yen compared to our original forecast and 2.1% from a year ago.

Consolidated life insurance premium income is forecast to be 460 billion yen, down by 14 billion from the original guidance.

Total premium income of both life and non-life insurance operations outside Japan is expected to decline by 13.1 billion yen from the initial budget to 537.2 billion yen. This is in line with our original plan, if we take into account impact of foreign exchange rates.

Next ordinary profit. As mentioned earlier, top line of TMN is expected to decline. However, its underwriting profit is expected to be 51 billion yen, up by 21 billion yen from the original forecast. This is because provision for outstanding claims is going to become smaller due to stronger yen and reversal of catastrophe reserve is expected to increase owing to the rising loss ratio.
Investment income, on the other hand, is expected to go down by 25 billion yen compared to the original forecast due to the major decrease in interest and dividend income. As a result, the revised guidance of ordinary profit is 115 billion yen, down by 5 billion yen from the original forecast.

Meanwhile, Nisshin Fire is expected to achieve the ordinary profit of 5.8 billion yen, an improvement of 1.5 billion yen from the initial guidance since the company is now expecting a bigger investment income given the better investment environment.

TMNFL also revised up its ordinary profit forecast by 6.2 billion yen, reflecting rising stock prices.

Profit guidance for international insurance business is also revised up by 2.7 billion yen from the original forecast to 52.4 billion yen. Reinsurance business is expected to achieve bigger profit due to more favorable trend of natural disasters than originally expected.

Based on these factors, we have revised our consolidated ordinary profit guidance by 10 billion yen to 135 billion yen.

Due to the same reasons, consolidated net income is now forecast to be 85 billion yen, an improvement of 5 billion yen from the original forecast.

Lastly, I would like to explain to you the forecast on adjusted earnings which our group is using as a management indicator. Please refer to the release paper titled Revised forecasts of business results of Tokio marine Group for the fiscal year ending March 31, 2010 (“FY2009") (Adjusted Earnings Basis) that we released today.

First, for TMN, we revised down the guidance on statutory net income by 5 billion yen from the original forecast due to the reasons that I explained earlier, and forecast on adjusted earnings is revised down by 16 billion yen from the original plan to 33 billion yen.

When we calculate adjusted earnings, we factor in reversal of catastrophe reserve which is now expected to be approximately 13 billion yen higher compared to the original plan. Another element which is adjusted in the adjusted earnings is gains on sales of securities which are now estimated to increase by 10 billion yen from the original expectation. These elements would push down adjusted earnings, and this is why adjusted earnings forecast is revised more severely than the statutory net income guidance.

In the domestic life insurance business, on the other hand, guidance on adjusted earnings of TMN Life is revised up by 2 billion yen to 26 billion yen. Forecast on TMNFL's adjusted earnings is also revised up by 13 billion yen to 10 billion yen due to the improvement of performance helped by rising stock prices.

On the international front, adjusted earnings of non-life direct underwriting business are estimated to go down by 5 billion yen from the initial forecast due to exchange rate fluctuation and major accidents. However, the adjusted earnings of reinsurance business overall including Kiln are now projected to go up by 5 billion yen from the original budget. We expect underwriting performance to be more favorable than originally expected, partly given the actual experience of fewer accidents so far.
Adding the guidance on life insurance business to non-life, total adjusted earnings of international insurance business is revised up by 1 billion yen to 54 billion yen.

Further, adding the guidance for financial and general business, the total adjusted earnings for our entire group is expected to be 106 billion yen, same as the original forecast.
However, adjusted capital or the denominator is slightly increasing due to the rise in stock price. Therefore, adjusted ROE is now expected to be 3.8%, down by 0.3% from the initial forecast.

This is the end of my presentation. Thank you very much for joining us till the very end. For the rest of the time, we would like to entertain your questions.
 
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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.



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