FY2014 Results Conference Call Summary of Q&A

Described below is the summary of Q&A session with institutional investors and securities analysts at the FY2014 results conference call held on May 20, 2015.

Q1In FY2015 projections, how much do you project for the net provision for catastrophe losses reserves at TMNF?

We project the net provision of 73.7 billion yen, an increase of 8.8 billion yen YoY.

Q1(2)As for FY2015 projections at TMNF, excluding the impact of natural catastrophe losses and foreign exchange rate changes which affect foreign currency denominated outstanding claims reserves, etc., an YoY increase in underwriting profit is approximately 8.5 billion yen. Considering positive effect of rate revisions in auto and profit increase accompanied by revenue growth, the amount of profit increase seems to be small. Do you have any reasons for this?

This is because we project an increase in loss ratio in auto and an increase in business expenses. As for auto insurance, we project E/I basis loss ratio of 62.2%, 1.1 points higher compare to FY2014 results, mainly due to projecting an increase in unit claims cost. As for business expenses, although we project the expenses for IT development as well as research and product development anticipating future risks, there is no change for our policy to improve efficiency of business expenses. We are focusing on investment which is necessary for realizing future growth and enhancing our business platform

Q1(3)How much do you project the business expenses to increase?

We project an increase of approximately 30.0 billion yen as a whole, of which approximately 19.0 billion yen is projected for business expenses other than agency commissions.

Q2In FY2014 results, adjusted earnings of reinsurance business in international insurance business decreased YoY. What is the reason for this?

This is mainly due to the foreign exchange losses of approximately 1.4 billion yen at Tokio Millennium Re headquartered in Switzerland associated with the appreciation of the US dollar to the euro as well as an increase in reserves for claims of approximately 4.0 billion yen for the natural catastrophes occurred in previous years.

Q3In Adjusted Net Income, your new KPI, gains/losses on sales of business-related equities are included. Please explain the background that you have decided to change your KPI. In addition, how much do you project for the sales of business-related equities and its gains in FY2015?

We have been continuously selling business-related equities from the past, and considering that the gains on the sales of these securities are forecasted stably going forward, we decided to include the gains/losses on sales of business-related equities in the new KPI. Besides, we think that the change is more appropriate in terms of making the KPI more close to the financial accounting basis. For your information, we project to sell business-related equities worth approximately 100.0 billion yen and gains of approximately 80.0 billion yen for FY2015.

Q4Concerning shareholder returns, are there any changes in your policy that the source of dividends is “average adjusted earnings excluding EV” ? In addition, please share with us the figure of “the average adjusted earnings excluding EV” in FY2014 results.

Dividends per share in FY2014 is 95 yen, with total amount of 72.2 billion yen. Average adjusted earnings excluding EV, in FY2014 is 155.0 billion yen and payout ratio is approximately 47%. For FY2015, dividends per share is projected to be 105 yen. We will explain the details of our policy on shareholder return at the IR conference scheduled on May 29. Although there are some changes on how to recognize the sources of the dividends, there are no changes on our policy to steadily increase dividends in line with profit growth.

Q5Revenue in long-term fire insurance seemed to increase in FY2014 due to a last-minute demand owing to the rate revisions of fire and the shortening of the term of insurance period to maximum 10 years in long-term fire insurance both scheduled in Oct. 2015. Did this increase have a negative impact to profit? In addition, do you assume similar risks in the FY2015 projections?

As you pointed out, premiums in long-term fire insurance increased in the second half of FY2014, and accordingly an increase in agency commissions, etc. had an effect of reducing profit to some degree. In FY2015 projections, decrease in revenue due to shortening of policy period is taken into consideration, however, we do not expect revenue increase for long-term fire insurance associated with last-minute demand. In addition, we project increase in revenue for fire insurance as a whole due to measures which we have taken from the past including cultivating customers’ coverage needs and rate revisions.

Q6Adjusted ROE for FY2015 is expected to decrease by 1pt YoY due to an increase in capital owing to increased unrealized gain on business-related equities while adjusted net income is projected to be almost flat YoY. Taking these circumstances into consideration, how do you regard share repurchases to respond to the situation?

FY2015 adjusted net income is projected to be almost flat YoY partly due to assuming an average level of natural catastrophe losses. We will explain the details of our policy on capital management and shareholder returns at the IR conference scheduled on May 29th. There are no changes in our policy to achieve “sustainable profit growth”, “enhance ROE” and “maintain financial soundness” in a good balance. We will continue to make efforts to enhance medium-to long-term corporate value through business investment for growth and capital adjustment including share repurchases.

Q7Please explain the background behind the revision of KPI.

The former definition was a little difficult to understand because it includes two different ideas; i) adjusted earnings in non-life business which shows profit generated during the period, and ii) increase in EV during the current fiscal year in life insurance business which includes changes in unrealized economic value. This revision aims to make the profit indices easier to understand by making it “closer to financial accounting basis” from the perspective of higher comparability with “Global Peers”.

Q7(2)Which KPI should investors care more, adjusted net income or business unit profits?

In comparing us with other companies, “adjusted net income” is more preferable, while “business unit profits” is helpful in evaluating each business domain. Especially concerning life insurance business, taking its business nature into consideration, MCEV is an important index to show corporate value based on economic value of the business. For business unit profits of non-life insurance business, “gains on sales of business-related equities” is not included so that the core performance can be measured more accurately.

Q8Media reported that other insurance company will revise premiums rate downwards for auto insurance. Please explain your course of action regarding rate revision.

Although we are planning to implement rate revisions in Oct. 2015, the levels of average premiums rate will be unchanged. E/I basis loss ratio in FY2014 improved by 4.1pt YOY attributable to less natural catastrophe losses than average and lower traffic volume due to hikes in gasoline price and expressway toll. However, we do not see that this situation will continue because traffic volume could rebound due to the plunge in gasoline price since the end of last year. In addition, unit repair cost continues to rise. There are some other factors we factor in which will increase our costs in the medium-term including consumption tax hike scheduled in 2017 and a decrease of statutory interest rate, which is used in calculation of deduction of present value of interest payments, associated with the revision of “Law of obligations”. Accordingly, we consider that we are not in a situation to make an instant decision to revise premium rates downwards. Regarding premium rate levels in the future, we would like to make our best efforts to provide auto insurance in a stable manner while making sure of our medium-term underwriting results.

Q9In this revision of the KPI for the Group profit, gains/losses of business-related equities is newly included, and KPI for domestic life insurance business does not use EV any more. As result, it seems that there will not be much difference from the consolidated net income in the financial accounting. Is my understanding correct?

Reconciliation of consolidated net income and adjusted net income is shown on page 19 in the material titled “Overview of FY2014 Results and FY2015 Projections”. The main difference is that adjusted net income excludes the impact of provision/reversal for reserves of capital nature.

Q9(2)Wouldn’t it become possible for the management to control the amount of dividend source, if gains/losses on sales of business-related equities are included in the source of dividends?

We have been continuously selling business-related equities from the perspective of reducing risks, and the amount of sales depends on negotiations with our customers. This means that the management is not in a position to adjust the amount of sales of those equities in order to control dividends level. Basically, we are planning to continuously sell business-related equities as well as increase dividends source through profit growth in the insurance business, which is our core business.

Q10Please explain details regarding payout ratio for FY2015 which is the basis of dividends projections of ¥105 per share. Since adjusted net income includes “gains/losses on sales of business-related equities” and “adjusted financial accounting basis net income of life insurance business”, level of dividend source will be increased compared to that in the former definition. How should we consider payout ratio in comparison with the former definition?

Regarding details on our shareholder return policy under the New Mid-Term Business Plan including payout ratio, we will explain it at the IR conference scheduled on May 29th. Although FY2015 dividends projections of ¥105 per share is based on the new KPI, it is also within the range of target payout ratio under the former definition. Therefore please consider projections for FY2015 also to be the same or higher level than before.

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.