FY2013 3Q Results Conference Call: Q&A

Described below is the summary of Q&A session with institutional investors and securities analysts at the FY2013 3Q results conference call held on February 13, 2014.

Q1According to the "Supplemental data" file posted on your IR website, TMNF's "net E/I basis loss ratio excluding impact of natural disasters (private insurance)" in 3Q recorded YoY improvements of 4.4 points, following that of 4.5 points in 2Q, maintaining a steady improvement. Meanwhile, improvement in "net claims paid" in 3Q seems to be slowing down with YoY decrease of 8.4 billion yen in 3Q compared to that of 9.2 billion yen in 2Q. Does the 3Q E/I loss ratio reflect the latest trend with the simplified method used for calculating outstading claims reserves in 1Q and 3Q? To understand the actual situation accurately, which data should I refer to, "net E/I loss ratio" or "net claims paid"?

The simplified method for calculating outstanding claims reserves has nominal impact on the "net E/I loss ratio." We think that "net E/I loss ratio" reflects the present situation more accurately than "net claims paid."

Q1(2)YoY improvement in "net claims paid" seems to be slowing down, however, can I say that the profitability improvement is progressing steadily?

As the "net E/I loss ratio" shows, we believe that we are making steady improvement.

Q2In international insurance business, is there any change to your FY2013 projection for natural catastrophe losses announced in November?

In the original projections for FY2013, natural catastrophe losses were projected at 35 billion yen (before tax). In the revised projections announced in November, the loss projection was revised downward to 30 billion yen reflecting the 1H FY2013 results. Regarding the latest revision in February, we reviewed the projections for international insurance business as a whole, reflecting the impact of the yen's depreciation and its recent business results. Although the fewer natural catastrophes were certainly one of the factors taken into consideration, it is difficult to tell specific figures of natural catastrophe losses separately from other factors. Thank you for your understanding.

Q2(2)Relating to the losses from the North American cold wave this January, if the losses are significant, I think it is possible that the losses are adjusted to be included in 4Q results. Does your revised projection as of February take this factor into consideration?

As for the North American cold wave, we are now receiving accident reports from our local offices, and the total loss status is yet to become clear. The full-year projections for international insurance business were revised to a highly probable level at this moment, considering various factors.

Q3Full-year projections of TMNF's net E/I loss ratio (Private insurance) was revised to 63.2%. Does this revision include the impact of the heavy snowfall in this February?

Since the loss situation is still under confirmation, the impact of the February snowfall is not reflected in the revised full-year projections. However, the revision was made assuming a certain amount of snow damage from the start.

Q4The E/I combined ratio at TMNF at the end of FY2013 can be estimated at 95.3%, when you total the projected year-end E/I loss ratio of 63.2% and the 3Q expense ratio of 32.1%. It seems that you can achieve the FY2014 target C/R of 95% as early as FY2013, one year before the original business plan. Factoring in the impact of consumption tax hike in FY2014, what level of combined ratio do you project for the next fiscal year?

In the revised projection in February, TMNF's combined ratio at the end of FY2013 is projected to be in the high 95% range on E/I basis and 93.2% on W/P basis. FY2013 is showing better business results than the original projections due to factors such as fewer natural catastrophe losses, however, FY2014 combined ratio is projected to worsen by 1.8 points YoY due to the forthcoming consumption tax hike. Therefore, we recognize that we need to pursue continued profitability improvement, with a close watch on the increasing trend of repair cost in auto, etc.

Q4(2)You explained that the rate revision of auto insurance in October 2013 will have an effect of profitability improvement of 26 billion yen in FY2014. Can I expect that the rate revision offsets the impact of consumption tax hike?

The rate revision in October 2013 was not a countermeasure against the cost increase associated with the consumption tax hike, however, in FY2014, it will eventually work as such effect.

Q5In 3Q, auto E/I loss ratio improved by 4.6 points YoY, whereas the full-year projections is 2.3 points improvement. Does this mean that the positive effect of the revision of the grade rating system was larger than expected? How much improvement in loss ratio do you project for 2H, as a result of the effect of the revision of the grade rating system?

Since it is difficult to grasp the individual effect on decrease in claims resulting from the revision of the grade rating system, such effect is factored in as a part of projections for claim cost. Therefore, it is hard to determine whether the effect exceeded the original projections or not. For your information, less snowfall in December was among the factors for the improvement in 3Q E/I loss ratio.

Q5(2)Although the number of reported claims decreased by 6.7% YoY, the traffic volume and the number of auto policies increased in 3Q. Is it possible to explain the reason for the improvement of E/I loss ratio only by the less snowfall in December?

According to the statistics by the police, the number of accident is on a downtrend. We believe that this also had some effect on the improvement of the loss ratio.

Q5(3)As at the 2Q announcement, the full-year projection for auto E/I loss ratio was 67.1%. Can I expect somewhere around this level at the end of FY2013?

The full year projection was revised to 66.2% this time.

Q6Because of the softening of the reinsurance market relating to natural catastrophe risks, Munich Re says that price competition has become very keen in this year's renewals. In your reinsurance business, how much did the rate fall in January renewals? In addition, I understand that April and July are also among the most important months for policy renewals. Could you give me your forecast for them, too?

We see that the reinsurance market relating to natural catastrophes is still experiencing excess capacity. In the January renewals, the rate decline continued for North America as well as for the other regions. Although we are still gathering information on renewal status at each subsidiary, there seems to be a certain impact on our business results, since we maintain strict underwriting discipline instead of forcing to chase top-line growth under these circumstances. Meanwhile, since our high credit rating could work as an advantage in some cases, we are going to aggressively seize growth opportunities which could lead to further growth while maintaining strict underwriting discipline.

Q6(2)Do you mean that you might refrain from policy renewals as other reinsurers did, if the April and July renewal rates fall to a certain extent like it did in January?

The conditions can be different in each case, but at present, we don't foresee any material changes.

Q7This January marked one year after the release of "Medical Kit R" by TMNL. How is its sales trend at present?

TMNL saw continued strong sales in each line of business; the first- and third- sector, and individual annuity. The strong sales of "Medical Kit R" is maintained and the number of its policies exceeded 200 thousand as of the end of December, 2013. Nearly half of the third-sector sales is by "Medical Kit R".

Q8As for the payment of the extra expense coverage attached to auto insurance, how big is its impact on your financial results, including advertising costs, etc?

Regarding the extra expense coverage insurance, at present we are making all possible efforts across the company to properly respond to our customers based on our policy of doing everything that is possible. We are not yet ready to answer your question about the extent of its impact on FY2013 financial results.

Q9Concerning international insurance business, you revised its FY2013 adjusted earnings projections upward by 18 billion yen. Could you break it down by each company; PHLY, Delphi, and Kiln?

As I said earlier in the answer to question number two, the revision of our full-year projections was not made by accumulating individual factors. Therefore, please understand that we cannot disclose individual figures.

Q10Please share with us the impact of the "extra expense coverage insurance" issue on your future growth measures and return to shareholders.

Regarding the extra expense coverage insurance, we are making every possible effort to properly respond to our customers. At present, we are not yet ready to answer your question about its impact on our future measures and return to shareholders.

Q11Regarding the payment of the extra expense coverage, how do you measure its impact on your financial results?

At present, we are making our best efforts to properly respond to our customers. We are not yet ready to answer your question about its impact on our financial results.

Q12Regarding the revised full-year projections, please tell us the FX sensitivity of international insurance business and TMNF.

Fiscal period of international insurance business is from January to December, and since we used the FX rate as at the end of December for the revised projection, the exchange fluctuations in and after January 2014 does not have an impact on international insurance business FY2013 results. On the other hand, such fluctuations will have a certain impact on TMNF through reserves for foreign currency-denominated outstanding claims and gains/losses on derivatives. With the depreciation by 1 yen, TMNF's adjusted earnings decreases by 1.7 billion yen in total.

Q13Regarding the outstanding claims reserves, I believe there was a major change in the trend of claims reported as a result of the revision of the grade rating system. To what extent do you plan to factor this change into your projections for outstanding claims reserves going forward?

In the revised full-year projections, the actual results through December 2013 were reflected. As for the projections for January through March 2014, we have not changed our projections announced in November.

Q13(2)Do you mean that you have not factored in what is expected in FY2014 and onward?

No. We have not factored those in the revised projections.

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.