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FY2009 3Q Results Conference Call
February 12, 2010
 
I would like to give you the overview of FY09 Q3 financial results of Tokio Marine Holdings that we announced today. Please make sure that you have these three materials with you: 1) FY2009 3Q Summary Report 2) Supplemental material for FY2009 3Q Conference Call 3) Status of investments in securitized products as of December 31, 2009. Please go to our website, click on Topics on the homepage and go to the page where these materials are listed.

Taking this opportunity, I would also like to brief you on the revisions that we made to our FY09 full-year guidance, in addition to the overview of Q3 results. My presentation, therefore, is going to be relatively long. It will take about 30 minutes.

Now, let me start by giving you the total picture on a consolidated basis. Please refer to Supplemental Material for FY2009 3Q Conference Call. I will explain the financial performance of our major subsidiaries later, so let us first review the main factors that contributed to the consolidated results.

Ordinary income was 2 trillion 703.6 billion yen, down by 3.0%, or 83.3 billion yen, from a year ago.

In terms of the breakdown of ordinary income, combined consolidated net premiums written (NPW) in the non-life business, domestic and international, was 1 trillion 730.1 billion yen, up by 3.9%, or 64.2 billion yen, year on year. As indicated below, NPW of Tokio Marine Nichido (TMN) and Nisshin Fire came down primarily because the significant reduction of CALI (compulsory automotive liability insurance) rate in April two years ago still had lingering negative effects. However, Philadelphia Consolidated in the US is newly consolidated to our book from this fiscal year and helped to grow the income.

Consolidated life insurance premiums were 335.1 billion yen, significantly down by 44.9%, or 273.2 billion yen, year on year. Insurance premium and others of Tokio Marine and Nichido Life (TMN Life) grew by 7.1%, or 21.6 billion yen, versus a year ago thanks to the steady increase of total in-force policies. On the other hand, insurance premiums and others of Tokio Marine and Nichido Financial Life (TMNFL) dropped significantly by 67.2% from a year ago. Given the market environment, TMNFL took a risk-restrictive sales approach so as to ensure proper control of risks.

If we simply add insurance premiums and others earned by TMN Life and TMNFL, the sum exceeds the life insurance premiums on the consolidated results. This is because non-consolidated results are calculated based on the life-insurance format, while the consolidated number is restated to match the non-life insurance format.
The main difference between the two is that surrender refund and reinsurance premiums are included under the claims paid on the life format, and they are deducted from life insurance premiums on the non-life format.

Next, let us look at our international business, both life and non-life, by referring to the International business total shown under the ordinary income table as reference. To be consistent with our past communication, I would like to review the business from the perspective of total international insurance premiums, which include contributions from overseas branch offices of TMN, equity method affiliates as well as non-consolidated companies.

Insurance premiums of our international business totaled 417.3 billion yen, up 19.3%, or 67.5 billion yen, compared to a year ago, thanks to the consolidation of Philadelphia from this fiscal year.
For your reference, cumulative NPW of Philadelphia as of the end of Q3 is 130.1 billion yen. Excluding its contribution, the other international insurance premiums declined by 62.5 billion yen year on year, out of which 55.8 billion yen was the negative impact of the yen appreciation. In addition, the non-life business was affected by the global economic downturn and, in particular, by the decline of logistics activities by Japanese companies. On the life insurance side, we sold our life insurance operation in Brazil, and as we shifted our sales focus from investment-oriented products to traditional life policies amid the weak economic environment, the average unit price declined.

Next, I will explain ordinary profit, which is indicated in the middle of the Supplemental material.
Consolidated ordinary profit increased by 179.2 billion yen year on year, to 165.8 billion yen.

This major growth was mainly driven by TMN.
On a non-consolidated basis, ordinary profit of TMN grew by 71.1 billion yen, to 120.2 billion yen. TMN posted a major expense for the Business Renovation Project in the same period last year which was not repeated this year. Also, provisions for catastrophe reserve declined, which increased underwriting profit materially.

Profits in the international business also grew by 44.3 billion yen from a year ago, to 55.2 billion yen, thanks to the strong performance of Kiln, reinsurance and life insurance businesses, in addition to the benefits of Philadelphia's consolidation.

Other group companies also grew their profits year on year, except for TMNFL whose profit declined from a year ago. This is primarily because in the same period of last fiscal year, the company ceded risks of policies acquired in previous years to reinsurance and posted a reversal of minimum guarantee reserve which raised their profit. Since the company did not have such a reversal this year, the ordinary profit of TMNFL declined by 11.4 billion yen to 300 million yen.

Furthermore, in the same period last year, we recorded negative 67.1 billion yen as the difference between purchase method and the pooling of interests method in relation to the major valuation loss caused by the financial turmoil. However, the difference improved by 48.5 billion yen to negative 18.6 billion yen.

Next, please take a look at net income which is shown at the bottom of the Supplemental material.
Consolidated net income increased significantly by 105.3 billion yen year on year to 110 billion yen, due mainly to the same reasons behind the ordinary profit increase. For more details, please refer to the materials at your convenience.

Let me next give you the highlights of non-consolidated performance based on the Summary report.

Please go to page 13 of Summary report and find quarterly P/L of TMN on a non-consolidated basis.

NPW was 1 trillion 301.5 billion yen, down by 68.3 billion yen or 5.0% year on year.
Excluding the impact of the CALI rate reduction in April 2008, the top line declined by 3.3%.
For a breakdown of NPW by line of business, please refer to page 14.

First, NPW of fire insurance fell by 6.7% due to a decline in new housing starts in Japan and a weak economy in the US.
In the marine insurance business, NPW declined by 28.7%, mainly due to weak logistics activities amidst the economic recession as well as stronger yen.
NPW of personal accident insurance dropped by 2.2%. Although TMN grew the top line of its domestic business by 0.6%, it stopped assuming reinsurance risks from local companies outside Japan, which led to the decline in total.
In the automotive insurance business, NPW fell 1.8%. Thanks to the rate increase, the average unit price went up. However, the number of policies written declined. NPW of CALI dropped by 15.2% year on year since the negative impact of the major rate cut two fiscal years ago remained into this fiscal year.
In the other line of business, NPW increased by 1.5% due to the successful acquisition of large liability insurance policies.

As indicated at the bottom of the same page, net claims paid were 821.9 billion yen, which is lower than last year by 36.8 billion yen. However, since the premiums on the denominator side declined, the loss ratio increased by 0.6 points year on year to 67.7%.
For your reference, excluding the impact of the CALI rate reduction, the loss ratio dropped 0.6 points to 64.4%.
To break this down by line of business, the loss ratio of fire insurance improved by 3.5 points to 43.3% mainly because claims paid for large accidents declined. On the other hand, the loss ratio of marine insurance increased by 8.8 points to 68.7%, due to the significant decline in premiums. The loss ratio of the automotive insurance business also went up by 1.2 points to 69.0% due to the decline in the top line and an increase in claims paid for automobile physical damages.

Please go back to page 13 and find the reference table at the bottom.

Net expense ratio improved by 1.1 points from a year ago to 34.0%. Excluding the impact of the CALI rate revision, the ratio improved by 1.7 points to 32.4%. NPW declined by 68.3 billion yen, but the net expense ratio still improved, primarily because compared to the previous year when the mainframe system went live in May, the expenses related to the Business Renovation Project this fiscal year declined by approximately 20 billion yen.

In addition, provisioning for catastrophe reserves dropped 17.6 billion yen from a year ago. In the fire insurance business, the actual amount of provisioning for catastrophe reserve declined since the outstanding balance reached the target level, and in the automotive insurance business, due to the aggravation of loss ratio, the company took down more from the catastrophe reserve. As a result, underwriting profit increased by 48.3 billion yen versus a year ago to 74.6 billion yen.

Next, I will discuss the investment side.
Please go to page 13 and refer to investment income under ordinary income in the top box on the P/L.
Interest and dividend income declined by 51.2 billion yen year on year to 90 billion yen, mainly because dividend received on our Japanese stock holdings declined due to weak corporate performance in the previous fiscal year.
Gains on sales of securities declined 20 billion yen from a year ago to 45.8 billion yen, since in the last fiscal year, sales gains of Aozora bank securities were recorded, unlike this year.
As for gains and losses on derivative products, on the other hand, although this is not stated on the quarterly P/L, losses on credit derivatives were improved by 24.7 billion yen to a positive gain of 9.8 billion yen. Meanwhile, unlike this year, major valuation gains on FOREX contracts and currency swaps were posted in the same period last year due to the rapid appreciation of the Japanese yen. By taking this into account, overall gains on derivatives declined by 5.5 billion yen to 11.3 billion yen.

Valuation losses of securities improved by 48 billion yen year on year to 22.2 billion yen, and valuation loss of ABS also improved by 24.2 billion yen to 1.3 billion yen.
All in all, investment income was 104.1 billion yen, while investment expenses totaled 32.2 billion yen, and investment profit, which is the difference between the two numbers, increased by 21.5 billion yen from a year ago to 71.9 billion yen.

As a result, ordinary profit increased by 71.1 billion yen versus a year ago, to 120.2 billion yen.

Taking into account extraordinary profits and losses as well as corporate tax, net income was 80.7 billion yen, which was up by 33.9 billion yen year on year.

Next, let me give you the highlights of Nisshin Fire. Please turn to page 17.

NPW declined by 3.9% from a year ago to 100.1 billion yen. The top line of fire insurance business decreased because policy sales were sluggish in the real estate agent channel due to the weak housing market. A large fire policy which we had covered as a non-lead underwriter expired. Furthermore, the rate revision for CALI in April 2008 negatively impacted the top line.

As indicated at the bottom, net loss ratio went up by 1.3 points to 62.8%. There was a decline in claims paid across the entire business, most notably in the automobile insurance business. However, the improvement was cancelled out by the severe decline in NPW.

Net business expense ratio increased by 1.2 points versus a year ago to 39.2% since NPW on the denominator side declined.

Based on these factors, underwriting profit went down by 200 million yen compared to a year ago to 600 million yen.

Investment income, on the other hand, improved by 22.5 billion yen year on year to 5.1 billion yen. This is mainly because valuation losses on securities went down thanks to the improvement of the investment environment.
As a result, ordinary loss improved by 23.7 billion yen, becoming an ordinary profit of 5.4 billion yen. Net income also turned around from negative 10.3 billion yen to positive 3.5 billion yen.

Next, let me explain the financial results of TMN Life.

For a review of total in-force policies as well as new business, please refer to page 27.
Sales of new policies went well. In the first sector, whole life policies with long-term discount and term policies sold well, so did medical plans and cancer treatment support insurance in the third sector. As indicated in the second table from the top on the right half, the number and amount of new individual policies acquired increased by 14.4% and 18.1% respectively year on year, and as shown on the bottom table on the right hand side, annualized premiums of new policies went up by 14.1% year on year.

Consequently, total in-force business increased steadily in terms of the number and amount of policies in force as well as annualized premium, as shown on the left hand side of the first and third tables from the top.

Please go to page 25 to review the P/L.
Under ordinary income, insurance premiums and others went up by 21.6 billion yen year on year to 324.6 billion yen. As I mentioned before, premium income increased steadily in line with the expansion of our total in-force book.

In addition, business expense under ordinary expenses went up only by 700 million yen year on year thanks to the effort to keep down non-personnel costs. By keeping the expense increase quite marginal in proportion to the top line increase, ordinary profit went up by 7.2 billion yen from a year ago to 19.8 billion yen, and net income increased by 3.3 billion yen to 9.1 billion yen.

As of the end of this fiscal year, the net income of TMN Life is expected to be almost zero since the company plans to make additional provisions to the standard liability reserve, like it has done in previous years.

Next, let's look at the financial performance of TMNFL.

Please turn to page 33.
The variable annuity market continues to decline. As indicated on the right hand side of the second table from the top as well as the bottom table, the number of new individual annuities acquired was merely 34.0% of the number in the previous year, and the coverage amount and annualized premium income of new policies were both 31.6% of the previous fiscal year.
However, this performance is in line with our original expectations. As I mentioned earlier, the company has been operating the business based on the risk-restrictive strategy so as to ensure it would not assume more risks than it can control.

Please go to page 31 to review the P/L.
Insurance premiums and others declined by 269.6 billion yen from a year ago to 131.4 billion yen, reflecting the decline in new business which I just mentioned Despite this fact, net income was positive 300 million yen. This is because the investment environment improved compared to the end of the last fiscal year, the outstanding balance of assets under separate account increased, and as a result, insurance fees that the company receives in proportion to assets under management increased accordingly. At the same time, the company contained business expenses by reviewing distribution costs.
Net income was down by 11.4 billion yen from a year ago. This was primarily because, unlike this year, in the last fiscal year net income was boosted by the reversal from minimum guarantee reserve, as the company ceded risks on policies acquired in the previous years to reinsurance.

Now, I have covered the highlights of the 4 major insurers' financial performance.
We established a new company called E.design Insurance this fiscal year whose financial statements are included from page 20 to 23. The bottom line of this company is expected to be negative for the time being since they just started their operation on the 13th of June last year and NPW of this fiscal year is quite marginal. Meanwhile, to support the start-up of the business, the company is planning upfront investments primarily in its IT system.

Let me next briefly touch upon the performance of our international insurance business.
Please go back to Supplemental material that we referred to earlier to review the consolidated results.
As shown in the International Business Total line in the middle of the net income table, net income as of the end of Q3 was 45.9 billion yen, up 35.4 billion yen from a year ago.
Now, in managing the international insurance business, we use adjusted earnings by making some adjustments to statutory profit. We not only look at the 45.9 billion yen but we also include profit earned by overseas branch offices of TMN as well as our share of profit from affiliated companies on the equity method in evaluating the international business. And we look at the life insurance business in terms of Embedded Value.
In order to explain the real picture of our entire international insurance business, consistent with our past IR disclosure materials, I would like to give my explanation based on the adjusted earnings including the non-statutory earnings.
Please refer to the bottom of Supplemental material.

Total adjusted earnings as of the end of Q3 were 52.2 billion yen, a significant increase of 41 billion yen from a year ago.

The biggest contributor behind this growth is Philadelphia. As they are newly consolidated to our group from this fiscal year, they boosted the adjusted earnings by 18.5 billion yen. Besides Philadelphia, the non-life business in Asia also grew the earnings by 5.7 billion yen year on year. In the last fiscal year, profitability was hurt in Asian non-life business due to major accidents, but they recovered their profitability. Reinsurance business grew their earnings by 4.9 billion yen from a year ago. The reinsurance market strengthened and there were few natural disasters. The life insurance business also achieved a substantial growth of 9.1 billion yen versus a year ago, helped by the recovery of the stock market.

As far as Kiln is concerned, they improved the underwriting profit quite materially by approximately 11 billion yen year on year, with the combined ratio (earned to incurred basis) of about 80%. In addition to the few large natural disasters, as I explained at the Q2 results conference call, the UK pound appreciated against the US dollar compared to the beginning of the fiscal year, which led to the reduction of provisioning for outstanding claim reserve denominated in US dollars. Certainly, investment income declined materially due to the financial crisis and lower interest rates, and they posted a loss from foreign exchange since the market value of US dollar-denominated assets fell due to the appreciation of the UK pound. However, despite these factors, Kiln grew their adjusted earnings positively by 2.9 billion yen year on year to 6.5 billion yen.

The total adjusted earnings were 52.2 billion yen, while the consolidated net income of our overseas subsidiaries on a statutory basis was 45.9 billion yen. The difference between the two numbers is mainly explained by the fact that the adjusted earnings do not factor in amortization of intangible assets incurred when we acquired Philadelphia.

Next, I will briefly explain our investment in securitized products. Please refer to Status of investments in securitized products as of December 31, 2009.

Please also note that we will refrain from disclosing the situation concerning financial guarantee reinsurance contracts. As was the case last year, the primary underwriter, Assured Guaranty Municipal, is scheduled to announce their December-end financial results after our Q3 results announcement. As soon as their results are released, we will make additional disclosure.

With that said, please go to page 1 of the material to look at gains and losses on securitized products.

This page shows how the valuation gains or losses of securitized products impacted our P/L. Valuation gains for CDS totaled 9.8 billion yen due to the tightening of credit spreads. On the other hand, for ABS, we posted a valuation loss of 900 million yen since the market value of some of our investments fell enough to make them impaired.
However, I would also note that when we look at both the impact on P/L and unrealized gains and losses on B/S, the overall market value of our investment in ABS improved by 6.8 billion yen as of the end of Q3 from the unrealized loss of 3.6 billion yen as of the end of Q2.

I would also add that, as it has been the case so far, none of our investments have defaulted. We expect to recover some profit as the outstanding contracts mature.

For more details, please refer to page 2 at your convenience.

That is all for my presentation on the overview of FY09 Q3 financial results.

Before I close, let me explain to you the revisions to our full-year guidance.
Please go to page 1 of FY2009 3Q Summary Report and refer to Consolidated Business Forecast for the fiscal year ending March 31, 2010 at the very bottom of the page.

First, our forecast for ordinary income remains unchanged at 3 trillion 460 billion yen.

Next, guidance on ordinary profit has been raised 30 billion yen from the original 135 billion yen, to 165 billion yen.

Projected net income was also raised by 20 billion yen from the original 85 billion yen, to 105 billion yen.

The main reason behind the upward revisions is that TMN and overseas insurance subsidiaries are now projected to show better-than-expected performance on a full year basis

First, let me speak more about the upward revision at TMN.
Again, please refer to Supplemental material and take a look at TMN's FY09 Revised Projection announced on Feb. 12, 2010 under ordinary income.
Given the Q3 actual results and expected performance for the balance of the year, we lowered the NPW forecast from the original 1 trillion 754 billion yen, or 3.3% year-on-year decline, to 1 trillion 735 billion yen, or a 4.3% year-on-year decline.
Accordingly, we revised our guidance for net loss ratio and net expense ratio.
First, net loss ratio was revised up by 0.1 point to 68.8%. Due to the decline in NPW, net loss incurred is expected to decline, so are the incurred losses for natural disasters. However, decline in NPW is now expected to negatively impact the net loss ratio.
Net expense ratio, on the other hand, is projected to improve by 0.2 points to 35.0%, since non-personnel costs are expected to be further cut thanks to cost reduction efforts.

Forecast underwriting profit was revised up 21 billion yen from the original 51 billion yen, to 72 billion yen. This is mainly because, as I just mentioned, the projection on losses incurred on natural disasters was lowered and non-personnel costs are now expected to be reduced further through cost reduction activities.

Adding investment income and other recurring income to the new estimate of underwriting profit, ordinary profit is now projected to be 140 billion yen, up by 25 billion yen from the original guidance of 115 billion yen.

Accordingly, forecast net income was raised 15 billion yen to 90 billion yen from the original 75 billion yen.

Next, in the overseas business, guidance on ordinary income was revised up by 12.6 billion yen from the original 52.4 billion yen, to 65 billion yen.
We made this upward revision based on the actual experience of major catastrophe loss occurrence at Kiln and other reinsurance subsidiary as well as the better-than-expected underwriting performance of Philadelphia.

Forecasted net income was also raised by 11.4 billion yen from the original 45.6 billion yen, to 57 billion yen, mostly due to the same reason behind the revision of ordinary profit.

Also, on a quarterly basis, we are disclosing the adjusted earnings just for the international business, for which guidance was also revised up by 9 billion yen from the original 54 billion yen, to 63 billion yen.
These are the revisions that we made to the full-year guidance and this concludes my presentation today. Thank you very much for staying with us for the entire presentation.
 
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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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