FY2019 Results Conference Call Summary of Q&A

Described below is the summary of Q&A session with institutional investors and securities analysts at the FY2019 results conference call held on May 20, 2020.

Q1I understand that COVID-19 will have an impact of reducing FY2020 adjusted net income by 30 to 40 billion yen mainly in overseas event cancellation (EC) insurance, based on the assumption that lockdowns will continue until the end of June. What is its impact on other business lines?
A1

Most of COVID-19’s impact will be on EC. In comparison, the impact on other business items will be relatively small.

Q2How will the impact of COVID-19 change if lockdowns are extended to the end of September?
A2

Even if lockdowns are extended, it is relatively easy to estimate their impact on EC. Furthermore, all of the new EC policies we have underwritten since the COVID-19 crisis began materializing have a communicable disease exclusion. Meanwhile, with respect to other business lines, many uncertainties exist regarding factors other than the lockdown period. This makes it difficult to have an accurate estimate. However, even if lockdowns are extended to the end of September, we do not project such a big change as the extension will double the estimated impact of COVID-19.

Q3Economic solvency ratio (ESR) based on net assets of overseas subsidiaries as of March 31, 2020 is smaller than 153% (and is below the target range). Is this the key factor to shelve share buybacks this time?
A3

The impact of COVID-19 is extremely unclear; we do not know when it will end and what impact it will have on businesses. We could even say that our opportunities to make growth investments may expand in the post-COVID-19 world. Based on these different factors, we have judged that we are currently in a phase where we should accumulate capital and have decided to hold off adjusting our capital level.

Q4In the U.S., the impact of COVID-19 could reduce topline revenues due to the stagnant economic activities, but at the same time it could cause rate increases. What is your FY2020 top line projection?
A4

At present, top line could fluctuate significantly upward or downward. Our revenue will decrease in business lines that are proportional to economic activities, while there is a trend of rate increases at the moment. We have been unable to make a specific estimate comprehensively factoring in all of these factors.

Q5Delphi Financial Group, Inc. (DFG) is projected to post a drop in business unit profit in FY2020 excluding the impact of COVID-19. Their investment results for the January-March quarter 2020 have been finalized. How are these results reflected in the projection excluding the impact of COVID-19?
A5

We are not factoring in the impact of lower interest rates in the January-March 2020 quarter. Our projection assumes that interest rates will move sideways from the end of 2019 throughout FY2020.

Q6FY2019 adjusted underwriting profit of Tokio Marine & Nichido Fire Insurance Co., Ltd. (TMNF), which excludes the impact of natural catastrophes, catastrophe loss reserves, and foreign exchange rates, is 133 billion yen. It has previously been a little less than 200 billion yen. Why did it decline?
A6

Main reasons are an increase in large and medium size losses, increase in net provision for natural catastrophe underwriting reserves (approx. 21 billion yen), and an increase in provisions for underwriting result for the first year (approx. 19 billion yen).

Q7I am estimating TMNF’s FY2020 adjusted underwriting profit, excluding the impact of COVID-19, to be around 110 to 120 billion yen. Can you explain the details?
A7

We project that a net provision in catastrophe loss reserves will be approximately 18 billion yen. Excluding natural catastrophes and catastrophe loss reserves, underwriting profit will be approximately 160 billion yen.

Q8Will you make an additional provision to natural catastrophe underwriting reserves in FY2020 as well?
A8

We expect to do so, although its size will be smaller than the provisions made in FY2019.

Q9You plan to increase dividends in FY2020. Will this trend continue after FY2021?
A9

Excluding the impact of COVID-19, our earnings potential is steadily improving. This is why we have projected to increase dividends in FY2020. While it is difficult to promise larger dividends in FY2021 at this stage, we will continue raising our abilities to generate profits, and there is no change to our overall policy of increasing the total amount of dividends in line with profit growth.

Q10How much increase in reinsurance costs is projected in FY2020?
A10

It was reported that reinsurance costs rose by 40 to 50%. We expect a similar level of increase.

Q11You made a special provision to catastrophe loss reserves in FY2019. Can you explain the approach to the use of catastrophe loss reserves and reinsurance?
A11

In terms of risk management, natural catastrophes in FY2019 were within our expectation. We therefore do not plan a major change of our underwriting and retention policies for wind and flood disaster risks. Given the occurrence of large-scale natural catastrophes in two consecutive years, however, we will monitor the trend in natural catastrophes and reinsurance market movements more closely than before and find the right balance of provisioning for catastrophe loss reserves.

Q12Can you quantitatively explain the factors which led to the reduction of 400 billion yen in net asset value as best as you can?
A12

The major factor is the acquisition of Pure Group. I would like to refrain from providing specific figures including other factors.

Q13The impact of the acquisition of Pure should be offset by the issuance of subordinated bonds to a certain degree. I think business-related equities have a greater impact. Am I correct?
A13

The impact of business-related equities accounts for a relatively large share.

Q14Adjusted net income excluding the impact of COVID-19 is 410 billion yen. Why is this below the maximum target of 450 billion yen set in the Mid-Term Business Plan?
A14

Main reasons include an increase in large-scale natural catastrophes, increase in reinsurance premiums, and the sale of Tokio Millennium Re (TMR).

Q15On page 4, profitability of Lloyd’s is projected to improve in FY2020 when excluding the impact of COVID-19. Can it improve even when factoring in the impact of COVID-19?
A15

John Neal, CEO of Lloyd’s, has disclosed the estimated insurance payouts Lloyd’s will make. Because Tokio Marine Kiln (TMK) will be impacted by COVID-19 to a certain degree, the improvement to be made on earnings will inevitably be smaller when factoring in the impact of COVID-19.

Q16Under the U.S. GAAP, if impairment losses are posted for DFG’s assets, will their book value remain lower, as in the case of “available-for-sale securities” under the Japanese GAAP?
A16

Your understanding is basically correct.

Q17Will COVID-19 have any impact on the business environment of the Pure Group?
A17

In a U.S. state, insurance companies are required to partially refund auto insurance premiums as people are driving less than usual. This will affect Pure because it offers auto insurance. As mentioned earlier, however, specialty insurance offered by companies other than Pure bears the brunt of the impact of COVID-19.

Q18What impact will the postponement of the Tokyo Olympic and Paralympic Games have?
A18

We expect both positive and negative impacts in various aspects, including the future sponsorship format, additional costs related to it, and a possible economic stimulus impact on the Japanese economy. The situation is extremely unclear including these factors. There is nothing we can say at this stage.

Q19Can you break down the projected FY2020 combined ratio of domestic business into the loss ratio and expense ratio?
A19

The combined ratio excluding the impact of COVID-19 is 93.0%. The E/I loss ratio is projected to improve significantly to 60.2% thanks to a reduction in natural catastrophes, while the expense ratio is projected to rise slightly to 32.8% due to the impact of the consumption tax hike.

Q20What is the impact of COVID-19 on excess workers’ compensation?
A20

As its name suggests, excess workers’ compensation pays for the excess portion. We therefore do not expect any large payout.

Q21Is the DFG’s liability still sticky? (Is liquidity risk acceptable to the liability?)
A21

The durations of the DFG’s liability are long and there is no major scheduled payment. DFG is expected to keep generating stable cash flow.

Q22Is the projected impact of COVID-19, which is minus 30 to 40 billion yen, before or after tax? Can you break down this amount by business line?
A22

This is an after-tax amount. We cannot disclose the amount of impact on each business line; however, as shown in the presentation slides, the biggest line will be EC followed by BI and then Credit / Surety.

Q23In excess workers’ compensation, premiums are linked to salaries. Even with so many people losing jobs in the U.S., will it have no impact on the top line?
A23

You are right in saying that insurance premiums are affected by economic slowdown. Meanwhile, during lockdowns, workers other than those in certain sectors such as healthcare workers are staying home; we therefore expect workers’ accidents to somewhat decline. We consider it too early to estimate how these positive and negative factors will affect our profits. We will continue closely monitoring their trends.

Q24You have earlier said that, “We are currently in a phase where we should accumulate capital.” I want to confirm if we can take your comment literally.
A24

Other companies are also accumulating capital. Furthermore, society in general seems to want financial institutions to be financially sound so that they can continue their businesses and make insurance payouts. I made the comment based on these trends in society.

Q25Why aren’t the figures excluding the impact of COVID-19 presented in the Summary Report?
A25

As we expect COVID-19 to have a certain degree of impact, we judged it inappropriate to present figures in our Summary Report which could mislead people to consider that there is no such impact.

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.