FY2022 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 FY2022 1Q results conference call held on August 5, 2022.

Q1With respect to COVID-19 in Taiwan, please explain the background for selling the insurance product.

The insurance product in question which makes claim payment “at time of infection and isolation” was being sold by various insurance companies in the Taiwanese market since 2020. TMNewa gathered and reviewed infection data and started agency sales in December 2021 and online sales in January 2022, then suspended sales in February 2022.

Q2Please explain the decision making process for the capital increase for TMNewa.

In response to this market event in Taiwan, we decided that making proportionate capital injection as a shareholder to enable TMNewa to make full claim payment to its customers was aligned with Tokio Marine’s purpose to “protect customers and society in their times of need.” Except for the COVID-19 event, Taiwan’s non-life insurance market is superior among neighboring Asian countries in terms of profitability and growth potential. Therefore, we believe acquiring TMNewa’s management rights to improve its ERM to global standard and capturing the profitability and growth potential offered by the Taiwanese market has strategic significance.

Q3According to pages 3 and 5, International business is expecting approximately +JPY22.0 billion upswing from local plan for 1H mostly from underwriting profits. Please explain the outlook for 2H.

Key overseas entities recorded strong results with robust investment income and underwriting profit which was supported by rates increases and expansion of underwriting. Preliminary 1H results is expected to exceed local plan by approximately +JPY22.0 billion. We will continue to expand profits, including with rate increases above loss cost.

Q4Will you apply hedge accounting to TMNF’s derivatives gains/losses? Also, are derivatives gains/losses adjusted for the calculation of adjusted net income?

Our existing policy is to fully hedge against currency risks, and we are reviewing whether to apply hedge accounting considering classification of investments and the impact of change in market value of hedged assets and hedging methods on net assets. We understand that it may have some impact on profit and loss for results reporting. Derivatives gains/losses are not part of adjustment for adjusted net income.

Q5According to page 7, expected loss for TMNewa is calculated based on the estimated infection rate for the whole of Taiwan. Is there possibility that TMNewa’s policy portfolio may have different infection rate from Taiwan overall? Also, if there is change in the scenario such as higher infection rate and larger losses, will you still acquire the management rights?

The amount of loss to be posted by TMNewa is calculated by adjusting the difference in infection rate between whole of Taiwan and TMNewa’s policy portfolio, and incorporating certain level of buffer based on a stress scenario. Except for the COVID-19 event, Taiwan’s non-life insurance market is superior among neighboring Asian markets in terms of profitability and growth potential. Therefore, we would like to steadily capture such opportunities by acquiring TMNewa’s management rights and improving its ERM to global standard.

Q6Loss ratio for TMNF’s auto seems to be deteriorating except for natural catastrophes. Please explain the trend in accident frequency and unit price, and the full-year outlook.

Net incurred losses for auto excluding nat-cat have increased +JPY11.5 billion YoY, mainly caused by the reversal of decrease in traffic volume from COVID-19 effects in the previous year. Accident frequency is at the same level as FY2019, before COVID-19. Unit price per accident is trending slightly upwards as various auto parts have become more advanced. Full year projections will not be reviewed at this point, but we will keep a close eye on how the increase in domestic COVID-19 infection will affect the traffic volume.

Q7Regarding the geopolitical risk, is the JPY4.0 billion reserves related to the Russia-Ukraine war provided overseas sufficient? Please also explain about the impact of a dispute or occurrence of a war in Taiwan.

The Russia/Ukraine situation continue to be volatile and the JPY4.0 billion reserve may change depending on future developments, but we believe it is adequate at this point. On possible dispute in Taiwan, we will pay close attention to the situation and focus on business continuity. Risk of war will not affect our earnings as insurance policies generally have a clause that excludes war from coverage. Individual policies that cover the risk of war depends on the content of the insurance policy and the situation at the time, so I will not comment on them.

Q8What is the impact of recent market conditions and COVID-19 in Taiwan on ESR?

ESR was 128% at start of FY2022 and 125% after shares buyback. Since then, accumulated profit in 1Q was offset by the market impact such as credit spread widening, and current level of ESR has not changed much from the start of the year. In addition, the impact of COVID-19 in Taiwan on ESR has been limited to date at around -2pt.

Q9What is the trend for overseas rate increases? Please also explain about the effect of inflation on the international business.

Rate increases in major U.S. and European entities have been strong, exceeding the original projections. Hardening of rates have peaked in 2021 and is slowing slightly at this point, but we will continue to improve profitability by maintaining rate increases above loss cost. Loss cost increased shapely in South & Central America due to surge in inflation that exceeded North America, but we have realized significant rate increases above loss cost at this point. In terms of investments, we hold inflation linked bonds and hedge against inflation. The effect of rate increases and inflation hedging should become apparent from 2Q onwards.

Q10The pace of sale of business-related equities seems quick. Will you be making upward revision to originally projected full year sale of JPY100.0 billion?

We have not revised the full year plan for sale of JPY100.0 billion in business-related equities. We are currently discussing the specific policy on accelerating the sale from our plan presented in May, and we should be able to announce the result by this autumn at the earliest, or by May 2023 at the latest.

Q11With regards to COVID-19 in Taiwan, is the risk management system for subsidiaries and sub-subsidiaries functioning properly?

COVID-19 related loss in Taiwan was due to the market event caused by the sudden change in policy in April 2022, which resulted in losses for various non-life insurance companies in Taiwan. TMHD requested TMNewa to immediately suspend sales in January 2022 while the infection rate was still low at 0.1%. As a result, the number of policies sold was limited to 940,000 and we believe our risk management is functioning.

Q11(2)Were you unable to recognize the issue without consultation by TMNewa on reinsurance?

We communicate with our subsidiaries at regular meetings and were able to capture and respond to this issue through these meetings.

Q12Will the capital injection to TMNewa affect the M&A budget?

M&A is the means, not the goal for us, so we don’t have a budget. However, the capital injection will not have quantitative effect on our M&A strategy.

Q13Spread of COVID-19 infection in Taiwan made headlines in local media by mid-May. How much timely information were you sharing?

We requested TMNewa to immediately suspend the sale of product in January 2022 when the infection rate was still low at 0.1%, and believe that we took a proactive approach leveraging on the Group knowledge.

Q14Please explain about TMNL’s COVID-19 related payments for 1Q and projections for the full year. The amount seems small compared to the number of in-force policies. Are TMNL’s in-force policies and portfolio different from the peers?

Payment of COVID-19 related hospitalization benefit, etc., for 1Q was about -JPY4.0 billion before tax. In addition, there will be reversal of reserves from payment of hospitalization benefits, etc., from products such as Medical Kit R, resulting in net impact on earnings of about -JPY1.7 billion after tax. We believe there is no significant difference in in-force policies compared to peers.

Q15Please explain about the capital injection scheme for TMNewa.

The capital injection stated in today’s press release falls under capital injection/reduction to supplement COVID-19 related loss for TMNewa. We are considering additional capital injection for future business continuity including the timing and amount under close cooperation with the local authorities, etc.

Q16How is the management discussing the increased risk of dispute in Taiwan?

We are in discussion including with external experts, paying close attention to the situation.

Q17Loss ratio for fire excluding natural catastrophes seem to be rising slightly. What is the outlook for 2Q onwards?

Loss ratio for fire excluding the impact of natural catastrophes and FX is 54.8%. Further excluding the impact of South African floods, loss ratio is around 41%, and similar level is expected for 2Q onwards.

Q18With respect to shareholder returns, will you maintain the full year DPS and share buyback even if the full year adjusted net income falls below JPY550.0 billion?

That is correct. We are not reviewing the full year projections at this point, so there is no change in projected full year dividend of JPY300 (JPY 150 interim dividend and JPY150* year-end dividend) and full-year shares buyback of JPY100.0 billion.
(*) JPY150 year-end dividend is projected dividend amount calculated by conversion to number of shares before the stock split. Year-end DPS based on number of shares after the stock split will be JPY50.

Q19Tokio Marine’s headquarters building is a building of historical value designed by architect Kunio Maekawa. What is the reason for the demolition?

We understand that our headquarters building has significant architectural value. However, there is a limit to achieving fundamental disaster resilience for the building with maintenance and repairs, and replacement with a new building is more cost effective. The new building is also eco-friendly as it will be a wooden structure.

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.