FY2011 1Q Results Conference Call: Q&A

Described below is the summary of Q&A session with institutional investors and securities analysts at the FY2011 1Q results conference call held on August 11, 2011.

Q1It was explained that the margin of decrease in number of reported claims in auto insurance gradually shrank beginning in April and that the number of claims as of the end of June was about the same as the level for the first quarter of last year. Was that figure as of the end of June for the month of June only or for the April-to-June quarter? Also, please discuss monthly changes in results beginning with April.

The figure as of the end of June was for June only and was intended to show that number of reported claims as of that time were at about the same level as at the end of June last year. As for trends beginning with April, after the Great East Japan Earthquake occurred in March, we saw number of accidents decline sharply in the second half of that month. Heading into April and May, the margin of decrease gradually shrank. And the figure for June was, as I just explained, about the same as the figure for June of last year. Through the first half of July the growth rate for accidents was slightly ahead of that for last year, but since the middle of July claims for nearly all types of coverage we offer are at levels below comparable figures for last year. We see this as a reversal effect of the significant increase in number of reported claims from the middle of July last year.

Q1(2)Tokio Marine & Nichido's Q1 E/I loss ratio is up relative to last year. Is this due to use of the compendium method? The compendium method was used for the third quarter of last year, with certain corrections to reflect recent accident rates. How were auto insurance reserves calculated and recorded for the first quarter of this year?

Regarding the increase in the E/I loss ratio for accounting purposes, there was no change in the calculation method used for the first quarter; we continued to use the compendium method (ultimate loss ratio method) used last year. In applying the compendium method, we refer to the loss ratio for the previous fiscal year, and it has remained basically unchanged, so there has been almost no change in the provision for outstanding claims. However, for the calculation method of IBNR reserves estimation for assumed reinsurance from the insurance pool of third party liability coverage in auto insurance, an increase in financial materiality lead to our switching from the compendium method to a statistical method. As a result, a slight accumulated burden has developed and there has been an increase in the provision for outstanding claims for accounting purposes.

Q2I would like to ask a question regarding capital policy. Given that the company's net income is on course, are there any conditions that we (investors) should bear in mind when considering the timing for future share repurchases?

There has been no change in the share repurchase policy discussed by our president, Sumi, at FY2011 IR Conference on June 1. As for current period conditions affecting share repurchases, there has been no addition or reduction in major factors. Basically, as we explained in June, there has been no change in our approach of flexibly implementing share repurchases, while considering business investment and other needs.

Q2(2)Equity markets have become extremely unstable, and when markets fluctuate, so do the values of the company's shareholdings. Would we be correct in dismissing equity market instability itself as a possible cause for putting off a share repurchase?

It is only natural that extreme share price fluctuations would be one element considered regarding a share repurchase, but at this time share price fluctuation is not yet a major factor in our consideration of possible share repurchases.

Q3Regarding international insurance business, it was explained that a one-time correction in the recording of policies in force in North America gave rise to a loss. To what extent did that loss have negative impact on a before-tax basis? In addition, should it be assumed that that negative impact will not be a factor for the following quarter?

Regarding the extraordinary factor affecting U.S. results, the before-tax impact came to USD6.5 million. And, as you point out, the second quarter will not be affected and the same amount will be recorded as a part of premium income.

Q3(2)Though the amount isn't so large, are the impacts of losses from cold waves and other natural disasters having a greater negative impact on North American earnings than the correction in the recording of policies?

In our North America business other than PHLY, there have been some impacts from natural disasters, but they have been relatively light. On the accounting front, the impacts of factors like changes in IBNR reserves estimation methods and of a slight decrease in current-year premium settlements for workers compensation insurance signed last year have resulted in lower income versus last year.

Q4Data posted on the company's website includes E/I loss ratio information, but I would like to know what the E/I loss ratio would have been without the impact of losses related to the Great East Japan Earthquake. Inclusion of the impact of those losses makes comparisons to last year difficult. I think estimates for disaster-related losses are probably up for the current fiscal year, and I would like to hear an explanation of the E/I loss ratio adjusted on that basis.

I will begin by giving you the E/I loss ratio without the impact of the recent disaster, and provide a little more explanation on key points as I talk about increases and decreases on an item-by-item basis.
The fire E/I loss ratio without the impact of the disaster would have been 46.0%, 13.8% higher than for the first quarter of last year. Marine would have been 55.2%, down 2.3%; personal accident would have been 58.5%, down 3.2%; and automobile would have been 67.8%, up 0.8%.
The E/I loss ratio for other lines would have been 52.3%, up 4.4% from last year. The fire E/I loss ratio was up 13.8% without considering the impact of the disaster because the E/I loss ratio for the first quarter of last year, at 32.2%, was relatively low. In addition, the calculation of the IBNR reserves, for which the compendium method was used for the first quarter, included a difference of around 10% between the ultimate loss ratio referred to last year and the one referred to this year. The impact of the sudden jump in the fire E/I loss ratio through the end of the second quarter of last year resulted in a worsening of the loss ratio for the first quarter of this year. Setting that aside, the fire E/I loss ratio would have remained basically unchanged.

Q4(2)Is the impact of using the compendium method for fire insurance around ¥4.0-¥5.0 billion? Also, are there any important points to note regarding changes in the E/I loss ratio for other lines?

The impact of using the compendium method for fire insurance would be around that amount as you mentioned. As for the slight increase in E/I loss ratio for the other lines, the primary explanation is the impact of yen appreciation.

Q5I recall that the plan for the current fiscal year called for a ¥42.0 billion reversal of the catastrophe loss reserve due to the impact of the Great East Japan Earthquake. However, the materials I received indicate that outstanding claims related to the earthquake resulted in a reserve decrease of ¥30.5 billion and the catastrophe loss reserve is down ¥38.8 billion compared to last year, so it is my understanding that claim payments in that amount (private insurance) were made in the first quarter. With what timing will the remaining ¥10.0 billion or so of the reversal of catastrophe loss reserve planned for this fiscal year be paid?

On a net basis, insurance claim payments through the end of June for losses related to the Great East Japan Earthquake came to around ¥30.0 billion on fire insurance.
That amount is roughly the same as the reversal of the catastrophe loss reserve. The catastrophe loss reserve is reversed once the W/P loss ratio exceeds 50%. In the first quarter, the fire W/P loss ratio exceeded 50% even before considering the impact of the Great East Japan Earthquake, so benefits paid for losses related to that disaster resulted in direct reversal of the catastrophe loss reserve.
These payments are running at about 40% of net incurred losses, and we continue to make payments as necessary. Some payments for commercial property losses will extend over a longer period of time, but we expect they will rise as a percentage of benefits paid through the interim closing.

Q6Comparing first-quarter results for international insurance business with the fiscal 2011 full-year forecast, it seems that, with net premiums written running at 27% and adjusted earnings at 19%, profitability is slightly down. Looking at causes, is it that PHLY's adjusted earnings are weak because of some nonrecurring first-quarter factors or that a soft market has made it difficult to achieve plan objectives? Please explain the situation with regard to PHLY.

The primary reason PHLY's first-quarter adjusted earnings are slightly below expectations is the impact of property damage resulting from record-setting severe cold weather.
Given that the cause of the damage was a natural disaster, it can be viewed as a nonrecurring factor.
Looking ahead, as we explained earlier, PHLY suffered incurred losses from tornado in April and May, which correspond to the second quarter. As for whether plan objectives of the full year will be achieved, we are closely monitoring conditions with regard to natural disasters, paying particular attention to developments regarding hurricanes, as that season begins to take hold in the summer.

Q6(2)Looking on the other hand at international businesses that are thriving, net premiums written in reinsurance business are running ahead of plans. I would like to know, however, what the adjusted earnings of this business look like when excluding the impacts of natural disasters during the January-to-March quarter.

Net premiums written by reinsurance subsidiaries other than Kiln include an expansion of U.S. underwriting through a new business at Tokio Millenium Re, a Bermuda subsidiary. In addition, openings of branches in Australia and Switzerland have had positive impacts on revenues.
Reinsurance business, however, also were affected by the earthquake in New Zealand and January's floods in Australia, which have held adjusted earnings below planned levels.
Regarding the achievement of full-year plans here, as well, we will have to watch closely what happens in terms of hurricanes and other potential causes for losses in the summer and beyond.

Q7It was explained that sales of business-related equities have been slowed given post-disaster share prices. On the other hand, the objective of selling business-related equities worth ¥100 billion during the current fiscal year has not been changed. Recent share prices have fallen below levels in the immediate aftermath of the Great East Japan Earthquake. What is the outlook for gains on sales of securities?

Everyone is very well aware of the condition of the stock market. And although we cannot say how the market will perform in the future, we can say that we will continue to pursue the original plan of selling shares worth ¥100 billion and that we believe there will be additional opportunities to sell if the market recovers. We do not anticipate the continuation of conditions making it impossible to sell, and we hope they will not continue.

Q7(2)I think that almost no shares were sold during the first quarter because prices were below expectations as of the beginning of the year. Considering a negative scenario in which share prices remain at their current level, is it possible that sales of business-related equities will not go forward?

There has been no change in our objective to accelerate selling business-related equities, so we will make efforts to sell as many shares as possible. But market conditions, of course, do not work like an equation in which one can say that given a certain price, this many shares can be sold, so I would like to ask for your understanding on this point.

Q8It was explained that auto operations are performing in line with expectations at the beginning of the year. Those expectations call for a loss of about the same size as that reported last year. At the present time, are losses being generated at that pace?

Following the earthquake and tsunami, the accident rate fell precipitously in March before gradually returning to levels similar to those of last year. The rise in the accident rate is expected to grow at slower pace than last year beginning in July, and, with the impacts of consumer sentiment returning from the post-disaster drop and of recovery-related demand, the base trend of claim cost is expected to rise. The impacts of last summer's sudden jump and of the heavier-than-usual snow beginning in December are expected to fade.

Q9With all the losses from natural disasters in Japan and abroad, is this a time for rethinking underwriting approaches for insurance and reinsurance? Will there be any change in reinsurance rates for excess losses (related to natural disaster risk in Japan)?

Overseas insurance underwriting, and reinsurance in particular, are, by their nature, businesses with large earnings fluctuations, so in dealing with them we continue to practice detailed risk management, relying mainly on the quantification of natural disaster risk. Recently, there has been a spate of natural disasters, but their impacts are well within the scope of our risk management practices.
We have three reinsurance subsidiaries, all of which have ample capital and have encountered no threats to their financial soundness. At this time, there have been no changes to our business strategy or underwriting policies. Rather than shying away, we believe that if they encourage markets to firm up, recent natural disasters will to the contrary present business opportunities, and we are closely watching markets to see how they develop.
Turning to the matter of rates, given the strength of recent natural disasters, including the earthquake in New Zealand and the Great East Japan Earthquake, some observers have pointed to the possibility of a hardening in the reinsurance market, but, as of this point in time, that has yet to happen for the reinsurance market as a whole.
Lastly, I would like to say a few words about Tokio Marine & Nichido's excess losses related to the reinsurance of natural disaster risk in Japan. At this time, impacts of the Great East Japan Earthquake have led to some hardening of the market, and ceding reinsurance premiums have risen, but not at all to the extent that they would have a significant direct impact on the top line.

Q10E. design Insurance's (W/P) loss ratio has fallen considerably. Is this the result of underwriting choices made, or other factors? Its (W/P) loss ratio is pretty low even when compared to that of Tokio Marine & Nichido. What is the outlook for the continuation of this trend?

E. design Insurance's (W/P) loss ratio was mainly affected by the fact that its figure for net premiums written, the denominator in calculating the loss ratio, was low last year because it had only just begun operating, and jumped to ¥1.0 billion this year. The growth of the denominator, in other words, is the primary reason for the decline in the loss ratio.

Q10(2)Would it be reasonable to see earned/incurred (the E/I loss ratio) as presenting a very different picture?

I do not have detailed data with me at this time, but I think that that would probably be reasonable.

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.