Hello. Thank you for coming today. I am Ishiguro from the IR group. We would now like to start the conference call for Tokio Marine Holdings fiscal year 2019 second- quarter results. I will first talk for the first 10 minutes, giving you a highlight of the presentation material that was posted today on our website, and will also speak to the news release regarding shareholder return. We will take questions after the presentation. I would also like to give a disclaimer before we start the call. The explanations that will be given today may include business projections and forecasts based off current expectations and are subject to a range of inherent risks and uncertainties. Actual results may vary from what was anticipated. I would also like to mention that this call is being recorded. Now, without further ado, I'd like to go into the highlights of our results.
Please refer to page three in the presentation. I will first talk about top line, that is net premiums written. Net premiums written increased by 3.7% on an underlying basis for the interim period, excluding the effect of the sale of TMR, the reinsurance subsidiary. Breaking down top line, the domestic P&C business grew by 4.7% due to all lines growing across the board. The international insurance business grew by 1.5%, despite a stronger yen, due to a steady growth in North America and a new consolidation of Safety National. For the full-year projection, although the underlying trends are brisk, with the domestic business outlook being revised upwards and the same for the international business on a local currency basis, due to the stronger yen, growth is expected to be up only 2.4% year- on- year, which is a JPY 20 billion downward revision from the beginning of year forecast.
Next, with regards to life insurance premiums, top line excluding technical accounting impact in Delphi pension business fell by 6.1% year- on- year. This was due to sales suspensions of some products for corporations by TMNL, as well as increased discipline in underwriting medical stop-loss insurance at TMHCC, combined with a stronger yen. For the full year, our forecast stays the same for TMNL as the beginning of the year, but accounting for the stronger yen and the increased discipline in the medical stop-loss business at TMHCC, we have revised down the overall forecast by JPY 20 billion compared to the beginning of year outlook, which translates into a 4.1% decline year- on- year. Next is bottom line. This will be interim period net income on a financially reported basis.
Like was the case in fiscal year 2018, we once again experienced net CAT that was greater than average, which had an impact on our bottom line. We have been affected by Typhoon number 15 and other disasters in our interim results. However, the net CAT overall has decreased on a year-over-year basis, resulting in net income growth of JPY 62.7 billion, reaching JPY 116.6 billion. As you know already, the reversal of CAT loss reserves is possible in the fire group, for example, when the loss ratio on a written paid basis exceeds 50%. For this interim period, the backlog from net CAT that occurred in fiscal 2018 has been mostly paid. For fiscal 2019, there are many policies which have not yet been paid, and thus, reversals have not taken place in the fire group. Please turn to page four for full-year projections of bottom line.
Financial accounting-based net income remain unchanged from original projections. Impact of increase in domestic natural catastrophes and increase in reserves set aside in North America due to social inflation are expected to be offset by takedown or reversal of catastrophe loss reserves, decrease in natural catastrophes overseas, and increase in investment income. Please find full-year forecasts of net incurred losses of net CAT and catastrophe loss reserve on the right side of the slide. While net CAT in fiscal year 2019 remains within the expected range in our risk model, we will continue to watch closely the net CAT trends and diversify risk globally as we take measures to improve profit for fire insurance with a sense of speed.
Full-year projections for adjusted net income is revised down by JPY 95 billion to JPY 305 billion due to domestic natural catastrophes, since the impact of catastrophe loss reserves are excluded from the net income based on financial accounting. Lastly, let me talk about ESR and shareholder return. Please turn to page 29 of the deck and news release on shareholders return. ESR as of September 2019 was 175% before capital level adjustment. This level is flat, only up by one point from end of March 2019. Against this backdrop, we announce today JPY 50 billion in capital level adjustment. As a result, ESR is 173%.
Let me explain our thinking behind this. 175% is within our target range, meaning the company will consider business investment, additional risk-taking, and shareholder return in a flexible manner. This stance remains the same. We also took into account the fact that a large M&A is expected, such as the acquisition of Pure Group announced in October this year, as well as changes in the economic landscape, future business investment opportunities, among others. Ordinary dividend for the fiscal year 2019 will remain unchanged. Interim dividends will be JPY 95 per share. Full-year dividends will be JPY 190 per share, up JPY 10, increasing dividend for eight years in a row.
Shareholder return will be explained in the second half IR briefing scheduled next week. In closing, I'd like to say that while the company is impacted by the large net CAT experience in Japan for two consecutive years, by steadily implementing global-based risk diversification and growth strategy called for in our plan, we intend to steadily strengthen the earnings power of the group. This is all for me. I'd like to spend the rest of the time for Q&A.
Explanation to ask questions during this telephone conference is being explained to the Japanese participants.
First of all, from SMBC Nikko, we would like to invite Mr. Muraki to ask a question.
I have two questions, please. The first is with regards to international business. I'm looking at page 26. For North America, compared to the beginning of year outlook, you revised it down by JPY 21 billion. Nat- cat was revised by JPY 10 billion as well. It's JPY 31 billion of a downward revision overall. For Philadelphia HCC, you talk about social inflation and its reserves, and also medical cost increase leading to losses. I was wondering how much of that is being accounted for, and how that additional expense is going forward. Are there any risks of that happening? Can you give me your view on that, please?
My second question is related to page 29, where you speak to ESR. Interest rate changes, if it affects ESR, what are you going to do with your capital policy was something that you said you were going to consider. Right now, it's within your range as of end of September, and I expect that it's probably better as of now. In your discussions this time around, what kind of possibilities were you discussing? If you can share them, that would be appreciated. Those are my two questions.
From IBDD, from Tokio Marine Holdings, Sakamoto will take your question.
With regards to the downward revision in North America and the reason why we have revised it down compared to the beginning of the year, and how Philadelphia and HCC contributes to that outlook. First of all, for Philadelphia, for liability insurance in the third quarter, we will be taking more reserves for past years. In North America, currently, we are seeing higher costs and the intervention of lawyers has been increasing, and that has led to higher liability unit price, which is basically social inflation. That's one of the reasons why loss cost is expected to be higher. For Philadelphia, litigation fees are becoming more expensive, in line with that, claims are becoming higher. Case reserve reviews are underway.
Just to talk about the progress, we have passed the peak of what we need to do.
Most of the impact we are anticipating has been accounted for in the revised outlook. As of end of Q4, our plan is to end all of the review processes by then. On the other hand, with regards to current policies we are underwriting, loss cost inflation. We are currently working on increasing the rates so that we can cover for the increased losses. For case reserve reviews, we plan to complete it by the end of Q4. We believe that we are not expecting any more impact in the following fiscal year. That is my commentary on Philadelphia. For medical cost increases for TMHCC. For medical stop-loss insurance loss increases in North America, medical expenses overall have been increasing, and unit claims have been increasing and larger claims have been coming through. We are seeing increased cases of higher payments.
The cause for that is, first of all, medical reform is taking place in North America, so that is considered to be one of the factors, but this is something that is influencing the entire North American market. For medical stop-loss, TMHCC has exposure to it to a certain extent, and in order to absorb the increase of loss cost, currently, we are working on double-digit rate increases. We would like to ensure that the countermeasures are well in place in order to improve our performance going forward. That concludes my remarks.
From Tokio Marine Holdings, my name is Gojo from Corporate Planning. With regards to your question on ESR and with regards to how we view interest rates and so forth. In the current midterm plan, since its start, the target range for ESR, we have been changing the way we show it.
As we did so, there were several changes that we made. First of all, 210%, when it exceeds that level, which is the maximum level, we have clarified what kind of actions are going to be taken. Also for restricted capital, and we were saying that ESR is going to be 100%-130% after excluding that component. However, due to peer comparison reasons, we got the feedback that it is hard to understand. Therefore, the restricted capital portion is now accounted for in ESR. With that, we have raised the lower end, and now it is 150%-210% target range. Major changes is to include restricted capital, and now ESR is easier to understand from our point of view.
With regards to the way we view the methods of capital adjustments, it was before we excluded restricted capital in accounting for ESR, but our overall thinking has not changed. Changes in interest rates basically impact restricted capital. If there are not any major changes, or maybe I should change the way I am saying it, but interest rates affect restricted capital. The ups and downs of restricted capital, if it is at a certain level, in the previous way we showed ESR, it did not really have a significant impact. But in the new way we show ESR, restricted capital is accounted for. Therefore, if interest rates were to fluctuate, restricted capital will also be affected, and that will change and impact ESR overall. The ESR fluctuates based off interest rate changes.
However, net cash business investments are also made with capital, which is not restricted capital, and that also changes ESR. But the nature of it is different, and that's the way we view it when thinking about shareholder return, as well as making decisions and capital level adjustments.
Thank you. If that's the case, on the right-hand side of page 29. For rate risk reduction. TMNL, ultra-long, you bought about JPY 800 billion and you're making progress. I think you're kind of naturally adjusting interest rate fluctuation.
From Holdings, this is Gojo once again from Corporate Planning. For interest rate risk control, to your point, we were striving to reduce rate risk by buying bonds, JGBs, and that's what we're doing in order to control the risk. Basically, we would like to continue to control interest rate risk.
Upon doing that, we are not striving to make profitability out of taking risk, and we're making bets on risk, but we would like to ensure that we are more profitable by selling our products as well as focusing on our insurance business. For interest rate, basically our policy is to control the risk.
Thank you very much. I understood your comment very well.
Thank you very much. Next, Mitsubishi UFJ Morgan Stanley, Tsujino-san, please.
Thank you. Thank you for taking my question. I have a question on TMNL underwriting profit to net CAT underwriting reserve. I'm looking at the adjusted underwriting income with JPY 15 billion in decline year-over-year in the first half, and the projection for the full year is a change, about JPY 25 billion decrease from the beginning of the year. For the first quarter, I think you talked about large claims and large losses, and you saw some impact from fire insurance this time around. Why is this different year-over-year? For the full year, why did you do a downward revision from the beginning of the year? That's my first question. My second question is the capital adjustment of JPY 50 billion. Compared to last year, you did JPY 100 billion, and this year you reduced that to JPY 50 billion.
Interest rate is not a factor for that. I think you suggested that in your earlier explanation. What is the reason for reducing the amount because of the acquisition of Pure? Was that an impact, or your thinking with regards to net CAT, was that taken into account? If Pure was the reason, hybrid procurement, a substantial amount of procurement funding was to take place. You also talked about the neutral rising, but if you could share with us your thinking behind it. That's all for me.
My name is Oki of the Corporate Accounting Department at TMNL. The first question about profit level at the TMNL. What are the changing factors, excluding nat- cat underwriting reserves? With regards to increase in nat- cat, we have the reinstated insurance or premium that has a negative impact on profit. There's small losses that are incurred. One- time, small losses are increased, therefore those factors are taken into account, therefore year-on-year, we are seeing a decrease, negative impact on our profit.
Thank you. JPY 10 billion or so reinstated premium. Is that the order of impact?
Last minute for interim, it's a JPY 15 billion increase in profit in revenue. For the full year, there's some impact from the first half, therefore JPY 8 billion increase in profit.
Thank you. Thank you very much for that.
I am Gojo, Corporate Planning of Tokio Marine Holdings. The amount of capital level adjustment, 167% was end of September 2018, last year, this time it was 175% before capital level adjustment this year. Therefore, reflecting the acquisition of PURE, the level is much lower than that. As you correctly pointed out, Tsujino-san, the part of the lowering of ESR as a result of acquisition, we are planning to issue capital- subordinated bonds. This should compensate partly for that. The impact of the acquisition, M&A, cannot fully be absorbed by this subordinated bonds. That is the reason for the adjustment. On top of that, for this fiscal year, we had the impact of domestic nat- cat, which incurred more losses or claims paid than we anticipated at the beginning of the year.
Against this backdrop, we implemented, executed the acquisition of PURE Group, and we will make further business investments for growth. This direction will remain unchanged, and therefore, we need to have some leeway in terms of our capital capability, and therefore, there are various reasons that we took into account to adjust the capital level. The amount is less than last year, but it's JPY 50 billion in capital adjustment to be implemented this year.
Well, the risk calculation for ESR, of course, this time you didn't change anything, but your domestic nat- cat level, did you need to change? That is my next question. You said it was as expected. What you mean by that is when a certain level of intensity of typhoon comes, you have a calculation as of an estimated loss that could be incurred as a result.
Maybe it was within your expectation in that regard, but in terms of frequency of the typhoons, maybe you need to revise the model, and then the risk volume of ESR is going to increase. How do you view the need for that, to revise?
My name is Masuda, Risk Management Department of Tokio Marine Holdings. With climate change, intensive rain, and the power of typhoons could become more intensified. Therefore, we're seeing a lot of natural catastrophes as a result of that. But when it comes to the impact of nat- cat, we cannot deny the fact that this is a result of climate change. But experts have diverse views. It's difficult to come up with a unified projection at this point in time.
Tokio Marine & Nichido Risk Consulting, we have group companies that we are tapping into, and we are also collaborating with outside experts to gather the most cutting-edge and most up-to-date information to come up with the decisions.
You are going to say that it's going to take some more time.
Yes. We intend to study this and do further research on this matter. Thank you very much.
Next person is Otsuka-san from J.P. Morgan, please.
Hi, I'm Otsuka from J.P. Morgan. I'm looking at the numbers on page four. I have two questions as well. My first question is on page four, left-hand side numbers. For domestic non-life insurance, you talk about JPY 173 billion for net incurred losses, I believe. But last year, for incurred losses, it was JPY 237 billion, I recall. For primary insurance, you had Typhoon No. 19, and I think this year was greater, but the net incurred losses is lower than last year, and I was wondering the reason why. That's my first question. For my second question, it's very simple. For nat- cat losses, it says JPY 140 billion for fire at the end of the year on the bottom right. As Ishiguro-san explained, you were talking about written- paid 50% rule, that we need to exceed that amount for the reversals to take place.
Simply put, when you look at the catastrophe loss reserve, it seems that the reserves are down pretty much. I was wondering how you view this going forward. You were talking about natural catastrophe underwriting reserves, that you need to take them. At this rate, if we were to experience typhoons going forward, wouldn't catastrophe loss reserve zero out? That was what I was implying.
I am Oki from Tokio Marine & Nichido. First of all, the expectations for nat- cat for the full year, we look at nat- cat that occurred in the first half, and also Typhoon No. 19, as well as past second half nat- cat incurred losses. Track records are what we refer to. On a net basis, reinsurance policies have an impact. We believe that this level is not a problem.
I am Yanagihara from the Corporate Accounting Department from Tokio Marine & Nichido. I will take your second question. The current balance is shown on the slide, and it depends on what happens for the second half, but additional provisioning is not accounted for at this moment. At this moment, this is what we are forecasting.
I want some follow-up answers. On a primary basis, it was larger or greater than last year, I believe. If it's about reinsurance policies, if that were to take effect, net incurred losses was lower. I guess that's the way I should look at it. Is that correct? Also for the catastrophe loss reserve, are you going to refer to the catastrophe loss reserves whilst you may cut down on underwriting or raise rates from next fiscal year onwards? That's another option.
Is that an option that you may consider?
This is Yanagihara once again. First of all, with regards to underwriting, we will account for risk diversification whilst we underwrite, continue to underwrite. With regards to rates for current products that we sell, as a matter of course, in the rate revisions in October, nat- cat that has recently happened is not accounted for. We probably need to consider rate increases going forward. We will also make managerial efforts to reduce expenses. Ultimately, we will make a comprehensive decision as to what we should do. How about reinsurance policies? For reinsurance, it is a cost item, so we will like to look at the risks we are exposed to as well as the catastrophe loss reserve levels as we consider the future direction. So far, we don't have any specific ideas.
No. My question is, you have been able to cover for your losses with reinsurance on a primary basis.
The net incurred losses are smaller, the reinsurance policies have not changed. For net incurred losses, it is smaller than last year.
Okay. I understood you very well. Thank you very much.
Thank you. Next from Mizuho Securities, Sato-san, please.
Thank you. Actually, my question is exactly the same as Wataru-san's question. My first question is primary loss, insurance loss. How much are you anticipating? Last year, track record for Tokio Marine & Nichido, JPY 460 billion approximately, as I recall it, and your planned. What is the planned level at this year? Last year, we had Typhoon 21. From the interim estimate, the primary insurance was increasing losses and net losses also increased for you. If a similar story is experienced this year, net losses could see an upside. Is that what you're expecting? My second question is also exactly the same as the previous question. If there is an upside to net losses, prior catastrophe loss reserve is like 45%, going to drop to that level. If there is further downside to that, special provision may become necessary.
Should we be anticipating the likelihood of that?
Oki of Corporate Accounting. The first question about net incurred losses. We have a reinsurance policy, therefore, please allow us to refrain from making any comments on that. For Typhoon 19, JPY 110 billion is expected at primary insurance level.
Additional provisions for cat loss reserves.
Let me respond to that question. As you pointed out, depending on the second half, we may need to take some flexible measures. At this point in time, we are not planning to set aside any special provisions for this.
The first question about the primary insurance premiums. When the full year accounts close, this is a number that is going to come out anyway, I don't understand why you don't disclose the net incurred losses.
Well, as for net incurred losses, we don't have a number at this moment. We have not computed the number at this moment. Just to give you a sense of the scale, JPY 140 billion for the first half for primary and Typhoon 19 is JPY 110 billion for Tokio Marine & Nichido Fire. In total is JPY 240 billion.
Thank you very much.
Thank you. Next is from Daiwa. Watanabe-san, please.
I'm Watanabe from Daiwa. I have two questions for you. My first one is on page 20 with regards to natural catastrophe underwriting reserve. You say here that you've done some provisioning. How much was that? When do you need to do provisioning, and when do you do the reversal? Do you include it into adjusted net income? Page eight in the financial statement is my second question. In your subsidiaries that adopt US GAAP, JPY 65 billion was recategorized, JPY 65.4 billion. What asset and which company did that belong to?
I am Oki once again from Tokio Marine & Nichido. First of all, with regards to natural catastrophe underwriting reserves, JPY 15 billion was the provisioning we took for the year. For this amount, at this moment, it's dependent on the risk we have.
We are in preparation for large nat- cat. We have calculated the ideal premium level, and depending on the gap we identified, we have decided to take the provisioning. Impact on net adjusted income, like financially reported income. Yes, natural catastrophe underwriting reserves have an impact on adjusted net income as well.
This is Sakaguchi from Corporate Accounting from Tokio Marine Holdings. Let me take your second question. With regards to US GAAP changes and the impact that our subsidiary received, there is a specific provision under US GAAP and TMHCC, Philly and Delphi are the entities that are going to be impacted that needs to adopt the new provisions. On our results, Philly, Delphi, TMHCC, looking at their stocks, they used to be other marketable securities, but it has been recategorized to stocks for trading purposes, and the mark-to-market amount has been acknowledged.
Delphi owns a certain level of stocks, and the latent income has hit the P&L.
One more additional question I have for you is for cat loss reserves. If it exceeds 50% on a written paid basis, you are able to do the reversal. For natural catastrophe underwriting reserves, what kind of conditions need to come together for you to do the reversals?
For nat- cat underwriting reserves, every year the provisioning amount is calculated. We look at the previous year and the difference compared to the previous year will be the impact on our financials. Thank you very much.
Thank you very much. Next question is from Merrill Lynch. Sasaki San, please.
This is Sasaki of Merrill Lynch. I have two questions. First question is with regards to how you view Typhoon 19, whether it be for direct insurance or net insurance premium paid. My impression is that it was quite small. The likelihood of major rivers to be flooded, the likelihood was quite high, and to a certain extent, I think it was within your risk model. I think from an engineering perspective, you should be looking at it from a more conservative manner. Natural catastrophe risk management, is it going to change going forward? I think earlier you talked about spending some time on this, doing study on this, but what is your basic view on it? Do you have a sense of urgency or do you not plan to change immediately?
What is your view on cat risk management? Second question is ESR subordinated bonds are planned to be issued, and if by issuing subordinated bonds, ESR is going to be pushed up. This amount means that the source you can tap into for shareholder return is going to increase. ESR to be increased as a part of surplus reserves increasing and subordinated bonds being issued that will push up ESR. What is the difference between the two? Do you perceive them differently? What will be the different quality?
My name is Masuda from Risk Management Department of Tokio Marine Holdings. The first part of your question, I think my answer is basically the same with what I said earlier. This fiscal year, we are experiencing large nat- cat, that does not necessarily mean that we will be seeing more damages going forward. While there is a possibility, we cannot say it for sure, therefore
It is difficult for us to come up with any kind of projection at this point in time. We will invite experts within the group as well as outside the group to come up with any kind of conclusion.
Gojo, Corporate Planning Department, Tokio Marine Holdings. As for the subordinated bonds within ESR. Earlier, I briefly talked about the restricted capital on interest rates. What you talked about is a bit different from what I talked about under restricted capital, because subordinated bond issuance leads to increase in pure assets, and therefore it will be used for shareholder returns. Let me take this opportunity to talk about our shareholder return policy. Basically, our position is to increase our profit, and with increase in profit, dividends will increase in line with the profit growth to make shareholder returns.
It is for that purpose, that capital level as a stock is to be looked at. If there is room or excess in capital, we will use it or pay it out in order to make adjustments. Subordinated bonds to be issued one after the other to use it for shareholder returns, this is not what we intend to do. When there is a large M&A, like in the kind we had this time, we do not have much experience in issuing subordinated bonds. When there is an opportunity for a large M&A, subordinated bonds will be issued. This is our thinking.
Understood. Thank you. Can I ask just one follow-up question? Last fiscal year, reinsurance cost, what is your outlook with the wind and fire losses that you incurred this year? What is your outlook for reinsurance cost next fiscal year?
Yanagihara of Corporate Accounting Planning, Accounting Department. From what we are seeing, 10%-20% increase in reinsurance cost increase is expected. Thank you very much.
Thank you very much. Next is Majima-san from Tokai Tokyo.
Thank you for taking my question. I have a detailed question. On page four, for domestic non-life, beginning of year forecast, comparing against that, you show the waterfall chart. JPY 86.8 billion is a negative, then it is plus JPY 78.1 of catastrophe loss reserve. There is a difference between net CAT and catastrophe loss reserve. Last year, catastrophe loss reserve covered the net CAT negative. It seems that you are not able to fully cover for it for catastrophe loss reserve. Why is not it able to make up for it? Is it because of payment-related factors, or is it related to different factors? That is my question.
This is Oki from Corporate Accounting. With regards to the reversal amount of catastrophe loss reserve for this fiscal year, for fire insurance, there was last-minute demand, so there was a top-line growth, which has had an impact. Also, earlier, as explained, for the provisioning rate, we have increased it by 1%, and that was another factor why when you compare it with last year, the reversal looks smaller than last year.
Thank you very much. That's all from me.
Thank you very much. Is there anyone else who would like to ask a question? Niwa-san from Citi.
Just one question. My question actually overlaps with other questions. Net CAT for this fiscal year. Looking at the reports from reinsurance companies or modeling companies, compared to conferences by reinsurance companies, the impact of CAT in Japan seems small in your projections, in your guidance. My question is the Japanese situation from a global perspective, how should I interpret the portfolio of your company? In a related note, reinsurance rates could increase, but in your case, you are able to successfully maybe cover for the reinsurance and the increased portion. Maybe you would need to increase the coverage of underwriting. Could you elaborate on the difference of your portfolio vis-a-vis the global situation?
Kamoda of Commercial Alliance Underwriting Department.
The vendor companies do talk about the model, but with regards to our model, there is a certain range in it. We have run half a million simulations for the model, and therefore, with regards to individual losses, the purpose is not to come up with not cat losses for each individual losses. Looking at the losses that we're seeing as of late, and we're also looking at historical track record of losses incurred.
This is point of clarification. Large companies, private entities, is there a difference in the portfolio? If you could explain about the difference in the portfolio.
This is Yanagihara of Corporate Accounting Department. As for the reinsurance scheme of other companies, we're not familiar with this. Therefore, please allow me to not comment on it. For us, we will look at the reinsurance cost. We would need to do a necessary revision. Of course, it's not just for us, but we would need to look at the amounts set aside for CAT losses and also look at the global situation.
Thank you very much for explaining in detail.
Are there any other questions? It seems that we are out of questions. We would like to end the Q&A session, although we have some time left. I'd like to thank you once again for participating on the call today. Thank you.