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Edited Transcript of 8766.T earnings conference call or presentation 19-Nov-19 7:00am GMT

Q2 2020 Tokio Marine Holdings Inc Earnings Call

Tokyo Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Tokio Marine Holdings Inc earnings conference call or presentation Tuesday, November 19, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Taizou Ishiguro

Tokio Marine Holdings, Inc. - Group Leader of Corporate Communications & IR Group

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Conference Call Participants

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* Futoshi Sasaki

BofA Merrill Lynch, Research Division - Research Analyst

* Kazuki Watanabe

Daiwa Securities Co. Ltd., Research Division - Research Analyst

* Koichi Niwa

Citigroup Inc, Research Division - Director and Analyst

* Koki Sato

Mizuho Securities Co., Ltd., Research Division - Senior Analyst

* Masao Muraki

SMBC Nikko Securities Inc., Research Division - Senior Analyst and Global Financial Strategist

* Natsumu Tsujino

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst

* Tatsuo Majima

Tokai Tokyo Research Institute Co., Ltd. - Senior Analyst

* Wataru Otsuka

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Taizou Ishiguro, Tokio Marine Holdings, Inc. - Group Leader of Corporate Communications & IR Group [1]

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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 we'll also speak to the news release regarding shareholder returns. 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.

So now, without further ado, I'd like to go into the highlights of our results. Please refer to Page 3 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 the new consolidation of safety.

For the full year projection, although the underlying trend [is at] risk 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's 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 the 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 nat cat that was greater than average, which had an impact on our bottom line. We have been affected by typhoon #15 and other disasters in our interim results. However, the nat 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 nat cat that occurred in fiscal 2018 has been mostly paid, but 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 4 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 forecast of net incurred losses of nat cat and catastrophe loss reserve on the right side of the slide.

While nat cat in fiscal year 2019 remains within the expected range in our risk model, we will continue to watch closely the nat 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 1 point from end of March 2019. Against this backdrop, we announced 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 [tends] 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 dividend will be JPY 95 per share, full year dividend will be JPY 190 per share, up JPY 10, increase in dividend is planned for 8 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 nat cat experienced in Japan for 2 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.

And this is all for me. I would like to spend the rest of the time for Q&A.

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Questions and Answers

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Operator [1]

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Explanation to ask questions during this teleconference is being explained to the Japanese participants. First of all, from SMBC Nikko, we would like to invite Mr. Muraki to ask a question.

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Masao Muraki, SMBC Nikko Securities Inc., Research Division - Senior Analyst and Global Financial Strategist [2]

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I have 2 questions, please. The first is with regards to international business. I'm looking at Page 26. So for North America compared to the beginning of the year outlook, you revised it down by JPY 21 billion. Nat cat was revised by JPY 10 billion as well, so 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? Well, it's something that you said you were going to consider. So right now, it's within your range as of the end of September, and I expect that it's probably better as of now. But 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 2 questions.

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Unidentified Company Representative, [3]

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[IBDD] , from Tokio Marine Holdings, [Sakamoto] will take your question.

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Unidentified Company Representative, [4]

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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 the past years.

In North America, currently, we are seeing higher costs and the intervention of lawyers have been increasing, and that has led to higher liability unit price, which is basically social inflation. And that's one of the reasons why loss cost is expected to be higher. For Philadelphia, litigation fees are becoming more expensive, and in line with that, claims are becoming higher. So case reserve reviews are underway.

Just to talk about the progress. We have passed the peak of what we need to do. And most of the impact we are anticipating has been accounted for in the revised outlook. And 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. And for case reserve reviews, we plan to complete it by the end of Q4. So by -- we believe that we're not expecting any more impact in the following fiscal year. So that's my commentary on Philadelphia.

For medical cost increases for HCC. 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. So we're seeing increased cases of higher payments. So 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, we do -- TMHCC has exposure to it to a certain extent. And in order [to serve] the increase of loss costs, currently we are working on double-digit rate increases. So we would like to ensure that the countermeasures are well in place in order to improve our performance going forward.

That concludes my remarks.

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Unidentified Company Representative, [5]

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From Tokio Marine Holdings, my name is [Gojo] from Corporate Planning. With regard 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. And 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. And also for restricted capital and we were saying that ESR is going to be 100% to 130% after excluding that component. However, due to peer comparison reasons, we got the feedback that it's hard to understand. Therefore, that restricted capital portion is now accounted for in ESR. And with that, we have raised the lower end. And now it is 150% to 210% target range. So major changes is to include restricted capital and now ESR is easier to understand from our point of view. And with regards to the way we view the methods of capital adjustment, it was before we excluded restricted capital and accounting for ESR, but our overall thinking has not changed. So changes in interest rates basically impacts restricted capital. So if there aren't any major changes or maybe I should change the way I'm saying it, but interest rates affect restricted capital. So the ups and downs of restricted capital, if it's at a certain level, in the previous way we showed ESR, it didn't 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.

So ESR fluctuates based off interest rate changes. However, nat cat 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.

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Masao Muraki, SMBC Nikko Securities Inc., Research Division - Senior Analyst and Global Financial Strategist [6]

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If that's the case, on the right-hand side of Page 29, for rate risk reduction, TMNL [overall,] you bought about JPY 800 billion and you're making progress. So I think you're kind of naturally adjusting interest rate fluctuation.

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Unidentified Company Representative, [7]

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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. So 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. So for interest rate, basically, our policy is to control the risk.

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Operator [8]

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Next, Mitsubishi UFJ Morgan Stanley. Tsujino-san, please.

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Natsumu Tsujino, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [9]

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I have a question on TMNL. Underwriting profit to nat cat underwriting reserve, I'm looking at the adjusted underwriting income with JPY 15 billion in decline year-on-year in the first half and the [projected] for the first half. For the full year has changed 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. So why is this difference year-on-year? And for the full year, why did you do a downward revision for the beginning of the year? That's my first question.

And 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. But what is the reason for reducing the amount because of the acquisition of PURE -- was that an impact? Or you're thinking with regards to nat cat, was that taken into account? And if PURE was the reason, hybrid procurement -- a certain substantial amount of procurement funding will still take place, but you also talked about the [neutral rising] . But if you could share with us your thinking behind it? That's all for me.

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Unidentified Company Representative, [10]

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My name is [Oki] of the Corporate Accounting Department at TMNL. The first question about profit levels at the TMNL, NF, what are the changing factors, excluding nat cat underwriting reserves. With regard to increase in nat cat, we have the reinstated insurance premium that has an impact on -- negative impact on profit. And there's small losses that are incurred. Onetime small losses are increased and therefore, those factors are taken into account, and therefore, year-on-year, we are seeing a decrease, negative impact on our profit.

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Natsumu Tsujino, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [11]

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So JPY 10 billion or so are reinstated profit premiums? Is that the order of impact?

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Unidentified Company Representative, [12]

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Last minute for interim, it's JPY 15 billion, JPY 15 billion increase in profit and revenue. But for the full year there is some impact from the first half and therefore, JPY 8 billion [is that] increase in profit.

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Unidentified Company Representative, [13]

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I'm [Gojo] of Corporate Planning of Tokio Marine Holdings. The amount of capital level adjustment. Well, 167% was at the end of September 2018 last year. And this time, it was 175% before capital level adjustment this year. And therefore, reflecting the acquisition of PURE, the level is much lower than that. And as you correctly pointed out, Tsujino-san, the -- part of the lowering of ESR as a result of acquisitions, we are planning to issue capital subordinated bonds. This is to cover -- compensate partly for that. But the impact of the acquisition M&A cannot fully be absorbed by this subordinated bonds. And that is the reason for the adjustment.

And on top of that, for this fiscal year, we had the impact of domestic nat cat, which was -- which incurred more losses of claims paid than we would -- we anticipated at the beginning of the year. And against this backdrop, we implemented -- executed the acquisition of PURE group, and we will make further business investments for growth. And 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. And the amount is less than last year, but it's JPY 50 billion in capital adjustments to be implemented this year.

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Natsumu Tsujino, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [14]

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Well, the risk calculation for ESR. Of course, this time, you didn't change anything. But the domestic nat cat level, do 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 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?

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Unidentified Company Representative, [15]

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My name is [Masuda,] Risk Management Department at Tokio Marine Holdings. With climate change, intensive rain and the power of typhoons could become more intensified. And 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 and -- 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 risk] .

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Natsumu Tsujino, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [16]

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And you are going to say that it's going to take some more time.

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Unidentified Company Representative, [17]

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Yes, we intend to study this and do a research -- do further research on this matter.

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Operator [18]

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Next question is Otsuka-san from JPMorgan.

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Wataru Otsuka, JP Morgan Chase & Co, Research Division - Analyst [19]

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I am Otsuka from JPMorgan. I'm looking at the numbers on Page 4. I have 2 questions as well. My first question is on Page 4 left-hand side numbers. For domestic non-life insurance, you talk about JPY 173 billion for current net incurred losses, I believe. But last year, for incurred losses, it was JPY 237 billion, I recall. For primary insurance, you had typhoon #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 [net debt] 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. But simply put, when you look at the cat loss reserve, it seems that the reserves are down pretty much. So I was wondering how you view this going forward?

You were talking about [net] natural catastrophe underwriting reserves, that you need to take them. But at this rate, if we were to experience typhoons going forward, wouldn't cat loss reserves zero out? That is what I was implying.

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Unidentified Company Representative, [20]

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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 #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. Therefore, we believe that this level is not a problem.

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Unidentified Company Representative, [21]

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I am [Yanagihara] from the Corporate Accounting Department from Tokio Marine & Nichido. I will take your second question. So the current balance is shown on this slide, and it depends on what happens to the second half, but additional provisioning is not accounted for at this moment.

So at this moment, this is what we are forecasting.

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Wataru Otsuka, JP Morgan Chase & Co, Research Division - Analyst [22]

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So I want some follow-up answers. But on a primary basis, it was larger or greater than last year, I believe. So 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?

And also for the cat loss reserves, are you going to refer to the cat 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 you may consider?

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Unidentified Company Representative, [23]

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Mr. [Yanagihara,] once again. So first of all, with regards to underwriting, we will account for risk diversification, whilst we underwrite -- continue to underwrite.

However, with regards to rates for current products that we sell, as a matter of course, in the rate revisions in October, our nat cat that has recently happened is not accounted for. So we probably need to consider rate increases going forward, but we will also make managerial efforts to reduce expenses. So ultimately, we will make a comprehensive decision as to what we should do.

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Wataru Otsuka, JP Morgan Chase & Co, Research Division - Analyst [24]

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How about reinsurance policies?

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Unidentified Company Representative, [25]

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For reinsurance, it is a cost item. So we will like to look at the risks we are exposed to as well as the cat loss reserve levels as we consider the future direction. But so far, we don't have any specific ideas.

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Wataru Otsuka, JP Morgan Chase & Co, Research Division - Analyst [26]

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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. So the reinsurance policies have not changed?

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Unidentified Company Representative, [27]

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For net incurred losses, it is smaller than last year.

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Operator [28]

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Next, from Mizuho Securities, Sato-san please.

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Koki Sato, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [29]

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Actually, my question is exactly the same as Otsuka-san's question. My first question is, primary loss insurance [costs], how much are you

anticipating -- expecting? Last year track record for Tokio Marine & Nichido, JPY 460 billion approximately, as I recall it. And your planned -- what is the current level at this year?

And last year, we had typhoon 21. And from the interim estimate, the primary insurance was increasing losses and net losses also increased for you. It's -- similar story as experienced this year, net losses could see an upside. Is that what you're expecting?

And my second question is also exactly the same as the previous question. If there is an upside to net losses, higher cat loss reserve is like 45%, going to drop to that level. And if there is further downside to that, special provisions may become necessary. Should we be anticipating the likelihood of that?

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Unidentified Company Representative, [30]

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[Oki] of Corporate Accounting. The first question about net incurred losses. We have a reinsurance policy. And therefore, please allow us to refrain from making any comments on that.

And for typhoon 19, JPY 110 billion is expected at primary insurance level.

Additional provision for cat loss reserves, let me respond to that question. As we pointed out, depending on the second half, we may need to take some flexible measures. But at this point in time, we are not planning to set aside any special provisions for this.

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Koki Sato, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [31]

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The third question about the primary insurance premium when the full year accounts closed. So this is a number that is going to come out anyway, and so I don't understand why you don't disclose the net incurred losses?

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Unidentified Company Representative, [32]

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Well, as for net incurred losses, we don't have a number at this moment. We have not computed the number at this moment. And 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, it is JPY 240 billion.

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Operator [33]

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Next is from Daiwa, Watanabe-san, please.

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Kazuki Watanabe, Daiwa Securities Co. Ltd., Research Division - Research Analyst [34]

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I am Watanabe from Daiwa. I have 2 questions for you. My first one is on Page 20. With regards to natural catastrophe underwriting reserves. So you have -- you say here that you've done some provisioning. So how much was that? And when do you need to do provisioning? And when do you do the reversal? And do you include it into adjusted net income?

So Page 8 in the financial statement is my second question. In your subsidiaries that adopt U.S. GAAP, 65 billion was recategorized -- 65.4 billion. So what asset and which company did that belong to?

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Unidentified Company Representative, [35]

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I am [Oki] once again, from Tokio Marine & Nichido. So first of all, with regard 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. And we look at -- we are in preparation for large nat cat. And 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.

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Unidentified Company Representative, [36]

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This is [Sakaguchi] from Corporate Accounting from Tokio Marine Holdings. Let me take your second question. With regards to U.S. GAAP changes and the impact that our subsidiary received, there is a specific provision under U.S. 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, HCC, looking at their stocks, they used to be other marketable securities, but it has been recategorized to stock for trading purposes. And the mark-to-market amount has been acknowledged. And Delphi owns a certain level of stock and the [latent] income has hit the P&L.

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Kazuki Watanabe, Daiwa Securities Co. Ltd., Research Division - Research Analyst [37]

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One more additional question I have for you is for cat loss reserves. It's -- if it exceeds 50% on a written paid basis, you were able to do the reversal. But for natural catastrophe underwriting reserves, what kind of conditions need to come together for you to do the reversals?

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Unidentified Company Representative, [38]

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For nat cat underwriting reserves every year, the provisioning amount is calculated. So we look at the past year -- previous year, and the difference compared to the previous year will be the impact on our financials.

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Operator [39]

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Next question is from Merrill Lynch, Sasaki-san, please.

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Futoshi Sasaki, BofA Merrill Lynch, Research Division - Research Analyst [40]

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Sasaki of Merrill Lynch. I have 2 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 is -- the likelihood was quite high. And to a certain extent, I think it was within your risk model, but 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? And I think earlier, you talked about spending some time on this. Doing a 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?

And second question is ESR. Subordinate bonds plan to be issued. And if you -- by issuing subordinated bonds, ESR is going to be pushed up. This amount means that the source that 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 2? Do you perceive them differently? What would be the difference in quality ?

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Unidentified Company Representative, [41]

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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 cats, but that does not necessarily mean that we will be seeing more damages going forward. While there is a possibility, we cannot say for sure. And therefore, we -- 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 conclusions.

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Unidentified Company Representative, [42]

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[Gojo], Corporate Planning Department, Tokio Marine Holdings. And 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 return. And so let me take this opportunity to talk about our shareholder return policy.

Basically, our position is to increase the profit and with increase in profit, dividend will increase in line with the profit growth to make shareholder returns. And it is for that purpose that capital level as 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. And subordinated bonds to be issued one after the other to use it for shareholder return. This is not what we intend to do. So if there is a large M&A like in the kind we had this time, we do not have much experience in issuing the subordinated bonds. And so when there is an opportunity for large M&A, the subordinated bonds will be issued. This is our thinking.

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Futoshi Sasaki, BofA Merrill Lynch, Research Division - Research Analyst [43]

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;Understood. But can I ask just one follow-up question. Last fiscal year, reinsurance cost. What is your outlook with the wind and drought fire losses that occurred this year? What is your outlook for reinsurance cost next fiscal year?

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Unidentified Company Representative, [44]

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[Yanagihara] of Corporate Account Planning, Accounting Department. From what we are seeing, 10% to 20% increase in reinsurance cost, increase is expected.

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Operator [45]

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Next is Majima-san from Tokai Tokyo.

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Tatsuo Majima, Tokai Tokyo Research Institute Co., Ltd. - Senior Analyst [46]

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I have a detailed question on Page 4 for domestic nonlife. Beginning of year forecast comparing against that, you showed the waterfall chart. So JPY 86.8 billion is a negative, and then it's plus JPY 78.1 billion of cat loss reserves. There is a difference between nat cat and cat loss reserves. Last year, cat loss reserves covered the nat cat negative. However, it seems that you're not able to fully cover for it. For cat loss reserves, why is it able to make up for it? Is it because of payment related factors? Or is it related to different factors? That's my question.

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Unidentified Company Representative, [47]

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This is [Oki] from Corporate Accounting. With regards to the reversal amount of cat loss reserves. For this fiscal year, for fire insurance, there was last minute demand. So it 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.

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Operator [48]

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Is there anyone else who would like to ask a question? Niwa-san from Citi.

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Koichi Niwa, Citigroup Inc, Research Division - Director and Analyst [49]

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Just one question. My question actually overlaps with other questions. Nat cat for this fiscal year. Looking at the report from reinsurance companies, the [remodeling] companies and compare it to conferences by the insurance companies, the impact of cat in Japan seems small in your projections, in your guidance. And my question is the company 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-à-vis the global situation?

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Unidentified Company Representative, [50]

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[Kamoda] of Commercial Lines Underwriting Department. The vendor companies do talk about the model. But with regards to our model, there is a certain range in it. And we have around 0.5 million simulations for the model. And therefore, with regards to individual losses, the purpose is not to come up with nat cat losses for each individual losses. Looking at the losses that we're [seeing delayed] , and we're also looking at historical track record of losses incurred.

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Koichi Niwa, Citigroup Inc, Research Division - Director and Analyst [51]

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Just a point of clarification, large companies of [the 5 entities,] is there a difference in the portfolio, if you could explain about the difference in the portfolio?

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Unidentified Company Representative, [52]

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This is [Yanagihara] of Corporate Accounting Department. And for the reinsurance scheme of other companies, we're not familiar with this. And therefore, please allow me to not comment on it. But for us, we will look at the reinsurance cost and we would need to do necessary provision. And of course, it's not just for us, but we need to look at the amount, the size for cat losses and also look at the global situation.

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Operator [53]

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Are there any other questions?

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Unidentified Company Representative, [54]

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It seems that we are out of questions. So 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.