FY2021 3Q Results Conference Call Summary of Q&A

Described below is the summary of Q&A session with institutional investors and securities analysts at the FY2021 3Q results conference call held on February 14, 2022.

Q1Currently, the whole industry seems to be affected by inflation. Your company took down past reserve in 3Q and 4Q. What is your view on the effect of inflation, particularly for the US entities?

We believe there is progression of economic inflation in the US, and labor cost and loss cost are increasing among others. However, we currently believe the impact on our performance is small and continue to achieve rate increase exceeding loss cost. With respect to the reserves, future rise in loss cost is incorporated for long-tail products. We believe the social inflation is slowing to a certain degree partially owing to the stagnant progress in litigations due to COVID-19, but we are cautiously evaluating the reserve to prepare for future social inflation.

Q2Current widening of the US credit spread has negative impact on ESR. Assessment of the impact must take into consideration the different accounting periods for overseas, but what is your understanding of the degree of widening compared to end of September 2021?

The spread was in the mid-80bps range at the end of September 2021, but we believe the current level is above 100bps, or a widening of about 20bps.

Q3For domestic fire insurance, your explanation for the 2Q was that progress exceeded original projections. How is it performing lately? Also, please let us know of any updates regarding future rate revisions.

We believe the fire insurance profitability is still making strong progress. There are no updates regarding future rate revision at this time.

Q4International business unit profit was revised upward by 45 billion yen. Please provide the breakdown.

We do not disclose details for each entity, but the factors are as stated on slide page 6. In addition to natural catastrophe and foreign exchange, underwriting profit was revised upward by 5 billion yen, for which premium increase and takedown of past reserve each account for about half. Investment income was revised upwards by 24 billion yen, with increase in capital gains accounting for around 7 billion yen. Of the remaining 17 billion yen, about half came from increase in income gains, and the rest consisted of smaller items.

Q4(2)You had also explained that capital gains exceeded original projections in November. Does it mean that the capital gains increased further? In addition, am I correct to understand that this factor will be absent from the original projections for FY2022?

We expected 12 billion yen increase in the November projections. We added further increase of 7 billion yen for a total of 19 billion yen increase in capital gains. This figure includes items dependent on the market trend such as FVTPL and is deemed to be a transient effect. Our original projections usually assume the market to remain flat, and it should be same for FY2022.

Q5J-GAAP profit for TMNF has been revised upward by 25 billion yen including capital gains from the sale of business-related equities. Please provide the breakdown. Also, fire insurance seems to be performing well. Should this be considered temporary due to the decrease in large losses?

The breakdown of 25 billion yen upward revision for TMNF comprises of 11 billion yen from the decrease in natural catastrophes, 9 billion yen increase in net premiums earned, and 5 billion yen increase in capital gains from the sale of business-related equities. Large losses for fire insurance decreased year-on-year, but we sustained average losses for the full year projections, so it is not a factor for the upward revision. We believe average large losses should be assumed for the FY2022 projections.

Q6Please tell us the impact of rising US interest rates on your company.

We make investments based on appropriate ALM, and do not expect significant impact if the interest rate hike remains at the current pace. However, income gains from floating interest rate assets and reinvestment may increase. On the other hand, sharp rate increase or stagflation may affect us due to change in credit spread, etc. We would like to pay close attention to the situation.

Q7Underlying adjusted net income was explained to be around 470–475 billion yen in November 2021. I understand that you have made upward revision of about 30 billion yen and the figure is expected to exceed 500 billion yen. Please let us know the background that led to the 30 billion yen upward revision in three months’ time. Also, can we expect adjusted net income over 500 billion yen to be announced in the FY2022 original projections?

Upward revision of the underlying adjusted net income should be seen as the release of factors incorporated somewhat conservatively in November 2021 after passage of three months. FY2022 original projections have not been determined yet, but we would like to present a level exceeding the figures for FY2021.

Q8I believe the ESR interest rate sensitivity disclosed in November 2021 was based on parallel shift. How should we consider the impact of current flattening of yield curves, etc.?

The effect of yield curve flattening is deemed to be small considering that the figure presented is the ESR after deduction of restricted capital.

Q9Domestic natural catastrophe budget (before tax) has been reduced significantly from the 72.5 billion yen in the original projections to 43 billion yen. What is the level of budget we should expect for FY2022 onwards?

The impact of natural catastrophe varies substantially each fiscal year. For FY2021, we believe there has been less natural catastrophe compared to average. The budget for FY2022 onwards is currently being prepared, and we believe the figure should be similar in size as the level in FY2021 original projections.

Q10Please let us know the status of reviews and direction for the capital level adjustment scheme.

Our capital level adjustment is implemented in a flexible manner, comprehensively taking into account the ESR level, M&A pipeline, business environment, ROE target, and other factors. The method is currently under review to ensure it is easy to understand for the market.

Q11Dividend payout ratio for FY2021 was increased from 43% to 47% in November 2021. With the current upward revision of the adjusted net income, I think the payout ratio may decrease to around 45% if the full year DPS is unchanged at 245 yen. As you are aiming to increase the dividend payout ratio to 50% in FY2023, are you considering upward revision of DPS at the moment?

We raised the dividend payout ratio during the fiscal year in FY2021, but in principle, our policy is to set the dividend payout ratio based on the profits in the original projections. Final decision on FY2021 dividends will be made based on actual profit at the end of the fiscal year and other factors.

Q12There is a gap in the amount of five-year average and single fiscal-year adjusted net income. Will you continue to use five-year average adjusted net income as the source of dividends?

Level of profit for an insurance company may vary depending on natural catastrophes and other factors. From the perspective of stable dividend payout, we will continue to use the five-year average adjusted net income.

Q13With respect to the status of reviews and direction for the new capital level adjustment scheme, am I correct to understand there is nothing more than what you explained earlier, and a review is underway taking current market opinions into consideration?

That is correct. A review is underway towards announcement in May, and we are communicating with various investors.

Q14With respect to Greensill, there were media reports that Credit Suisse is to file a claim for insurance payment from Tokio Marine. Should we continue to assume the impact on your performance is limited?

We cannot provide the details of individual contracts, but we have been investigating this matter for more than two years and determined that the impact on earnings is limited. We stated so in the press releases announced in March and June 2021, and our understanding remains the same. In case there is any change in the situation, we will make a prompt announcement.

Q15For the FY2021 results, are there possible factors for decrease in profits towards 4Q?

We are not expecting any.

Q16There have been repeated upward revisions to the original projections made during FY2021. Will you continue to make conservative original projections for FY2022 onwards?

We happened to make two upward revisions in FY2021, but we are not intentionally making conservative projections. For FY2022 onwards, we would like to further enhance the accuracy of projections.

Q17Regarding the new scheme of capital level adjustment, please let us know the size of small- and medium-sized business investments deducted from the100 billion yen for FY2021.

There are no domestic or overseas business investments subject to the capital level adjustment. TMNF is making many digitalization investments that contribute to increasing corporate value, but these are not included due to the small size of investments.

Q18Regarding the overseas rate increase trends, PHLY and TMHCC are currently making good progress. What is your thought on sustainability of rate increases?

Although the level of increase differs by line, we expect the favorable rate environment to continue for a while considering the US inflation. We will continue increasing the rate with attention to market conditions and loss cost trends, but the size of rate increase is expected to decrease slightly.

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.