Tokio Marine : & Nichido Life "Disclosure of Market Consistent Embedded Value as at March 31, 2021"PDF

May 24, 2021

Tokio Marine Holdings, Inc.

President: Satoru Komiya

TSE code number: 8766

Tokio Marine & Nichido Life

Disclosure of Market Consistent Embedded Value as at March 31, 2021

Tokio Marine & Nichido Life Insurance Co., Ltd. ("TMNL", President: Katsumi Nakazato) herein reports its Market Consistent Embedded Value (MCEV) as at March 31, 2021 in compliance with the European Insurance CFO Forum Market Consistent Embedded Value Principles©1 (referred to as "MCEV Principles" hereinafter) as one of various indices used to assess the value of the domestic life insurance business of Tokio Marine Group.

1 Copyright © Stichting CFO Forum Foundation 2008

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*This report is a reference translation of the Japanese version (Japanese version is reviewed by an independent third party). This translation may be used only for reference purposes.

Table of Contents
1.	Introduction ........................................................................................................................	- 3 -
	1.1.	About MCEV...............................................................................................................	- 3 -
	1.2.	Covered business.......................................................................................................	- 3 -
	1.3.	Statement of directors ................................................................................................	- 3 -
	1.4. Review by an independent third party........................................................................	- 3 -
	1.5. Compliance with MCEV Principles.............................................................................	- 3 -
	1.6. Use of government bond yields as reference rates ...................................................	- 4 -
2.	MCEV Results ...................................................................................................................	- 5 -
	2.1.	MCEV results..............................................................................................................	- 5 -
	2.2.	Adjusted net worth......................................................................................................	- 5 -
	2.3.	Value of in-force..........................................................................................................	- 6 -
	2.4.	New business value ...................................................................................................	- 6 -
	2.5.	New business margin.................................................................................................	- 7 -
	2.6. Reconciliation analysis of MCEV from the end of the prior year ...............................	- 8 -
	2.7.	Sensitivity analysis ...................................................................................................	- 10 -
3.	Assumptions ....................................................................................................................	- 14 -
	3.1.	Economic assumptions ............................................................................................	- 14 -
	3.2.	Other assumptions ...................................................................................................	- 19 -
4.	Calculation method of MCEV ..........................................................................................	- 21 -
	4.1.	Covered business.....................................................................................................	- 21 -
	4.2.	MCEV .......................................................................................................................	- 21 -
	4.3.	Adjusted net worth....................................................................................................	- 21 -
	4.4.	Required capital .......................................................................................................	- 21 -
	4.5.	Free surplus..............................................................................................................	- 22 -
	4.6.	Value of in-force........................................................................................................	- 22 -
	4.7.	New business value .................................................................................................	- 22 -
	4.8. Certainty equivalent present value of future profits .................................................	- 23 -
	4.9. Time value of options and guarantees.....................................................................	- 23 -
	4.10.	Frictional costs......................................................................................................	- 24 -
	4.11.	Cost of non-hedgeable risks.................................................................................	- 24 -
	4.12.	Cost of capital rate................................................................................................	- 24 -
	4.13.	Treatment of reinsurance......................................................................................	- 24 -
	4.14.	Treatment of semi-participating dividend policies ................................................	- 25 -
5.	Review by an Independent Third Party ...........................................................................	- 26 -
6.	Caveats............................................................................................................................	- 28 -
7.	Glossary...........................................................................................................................	- 29 -
8.	Disclaimer ........................................................................................................................	- 31 -

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1. Introduction

1.1. About MCEV

The current Japanese financial accounting standards focus on conservativeness and have the limitation that the profits generated from life insurance business are often undervalued, especially shortly after acquisition of the business, leading to challenges in terms of the valuation and assessment of performance of life insurance business.

Embedded values (EV) are calculated as the total of the "corporate net asset value" and the "value of existing business". EV is designed to address the limitations of the financial accounting standards in order to facilitate an appropriate evaluation of value and improve performance assessment, considering the actual situation of the business performance.

While there have been various methodologies for calculation of EV, the CFO Forum released its MCEV Principles in June 2008 and additional guidance subsequently to enhance the consistency of valuation standards and unify the standards for disclosures. TMNL has been disclosing its EV in compliance with the MCEV Principles to enhance the disclosure since the period ending March 2015.

1.2. Covered business

The business covered in this report is the business written by TMNL and its subsidiaries. We have reflected book values of subsidiaries on a Japanese GAAP basis in calculating adjusted net worth. Calculation results in this report do not reflect business written by other business entities in the Tokio Marine Group.

1.3. Statement of directors

The Directors of TMNL state that the MCEV results presented here were prepared in compliance with MCEV Principles, except for points of special notice. Please refer to "1.5. Compliance with MCEV Principles" for areas of non-compliance with MCEV Principles.

1.4. Review by an independent third party

TMNL has requested Milliman, Inc., an independent third-party with actuarial expertise, to conduct a review to assure the appropriateness and reasonableness of the EV calculations, and has received an opinion (Only for the Japanese version).

1.5. Compliance with MCEV Principles

We have calculated our MCEV in accordance with the calculation methodologies and assumptions prescribed in the MCEV Principles. Points of special notice regarding compliance with MCEV Principles are as follows:

• The reference rate used in the calculations has been defined as government bond yields rather than the swap rate curve as stipulated in the MCEV Principles.
• MCEV results are solely for TMNL, and they are not the consolidated results of the Tokio Marine Group. Group MCEV, as prescribed in the MCEV Principles, is not considered in this
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report, as the report is for TMNL on a standalone basis.

1.6. Use of government bond yields as reference rates

While MCEV Principles stipulate that swap rates should be employed as reference rates as a proxy for risk free rates, we use government bond yields as reference rates for the following reasons:

• While swap rates reflect credit risks with regard to LIBOR in general, it is believed that the Japanese government bond yields and US Treasury bond yields we have employed as reference rates have no credit risk.
• We have been conducting ALM focusing on government bonds, from which we can in practice earn income equivalent to the risk free rates. This also allows a consistent valuation of assets and liabilities.
• Both Japanese government bonds and US Treasury bonds have sufficient liquidity.

Please refer to "2.7 Sensitivity analysis" to see the impact of a change in the reference rates from government bond yields to swap rates.

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2. MCEV Results

2.1. MCEV results

The MCEV of TMNL as at March 31, 2021 is 1,177.3 billion yen, which consists of 854.6 billion yen of adjusted net worth and 322.7 billion yen of value of in-force. New business value for FY2020 is 55.0 billion yen.

MCEV as at March 31, 2021 increased by 186.8 billion yen from the last fiscal year end (March 2020) primarily due to "Economic Variances" of 128.2 billion yen. Please refer to "2.6 Reconciliation analysis of MCEV from the end of the prior year" for more details.

(in Billions of Yen)

				As at March 31, 2020		As at March 31, 2021		Change
	MCEV	990.5	1,177.3		186.8
		Adjusted net worth	1,113.0	854.6		(258.3)
		Value of in-force	(122.4)	322.7		445.2
				As at March 31, 2020		As at March 31, 2021	Change
	New business value		37.3		55.0	17.7

2.2. Adjusted net worth

Adjusted net worth is defined as the market value of assets allocated to the covered business in excess of statutory policy reserves and other liabilities as at the valuation date. Please refer to "4.3 Adjusted net worth" for more details.

			(in Billions of Yen)
		As at March 31,	As at March 31,	Change
		2020	2021
Adjusted net worth	1,113.0	854.6	(258.3)
	Total net assets (*)	380.6	389.0	8.3
	Reserve for price fluctuations	13.4	17.0	3.6
	Contingency reserves	51.6	53.3	1.6
	General provision for loan losses	0.4	0.3	(0.0)
	Unallocated amount within	69.1	59.1	(10.0)
	policyholders' dividend reserves
	Unrealized gains or losses on	873.7	635.5	(238.1)
	held-to-maturity securities
	Unrealized gains or losses on	10.8	(112.5)	(123.4)
	bonds backing policy reserves
	Unrealized gains or losses on	(1.7)	(1.2)	0.4
	subordinated debt
	Unfunded pension liabilities	(0.4)	(0.0)	0.3
	Intangible fixed assets	-	(4.8)	(4.8)
	Tax effect related to the above 9	(284.8)	(181.0)	103.7
	items

1. Unrealized foreign exchange gains or losses on investments in affiliates (1.0 billion yen) are included.
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