FY2020 1Q Results Conference Call Summary of Q&A

Described below is the summary of Q&A session with institutional investors and securities analysts at the FY2020 1Q results conference call held on August 7, 2020.

Q1Can you provide a business line breakdown of COVID-19’s impact on international insurance underwriting, which you estimated at -40 billion yen (excluding the -17 billion yen you have newly included)?

We have not disclosed a breakdown of this figure. Roughly speaking, about half of the -40 billion yen is attributable to event cancellations (EC), while business interruption (BI) insurance policies that explicitly cover communicable diseases account for approximately half of the remaining 20 billion yen. The rest consists of a total of other business lines including life insurance, but each line represents only a limited amount.

Q2The recent projection includes the expected impact of COVID-19 on Non-Damage BI (NDBI) policies. Is it for the insurance policies underwritten in the United Kingdom (UK)?

This amount includes the policies underwritten in the UK as well as those in the US underwritten by Lloyd’s.

Q3There is an emerging tendency among European and American peers to estimate the impact of COVID-19 on the incurred but not reported (IBNR) basis with respect to the 2Q financial results. Are you adopting the same approach?

We are not going to reflect the full-year impact of COVID-19, which is -57 billion yen, in the 2Q financial results, but plan to post most of it in our interim financial results.

Q4Has the likelihood of share buyback resumption in 2H changed in the last three months?

We will consider share buybacks in line with the policy we have adopted so far. More specifically, if the economic solvency ratio (ESR) is in the target range, we will prioritize further business investments and additional risk-taking activities. In the absence of these opportunities, we will flexibly consider providing shareholder returns. While we have not calculated the current ESR, we understand that it has risen from the end of March as share prices and interest rates have gone up and credit spreads have tightened. Having said that, the level of the ESR is one of the elements we base our decisions on, and it will fluctuate depending on factors such as changes in the future economic conditions. We therefore cannot unequivocally say that the likelihood of share buybacks is increasing at this stage.

Q5Although the insurance authorities’ position has an important bearing on the capital policy of European peers, your previous answer did not mention regulations. Is it correct to say that you will make decisions on share buybacks based on the issues unique to your company’s business and the economic environment?

Our decision will be based on a comprehensive examination of the level of capital, market environment, and business investment opportunities. Our interim financial results reflect the performance of the international insurance business up to the end of June; our decision will accordingly be based on the results up till that time. However, there have been various developments in Europe and the US since July such as their political situations and lawsuits. Although they do not influence our interim financial results, we will determine our capital policy considering these developments as well.

Q6What was updated in the latest full-year projection compared with the pre-COVID-19-based projection you had previously made? Can you tell us your latest ordinary income forecast?

The latest full-year projection added the impact of COVID-19 to the previous projection. That is the only change we have made. TMNF’s ordinary income was forecast at 245 billion yen in May on the pre-COVID-19 basis and at 214 billion yen in the latest projection.

Q7TMNF’s net incurred losses in 1Q improved by 34.7 billion yen year on year. If you factored this in for the full-year projection, wouldn’t it raise your projected ordinary income above the pre-COVID-19-based projection?

Net incurred losses are reflected on profits in a timely manner, while the impact of the reduced net premiums written (NPW) and the smaller takedown of catastrophe loss reserves will not materialize at least in 1Q. This means that the impact that the improved net incurred losses may have will diminish as the financial year progresses. On a consolidated basis, the ordinary income projection we made in May was 410 billion yen, but the latest forecast is 265 billion yen as it factors in the impact of COVID-19 (-145 billion yen).

Q8How much do you expect net incurred losses in auto insurance to decrease on a full-year basis due to COVID-19?

The number of traffic accidents reported to us fell by 20% to 30% in April and May due to the smaller traffic volume. This led to a decrease by 24.6 billion yen year on year in net incurred losses in auto insurance in 1Q. However, June and July saw the number of traffic accidents reported recover to nearly the same level as the same month last year. We therefore do not expect the temporary drop in net incurred losses recognized in 1Q to significantly increase from now on. On the other hand, net incurred losses may decline further depending on the second and third waves of COVID-19 infections.

Q9In 1Q, the impact of COVID-19 on domestic non-life insurance underwriting was +14.5 billion yen. How did you factor in the underwriting result for the first year?

We calculate the underwriting result for the first year generally using a simplified method based on the average underwriting balance ratio (1 – [loss ratio + expense ratio]) of three years. For the latest projection, we added a certain amount based on the recent situation, given a significant decline in net incurred losses in auto insurance.

Q10What is the investment situation of the international insurance business if you divide the impact of COVID-19, which is -32.4 billion yen (January to June), into the January-March quarter and April-June quarter? What is the reason for an approximately 10-billion-yen increase in its negative impact from July?

The impact of COVID-19 from January to March was -33.6 billion yen, mainly consisting of equity valuation losses of around 27 billion yen and credit asset impairment losses of 6 billion yen. This means that the impact in the April-June quarter is positive at 1.2 billion yen. This reflects the posting of valuation gains, which more than offset losses on sales and additional credit asset impairment losses. The minus 10-billion-yen impact of COVID-19 from July onward is based on the estimated credit asset impairment losses, among other factors.

Q11Can you also break down the impact of COVID-19 on international insurance underwriting (-43.3 billion yen) in 1H into the January-March quarter and April-June quarter?

The impact is -5 billion yen in the January-March quarter and -38.3 billion yen in the April-June quarter.

Q12If the Financial Conduct Authority (a financial regulatory body in the UK; hereinafter, the “FCA”) presents its policy on lawsuits concerning BI insurance coverages, will you revise your newly added estimated impact of COVID-19 which is -17 billion yen?

We do not expect the FCA to present its policy at least until the end of September. We have included -17 billion yen as our current best estimate of the impact of COVID-19.

Q13Can you provide a breakdown of the 5-billion-yen rise in domestic non-life insurance underwriting (on the business unit profit basis)?

It consists of +15 billion yen, which is net premiums earned less net incurred losses, commissions, and taxes, plus -10 billion yen, which is an increase in the underwriting result for the first year.

Q14Did you factor in the impact of the FCA’s court action in your projection because you expected it to be resolved before the end of the year? What is the scale of losses on NDBI you have newly included in the latest projection in comparison with the maximum amount of losses?

We made the best estimate based on the information available at this stage and with the involvement of local actuaries. We do not have any specific idea about the timeline for the resolution of the dispute. We would like to refrain from making any comment on exposures.

Q15Does the impact of COVID-19 on EC include potential future cancellations of the events currently scheduled to take place?

We have included them to a certain degree.

Q16If the loss ratio of auto insurance remains at the current strong level, you will need to provide a larger amount of catastrophe loss reserves at term end compared to normal times. Does your full-year projection factor in this possibility?

We expect the loss ratio of auto insurance to return to the normal level from July. This means it will be only slightly better than normal on a full-year basis. We therefore expect a decrease in takedown of catastrophe loss reserves only for this slight improvement.

Q17What is your forecast for the final loss ratio?

We would like to refrain from answering the loss ratio of auto insurance on a stand-alone basis, but the overall loss ratio is expected to rise 2.2 points from the end of FY2019, excluding the impact of COVID-19. The reduction of the impact of COVID-19 from this ratio will be the final loss ratio.
We forecast full-year combined ratio for all private insurance lines to be at a strong level of 92.6%. This mainly reflects the expected improvement to the loss ratio of auto insurance.

Q18Can you tell us about the top-line revenue and the hardening of the international insurance business from April?

Due to COVID-19, premiums decrease in auto insurance in emerging countries, travel insurance, and the lines where the calculation basis of premiums is affected by economic conditions. Meanwhile, there are some lines where premiums are expected to experience a double-digit growth due to the hardening of the market. We want to smoothly capture this trend.

Q19What is your intention behind describing the impact of COVID-19 on NDBI as “conservative”?

There is nothing certain about NDBI including whether we are liable to make payments. While some companies have elected not to post their potential payment obligations on the IBNR basis until the court action ends, we have decided to post them using the best estimate. This is the reason why we have described our approach as “conservative.”

Q20Why did you change the format for the projection section in the latest announcement of financial results and projections?

This is because we disclosed our pre-COVID-19 financial projection in May in the same format as in the previous years, but our latest full-year projection updated the May projection to reflect only the impact of COVID-19.

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.