Described below is the summary of Q&A session with institutional investors and securities analysts at the FY2020 2Q results conference call held on November 19, 2020.
- Q1Is any deterioration possible to the estimated -65.0-billion-yen impact of COVID-19 on international insurance underwriting stated on page 5?
This figure is based on the current situation and no deterioration is expected while the current outlook remains unchanged. As communicable diseases are excluded from the coverage of the newly underwritten event cancellation (EC) and business interruption (BI) insurance policies, which account for the most of the impact, COVID-19’s impact on the next fiscal year will be limited.
- Q2Is it correct to understand that the managements consider that Tokio Marine’s ESR is in the upper target range as of the end of September 2020 based on the ESR after deducting restricted capital (hereinafter, “ESR after deduction”)?
We develop our capital policy based on the ESR before deduction. We therefore do not establish a target range for the ESR after deduction. Our managements consider that the current ESR is at a level where we can adequately make business investments and provide shareholder return. We are currently considering how to use ESR in the next Mid-Term Business Plan. We may use an ESR after deduction; in this case, we will closely examine the internal and external environments and the definition of ESR before looking into a target range.
- Q3What was the ESR after deduction as of March 31, 2020 and its sensitivity to credit spread?
The ESR after deduction was 119% as of March 31, 2020. There is no information on sensitivity at hand, but please refer to the information on sensitivity we have recently provided.
- Q4Why did the ESR after deduction fall from March 31, 2020 to September 30, 2020?
The ESR before deduction rose by 10 points, which included increases in restricted capital such as an increase in the value of in-force life insurance policies following interest rate rises. The ESR after deduction fell because these factors, including provisions for catastrophe loss reserves, were excluded from it.
- Q5Will the next Mid-Term Business Plan place an emphasis on the ESR after deduction?
As restricted capital is also capital, it can be used to support the soundness of our business. However, there are restrictions on its movement. Considering these points, we are currently discussing an easy-to-understand way to show for the next Mid-Term Business Plan but have not yet come to any decision.
- Q6When comparing the August projection and revised projections of COVID-19’s impact on international insurance business, there is no difference in adjusted net income, but business unit profits are projected to improve by 6.0 billion yen. What is the reason for this difference?
This is due to the different calculation method of profits adopted in life insurance in Asia. Adjusted net income is based on financial accounting, while business unit profits are based on EV.
- Q7In international insurance underwriting, COVID-19’s impact on adjusted net income is expected to increase by 8.0 billion yen from the August projection. Of this amount, how much is incurred but not reported (IBNR)?
The 8.0-billion-yen deterioration in the impact of COVID-19 on adjusted net income is mainly attributable to an increase in net incurred losses in trade credit insurance. There is no other material change from the August projection.
- Q8Which has a greater impact on ESR, credit spread volatility or its absolute level?
In addition, there is a statement on page 31 saying, “Allow risk-taking within the risk limits.” How much credit spread fluctuation is acceptable?
Volatility affects price fluctuations of credit risk assets, while the absolute level impacts the default rate. We therefore look at both factors.
We establish a risk-taking standard for each of main risks based on risk appetite when preparing business plans. The reference material refers to this and “risk limits” do not mean the acceptable fluctuation range of credit spread.
- Q9Why does TMNF project its business expenses to fall by 13.0 billion yen compared with the August projection? Similarly, why does TMNF expect its net incurred losses relating to natural catastrophes to rise, but underwriting reserves for natural catastrophes to decline?
The projected fall in business expenses reflects factors such as a delay from FY2020 to FY2021 in the timing of a large-scale system development project going live. The smaller natural catastrophe underwriting reserves are due to a fall in premiums corresponding to the natural catastrophe risk based on the more accurate projection using 2Q results.
- Q10You have revised the natural catastrophe budget upward for domestic operations. What is the reaction to this move within your company?
We establish a natural catastrophe budget based on past payments and our risk model. We reviewed the budget because, although no typhoon landed Japan in FY2020, Typhoon Haishen and the July heavy rains in Kyushu caused relatively large damage and we exceeded the budget in 1H. We have projected 13.0 billion yen in snow damage and so on in 2H and made a slightly conservative projection.
- Q11Based on the recent situation, has there been any discussion in your company that the natural catastrophe budget may be too small?
In the last three years, natural catastrophes exceeded the budget prepared at the beginning of the year. From the viewpoint of the stability of plans and so on, our management team is discussing the natural catastrophe budget for the next Mid-Term Business Plan.
- Q12Does the scope of discussions include a review of reinsurance?
Yes, it does.
- Q13Why did an increase in net premiums earned in fire and specialty insurance in Domestic Non-Life have a significant impact on the upward revision of the bottom-line projection among other factors?
It is mainly fire insurance. Although the August projection factored in the premium hike in January next year, we made an upward revision based on interim results. Net premiums earned in fire insurance could fluctuate significantly depending on the insurance period, timing of posting, weight between households and companies, and other factors. Another reason for the upward revision was that our August projection was conservative.
- Q14Page 21 shows that “Upward revision of recovery from private equities” is one of the factors that contributed to an increase in net investment income and other. Does this reflect sales of businesses?
It is not from sales of businesses; it is due to dividends. The August projection conservatively estimated the impact of COVID-19. We reviewed it based on 2Q results.
- Q15What does “impairment losses on affiliate equities” in extraordinary gains/losses on page 21 refer to?
It is mainly an impairment loss on the equities of an overseas non-consolidated subsidiary and was already posted in 2Q.
- Q16If an analyst is to use sensitivity to credit spread to calculate the credit spread’s impact on ESR, what kind of benchmark should we use? Can you show us how to use it?
The graph on the right-hand bottom on page 31 uses the weighted average spread of investment-grade US corporate bonds. I want you to use it as a reference. However, please note that this is a simplified indicator and cannot fully replicate ESR’s movements and that the figures for the net asset value of overseas subsidiaries are as of three months earlier.
- Q17Do you adopt index investing or active investing approach in your credit investment?
We do not use a specific index as a benchmark. We do not adopt active investing either. We invest in assets that offer sufficient spreads from the viewpoint of return on risk (RoR).
- Q18What was the reason behind splitting the 50.0-billion-yen capital level adjustment into share buyback and one-time dividend? Did you not think of paying one-time dividend at term-end instead of mid-term?
The combination of share buyback and one-time dividend is based on the needs of investors. Roughly half investors prefer share buyback and the rest do one-time dividend. We have so far split our capital level adjustment 50-50 between the two when the level of adjustment reached a certain size. However, we are not rigidly following this approach. When carrying out capital level adjustments including one-time dividend, the ESR becomes an important factor. Since the ESR is based on September 30, 2020, we use the same date as the base date for one-time dividend.
- Q19Can you show us some figures that give us a sense of volume, such as your projection and revised projection of the premium rate increase and the actual rate increase in the key business lines of three North American companies?
As shown on page 15, by 2Q, Philadelphia raised premiums by approx. 10% and TMHCC raised premiums by 23.5% on an effective rate change basis in MSL. They are achieving rate increases by steadily capturing a hard market environment.
- Q20Although the market environment is currently improving, TMNF’s full-year projections seem conservative with a downward revision to capital gains. What is the reason for the downward revision?
We factored in the losses on sales of Japanese yen bonds and the losses on equities and interest rate hedges, which we incurred in1H.
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.