| Q1. |
I have two questions about factors behind the upward revision of your full-year guidance. You raised the forecast of underwriting profit of Tokio Marine & Nichido by 21 billion yen. How much of that is attributable to smaller losses incurred and how much is due to cost reductions?
My next question is regarding the overseas insurance business. If I understood your explanation correctly, the loss trend and losses incurred at Kiln were better than expected. Is this correct? You also mentioned the underwriting performance at Philadelphia was good, but may I understand that their top line was better than originally projected? I would appreciate it if you could help me understand in more detail the factors which contributed to the upward revision. |
| A1. |
To answer your first question about underwriting profit, losses incurred, cost reductions as well as claims paid for natural disasters are now projected to be slightly better than the original expectations. To give you the rough breakdown, losses paid for catastrophes including Typhoon No.18 are now expected to be approximately 5 billion yen (to be more accurate 4 billion yen) lower than the original projection.
Cost saving efforts are now expected to contribute to profits, not in the magnitude of the tens of billions of yen, but more than 5 billion yen. In addition to the Business Renovation Project that you are aware of, we have been reducing recurring non-personnel expenses as well. The remainder of the upward revision is not necessarily solely explained by the improvement of incurred losses, but for the most part it is because of the revised projection of incurred losses.
With respect to the international insurance business, I believe your question was two-fold, one about Kiln and the other about Philadelphia. Just to make sure, if I may reiterate what I mentioned earlier about Kiln, the provision to the outstanding claim reserve was smaller than expected thanks to the exchange rate (or stronger UK pound against US dollar compared to the beginning of the fiscal year). In addition, major catastrophe losses were smaller than expected, and the combined ratio came down to approximately 80% on an earned-to-incurred basis. Based on such improvement, we raised the full-year guidance.
Philadelphia, on the other hand, grew its top line by more than 10%, which is in line with our original expectations. Rather, it is their profitability which came in slightly better than initially projected and contributed to the upward revision.
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| Q2. |
This is not directly related to the Q3 results, but on a full-year basis, net income is projected to be 105 billion yen. If the current guidance on dividends remains unchanged at 48 yen, the company would pay approximately 38 billion yen in total dividends, which leaves approximately 70 billion yen as retained earnings. Given the current market environment and developments concerning regulations and credit ratings, what is your current capital policy? |
| A2. |
My general answer to that is we do not judge our capital policy merely based on quarterly numbers. We need to look at the policy in a broader context including developments concerning capital regulations and credit ratings as you pointed out, as well as overall surplus capital. If I may emphasize, we do not expect to revise our capital policy solely based on quarterly numbers.
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| Q3. |
I have understood that E.design Insurance is aiming to reach 2 to 3 billion yen in premium income this year, but it only achieved approximately 600 million yen as of the end of Q3 and it seems quite slow. What do you intend to do about this company? |
| A3. |
E.design Insurance has just started its operations, as you know. We do not expect the overall direction of this company changed just because of short-term performance. We would rather look at this business from a long-term perspective. In particular because we are using this business to learn how new technologies such as mobile phones and the internet can be leveraged not only in E.design Insurance's business but also in the non-life businesses which are currently based on the agency channel.
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| Q4. |
Please help me better understand the full-year guidance. According to your explanation, Tokio Marine & Nichido expected to achieve an underwriting profit of 72 billion yen, but it already achieved 74.6 billion yen as of the end of Q3. What should I expect in Q4? While catastrophe loss is likely to be small, IT costs might increase. I also noticed that since Q4 of last fiscal year, provision to the catastrophe reserve in the fire line of business has come down because the outstanding balance of the reserve reached its maximum level. I do not expect the provision to increase materially this year, and therefore, I thought the final number should be better. How should I interpret this? |
| A4. |
I believe you are making the point that, in contrast to the trend through the end of Q3, the underwriting profit has to come down by about 50 billion yen this Q4 from the Q4 results last fiscal year. Otherwise, the underwriting profit is not going to be 72 billion yen for the full year, following a Q3 result of 74.6 billion yen.
To give you a rough breakdown, first, expenses are expected to push down the profit by about 15 billion yen. You earlier pointed out the cost incurred for the Business Renovation Project. In addition to that, we have been developing what we call “Multi Access," or a system where agents can reach us through various routes this year, while we have also taken some measures to respond to Insurance Business Law.
Furthermore, the catastrophe reserve that you also referred to is now expected to reduce profits by about 20 billion yen year on year. The outstanding balance of the catastrophe reserve for fire insurance reached its maximum level in Q4 last fiscal year, which has supported year-on-year positive growth of profit until Q3 this year. However, in Q4, we cannot expect this positive support for year-on-year growth any longer because the benefit has run its course since one year has elapsed since the provision amount started to decline.
Among other minor factors, losses incurred are expected to be lower and reduce profits by approximately 10 billion yen. If we add all these factors up, the total negative impact to the profit is close to 50 billion yen and, therefore, the profit in Q4 is expected to come down compared to the same period last fiscal year.
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| Q4(1) |
I would like to look at this from a different angle. When we single out Q3, the underwriting profit was 21.3 billion yen. Let us put aside the impact of lower provisions to catastrophe reserve for fire insurance since it is not relevant in the quarter-on-quarter comparison between Q3 and Q4 this year. As just explained, IT costs are estimated to increase by 15 billion yen in Q4 from the Q3. Factoring in the slight increase of losses incurred, it looks like underwriting profit in Q4 will be close to zero. Meanwhile, catastrophe losses incurred are taking into account in the Q3 number, which makes me think again that the projected underwriting profit in the Q4 is too low. What do you think about my analysis? |
| A4(1) |
You touched upon the catastrophe reserve. The company was making ordinary provisions for the reserve until the end of Q3 last fiscal year, and in Q4 the provision rate was lowered because the outstanding balance of the catastrophe reserve reached its ceiling..This factor will negatively affect profits by about 15 billion yen in the 3 months of Q4 this year.
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| Q4(2) |
But that factor is relevant only in FY08 Q3. The balance of the catastrophe reserve for fire insurance had already reached its ceiling in FY09 Q3. Therefore, if we start from 21.3 billion yen which is the underwriting profit in FY09 Q3, I understand that expenses and losses incurred are expected to increase. But the underwriting profit of 21.3 billion yen in Q3 also factors in losses paid for natural disasters, and even compared to that Q3 result, the estimated underwriting profit of almost zero in the Q4 seems too small. Underwriting profit is difficult to understand as it moves up and down quarter to quarter. I would appreciate a bit more detailed explanation. |
| A4(2) |
In absolute yen terms, our underwriting profit projection is explained by two factors. First, as you correctly pointed out, expenses will increase from last year. And losses incurred are estimated to be at normal level, therefore, bigger than last year.
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| Q4(3) |
I do not have a good understanding of why underwriting profit increased significantly in Q4 last fiscal year. When we refer to the very bottom of Page 14 of FY2009 3Q Summary Report, and if we deduct 26.2 billion yen which is the cumulative underwriting profit as of Q3-end from 73.8 billion yen which is the full-year underwriting profit last fiscal year, this gives us the profit earned over the 3 months in the Q4. What should I make of this Q4 number? |
| A4(3) |
A major factor behind the significant profit was the smaller provision to the catastrophe reserve in Q4 last fiscal year. Also, loss performance was better than ever.
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| Q5. |
Please explain the Group's adjusted earnings. The upward revision that you made this time to guidance for financial accounting figures is attributable to the domestic non-life business and the international insurance business. Guidance on adjusted earnings for the international business was raised by 9 billion yen, and listening to the questions and answers today, it sounds like adjusted earnings of the domestic non-life business should be slightly better than expected, benefitting from the current estimation of incurred losses and additional cost savings. Furthermore, you did not revise your guidance on financial accounting figures for the domestic life insurance business. Do you expect both domestic life and non-life operations to exceed the current projection for adjusted earnings? I am interested to get a sense of direction for the adjusted earnings rather than specific numbers per se. |
| A5. |
As you have probably noticed based on the explanations so far, there are certainly some factors which could push up adjusted earnings, although, as you are aware, we do not disclose what we think the number would be. There are many uncertainties. That is the reason why we are not making any comment on it at this time, although there could be some positive factors as you pointed out.
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| Q6. |
When we look at the difference between direct premiums written for Tokio Marine & Nichido and net premiums written, the difference has increased slightly from a year ago in the Others line of business. I would presume that this has something to do with reinsurance, but has there been any change to your reinsurance underwriting or is this also an effect of foreign exchange rates? |
| A6. |
This is not due to foreign exchange rates. This difference is simply coming from the balance between direct underwriting and reinsurance transactions this year.
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| Q6(1) |
Have you not changed your underwriting policy? |
| A6(1) |
This is not because of our underwriting policy, but rather a natural result of individual underwriting decisions that we made. This is not a reflection of any change in our reinsurance policy.
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