Introduction to Earthquake Reinsurance in Japan
Contents
1 Message from the President 2 Earthquake Insurance in Japan Reinsurance of Earthquake Insurance 10 Statistics 14 18    Japan Earthquake Reinsurance Co., Ltd. 24 Financial Section 41 Corporate Data
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.

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 govern- ment 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 responsibil- ity 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.
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 erup- tion, 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, automo- biles 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.
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.

Authorization criteria of losses
Total loss, half loss or partial loss applies to any of the following cases:

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.
L IMIT 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 Organi- zations. 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 appli- cable 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).
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
The Headquarters for Earthquake Research Promotion*, a government organization, published the Probabilistic Seismic Hazard Maps. The risk premium rate is calculated based on the lat- est 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.
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

(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
10%
(d) Building age discount rate
When the building was constructed during or after June 1981 and accommodated per- sonal property

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.

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%
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.
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 self- help 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 insur- ance policy became easier.

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 com- panies 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 in- demnity. 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 rein- surance 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 retro- cedes to the government part of insurance liability taken up according to Treaty A to the indemnity limit as approved by the Diet.
mechanism of payment of

The policyholder claims insurance money to the non-life insurance company when the policy- holder 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 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
Liability Limit

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 insur- ance 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.
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 govern- ment will pay each in the following amount:
THE PERCENTAGE OF HOUSEHOLDS PURCHASING EARTHQUAKE insurance in areas at risk of major earthquakes
tional 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.

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.
Note: Insurance claims worth 78,346 milion yen were paid to cover the Hyogoken-Nanbu Earthquake. Of these claims,  the  the  the government paid 6,173 milion yen and the non lion yen according to the reinsurance scheme in force at the time. Below are the epicenters and magnitudes of the top 10 earthquakes for which we paid reinsur- ance 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 Earth-

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.

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 insur- ance 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 compa- nies, 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 insur- ance premiums paid by policyholders as the sole earthquake reinsurance company in Japan.
TOP 10 SHAREHOLDERS

ORGANIZATION
DIRECTORS (FULL-TIME)

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 re- insurance 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.
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 re- ported 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 Fi- nancial 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 Com- panies 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 Company fairly and objectively, and from the standpoint of  lawfulness and rationality. It also requires 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 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.
R ISK 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 estab- lishing 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 reinsur- ance 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.
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
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 pay- outs 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. (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 num- ber 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 insur- ance 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 re¬ serves 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 add- ing net premiums written and profit from investments of  27.9 billion yen (up 15.8% year on year), and draw- ing 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 in- terest 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 defla¬ tion. 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 medium ­ term interest rates declined sharply. The yen appreciated against both the dollar and euro, reflecting forecasts that monetary easing by cen- tral 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 fis- cal year under review. In the circumstances, we invested in assets with the top priority placed on security and liquidity, fol- lowed by profitability. We did this by raising the ra¬ tio 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 bil- lion 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.
INDICATORS SHOWING THE MAIN RESULTS
OVER THE LAST FIVE FISCAL YEARS

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.
indicators showing results for the
LAST THREE FISCAL YEARS
● Indicators showing the main business results
1. Net premiums written
Item: earthquake
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 pre- mium ceded from assumed net premiums written.
2. Underwriting profit

Note: 1: The above operating, general and administrative expenses are those relating to the underwriting of insurances mentioned in the operat- ing, general and administrative expenses in a statement of  profits and losses. 2: Other incomes and expenses are those equivalent to corporate tax- es mentioned in a statement of earthquake insurance profits and losses. Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 26
3. Net claims paid

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.
� Indicators relating to insurance contracts
1. Loss ratio, net expense ratio and their combined

1: Loss ratio: (Net claims paid + loss adjustment expenses) ÷ net pre- miums written 2: Net expense ratio: (Agency commissions and brokerage fees + Insur- ance 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 over-
seas contracts

3. No. of reinsurers that ceded insurance contracts and
top five reinsurers for ceded reinsurance premiums

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.
● Indicators relating to accounting
1. Amounts of outstanding claims and underwriting

2. Detailed listing of liability reserves

3. Detailed listing of shareholders' equity

The number of owned shares was 11,400 as of the end of fiscal 2008.
The number of owned shares was 11,400 as of the end of fiscal 2009.
Business expenses are the total of  loss adjustment expense, operating, general and administrative expenses, agency commissions and broker- age fees as shown in the income statement.
5. Profit on sale of securities by category

6. Loss on sale of securities by category

2008

7. Securities appraisal loss by category

8. Depreciation expenses by category

Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010 28
No mention is made about the level of underwriting reserves because there is no target contract. Mention about fluctuations of  ordinary profit or writ- ten 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 prof- it from property and equipment.
● Special deposit premium account
Nothing is to be mentioned.
© Earthquake insurance underwriting reserves by

© 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.
� The amount of estimated final damages
associated with the elapse of a period from the occurrence of accidents does not apply to earthquake insurance.
● 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, inde- pendently of the transactions execution division.
2. Investments in outline

3. Amount of interest and dividend received and investment assets yield (income yield)
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 invest- ment assets while the denominator is an acquisition cost based assets. Numerator = Interest and dividend income (including the amount equiva- lent to interest and dividend income of profit (or loss) from monetary trust operation) Denominator = Acquisition cost or depreciation based average balance
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
Market-price based overall yield: indicator showing the efficiency of  operation on a mark ket price basis. The numerator reflects realized profit and loss and fluctuations in mar- ket price appraisal while the denominator is market-price based assets. Numerator = (income from operated assets management + investment income on say ings premium – expenses for assets management) + (after-tax unrealized gain for the year r – 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 unreal- ized 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

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 (real- ized yield) in connection with the assets involving foreign investment.
7. Balance of securities by category and percentage

Japan Earthquake Reinsurance Co., Ltd.  Annual Report 2010

9. Balance Current Maturity of securities by category
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 Ioan by industry and its ratio to the total 8. Balance of  loan by debtor size and its ratio to the total 9. Amount of Ioan & investment to public works (on a basis of newly undertaken loan) 10. Housing related Ioan 11. Loan interests
accounting concepts
1. Financial statements
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 moving. average 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 oper- ated as trust assets is done on the basis of mar- ket 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 cal¬ culated using the declining balance method, build- ings (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 in- tangible fixed asset is amortized using the straight- line method over the usable life (five years). 6. The conversion of foreign currency assets and lia¬ bilities into Japanese currency is processed accord- ing 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 dis- position by suspension of business at a clearing house, or debtors who are effectively bankrupt, the rest of any of the claims deducting an es- timated amount of disposable mortgage and a deductible amount by guarantee was appropri¬ ated 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 de- partment independent of the finance depart- ment to appropriate the appraisal for reserves. There are no assets in the current term that are to be appropriated for reserves, and no re- serve is required. (2) Reserves for employees' retirement For employees' retirement and severance ben¬ efits, 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 re- corded according to the relevant in-house rules. (4) Accrued bonuses for employees Accrued bonuses for employees' bonus is calcu- lated 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. 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 liquid- ity risks, and also taking profitability into account. As a result, the financial assets that the Com¬ pany owns consist primarily of domestic and foreign, high-rated, medium-term bonds. The Company regularly obtains and manages infor- mation 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
Net receivables or net payables generated from derivatives trading are shown. Figures n 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 ma- turities 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 ex- penses and operating, general and administrative expenses. Consumption taxes and other items for assets that are not subject to deductions are record- ed as suspense payments and written down by an equal amount over five years. 10. The risk reserves contained in the underwriting re- serves have been deposited based on instructions for the calculation of  liability reserves by accumu- lating 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 as- sets is 129 million yen. 13. Total deferred tax assets amount to 90 million yen, while total deferred tax liabilities come to 9 mil- lion 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 re- serve of 6 million yen. The deferred tax liabilities result primarily from an unrealized gain of 9 mil- lion yen on securities. 14. Net assets per share are 812.32 yen. The basis for this calculation is that net assets are 1,633 mil¬ lion 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.

Notes for fiscal 2009
1. See below for the net premiums written by break- down.
2. The interests and dividends income are given below by category:
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 in- come is 5 million yen, the net income accrued from ordinary shares is 5 million yen and the term aver- age 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 ap¬ plying the tax effect is 99.46%. The difference is explained by the following breakdown: the non- deductible amount of the taxable provision of risk reserves is 67.62%, the amount of the write-off car- ried from publicity expenses related to risk reserves is △4.56%. 6. Each amount is rounded down to the nearest whole unit.
Notes: 1. Relationship of cash and cash equivalents at the end of the year with the amounts mentioned in the relevant balance sheet item.
assets operations in the insurance business.
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
Article 86 and Article 87 of the Enforcement Rules of the Insurance Busi- ness 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 com¬
pany owned capital and reserves] (Total of solvency-
margin)
The total of capital owned by a non-life insurance com¬ pany, reserves (price fluctuation reserve, catastrophe re- serve, 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 insur- ance companies to determine the soundness of man¬ agement for supervisory purposes. When the rate is 200% or more, the insurance company is deemed sat- isfactory in terms of its ability to make insurance and other payouts. © JER has entered into a reinsurance contract with the government of Japan for earthquake insurance in ac- cordance 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 us- able 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 Sec¬ tion 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 Earth- quake 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
● Securities

2. Other securities sold at the term

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.
� Money trust

2. Money trust for maturity
Nothing to be mentioned.
3. Other money trusts with any other purpose than

© 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 con- tracts and currency option transactions. In addition, we conduct bond futures trading and over-the-coun- ter 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 as¬ sets 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.
Foreign exchange forward contract: Foreign exchange rates depend on futures quotations.