1 Message from the President 2 Earthquake Insurance in Japan 10 Reinsurance of Earthquake Insurance 14 Statistics 18 Japan Earthquake Reinsurance Co., Ltd. 24 Financial Section 41 Corporate Data Contents 1Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 We are delighted to introduce to the readers of this annual report a detailed disclosure of the current situation and activities of the Company. Japan Earthquake Reinsurance Co., Ltd. was founded in 1966 as the only company in Japan permitted to exclusively handle reinsurance for earthquake insurance on dwelling risks. For more than 40 years since then, we have been underwriting the dwelling risk of earthquakes in Japan in alliance with the Japanese government and non-life insurance companies. As the core entity in this sector, we have not only been committed to bolstering and upgrading the system of our reinsurance payment, but also to providing our best care to managing and operating the assets that support the system. Since last year, Samoa, Haiti, and Chile have each experienced massive earthquakes of seven to eight magnitudes, causing extensive damage. In association with the Chilean earthquake, a serious tsunami warning was issued in Japan for the first time in 17 years, affecting people on the coast, some of whom were evacuated for many hours. Although there were no major temblors in Japan, there were an earthquake with its seismic center in Suruga Bay, an earthquake with its epicenter to the east of the Izu Peninsula, and an earthquake centered in the sea around the main island of Okinawa. With rising public awareness of earthquake insurance in these circumstances, the number of earthquake insurance contracts increased steadily, and reaching 12.27 million at the end of March 2010, partly reflecting reductions in earthquake insurance premiums and the expansion of tax deductions for earthquake insurance premiums from income. In asset management, the Company achieved a profit despite the appreciation of the yen. As a result, total assets of the Company stood at 1,092.2 billion yen. Given the increasingly important roles and responsibilities in the earthquake insurance system, we must be even more prudent in our management approach. In these circumstances, we will play an active role in enhancing and developing the earthquake insurance system and will address challenges such as refining our expertise in earthquake insurance operations, bolstering our asset management and risk management, and improving our business continuity plan. We have prepared this annual report to provide our stakeholders with insight into the current situation and activities of the Company. We welcome any comments or opinions. Message from the President President: Hideo Suzuki Chairman: Shozo Wakabayashi July 2010 Hideo Suzuki President Japan Earthquake Reinsurance Co., Ltd. 2 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 Establishing the earthquake insurance system Japan is well known for its frequent earthquakes. Traditionally, the thinking has been that it is difficult to provide insurance coverage for damage caused by earthquakes. One reason for this is that nobody can be sure when an earthquake will strike. Another reason is that there is a risk that a major earthquake could cause tremendous damage. Earthquake insurance was for many years the subject of a great deal of research and discussion, to little avail. Despite this, there was considerable public demand for a system of earthquake insurance on dwelling risks* to enable victims of an earthquake who have lost their homes or property rebuild their life. Responding to this demand, the non-life insurance business continued to study ways to build such a system. The Niigata Earthquake of June 1964 prompted efforts to establish the system. The government and the non-life insurance sector conducted a detailed examination of the earthquake insurance system, ultimately leading to the Law concerning Earthquake Insurance. The system for earthquake insurance on dwelling risks was built based on this law and Japan Earthquake Reinsurance Co., Ltd. (JER) was established. We play a key role in taking on full responsibility with the reinsurance of earthquake insurance contracts entered into by non-life insurance companies. Mechanism of the earthquake insurance system Earthquake insurance is arranged as an optional rider to fire insurance which covers buildings for residential use and/or personal property. Earthquake insurance cannot be purchased on its own. If you conclude a fire insurance contract without earthquake insurance, you are required to seal the earthquake insurance check column of the fire insurance contract application form. If you have entered into a fire insurance contract without earthquake insurance, you will be able to buy earthquake insurance while your fire insurance contract is valid. In some areas, however, if an announcement warning of an earthquake has been made, you may not be able to buy earthquake insurance. * Non-life insurance is divided into two groups: insurance in the household risks field taken out by individuals to cover various risks in the home, and insurance in the corporate risks field taken out by companies to cover various company’s risks. The same distinction applies to earthquake insurance. Insurance taken out by individuals is called earthquake insurance on dwelling risks, and the other insurance is called as earthquake insurance for companies. The Law concerning Earthquake Insurance targets at earthquake insurance on dwelling risks. EARTHQUAKE INSURANCE in japan 3Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 Insurance Coverage Loss of or damage to buildings for residential use and/or personal property through fire, destruction, burial or flooding caused directly or indirectly by any earthquake or volcanic eruption, or resulting tsunami (hereinafter referred to as an earthquake, etc.). Fire insurance* does not cover   1. any losses caused by fire (including the spread thereof, and expanded loss) resulting from an earthquake, etc., and   2. any fire that has spread because of an earthquake, etc. Earthquake insurance is needed to compensate for these kinds of losses. Insurable interests Buildings for residential use and/or personal property None of the following is insurable: A building used as a plant or office, and not used for dwelling purposes, precious metals, gems or antiques valued at ¥300,000 or more per piece, currency, securities (checks, share certificates, gift certificates), certificates of deposit, revenue stamps, postal stamps, automobiles and certain other items. Term insured Short-term, one year and long-term (two to five years) Amount insured The policyholder is required to set the amount insured under earthquake insurance within a range of 30-50% of the amount of insurance provided by his/her fire insurance. However, the amount insured is limited to a maximum of ¥50 million for a building** and ¥10 million for personal property. * Fire insurance Ordinary fire insurance, long-term comprehensive insurance, deposit life comprehensive insurance, dwelling fire insurance, householders’ comprehensive insurance, storekeepers’ comprehensive insurance and certain other types of insurance. **  The amount insured of a condominium building such as apartment building is limited to ¥50 million, totaling exclusive areas and common areas. 4 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 * Current price The current price is such that the amount of depreciation according to the service year is deducted from the price of a new building. Payment of insurance claims Insurance claims are paid according to the policyholder’s earthquake insurance to cover total, half or partial loss of the policyholder’s residential building and/or personal property. Insurable objects Degree of loss Amount of insurance claim paid Residential buildings, personal property Total loss 100% of amount insured (up to the current price* of the insurable objects) Half loss 50% of amount insured (up to 50% of the current price of the insurable objects) Partial loss 5% of amount insured (up to 5% of the current price of the insurable objects) Authorization criteria of losses Total loss, half loss or partial loss applies to any of the following cases: Residential building Personal property Degree of loss Amount of loss of major structural parts Area of floor burnt down or washed away (partial loss applies when the residential building is flooded above floor level) Degree of loss of or damage to the personal property Total loss 50% or more of the current price of the residential building 70% or more of the total floor area of the residential building 80% or more of the current price of the personal property Half loss From 20% to less than 50% of the current price of the residential building From 20% to less than 70% of the total floor area of the residential building From 30% to less than 80% of the current price of the personal property Partial loss From 3% to less than 20% of the current price of the residential building The residential building was damaged but not totally or half lost although it was flooded above the floor level or above 45 cm or higher from the ground level. From 10% to less than 30% of the current price of the personal property Cases when no insurance claim is payable: Loss or damage due to willful acts or gross negligence or violation of law• Loss or damage due to war or insurrection• Loss or damage occurring ten days or more after the earthquake• Loss or theft of the objects of the insurance• When a non-life insurance company becomes insolvent: With respect to the earthquake insurance, the Non-life Insurance Policy-holders Protection Corporation of Japan will pay the insurance benefit on behalf of a bankrupt company with a 100% indemnity rate. 5Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 Limit of total amount of insurance claims to be paid Limit of total amount of insurance claims to be paid* is limited to 5,500 billion yen as revised in April 2008 per earthquake, etc.. In the event the total amount of insurance claims payable exceeds the limit, law allows insurance claims per contract to be reduced. Premium rate The premium rate for earthquake insurance is calculated by the Non-Life Insurance Rating Organization of Ja­pan** on the basis of the Law concerning Non-Life Insurance Rating Organizations. The basic rate of insurance premiums consists of a risk premium rate applicable to or appropriate for the future payment of insurance claims and a loading premium rate applicable to or appropriate for non-life insur­ance company expenses and agency commissions. Premium rate = Risk premium rate + Loading rate The premium rate actually applied is calculated by multiplying the basic rate of the insurance premium that is set according to the structure of the residential building and the residential building to accommodate personal property that are subject to insurance and the building location, by a discount rate set according to the earthquake-resistance capability (for which certain confirmation documents are required). * Limit of total amount of insurance claims to be paid The Law concerning Earthquake Insurance stipulates that the limit to the total insurance claims payable by the government and private insurance company per earthquake, etc.. For details, see p.12 Insurance liabilities held by JER, non-life insurance companies and the government. ** Non-Life Insurance Rating Organization of Japan An organization established in accordance with the Law concerning Non-Life Insurance Rating Organizations, which aims to provide a fair basis premium rate applicable to non-life insurance. 6 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 Basic rate (applicable to buildings and personal property) The basic rate is set according to the structure of the residential building and the residential building to accommodate personal property that are subject to insurance and the building location. * The Headquarters for Earthquake Research Promotion Following on the lessons learned from the Great Hanshin-Awaji Earthquake Disaster, the Special Measure Law on Earthquake Disaster Prevention was enacted to develop a system to facilitate research and study on earthquakes, and based on this Law, the Headquarters for Earthquake Research Promotion was founded in July 1995. In March 2005, the Headquarters for Earthquake Research Promotion published two kinds of maps as the National Seismic Hazard Maps for Japan: the Probabilistic Seismic Hazard Map and the Scenario Earthquake Shaking Map. The Probabilistic Seismic Hazard Map was revised in July 2010. The Headquarters for Earthquake Research Promotion* , a government organization, published the Probabilistic Seismic Hazard Maps. The risk premium rate is calculated based on the latest revised damage projection method to cover all earthquakes (number of epicenters: about 730,000 epicenter model) used in the preparation of the maps that are assumed to have the potential to cause damage in the future. Annual insurance premium (per insurance year)/ amount insured (thousand yen of earthquake insurance) (Unit: yen) Non- wooden Wooden With cost easing measures Prefecture n 0.5 1.00 0.65 Iwate-ken, Akita-ken, Yamagata-ken, Fukushimaken, Tochigi-ken, Gunma-ken, Toyama-ken, Ishikawa-ken, Fukui-ken, Tottori-ken, Shimane-ken, Yamaguchiken, Fukuoka-ken, Saga-ken, Nagasaki-ken, Kumamotoken, Kagoshima-ken n 0.65 1.27 0.84 Hokkaido, Aomori-ken, Miyagi-ken, Niigata-ken, Nagano-ken, Gifu-ken, Shigaken, Kyoto-fu, Hyogo-ken, Nara-ken, Okayama-ken, Hiroshima-ken, Oita-ken, Miyazaki-ken, Okinawa-ken n 0.65 1.56 0.84 Kagawa-ken n 0.91 1.88 1.18 Ibaraki-ken, Yamanashi-ken, Ehime-ken n 1.05 1.36 Saitama-ken, Osaka-fu n 0.91 2.15 1.18 Tokushima-ken, Kochi-ken n 1.69 3.06 2.19 Chiba-ken, Aichi-ken, Mie-ken, Wakayama-ken n 3.13 Tokyo-to, Kanagawa-ken, Shizuoka-ken 7Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 Discount rate Either discount rate will apply to the foregoing basic premiums rate when the building and personal property come under any of the following: Discounts cannot be claimed more than once.• (a) Seismic isolated building* discount When the building is a seismic isolated building constructed in accordance with related laws and accommodated personal property Discount rate 30% (b) Earthquake-resistance class* discount rate When the building corresponds to the earthquake-resistance class as provided for by law and accommodated personal property Earthquake-resistance class 1 2 3 Discount rate 10% 20% 30% * Earthquake-resistance class The earthquake-resistance class of a residential building is an indicator of earthquake resistance as stipulated in the Japanese Housing Performance Designation Standards based on the Housing Quality Guarantee Law. It is also used to evaluate a building for earthquake resistance as provided for in the assessment guidelines for earthquake-resistance diagnosis based on the earthquake-resistance class (as to the body of the building) established by the Ministry of Land, Infrastructure and Transport. A description of the classes is as follows. Earthquake-Resistance Class 3 A class suggesting that the building will not topple or collapse against a force that is 1.5 times stronger than the force of an earthquake (as provided for in Section 3, Article 88, Enforcement Order of the Construction Standard Act) that occurs very rarely (once every some hundred years) Earthquake-Resistance Class 2 Class suggesting that the building will not topple or collapse against a force 1.25 times stronger than the force of an earthquake that occurs very rarely Earthquake-Resistance Class 1 Class suggesting that the building will not topple or collapse against that force of earthquake that occurs very rarely 8 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 * Seismic isolated building A seismic isolated building is a building that is assessed to be a seismic isolated building in accordance with the related indicators in the Japanese Housing Perfor­mance Designation Standards under the Housing Quality Guarantee Law. ** Earthquake-resistance capacity Earthquake-resistance capacity is an aseismic capacity that conforms to the current earthquake-resistance standards set out in the Building Standards Law. (c) Earthquake-resistance diagnosis discount When the building was assessed as having an earthquake-resistance capacity** equivalent to that stipulated by related laws as a result of an earthquake-resistance diagnosis or an earthquake-resistance refurbishment, and accommodated personal property Discount rate 10% (d) Building age discount rate When the building was constructed during or after June 1981 and accommodated personal property Discount rate 10% Premium rate of a long-term contract Premium rate of a long-term contract (a two-to-five year contract with special conditions for premiums) is calculated as follows: (Basic rate – discount rate) x applicable coefficient = premium rate of a long-term contract. Contract period 2 years 3 years 4 years 5 years Coefficient 1.90 2.75 3.60 4.45 9Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 Income tax credit system for earthquake insurance In the tax system revision in fiscal 2006, the old income tax credit for non-life insurance was revised, and an income tax credit for earthquake insurance was established to support selfhelp efforts of the public in preparation for earthquake damages. As the revision enables deductions of up to 50,000 yen and 25,000 yen from the gross income, etc. for the purposes of income tax and the local inhabitant tax, respectively, the purchase of an earthquake insurance policy became easier. An example of insurance premiums calculated A wooden residential building constructed in January 2000 in Hyogo-ken: Fire insurance (principal contract) amount insured: Building 20 million yen; personal property 6 million yen 1. Setting the amount insured of earthquake insurance: In this case, the proportion insured (*) will be 50%. Residential building: 20 million yen x 50% = 10 million yen Personal property: 6 million yen x 50% = 3 million yen 2. Confirming the premium rate applicable: Hyogo-ken, wooden → 1.27 3. Confirming the discount rate applicable: Building constructed in and after June 1981 → 10% = 10,000 x 1.27 x (100% – 10%) = 11,400 (yen) Earthquake insurance premium on residential building Earthquake amount insured Earthquake insurance premium rate Discount rate 1.14 (1,000 yen) = 3,000 x 1.27 x (100% – 10%) = 3,420 (yen) Earthquake insurance premium on personal property Earthquake amount insured Earthquake insurance premium rate Discount rate 1.14 (1,000 yen) * Proportion Insured The insured earthquake amount as a percentage of the insured fire amount. The insured earthquake amount should be 30-50% of the insured fire amount. 10 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 Mechanism of reinsurance In the event that a major earthquake happens, it can result in large payouts of insurance claim by insurance companies. Because there is a certain limit, however, to the ability of these companies to make payments, the government shares insurance responsibility with them through reinsurance. We reinsure the earthquake insurance contracts underwritten by non-life insurance companies to take on full liability, which we homogenize before we pass on the risk proportionally to the non-life insurance companies and the government by retrocession according to the limit indemnity. We take up the remaining indemnity. Treaty A Reinsurance by JER for non-life insurance companies JER has entered into a reinsurance contract with non-life insurance companies operated in Japan. According to the contract, the non-life insurance companies conclude a reinsurance contract with JER on the earthquake insurance contracts in full underwritten by them in accordance with the Law concerning Earthquake Insurance. JER takes up the full liability for this earthquake insurance without fail. Treaty B Retrocession by JER on non-life insurance companies JER enters into a reinsurance contract individually with the non-life insurance companies, and retrocedes to each company part of the insurance liability taken up by JER to the limit as determined according to the balance of earthquake insurance risk reserves and other factors. Treaty C Retrocession by JER on the government (Excess of loss reinsurance) JER has entered into an excess of loss reinsurance with the government on earthquake insurance for a loss exceeding the amount payable by JER, according to which JER retrocedes to the government part of insurance liability taken up according to Treaty A to the indemnity limit as approved by the Diet. Reinsurance of earthquake insurance 11Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 Mechanism of payment of insurance claims The policyholder claims insurance money to the non-life insurance company when the policyholder suffers a certain loss or damage as a result of an earthquake, etc., and the company will pay insurance claim to the policyholder. The non-insurance company which paid an insurance claim to the policyholder will claim the full amount from JER through reinsurance. JER will pay the reinsurance claim in full to the non-life insurance company. This means that the amount of reinsurance claim paid by JER is the same as the amount of the insurance claim paid to the policyholder by the non-life insurance company. Flowchart of reinsurance of earthquake insurance Policyholder Policyholder Owned by JER Non-life insurance company The government of Japan The government of Japan Non-life insurance companies Non-life insurance companies Non-life insurance company Japan Earthquake Reinsurance Company, Limited Japan Earthquake Reinsurance Company, Limited Flowchart of reinsurance Flowchart of reinsurance claim payment Treaty A Treaty C Treaty B Treaty C Treaty B Treaty A Conclusion of earthquake insurance contract Claiming the insurance claim Claiming the insurance claim Payment of insurance claim Payment of insurance claim Reinsurance in full amount Claiming retrocession insurance money Claiming retrocession insurance money Payment of retrocession insurance claim Payment of retrocession insurance claim 12 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 Insurance liabilities held by JER, non-life insurance companies and the government The following is the reinsurance scheme, showing how JER, non-life insurance companies and the government share insurance liabilities, and the way each handles the shared liabilities. Revised as follows on April 1, 2009. Reinsurance scheme JER The governmentNon-life insurance companies 115 billion 905 billion 3 trillion 396.25 billion 503.8 billion 401.2 billion 89.35 billion 89.4 billion 50% 100% 95% 5% 50% 5.5 trillion yen Up to 3 trillion 712 billion yen Up to 1 trillion 925 billion yen Up to 1 trillion 122.6 billion yen Up to 115 billion yen (Payable insurance claim) Liability limit JER Non-life insurance companies The government 605.60 billion yen 593.15 billion yen 4,301.25 billion yen Total (limit amount of payable insurance claims) 5.50 trillion yen 13Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 The balance of risk reserves at JER and non-life insurance companies and the government liability reserves at the end of fiscal 2009 JER and non-life insurance companies save the risk premium of insurance premiums paid by policyholders as earthquake insurance risk reserves for the possible payment of earthquake insurance claims while the government saves government reserves in the earthquake insurance special account under law. In the event that an earthquake occurs and causes losses or damages, each of JER, non-life insurance companies and the government pays an insurance claim according to each liability as stipulated in the reinsurance scheme by withdrawing from reserves. JER Non-life insurance companies The government 496.7 billion yen 524.3 billion yen 1,270.8 billion yen Total 2,291.9 billion yen Note: The risk reserves by the non-life insurance companies include the amount equivalent to deferred tax assets due to tax effect accounting. Examples of insurance claims to be paid by JER, non-life insurance companies and the government Suppose that insurance claims amounting to 2 trillion yen for losses or damages associated with a single earthquake are to be paid. JER, non-life insurance companies and the government will pay each in the following amount: (Unit: billion yen) Claims paid A person of burden Portion up to 115 billion yen Portion over 115 billion yen, and up to 1,925 billion yen Portion over 1,925 billion yen, and up to 2,000 billion yen Total JER 115.0 401.2 — 516.2 Non-life insurance companies — 503.8 3.75 507.55 The government — 905.0 71.25 976.25 Total 115.0 1,810.0 75.0 2,000.0 STATISTICS 14 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 The percentage of households purchasing earthquake insurance in areas at risk of major earthquakes Earthquake No. of households (A) (1,000 households) No. of contracts (B) (1,000 contracts) Amount insured (million yen) Percentage of households with insurance (B/A) (%) Probability that an earthquake could occur within the next 30 years Great Kanto earthquake 23,589 6,328 52,686,764 26.83 Nearly 0%- 1% Earthquake with an epicenter directly below metropolitan Tokyo 16,647 4,581 37,588,171 27.52 About 70% Tokai earthquake 22,431 6,270 52,094,508 27.95 87% (reference value) Tonankai earthquake 21,266 5,500 46,023,637 25.86 About 60% – 70% Nankai earthquake 28,969 7,125 59,822,819 24.60 About 60% Note: The probability that an earthquake could occur within the next 30 years is based on the 2010 version of the National Seismic Hazard Maps for Japan of the Headquarters for Earthquake Research Promotion of the Japanese government. The probability of an earthquake with an epicenter directly below metropolitan Tokyo refers to an earthquake with magnitude of about 7 that could occur in southern Kanto. Reinsurance claims paid in fiscal 2009 Reinsurance claims paid in fiscal 2009 amounted to 5,544 million yen, including earthquake reinsurance claims paid to cover the Surugawan Earthquake that occurred in 2009. In terms of numbers, 9,901 claims were paid (on the basis of insurance policies). See below for major claims paid per earthquake. Earthquake Date of occurrence Magnitude No. of policies Reinsurance claims paid (million yen) 1. Surugawan Earthquake August 11, 2009 6.5 8,244 4,508 2. Izuhanto Toho-oki Earthquake December 17, 2009 5.1 363 299 3. Iwate-Miyagi Nairiku Earthquake June 14, 2008 7.2 398 217   Other earthquakes — — 896 518   Total — — 9,901 5,544 statistics 15Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 Top ten earthquakes as to reinsurance claims paid See the table below for the top ten earthquakes with respect to reinsurance claims paid since the earthquake insurance was established. (As of March 31, 2010) Note: Insurance claims worth 78,346 million yen were paid to cover the Hyogoken-Nanbu Earthquake. Of these claims, the government paid 6,173 million yen, JER 40,000 million yen and the non-life insurance companies 32,173 million yen according to the reinsurance scheme in force at the time. 0 10000 20000 30000 40000 50000 60000 70000 80000 65,427 78,346 24,448 16,939 21,970 16,896 12,598 14,893 7,826 8,226 11,309 6,409 10,546 5,987 8,000 5,407 8,244 4,508 7,660 3,918 Reinsurance claims paid (million yen)No. of policies Earthquake 1. Hyogo- ken Nanbu 2. Geiyo 3. Fukuoka- ken Seiho-oki 4. Niigata- ken Chuetsu 5. Niigata- ken Chuetsu- oki 6. Fukuoka- ken Seiho-oki 7. Tokachi- oki 8. Iwate- Miyagi Nairiku 9. Suruga- wan 10. Iwate Engan Hokubu Date of occurrence Jan. 17, 1995 Mar. 24, 2001 Mar. 20, 2005 Oct. 23, 2004 Jul. 16, 2007 Apr. 20, 2005 Sep. 26, 2003 Jun. 14, 2008 Aug. 11, 2009 Jul. 24, 2008 Magnitude 7.3 6.7 7.0 6.8 6.8 5.8 8.0 7.2 6.5 6.8 Nankai Earthquake (about M8.4) About 50% – 60% 7. Tokachi-oki Earthquake in 2003 (M8.0) Earthquake of about M7 in the southern Kanto (about M6.7 – 7.2) About 70% Tokai Earthquake (M8.0) 87% (reference value) 1. Hyogoken Nanbu Earthquake in 1995 (M7.3) 10. Iwate Engan Hokubu Earthquake (July 24, 2008) (M6.8) 8. Iwate-Miyagi Nairiku Earthquake in 2008 (M7.2) 4. Niigataken Chuetsu Earthquake in 2004 (M6.8) 5. Niigataken Chuetsu-oki Earthquake in 2007 (M6.8) 2. Geiyo Earthquake in 2001 (M6.7) 9. Surugawan Earthquake in 2009 (M6.5) 6. Fukuokaken Seiho-oki Earthquake (April 20, 2005) (M5.8) 3. Fukuokaken Seiho-oki Earthquake (March 20, 2005) (M7.0) Tonankai Earthquake (about M8.1) About 60% – 70% Below are the epicenters and magnitudes of the top 10 earthquakes for which we paid reinsurance claims in the past. The number attached to the name of the earthquake is in order of payment amount. As a reference, the epicenter area and the probability that an earthquake with a magnitude of about 7 in southern Kanto, the Tokai earthquake, the Tonankai earthquake and the Nankai earthquake could occur within the next 30 years announced by the Headquarters for Earthquake Research Promotion of the government are also included. Nankai Earthquake (about M8.4) About 50% – 60% 7. Tokachi-oki Earthquake in 2003 (M8.0) Earthquake of about M7 in the southern Kanto (about M6.7 – 7.2) About 70% Tokai Earthquake (M8.0) 87% (reference value) 1. Hyogoken Nanbu Earthquake in 1995 (M7.3) 10. Iwate Engan Hokubu Earthquake (July 24, 2008) (M6.8) 8. Iwate-Miyagi Nairiku Earthquake in 2008 (M7.2) 4. Niigataken Chuetsu Earthquake in 2004 (M6.8) 5. Niigataken Chuetsu-oki Earthquake in 2007 (M6.8) 2. Geiyo Earthquake in 2001 (M6.7) 9. Surugawan Earthquake in 2009 (M6.5) 6. Fukuokaken Seiho-oki Earthquake (April 20, 2005) (M5.8) 3. Fukuokaken Seiho-oki Earthquake (March 20, 2005) (M7.0) Tonankai Earthquake (about M8.1) About 60% – 70% 16 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 17Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 18 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 Financial highlights Although assumed net premiums written and net premiums written in fiscal 2009 declined from the previous year, total assets increased steadily to 1,092.2 billion yen at the end of March 2010. Most of the assets under management are invested in bonds with high credit ratings and liquidity to prepare for the payment of reinsurance claims. JAPAN EARTHQUAKE REINSURANCE CO., LTD. 0 40,000 80,000 120,000 160,000 0 400,000 800,000 1,200,000 1,600,000 0 10 20 30 40 50 (%)(Unit: million yen) (Unit: million yen) (Unit: million yen) Loss ratioNet premiums written Breakdown of total assets (as of March 31, 2010) Total assets 20092005 2006 2007 2008 20092005 2006 2007 2008 2009 Year Year Year 2005 2006 2007 2008 Total 1,092,272 Government bond 457,324 Municipal bond 80Corporate bond 120,593 Foreign securities 425,813 Other securities 3,135 Others 85,324 Others 85,324 Total of securities 1,006,947 19Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 (Unit: Million yen) Fiscal Year 2005 2006 2007 2008 2009 Net premiums written 71,132 67,981 64,040 67,126 72,225 Loss ratio 37.9% 3.7% 21.0% 16.0% 8.6% Underwriting income 91,001 72,451 67,320 70,546 79,278 Ordinary profit 23 143 16 200 951 Net income 36 △16 4 12 5 Solvency-margin ratio 160.2% 175.3% 185.4% 159.1 161.6 Total shareholders’ equity 1,605 1,600 1,614 1,617 1,633 Total assets 838,555 908,963 955,968 1,015,053 1,092,272 Net unrealized gains on other securities △5 5 15 6 16 Net unrealized gains on other securities of earthquake insurance △9,054 △4,540 1,722 3,063 16,154 Profile In accordance with the introduction of the Law concerning Earthquake Insurance (Law No.73, May 18, 1966) and following the launch of sales of earthquake insurance on dwelling risks to be written in conjunction with dwelling and shop-owners comprehensive insurance policies, JER was established with share capital of 1 billion yen by 20 domestic Japanese non-life insurance companies on May 30, 1966. The Company was licensed for the earthquake insurance business and started its operation on June 1, 1966. Earthquake insurance on dwelling risks depends on this reinsurance system (which is a safety net, as it were), in which the government, non-life insurance companies and JER participate to ensure that insurance claims can be paid to policyholders without fail. The insurance premiums paid by policyholders are separated from non-life insurance companies, and are managed and operated by the government and JER. JER is thus at the center of a reinsurance system, and undertakes reinsurance procedures with the government and non-life insurance companies, while managing and operating the insurance premiums paid by policyholders as the sole earthquake reinsurance company in Japan. 20 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 Top 10 shareholders (As of March 31, 2010) Shareholder No. of shares owned (1,000 shares) Percentage of shares owned (%) Tokio Marine & Nichido Fire Insurance Co., Ltd. 537 26.9 Mitsui Sumitomo Insurance Co., Ltd. 338 16.9 Sompo Japan Insurance Inc. 321 16.1 NIPPONKOA Insurance Co., Ltd. 208 10.4 Aioi Insurance Co., Ltd. 153 7.7 The Fuji Fire and Marine Insurance Co., Ltd. 123 6.2 Nissay Dowa General Insurance Co., Ltd. 102 5.1 The Toa Reinsurance Co., Ltd. 93 4.7 Nisshin Fire & Marine Insurance Co., Ltd. 61 3.1 The Kyoei Fire & Marine Insurance Co., Ltd. 34 1.7 Organization (As of April 1, 2010) General meeting of shareholders Board of directors Board of managing directors Board of auditors Compliance committee Comprehensive risk management committee Earthquake disaster task force Reinsurance administration dept. Financial dept. Controller dept. Audit office 21Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 Directors (full-time) (As of July 1, 2010) Post Name Chairman (representative director) Shozo Wakabayashi President (representative director) Hideo Suzuki Managing director (representative director) Masayuki Hashimoto Managing director (representative director) Koichi Kubota Corporate auditor Terumasa Hasegawa Responding to major earthquakes Our most important role is to pay reinsurance claims promptly and properly in the event of a major earthquake. We are provided therefore with a standing task force against earthquake disasters, consisting of full-time directors and managerial staff, and conduct annual drills to bolster our system for major earthquakes. We also carefully manage and operate our assets, with a focus on liquidity and safety in mind. See below for details. Task force against earthquake disasters and its activities The committee is a standing in-house organization drawn from across JER. It prepares an annual plan, according to which it is the first responder, and implements training such as reinsurance claim payment drills, along with the inspection and maintenance of an emergency manual for use in the event of an assumed major earthquake. The Company set up a review team under the earthquake disaster task force in fiscal 2009, which began to review the emergency manual for business continuity. We also conducted an operation drill to confirm safety and information transmission systems and organized an emergency training program at the Jishin-no Gakushukan (earthquake study center) of the Meguro-ku Bosai Center (Meguro disaster prevention center). Operation based on highly liquid assets Should a destructive inland earthquake strike Tokyo, we would have to pay a tremendous amount of reinsurance claims in a short period of time. For this reason, we always hold mainly highly liquid and high-rating securities. To reduce cost-related risks at the time of realization, we hold mainly medium-term securities. 22 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 Corporate governance In-house governance system Executive division In-house audit In-house audit Comprehensive risk management committee General meeting of shareholders Board of directors Appointments and dismissals Audit Submission/Report Submission/Report Accounting audit Audit Cooperation Appointments and dismissals Appointments and dismissals Board of managing directors compliance committee Earthquake disaster task force Accounting auditors Accounting auditors In-house audit division Committee-based operation We have established a Compliance Committe and a Comprehensive Risk Management Comittee and positioned them under the direct control of the Board of Managing Directors. Our aim is to ensure sound and transparent business operations by strengthening the supervisory function with the construction of compliance and risk management systems. Preparing for a natural calamity, the Company is provided with a task force against natural disasters to facilitate the payment of insurance claims and maintain the funding plan for payment, enabling it to take prompt action in response to large-scale earthquake disasters. The annual operation policy and operating conditions of each committee is periodically reported to the Board of Managing Directors and Board of Directors. Auditing and inspection systems Outside auditing and inspection The overall management and operations of the Company are subject to inspection by the Financial Services Agency under the Insurance Business Act and inspection by the Ministry of Finance under the Act on Earthquake Insurance. We also receive an accounting audit by an auditing corporation in accordance with the Companies Act. In-house auditing Apart from the audit conducted by corporate auditors under the Companies Act, the Audit office conducts in-house audits. The purpose of an in-house audit is to develop and establish an internal control system. This is done by conducting an audit to examine and evaluate the execution of plans and activities in the Companyfairlyandobjectively,andfromthestandpointof lawfulnessandrationality.Italsorequires providing the necessary advice and recommendations based on the evaluation, contributing to the sound development of the company and building credibility in the community. In fiscal 2010, we decided based on the “In-House Audit Policy and Plan” adopted by resolution of the Board of Directors to focus on audits of responses to the revision of the insurance inspection 23Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 Risk management system The construction of an appropriate risk management system is an important issue to ensure the safety and soundness of management, as surrounding risks are becoming increasingly complicated and diversified. We have been endeavoring to accurately understand and appropriately manage risks by establishing a comprehensive risk control committee to supervise risk management. We have also consolidated the risk management system to reinforce the risk control function. Dealing with assets management risks Risk management relating to asset management is carried out primarily for paying reinsurance claims promptly and with certainty when there are major earthquakes, in accordance with the risk management policy of each year. Major items are as follows: Market risks We measure the responsiveness to interest rates and currency exchanges and value at risk (VaR), and calculate the amount of loss due to a heavy change in interest or exchange rate to limit the volume of risks. Credit risks When purchasing securities, we limit the issuers to those with high credibility with reference to the credit rating made by rating agencies. We always check securities held to determine credibility, and conduct individual controls to avoid a concentration on a specific group of companies or type of business. Liquidity risks We check individual securities in advance for cashing, and to the assets for cashing. Dealing with paperwork issues We constantly examine the rules and regulations of authority and paperwork procedures and manuals for exact and perfect paperwork. We also regularly check the rules and regulations through in-house auditing for conformity with related laws and regulations. Dealing with system risks We constantly review the risk control plan with an emphasis on system security in the event of a calamity. This will improve the control system. manual and to conduct regular audits of the internal control conditions of all divisions. Audit results including recommendations of corrections and improvements are reported to the Board of Managing Directors and the Board of Directors and communicated to audited divisions. 24 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 Financial Section Financial Review Indicators Showing the Main Results over the Last Five Fiscal Years Indicators Showing Results for the Last Three Fiscal Years Accounting Concepts 1. Financial statements 2. Risk management credits 3. Present conditions of loans involving trust with contact for replacement of losses 4. Credit obligations based on debtor classification 5. Conditions of solvency-margin ratio 6. Information on market prices (acquisition cost or contract cost, market price and appraisal profit and loss) and others 25Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 (1) Summary of earthquake insurance results a. Premiums written and insurance claims paid Net premiums written amounted to 72.2 billion yen (up 7.6% year on year), reflecting an increase in the number of insurance contracts and premiums written. Earthquake insurance claims paid came to 5.5 billion yen (down 40.7% year on year) due to the Surugawan Earthquake in 2009. b. Underwriting reserves Risk reserves added amounted to 42.4 billion yen (up 19.0% year on year), the total of net premiums written of 36.4 billion yen, given by deducting assumed insurance commissions from net premiums written, and a profit of 6 billion yen from investments. Risk reserves at the end of the current term were 496.7 billion yen (up 8.0% year on year), reflecting the drawing of 5.8 billion yen from risk reserves in the past year following the payment of ongoing insurance claims, the provision of outstanding claims, as well as advertising and publicity expenses. Underwriting reserves at the end of the current term totaled 585.8 billion yen (up 7.4% year on year) after adding unearned premium reserves and refunded reserves to the risk reserves. c. Entrusted reserves Risk reserves of direct insurance companies recorded as entrusted reserves were 524.3 billion yen for the current term (up 5.4% year on year), obtained by adding net premiums written and profit from investments of 27.9 billion yen (up 15.8% year on year), and drawing advertising and publicity expenses of 900 million yen. (2) Outline of investments Medium- to long-term domestic interest rates rose in the first half of the fiscal year, reflecting rises in interest rates in the United States and concerns about the supplementary issuing of Japanese government bonds. However, the interest rates fell thereafter after the Bank of Japan hammered out policy to step up its relaxed monetary policy to deal with protracted deflation. Long-term interest rates at the end of the fiscal year under review were mostly on a par with the levels at the end of the previous fiscal year, and mediumterm interest rates declined sharply. The yen appreciated against both the dollar and euro, reflecting forecasts that monetary easing by central banks in Europe and the United States would be protracted, and moves to avoid risk given the bad-debt problem related to government-affiliated companies in Dubai and the fiscal crisis in Greece. Compared with a year ago, the yen had appreciated about five yen against both the dollar and euro at the end of the fiscal year under review. In the circumstances, we invested in assets with the top priority placed on security and liquidity, followed by profitability. We did this by raising the ratio of foreign currency-denominated bonds, primarily safe issues with government guarantees, to mitigate exchange fluctuation risks. As a result, pre-tax profits from investments amounted to 7.0 billion yen in the business account and 5.3 billion yen in the entrusted reserves account. Consequently, investment assets at the end of the term under review stood at 1,071.2 billion yen. (3) Current profit and loss Net income was 5 million yen (down 58.9% year on year) after calculating interest and dividend income to capital account and other items. Financial review The number of earthquake insurance contracts increased during the year under review, as they did in the previous year. Premiums written also rose from the previous year, backed by factors such as a higher level of interest in earthquake insurance and a lower premium rate. The number and amount of earthquake insurance payouts declined from the previous year, despite insurance payouts for the Surugawan Earthquake in 2009. Profits from investments increased from the previous year, reflecting a rise in the ratio of foreign currency-denominated bonds, which offset the appreciation of the yen. Administrative expenses remained flat from the previous year as a result of a commitment to achieve efficient business operations and cut costs as operations expanded. 26 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 (Unit: Million yen) Division Fiscal Year 2005 2006 2007 2008 2009 Net premiums written (percentage change over the previous term) 71,132 (22.2%) 67,981 (△4.4%) 64,040 (△5.8%) 67,126 (4.8%) 72,225 (7.6%) Ordinary incomes (percentage change over the previous term) 107,868 (50.1%) 90,373 (△16.2%) 81,290 (△10.1%) 84,993 (4.6%) 99,464 (17.0%) Ordinary expenses (percentage change over the previous term) 107,845 (50.3%) 90,229 (△16.3%) 81,273 (△9.9%) 84,792 (4.3%) 98,512 (16.2%) Ordinary profit (percentage change over the previous term) 23 (△76.4%) 143 (521.1%) 16 (△88.5%) 200 (1,108.8%) 951 (374.2%) Net income (percentage change over the previous term) 36 (243.6%) △16 (△146.4%) 4 (–) 12 (184.1%) 5 （△58.9%） Common stock (sum of shares issued) 1,000 (2 mil. shares) 1,000 (2 mil. shares) 1,000 (2 mil. shares) 1,000 (2 mil. shares) 1,000 (2 mil. shares) Net assets 1,605 1,600 1,614 1,617 1,633 Total assets 838,555 908,963 955,968 1,015,053 1,092,272 Underwriting reserves (percentage change over the previous term) 450,892 (8.4%) 490,901 (8.9%) 515,586 (5.0%) 545,255 (5.8%) 585,820 (7.4%) (of the balance, risk reserve balance) (percentage change over the previous term) 378,731 (6.4%) 412,364 (8.9%) 433,841 (5.2%) 460,081 (6.0%) 496,708 (8.0%) Loans (percentage change over the previous term) – (–) – (–) – (–) – (–) – (–) Securities (percentage change over the previous term) 771,383 (5.1%) 851,739 (10.4%) 895,513 (5.1%) 953,118 (6.4%) 1,006,947 (5.6%) Solvency-margin ratio 160.2% 175.3% 185.4% 159.1% 161.6% Dividend propensity –% –% –% –% –% No. of employees 21 21 24 28 26 Note: Order to specify divisions, provided for in Section 2, Article 132, Insurance Business Law, our solvency-margin ratio is not supposed to be used as a criterion to enable the administrative authorities to trigger an order for improvement. We conduct no trust business. q Indicators showing the main business results 1. Net premiums written Item: earthquake (Unit: Million yen) Division Fiscal Year 2007 2008 2009 Premiums written 142,811 145,445 151,353 Return premiums 3,349 3,241 2,464 Assumed net premiums written (A) 138,086 141,271 148,349 Reinsurance premiums ceded (B) 74,045 74,145 76,123 Net premiums written (A-B) 64,040 67,126 72,225 Note: 1: Return premiums: Return premiums of receiving reinsurance. 2: Assumed net premiums: Produced by deducting return premiums from receiving premiums. 3: Net premiums written: Produced by deducting paid reinsurance premium ceded from assumed net premiums written. 2. Underwriting profit (Unit: Million yen) Division Fiscal Year 2007 2008 2009 Underwriting incomes 67,320 70,546 79,278 Underwriting expenses 66,860 69,884 77,828 Operating and general ad­ministrative expenses 459 474 509 Other incomes and expenses – △187 △941 Underwriting profit – – – Note: 1: The above operating, general and administrative expenses are those relating to the underwriting of insurances mentioned in the operating, general and administrative expenses in a statement of profits and losses. 2: Other incomes and expenses are those equivalent to corporate taxes mentioned in a statement of earthquake insurance profits and losses. Indicators showing the main results over the last five fiscal years Indicators showing results for the last three fiscal years 27Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 3. Net claims paid Item: earthquake (Unit: Million yen) Division Fiscal Year 2007 2008 2009 Assumed net claim paid (A) 12,370 9,350 5,544 Reinsurance claims recovered (B) – – – Net claims paid (A-B) 12,370 9,350 5,544 Note: 1: Assumed net claims paid: Produced by deducting surrender value from ceded insurance money paid. 2: Net claims paid: Produced by deducting reinsurance claims recov­ered by ceded contract from assumed net claims paid. w Indicators relating to insurance contracts 1. Loss ratio, net expense ratio and their combined ratio (Unit: Million yen) Division Fiscal Year 2007 2008 2009 Loss ratio 21.0% 16.0% 8.6% Underwriting expenses 29,198 29,897 31,381  Insurance related operating, general and administrative expenses (459) (474) (509)  Agency commissions and brokerage fees (28,739) (29.423) (30,872) Net expense ratio 45.6% 44.5% 43.4% Combined ratio 66.6% 60.5% 52.0% Note: 1: Loss ratio: (Net claims paid + loss adjustment expenses) ÷ net premiums written 2: Net expense ratio: (Agency commissions and brokerage fees + Insurance related operating and general ad­ministrative expenses) ÷ net premiums written 3: Combined ratio: Loss ratio + net expense ratio 2. Rate of premiums written by domestic and overseas contracts Division Fiscal Year 2007 2008 2009 Domestic contract 100% 100% 100% 3. No. of reinsurers that ceded insurance contracts and top five reinsurers for ceded reinsurance premiums 2008 2009 No. of reinsurers that ceded insurance contracts 17 17 Rate of top five reinsurers’ ceded insurance premiums 77.5 77.5 Note: The number of reinsurers that ceded insurance contracts is the number who ceded treaty reinsurance contracts of 10 mil­lion or more yen. There are no notes about unearned claims paid. There are no notes about the rate of damage occurrence, the expenses ratio and rate of sum total before ceded insurance de­duction. The ratio of ceded insurance premiums by rating does not apply to earthquake insurance. We pay no contractor dividend. e Indicators relating to accounting 1. Amounts of outstanding claims and underwriting reserves (Unit: Million yen)  Year Division As of the end of fiscal 2007 As of the end of fiscal 2008 As of the end of fiscal 2009 Outstanding claims 178 228 420 Underwriting reserves 515,586 545,255 585,820 Total 515,765 545,484 586,241 2. Detailed listing of liability reserves As of the end of Fiscal 2008 (Unit: Million yen) Division Balance as of the end of fiscal 2007 Amount of increase in fiscal 2008 Amount of decrease in fiscal 2008 Balance as of the end of fiscal 2008 Reserve for ordinary bad debts – – – – Reserve for individual bad debts – – – – Reserve for specific foreign securities – – – – Accrued sever­ance benefits 94 18 9 102 Reserve for directors’ retirement allowances 13 4 8 9 Reserve for bonus payment 17 19 17 19 Reserve for price fluctuation 8 – 0 7 Total 133 42 36 139 As of the end of Fiscal 2009 (Unit: Million yen) Division Balance as of the end of fiscal 2008 Amount of increase in fiscal 2009 Amount of decrease in fiscal 2009 Balance as of the end of fiscal 2009 Reserve for ordinary bad debts – – – – Reserve for individual bad debts – – – – Reserve for specific foreign securities – – – – Accrued sever­ance benefits 102 21 13 110 Reserve for directors’ retirement allowances 9 4 0 13 Reserve for bonus payment 19 18 19 18 Reserve for price fluctuation 7 – 0 7 Total 139 44 34 150 28 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 3. Detailed listing of shareholders’ equity As of the end of Fiscal 2008 (Unit: Million yen) Division Balance as of the end of fiscal 2007 Amount of increase in fiscal 2008 Amount of decrease in fiscal 2008 Balance as of the end of fiscal 2008 Common stock 1,000 – – 1,000 Issued stock Ordinary stock (2 mil. stock) 1,000 – – (2 mil. stock) 1,000 Total (2 mil. stock) 1,000 – – (2 mil. stock) 1,000 Legal reserve of retained earnings and voluntary reserves Legal reserve of retained earnings 1 – – 1 Voluntary reserves Special reserves 17 – – 17 Special price fluctuation reserves 39 – – 39 Total 57 – – 57 Note: The number of owned shares was 11,400 as of the end of fiscal 2008. As of the end of Fiscal 2009 (Unit: Million yen) Division Balance as of the end of fiscal 2008 Amount of increase in fiscal 2009 Amount of decrease in fiscal 2009 Balance as of the end of fiscal 2009 Common stock 1,000 – – 1,000 Issued stock Ordinary stock (2 mil. stock) 1,000 – – (2 mil. stock) 1,000 Total (2 mil. stock) 1,000 – – (2 mil. stock) 1,000 Legal reserve of retained earnings and voluntary reserves Legal reserve of retained earnings 1 – – 1 Voluntary reserves Special reserves 17 – – 17 Special price fluctuation reserves 39 – – 39 Total 57 – – 57 Note: The number of owned shares was 11,400 as of the end of fiscal 2009. 4. Business expenses (inclusive of loss adjustment) (Unit: Million yen) Division Fiscal Year 2007 2008 2009 Personnel expenses 391 474 378 Non personnel expenses 1,397 1,673 1,085 Taxes 177 185 197 Agency commissions and brokerage fees 28,739 29,423 30,872 Total 30,706 31,757 32,534 Note: Business expenses are the total of loss adjustment expense, operating, general and administrative expenses, agency commissions and brokerage fees as shown in the income statement. 5. Profit on sale of securities by category (Unit: Million yen) Division Fiscal Year 2007 2008 2009 Government bonds 597 27 7 Foreign securities – – 574 Total 597 27 582 6. Loss on sale of securities by category (Unit: Million yen) Division Fiscal Year 2007 2008 2009 Government bonds 4 6 329 Foreign securities 66 – 232 Total 70 6 562 7. Securities appraisal loss by category (Unit: Million yen) Division Fiscal Year 2007 2008 2009 Government bonds – – – Foreign securities – – – Total – – – 8. Depreciation expenses by category As of the end of Fiscal 2008 Type of asset Acquisition cost Amount of depreciation in fiscal 2008 Aggre- gated deprecia- tions Balance as the end of fiscal 2008 Rate of ag­ gregated depreciations % Tangible fixed assets Buildings 100 2 58 41 58.5 (for underwriting) (100) (2) (58) (41) (58.5) (for investment) (–) (–) (–) (–) (–) Others 86 27 48 37 56.1 Total 186 29 107 79 57.4 Intangible fixed assets Software 175 16 23 151 13.7 Other intangible fixed assets 0 0 0 0 86.0 Total 175 16 24 151 13.9 Grand total 362 45 131 230 36.3 As of the end of Fiscal 2009 Type of asset Acquisition cost Amount of depreciation in fiscal 2009 Aggre- gated deprecia- tions Balance as the end of fiscal 2009 Rate of ag­ gregated depreciations % Tangible fixed assets Buildings 101 2 61 40 60.0 (for underwriting) (101) (2) (61) (40) (60.0) (for investment) (–) (–) (–) (–) (–) Others 95 20 68 26 72.2 Total 196 23 129 67 65.9 Intangible fixed assets Software 409 60 75 334 18.4 Other intangible fixed assets 0 0 0 0 86.9 Total 410 60 75 334 18.4 Grand total 607 83 205 401 33.8 (Unit: Million yen) (Unit: Million yen) 29Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 9. Loss from disposal of fixed assets (Unit: Million yen) Division Fiscal Year 2007 2008 2009 Land (–) (–) (–) Buildings (0) (–) (0) Other tangible fixed assets (0) (0) (–) Total 0 0 0 No mention is made about the level of underwriting reserves because there is no target contract. Mention about fluctuations of ordinary profit or written loss over the increase in the loss ratio is omitted because insurance claims are offset by the disposition of underwriting reserves. There are no notes about the loan write-off and profit from property and equipment. r Special deposit premium account Nothing is to be mentioned. t Earthquake insurance underwriting reserves by category (Unit: Million yen)  Year Division As of the end of fiscal 2007 As of the end of fiscal 2008 As of the end of fiscal 2009 Risk reserve 433,841 460,081 496,708 Unearned premium reserve 79,695 83,366 87,453 Repayment reserve 2,050 1,808 1,659 Total 515,586 545,255 585,820 y The conditions at the end of the current fiscal year (runoff result) of outstanding claims (estimated amount) at the beginning of the term do not apply to earthquake insurance. u The amount of estimated final damages associated with the elapse of a period from the occurrence of accidents does not apply to earthquake insurance. i Investments 1. Investments policy Because we have to pay a substantial amount of claims promptly in the event of a natural disaster such as a major earthquake, we put in principle the highest priority on safety and liquidity in operating our assets, followed by profitability to increase risk reserves. The risk management division is engaged in monitoring and controlling risks of all kinds, independently of the transactions execution division. 2. Investments in outline Deposits (Unit: Million yen)  Year Division As of the end of fiscal 2007 As of the end of fiscal 2008 As of the end of fiscal 2009 Deposits 31,077 24,275 22,352 (Ordinary deposit) (6,777) (1,475) (2,052) (Time deposit) (24,300) (22,800) (20,300) Total assets and investments assets (Unit: Million yen) Fiscal Year Division 2007 2008 2009 Percentage distribution (%) Percentage distribution (%) Percentage distribution (%) Deposits 31,077 3.3 24,275 2.4 22,352 2.0 Call loans – – 8,819 0.9 28,254 2.6 Monetary receivable bought 499 0.0 – – – – Money trusts 13,723 1.4 13,495 1.3 13,692 1.3 Securities 895,513 93.7 953,118 93.9 1,006,947 92.2 Buildings 38 0.0 41 0.0 40 0.0 Total of investments assets 940,851 98.4 999,749 98.5 1,071,286 98.1 Total assets 955,968 100.0 1,015,053 100.0 1,092,272 100.0 3. Amount of interest and dividend received and in­vestment assets yield (income yield) (Unit: Million yen) Fiscal Year Division 2007 2008 2009 Yield Yield Yield Deposits 215 0.67 236 0.76 219 0.61 Call loans – – 27 0.29 11 0.07 Monetary receivables bought 7 0.76 3 0.87 – – Money trusts 94 0.69 91 0.66 86 0.63 Securities 12,894 1.49 13,956 1.52 16,991 1.76 Buildings – – – – – – Total 13,211 1.45 14,315 1.47 17,309 1.67 Note: Investment assets yield (income yield): indicator showing the result of invest­ment assets from a point of income (interest and dividend income) (which has been disclosed) The numerator is composed of interest and dividend income from investment assets while the denominator is an acquisition cost based assets. Numerator = Interest and dividend income (including the amount equivalent to interest and dividend income of profit (or loss) from monetary trust operation) Denominator = Acquisition cost or depreciation based average balance 30 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 4. Assets management yield (realized yield) (Unit: Million yen) Fiscal Year Division 2008 2009 Amount of numerator Amount of denomi- nator Yield on working assets (%) Amount of numerator Amount of denomi- nator Yield on working assets (%) Deposits 236 31,183 0.76 219 35,819 0.61 Call loans 27 9,481 0.29 11 16,691 0.07 Bond trading with repurchase agreement – – – – – – Monetary receivables bought 3 448 0.87 – – – Commodity securities – – – – – – Money trusts 273 13,750 1.99 △72 13,750 △0.52 Securities 13,977 918,528 1.52 17,011 967,658 1.76 Public and corporate bonds 5,804 618,392 0.94 5,372 542,992 0.99 Stocks – – – – – – Foreign securities 8,149 290,325 2.81 11,968 415,507 2.88 Other securities 23 9,810 0.24 △329 9,158 △3.6 Loans – – – – – – Buildings – 42 – – 42 – Financial derivative △7,711 – – △4,223 – – Others △31 – – △66 – – Total 6,774 973,434 0.70 12,879 1,033,962 1.25 Note: Asset management yield (realized yield): indicator to show the result of managing of assets from the point of contribution to the current profit and loss. The numerator is realized profit and loss while the denomi­nator is an acquisition cost based assets. Numerator = profit from asset management + investment income on sav­ings premiums – expenses of assets management Denominator = acquisition cost or writing-off cost based average bal­ance 5. Market-price based overall yield (for reference) (Unit: Million yen) Fiscal Year Division 2008 2009 Amount of numerator Amount of denomi- nator Yield on working assets (%) Amount of numerator Amount of denomi- nator Yield on working assets (%) Deposits 236 31,183 0.76 219 35,819 0.61 Call loans 27 9,481 0.29 11 16,691 0.07 Bond trading with repurchase agreement – – – – – – Monetary receiv­ables bought 3 448 0.87 – – – Commodity securities – – – – – – Money trusts 45 13,723 0.33 124 13,495 0.92 Securities 15,531 920,302 1.69 29,921 970,987 3.08 Public and corporate bonds 7,083 620,291 1.14 8,113 546,170 1.49 Stocks – – – – – – Foreign securities 8,626 290,353 2.97 22,047 416,011 5.30 Other securi­ties △177 9,658 △1.84 △240 8,805 △2.73 Loans – – – – – – Buildings – 42 – – 42 – Financial deriva­tive △7,711 – – △4,223 – – Others △31 – – △66 – – Total 8,101 975,181 0.83 25,986 1,037,036 2.51 Note: Market-price based overall yield: indicator showing the efficiency of op­eration on a market price basis. The nu­merator reflects realized profit and loss and fluctuations in market price appraisal while the denominator is market-price based assets. Numerator = (income from operated assets management + investment income on savings premium – expenses for assets man­agement) + (after-tax unrealized gain for the year – after-tax unrealized gain for previous year)* + fluctuation in deferred hedge profit and loss Denominator = acquisition cost or write-off based average balance + after-tax unrealized gain for previous year of other securi­ties + profit and loss for the previous year related to se­curities for transaction *Based on the amount before tax effect deduction 6. Balance, percentage distribution and yield of Foreign Loans & Investments (Unit: Million yen)  Year Division As of the end of fiscal 2007 As of the end of fiscal 2008 As of the end of fiscal 2009 Percentage distribution (%) Percentage distribution (%) Percentage distribution (%) Foreign currency denominated Foreign public and corporate bonds 152,411 63.4 221,324 60.0 270,894 63.6 Yen denominated Foreign public and corporate bonds 88,003 36.6 147,827 40.0 154,918 36.4 Total 240,414 100.0 369,151 100.0 425,813 100.0 Yield on foreign loans & investment Investment assets yield (income yield) 3.28% 2.81% 2.80% Assets management (realized yield) 3.25% 2.81% 2.88% Market-price based overall yield (for refer- ence) 4.51% 2.97% 5.30% Note: 1. Of the yield on foreign loans & investments, the investment assets yield was calculated in the same manner as 3., Amount of interest and dividend received and yield on investment assets (income yield) in connection with the assets involving foreign investment. 2. Of the yield on foreign investments, the asset management yield was cal­culated in the same manner as 4., Asset management yield (realized yield) in connection with the assets involving foreign investment. 7. Balance of securities by category and percentage dis­tribution (Unit: Million yen)  Year Division As of the end of fiscal 2007 As of the end of fiscal 2008 As of the end of fiscal 2009 Percentage distribution (%) Percentage distribution (%) Percentage distribution (%) Govern­ment bonds 449,201 50.2 412,278 43.3 457,324 45.4 Municipal bonds 4,404 0.5 2,581 0.3 80 0.0 Corporate bonds 191,835 21.4 159,650 16.8 120,593 12.0 Stocks – – – – – – Foreign securities 240,414 26.8 369,151 38.7 425,813 42.3 Other securities 9,658 1.1 9,456 1.0 3,135 0.3 Loan receivable in securities – – – – – – Total 895,513 100.0 953,118 100.0 1,006,947 100.0 31Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 8. Yield on securities held (Unit: %)  Fiscal Year Division 2007 2008 2009 Investment assets yield (income yield) Public & corporate bonds 0.85 0.94 0.99 Stocks – – – Foreign securities 3.28 2.81 2.80 Other securities 3.06 0.24 – Total 1.49 1.52 1.76 Assets management yield (realized yield) Public & corporate bond 0.93 0.94 0.99 Stocks – – – Foreign securities 3.25 2.81 2.88 Other securities 4.26 0.24 △3.60 Total 1.55 1.52 1.76 Market-price based overall yield (for reference) Public & Corporate bonds 1.58 1.14 1.49 Stocks – – – Foreign securities 4.51 2.97 5.30 Other securities 1.58 △1.84 △2.73 Total 2.32 1.69 3.08 9. Balance Current Maturity of securities by category As of the end of fiscal 2008  (Unit: Million yen) Division Less than 1 year 1 to less than 3 years 3 to less than 5 years 5 to less than 7 years 7 to less than 10 years 10 years or longer Total Govern­ ment bonds 56,096 196,100 132,707 – 9,636 17,737 412,278 Municipal bonds 2,501 79 – – – – 2,581 Corporate bonds 43,212 77,355 37,232 409 1,440 – 159,650 Stocks – – – – – – – Foreign securities 69,899 139,709 103,025 9,299 47,217 – 369,151 Other securities – – – – – 9,456 9,456 Loan receivable in securi- ties – – – – – – – Total 171,709 413,245 272,965 9,709 58,295 27,194 953,118 As of the end of fiscal 2009  (Unit: Million yen) Division Up to 1 year 1 over up to 3 years 3 over up to 5 years 5 over up to 7 years 7 over up to 10 years Over 10 years Total Govern­ ment bonds 139,800 225,477 36,389 6,344 36,734 12,577 457,324 Municipal bonds 80 – – – – – 80 Corporate bonds 44,528 54,001 20,437 104 1,521 – 120,593 Stocks – – – – – – – Foreign securities 54,596 219,828 115,466 23,655 12,267 – 425,813 Other securities – – – – – 3,135 3,135 Loan receivable in securi- ties – – – – – – – Total 239,005 499,307 172,293 30,104 50,523 15,712 1,006,947 10. Tangible fixed assets by breakdown (Unit: Million yen)  Year Division As of the end of fiscal 2007 As of the end of fiscal 2008 As of the end of fiscal 2009 Land – – – (for underwriting) (–) (–) (–) (for investment) (–) (–) (–) Buildings 38 41 40 (for underwriting) (38) (41) (40) (for investment) (–) (–) (–) Construction in progress – – – (for underwriting) (–) (–) (–) (for investment) (–) (–) (–) Total of property 38 41 40 (for underwriting) (38) (41) (40) (for investment) (–) (–) (–) Other tangible fixed assets 53 37 26 Total 91 79 67 There are no notes with respect to the following 11 items:   1. Commodity securities   2. Average balance and sales amount of commodity securities   3. Amount of stocks held by type of business   4. Balance current maturity of loan by remaining life   5. Balance of loans by type of collateral secured   6. Balance and percentage distribution of loan by designated use   7. Balance of loan by industry and its ratio to the total   8. Balance of loan by debtor size and its ratio to the total   9. Amount of loan & investment to public works (on a basis of newly undertaken loan) 10. Housing-related loan 11. Loan interests 32 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 1. Financial statements ❶ Balance sheets (ASSETS) (Unit: Million yen)  Fiscal Year Item 2008 (As of March 31, 2009) 2009 (As of March 31, 2010) Amount Percentage distribution Amount Percentage distribution Cash & deposits 24,275 2.4 22,352 2.0   Deposits 24,275 22,352 Call loans 8,819 0.9 28,254 2.6 Money trusts 13,495 1.3 13,692 1.3 Securities 953,118 93.9 1,006,947 92.2   Government bonds 412,278 457,324   Municipal bonds 2,581 80   Corporate bonds 159,650 120,593   Foreign securities 369,151 425,813   Other securities 9,456 3,135 Tangible fixed assets 79 0.0 67 0.0   Buildings 41 40  Other tangible fixed assets 37 26 Intangible fixed assets 151 0.0 334 0.0   Software 151 334  Other intangible fixed assets 0 0 Other assets 15,036 1.5 20,547 1.9  Reinsurance balance receivable 8,257 8,628   Accounts receivable 271 7   Uncollected income 4,081 5,265   Deposits 54 54   Suspense payment 106 119   Financial derivative 2,264 6,472 Deferred tax assets 78 0.0 76 0.0    Total assets 1,015,053 100.0 1,092,272 100.0 (LIABILITIES) (Unit: Million yen)  Fiscal Year Item 2008 (As of March 31, 2009) 2009 (As of March 31, 2010) Amount Percentage distribution Amount Percentage distribution Underwriting funds 545,484 53.7 586,241 53.7   Outstanding claims 228 420   Underwriting reserves 545,255 585,820 Entrusted reserves 446,886 44.0 473,207 43.3 Other liabilities 17,861 1.8 14,885 1.4   Reinsurance balance payable 5,431 5,507   Corporate taxes payable 294 952   Deposits payable 3 2   Accrued amounts pay­able 609 1,144   Financial derivative 11,522 7,278 Accrued serverance benefits 102 0.0 110 0.0 Reserves for directors’ retirement benefit 9 0.0 13 0.0 Reserves for bonus payment 19 0.0 18 0.0 Price fluctuation reserves 7 0.0 7 0.0 Net unrealized gains on other securities of earthquake insurance 3,063 0.3 16,154 0.5 Total liabilities 1,013,435 99.8 1,090,639 99.9 (NET ASSETS) (Unit: Million yen)  Fiscal Year Item 2008 (As of March 31, 2009) 2009 (As of March 31, 2010) Amount Percentage distribution Amount Percentage distribution Common stock 1,000 0.1 1,000 0.1 Retained earnings 617 0.1 622 0.1  Legal reserve of retained earnings 1 1  Other legal reserve of retained earnings 616 621   Special reserves 17 17   Special price fluctuation reserves 39 39   Retained earnings brought forward 559 564 Treasury Stock △5 △0.0 △5 △0.0 Total shareholders’ equity 1,611 0.2 1,616 0.1 Net unrealized holding gain on securities 6 0.0 16 0.0  Total valuation and translation adjustments 6 0.0 16 0.0 Total net assets 1,617 0.2 1,633 0.1 Total liabilities and net assets 1,015,053 100.0 1,092,272 100.0 ACCOUNTING CONCEPTS 33Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 1. Appraisal standards and method of securities, and meth­od of indication (1) Of other securities, those to which the market price is applicable is appraised according to the mar­ket price at term end. (2) Of other securities, those to which the market price is not applicable is appraised based on cost or write-off cost price using the movingaver­age method. (3) With respect to the unrealized gain of assets corresponding to the underwriting reserves and entrusted reserves of earthquake insurance, the amount before tax effect deduction is shown as an Net unrealized gains on other securities of earthquake insurance in Liabilities, according to the pertinent Enforcement Rules of Insur­ance Business Act. For other unrealized gains, the amount after tax effect deduction is processed entirely according to the direct capital injection method and indicated in Shareholders’ Equity. The calcula­tion of the sales price is based on the moving average method. 2. Appraisal standards and method of money trusts (1) In money trusts exclusively operated centering on se­curities, the appraisal of securities operated as trust assets is done on the basis of market price. (2) In money trusts exclusively operated with a view to hold­ing securities which is not intended to be operated or held to maturity, the appraisal of securities operated as trust assets is done in the same manner as other securities. 3. The appraisal of derivatives is done on the basis of market price. 4. Although depreciation of tangible fixed assets is calculated using the declining balance method, buildings (excluding equipment attached to buildings) that were acquired on and after April 1, 1998 were depreciated using the straight-line method. 5. Software for in-house use that is recorded as an intangible fixed asset is amortized using the straightline method over the usable life (five years). 6. The conversion of foreign cur­rency assets and liabilities into Japanese currency is processed according to the accounting standards for foreign cur­rency transactions. 7. Writing standards of reserves (1) Reserve for bad debts Reserves for bad debts are written as follows against losses from bad debts in accordance with the self-appraisal standard of assets and depreciation and re­serve standards.   In connection with claims against debtors who have gone bankrupt legally and formally, including bankrupt­cy, special liquidation or disposition by suspension of business at a clearing house, or debtors who are effectively bankrupt, the rest of any of the claims deduct­ing an estimated amount of disposable mortgage and a deductible amount by guarantee was appropriated for such reserves.   In connection with the other claims, the rate of bad debts calculated according to past bad debts and other factors is multiplied by the amount of claims to ap­propriate for reserves.   In addition, all claims are written after the finance department appraises the assets, and the result is au­dited by the management department independent of the finance department to appropriate the appraisal for reserves.   There are no assets in the current term that are to be appropriated for reserves, and no reserve is re­quired. (2) Reserves for employees’ retirement For employees’ retirement and severance benefits, re­serves is appropriated according to the retirement allowance liabilities at the end of the term and the esti­mated amount of pension assets. The retirement allow­ance liabilities is calculated using a simple method on the basis of the allowance to be supplied at the end of the term for any employee who retires for his/ her own reasons. (3) Reserves for directors’ retirement benefit For reserves for directors’ retirement benefits, the benefits to be paid at the end of the term are recorded according to the relevant in-house rules. (4) Accrued bonuses for employees Accrued bonuses for employees’ bonus is calculated according to the standards of estimated bonus payable. (5) Reserves for price fluctuation To prepare for a loss from price changes of shares and others, reserves are appropriated according to Ar­ticle 115, Insurance Business Law. 34 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 8. Financial instruments and fair values of financial instruments (1) Situation of financial instruments The Company carries out asset management in preparation for the payment of reinsurance claims, primarily considering soundness, namely, low price fluctuation risks, credit risks, and liquidity risks, and also taking profitability into account. As a result, the financial assets that the Company owns consist primarily of domestic and foreign, high-rated, medium-term bonds. The Company regularly obtains and manages information on fair values and credit information in association with each risk. Trading in derivatives principally involves foreign exchange forward contracts used to hedge the risks arising from possible changes in exchange rates for bonds in foreign currencies and is kept within the scope of actual demand. (2) Fair values of financial instruments The table below shows the balance sheet amounts and fair values of financial instruments and the differences between them as of March 31, 2010. (Million yen)  Balance sheet amount Fair value Difference (i) Cash and deposits 22,352 22,509 157 (ii) Call loans 28,254 28,254 – (iii) Money trusts 13,692 13,692 – (iv) Securities Other securities (available for sale) 1,006,947 1,006,947 – (v) Derivatives* (806) (806) – *Derivatives recorded in other assets and other liabilities. Net receivables or net payables generated from derivatives trading are shown. Figures in parentheses are net payables. Note 1: Methods for calculating the fair values of financial instruments (i) Cash and deposits The fair values of deposits without maturities and time deposits whose maturities are within one year of the end of the fiscal year approximate their carrying values and are therefore deemed equal to the carrying values. The fair values of time deposits whose maturities exceed one year are present values estimated by discounting the future cash flows, using interest rates at which similar new time deposits would be made. (ii) Call loans Call loans are settled in the short term, and their fair values are therefore deemed equal to their carrying values. (vi) Money trusts The fair values of money trusts are determined by prices offered by trust and banking companies. (iii) Securities In principle, the fair values of securities are based on their market prices, which are reference prices in the trading statistics of the Japan Securities Dealers Association or market prices obtained from outside vendors or brokers. (iv) Derivatives The fair values of derivatives are determined by prices offered by correspondent financial institutions. 9. Taxes are excluded when preparing accounts for consump­tion tax and other items. However, taxes are included when recording loss adjustment expenses and operating, general and administrative expenses. Consumption taxes and other items for assets that are not subject to deductions are recorded as suspense payments and written down by an equal amount over five years. 10. The risk reserves contained in the underwriting reserves have been deposited based on instructions for the cal­culation of liability reserves by accumulating the amounts that result from subtracting an amount equivalent to corporate taxes from the net premiums written and profit from operating the assets. 11. For finance leases commencing before April 1 2008, other than those in which the ownership rights of the leased property are deemed to transfer to the lessee, an accounting method similar to that used for ordinary rental transactions is used. 12. The accumulated depreciation of tangible fixed assets is 129 million yen. 13. Total deferred tax assets amount to 90 million yen, while total deferred tax liabilities come to 9 million yen. The amount deducted from deferred tax assets as a valuation reserve is 4 million yen. The breakdown of deferred tax assets reveals unpaid business taxes of 21 million yen, unpaid special local corporate tax of 14 million yen, a retirement benefit reserve of 40 million yen and a bonus reserve of 6 million yen. The deferred tax liabilities result primarily from an unrealized gain of 9 million yen on securities. 14. Net assets per share are 812.32 yen. The basis for this calculation is that net assets are 1,633 million yen, net assets accrued from ordinary shares are 1,633 million yen and the number of ordinary shares at the end of the term is 1.988 million. 15. The amounts are indicated by rounding down any amount not reaching the unit as mentioned. 35Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 ❷ Statements of income (Unit: Million yen)  Fiscal Year Item 2008 (from April 1, 2008 to March 31, 2009) 2009 (from April 1, 2009 to March 31, 2010) Amount Amount Ordinary incomes 84,993 99,464   Underwriting incomes 70,546 79,278    Net premiums written 67,126 72,225   Investment income on savings premium, etc 3,420 7,052 Investment income 14,445 20,186    Interest and dividend income 14,224 17,222    Profit from operating monetary trust 273 86    Realized gain on sale of securities 27 582    Financial derivative gain 3,267 9,326    Profit from other operations 72 21   Transfer of profit from Investment income on savings premiums △3,420 △7,052   Other ordinary incomes 2 0 Ordinary expenses 84,792 98,512   Underwriting expenses 69,884 77,828    Net claims paid 9,350 5,544    Loss adjustment expenses 1,391 653   Agency commissions and brokerage fees 29,423 30,872    Provision for outstanding claims 50 192    Provision for underwriting reserves 29,668 40,565   Investment expenses 11,090 14,359    Loss from operating monetary trust – 158    Realized loss on sale of securities 6 562    Foreign exchange loss 10,979 13,550    Other operation cost 104 88  Operating, general and administrative expenses 942 1,007   Other ordinary expenses 2,875 5,317    Interest paid 2,875 5,317    Other ordinary expenses 0 – Ordinary profit 200 951 Extraordinary incomes 0 0   Reversal of price fluctuation reserves 0 0 Extraordinary losses 0 0   Loss on disposal fixed assets 0 0 Income before taxes 201 951 Income taxes – current 202 950 Income taxes – deferred △13 △4 Total income taxes 188 946 Net income 12 5 Notes for fiscal 2009 1. See below for the net premiums written by break- down. Premiums written: 148,349 (million yen) Reinsurance premiums ceded: 76,123 (million yen) Net premiums written: 72,225 (million yen) 2. The interests and dividends income are given below by category: Interest on deposits: 219 (million yen) Call loans: 11 (million yen) Interest on securities: 16,991 (million yen) Total: 17,222 (million yen) 3. Paper profit/loss involved in the financial derivative expenses is a loss of 806 million yen. 4. The net income per share is 2.58 yen. The basis for this calculation is such that the net income is 5 million yen, the net income accrued from ordinary shares is 5 million yen and the term average No. of ordinary shares amount to 1.988 mil- lion. 5. The legal effective tax rate at the end of the term is 36.21%, and the corporate tax burden after applying the tax effect is 99.46%. The difference is explained by the following breakdown: the nondeductible amount of the taxable provision of risk reserves is 67.62%, the amount of the write-off carried from publicity expenses related to risk reserves is △4.56%. 6. Each amount is rounded down to the nearest whole unit. 36 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 ❸ Statements of cash flow (Unit: Million yen)  Fiscal Year Item 2008 (from April 1, 2008 to March 31, 2009) 2009 (from April 1, 2009 to March 31, 2010) Amount Amount Cash flow from operating activities Net profit before income taxes (△ denotes a loss) 201 951 Depreciation 45 83 Changes in outstanding claims (△ denotes a decline) 50 192 Changes in underwriting reserves (△ denotes a decline) 29,668 40,565 Changes in entrusted reserves (△ denotes a decline) 22,903 26,320 Changes in reserves for employees’ retirement and severance benefits (△ denotes a decline) 8 7 Changes in directors’ retirement benefit reserves (△ denotes a decline) △4 4 Changes in accrued bonuses for employees (△ denotes a decline) 2 △1 Changes in reserve for price fluctuation (△ denotes a decline) △0 △0 Interest and dividend income △14,224 △17,222 Gain or loss on investment in securities (△ denotes a gain) △20 △19 Foreign exchange gain or loss (△ denotes a gain) 10,631 5,360 Gain or loss on tangible fixed assets (△ denotes a gain) 0 0 Increase in other assets (other than investment and financial activities related) (△ denotes an increase) △392 △120 Increase in other liabilities (other than investment and financial activities related) (△ denotes a decline) 180 610 Others 5,662 △8,446     Subtotal 54,713 48,285 Interest and dividends received 13,277 15,664 Income taxes paid △3 △298 Net cash provided by operating activities 67,987 63,651 Cash flow from investing activities Net increase in deposits at bank (△ denotes an increase) 1,500 2,500 Purchase of securities △325,785 △275,224 Proceeds from sales and redemption of securities 259,489 229,340    Total investment assets activities △64,795 △43,383     (Total operating activities and     investment assets activities) (3,191) (20,267) Acquisition of tangible fixed assets △17 △11 Others △156 △243 Net cash used in investing activities △64,969 △43,639 Cash flow in financing activities – – Effect of exchange rate changes on cash and cash equivalents – – Net change in cash and equivalents 3,017 20,012 Cash and cash equivalents at the beginning of the year 7,276 10,294 Cash and cash equivalents at the end of the year 10,294 30,306 Notes: 1. Relationship of cash and cash equivalents at the end of the year with the amounts mentioned in the relevant balance sheet item. (Unit: Million yen) (As of March 31, 2009) (As of March 31, 2010) Cash & deposits 24,275 22,352 Call loans 8,819 28,254 Securities 953,118 1,006,947 Deposits of a depository period of three months or longer △20,300 △20,300 Securities other than cash equivalent △953,118 △1,006,947 Cash and cash equivalents 10,294 30,306 2. Cash flow in investing activities includes cash flow from the investment assets operations in the insurance business. 37Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 ❹ Statement of Changes in Shareholders’ Equity  Fiscal Year Item 2008 (from April 1, 2008 to March 31, 2009) 2009 (from April 1, 2009 to March 31, 2010) Amount Amount Share holder’s equity Capital stock Balance at the end of the previous year 1,000 1,000 Amount of change during the term Issuance of new shares – – Total change during the term – – Balance at the end of the fiscal year 1,000 1,000 Earned surplus Legal earned reseve Balance at the end of the previous year 1 1 Amount of change during the term Total change during the term – – Balance at the end of the fiscal year – – Other earned surplus 1 1 Special reserve Balance at the end of the previous year Amount of change during the term 17 17 Total change during the term Balance at the end of the fiscal year 39 39 Special price fluctuation reserves Balance at the end of the previous year – – Amount of change during the term 39 39 Total change during the term Balance at the end of the fiscal year 546 559 Earned surplus carried forward Balance at the end of the previous year – – Amount of change during the term 12 5 Dividend of surplus 12 5 Net income 559 564 Total change during the term Balance at the end of the fiscal year 604 617 Total earned surplus Balance at the end of the previous year – – Amount of change during the term 12 5 Dividend of surplus 12 5 Net income 617 622 Total change during the term Balance at the end of the fiscal year △5 △5 Treasury stock Balance at the end of the previous year – – Amount of change during the term – – Total change during the term △5 △5 Balance at the end of the fiscal year Total share-holders’ equity Balance at the end of the previous year 1,598 1,611 Amount of change during the term Issuance of new shares – – Dividend of surplus – – Net income 12 5 Deposition of treasury stock – – Total change during the term 12 5 Balance at the end of the fiscal year 1,611 1,616 (Unit: Million yen)  Fiscal Year Item 2008 (from April 1, 2008 to March 31, 2009) 2009 (from April 1, 2009 to March 31, 2010) Amount Amount Valuation and translation adjustments Net unrealized gains on other securities Balance at the end of the previous year 15 6 Amount of change during the term Net amount of changes in items other than owners’ equity during the term △9 10 Balance at the end of the fiscal year △9 10 Total change during the term 6 16 Balance at the end of the fiscal year Total valuation and translation adjustments Balance at the end of the previous year 15 6 Amount of change during the term Net amount of changes in items other than owners’ equity during the term △9 10 Total change during the term △9 10 Balance at the end of the fiscal year 6 16 Total net assets Balance at the end of the previous year 1,614 1,617 Amount of change during the term Issuance of new shares – – Dividend of surplus – – Net income 12 5 Deposition of treasury stock – – Net amount of changes in items other than owners’ equity during the term △9 10 Total change during the term 3 15 Balance at the end of the previous year 1,617 1,633 ❺ Dividend per stock and total assets per employee (Unit: Million yen)  Fiscal Year Division 2007 2008 2009 Dividend per stock – – – Net income per stock 2.21 yen 6.30 yen 2.58 yen Dividend propensity – – – Net assets per stock 812.01 yen 813.57 yen 821.32 yen Total assets per employee 39,832 36,251 42,010 Notes: 1. Net income per share comes from net income / term average No. of stocks 2. The number of treasury stock is deducted from producing information per stock 3. The total assets per employee come from the total assets at the end of the term / No. of employees at the end of the term. 38 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 2. Risk management credits There are no notes about the following five items: (1) Currently in bankruptcy (2) Delinquent in payments (3) Payments more than three months in arrears (4) Favorable loan revisions completed (5) Total of risk management credit 3. Present conditions of loans involving trust with contact for replace­ment of losses No notes required. 4. Credits obligations based on debtor classification There are no notes about the following four items: (1) Bankrupt or bankrupt for all intents and pur­poses (2) On verge of bankruptcy (3) Financial status needs careful monitoring (4) Financial status normal 5. Conditions of solvency-margin ratio (Unit: Million yen)  Year Division As of the end of fiscal 2008 As of the end of fiscal 2009 (A) Total of solvency-margin 463,262 506,735 Common stock, etc. (amount obtained by subtracting an estimated outflow to the outside, deferred assets and valuation and translation adjustments from total net assets) 1,611 1,616 Price fluctuation reserve 7 7 Risk reserve – – Catastrophe reserves 460,081 496,708 Reversal for ordinary bad debts – – Variance of estimate for other securities (excluded deductions for Tax Consequences) unrealized gain / loss on securities available for sale 1,562 8,403 Unrealized gain and loss included land holdings – – Funding instruments with a debt-like nature – – Items deductible – – Others – – (B) Total risk √(R1 + R2)2 + (R3 + R4)2 + R5 + R6 582,221 626,848 General underwriting risk (RI) – – Underwriting risk in third-area insurance (R2) – – Anticipated Rate of Return Risk (R3) – – Investment risk (R4) 10,805 8,957 Management risk (R5) 11,416 12,291 Catastrophe risk (R6) 560,000 605,600 (C) Solvency-Margin ratio [(A) / { (B) x 1 / 2 }] x 100 159.1% 161.6% Notes: 1. The amounts and figures above are calculated based on the provisions of Article 86 and Article 87 of the Enforcement Rules of the Insurance Business Act and the Ministry of Finance Official Notification No.50 in 1996. Solvency-margin ratio The non-life insurance company deposit reserves in case that they pay in­surance money for any insurance accident that occurred or refund de­pository insurance at maturity. It is also necessary for them to maintain a satisfactory ability to make payments or solvency even in case of unusual, unforeseeable risk, including a huge disaster or sharp drop in price of such assets as owned by them.   The rate of “Non-life insurance company’s ability to make payments by owned assets and reserves (A in the above table) over any risk unfore­seeable (B in the above table)” is indicated as the solvency-margin ratio (C in the above table) which is calculated according to the pertinent rules, including the Insurance Business Law. [Unforeseeable risk] (Total of risks): Sum of 1~5 1. General underwriting risk: risk associated with an insurance accident rate that is higher than normally predictable (other than the risk associated with a huge disas­ter). 2. Anticipated ratio of Return Risk: risk that might arise when actual yields from operation are lower than original at the time of calculating premiums of a deposi­tory insurance 3. Investment risk: management risk that might arise when the value of assets owned including securities changes in an unforeseeable manner. 4. Management risk: risk that might arise on business man­agement in an unforeseeable manner, other than 1~3 and 5. 5. Catastrophe risk: risk that might arise with a huge disaster (such as the Great Kanto Earthquake) which is nor­mally unforeseeable. [Capability of payment by non-life insurance company owned capital and reserves] (Total of solvency- margin) The total of capital owned by a non-life insurance company, reserves (price fluctuation reserve, catastrophe reserve, securities and part of latent profit from land, and so on) The solvency-margin ratio is one of the indicators used when the admin­istrative authorities check insurance companies to determine the sound­ness of management for supervisory purposes. When the rate is 200% or more, the insurance company is deemed satisfactory in terms of its ability to make insurance and other payouts. 39Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 ◎ JER has entered into a reinsurance contract with the government of Japan for earthquake insurance in accordance with Law concerning Earthquake Insurance. The law stipulates in addition that the govern­ment takes responsibility for support and for lending funds for the payment of insurance money. Because this is a form of special business, JER’s solvency-margin ratio is not usable as a figure to enable the administrative authorities to trigger an order for improvement, irrespective of the above solvency-margin ratio, as provided for in Section 4, Article 3, Order to specify the division stated in Section 2, Article 132, Insurance Business Law. Note: The article is as follows. [In the event that an insurance company has entered into a reinsurance contract with the government as stated in Section 1, Article 3, Law con­cerning Earthquake Insurance (law No. 73, 1966), any order to be issued according to the listed division in Section 1 of the Article applicable to the insurance company shall be issued in accordance with the list of inapplicable division.] 6. Information on market prices (acquisition cost or contract cost, market price and appraisal profit and loss) and others ❶ Securities 1. Other securities with market price At the end of fiscal 2008 (Unit: Million yen) Division Type Acquisition cost Book value Difference Securities with acquisition cost higher than that posted on the balance sheet Public & corporate bonds 482,714 487,886 5,171 Stocks – – – Foreign securities 137,947 147,415 9,468 Others 5,000 5,006 6 Subtotal 625,662 640,308 14,646 Securities with acquisition cost not higher than that posted on the balance sheet Public & corporate bonds 88,618 88,623 △1,994 Stocks – – – Foreign securities 237,898 221,735 △16,162 Others 4,810 4,450 △359 Subtotal 331,327 312,810 △18,517 Total 956,989 953,118 △3,870 At the end of fiscal 2009 (Unit: Million yen) Division Type Acquisition cost Book value Difference Securities with acquisition cost higher than that posted on the balance sheet Public & corporate bonds 483,926 490,673 6,746 Stocks – – – Foreign securities 269,042 279,448 10,405 Others – – – Subtotal 752,969 770,121 17,152 Securities with acquisition cost not higher than that posted on the balance sheet Public & corporate bonds 88,152 87,324 △828 Stocks – – – Foreign securities 158,746 146,365 △12,381 Others 3,400 3,135 △264 Subtotal 250,299 236,825 △13,473 Total 1,003,268 1,006,947 3,678 2. Other securities sold at the term (Unit: Million yen) Type Fiscal 2008 Fiscal 2009 Sales price Total of profit on sale Total of loss on sale Sales price Total of profit on sale Total of loss on sale Total 83,063 27 6 58,208 582 562 There are no notes with respect to the following items: 1. Securities held for trading purposes 2. Securities to be held until maturity and with market price 3. Securities without market price. ❷ Money trust 1. Money trust for investment (Unit: Million yen) Type As of end of fiscal 2008 As of end of fiscal 2009 Amount posted on the balance sheet Appraisal difference contained in profit/loss Amount posted on the balance sheet Appraisal difference contained in profit/loss Money trust 10,000 – 10,000 – 2. Money trust for maturity Nothing to be mentioned. 40 Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 3. Other money trusts with any other purpose than op­eration and maturity (Unit: Million yen) Type As of the end of fiscal 2008 As of the end of fiscal 2009 Acquisi­ tion cost Book value Differ­ ence Acquisi­ tion cost Book value Differ­ ence Money trust 3,750 3,495 △254 3,750 3,692 △57 ❸ Information on transactions involving derivatives 1. On the conditions of transactions With a view to hedging risks as a result of possible changes in the foreign exchange of assets in foreign currency, JER deals in foreign exchange forward contracts and currency option transactions. In addition, we conduct bond futures trading and over-the-counter securities option transactions to reduce interest fluctuation risks in connection with securities.   The derivative transactions we engage in have market risks associated with market fluctuations. Most of them are done, however, to hedge the assets in kind, and losses from the transaction in question never arise on their own. In some cases, we use options transactions for securities scheduled to be purchased. But risks are limited because we put a quantita­tive limit on such transactions.   Because we deal with highly reputable financial institutions, we believe that there is little credit risk such as non-fulfillment of a contract.   Our derivatives transactions are checked by the Risk Management Division, independent of the Transactions Execution Division, and the results of the checks are regularly reported to the board of managing directors. 2. On market prices for transactions A contract amount in a derivative transaction is simply a nominal contract amount or an as­sumed principal by calculation in such a trans­action. The contract amount as such represents no market risk or credit risk. 3. Derivative transaction contract amounts, market price and appraisal profit and loss (a) Currency related (Unit: Million yen) Type As of end of fiscal 2008 As of end of fiscal 2009 Contract amount Market price Appraisal profit and loss Contract amount Market price Appraisal profit and loss 1 year or longer ones 1 year or longer ones Transactions other than market transactions  Forward foreign exchange contracts    Short commitment     US dollar 52,984 33,907 53,582 △598 22,549 6,394 21,870 679     Euro 141,384 103,181 150,169 △8,785 229,048 71,341 230,469 △1,420     Canadian dollar 1,211 1,211 1,085 126 1,211 – 1,276 △64 Total △9,257 △806 Note: Calculating a market price Foreign exchange forward contract: Foreign exchange rates depend on futures quotations. Corporate data (as of March 31, 2010) Established: May 30, 1966 Capital: 1 billion yen Total assets: 1,092.2 billion yen No. of employees: 26 Address: Hulic Kobuna-cho Building, 8-1, Nihonbashi-kobuna-cho, Chuo-ku, Tokyo Japan 103-0024 Phone: 03-3664-6098 E-mail: kikaku@nihonjishin.co.jp URL: http://www.nihonjishin.co.jp/