Described below is the summary of Q&A session with institutional investors and securities analysts at the FY2023 1Q results conference call held on August 7, 2023.
- Q1With respect to a series of press releases Tokio Marine has issued, please tell us how the Board of Directors, Management Meeting and others in Tokio Marine Holdings see and respond to the reported matters (i.e., potential price-fixing and BIGMOTOR)? Will these matters affect you when you consider expanding your full-year plan for share buybacks (JPY100bn)?
- A1
We take these matters seriously. With respect to the potential price-fixing, we first became aware of the reported matter in January this year, and that was when we gave instruction to promptly find out the facts, respond to our corporate customers, and develop recurrence prevention measures. A report was provided to our Board of Directors in April based on the result of the investigation conducted with the help of external lawyers. Thereafter, the Board has continued sharing information and discussing Tokio Marine’s response every month. As for the matter of BIGMOTOR, since this matter came to light, information has been shared with our management at appropriate timings based on the self-investigation of TMNF and based on the investigation conducted by BIGMOTOR. We have agreed to consistently take a firm attitude to BIGMOTOR, and our management have been following and supervising the situation. At present, we do not expect these matters to have an immediate impact on our business performance. We also do not expect any impact on our shareholder returns at this stage. We will consider whether we need to review our approach to shareholder returns in the future based on our ESR at the end of September 2023 and other relevant factors.
- Q2With respect to the investment performance of DFG, what is the breakdown of capital losses of JPY11bn (before tax) posted in the 1Q? Do the higher levels of US short-term interest rates have any impact on income gains, capital losses, and hedge cost, in comparison with the original plan you prepared at the beginning of the year?
- A2
The breakdown of capital losses of JPY11bn is as follows: impairment losses of c. USD50mn; losses on sale of c. USD20mn, and an increase in CECL expense of c. USD10mn. The rise in capital losses is mostly offset by an upswing in income gains. Hedge costs (before tax) for three domestic insurers are projected at JPY22bn in the 1Q and JPY90bn for the full year, and they are progressing almost as planned.
- Q3On the Adverse Development Cover (ADC), is the additional provision of JPY11bn (after tax) to the reserve reflected in the projected full year adjusted net income of JPY670bn?
- A3
We were notified of this in June; the additional provision is therefore not reflected in the full-year projections we made at the beginning of the year.
- Q4In relation to the potential price-fixing, what is the current profitability of corporate fire insurance? Has a series of media reports made it difficult to raise premiums?
- A4
We consider it necessary to continue improving the profitability of fire insurance in both the corporate and retail areas. We have currently not received any special demands from our corporate customers in relation to the media reports and we will continue providing them with thorough explanations to gain their understanding.
- Q5The combined ratio (C/R) of auto insurance rose +3.5pt just in the 1Q (excluding the impact of Nat Cats). Have you revised your full-year outlook for FY2023 based on this?
- A5
In the 1Q, the accident frequency was slightly higher than our projections. We, however, expect the C/R to fall by approx. -2pt to -3pt, as we projected at the beginning of the year, because the resurgence in people’s enthusiasm for driving after the voluntary restraint on outings during the COVID-19 pandemic will gradually abate. The average insurance payout is moving almost as we projected.
- Q6Is there any change to your future premium rate revision policy for auto insurance?
- A6
Given the current loss cost situation and the outlook for the future, we consider it necessary to raise premium rates. With respect to the illegal insurance claims made by BIGMOTOR, we will naturally respond carefully as a company by, for instance, notifying the relevant customers of the correction of their insurance grades. Considering the number of vehicles that we sent to BIGMOTOR for repairs in comparison with the total number of auto insurance policies we issue, however, we consider that the impact of this matter on the result of the entire auto insurance business will be insignificant, although we are yet to see the whole truth. We will carefully investigate the actual situation of the illegal insurance claims and will determine a concrete rate premium revision policy in January 2024 considering their impact.
- Q7If you correct grades for the customers caught up in the BIGMOTOR issue, what is the size of cost increase do you expect from it?
- A7
We now only have a provisional number for the number of insurance claims affected by BIGMOTOR. There were approx. 30,000 cases where vehicles were sent to BIGMOTOR under our insurance policies in the past three years. Of these cases, we will correct the grades if such correction is economically reasonable for our customers; for instance, if the insurance premium refund arising from the grade correction exceeds the insurance money to be refunded from our customers. We expect the number of these cases to be small based on our preliminary investigation.
- Q8I understand that compulsory automobile liability insurance (CALI) generates no loss and no profit. Can you explain why the underwriting volume of CALI will become an incentive?
- A8
As you understand, CALI will not generate profit for Tokio Marine. However, CALI has double-layered structure together with voluntary insurance. This means that we may increase touchpoints with our customers through CALI. Please also note that we set top-line targets for all our business lines including CALI.
- Q9On the top-line results of your North American business, is it correct to understand that PHLY is on track, while DFG and TMHCC are outperforming the projections?
- A9
The top-line results of our North American business are overperforming the plan. This is partly due to the hardening insurance market mainly caused by an increase in Nat Cats and social inflation. PHLY is performing better than its plan supported by smooth rate increases, although the rising reinsurance fees are a negative factor. By business line, the life insurance business in DFG, specifically group insurance and disability insurance, and mainly cyber security insurance and MSL (Medical Stop Loss) in TMHCC are doing well.
- Q10Specialty insurance in Japan is performing well. What is the color of each area?
- A10
Of the four focus areas, SMEs did well in the 1Q, accounting for approx. half of the topline increase.
- Q11Please tell me the progress you have made in selling business-related equities.
- A11
Although the value of business-related equities we sold fell from the same period of the previous year, it is in line with the plan. We executed the sale of the equities earlier than planned last year, considering the impact of the Russia-Ukraine war. This year, however, we are executing the sale as originally planned at the beginning of the year.
- Q12I understand that the loss ratio of each agency is one of the evaluation items under the agency commission point system. In operating this system, could you not detect the recently reported illegal insurance claims made by BIGMOTOR?
- A12
As you understand, the loss ratio of agencies is factored in in the calculation of agency commission points. However, BIGMOTOR’s loss ratio is not especially poor, and it was difficult to detect wrongdoing from this kind of macro indicator. We meticulously check each repair quote prepared by repair factories. In the recent matter, however, they overcharged repair fees using extremely cunning methods, such as attaching misleading photos about the details and scope of the repair work. I want you to understand that this made it difficult to discover their wrongdoing through normal assessments. With this in mind, we prioritize the damage recovery of our customers, clarify the entire picture of this matter, and endeavor to conduct appropriate assessments.
- Q13How do you determine insurance premiums for co-insurance and the appropriate level of fire insurance premiums?
- A13
To offer co-insurance, each insurer examines and presents their respective conditions and premium rates, and the insurance conditions and premium are determined after having dialogues with a prospective policyholder. A prospective policyholder eventually approaches insurers with the underwriting conditions and shares, and when the insurers accept them, they offer a co- insurance policy. The level of insurance premium is determined considering factors such as the risk profile of each company, frequency of accidents, the company’s disaster prevention and crisis management measures. This structure will not change in the future.
- Q14Please explain the factors behind the increases in underwriting profit in the key overseas businesses by JPY7bn in the 1Q and by JPY20bn in the 1H?
- A14
Upswings in underwriting profit at DFG and TMSR made a great contribution. For the 1H, an upswing at TMK will also make contribution.
- Q15It seems the underwriting profit of TMHCC is not progressing well.
- A15
TMHCC’s underwriting profit slightly underperformed the plan in the 1Q despite the increased revenue, mainly due to an increase in foreign currency denominated outstanding claims reserves necessitated by the US dollar depreciation toward GBP and increases in revenue in the business lines that have a relatively higher corporate expense ratio. It is catching up with the plan for the 1H term.
- Q16Could the recent BIGMOTOR issue derail digitalization efforts to improve administrative efficiency especially in terms of damage assessment?
- A16
No, it will not. To improve our assessments, we are conducting research on image analysis and the analysis of past data using digital technology. We will continue proactively using digital technology.
- Q17On the level of fire insurance premiums, all the insurers are facing tough profit conditions. Will they in the end converge to a similar level of insurance premiums?
- A17
Fire insurance premiums are determined based not only on past accident data but also on future predictions. This means that insurance premiums are not determined uniformly and the accident status that forms a basis of their determination varies from one company to another because each company’s underwriting portfolio differs depending on their underwriting policy and implementation policy of measures to achieve performance targets.
- Q18At the press release regarding the potential price-fixing from TMNF on August 4, 2023, it refers to “an investigation of all branches.” Does that mean that TMNF will investigate all their insurance policies?
- A18
TMNF received from the Financial Services Agency an order to provide a report on an investigation into potential problems at all their sales divisions and branches.
- Q19If the depreciation trend of the JPY continues as it is, will AL fail to achieve their full-year projections?
- A19
That is correct. From the viewpoint of its impact on this period’s profit / loss, the continuing JPY depreciation will result in losses on some hedges, and as a result AL will likely underperform their full-year projections. However, the JPY depreciation has a neutral impact on the economic value-based valuation.
- Q20Is it possible that there will be no co-insurance scheme in the future due to the recent incident of insurance premium adjustment?
- A20
We understand that co-insurance is a necessary structure for both corporate customers and insurers when it is difficult for one insurer to underwrite an elevated level of risk. There is an option of one company becoming a direct, sole underwriter and using reinsurance. This, however, may hinder policyholders from securing stability in insurance capacity, as the policy will be susceptible to the impact of the reinsurance market. From these viewpoints, we do not expect co-insurance to disappear.
- Q21Net incurred losses from Nat Cats in Japan were JPY14bn in the 1Q. What is the degree of impacts of the heavy rain in July mainly in various parts of Western Japan and the hail in northern Kanto?
- A21
We project the cumulative impact from the 1Q of these Nat Cats, including the rough estimate of heavy rain in various parts of Western Japan as well as the hail in northern Kanto between July 31 and August 1 on a preliminary figure basis, to be around JPY55bn (before tax). This figure does not include the impact of the most recent Typhoon No. 6.
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.
