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Typical management indicators
More and more earthquake insurance contracts have been entered into, and the net premiums written recorded a 22.2% increase over the previous year. In addition, the assets are being operated by highly liquidand high-rate securities for the payment of reinsurance money.

Ordinary proﬁt

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Net premiums written result from the deduction of reinsurance premiums of ceded reinsurance contracts from premiums written of assumed premiums written

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Ordinary proﬁt = ordinary income – ordinary expenses

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Net proﬁt = ordinary incomes ± extra ordinary gains and losses ±corporate income taxes, local taxes and deferred income taxes

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Japan Earthquake Reinsurance Co., Ltd. 2006�������

The total assets are composed of cash, deposits, securities, propertyand other assets, as shown in B/S ASSETS.

Net loss ratio Net operating expenses ratio

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Net loss ratio = (net claims paid + loss adjustment expenses) ÷ net
premiums written

The non-life insurance company has reserves for insurance claims
in case of accidents and repayment at maturity of installment insurance and other cases. In addition, it is expected that the company
maintains satisfactory solvency against extraordinary, unpredictablerisks such as great disaster and sharp decrease in assets owned by
the company.
The solvency-margin ratio is one of the indicators which is used by theadministrative authorities to give a check to the company for soundmanagement. When the ratio is 200% or higher, the company is regarded as having proper and satisfactory solvency.

Net operating expenses ratio = operating expenses involved in insurance underwriting ÷ net premiums written

Japan Earthquake Reinsurance Co., Ltd. has entered into an earthquake insurance reinsurance contract with the Japanese government
according to Law concerning Earthquake Insurance.
It is to be noted, in addition, that reinsurance on earthquake insurance
is a special form of business as seen from the provision of Law sayingthat the government should make an effort to facilitate or accommodate loan necessary for the payment of insurance money, and Item 4,
Order Article 3 stipulating the divisions as speciﬁed in Item 2, Article
132, Insurance Business Law provides that our solvency-margin ratio
is not supposed to be usable as a key ratio despite the above-mentioned ratio level when the government issues an administrative orderfor business improvement.

(Unit: Yen in million)

Fiscal Year

2001

2002

Net premiums written

50,859Net loss ratio
Net expense ratio
Underwriting incomes

2003

2004

2005

47,56650,89658,19871,132

35.8%

0.7%

20.5%

28.7%

37.9%

42.8%

43.2%

43.9%

42.6%

40.7%

62,86051,89754,67861,99591,001

Ordinary proﬁt

707

303

184

98

23

Net income

2210171036203.3%

176.3%

184.3%

182.2%

160.2%

1,569

1,577

1,5791,587

1,605

681,736

726,458

761,594

804,333

838,555

27

25

1411

△511,748

11,825

7,000

5,458

△ 9,054

Solvency-margin ratio
Total shareholders' equity
Total assets
After-tax unrealized gain in securities
After-tax unrealized gain
earthquake insurance

insecurities

ofJapan Earthquake Reinsurance Co., Ltd. 2006

17

Coping with great earthquakes
The important role of ours is to pay reinsurance
claims promptly as well as properly in the eventthat a great earthquake occurred. We are provided therefore with a standing task force against
earthquake disasters, composed of full-time directors and managerial staff, and conduct a drill

against a great earthquake and system frame-up
annually. We also use the best care to manageand operate the assets, bearing liquidity (realization) and safety in mind. See below for detail.

■ Task force against earthquake disasters and its activities
The committee is a standing in-house crossoverorganization. It prepares an annual plan, takes
the ﬁrst-step action according to the plan, sets
up a task force headquarters and exercises
payment of reinsurance claims, and keeps an
emergency manual against an assumed greatearthquake. In 2006, all of the directors and employees are put to the drill that they walk to andfrom work.

We also gave a check to the payment system
in 2002, including a fund raising plan, by simulating damages suffered by the cities of Tokyo
because of a destructive inland earthquake. An
outside research institution prepared a survey
report in 2005 in a close cooperation with the
non-life insurance companies and JER, showing
how much a destructive inland earthquake is assumed to damage the metropolis. It will serve us
to improve the payment system.

■ Highly cashable assets based operation
We have to pay a tremendous amount of reinsurance claims in a short period of time in theevent that a great destructive inland earthquake
attacked the metropolis. For this reason, we always operate highly liquid, high-rating securities

18

Japan Earthquake Reinsurance Co., Ltd. 2006

on the main, and basically we are so prepared
as to cash almost all the assets within 4 days. To
reduce cost risks at the time of realization, weoperate mid-term securities on the main.

Mid-term management plan
We celebrated the 40th anniversary on June 1, 2006. We have decided to take this opportunity to make out
a mid-term management plan, the key words of which are [Trust and Leap], and start over.
Our goals in a 10-year perspective are:
1. To play an active role in fulﬁlling and developing the earthquake insurance system;
2. To grow the company to a company highly trusted by the stakeholders at all times while operating the earthquake insurance system.
In order to realize them, we have a more concrete three-year action plan composed of 15 target items.
Furthermore, we have prepared a plan for the current year and we are to make every effort to achieve theplan without fail.

Three-year action plan
1 Assuming such a state of affairs as may force us to innovate, and conducting research on how to cope with it2
3
45

Reinforcing the checkup system of ceded reinsurance contracts according to the treaty A
Preparing a plan of independent management of credits and debts
Innovating the current system of accounting and business operating
Executing a quarterly settlement of accounts

6 Building a unitary risk control system
7 Establishing and implementing an efﬁcient way of exchange hedge

8 Upgrading the employees for business knowledge and skills, and fostering specialists
9 Supporting the employees institutionally for their life planning
10 Promoting the improvement of personnel system and work site environment

11 Taking measures for the improving of the earthquake insurance system
12 Conducting disposition of loss adjustment expenses from risk reserves

13 Taking active measures to encourage people to join earthquake insurance
14 Publicizing the products for contents and reinforcing the measures against great earthquakes

15 Strengthening corporate governanceJapan Earthquake Reinsurance Co., Ltd. 2006

19

Operating system■ In-house governance system������������������������������������������������������������������������������������������������������������������������

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■ Committees system based operation
Our corporate governance depends on thecommittees system under control of the board ofmanaging directors. Composed of three committees, in-house auditing committee, compliancecommittee and comprehensive risk management
committee, the system is aimed at conducting
audit, law observation and risk management andmaintaining sound business operation. Preparing
for a natural calamity, the company is provided
with a task force against natural disasters to fa-cilitate the payment of the insurance claims andmaintain the funding plan for payment, enabling
the company to take prompt action in responseto earthquake disasters of a large scale.
The annual operation policy and operating conditions of each committee is periodically reported to or put to the discussion by the board ofmanaging directors and board of directors.

■ Compliance
We are making efforts to foster a sound corporate business climate needed as insurance company, considering strict abiding by law as one of
the most important tasks. In order to establish acompliance promotion system, the company has
set up the compliance committee headed by thepresident to enable it to manage and promotecompliance in a unitary manner.
The current compliance program is so designed

as to review the action code, establish a legal
checkup system, train the labor and management on human rights, hold a hearing on compliance and hold a study meeting participated by
the labor and management. There are provided
an in-house consultation window and an outsidecompliance hot line to promote strict abiding bylaws and prevent and ﬁnd any illegal action.

■ Information protection
Because the protection of information is one ofour most important tasks, we hold a security policy, a basic one mentioning the safety measures,
establishing safety measure standards as concrete instructions to this effect. We handle theinformation assets properly using the best care.

In particular, we handle personal information ina proper manner with reference to the privacy
policy, personal information protection rules andpersonal data safety control standards in connection with proper acquisition, use and stocking of personal information.

☞ See p.18 Coping with great earthquakes for the task force against earthquake disasters and its activities.

20

Japan Earthquake Reinsurance Co., Ltd. 2006

■ Risk management system
It is getting more and more important to grasp and control various complicated and diversifying risks surrounding us, such as ongoing ﬁnancial liberalization and sophistication of ﬁnancial technology.
To meet the situation, we have been making efforts to maintain and develop the risk control system by establishing the comprehensive risk control committee to supervise risk control and reinforcing the functionsof comprehensive risk control. This helps us understand risks exactly and control them properly. Developments of the matter are regularly reported to the board of directors and the board of managing directors
as well.
Coping with assets management risks

Coping with paperwork risks

The investment assets have amounted to 826.7 billion yen. Because it is primarily necessary to pay reinsurance money promptly and properly in case of agreat earthquake disaster, the assets are being operated using public bondson the main. The management of risks involved in the management of assets
is carried out according to the annual control policy. See below for detail.

We constantly put the rules and regulations of authorityand paperwork procedures and manuals to the examination for exact and perfect paperwork. We also give a regular check to the rules and regulations by in-house auditing for conformity with related laws and regulations.

Market risks

We measure the responsiveness to interest rates and currency exchanges andvalue at risk (VaR), and calculate the amount of loss due to a heavy change ininterest or exchange rate to limit the volume of risks.

Credit risks

When purchasing securities, we limit the issuers to those high in credibility
with reference to the credit rating made by rating agencies. We always givea check to the securities in possession for credibility, and conduct individualcontrols to avoid the concentration in a speciﬁc group of companies or typeof businesses.

Coping with system risks
We constantly review the risk control plan with emphasison system security in case of a calamity. This will result in
the improvement of the control system.

Liquidity risks

We give a check to the individual securities in advance for cashing, and tothe assets for cashing.

■ Auditing system, outside and in-house inspection
Outside auditing and inspection
We are to be given a check for management and general business operation by the Financial Services
Agency in accordance with Articles 129 and 313, Insurance Business Law and by the Ministry of Financein accordance with Article 9, Law concerning Earthquake Insurance.
We are also audited for accounting by an auditing corporation in accordance with Law for Exception on
Commercial Code.
In-house auditing
In addition to Commercial Code based auditing conducted by the auditors, we are equipped with the inhouse auditing committee as an inside organization. In-house auditing puts emphasis on how big issues
are handled by each division and the compliance system and risk control system as well.
The management of reinsurance, operation of ﬁnance and control system of assets are put to the auditing
this year, putting emphasis on the inspection of internal control conditions including ofﬁce work.
On top of that, we put the conditions of personal information control, system security and progress of compliance to the auditing.

Japan Earthquake Reinsurance Co., Ltd. 200621