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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you very much for participating in Tokio Marine Holdings FY '17 Third Quarter Financial Results Conference Call. [Operator Instructions] Also this conference call is being recorded.
Before we begin, let me remind you that the presentation contains forward-looking statements based on current projections. And they entail risks as well as uncertainties. Actual results may differ from current projections.
With that, I would now like to hand over to Mr. Wada.
My name is Wada from the IR group of Tokio Marine Holdings. Let me explain about Tokio Marine Holdings' overview of fiscal 2017 Third Quarter Results and full year projections, which was announced today. I would like to use the materials available at the website from the homepage under topics. I would like to first give you a presentation for about 15 minutes, then welcome questions afterwards.
Now I'll explain about the outline of consolidated financial results. Please turn to Page 3. As for net premiums written, due to the expansion of underwriting at both domestic and overseas market as well as progression of yen, it grew 7% year-on-year or plus JPY 176.8 billion to JPY 2,715.7 billion. Life insurance premiums increased due to increase of in-force policies at Tokio Marine & Nichido Life Insurance Company and depreciation of yen at overseas et cetera and grew 6.8% year-on-year or increased by JPY 43.3 billion to JPY 676.4 billion. Profit declined due to increase in net incurred losses relating to natural catastrophe at domestic and overseas markets and impact of large losses at Tokio Marine & Nichido Fire. Consolidated ordinary profit declined by JPY 78.5 billion to JPY 237.2 billion and net income was JPY 159.3 billion. As a result, adjusted net income, which excludes the effect of provision for catastrophe loss reserve, amortization of goodwill and other intangible fixed assets decreased by JPY 81.5 billion.
Next, let me explain about the overview of ordinary profit. Please turn to Page 4. In the domestic nonlife insurance business, underwriting profit wasn't due to increase in net incurred loss relating to natural catastrophe as well as impacts of large losses at TMNF. However, net investment income such as dividend income from overseas subsidiaries to TMNF increased, which made ordinary profit increase year-on-year by JPY 4.4 billion. At overseas subsidiaries, though we feel progression of yen depreciation, there were large natural catastrophe losses relating to hurricanes in North America and deterioration of foreign exchange gains and so decrease in profits by JPY 29.4 billion. As for consolidation adjustment, due to increase in dividend income from overseas subsidiaries at TMNF, negative adjustment increased by JPY 53.9 billion year-on-year.
Let's now turn to adjusted net income. Please turn to Page 5. Adjusted net income decreased by JPY 81.5 billion to JPY 238.4 billion. Reconciliation from statutory accounting basis net income to adjusted net income, as well as movements from last year are as described on the slide.
Next, let's look at domestic nonlife business. Please turn to Page 6. Net premiums written was year-on-year plus 1.8% or increased by JPY 24.2 billion due to increase in premium was auto insurance as well as other line of business.
Please refer to Page 8 for line-by-line details. Net incurred losses increased due to natural catastrophe, as well as due to large losses, and increased by JPY 83.5 billion year-on-year. Business expenses increased by JPY 4.8 billion due to increase in agency commission associated with increase in net premiums written. Catastrophe loss reserve provision was reduced by JPY 8.1 billion to increase in reversal associated with hike in loss ratio of auto and fire life of insurance. As a result, underwriting profit decreased by JPY 58.8 billion to be JPY 40.8 billion.
Please refer to details of net investment income on Page 9. Investment income increased by JPY 62.7 billion year-on-year to JPY 209.2 billion, mainly due to increase in dividend income from overseas subsidiaries. Dividend from subsidiaries is eliminated along the consolidation adjustment and its impact is net neutral to group's consolidated financial earnings. Total amount of business-related equities sold during the term was JPY 93 billion and gains from sales of equities was JPY 72 billion. As a result, net income of the term increased by JPY 8.5 billion year-on-year to be JPY 201.5 billion.
Next, I'll explain about the combined ratio. Please turn to Page 7. E/I combined ratio for private lines of insurance rose by 4.7 points to be 62.5%. This is due to increase in net incurred losses relating to natural catastrophes and impact of large losses. Expense ratio declined by 0.2% to 32.0%, mainly due to an increase in net premiums written. As a result, E/I combined ratio in private lines of insurance rose by 4.5 points to be 94.4%.
Next, I will explain about Nisshin Fire. Please turn to Page 10. Underwriting profit of Nisshin Fire declined by JPY 2.4 billion over the year to JPY 2.7 billion. This is mainly because while net premiums written in the fire and specialty line of business increased, net losses incurred related to natural catastrophes increase. Net investment income and other increased by JPY 0.8 billion year-on-year to JPY 1.5 billion, due to increase in gains on sales and redemption of securities. Accordingly, net income became JPY 2.6 billion, down by JPY 1.1 billion year-on-year.
Next, let us review the performance of TMNL. Please turn to Page 11. New policy ANP declined by 8.7% year-on-year due to the sales suspension of long-term saving products. However, excluding long-term saving products, new businesses grew by 0.8% year-on-year. ANP of in-force policies increased by 3.8% over the year, due to an increase in new policies. Under JGAAP, net income decreased by JPY 0.3 billion over the year to JPY 11.4 billion, while net provision for underwriting reserves decreased due to the revision of standard interest rates, provision for contingency reserves increased and sales gains of securities that we recorded last year were not repeated this time around. And core operating profit was JPY 23.8 billion, down by JPY 0.2 billion year-on-year.
Next, I will discuss International Insurance Business. Please turn to Page 12. Net premiums written in the International Insurance Business grew by 18% year-on-year, due to progress of growth measures implemented in each business, as well as depreciation of Japanese yen. We will break it down by region. 3 group companies in North America grew their top line by 16% in total due to rate increases in renewal book and business expansion. Europe also grew their top line driven by business expansion at Tokio Marine Kiln. Growth in South and Central America is mainly attributable to expansion of auto business in Brazil and Asia also achieved growth based on increased stakes in an Indian operation and growth measures pursued in each business. Reinsurance declined mainly due to the absence of increase in multiyear policies recorded last year. Life insurance grew their top line driven by depreciation of Japanese yen.
Next, I'll explain business unit profit of International Insurance Business on Page 13. Business unit profit declined by 34% year-on-year to JPY 41 billion, mainly due to the large net cat losses related to hurricanes in North America and foreign exchange losses despite the progress of growth measures in each business and weaker Japanese yen. Please also note that the impact of March nat cat events such as hurricanes in North America are reflected on the actual performance of each region. We will give you the break down by regions. North America grew by JPY 2.3 billion. While there were negative factors such as large nat cat events in Philadelphia and TMHCC, investment income increased at Delphi in addition to the absence of the investment losses realized last year and fall in Japanese yen was also a positive factor. Europe and reinsurance declined significantly mainly due to large nat cat events and deterioration of currency translation gains and losses. However, Asia grew its profits based on profitability improvement in each group company, in addition to the increase in stakes in the Indian operation and reserve relief. Actual performance of 3 companies in North America is included on Page 14 for your later reference.
I will now explain full year projection of FY '17 on Page 16. As U.S. tax reform bill passed the Congress late December last year, this impact will be reflected in our FY '17 numbers. Since the tax reform impact was not factored in our revised projection that we announced in November last year and its impact on FY '17 numbers is material, we decided to revise our projections just to reflect the effect of this tax reform. The impact includes takedown of deferred tax assets or liabilities in conjunction with lower corporate tax rates, as well as one-time repatriation total tax on retained earnings of foreign subsidiaries. But it is a formal element that is more relevant to our company's numbers. Our DTL is bigger than DTA. And mainly because of the takedown of DTL, we revised upwardly the projection of net income attributable to owners of the parent by JPY 50 billion to JPY 280 billion. We did not revise our full year projection on adjusted net income, but the impact of the U.S. tax reform on adjusted net income is estimated to be approximately JPY 10 billion. The magnitude of the impact here is smaller compared to JGAAP-based number, because takedown of the DTL related to intangible fixed assets is excluded from adjusted net income in its calculation.
This concludes my explanation today. We would now like to open the floor for Q&A session. Thank you very much for your kind attention.
Thank you, Mr. Wada. Now we would like to start the Q&A session. Now the operator will be explaining how to update question among the Japanese participants.
[Operator Instructions] The first question will be from Mr. Muraki of Deutsche Securities.
My first question is regarding Page 12, regarding the top line of the overseas subsidiary. As of the January 1 reinsurance renewals, the numbers are shown. And in your reinsurance business, as well as in North America and European businesses, what is the implication for the premium for fiscal 2018, what is your outlook based on the renewed rates? So that is my first question regarding the insurance. The second question is about next fiscal year, the reduction of the corporate tax to be enforced on the 3 U.S. subsidiaries, I'm trying to magnify its impact. The initial profit plan was JPY 124 billion and if the tax rate is 135% (sic) [ 35% ] but now it's going to be 21%, then that means the consolidated profit is going to be pushed up by JPY 27 billion. However, there are some municipality bonds, which you invest in, which is tax exempt. And also, what you call as REIT or BEIT, if BEIT is introduced then, I'm sure there will be some impact to the reinsurance business coming from the BEIT. And so on net-net basis, what will be the profit impact, positive impact to the profit coming from those tax reforms?
My name is Yuasa from International Business Development. I would like to answer your first question. In our International Insurance Business and as for the refreshed rates, right now we are still in the process of collecting the information and we -- how much the market has hardened depends on the loss impacted contracts as well as no-impacted contracts on other contracts. And so we have not been able to grasp the comprehensive situation about the rate changes. But regarding the reinsurance business, which was under your question, I believe the impact is a change, with rate increase in the first half of the single-digit in the reinsurance business. And as for the primary underwriting business in North America, it is still the same range in the first half of the single-digit. Because of the overcapacity situation versus our expectation, the market hasn't hardened as much as we expected. That concludes my answer to your first question.
My name is Okajima from Corporate Accounting of Tokio Marine Holdings. I would like to answer your second question. In fiscal 2018 and after, after the corporate tax rate is reducing in North America, the tax burden is going to be less by about JPY 18 billion and also to BEIT impact, as you mentioned, in our case from the U.S. subsidiaries and there are some reinsurance being seized to the overseas companies. However, due to the arrangement of each of those contracts, there is not expected to be any impact coming from the BEIT.
Regarding the second point, if I do the same -- no, it's not doing a simple calculation and coming to the answer. The municipality bond investment you have done before, it was not fully taxed and is not part of the reason because my assumption was JPY 27 billion, you say it's JPY 18 billion, so there is a difference by about JPY 9 billion, and that difference comes from those tax treatments on bonds. And also in the underwriting -- primary underwriting business, the rate increase is single-digit, but that's a wide range. And so in the reinsurance, it is in the first half of the single-digit versus reinsurance. What is the rate situation regarding the primary underwriting? Can you narrow down the range of the percentage that hardened for the primary underwriting business?
My name is Okajima, again. As for the impact of the lesser tax burden, yes, the municipality bonds and also there were other bonds, which were tax exempted, that is where the difference is coming from. And also this JPY 18 billion of impact I mentioned, this is based on the taxable income of 2016. That concludes my answer. Regarding the second point about the primary underwriting business, especially surrounding property business, centering around properties, I would say the rate increase was in the midpoint in the single-digit range.
Next questions are from Ms. Tsujino of JP Morgan.
Now domestically at TMNF, there is A4-sized material, the big material on Excel sheet. When I look at earning credit loss ratio, excluding nat cat on a cumulative basis on the third quarter, if I make a year-on-year comparison by line, it hasn't increased quite a bit. Up until the end of the second quarter, the loss ratio actually did increase. So I believe that the impact is lingering from the end of the second quarter. And from a different perspective, from underwriting profit, if I actually exclude nat cat events and also take down of the cat loss reserve, as of the end of the first half, I believe that there was a deterioration by about JPY 40 billion. And also on a cumulative basis as of the end of the third quarter, I believe that there was a deterioration of about JPY 47 billion. So on the underwriting side, is it fair to say that deterioration trend up until the end of the first half is still lingering into the third quarter, is my understanding correct?
My name is [ Kota ] from Corporate Accounting Department of TMNF. Your question is with regards to loss ratio. So first off, with regards to loss ratio on earned incurred basis on year-on-year basis, because of the large loss events and also midscale events, there has been some negative impact, which were primarily recorded in the first half of the year, primarily already. And looking at this October through December period, to some extent there have been some losses. However, the majority of the losses, which has resulted into the deterioration of loss ratios were due to the losses incurred by the end of the first half of the year. Yes, I believe that some billion yen worth of deterioration was certainly witnessed in the third quarter, however.
Is it because some unique insurance were offered and results of those unique insurance products were deteriorating, so should we expect that this negative situation would actually continue? Or is it primarily because of some unlucky events, perhaps because of prior events?
So it is in the magnitude of some dozens of billions of yen.
And of course, it would have been great if we could actually see the improvement on a year-on-year basis. However, that wasn't the case, so this is a little bit concerning. So how should we actually make sense of this deterioration that we witnessed in the third quarter this year?
Once again [ Kota ] from Corporate Accounting Department of TMNF. To your question, of course, if I look at the year-on-year comparison, of course, you will probably get the impression that the performance is deteriorating quite significantly. However, last year, the loss ratio was actually quite benign and also good, even based on the historical standard. And that probably is the reason why you believe that the loss ratio this year seems to be deteriorating. Certainly, some small losses have been incurred. However, there is no strong core relation amongst these events, so these are rather one-off events.
Now looking at the underwriting profit, which is also deteriorating, of course, the provisioning of the underwritten premium policy reserve. Depending on how you actually do the provisioning, the numbers would actually look quite differently. However, these are actually not the -- those factors that are affecting our numbers this time around. Is my understanding correct?
Now up until the end of the third quarter, the trends that we have observed is in particular looking at the outstanding balance of the policy reserve. Based on the recent trend, we have actually used a simplified approach in doing the provisioning calculation. And therefore, I don't think that we have actually observed a material changed or change or changing trend in the third quarter. However, as we go towards the end of the year, because the loss ratio last year was rather benign and also good, I believe that there was actually -- because the loss ratio is actually increasing this year, I believe that the provisioning amount should actually decrease this year.
I understand. So you believe that you'll be able to do some catch-up towards the end of the fiscal year?
Yes, that's our assumption.
Next question is from Mr. Watanabe of Daiwa Securities.
My name is Watanabe from Daiwa. I have 2 questions. My first question has to do with the adjusted net income for the fiscal year. Due to the tax reform in the United States, I believe there will be a positive impact by about JPY 10 billion, but the original target was JPY 315 billion and now it is JPY 325 billion, that you can revise the planned net worth due to this? And also what is the timing of approaching this? Would you be doing this at the end of the fourth quarter? And also the second question is about the natural catastrophes overseas. If you have the actual numbers as of the end of the third quarter, please let me know.
My name is Koga from Corporate Planning of Tokio Marine Holdings. First, I would like to answer the question regarding the tax reform. And adjusted net income is going to have an upside by about JPY 10 billion. And due to the tax reform, we are expecting about JPY 10 billion increase in profit. And as for the plan, as Mr. Wada just explained, compared to the statutory accounting basis profit, the impact to the adjusted net income is going to be less. And so we have not made any changes to the annual plan for the adjusted net income.
My name is Okajima from Corporate Accounting of Tokio Marine Holdings. To your second question about the natural catastrophe current situation overseas, the impact to the statutory accounting profit on pretax basis is about JPY 62 billion, so this means year-on-year increased by JPY 42.5 billion.
About the timing for booking the impact of the tax reform and the refreshed profit, when would that be?
This is Koga again from Corporate Planning. Yes, your understanding is correct, by the end of the fourth quarter.
There seems to be no questions at the moment. So the operator is explained how to place additional questions for the Japanese audience. There seems to be no questions. So the operator is repeating once again how to place additional questions to Japanese audience. We thank you for your patience.
The next question is from Ms. Tsujino of JP Morgan.
Sorry, the numbers that you have announced today include nat cat losses incurred overseas from January through September. However, when it comes to the bushfire in California, how much of that -- how much is the impact? If you have the numbers, please share that with me?
My name is Yuasa from International Business Development Department. With regards to bushfire in California, which actually occurred in last October, which is essentially the results to be announced as part of the Q4 results. Of course, there were 2 bushfires in North and South and the impact is expected to be some billion yen, respectively.
So he total is a little more than a JPY 1 billion, is that right?
Yes.
There seems to be no questions, so Mr. Wada over to you.
Once again, thank you very much for participating in Tokio Marine Holdings' FY '17 Q3 Earnings Call today. If you have any further questions or if you need further clarification, please do contact us. Thank you once again for your participation.
With this, we would now like to conclude Tokio Marine Holdings' FY '17 Third Quarter Earnings Call. We thank you for your participation. This is the end of the call. Thank you.