UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2006

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

OR

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

Commission file number: 0-31376

Kabushiki Kaisha Millea Holdings

(Exact name of Registrant as specified in its charter)

Millea Holdings, Inc.

(Translation of Registrant’s name into English)

Japan

(Jurisdiction of incorporation or organization)

Tokyo Kaijo Nichido Building Shinkan,

2-1, Marunouchi 1-chome,

Chiyoda-ku, Tokyo 100-0005, Japan

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock	NASDAQ(*)
American Depositary Shares represented by American Depositary Receipts, each of which represents .005 of one share of our Common Stock	NASDAQ

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Common Stock: 1,680,467.65 shares as of March 31, 2006

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

x  Yes    ¨  No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

¨  Yes    x  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  x Accelerated Filer  ¨ Non-accelerated Filer  ¨

Indicate by check mark which financial statement item the registrant has elected to follow.

¨  Item 17    x  Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨  Yes    x  No

* Not for trading, but only for technical purposes in connection with the registration of the ADSs.

TABLE OF CONTENTS

	Page
Forward-Looking Statements	3
Selected Financial Data	4
Risk Factors	6
Exchange Rates	13
Market Price Information	14
Dividend Policy	15
Major Shareholders	16
Business	18
Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
Directors and Corporate Auditors	87
The Japanese Insurance Industry	92
Regulation	94
Description of Common Stock	99
Taxation	109
Controls and Procedures	113
Code of Ethics	113
Principal Accountant Fees and Services	114
Relief From Certain NASDAQ Corporate Governance Rules	115
Where You Can Find More Information	118
Index to Financial Statements	F-1
List of Exhibits
Cross Reference Index for Form 20-F
Signatures

We were formed on April 2, 2002 as the holding company for The Tokio Marine and Fire Insurance Company, Limited and The Nichido Fire and Marine Insurance Company, Limited in a statutory share transfer under Japanese law. In October 2004, we merged the two companies and named the new combined entity “Tokio Marine & Nichido Fire Insurance Co., Ltd.” For a more detailed description of the background to our formation and the merger of our property and casualty insurance subsidiaries, please refer to “Business—Group Overview” in this annual report.

As used in this annual report, references to:

• “Millea Holdings”, “we”, “us” and “our” are to (1) Millea Holdings, Inc., (2) Millea Holdings, Inc. and its direct and indirect subsidiaries or (3) Tokio Marine & Nichido Fire Insurance Co., Ltd. and/or other operating subsidiaries of Millea Holdings, Inc., as the context may require;

• “Tokio Marine & Nichido” are to Tokio Marine & Nichido Fire Insurance Co., Ltd. and/or either or both of its predecessors, as the context may require;

• “Tokio Marine” are to The Tokio Marine and Fire Insurance Company, Limited, a predecessor of Tokio Marine & Nichido;

• “Nichido Fire” are to The Nichido Fire and Marine Insurance Company, Limited, a predecessor of Tokio Marine & Nichido;

• “Tokio Marine & Nichido Life” are to Tokio Marine & Nichido Life Insurance Co., Ltd.; and

• “Tokio Marine & Nichido Financial Life” are to Tokio Marine & Nichido Financial Life Insurance Co., Ltd.

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Unless the context otherwise requires, references to the business or financial results of:

• “Tokio Marine & Nichido” are to those of Tokio Marine & Nichido and its consolidated subsidiaries;

• “Tokio Marine” are to those of Tokio Marine and its consolidated subsidiaries prior to its October 2004 merger with Nichido Fire;

• “Nichido Fire” are to those of Nichido Fire and its consolidated subsidiaries prior to its October 2004 merger with Tokio Marine;

• “Tokio Marine & Nichido Life” are to those of Tokio Marine & Nichido Life only; and

• “Tokio Marine & Nichido Financial Life” are to those of Tokio Marine & Nichido Financial Life only.

As used in this annual report, “yen” or “¥” means the lawful currency of Japan and “dollar” or “$” means the lawful currency of the United States of America.

As used in this annual report, “Japanese GAAP” means generally accepted accounting principles in Japan and “U.S. GAAP” means generally accepted accounting principles in the United States of America.

In tables appearing in this annual report, figures may not add up to totals due to rounding.

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements that are based on our current expectations, intentions, assumptions, estimates and projections about our businesses, operations, strategies and plans, about the insurance industry, and about capital markets around the world. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “anticipate”, “estimate”, “plan”, “intend” or similar words. These statements discuss future expectations, identify strategies, contain projections of results of operations or financial condition, or state other forward-looking information. These forward-looking statements are subject to various risks and uncertainties. Known and unknown risks, uncertainties and other factors could cause the actual results to differ materially from those contained in any forward-looking statement. We cannot promise that the expectations expressed in these forward-looking statements will turn out to be correct. Our actual results could be materially different from and worse than our stated expectations. Important risks and factors that could cause actual results to be materially different from those expectations are set forth in “Risk Factors” and elsewhere in this annual report.

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SELECTED FINANCIAL DATA

The following selected consolidated financial data of Millea Holdings and its subsidiaries as of and for each of the five years ended March 31, 2006 are derived from the audited U.S. GAAP consolidated financial statements of Millea Holdings for those periods. You should read the information below in conjunction with the U.S. GAAP consolidated financial statements of Millea Holdings, including the related notes, included elsewhere in this annual report.

	As of and for the year ended March 31,
	2006 (1)			2005 (1)			2004 (1)			2003 (1)			2002 (1)
	(yen in millions, except share numbers, per share data and percentages)
Statement of income data:
Net premiums written	¥	1,974,646		¥	1,925,407		¥	1,945,246		¥	1,898,557		¥	1,381,483
Premiums earned		1,952,304			1,895,650			1,860,203			1,760,968			1,342,962
Life premiums (2)		281,276			253,369			241,553			255,977			209,208
Net investment income		164,433			133,197			126,173			108,311			104,681
Total operating income (2)		2,635,685			2,409,097			2,207,518			2,187,103			1,648,512
Total operating costs and expenses (2)		2,405,254			2,302,491			2,055,251			1,985,795			1,539,844
Income before extraordinary items and cumulative effect of accounting changes		156,960			77,527			102,882			129,694			75,252
Extraordinary items (3)		—			14,458			—			248,323			—
Cumulative effect of accounting changes, net of tax (4)		—			(26	)		—			—			85,465
Net income		156,960			91,959			102,882			378,017			160,717
Balance sheet data:
Total investments	¥	12,837,495		¥	10,304,749		¥	9,393,222		¥	8,345,203		¥	6,628,825
Total assets		15,516,117			12,894,898			12,200,373			10,893,363			8,559,177
Total stockholders’ equity		4,440,243			3,432,640			3,408,351			2,824,316			2,509,694
Common stock		150,000			150,000			150,000			150,000			101,995
Number of shares issued (in thousands) (5)		1,687.05			1,727.05			1,857.05			1,857.05			1,549,692
Number of shares held as treasury stock (in thousands)		6.58			7.15			68.99			7.90	(6)		—
Per share data (7):
Net income—basic	¥	92,438		¥	52,531		¥	56,457		¥	203,558		¥	103,709
Net income—diluted	¥	92,426		¥	51,855		¥	56,457		¥	203,558		¥	103,709
Cash dividends declared (8)	¥	15,000		¥	11,000		¥	11,000		¥	10,000		¥	8,500
	$	129.12		$	99.76		$	100.52		$	83.42		$	70.92
Key ratios (9):
Net loss ratio		61.1	%		66.6	%		56.4	%		54.2	%		54.9	%
Combined loss and expense ratios		97.1	%		103.1	%		92.6	%		91.7	%		94.3	%

(1) Our U.S. GAAP consolidated financial statements for the fiscal years ended March 31, 2006, 2005, 2004 and 2003, from which some of the data in this table are derived, reflect the inclusion in those financial statements of the results of operations and financial position of Nichido Fire and its consolidated subsidiaries from and after the date of our formation on April 2, 2002. Consistent with U.S. GAAP and with Exchange Act requirements regarding the presentation of our financial statements, our U.S. GAAP consolidated financial statements for the fiscal year ended March 31, 2002 have not been restated to include

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the results of operations and financial position of Nichido Fire and its consolidated subsidiaries for such fiscal year. Accordingly, the amounts shown in this table for the fiscal years ended March 31, 2006, 2005, 2004 and 2003 are not directly comparable to the amounts shown for the fiscal year ended March 31, 2002. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Combination”.

(2) Certain amounts in our U.S. GAAP consolidated financial statements for the fiscal years ended March 31, 2005, 2004 and 2003 have been reclassified to conform to the new classifications adopted during the fiscal year ended March 31, 2006. Corresponding amounts in our U.S. GAAP consolidated financial statements for the fiscal year ended March 31, 2002 have not been similarly reclassified as they were not significant for such fiscal year. Accordingly, such reclassified amounts shown in this table for the fiscal years ended March 31, 2006, 2005, 2004 and 2003 are not directly comparable to the amounts shown for the fiscal year ended March 31, 2002.

(3) Extraordinary items for the fiscal year ended March 31, 2003 represent unallocated negative goodwill arising from the business combination with Nichido Fire. Extraordinary items for the fiscal year ended March 31, 2005 represent unallocated negative goodwill arising from the business combination with Nisshin Fire. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Alliance”.

(4) In accordance with the adoption of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended, we recognized “Cumulative effect of accounting changes, net of tax” for the fiscal year ended March 31, 2002. In accordance with the adoption of Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants, we recognized “Cumulative effect of accounting changes, net of tax” for the fiscal year ended March 31, 2005.

(5) In connection with our formation on April 2, 2002, each 1,000 shares of Tokio Marine common stock were exchanged for one share of our common stock.

(6) Includes shares held by our subsidiaries as of March 31, 2003.

(7) To facilitate comparability of the per share data from year to year after the share exchange in connection with our formation, the per share data for the fiscal years ended March 31, 2006, 2005, 2004 and 2003 are calculated based on 1.00 of our shares, while the per share data for the fiscal year ended March 31, 2002 is calculated based on 1,000 of Tokio Marine’s shares. The per share data are calculated using the weighted average number of shares outstanding for the period.

(8) The U.S. dollar amounts represent translations of the Japanese yen amounts at the noon buying rates for Japanese yen per $1.00 in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York in effect on the respective dividend payment dates.

(9) The key ratios relate to property and casualty insurance only. The net loss ratio is calculated by dividing losses incurred by premiums earned. The combined ratio is the sum of the ratio of loss and loss adjustment expenses incurred to premiums earned and the ratio of underwriting and administrative expenses incurred to premiums written. A combined ratio under 100% represents an underwriting profit and over 100% represents an underwriting loss.

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RISK FACTORS

If you own our securities, you should carefully consider the risks described below. Our business, operating results and financial condition could be materially adversely affected by any of these risks.

In addition, this annual report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks described below and elsewhere in this annual report.

Risks Relating to Our Business

If economic conditions in Japan again worsen, our financial condition and results of operations may be adversely affected.

We derive most of our insurance underwriting revenues from Japan. In addition, a substantial majority of the investments in our investment portfolio are Japanese equity securities, bonds and loans. Accordingly, our financial condition and results of operations are very dependent on economic conditions in Japan.

The Japanese economy experienced a significant downturn in the early 1990s and the Nikkei Stock Average, which is one of the major benchmarks for equity prices in Japan, reached its lowest level in twenty years in April 2003. While economic conditions improved in the fiscal years ended March 31, 2004, 2005 and 2006 and equity prices have risen since late April 2003, if economic conditions again worsen, due to factors including but not limited to current or future high oil prices, it could have a significant impact on our financial condition and results of operations.

A decline in the Japanese stock market may adversely affect our results of operations and financial condition.

We invest our policyholders’ premiums in a portfolio of assets, including Japanese stocks. As of March 31, 2006, equity securities available for sale represented approximately 39.0% of the value of our total investments other than investments in related parties. The market values of these equity securities are inherently volatile. We intend to hold our equity investments for the long term, but we may incur losses on our equity securities portfolio if the Japanese stock market again experiences declines or if other economic factors cause the value of our equity securities to decline. A significant decrease in the market value of these equity securities could have a negative impact on our financial condition and results of operations.

Fluctuations in interest rates may adversely affect our results of operations.

We are subject to interest rate risk due to our investments in fixed income instruments and derivatives as well as deposit-type insurance and long-term insurance liabilities. As of March 31, 2006, fixed income instruments represented approximately 43.0% of the value of our total investments other than investments in related parties. An increase in interest rates decreases the value of our fixed income portfolio and thereby adversely affects our financial condition. An increase in interest rates also decreases the value of our interest rate derivatives positions and thereby adversely affects our results of operations.

However, even though the current value of our fixed income portfolios and derivatives positions would decrease with an increase in interest rates, such decrease would be expected to be more than offset by a decrease in the value of our deposit-type insurance and long-term insurance liabilities. On the other hand, a decrease in interest rates may adversely affect our financial position because the amount of increase in the current value of our liabilities would be expected to exceed the amount of increase in the current value of our fixed income portfolio and derivatives positions.

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Despite our hedging and other risk management activities to limit our exposure to changes in interest rates, we still maintain exposure to interest rate risk. See “Management’s Discussion and Analysis of Financial Condition and Result of Operations—Quantitative and Qualitative Disclosures about Market Risk”.

Defaults in our fixed income and loan portfolios may adversely affect our results of operations and financial condition.

Issuers of fixed income instruments and loan borrowers may default on principal and interest payments with respect to fixed income instruments and loans we hold. Economic sluggishness, a decline of equity market prices or real estate prices in Japan, an increase in the number of insolvency procedures in Japan or a combination of these events or other factors may increase defaults by issuers or borrowers. A continuation of, or an increase in, defaults may require us to record losses on our fixed income and loan portfolios and may adversely affect our results of operations and financial condition.

Our foreign assets and liabilities are exposed to foreign currency fluctuations.

We are holding assets and liabilities denominated in foreign currencies such as the U.S. dollar, the euro and the pound sterling. A decrease in the fair value of assets or an increase in the fair value of liabilities as a result of foreign currency fluctuations could adversely affect our financial position. Fluctuations in foreign exchange rates also create foreign currency translation gains or losses.

Japan is prone to natural disasters that can result in substantial claims under non-life insurance policies.

Japan is subject to earthquakes, typhoons, windstorms, volcanic eruptions and other types of natural disasters, the frequency and severity of which are inherently unpredictable. Over the past several years, changing weather patterns and climatic conditions such as global warming have added to the unpredictability and frequency of natural disasters in certain parts of the world and created additional uncertainty as to future trends and exposures. During the fiscal year ended March 31, 2005, Japan experienced more severe typhoons in significantly higher number than in previous years and in the fiscal year ended March 31, 2006. As a result, in the fiscal year ended March 31, 2005, we recorded typhoon and other natural disaster-related insurance claims (including fire and automobile) in the amount of ¥148.0 billion, which was the highest amount of such insurance claims we have recorded since the fiscal year ended March 31, 1992. These natural disasters can have a serious impact on property and casualty insurers, depending on the frequency, nature and scope of the disaster, the amount of insurance coverage that the insurer has written in respect of the disaster, the amount of claims for losses, the timing of claims and the extent to which the insurer’s liability is covered by reinsurance. In order to mitigate the effect of disasters, we set our premium rates at levels which we believe are adequate to accommodate the effect of disasters and cede certain of the relevant risks to reinsurers under reinsurance policies. However, the occurrence of a natural disaster the severity of which we did not predict, or for which we did not adequately reinsure, could significantly affect our financial position and results of operations. In addition, if the frequency of occurrences of typhoons increases, we may be required to significantly increase our loss reserves relating to natural disaster-related insurance claims in the future, which could have a material adverse effect on our results of operations and financial condition.

We may be required to augment our reserves in case of unforeseen losses.

The insurance business is unlike manufacturing and most other businesses in that, at the time of a “sale”, when the insurance policy is written and the premium is paid, the “cost of sale” or the payment of a claim for a loss under the insurance policy is not yet conclusively determined. Losses may occur whose type or magnitude was not foreseen by the insurance company or the insurance industry generally at the time the insurance policies were written. If this type of deficiency arises with respect to our insurance liability reserves, we would have to augment our reserves or otherwise incur a charge to earnings, which in turn could have a material adverse effect on our results of operations. Historically, Japanese insurance companies have not experienced these unforeseen

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losses, unlike insurance companies in some other countries. For example, the U.S. insurance industry experienced significant losses with respect to unexpected claims resulting from the harmful effects of asbestos use. Our loss reserves could substantially increase if similar claims are made against our insurance policies for risks which we did not anticipate.

Disasters such as typhoons and earthquakes that affect broad areas could result in an unexpected increase of claims for loss under insurance policies and increase our demand for liquidity. As a result, we may be forced to raise capital at a higher interest rate or sell assets at a lower price than we otherwise would, which could adversely affect our financial condition.

Our financial results may be materially adversely affected by unpredictable events.

Our business, results of operations and financial condition may be materially adversely affected by unpredictable events and their consequences. Unpredictable events include single or multiple man-made or natural events that, among other things, cause unexpectedly large market price movements, increases in claims or deterioration of economic conditions of certain countries or regions, such as the terrorist attack on the United States on September 11, 2001, the outbreak of Severe Acute Respiratory Syndrome (SARS) in Asia in 2003 or the recent outbreaks of the bird flu.

We are subject to risks associated with reinsurance.

Like many other non-life insurance companies, Tokio Marine & Nichido utilizes reinsurance to provide greater capacity to write larger policies and to control its exposure to extraordinary losses or catastrophes. Reinsurance is a form of insurance that insurance companies buy for their own protection. An insurance company, referred to as a reinsured, reduces its possible maximum loss on risks by giving, or ceding, a portion of its liability to another insurance company, referred to as a reinsurer. Reinsurance is subject to prevailing market conditions, both in terms of price, which could affect our profitability, and in terms of availability, which could affect our ability to offer insurance. In addition, we are subject to credit risk with respect to our ability to recover amounts due from our reinsurers, as the ceding of reinsurance does not relieve us of our liability as the direct insurer to policyholders.

Tokio Marine & Nichido Life and Tokio Marine & Financial Life also utilize reinsurance and are subject to the same risks typically associated with reinsurance.

Deregulation, consolidation and the entry of new competitors has intensified competition in the Japanese insurance industry.

Japan’s current Insurance Business Law enacted in April 1996 contains provisions designed to deregulate and increase competition in the life and non-life insurance business in Japan. The Insurance Business Law has provisions permitting life insurance companies and non-life insurance companies to enter each other’s business through subsidiaries. The Insurance Business Law also permits the entry of foreign insurance companies with global operations into the Japanese insurance market and the entry of new competitors that have traditionally been engaged in non-insurance business activities. Furthermore, an amendment to the Law Concerning the Non-Life Insurance Rating Organization in 1998 has allowed non-life insurers to set their own premium rates, which has effectively opened the door to premium rate competition. We operate in a business environment in which competition has intensified and accelerated due to these measures.

In addition, anticipated changes in the financial services market, including the full liberalization of over-the-counter sales of insurance products at banks, are expected to accelerate competition in both price and quality of insurance products. Such competition could adversely affect our profitability.

These measures for deregulation have also resulted in increased consolidation among non-life insurance companies and the formation of business alliances among non-life and life insurance companies. We compete with such alliances on the basis of products and services. See “Business—Competition”.

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We may not succeed in executing our growth strategies outside of Japan.

To date, we have derived most of our insurance underwriting revenues from Japan. However, our strategy includes expanding our businesses in markets outside of Japan.

Each of the following additional factors, among others, could affect our future international operations:

• The impact of economic slowdown or currency crises in economies outside Japan;

• Unexpected changes in or delays resulting from regulatory requirements;

• Exchange controls;

• Restrictions on foreign investment or the repatriation of profits or invested capital;

• Changes in the tax system or rate of taxation;

• Social, political and economic risks;

• Natural disasters; and

• Unexpected spread of contagious diseases.

These and other factors could adversely affect our business, financial condition and results of operations.

We may not succeed in executing our growth strategies in other businesses.

As part of our growth strategy, we intend to develop our non-insurance businesses, such as asset management, health care and senior citizen related businesses. We may not succeed in competing in these competitive markets, particularly against companies with well-established operations. In addition, we may be required to make significant investments, and devote substantial management and other resources, in order to expand these businesses. If we are unable to compete successfully in these businesses, our results of operations and financial condition may be adversely affected.

A downgrade in the financial strength ratings of our operating subsidiaries could limit our ability to market products, increase the number of policies being surrendered and hurt our relationships with customers and trading counterparties.

Financial strength ratings, which are intended to measure an insurer’s ability to meet policyholder obligations, are an important factor affecting public confidence in most of our products and, as a result, our competitiveness. A downgrade, or potential downgrade, of the financial strength ratings of our operating subsidiaries, including Tokio Marine & Nichido, Tokio Marine & Nichido Life and Tokio Marine & Nichido Financial Life, may limit our ability to sell our insurance and annuity products, adversely affect our reinsurance business and adversely affect the terms and conditions of the business we conduct with trading counterparties.

Business interruptions, human factors or external events may adversely affect our financial results.

Operational risk is inherent in our business and can manifest itself in various ways, including business interruptions, regulatory breaches, human errors, employee misconduct and external fraud. These events can potentially result in financial loss or harm to our reputation, or otherwise hinder our operational effectiveness. Our management attempts to control this risk and keep operational risk at appropriate levels. Notwithstanding these control measures, operational risk is part of the business environment in which we operate and we may incur losses from time to time due to operational risk.

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System failures may adversely affect our reputation, operations and financial condition.

System failure risk is inherent in our operations, which rely heavily on computer and other information systems. System failures due to unexpected events, the wrongful use of these systems due to deficient or defective security measures or failures due to deficient or defective development or operation of information systems could result in adverse effects on our operations, increased direct or indirect costs due to recovery operations as well as impaired reputation and credibility due to press coverage of such failures. We seek to manage and minimize our system failure risk and have implemented a contingency plan that would allow us to continue our operations in the event of a system failure. However, despite these measures to mitigate system failure risk, any significant system failure could still materially adversely affect our operations and financial condition.

Unauthorized disclosure of personal information held by us may adversely affect our business.

We keep and manage personal information obtained from customers in relation to our insurance business. In recent years, there have been many cases of personal information and records in the possession of corporations and institutions being improperly accessed or disclosed. The standards relating to protection of personal information that apply to us have become more stringent under the Law Concerning Protection of Personal Information and rules, regulations and guidelines relating thereto. The provisions of this law applicable to us became effective on April 1, 2005. Although we exercise care in protecting the confidentiality of personal information and take steps to ensure security of such information, if any material unauthorized disclosure of personal information does occur, our credibility and brand image may suffer. In addition, we may have to provide compensation for economic loss arising out of a failure to protect such information, thereby materially adversely affecting our results of operations and financial condition.

Changes in existing, or new, Japanese regulations may materially impact our business, results of operations and financial condition.

Our insurance business is subject to detailed, comprehensive regulation and supervision in Japan. Changes in existing, or new, insurance laws and regulations are unpredictable and beyond our control and may affect the way we conduct our business and the products we may offer in Japan. These changes in existing or new insurance laws and regulations may be more restrictive or may result in higher costs than current requirements. Also, such changes may require increases of various statutory reserves.

If the actual experience on our products differs from management’s estimates, our business, results of operations and financial condition could be materially adversely affected.

The determination of liabilities and premiums for our property and casualty insurance, life insurance and annuity businesses is based on models which involve numerous assumptions and subjective judgments. There can be no assurance that ultimate actual experience on these products will not differ from management’s estimates. In particular, experience on automobile insurance which could require large insurance payments, fire insurance that covers losses arising from natural disasters, third-sector insurance with lifetime-long contractual periods and variable annuities that are affected by fluctuations of stock prices are inherently difficult to estimate. If the actual experience differs from management’s estimates, our business, results of operations and financial condition could be materially adversely affected.

Litigation and regulatory investigations may adversely affect our financial results.

We face risks of litigation and regulatory investigation and actions in connection with our operations. Lawsuits, including regulatory actions, may seek recovery of very large, indeterminate amounts or limit our operations, and their existence and magnitude may remain unknown for substantial periods of time. A substantial legal liability or a significant regulatory action could have a material adverse effect on our business, results of operations and financial condition.

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In May 2005, one of Tokio Marine & Nichido’s U.S. subsidiaries received subpoenas from the United States Attorney’s Office for the Southern District of New York and the United States Securities and Exchange Commission, or the SEC, requesting documents relating to certain types of reinsurance transactions, in connection with what we believe are investigations involving a number of industry participants. We are cooperating with the relevant authorities with respect to these matters. At this time we are unable to predict the potential effects, if any, that these investigations may have upon us, the reinsurance markets and industry business practices. Any of the foregoing could have a material effect on our business, results of operations and financial condition relating to our reinsurance activities.

It may not be possible for investors to effect service of process within the United States upon us or our directors, executive officers or corporate auditors, or to enforce against us or those persons judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States.

We are a joint stock corporation organized under the laws of Japan. All of our directors, executive officers and corporate auditors reside outside of the United States. Many of our and their assets are located in Japan and elsewhere outside the United States. It may not be possible, therefore, for U.S. investors to effect service of process within the United States upon us or these persons or to enforce against us or these persons judgments obtained in the U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States. We believe that there is doubt as to the enforceability in Japan, in original actions or in actions to enforce judgments of U.S. courts, of liabilities predicated solely upon the federal securities laws of the United States.

Since we are a holding company, our ability to pay operating and financing expenses and dividends depends on the financial performance of our principal operating subsidiaries. Our ability to pay dividends also depends on our own dividend-paying capacity.

As a holding company, our ability to pay operating and financing expenses and dividends depends primarily on the receipt of sufficient funds from our principal operating subsidiaries. Statutory provisions regulate our operating subsidiaries’ ability to pay dividends. If our operating subsidiaries are unable to pay dividends to us in a timely manner and in amounts sufficient to pay our operating and financing expenses to declare and pay dividends and to meet our other obligations, we may not be able to pay dividends or we may need to seek other sources of liquidity.

Under the Corporation Law of Japan, or the Corporation Law, we cannot declare or pay dividends unless we meet specified financial criteria on a “parent-only” basis. Generally, we will be permitted to pay dividends only if we have retained earnings on a non-consolidated balance sheet basis as of the end of the preceding fiscal year (determined in accordance with Japanese GAAP).

Risks Relating to Owning Our American Depositary Shares

Foreign exchange rate fluctuations may affect the U.S. dollar value of our American depositary shares and dividends payable to holders of our American depositary shares.

Market prices for our American depositary shares, or ADSs, may fall if the value of the yen declines against the U.S. dollar. In addition, the U.S. dollar amount of cash dividends and other cash payments made to holders of our ADSs would be reduced if the value of the yen declines against the U.S. dollar.

A holder of ADSs has fewer rights than a shareholder and must act through the depositary to exercise those rights.

The rights of shareholders under Japanese law to take various actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining a company’s accounting books and

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records, and exercising dissenters’ rights, are available only to holders of record on a company’s register of shareholders. Because the depositary, through its custodian agent, is the registered holder of the shares represented by our ADSs, only the depositary is able to exercise those rights in connection with the deposited shares. The depositary will make efforts to vote the shares represented by our ADSs as instructed by the holders of those ADSs and will pay to those holders the dividends and distributions collected from us. However, a holder of ADSs will not be able directly to bring a derivative action, examine our accounting books and exercise dissenters’ rights through the depositary unless the depositary specifically undertakes to exercise those rights and is indemnified to its satisfaction by the holder of ADSs for doing so.

There are restrictions on the withdrawal of shares from our depositary receipts facility.

Each of our ADSs represents the right to receive .005 of one share of our common stock. Although we maintain a book-entry fractional share register, a holder of ADSs must surrender for cancellation depositary receipts evidencing 200 ADSs or any integral multiple thereof in order to withdraw whole shares of our common stock in certificated form. Each depositary receipt evidencing our ADSs bears a legend to that effect.

Effective September 30, 2006, we will conduct a stock split of our shares of common stock, whereby one share of our common stock will be split into 500 shares of common stock. Concurrently with the stock split, we will adopt a unit share system. Effective from October 2, 2006, 100 shares of common stock will constitute one unit.

Concurrently with these changes, we will reset the ratio of ADSs per share of common stock so that each ADS will represent one share of our common stock. Subsequently, a holder of ADSs must surrender for cancellation depositary receipts evidencing 100 ADSs or any integral multiple thereof in order to withdraw shares of our common stock. Each depositary receipt evidencing our ADSs will bear a legend to that effect. In addition, although we have implemented procedures that require us, subject to certain conditions, to repurchase common shares representing less than one unit, holders of ADSs in lots of less than 100 will not be able to withdraw shares of our common stock and will therefore not be entitled to sell such ADSs, or the shares of common stock that they represent, to us.

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EXCHANGE RATES

Fluctuations in exchange rates between the Japanese yen and the U.S. dollar and other currencies affect the U.S. dollar and other currency equivalents of the yen price of our shares. These fluctuations also affect the U.S. dollar amounts received on conversion of any cash dividends. The following table shows noon buying rates for Japanese yen per $1.00 in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York for each period indicated:

	Average (1)
Year ended March 31:
2002	¥	125.64
2003		121.10
2004		112.75
2005		107.28
2006		113.67

	High		Low
Month:
March 2006	¥	115.89	¥	119.07
April 2006		113.79		118.66
May 2006		110.07		113.46
June 2006		111.66		116.42
July 2006		113.97		117.44
August 2006		114.21		117.35
September (through September 15) 2006		116.04		117.82

(1) Average rate for each fiscal year is calculated by using the average of the exchange rates on the last day of each month during that year.

The noon buying rate for Japanese yen on September 15, 2006 was $1.00 = ¥117.72.

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MARKET PRICE INFORMATION

Our common stock is listed in Japan on the First Section of Tokyo Stock Exchange, Inc., or the Tokyo Stock Exchange, and on the First Section of Osaka Securities Exchange Co., Ltd., or the Osaka Securities Exchange. Trading of our shares on these exchanges began on April 1, 2002.

ADSs representing shares of our common stock are currently traded in the United States on the NASDAQ Global Select Market and, prior to July 2006, the NASDAQ National Market under the symbol “MLEA”. Trading of our ADSs on the NASDAQ National Market commenced on April 2, 2002. Each ADS represents .005 of one share of our common stock. As of March 31, 2006, outstanding ADSs represented 5.3% of our outstanding shares.

Effective September 30, 2006, we will conduct a stock split of our shares of common stock, whereby one share of our common stock will be split into 500 shares of common stock. In connection with this change, we will reset the ratio of ADSs per share of common stock so that each ADS will represent one share of our common stock.

The following table sets forth, for the periods indicated, the reported high and low sales price per share of our common stock on the First Section of the Tokyo Stock Exchange, as well as the high and low sales price per ADS quoted on the NASDAQ Global Select Market and, prior to July 2006, the NASDAQ National Market. The table also includes high and low market price quotations from the Tokyo Stock Exchange, translated in each case into U.S. dollars per ADS at the Federal Reserve Bank of New York’s noon buying rate on the relevant date.

	Price per share on the Tokyo Stock Exchange				Translated into U.S. dollars per ADS (1)				Price per ADS on the NASDAQ Global Select Market (2)
	High		Low		High		Low		High		Low
	(yen)				(US$)				(US$)
Year ended March 31, 2003	¥	1,140,000	¥	706,000	$	45.71	$	30.15	$	44.50	$	29.76
Year ended March 31, 2004		1,710,000		725,000		81.03		30.66		80.05		30.75
Year ended March 31, 2005
First fiscal quarter		1,730,000		1,280,000		82.74		56.09		83.00		55.81
Second fiscal quarter		1,690,000		1,360,000		76.75		61.42		77.01		62.10
Third fiscal quarter		1,610,000		1,320,000		76.41		61.91		76.32		63.16
Fourth fiscal quarter		1,670,000		1,430,000		79.53		69.05		80.07		68.53
Year ending March 31, 2006
First fiscal quarter		1,650,000		1,380,000		76.21		63.98		76.32		64.70
Second fiscal quarter		1,920,000		1,450,000		86.23		64.69		84.93		64.41
Third fiscal quarter		2,260,000		1,740,000		96.50		76.62		95.40		76.35
Fourth fiscal quarter		2,400,000		1,880,000		103.61		81.49		101.88		84.21
Year ending March 31, 2007
First fiscal quarter		2,440,000		1,810,000		102.86		79.23		106.53		78.64
Month
March 2006		2,350,000		2,170,000		101.14		92.03		101.81		91.80
April 2006		2,440,000		2,260,000		102.86		96.02		102.69		96.05
May 2006		2,380,000		1,970,000		106.91		87.74		106.53		88.33
June 2006		2,140,000		1,810,000		93.44		79.23		93.37		78.64
July 2006		2,240,000		2,040,000		97.87		86.85		97.02		87.46
August 2006		2,270,000		2,070,000		97.48		89.89		98.25		91.36
September (through September 15) 2006		2,210,000		2,050,000		94.28		87.00		94.93		87.07

(1) U.S. dollar amounts have been translated from yen at the Federal Reserve Bank of New York’s noon-buying rate as of the relevant high and low quotation date or the last available date prior thereto.

(2) Prior to July 2006, the NASDAQ National Market.

The closing price of our shares of common stock on the Tokyo Stock Exchange as of September 15, 2006 was ¥2,140,000.

The above prices for our ADSs are based on inter-dealer prices reported by NASDAQ and do not include retail mark-ups, retail mark-downs or commissions.

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DIVIDEND POLICY

In June 2006, we declared cash dividends on shares of our common stock in the amount of ¥15,000 per share and paid ¥25,207 million in respect of the fiscal year ended March 31, 2006. In June 2005, we declared cash dividends on shares of our common stock in the amount of ¥11,000 per share and paid ¥18,919 million in respect of the fiscal year ended March 31, 2005. In June 2004, we declared cash dividends on shares of our common stock in the amount of ¥11,000 per share and paid ¥19,668 million in respect of the fiscal year ended March 31, 2004.

As a holding company, our ability to pay dividends in the future will depend primarily on our receipt of sufficient funds from our principal operating subsidiaries. In addition, under the Corporation Law, we cannot declare or pay dividends unless we meet specified financial criteria on a “parent-only” basis. Generally, we will be permitted to pay dividends only if we have retained earnings on a non-consolidated balance sheet basis as of the end of the preceding fiscal year (determined in accordance with Japanese GAAP). See “Risk Factors—Risks Relating to Our Business” and “Description of Common Stock—Distributions of Surplus”.

When apportioning profits in respect of any given fiscal year, we seek to improve returns to shareholders by distributing stable dividends on our common stock and by repurchasing our own shares (see “Description of Common Stock—Repurchase by Millea Holdings of Shares”), subject to having provided sufficient capital to meet our business needs.

Although we had not been paying cash interim dividends to our shareholders in the past, on May 24, 2006, the board of directors has approved the policy to pay interim cash dividends starting with the fiscal year ending March 31, 2007.

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MAJOR SHAREHOLDERS

Our ten largest shareholders of record as of March 31, 2006, expressed as a percentage of the total number of our shares then outstanding, were as follows:

Shareholder	Number of whole shares held	Percentage of total shares outstanding (1)
The Master Trust Bank of Japan, Ltd. (Trust Account)	115,446	6.9	%
Japan Trustee Services Bank, Ltd. (Trust Account)	99,450	5.9	%
Moxley & Co. (2)	89,410	5.3	%
State Street Bank and Trust Company	53,219	3.2	%
The Bank of Tokyo-Mitsubishi UFJ, Ltd.	40,132	2.4	%
Meiji Yasuda Life Insurance Company	39,187	2.3	%
State Street Bank and Trust Company 505103	33,680	2.0	%
Trust & Custody Services Bank, Ltd. (3)	28,148	1.7	%
Mizuho Corporate Bank, Ltd.	27,045	1.6	%
The Chase Manhattan Bank N.A. London	25,027	1.5	%
Total	550,744	32.8	%

(1) The number of total shares outstanding equals the number of total issued shares minus the number of treasury shares. As of March 31, 2006, there were 1,680,467.65 shares of our common stock outstanding.

(2) Moxley & Co. is the corporate nominee holder of common stock deposited for the issuance of ADSs.

(3) As trustee for Mizuho Trust Retirement Benefits Trust Account for Mitsubishi Heavy Industries, Ltd.

None of our shareholders listed above has voting rights that are different from voting rights of our other shareholders.

As of March 31, 2006, we had 85,069 shareholders of record, of which 84,971 were Japanese record holders. As of the same date, 63.1% of our outstanding shares were owned by Japanese record holders.

We are not aware of any arrangements that may result in a change of control of us.

The identities of shareholders in companies listed on a Japanese stock exchange, as well as their shareholdings, must be publicly reported in Japan under the following circumstances:

• Reporting by Shareholders. As explained in “Regulation—Reporting of Substantial Shareholdings”, any person who becomes a beneficial owner of more than 5% of the total issued shares of a company listed on a Japanese stock exchange must file a public report concerning their shareholdings with the related local finance bureau.

• We received copies of reports filed on May 13, 2005 with the Kanto Finance Bureau by Mitsubishi Tokyo Financial Group, Inc. on behalf of The Bank of Tokyo-Mitsubishi, Ltd., The Mitsubishi Trust and Banking Corporation, Mitsubishi Securities Co., Ltd., Mitsubishi Securities International plc, and Mitsubishi Asset Management Co., Ltd. indicating that these entities beneficially owned an aggregate of 75,263 shares of common stock as of April 30, 2005, representing 4.36% of the total issued shares. Such shares represented 4.39% of the total shares outstanding as of April 30, 2005.

Subsequently, we received copies of reports filed on November 15, 2005 with the Kanto Finance Bureau by Mitsubishi UFJ Financial Group, Inc. on behalf of The Bank of Tokyo-Mitsubishi, Ltd., Mitsubishi UFJ Trust and Banking Corporation, Mitsubishi UFJ Securities Co., Ltd., Mitsubishi UFJ Securities International plc, Mitsubishi UFJ Asset Management Co., Ltd., UFJ Bank Limited and MU Investments Co., Ltd. indicating that these entities beneficially owned an aggregate of 93,223 shares of common stock as of October 31, 2005, representing 5.40% of the total issued shares. Such shares represented 5.50% of the total shares outstanding as of October 31, 2005.

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We also received copies of reports filed on February 15, 2006 with the Kanto Finance Bureau by Mitsubishi UFJ Financial Group, Inc. on behalf of The Bank of Tokyo-Mitsubishi UFJ, Ltd., Mitsubishi UFJ Trust and Banking Corporation, Mitsubishi UFJ Securities Co., Ltd., Mitsubishi UFJ Securities International plc and Mitsubishi UFJ Asset Management Co., Ltd. indicating that these entities beneficially owned an aggregate of 102,095.74 shares of common stock as of January 31, 2006, representing 5.91% of the total issued shares. Such shares represented 6.06% of the total shares outstanding as of January 31, 2006.

We also received copies of reports filed on May 15, 2006 with the Kanto Finance Bureau by Mitsubishi UFJ Financial Group, Inc. on behalf of The Bank of Tokyo-Mitsubishi UFJ, Ltd., Mitsubishi UFJ Trust and Banking Corporation, Mitsubishi UFJ Securities Co., Ltd., Mitsubishi UFJ Securities International plc, Mitsubishi UFJ Asset Management Co., Ltd. and Mitsubishi UFJ Asset Management (UK) Ltd. indicating that these entities beneficially owned an aggregate of 91,261.74 shares of common stock as of April 30, 2006, representing 5.41% of the total issued shares. Such shares represented 5.44% of the total shares outstanding as of April 30, 2006.

We also received copies of reports filed on August 15, 2006 with the Kanto Finance Bureau by Mitsubishi UFJ Financial Group, Inc. on behalf of The Bank of Tokyo-Mitsubishi UFJ, Ltd., Mitsubishi UFJ Trust and Banking Corporation, Mitsubishi UFJ Securities Co., Ltd., Mitsubishi UFJ Securities International plc, Mitsubishi UFJ Asset Management Co., Ltd., MU Investments Co., Ltd. and Mitsubishi UFJ Asset Management (UK) Ltd. indicating that these entities beneficially owned an aggregate of 97,145.74 shares of common stock as of July 31, 2006, representing 5.76% of the total issued shares. Such shares represented 5.91% of the total shares outstanding as of July 31, 2006.

• We received copies of reports filed on September 14, 2005 with the Kanto Finance Bureau by Barclays Global Investors Japan Trust & Banking Co., Ltd., Barclays Global Investors Japan Limited, Barclays Global Investors, N.A., Barclays Global Fund Advisors, Barclays Global Investors Australia Limited, Barclays Global Investors Limited, Barclays Life Assurance Company Limited, Barclays Capital Securities Limited and Barclays Capital Inc. indicating that these entities beneficially owned an aggregate of 43,273 shares as of June 30, 2005, representing 2.51% of the total issued shares. Such shares represented 2.54% of the total shares outstanding as of August 31, 2005.

• We received a copy of a report filed on July 19, 2005 with the Kanto Finance Bureau by Brandes Investment Partners, L.P. (formerly Brandes Investment Partners, L.L.C.) indicating that it beneficially owned an aggregate of 106,093 shares of common stock as of June 30, 2005, representing 6.14% of the total issued shares. Such shares represented 6.19% of the total shares outstanding as of June 30, 2005.

• Reporting by Listed Companies. Under the Japanese Securities and Exchange Law, any company whose shares are listed on a Japanese stock exchange must publicly report information about its major shareholders. We are required to make this disclosure, which generally includes information about a company’s ten largest shareholders of record, as of each March 31 and September 30.

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BUSINESS

Group Overview

We were formed on April 2, 2002 as the holding company, a joint stock corporation (kabushiki kaisha) organized under the laws of Japan, for Tokio Marine and Nichido Fire. Since being formed, we have reorganized various subsidiaries of Tokio Marine and Nichido Fire, so that those subsidiaries are directly owned by us. See “—Subsidiaries and Affiliates”. Our legal name as specified in our articles of incorporation is Kabushiki Kaisha Millea Holdings, translated into English as Millea Holdings, Inc. Our commercial name is Millea Holdings.

In October 2004, we merged our property and casualty insurance subsidiaries, Tokio Marine and Nichido Fire, and named the new entity “Tokio Marine & Nichido”.

Tokio Marine & Nichido, as the successor of Tokio Marine and Nichido Fire, is the oldest and largest, in terms of net premiums written, property and casualty insurance company in Japan. It underwrites the full range of property and casualty insurance coverage available in Japan, including voluntary automobile, compulsory automobile liability, fire and allied lines, personal accident, cargo and transit, and hull insurance. Tokio Marine & Nichido underwrites some lines of property and casualty insurance coverage overseas. It also accepts and cedes reinsurance for certain lines of property and casualty insurance coverage.

Formation of Millea Holdings

We were formed as the holding company for Tokio Marine and Nichido Fire through a statutory share transfer that became effective on April 2, 2002. After the statutory share transfer became effective, former Tokio Marine shareholders held approximately 83% of the outstanding shares of our common stock and former Nichido Fire shareholders held approximately 17%.

Recent Developments

Acquisition and Management Integration of Nisshin Fire and Marine Insurance Company, Limited

Pursuant to an agreement reached in March 2003, we entered into a strategic alliance with Nisshin Fire and Marine Insurance Company, Limited, or Nisshin Fire. This alliance included cooperation in marketing of Tokio Marine & Nichido Life’s products and joint proposals by Tokio Marine & Nichido and Nisshin Fire to Nisshin Fire’s corporate clients and automobile dealer agents. We acquired approximately 31% of the total outstanding shares of Nisshin Fire as of February 2005, and the two companies expanded their cooperation to include, among others, sales by Nisshin Fire of Tokio Marine & Nichido’s defined contribution pension products. As a result of the February 2005 acquisition, Nisshin Fire became our affiliate by equity method, and on April 1, 2006, a corporate separation was effected to transfer Tokio Marine & Nichido’s business management functions with respect to Nisshin Fire to us, thereby bringing Nisshin Fire under our direct management.

In May 2006, Nisshin Fire and we agreed to integrate management of the two companies by way of a stock-for-stock exchange, to be effective on September 30, 2006, making Nisshin Fire our wholly-owned subsidiary. Nisshin Fire will continue to operate its independent property and casualty insurance business, separately from Tokio Marine & Nichido.

Acquisition of Asia General Holdings Ltd.

In April 2006, Tokio Marine & Nichido reached an agreement with the major shareholders of Asia General Holdings Ltd., or Asia General, to acquire their shareholdings in Asia General, which holds property and casualty and life insurance companies in Singapore and Malaysia. Pursuant to the agreement, Tokio Marine & Nichido acquired approximately a 15% interest in Asia General in May 2006 for S$130 million (approximately ¥9,264 million at the exchange rate on May 25, 2006). Tokio Marine & Nichido expects to acquire additional shares to hold a majority interest by early 2007. Through this acquisition, Tokio Marine & Nichido expects to expand its property and casualty insurance operations and to establish a foundation for life insurance operations in Singapore and Malaysia.

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Acquisition of Real Seguros S.A. and investment in Real Vida e Previdência S.A.

In July 2005, we acquired a 100% interest in Real Seguros S.A., primarily a property and casualty insurer, and a 50% interest in Real Vida e Previdência S.A., a life and pension insurer, both located in Brazil, from ABN AMRO Bank N.V. for a total cost of R$983 million (¥46.6 billion). As a result of this transaction, Tokio Marine & Nichido now markets its insurance products through approximately 1,900 branches of Banco ABN AMRO Real S.A. and 8,700 insurance brokers in Brazil.

Acquisition of Allianz President General Insurance Co., Ltd. and its merger with Newa Insurance

In September 2004, Millea Asia Ptd. Ltd., or Millea Asia, subsequently renamed as Tokio Marine Asia Pte. Ltd., or Tokio Marine Asia, our directly held subsidiary, acquired Allianz President General Insurance Co., Ltd., a Taiwanese property and casualty insurance company. This company merged with Newa Insurance Co., Ltd., a Taiwanese property and casualty insurance affiliate of Tokio Marine Asia, on April 1, 2005 and the newly merged company operates under the name of Tokio Marine Newa Insurance Co., Ltd., in which Tokio Marine Asia holds a 49% interest.

Objects and Purposes

Our objects and purposes, as stated in article 2 of our articles of incorporation, are to engage in the following businesses as an insurance holding company:

• Management of non-life insurance companies;

• Management of life insurance companies;

• Management of specialized securities companies;

• Management of foreign companies engaged in the insurance business;

• Management of any other company which is or may become our subsidiary in accordance with the provisions of the Insurance Business Law of Japan; and

• Any other business pertaining to the foregoing listed businesses.

Corporate Philosophy

In November 2003, we adopted as our corporate philosophy the following:

“Millea Group Corporate Philosophy

The Millea Group is committed to the continuous enhancement of corporate value, with customer trust at the base of all of its activities.

• By providing customers with the highest quality products and services, we will spread safety and security to all around us.

• For fulfilling our responsibility to shareholders, we will pursue global development of sound, growing and profitable businesses.

• For promoting the creativity of each and every employee, we will foster a corporate culture which encourages free and open communications.

• While demonstrating responsible management as a good corporate citizen, we will make a positive contribution to society”.

In addition, our group companies have long dedicated themselves to providing products and services designed to meet society’s need for “safety and security”, and to corporate social responsibility, or CSR, activities such as environmental conservation and philanthropic activities. In November 2004, we established the

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Millea Group CSR Charter as a common guideline for our group companies’ CSR activities. During the fiscal year ended March 31, 2006, Tokio Marine & Nichido and we participated in the United Nations Global Compact with the approval of the United Nations Headquarters, which was officially launched in July 2000 to promote business activities relating to human rights, labor, the environment and anti-corruption measures. This is one example of our many CSR activities that we engage in; other activities include those relating to environmental protection and conservation and philanthropic activities.

Principal Executive Offices

Our principal executive offices are located at Tokyo Kaijo Nichido Building Shinkan, 2-1 Marunouchi 1-chome, Chiyoda-ku, Tokyo 100-0005, Japan, and our telephone number is 81-3-6212-3333.

Business Goals and Strategies

In November 2005, we announced our long-term corporate strategy and our current medium- and long-term business strategy called “Stage Expansion 2008.” By implementing our strategy for each of our property and casualty insurance, life insurance and other businesses, we aim to create the optimum business portfolio and to maximize our corporate value. We aim to increase our corporate value through:

• comprehensive product design;

• efficient utilization of existing and new distribution channels, including, subsequent to the full liberalization of over-the-counter sales of insurance products, through over-the-counter sales at banks; and

• expansion of our local insurance business in attractive markets around the world;

on the basis of our commitment to corporate social responsibility and compliance.

Domestic Property and Casualty Insurance Business

Our principal revenue base is our domestic property and casualty insurance business. We aim to increase the revenues and the results of operations of this business by strengthening our underwriting operations, increasing sales and further improving efficiencies by:

• Enhancing Tokio Marine & Nichido’s product portfolio by responding to customer needs through further quality improvements of its products and innovative product design, including the packaging of multiple products and the incorporation of accident prevention features, post-accident care services and other peripheral services. Tokio Marine & Nichido intends to leverage its experience with existing well received products such as “Cho Hoken (Super Insurance)”, “Total Assist” and “Diabetes-dedicated Casualty Insurance”. See “—Property and Casualty Insurance—“Cho Hoken” and “Cho Business Insurance””.

• Expanding and improving Tokio Marine & Nichido’s distribution network through growth of its existing sales agencies and ongoing training, support and supervision of its sales agencies and through utilization of new sales channels, including, but not limited to over-the-counter sales at banks.

• Introducing a fundamental reform to Tokio Marine & Nichido’s business processes and infrastructure through the Business Renovation Project. As part of the Business Renovation Project, Tokio Marine & Nichido intends to reorganize its sales infrastructure in order to enhance its operational efficiency and to optimize the utilization of information technologies. Through the implementation of this Business Renovation Project, Tokio Marine & Nichido aims to concentrate its management resources on customer-relation matters and to gain outstanding customer trust in response to enhanced user-friendliness and high-quality claims handling and payment services.

• Enhancing Tokio Marine & Nichido’s profit-earning capacity in its asset management operations, including through absolute return investments.

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Domestic Life Insurance Business

We plan to expand our domestic life insurance business as one of our core businesses. We aim to strengthen our life insurance subsidiaries, Tokio Marine & Nichido Life and Tokio Marine & Nichido Financial Life, and seek revenue growth and improved results of operations in this business by:

• Continuing to deliver new innovative products that respond to customer needs, based on Tokio Marine & Nichido Life’s experience with its well received products such as the broad market products “Nagawari” and “Mittsu-no-Anshin” and specialized products such as “Anshin Amulet”, a medical insurance product exclusively for women and “Anshin Iryou Plus”, covering cancer, stroke and heart attack. See “—Life Insurance Business—Tokio Marine & Nichido Life”.

• Further growing Tokio Marine & Nichido Financial Life’s business in the variable annuity market.

• Positioning conventional cross-selling by Tokio Marine & Nichido’s insurance agents as its core sales channel and promoting a multi-channel sales strategy that includes the use of sales personnel specialized in life insurance products, such as our Life Partners or Life Professionals, and the adoption of over-the-counter sales at banks and mail order sales.

• Increasing the number of banks that distribute Tokio Marine & Nichido Financial Life’s products and enhancing the support infrastructure with respect to over-the-counter sales at banks.

Third Sector Insurance Business

We aim to continue to expand our product portfolio in the third sector insurance business, which includes personal accident, medical and cancer insurance and insurance covering expenses for nursing care, by leveraging our experience in the property and casualty and life insurance businesses. By combining new insurance offerings with attractive features from our property and casualty and life insurance businesses, we intend to provide customized product offerings that are suitable for specific markets or distribution channels, including for distribution through over-the-counter sales at banks subsequent to the full liberalization of sales of insurance products scheduled to take place in December 2007.

Overseas Insurance Business

To diversify geographically and realize stable revenue growth, we aim to expand our overseas insurance business. Our primary focus was the Asian local insurance market, which we believe has potential for high growth and profitability. In April 2003, we transferred our Asian insurance operations to Millea Asia, renamed as Tokio Marine Asia in 2006. Tokio Marine Asia is in charge of planning our business growth strategy in the Asian region (excluding Japan) through mergers, acquisitions, business tie-ups and the management of our local Asian subsidiaries. We have been, and we intend to continue, pursuing the expansion of Asian business with a focus on what we believe are growing areas, especially China, Taiwan, Thailand, Malaysia and India. In April 2006, we reached an agreement with the major shareholders of Asia General to acquire Asia General and its subsidiaries. This acquisition will increase our access to the property and casualty and life insurance markets in Singapore and Malaysia. We are also focusing on other growing markets such as Brazil, where we acquired a 100% interest in Real Seguros S.A., primarily a property and casualty insurer, and a 50% interest in Real Vida e Previdência S.A., a life and pension insurer, in July 2005 for a total cost of R$983 million (¥46.6 billion).

In the developed markets such as North America and Europe, we aim to expand our local insurance business in the field of commercial property and casualty insurance through a combination of regional internal growth strategies, acquisitions, equity participations and business alliances.

We also seek to achieve revenue growth and risk diversification through operations of Tokio Millennium Re Ltd., Tokio Marine Global Limited and Tokio Marine Global Re Limited, which are our overseas reinsurance subsidiaries.

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Asset Management and Other Businesses

We intend to expand our asset management business and other businesses, which we believe have significant potential for synergies with our insurance business.

Asset Management Business

Utilizing the expertise acquired in the investment operations of our insurance companies, we intend to pursue the following measures to further increase our assets and to increase revenue:

• In the retail market, we aim to establish an investment trust/defined contribution business.

• In the wholesale market, we plan to actively launch new products in alternative investment areas such as private equity to expand our product line-up.

• We intend to expand our asset management operations globally through Tokio Marine Asset Management Company, Limited.

Other Businesses

We plan to selectively expand our insurance-related businesses such as health care and senior citizen-related businesses, the risk consulting business and comprehensive human resource-related services, as well as other existing related businesses, where we believe opportunities for growth exist.

In the fiscal year ended March 31, 2006, we have established two joint ventures by acquiring a 50% interests in Millea Mondial Co., Ltd., which provides various assistance services in relation to customers’ private and business travel, automobile related services and medical care, in January 2006, and a 49% interests in Tokio Marine & Nichido Samuel Co., Ltd., which provides nursing-care services for elderly people in senior care homes, in February 2006.

Property and Casualty Insurance

Property and Casualty Insurance Lines

We engage primarily in underwriting voluntary automobile, compulsory automobile liability, fire and allied lines (including earthquake), personal accident, marine (including cargo and transit and hull) and other lines of property and casualty insurance through Tokio Marine & Nichido, principally in Japan. The following table, prepared on a U.S. GAAP basis, shows a breakdown of our direct premiums written by our principal lines of insurance for each of the periods indicated:

	Year ended March 31,
	2006		2005		2004
	(yen in millions)
Voluntary Automobile	¥	890,013	¥	868,393	¥	887,750
Compulsory Automobile Liability (1)		292,184		302,955		311,124
Fire and Allied Lines (2)		318,754		302,081		299,481
Personal Accident		152,787		151,667		153,849
Marine—Cargo and Transit		87,029		81,878		71,678
Marine—Hull		20,754		18,770		19,599
Other (3)		241,001		239,806		235,074
Total	¥	2,002,522	¥	1,965,550	¥	1,978,555

(1) Japanese law requires that all automobiles be covered by compulsory automobile liability insurance. See note 1 to our consolidated financial statements.

(2) Includes earthquake insurance.

(3) Major “Other” lines of insurance are liability, aviation, workers’ compensation, movables comprehensive, machinery breakdown, contractors’ all-risk, credit and guarantee and surety bonds.

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The following table, prepared on a U.S. GAAP basis, shows a breakdown of each key component of our property and casualty insurance premiums written for the year ended March 31, 2006:

	Direct premiums written		Reinsurance premiums assumed		Reinsurance premiums ceded		Net premiums written (1)
							Amount		%
			(yen in millions, except percentages)
Voluntary Automobile	¥	890,013	¥	6,058	¥	11,367	¥	884,704	44.80	%
Compulsory Automobile Liability (2)		292,184		250,628		226,313		316,499	16.03	%
Fire and Allied Lines (3)		318,754		42,969		73,328		288,395	14.60	%
Personal Accident		152,787		3,332		4,514		151,605	7.68	%
Marine—Cargo and Transit		87,029		4,313		14,129		77,213	3.91	%
Marine—Hull		20,754		9,961		14,921		15,794	0.80	%
Other (4)		241,001		37,089		37,654		240,436	12.18	%
Total	¥	2,002,522	¥	354,350	¥	382,226	¥	1,974,646	100.00	%

(1) Net premiums written = direct premiums written + reinsurance premiums assumed – reinsurance premiums ceded.

(2) Japanese law requires that all automobiles be covered by compulsory automobile liability insurance. See note 1 to our consolidated financial statements.

(3) Includes earthquake insurance.

(4) Major “Other” lines of insurance are liability, aviation, workers’ compensation, movables comprehensive, machinery breakdown, contractors’ all-risk, credit and guarantee and surety bonds.

Voluntary Automobile

Automobile ownership in Japan has grown over the years and there is currently no other country in the world except the United States where a greater number of automobiles is owned. According to statistics published by the Japanese Automobile Inspection and Registration Association, the number of automobiles owned in Japan has been slowly but consistently growing in the past several years, and as of March 31, 2006, approximately 78 million automobiles were owned in Japan. In line with the high level of automobile ownership, the number of automobile accidents and the number of persons injured or killed in automobile accidents have remained at high levels despite various social efforts to reduce the number of accidents. To further the public policy of reducing losses from automobile accidents, the Automobile Liability Security Law provides for owner-operators’ tort liabilities that are more strict than those under the Japanese Civil Code’s general tort theory. Over the years, the average amount of damages awarded by Japanese courts in liability claim cases stemming from automobile accidents has increased, as has the public’s awareness of the risks involved in automobile ownership.

“Total Assist”, our current voluntary automobile product, has evolved from its predecessor products, “TAP” and “TAP Navi”. “TAP”, first introduced in 1998 by Tokio Marine, met a wide range of customer requirements and offered a wider compensation coverage that was not previously available under conventional automobile insurance policies. TAP’s most notable feature is the offering of bodily injury indemnity insurance. If a policyholder is injured in an automobile accident, a full settlement is paid to the injured policyholder regardless of who is at fault. TAP also offers a broad coverage in connection with any physical damage to automobiles. “TAP Navi”, which was introduced in August 2003 and is not currently marketed, was a risk-differentiated automobile product to strengthen price-competitiveness and to meet a wide variety of customer needs. “TAP Navi” offered insurance coverage for a premium based on characteristics of each customer such as usage of the insured automobile, status of the driver’s license in the public classification scheme and age. In August 2004, we launched a new feature called “Choki Bunkatsu”, a long-term installment-payment automobile insurance policy, typically for a term of two to three years, which eliminates the necessity for the annual renewal procedure. “Total Assist”, introduced in August 2005, places an emphasis on “assistance” by offering a variety of support services before and after an accident, in addition to offering the same wide compensation coverage previously offered by TAP Navi which can be combined with the long-term installment-payment features offered by “Choki Bunkatsu”.

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Compulsory Automobile Liability

Under the Automobile Liability Security Law, all automobiles operated on public roads in Japan (with certain minor exceptions) are required to be covered by “compulsory automobile liability insurance”, or CALI, which covers liability for bodily injuries. This type of insurance coverage is required in order to register an automobile and for periodic automobile inspections. Generally, if an automobile is not registered, it cannot legally be operated in Japan. Compulsory automobile liability insurance is designed to serve public policy by ensuring that people injured in automobile accidents receive a minimum payment for their injuries from those who are legally responsible. In light of this public policy, licensed non-life insurance companies in Japan cannot refuse to issue compulsory automobile liability policies except in limited cases.

Under these compulsory insurance policies, the maximum amount of coverage for accidents resulting in death is limited to ¥30 million per person, and the maximum amount of coverage for accidents resulting in permanent disability is limited to ¥40 million per person. The maximum amount of coverage for accidents resulting in other injuries is ¥1.2 million per person. Individuals who wish to purchase coverage beyond these maximum amounts may purchase automobile insurance with a bodily injury liability coverage on a voluntary basis (as described above). In order to reduce inconveniences caused by being covered by compulsory and voluntary policies, an insured can submit claims for indemnity under both the compulsory and voluntary policies to the insurance company that wrote the voluntary policy. Prior to April 1, 2002, 60% of all CALI insurance written was required by statute to be reinsured with the government. Since April 1, 2002, all CALI premium portfolios are reinsured with the CALI Reinsurance Pool in which all insurers operating CALI business participate.

Fire and Allied Lines

Fire and allied lines insurance is one of the traditional lines of insurance we write. Fire and allied lines insurance (other than earthquake insurance, which is described below) generally covers dwelling houses, shops, offices, factories and warehouses and their contents against loss or damage caused by fire, flood, storms, lightning, explosion, theft and other risks. In addition, some policies cover personal accident, third-party liability and loss of income caused by these kinds of events. Some of the products offered under this insurance line are deposit-type insurance.

This type of insurance is written for individual customers to safeguard their personal financial security and for business customers to protect their on-going business operations. This type of insurance also provides mortgage lenders, whether residential or commercial, with protection against loss or damage to mortgaged properties.

Under fire and allied lines insurance, insurers may be required to make indemnity payments of a huge aggregate amount in the event of a disastrously large windstorm, flood or other catastrophe. The following table shows information concerning major windstorms and floods in Japan that occurred during the thirty years ended March 31, 2005.

Major windstorms and floods	Date	Buildings damaged	Buildings flooded
Typhoon No. 17 and accompanying weather front	September 1976	11,193	442,317
Typhoon No. 20	October 1979	7,523	37,450
Downpour, July 1982	July 1982	851	52,165
Typhoon No. 10 and accompanying weather front	August 1982	5,312	113,902
Typhoon No. 8 and accompanying weather front	September 1982	651	136,308
Downpour, July 1983	July 1983	3,669	17,141
Typhoon No. 10	August 1986	2,683	105,072
Typhoon No. 19	September 1991	170,447	22,965
Downpour, August 1993	August 1993	824	21,987

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Major windstorms and floods	Date	Buildings damaged	Buildings flooded
Typhoon No. 18	September 1999	47,150	23,218
Hailstorm, May 2000	May 2000	24,692	43
Downpour, September 2000	September 2000	312	71,291
Typhoon No. 14 and accompanying weather front	September 2000	609	70,017

Source: “General Insurance in Japan Fact Book 2004-2005”, The General Insurance Association of Japan.

Earthquake

Japan is subject to earthquakes. Earthquake risk, however, is not easily underwritten by non-life insurance companies in Japan. This is because the loss that may result from one earthquake could be disastrously large and because the lack of adequate statistical data makes the actuarial analysis ineffective. In 1966, the Japanese government enacted the Law Concerning Earthquake Insurance, which implemented a government-sponsored earthquake insurance program for dwellings and their contents. The program incorporates a partial reinsurance arrangement with the government and limits the maximum insured amount.

We write earthquake insurance under the Law Concerning Earthquake Insurance as an extension of fire insurance coverage for dwellings and their contents. The insured amount for earthquake coverage under these policies is within a range of 30% to 50% of the insured amount for fire insurance coverage and up to a maximum amount of ¥50 million for the dwelling and ¥10 million for its contents. These maximum amounts are all prescribed by law. For the year ended March 31, 2006, our direct premiums written for earthquake insurance policies under the Law Concerning Earthquake Insurance amounted to ¥33.8 billion, representing 10.6% of our direct premiums written for fire and allied lines.

Under the Law Concerning Earthquake Insurance, the aggregate amount of indemnity payable by all insurers to all policyholders for any one occurrence is limited to ¥5,000 billion. The earthquake risks written by direct insurers, including us, are wholly reinsured with the Japan Earthquake Reinsurance Company Limited, or JER, a private reinsurer in Japan owned by major Japanese non-life insurance companies, including us. This portfolio is protected by (1) an excess of loss reinsurance cover arranged between JER and the Japanese government and (2) another excess of loss reinsurance cover arranged among JER, Toa Reinsurance Company, Limited, or Toa, which is another private reinsurer in Japan, and the original direct insurers, including us, which participate in this insurance cover through retrocession agreements with JER. The maximum amount to be paid by JER for any one occurrence, net of the amount covered by reassurance ceded, is ¥452.0 billion. The maximum amount to be paid by the Japanese government for any one occurrence is ¥4,122.2 billion. The maximum aggregate amount to be paid by the original direct insurers and Toa for any occurrence according to the share specified under the retrocession agreements is ¥425.8 billion. Our share of that amount is approximately 29.2%. The Law Concerning Earthquake Insurance requires that, if there are special needs, such as insufficient existing funds for the payment of indemnity under earthquake insurance policies, the Japanese government will make efforts to arrange for, or to facilitate, financings by non-life insurance companies for these payments.

We also write earthquake insurance for buildings and structures other than dwellings as an extension of fire insurance coverage on a private basis. This earthquake insurance is not entitled to the reinsurance arrangements under the Law Concerning Earthquake Insurance, and a substantial part of the risk associated with these policies is reinsured with reinsurers. For the year ended March 31, 2006, our direct premiums written for earthquake insurance policies other than those under the Law Concerning Earthquake Insurance represented 7.3% of our direct premiums written for fire and allied lines.

Personal Accident

We write personal accident insurance for individual customers primarily through our agents in Japan. Generally, such insurance covers the insured’s personal injuries caused by certain types of accidents that are set forth in the policy.

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Typically, a fixed amount, regardless of the actual damages sustained, is paid according to a pre-set payment table. We offer a variety of personal accident insurance products, including:

• General Personal Accident—covers the insured against a broad range of accidents resulting in personal injuries. A fixed amount of indemnity is paid according to the type of injuries (e.g., death, permanent disability or hospitalization).

• Income Indemnity—covers against the loss of income caused by an injury or illness.

• Overseas Traveler’s Personal Accident—covers against accidents during travel and, if the policyholder has elected a special policy condition, against illness during travel.

• Traffic Accident—covers the insured against collisions with, or accidents occurring on, automobiles, trains, planes, ships and other types of vehicles.

Marine Insurance

Cargo and Transit

Cargo insurance covers goods aboard vessels against risks during international transportation or risks during transportation in coastal seas. The terms of international cargo insurance are generally governed by the Institute Cargo Clauses of the International Underwriting Association. This line of insurance is unique in that it provides coverage against acts of war. For the year ended March 31, 2006, approximately 75% of insurance premiums of our cargo insurance was from international cargo. Japanese manufacturers and trading companies are our major clients for international cargo insurance.

The cargo insurance business is generally conducted directly by our personnel and not by insurance agents. Insurance premiums written are affected primarily by levels of Japanese import and export trading activity.

Inland transit insurance is usually purchased by the owners of goods to cover physical damage to those goods when they are transported by rail, truck or domestic air transport and when the goods are stored on land incidental to transit. Carriers of the goods, on the other hand, purchase inland transit liability insurance to cover their legal and contractual liabilities that may arise from the handling of the goods.

Hull

Hull insurance is one of our traditional lines of insurance. Hull insurance covers ocean-going and coastal vessels against loss or damage caused by sinking, stranding, grounding, fire, collision and other maritime accidents. The coverage includes damage to the hull, loss of earnings and liability to others for damages. Hull war risk insurance covers vessels against loss or damage resulting from acts of war. Hull insurance is available not only to vessels in operation but also to vessels under construction for damages caused during the construction period.

Our primary customers in this line are Japanese shipping companies, which operate either Japan flag vessels or “flag of convenience” vessels, as well as Japanese shipbuilders. The marketing for these customers is generally conducted by our personnel directly and not by insurance agents or brokers. Our revenues in hull insurance are influenced by the number of vessels that are operated by Japanese shipping companies directly and by foreign shipping companies closely associated with Japanese shipping companies, as well as by the number of vessels being built by Japanese shipbuilders. These are in turn influenced by overall worldwide economic conditions and a number of global competitive factors affecting the respective industries of our customers.

For the year ended March 31, 2006, approximately 60% of our hull insurance premiums received were denominated in Japanese yen, while the rest was denominated in currencies other than the Japanese yen, primarily the U.S. dollar.

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Because accidents involving vessels can result in large losses, we reinsure a portion of these risks with Japanese and overseas reinsurers.

Other Lines

Other types of property and casualty insurance we write include liability insurance, aviation insurance, workers’ compensation insurance, movables comprehensive insurance, machinery breakdown insurance, contractors’ all-risk insurance, e-risk insurance, nuclear insurance, weather insurance, event cancellation and abandonment insurance, credit and guarantee insurance and surety bonds. Liability insurance is written primarily for business customers and includes product liability insurance, directors’ and officers’ liability insurance and umbrella liability insurance. Movables comprehensive insurance covers damages resulting from loss, theft or destruction of various types of movable property.

Deposit-Type Insurance Products

Deposit-type insurance products combine a long-term insurance policy with a savings feature. We and other non-life insurance companies in Japan are permitted to attach a savings feature to almost all personal lines of insurance other than compulsory automobile liability insurance. The premium for the insurance portion is accounted for as premium written, and the premium for the savings portion is accounted for as “policyholders’ contract deposits”. For the year ended March 31, 2006, premiums written arising from deposit-type policies accounted for 1.6% of our direct premiums written for property and casualty insurance.

These policies, which have terms ranging from 2 to 64 years, provide for repayment at maturity of the savings-related portion of the premiums together with interest calculated on that amount at a specified rate. The policyholder knows the maturity value of the savings-related portion of the policy when he or she takes out the policy. Additional payments may also be made depending upon our investment performance during the term of the policy and other factors. Our repayment of the savings-related portion of the premiums and the payment of interest are conditioned on the policy remaining in effect until maturity. Consequently, where a claim for a total loss terminates the policy, we are released from our obligations to make payments to the policyholder. A total loss occurs in only a small number of cases each year. The policyholder can terminate the deposit-type insurance contract before the maturity date by paying us a pre-determined commission.

The contractual rate of interest credited to the policy varies by product and length of policy and is established at the beginning of the policy. We cannot change the committed interest rate during the policy term, except under extraordinary circumstances where policy terms are changed pursuant to the Insurance Business Law. Committed interest rates on newly issued policies ranged from 0.12% to 1.5% for the year ended March 31, 2006, 0.06% to 1.53% for the year ended March 31, 2005 and 0.06% to 1.60% for the year ended March 31, 2004. Committed interest rates on newly issued policies ranged from 0.10% to 2.75% during the five years ended March 31, 2003, and from 1.00% to 3.75% during the two years ended March 31, 1998. The aggregate amount of deposit-type insurance policies entered into prior to April 1, 1996 that remained in force as of March 31, 2006 is not significant.

The savings-related portion of the premiums received under deposit-type insurance is invested primarily in securities other than equity securities. The investment return may exceed or fall short of the committed interest depending on, among other factors, the expected rate of interest, the market interest rates of these securities and the extent to which the terms of these securities match the terms of the deposit-type insurance policies. We adjust from time to time the committed interest offered on new deposit-type insurance policies to reflect changes in the market levels of interest rates.

“Cho Hoken” and “Cho Business Insurance”

Tokio Marine and Nichido Fire jointly developed and launched “Cho Hoken”, meaning “Super Insurance”, during the fiscal year ended March 31, 2003. Cho Hoken, which we believe is an innovative product in the

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Japanese market, integrates property and casualty and life insurance coverage for individual customers. We intend to offer opportunities for lifetime security to our customers through marketing of this product, which is a new business approach to the Japanese insurance market. For corporate customers, we released “Cho Business Insurance”, a comprehensive policy for business activities, which was also jointly developed by Tokio Marine and Nichido Fire, during the fiscal year ended March 31, 2003. Cho Business Insurance offers comprehensive coverage for various risks faced by small and medium-sized corporations, including fire, business interruption, general liability and personal accident of employees.

Premium Rates

A premium under an insurance policy corresponds to the “sales price” of that insurance product. There are two components of a premium: the “pure premium”, which represents the cost of claims payment, and the “loading”, which represents the agent commissions and certain other costs to the insurer. The pure premium is determined by multiplying the amount insured by the applicable premium rate, which represents the probability that the loss covered by the insurance policy will occur. The premium rate is calculated by a formula which, on the basis of the “law of large numbers”, purports to reflect the statistical likelihood that the loss will occur. The “law of large numbers” is a mathematical premise that states that the greater the number of exposures, (1) the more accurate the prediction, (2) the less the deviation of the actual losses from the expected losses and (3) the greater the credibility of the prediction. Out of a large group of policyholders, an insurance company can fairly accurately predict the number of policyholders who will suffer a loss. The Law Concerning Non-Life Insurance Rating Organizations requires that premium rates be “reasonable and appropriate in accordance with the mathematical principles of insurance”, and that they not be “unfairly discriminatory”.

Prior to July 1, 1998, premium rates for certain lines of non-life insurance were established by the rating organization that dealt with that particular line of insurance, such as the Automobile Insurance Rating Organization and the Property and Casualty Insurance Rating Organization. Almost all non-life insurance companies, including us, participate in the activities of these rating organizations, although we are not required to do so. As discussed in “Regulation”, the 1998 amendment to the Law Concerning Non-Life Insurance Rating Organizations abolished the rate-establishing activities of these organization. Since July 1998, the rating organizations have served in an advisory capacity to the non-life insurance companies. They calculate advisory or “reference risk premium” rates, prepare standard forms of insurance contracts and collect a wide range of insurance-related data. As a result of this liberalization, non-life insurance companies may set their own premium rates for their products. This has had the effect of intensifying competition in the industry. For some lines of insurance, however, such as earthquake insurance and compulsory automobile liability insurance, non-life insurance companies are obligated to use standardized rates.

Reinsurance

In order to reduce our maximum potential net loss and to maximize the return on our retained risk portfolio, we cede and hedge a portion of our insurance risks to other insurers, reinsurers and investors by way of reinsurance and risk financing tools.

We cede and assume risks under reinsurance and other similar arrangements to and from other insurance companies principally in order to better diversify our risks and enhance our underwriting capacity. Our proportional reinsurance, as discussed below, helps us limit the loss amount on an individual-risk basis by spreading the risk proportionally with other insurers. We also actively seek to utilize reinsurance to limit potential losses arising from specific extraordinary or catastrophic loss risks, including earthquake and typhoon risks. As a general matter, by ceding reinsurance we also seek to increase the stability of profits—by reducing fluctuations of loss ratios arising from large or multiple claims—and procure greater capacity to write larger risks. As a general matter, by assuming reinsurance, we seek to further diversify our risk portfolio while gaining additional potential sources of income.

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We cede to reinsurers a portion of the risks we underwrite for property and casualty insurance. We pay reinsurance premiums to the reinsurers based upon the risks that are subject to reinsurance. Although a reinsurer is liable to us to the extent of the risks assumed, we remain liable as the direct insurer to policyholders on all of these risks.

We cede reinsurance to various reinsurers around the world. We select these reinsurers primarily for their financial security. We believe that no material amounts are uncollectible from our current reinsurers.

We utilize a variety of reinsurance arrangements, which are classified into two basic types: proportional reinsurance and excess-of-loss reinsurance.

• Proportional reinsurance. This type of reinsurance involves reinsurers sharing a proportional part of the original premiums and losses under the reinsurance cession assumed. This type of reinsurance is used as a means to limit a loss amount on an individual-risk basis. In proportional reinsurance, the reinsurer customarily pays the ceding company a ceding commission, which is generally based upon the ceding company’s cost of acquiring the business ceded and may also include the ceding company’s margin. In most cases, this type of reinsurance is arranged in the form of a reinsurance treaty, where the ceding company is automatically authorized to cede any business under a set of terms and conditions previously agreed upon without obtaining a separate prior consent to each cession from the reinsurers. If the underwriting capacity provided by such a treaty is not sufficient, the ceding company must arrange for “facultative reinsurance”, whereby a separate prior consent must be obtained from each reinsurer.

• Excess-of-loss reinsurance. This type of reinsurance indemnifies the ceding company against a specified level of loss on underlying insurance policies in excess of a specified agreed amount. Excess-of-loss reinsurance is usually arranged in layers to secure greater capacity with more competitive pricing by offering various levels of risk exposure with different terms for reinsurers with different preferences. This type of reinsurance is commonly used as a means to protect against the occurrence of catastrophes, such as earthquakes and windstorms, by capping the total accumulated amount of losses from the retention on each individual risk after recovery of losses from proportional reinsurance.

We manage our insurance risk portfolio in a manner similar to the concept of “Value at Risk” used in managing risks in the financial markets. We take a mathematical approach in calculating the optimal retention for most lines of risks. Under this approach, potential fluctuations of underwriting results are estimated in terms of risks and returns. The actual amount of risk retained is determined by taking the amount of internal reserves into consideration, together with the outcome of the risk and return analysis. Based on these methods, we believe it adequately controls our exposure per risk and per occurrence.

We assume reinsurance from direct insurers and professional reinsurers as an additional source of income. The premiums we assumed from foreign insurers and reinsurers are generally in foreign currencies, in particular U.S. dollars.

In November 1997, Tokio Marine obtained ten-year coverage from the capital markets for up to $90 million of specified Tokyo-area earthquake risks through a bond offering by Parametric Re Ltd., a special purpose reinsurance company in the Cayman Islands. The Parametric Re transaction represented the first participation in a “catastrophe bond” by a Japanese insurance company, and was intended to provide us with a long-term, stable and fully collateralized supplemental source of catastrophe coverage through the capital markets.

One of the most important targets of our global risk management through reinsurance is to increase our capital efficiency. We have been purchasing traditional reinsurance to reduce our exposure to natural catastrophe risk in Japan, where most of our natural catastrophe risk is concentrated.

Additionally, Tokio Marine developed a new risk management method by establishing a natural catastrophe risk exchange with other premier insurers and reinsurers including State Farm Automobile Mutual and Swiss Re.

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This exchange allows its participants to diversify their respective risk portfolios and thereby to improve their capital efficiency. We cede domestic risk and assume overseas risk through this exchange. We execute these transactions (other than transactions with State Farm Automobile Mutual) through Tokio Millennium Agency Ltd., which was launched in May 2003 as a wholly owned subsidiary of Tokio Millennium Re Ltd.

In addition to the natural catastrophe exchange, Tokio Millennium Re Ltd., Tokio Marine Global Limited and Tokio Marine Global Re Limited assume reinsurance to further diversify our risk portfolio. Tokio Millennium Re specializes in natural and man-made catastrophe reinsurance and structured products, while Tokio Marine Global specializes in facultative reinsurance and specialty line reinsurance. Tokio Marine Global Re assumes traditional treaty reinsurance mainly in South East Asia.

The following table, prepared on a U.S. GAAP basis, shows our reinsurance premiums assumed and ceded, and retention ratio, for each of the periods indicated:

	Year ended March 31,
	2006			2005			2004
	(yen in millions, except percentages)
Direct premiums written	¥	2,002,522		¥	1,965,550		¥	1,978,555
Reinsurance premiums assumed		354,350			353,571			374,219
Reinsurance premiums ceded		(382,226	)		(393,714	)		(407,528	)
Net premiums written	¥	1,974,646		¥	1,925,407		¥	1,945,246
Retention ratio (1)		83.8	%		83.0	%		82.7	%

(1) The retention ratio is calculated by dividing net premiums written by total of direct premiums written and reinsurance premiums assumed.

Property and Casualty Losses and Reserves

Loss and Expense Ratios

The following table, prepared on a U.S. GAAP basis, shows information with respect to loss and expense ratios for our principal lines of property and casualty insurance for each of the periods indicated:

	Year ended March 31,
	2006			2005			2004
	(yen in millions, except percentages)
Marine—Hull:
Net premiums written	¥	15,794		¥	14,474		¥	14,484
Premiums earned		15,282			14,152			14,309
Losses incurred		14,267			15,659			9,932
Loss ratio (1)		93.4	%		110.6	%		69.4	%
Marine—Cargo and Transit:
Net premiums written	¥	77,213		¥	71,006		¥	65,998
Premiums earned		75,879			70,735			65,869
Losses incurred		39,012			31,093			30,877
Loss ratio (1)		51.4	%		44.0	%		46.9	%
Fire and Allied Lines:
Net premiums written	¥	288,395		¥	263,701		¥	270,495
Premiums earned		264,264			254,128			244,777
Losses incurred		118,803			220,002			85,335
Loss ratio (1)		45.0	%		86.6	%		34.9	%

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	Year ended March 31,
	2006			2005			2004
	(yen in millions, except percentages)
Voluntary Automobile:
Net premiums written	¥	884,704		¥	860,820		¥	878,499
Premiums earned		891,651			863,426			884,201
Losses incurred		544,993			537,133			509,682
Loss ratio (1)		61.1	%		62.2	%		57.6	%
Personal Accident:
Net premiums written	¥	151,605		¥	151,009		¥	152,062
Premiums earned		150,035			151,435			151,954
Losses incurred		71,614			64,688			61,290
Loss ratio (1)		47.7	%		42.7	%		40.3	%
Compulsory Automobile Liability:
Net premiums written	¥	316,499		¥	328,847		¥	333,640
Premiums earned		325,463			316,333			262,082
Losses incurred		246,493			250,104			207,483
Loss ratio (1)		75.7	%		79.1	%		79.2	%
Other:
Net premiums written	¥	240,436		¥	235,550		¥	230,068
Premiums earned		229,730			225,441			237,011
Losses incurred		157,271			143,754			143,919
Loss ratio (1)		68.5	%		63.8	%		60.7	%
Total:
Net premiums written	¥	1,974,646		¥	1,925,407		¥	1,945,246
Premiums earned		1,952,304			1,895,650			1,860,203
Losses incurred		1,192,453			1,262,433			1,048,518
Loss ratio (1)		61.1	%		66.6	%		56.4	%
Loss adjustment expenses incurred—unallocated	¥	79,182		¥	68,886		¥	77,389
Ratio of losses and loss adjustment expenses incurred to premiums earned (A)		65.1	%		70.2	%		60.5	%
Underwriting and administrative expenses incurred	¥	631,044		¥	634,078		¥	623,819
Ratio of underwriting and administrative expenses incurred to premiums written (2)(B)		32.0	%		32.9	%		32.1	%
Combined loss and expense ratios (3)		97.1	%		103.1	%		92.6	%
Net premiums/direct premiums written ratios		98.6	%		98.0	%		98.3	%

(1) Ratio of net loss incurred to net premiums earned.

(2) These data are for our property and casualty business only.

(3) Sum of (A) and (B).

See note 19 to our consolidated financial statements and “Managements Discussion and Analysis of Financial Condition and Results of Operations—Business Segment Analysis” for comparable information prepared on a Japanese GAAP basis.

Property and Casualty Reserves

When claims are made by or against a policyholder, any amounts that we pay or expect to pay to the policyholder are referred to as losses, and the costs of investigating, resolving and processing those claims are referred to as loss adjustment expenses. We establish reserves for losses and loss adjustment expenses for claims under property and casualty insurance policies and reinsurance policies. We establish these reserves each year for each principal line of property and casualty insurance. In accordance with U.S. GAAP, we do not establish specific loss or loss adjustment expense reserves until an event that causes a loss has occurred.

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Loss and loss adjustment expenses fall into two categories:

• Reserves for reported claims. These reserves are based on our estimates of future payments that will be made in respect of claims, including expenses related to those claims. These estimates are made on a case-by-case basis and are based on the facts and circumstances available at the time the reserves are established. These estimates reflect the informed judgment of the claims personnel based on general insurance reserving practices and knowledge of the nature and value of a specific type of claim. These reserves are periodically adjusted in the ordinary course of settlement and represent the estimated ultimate costs necessary to bring all the pending reported claims to final settlement. Consideration is given to historic trends and disposition patterns of loss payments, pending levels of unpaid claims and types of coverage.

• Reserves for incurred but not reported claims. These reserves are established to recognize the estimated cost of losses that have occurred but as to which we do not yet have notice. These reserves, like reserves for reported claims, are established to recognize the estimated costs, including expenses, necessary to bring claims arising out of losses to final settlement. Since nothing is known about the occurrence of the losses, we rely on our past experience to estimate our liability in respect of incurred but not reported claims. These reserves are estimates that involve actuarial and statistical projections of the expected cost of the ultimate settlement and administration of claims. The analyses are based on facts and circumstances known at the time, predictions of future events, estimates of future inflation and other demographic and economic factors. Late reported claim trends, claim severity, exposure growth and future inflation are some of the factors used in projecting reserve requirements for incurred but not reported claims. These reserves are reviewed and revised periodically as additional information becomes available and actual claims are reported.

We factor in the following loss development information, among others, when establishing reserves for incurred but not reported losses:

• For fire and allied lines insurance, substantially all losses are reported and paid within one year from the casualty date and substantially all underwriting risk is assumed in Japan.

• For liability and workers’ compensation insurance, approximately 90% of losses are recognized within two years from the casualty date while the remaining losses are paid or recognized after two or more years. For underwriting risk assumed outside Japan, we make reserves based on reports from actuaries in the relevant countries.

• For automobile, personal accident, marine (including cargo and transit and hull) and all other insurance, substantially all of the underwriting risk is assumed in Japan. For these insurance policies, except for bodily injury claims under automobile insurance, substantially all losses are paid or recognized within two years from the casualty date. For bodily injury claims under automobile insurance, approximately 90% of the losses are paid or recognized within one year while the remaining losses are paid or recognized after one or more years.

The ultimate cost of losses and loss adjustment expenses is subject to a number of highly variable circumstances. From when a claim is reported to when it is finally settled, a change in circumstances may require established reserves to be adjusted either upwards or downwards. Items such as changes in the legal environment, results of litigation, changes in medical costs, costs of automobile and home repair materials and labor rates can substantially impact claim costs. These factors can cause actual developments to vary from expectations, in some cases materially. Claim reserve adjustments are periodically reviewed and updated, using the most current information available to management, and any adjustments resulting from changes in reserve estimates are reflected in current results of operations.

We believe, based on information currently available to us, that our property and casualty reserves are adequate. However, the establishment of loss reserves is an inherently uncertain process. Accordingly, ultimate losses may differ from our initial estimates.

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Reconciliation of Beginning and Ending Reserves

The following table, prepared on a U.S. GAAP basis, is a summary reconciliation of our beginning and ending reserves for property and casualty insurance, including the effect of reinsurance ceded, for each of the periods indicated:

	Year ended March 31,
	2006		2005		2004
	(yen in millions)
Balance at beginning of year	¥	1,345,196	¥	1,221,146	¥	1,131,884
Less reinsurance recoverables		351,937		342,217		342,132
Net balance at beginning of year		993,259		878,929		789,752
Adjustment in connection with acquisitions		9,602		—		—
Incurred related to:
Current year insured events		1,247,933		1,326,179		1,116,582
Prior years insured events		23,702		5,140		9,325
Total incurred		1,271,635		1,331,319		1,125,907
Paid related to:
Current year insured events		625,741		722,166		588,432
Prior years insured events		563,432		495,793		446,825
Total paid		1,189,173		1,217,959		1,035,257
Foreign currency translation adjustments		5,214		970		(1,473	)
Net balance at end of year		1,090,537		993,259		878,929
Plus reinsurance recoverable		329,118		351,937		342,217
Balance at end of year	¥	1,419,655	¥	1,345,196	¥	1,221,146

Prior year claims and expenses incurred, as reflected in the preceding table, resulted principally from re-estimating and settling claims established in earlier accident years in amounts that differed from expectations.

Operations

Sales and Marketing

In addition to our head offices, which are located in Tokyo, Tokio Marine & Nichido had 68 branches and 365 sub-branches located throughout Japan as of March 31, 2006. Branches and sub-branches carry out ordinary insurance activities, such as loss adjustment and claim settlement, in specified geographical areas or for certain categories of industries, all at their own discretion within authorized limits. Certain activities in the branches are under the control of Tokio Marine & Nichido’s head office in Tokyo, including all reinsurance business and transactions involving amounts which exceed the branches’ authorized limits.

Non-life insurance in Japan is sold primarily through a network of full- and part-time insurance agents. As of March 31, 2006, Tokio Marine & Nichido had 63,413 insurance agents throughout Japan. These agents include corporations and individuals. In addition to the traditional agency system used to sell insurance products, since April 2001, as a result of insurance industry deregulation, Japanese commercial banks have been permitted to sell certain insurance products of their affiliated insurance companies at their branch offices. We utilize commercial banks, with their national and regional networks of branches, as a distribution channel for our products. Agents have historically been compensated on a commission basis, with rates varying according to the type of insurance and the qualifications of the agents. In April 2001, we introduced a new compensation system

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that uses individual performance criteria to a greater extent in determining compensation for agents. Insurance agents in Japan are required to be registered with the Financial Services Agency, or the FSA.

Our agents in Japan are authorized to write substantially all lines of insurance. Approximately 94% of our total direct premiums written (including deposits received) in the year ended March 31, 2006 originated through our agents. Through our underwriting agents, subsidiaries and affiliates, we sell insurance in 38 countries and territories overseas, including the United States where we sell insurance in all 50 states. Approximately 6% of our direct premiums written for the year ended March 31, 2006 originated from policies written outside of Japan.

Tokio Marine and Nichido Fire adopted an on-line agency system in 1991 and continuously expanded this system, which allows for greater efficiency in the contract process by allowing agents to directly input and access contract data. As of March 31, 2006, this on-line system maintained by Tokio Marine & Nichido was available for approximately 330,000 users. The number of contracts whose terms were directly input by Tokio Marine & Nichido’s agents using this system was approximately 19 million in the year ended March 31, 2006.

We have made efforts in developing the on-line systems for agents to increase work efficiency and strengthen sales capabilities at both insurance companies and agents. During the fiscal year ended March 31, 2003, Tokio Marine and Nichido Fire began to develop “Millea Partners Net”, a new on-line system for agents utilizing broadband communications. As of March 31, 2006, “Millea Partners Net” was used by approximately 43,000 agents of Tokio Marine & Nichido with an aggregate of 160,000 users.

Operational Process Reform

During the fiscal year ended March 31, 2006, Tokio Marine & Nichido started its “New Wind” project, an operational process enhancement program with a focus on effective utilization of the agent system and cashless payment of premiums. This project aims to establish the foundation for the Business Renovation Project that Tokio Marine & Nichido plans to implement in the coming years.

Claims Processing

Claims of policyholders are accepted for processing either by insurance agents or directly by us at our branch offices. There is great customer demand for quick claims processing at a nearby office. In view of the intensifying competition among various sectors in the insurance and other financial markets in Japan, we have focused on expediting claims processing in order to satisfy customer needs. We handle calls from our policyholders involved in accidents throughout Japan from our toll-free line 24 hours a day. In August 2003, we launched a new service which includes giving advice immediately after an accident, making initial contact to hospitals and repair yards and offering expert assistance with car troubles and health problems. By offering such services over the telephone, we aim to mitigate our customers’ anxiety as soon as possible after an accident. For policyholders of our overseas travel accident insurance, we have facilities to respond to phone calls from policyholders traveling anywhere in the world and provide appropriate services to these customers.

As of March 31, 2006, there were 246 claims handling offices for Tokio Marine & Nichido throughout Japan, including its branch offices, that engage in claims processing work.

Business Improvement Order

On November 25, 2005, Tokio Marine & Nichido received a business improvement order from the FSA in connection with certain non-payment of insurance claims on incidental expenses. In response to the business improvement order, Tokio Marine & Nichido submitted a business improvement plan to the FSA and is addressing the issues presented in the FSA business improvement order. Tokio Marine & Nichido is continuing to investigate the issues and to implement corrective measures to prevent the recurrence of the problem.

In August 2006, Tokio Marine & Nichido announced to implement additional measures to enhance compliance in its business operations. These measures include the appointment of a director of Tokio Marine &

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Nichido who will be exclusively responsible for the Internal Audit Department and the establishment of a Quality Improvement Committee, a Complaint Response Program, and an External Grievance Committee at Tokio Marine & Nichido.

Life Insurance Business

We conduct our life insurance business primarily through our subsidiaries Tokio Marine & Nichido Life and Tokio Marine & Nichido Financial Life.

Tokio Marine & Nichido Life

Following an amendment to the Insurance Business Law, which permitted non-life and life insurance companies to enter one another’s markets through subsidiaries, Tokio Marine established The Tokio Marine Life Insurance Company, Limited, or Tokio Marine Life, in August 1996 to carry out its life insurance business. In addition, Nichido Fire established The Nichido Life Insurance Co., Ltd., or Nichido Life, in August 1996. Since these two subsidiaries were established, our life insurance business has experienced rapid growth. The number of existing policies exceeded one million during the year ended March 31, 2003. In April 2003, we made Tokio Marine Life and Nichido Life our direct subsidiaries and merged the two subsidiaries on October 1, 2003. The surviving entity was named Tokio Marine & Nichido Life Insurance Co., Ltd., or Tokio Marine & Nichido Life.

We are focusing our sales efforts on lapse-supported type life insurance products, such as “Nagawari”, which is described below. We seek to position these products to compete with existing life insurance companies by offering competitive premium rates. Currently, our main products include comprehensive lifetime insurance, fixed term insurance and pension insurance.

We see product innovation as a core element of our strategy and work to develop new products that will satisfy our customers’ needs. For example, Tokio Marine Life’s “Nagawari” is a lapse-supported whole-life insurance product which allows us to offer lower premiums by making use of a high surrender charge. In 1997, Tokio Marine Life launched “Mittsu-no-Anshin”, or “Triple Coverage”, a type of comprehensive whole-life insurance combining coverage for hospitalization, nursing care and death benefits, which won an innovative-product award in February 1998 from the Nihon Keizai Shimbun, the Japanese daily business journal. In 2002, Tokio Marine Life revised its “Household Income Coverage” insurance, a fixed term insurance product which covers household income by monthly payment of insurance money for a reasonable premium. In January 2004, we launched “Anshin Dollar Annuity”, a U.S. dollar denominated annuity, in the Japanese market through Tokio Marine & Nichido Life. In May 2005, we launched “Anshin Yen Annuity”, a Japanese yen denominated annuity, through Tokio Marine & Nichido Life. Tokio Marine & Nichido Life launched “Anshin Dollar Shushin”, a U.S. dollar denominated whole-life insurance, in December 2005, followed by “Anshin Yen Shushin”, a Japanese yen denominated whole-life insurance, in January 2006. Under these products, the death benefit increases with an increase in accumulated principal, and the interest rates on the accumulated principal is reviewed and revised periodically. A minimum death benefit is also guaranteed.

We utilize our property and casualty insurance business’s nationwide network of insurance agents to sell life insurance products. We rely largely on our property and casualty insurance business agents for marketing and sales. We plan to further strengthen cross-selling of life and non-life insurance products. To achieve this, in 2002, we started utilizing “promoters”, who are sales support personnel, to assist insurance agents in marketing life insurance products. We also increased the number of “Life Partners”, our direct sales staff for life insurance. We also aim to further strengthen other distribution channels such as agents specializing in life products and sales through banks.

Tokio Marine & Nichido Life’s total insurance-in-force as of March 31, 2006 was ¥16.0 trillion, compared to ¥14.8 trillion as of March 31, 2005. During the year ended March 31, 2006, the number of Tokio Marine & Nichido Life’s total life insurance policies in force exceeded 2 million.

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Tokio Marine & Nichido Financial Life

We offer variable insurance products through our subsidiary, Tokio Marine & Nichido Financial Life, including variable annuity and variable universal life insurance products. We entered this business through our acquisition of Skandia Japan in February 2004, which was primarily engaged in the variable insurance and variable annuity businesses. Skandia Japan was subsequently renamed Tokio Marine & Nichido Financial Life. We are continuing our efforts to further strengthen our variable annuity business by leveraging the expertise and existing infrastructure of Skandia Japan and implementing synergies with our other businesses.

Typically, for our variable annuity policies, initial purchase payments are made in lump sums and the payments are invested in investment trusts as designated by individual policyholders over the course of the accumulation period, usually a minimum of 10 years. Upon expiration of the accumulation period, annuity payments are paid out of the accumulated principal over the course of the payout period. Alternatively, a policyholder may choose to receive a lump-sum payment at expiration of the accumulation period. In the event of the insured’s death during the accumulation period, there is generally a guaranteed death benefit in an amount at least equal to the amount of the initial purchase payment. The death benefit is payable to beneficiaries in a lump sum or in periodic payments.

In September 2004, Tokio Marine & Nichido Financial Life entered into a business alliance with Mitsubishi Tokyo Financial Group, Inc. and its subsidiary, The Bank of Tokyo Mitsubishi UFJ, Ltd., and together launched “As You Like”, a new variable annuity product. The special feature of the “As You Like” product is that it provides policyholders with three choices of plans at the time of contract and permits switching of plans during the accumulation period. The three plans offer different guarantee levels on accumulated principal, allowing policyholders to choose a plan based on risk preferences at various stages of their lives. The “Plan Change” feature represented an innovation in the Japanese market for variable annuities.

Tokio Marine & Nichido Financial Life also currently offers a range of other variable annuity products with different kinds and levels of guarantees. In several of Tokio Marine & Nichido Financial Life’s products, including “Best Scenario”, “Marine Wave”, “Good News”, “Todokundesu” and “Sanmi-Ittai” that were launched during 2005 and 2006, the amount of accumulated principal is transferred to a deferred fixed annuity account when it reaches a certain target after three years. “Nenkin Shin-Sedai”, launched in October 2004, is similar to “As You Like” in that it permits switching of plans during the accumulation period and offers different guarantee levels on accumulated principal.

Tokio Marine & Nichido Financial Life also currently offers a variable universal life insurance product called “Prime Life”, which allows policyholders to initially set and later modify during the accumulation period the amount of premium payments as well as the amount of benefits in accordance with differing needs and preferences at various stages of their lives.

For marketing and sales of its products, Tokio Marine & Nichido Financial Life relies on agencies with specialized knowledge of variable insurance products, including those of financial institutions and other “professional” agencies which exclusively market and sell insurance products. For example, Tokio Marine & Nichido Financial Life’s products “As You Like”, “Nenkin Shin-Sedai”, “Best Scenario” and “Good News” are being distributed in Japan through branch offices of national and regional banks.

Tokio Marine & Nichido Financial Life’s total life insurance-in-force as of March 31, 2006 was ¥1.0 trillion, compared to ¥0.5 trillion as of March 31, 2005, reflecting primarily an increase in Tokio Marine & Nichido Financial Life’s variable annuity business.

Third Sector Insurance Business

In the Japanese insurance industry, the “third sector” refers to insurance products and services that do not fall within the traditional life and non-life insurance areas, such as personal accident, medical and cancer insurance and insurance covering expenses for nursing care. Since the deregulation in 2001, we have been

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offering cancer and medical insurance products through our life insurance subsidiaries as well as property and casualty insurance subsidiaries. In 2003, Tokio Marine Life released “Medical Mini”, a medical insurance product featuring simplified terms and conditions at an affordable price, thereby continuing to expand its business in this area. In the field of medical insurance, Tokio Marine & Nichido launched “Long Life Mini”, a new product similar to “Medical Mini”, in October 2004, and Tokio Marine & Nichido Life released new products in January 2005, including “Anshin Amulet”, a form of medical insurance exclusively for women, and “Anshin Iryou Plus”, a product offering enhanced coverage for cancers, strokes and heart attacks. In addition, Tokio Marine & Nichido Life introduced new medical insurance products in May 2006 called “Anshin Iryou Cash Back 60” and “Anshin Iryou Triple Guard 60”. “Anshin Iryou Cash Back 60” provides hospitalization coverage for up to 60 days and offers a “cash back” payment every five years if no claim is made during such five years. “Anshin Iryou Triple Guard 60” provides hospitalization coverage for up to 60 days and waives premium payments when the insured suffers from cancer, a stroke or a heart attack.

Overseas Operations

Our overseas business dates back to 1880, when Tokio Marine started offering insurance products in the United Kingdom, France and the United States. As of March 31, 2006, we maintained branch offices in the United States and China and overseas offices in 30 other countries, territories and jurisdictions.

The following are our principal overseas subsidiaries and affiliates:

• Asia and Oceania—The Tokio Marine and Fire Insurance Company (Hong Kong) Limited, The Tokio Marine and Fire Insurance Company (Singapore) Pte. Limited, Tokio Marine Management (Australasia) Pty. Ltd. and Tokio Marine Newa Insurance Co., Ltd.

• The Americas—Tokio Marine Management, Inc., First Insurance Company of Hawaii, Ltd., Tokio Marine Compañia de Seguros, S.A. de C.V., Tokio Marine Brasil Seguradora S.A., Tokio Millennium Re Ltd., Real Seguros S.A. and Real Vida e Previdência S.A.

• Europe, the Middle East and Africa—Tokio Marine Europe Insurance Limited, Tokio Marine Global Re Limited and Tokio Marine Global Ltd.

We issue insurance policies in 38 countries and territories outside of Japan. One of our objectives is to expand the profitability and size of our international operations simultaneously on a coordinated basis, with particular emphasis on Asia.

In December 2002, we launched Millea Asia, subsequently renamed as Tokio Marine Asia, as an intermediate holding company in Singapore to facilitate the growth of our Asian insurance business. We transferred the Asian insurance management operations of Tokio Marine to the new company in April 2003. Tokio Marine Asia is in charge of planning our business growth strategy, pursuing business tie-ups and merger and acquisitions opportunities, and managing our local subsidiaries in the Asian region (excluding Japan).

Since its establishment, Tokio Marine Asia has been actively investing in insurance companies in Asia, including Taiwan and China. For example, in Taiwan, Tokio Marine Asia acquired the Taiwanese property and casualty insurance company Allianz President General Insurance Co., Ltd. in September 2004. This company merged with Newa Insurance on April 1, 2005, and the newly merged company now operates under the name Tokio Marine Newa Insurance Co., Ltd., in which Tokio Marine Asia holds a 49% interest. In July 2003, Tokio Marine Asia, together with Tokio Marine, acquired a 24.9% interest in Sino Life Insurance Co., Ltd., a life insurer in China, which commenced its life insurance operations in Shanghai in November 2003 and now operates primarily in major cities such as Beijing, Nanjing and Hangzhou. In June 2005, Tokio Marine & Nichido acquired a 24.9% interest to establish ZhongSheng International Insurance Brokers Co., Ltd., or ZhongSheng, an insurance brokerage company in Beijing. Also in December 2005, Tokio Marine & Nichido acquired a 24.9% interest in Tianan Insurance Company Limited, of China, or Tianan Insurance, a Chinese property and casualty insurance company which has approval to operate across the country and is free from

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categorical underwriting restrictions. Together with Tokio Marine’s Shanghai branch office, Sino Life, ZhongSheng and Tianan Insurance are driving the expansion of our insurance businesses in China.

Tokio Marine & Nichido is also expanding its operations elsewhere in Asia. In January 2006, Tokio Marine & Nichido was granted a Takaful license by the central bank of Malaysia. Takaful is a financial system based on the teachings of Islam. A joint venture with the Hong Leong Group, a Malaysian banking group, to offer Takaful insurance products is expected to commence its operations during the year ending March 31, 2007. In April 2006, Tokio Marine & Nichido reached an agreement with the major shareholders of Asia General Holdings Ltd., or Asia General, to acquire their shareholdings in Asia General, which holds property and casualty and life insurance companies in Singapore and Malaysia. Pursuant to the agreement, Tokio Marine & Nichido acquired approximately a 15% interest in Asia General in May 2006 for S$130 million (approximately ¥9,264 million at the exchange rate on May 25, 2006). Tokio Marine & Nichido expects to acquire additional shares to hold a majority interest by early 2007. Through this acquisition, Tokio Marine & Nichido expects to expand its property and casualty insurance operations and to establish a foundation for life insurance operations in Singapore and Malaysia.

In December 2005, Tokio Marine & Nichido contributed US$150 million into Tokio Millenium Re, increasing its total capital investment to US$650 million, in order to provide Tokio Millenium Re with a capital base that is adequate to support a growing portfolio. In July 2005, we acquired a 100% interest in Real Seguros S.A., primarily a property and casualty insurer, and a 50% interest in Real Vida e Previdência S.A., a life and pension insurer, both located in Brazil, from ABN AMRO Bank N.V. for a total of cost of R$983 million (¥46.6 billion). As a result of this transaction, Tokio Marine & Nichido now markets its insurance products through approximately 1,900 branches of Banco ABN AMRO Real S.A. and 8,700 insurance brokers in Brazil.

Tokio Marine & Nichido has a representative office in Iran, a country which has been designated by the U.S. Secretary of State as a state sponsor of international terrorism. However, that office is precluded by law from conducting any insurance business in Iran, and functions only as a clearinghouse for information of interest to our clients with an interest in Iran. Tokio Marine & Nichido’s aggregate premiums written involving Iran in the fiscal year ended March 31, 2006 were less than $1 million, representing less than 1 ten thousandth of our total property and casualty premiums written in that year. Much smaller premiums were received for a policy involving Libya prior to the June 30, 2006 recission of its designation as a state sponsor. After a careful review of this de minimis activity involving Iran and Libya, we have determined that it is neither quantitatively nor qualitatively material to our business results or to the investment risk from investment in our securities.

Investments

We invest in a portfolio of assets using funds which represent either (1) our general funds, including that portion of net premiums written that have not been disbursed as claims payments or (2) that portion of deposit premiums by policyholders under deposit-type insurance that are not due for refund to the policyholders.

Our principal investment objectives are (1) to maintain the high quality of our investment assets in order to strengthen our claim payment capabilities; (2) to maintain sufficient liquidity to timely meet the requirements of indemnity payments and payments of maturity refunds and dividends; and (3) subject to satisfying the first two objectives, to obtain the highest possible return on our investments. We also seek to maintain and enhance our business relationships with major corporate customers in Japan by investing in the equity securities of those customers on a long-term basis.

We engage in asset-liability management with respect to long-term assets and liabilities, seeking a stable present net asset value by controlling interest rate risk. We also seek to increase profit by investing flexibly in various assets that we believe will produce profits commensurate with the associated risks.

The Japanese government’s regulations concerning non-life insurance companies specify the types of assets in which they can invest and also set upper limits on various kinds of investments based on a percentage of the

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book value of total assets. For example, investment in domestic stocks is limited to 30% of the book value of total assets, real estate to 20% and assets in foreign denominated currencies to 30%. Under special circumstances, the FSA may approve investments in excess of these limits.

Our investment portfolio consists primarily of Japanese and foreign equity securities, Japanese and foreign bonds and loans to Japanese companies. The following table, prepared on a U.S. GAAP basis, shows our investments as of each date indicated:

	As of March 31,
	2006		2005		2004
	(yen in millions)
Investments—other than investments in related parties:
Securities held to maturity, at amortized cost	¥	1,216,061	¥	1,109,715	¥	1,109,861
Securities available for sale:
Fixed maturities, at fair value		4,179,797		3,962,641		3,209,582
Equity securities, at fair value		5,009,430		3,645,779		3,457,374
Trading securities, at fair value		824,986		241,878		48,513
Mortgage loans on real estate		70,743		71,033		129,076
Investment real estate		132,496		134,180		104,110
Policy loans		43,369		38,567		33,610
Other long-term investments		429,837		409,187		419,199
Short-term investments		930,776		691,769		881,897
Total investments	¥	12,837,495	¥	10,304,749	¥	9,393,222

The increase in equity securities available for sale during the year ended March 31, 2006 is primarily a result of increased prices for Japanese equity securities. The increase in trading securities during the fiscal year ended March 31, 2006 results mainly from an increase in investment deposits made under variable annuity contracts.

Securities Available for Sale

The following table, prepared on a U.S. GAAP basis, shows our investments in securities available for sale by type (other than in related parties) as of each date indicated:

	As of March 31,
	2006		2005		2004
	(yen in millions)
Japanese fixed maturities	¥	3,349,814	¥	3,271,634	¥	2,747,031
Foreign fixed maturities		829,983		691,007		462,551
Total fixed maturities		4,179,797		3,962,641		3,209,582
Japanese equity securities		4,768,406		3,428,374		3,301,699
Foreign equity securities		241,024		217,405		155,675
Total equity securities		5,009,430		3,645,779		3,457,374
Total securities available for sale	¥	9,189,227	¥	7,608,420	¥	6,666,956

Japanese bonds. We invest in Japanese government bonds, local government bonds and corporate bonds, which generally yield higher returns on investment, yet are nearly as liquid, when compared with deposits and savings or call loans. We purchase Japanese bonds primarily to meet future obligations arising from insurance and investment contracts.

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Foreign bonds. We invest in government and corporate bonds of foreign issuers with a view toward generating interest income which is generally higher as compared with investments in Japanese bonds under recent market conditions. We also invest with a view toward maintaining a certain degree of liquidity in our assets in the event of a major natural disaster in Japan that temporarily incapacitates the Japanese financial and monetary system and necessitates indemnity payments under our policies. We manage and control foreign exchange exposures within certain parameters, primarily by using forward exchange contracts and currency options.

Japanese equities. As part of our investment activities, we invest in equity securities of Japanese companies, primarily in equity securities listed on the Tokyo Stock Exchange, consistent with our overall investment objectives. We also seek to maintain and enhance our business relationships with major corporate customers in Japan by investing in the equity securities of those customers on a long-term basis.

Loans

The following table, prepared on a U.S. GAAP basis, shows our investments in loans (other than those to related parties) as of each date indicated:

	As of March 31,
	2006		2005		2004
	(yen in millions)
Mortgage loans on real estate	¥	70,743	¥	71,033	¥	129,076
Mortgage loans on vessels and facilities (1)		9,778		10,979		20,356
Collateral and bank-guaranteed loans (1)		13,598		11,250		18,542
Unsecured loans (1)		366,202		359,696		357,504
Policy loans		43,369		38,567		33,610
Total	¥	503,690	¥	491,525	¥	559,088

(1) Included in “other long-term investments” in our balance sheet prepared in accordance with U.S. GAAP.

Most of our loans are to corporate borrowers in Japan.

Short-Term Investments

The following table, prepared on a U.S. GAAP basis, shows our short-term investments by type as of each date indicated:

	As of March 31,
	2006		2005		2004
	(yen in millions)
Call loans	¥	111,360	¥	203,322	¥	587,092
Commercial paper		460,798		328,779		21,599
Deposits and other invested cash		358,618		159,668		273,206
Total	¥	930,776	¥	691,769	¥	881,897

We invest in short term investments in order to maintain necessary liquidity in our investment portfolio while seeking to generate returns based on interest rates that reflect current market conditions. We decreased our investments in call loans and increased our investments in commercial paper to improve investment efficiency by capturing the relatively higher interest rates of commercial paper.

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Investment Results

The following table, prepared on a U.S. GAAP basis, shows our investment results for each of the periods indicated:

	Year ended March 31,
	2006			2005			2004
	(yen in millions)
Investment income:
Interest on fixed maturities	¥	84,478		¥	73,677		¥	73,683
Dividends from equity securities		67,044			47,216			36,692
Interest on mortgage loans on real estate		1,574			2,414			3,286
Rent from investment real estate		15,135			16,592			12,501
Interest on policy loans		1,564			1,396			1,280
Interest on other long-term investments		5,491			6,585			9,339
Interest on short-term investments (1)		7,404			4,415			1,536
Others		6,936			1,423			1,850
Gross investment income (1)		189,626			153,718			140,167
Less investment expenses		25,193			20,521			13,994
Net investment income		164,433			133,197			126,173
Realized gains (losses) on investments:
Fixed maturities		(9,983	)		3,432			(8,399	)
Equity securities		180,751			64,672			4,645
Other investments		4,429			18,646			(101	)
Realized gains (losses) on investments		175,197			86,750			(3,855	)
Gains (losses) on derivatives:
Interest rate swaps		(14,008	)		19,404			(45,775	)
Foreign exchange contracts		(22,976	)		(12,752	)		7,458
Credit default swaps		453			2,871			6,797
Other		7,226			(1,227	)		(5,235	)
Gains (losses) on derivatives		(29,305	)		8,296			(36,755	)
Total net investment income, realized losses on investments and gains (losses) on derivatives	¥	310,325		¥	228,243		¥	85,563

(1) Certain amounts in our U.S. GAAP consolidated financial statements for the fiscal year ended March 31, 2004 have been reclassified to conform to the new classifications adopted during the fiscal year ended March 31, 2005.

Subsidiaries and Affiliates

Significant Subsidiaries

The following were our significant subsidiaries as of March 31, 2006, all of which were wholly owned and incorporated in Japan, except as otherwise noted: Tokio Marine & Nichido Fire Insurance Co., Ltd., Tokio Marine & Nichido Life Insurance Co., Ltd., Tokio Marine & Nichido Financial Life Insurance Co., Ltd. (formerly known as Skandia Life Insurance Company (Japan) Limited), Tokio Marine & Nichido Career Service Co., Ltd., Tokio Marine & Nichido Facilities, Inc. (75% owned), Tokio Marine Europe Insurance Limited (incorporated in the United Kingdom), The Tokio Marine and Fire Insurance Company (Hong Kong) Limited (incorporated in Hong Kong, China), Trans Pacific Insurance Company (incorporated in New York, U.S.A.), Tokio Millennium Re Ltd. (incorporated in Bermuda), Tokio Marine Global Re Limited (incorporated in Ireland), Tokio Marine Asset Management Company, Limited, Tokio Marine Asia Pte. Ltd. (incorporated in

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Singapore), The Tokio Marine and Fire Insurance Company (Singapore) Pte. Limited (incorporated in Singapore), Tokio Marine Brasil Seguradora S.A. (91.4% owned) (incorporated in Brazil), Tokio Marine Financial Solutions Ltd. (incorporated in the Cayman Islands), Tokio Marine Global Limited (incorporated in the United Kingdom) and Real Seguros S.A. (incorporated in Brazil).

Relationships with the Mitsubishi Group

Tokio Marine & Nichido is a member of the Mitsubishi Group, which has evolved over a period of more than 100 years. The Mitsubishi Group relationship, which is similar to that of other major Japanese corporate groups, is one of cooperation in areas of common interest within a group of companies, each operating independently under its own separate management. Currently there are about 30 Mitsubishi Group companies engaged in a broad range of activities, including manufacturing, trading, natural resources, transportation, real estate, banking, securities and life and non-life insurance. We believe that we write a substantial majority of the non-life insurance purchased by Mitsubishi Group companies.

Competition

There is strong competition in the Japanese non-life insurance industry. We expect that, as deregulation of the insurance business continues, competition will intensify at all levels.

Competition within the non-life insurance industry involves, among other things, expansion of an agency network through the training of new insurance agents, investment in information technology systems and the development and marketing of new insurance products and related services. We expect competition in premium rates and commissions to increase for our property and casualty lines of business as a result of the continuing deregulation of the non-life insurance industry. We believe that it is important to continue to compete on the basis of the quality of services associated with our insurance products, such as the giving of advice on risk management matters to business customers and extended-hour services for automobile insurance claims processing, rather than on premium rates being reduced.

Recent consolidation and alliances among non-life and life insurance companies in Japan have increased competition within the industry. We represent one of the five major non-life insurer groupings that have emerged in the Japanese insurance industry. The others are: the Sompo Japan insurance group (formed by Yasuda Fire and Marine Insurance and others); the Mitsui Sumitomo insurance group (formed by Mitsui Marine and Fire Insurance and Sumitomo Marine and Fire Insurance); the Aioi insurance group (formed by Chiyoda Fire and Marine Insurance and Daitokyo Fire and Marine Insurance); and the Nipponkoa insurance group (formed by Nippon Fire and Marine Insurance and Koa Fire and Marine Insurance and others). There have also been alliances between non-life and life insurers, such as Sompo Japan with Dai-Ichi Mutual Life and Nipponkoa Insurance with Meiji Yasuda Life and Taiyo Life.

Major insurance companies with global operations compete in the Japanese insurance market. We believe that the current strategy of these global insurance companies focuses on marketing methods and products that are not yet popular in Japan, such as direct marketing to individual customers and risk-segmented automobile insurance. It is probable that over time some foreign insurers will succeed in increasing their sales of products in more popular lines of business such as voluntary automobile insurance. However, the foreign companies’ market share is currently fairly limited. Some of the foreign insurers have already exited from the Japanese insurance market. We do not feel these companies pose a threat to our market position but we are closely monitoring the situation and will respond if necessary.

Many of Japan’s life insurance companies have established non-life insurance subsidiaries as permitted under the 1995 amendments to the Insurance Business Law.

Life insurance providers in Japan can be classified into three categories: traditional life insurers; new entrants, such as the foreign life insurers and subsidiaries of Japanese non-life insurers, including Tokio

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Marine & Nichido Life; and the postal life insurance system. While the traditional life insurers continue to underwrite the large majority of privately underwritten life insurance in Japan, some of the new entrants in the market, such as foreign life insurers and subsidiaries of Japanese non-life insurers have experienced steady growth through the utilization of new sales techniques. The postal life insurance system, a public insurance system managed by Japan Post, is a distinctive element of the Japanese life insurance market. Postal life insurance products are offered through the network of post offices located throughout Japan. Currently, the postal life insurance system is scheduled to be incorporated as a separate entity in October 2007 in preparation for a privatization by the Japanese government at a later stage.

Properties

We lease real property in Tokyo for use in our operations at the holding company level. We moved our office in July 2005 and the floor space for our new office is approximately 13,400 square feet.

Tokio Marine & Nichido owns and leases real property for use in its operations. Approximately 85% of the 7,761,541 square feet of real property that Tokio Marine & Nichido uses in its Japanese operations is owned. Tokio Marine & Nichido owns two large buildings (25 stories and 15 stories) in Marunouchi, Tokyo’s central business district. Approximately 79% of the total space in these two buildings (1,241,280 square feet) is used by Millea Holdings and its subsidiaries; the rest is held for lease to tenants.

Tokio Marine & Nichido also owns and utilizes approximately 670,000 square feet of floor space for its data center located in a suburb of Tokyo. In this center, Tokio Marine & Nichido utilizes five sets of leased computers with a total capacity of 5,300 million instructions per second, or MIPS. In addition, Tokio Marine & Nichido has a data center located in a suburb of Chiba prefecture. This center has total floor space of approximately 163,000 square feet and is equipped with three sets of leased computers with a total capacity of 591 MIPS. The Chiba center serves as a backup center in case of a disaster in the Tokyo area. The Chiba center operates in conjunction with the Tokyo center to share the data processing load of Tokio Marine & Nichido.

Employees

As of March 31, 2006, we had 19,761 employees on a consolidated basis, of whom 17,356 were in the property and casualty insurance business, 1,892 were in the life insurance business and 513 were in other businesses, compared with 18,910 employees on a consolidated basis as of March 31, 2005, of whom 17,024 were in the property and casualty insurance business, 1,474 were in the life insurance business and 412 were in other businesses. As of March 31, 2004, we had 19,779 employees on a consolidated basis, of whom 18,125 were in the property and casualty insurance business, 1,237 were in the life insurance business and 417 were in other businesses. A majority of Tokio Marine & Nichido and Tokio Marine & Nichido Life employees are members of their respective labor unions, which negotiate with the respective companies concerning remuneration and working conditions. We consider our labor relations to be good.

Legal Proceedings

Neither we nor any of our operating subsidiaries is a party to any material pending legal proceedings other than routine litigation incidental to our business. In addition, we are not aware of any litigation that is reasonably likely to have a material adverse effect on our financial position or results of operations.

In May 2005, one of Tokio Marine & Nichido’s U.S. subsidiaries received subpoenas from the United States Attorney’s Office for the Southern District of New York and the SEC, requesting documents relating to certain types of reinsurance transactions, in connection with what we believe are investigations involving a number of industry participants. We are cooperating with the relevant authorities with respect to these matters.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with our U.S. GAAP consolidated financial statements included in this annual report, together with the related notes. The following discussion is based on those U.S. GAAP consolidated financial statements, except as otherwise noted. Our fiscal year end is March 31.

Overview

We are principally engaged in the insurance business in Japan and in overseas markets. We offer property and casualty insurance products as well as life insurance products.

In the year ended March 31, 2006, or fiscal 2006, our property and casualty insurance business generated 83.9% of our operating income and 93.8% of our net income. The remainder was generated primarily by our life insurance business.

Our operating income consists of premiums from our property and casualty insurance policies, life premiums, net investment income, realized gains (losses) on investments, gains (losses) on derivatives and other income. We earn most of our premiums from our operations in Japan. Our operating costs and expenses consist primarily of losses and claims under our property and casualty insurance policies, policy benefits and losses under our life insurance policies and policy acquisition costs.

We believe that our results of operations and financial condition over the past three fiscal years have been influenced by the following major trends:

• A significant increase in Japanese equity prices in fiscal 2006 and a relatively stable value of Japanese equities in the year ended March 31, 2005, or fiscal 2005, following a significant increase in Japanese equity prices in the year ended March 31, 2004, or fiscal 2004, which have resulted in fluctuations in our realized and unrealized gains (losses) on investments;

• Fluctuations in long-term interest rates in Japan, in particular a significant rise in long-term interest rates in fiscal 2006, subsequent to a slight decrease in fiscal 2005 and a significant increase in fiscal 2004. An increase in long-term interest rates has had the effect of increasing losses on derivatives and decreasing unrealized gains on investments and the value of our policyholders’ contract deposits, while a decrease in long-term interest rates has had the opposite effect;

• Increased competition in the property and casualty insurance business, including price competition, which has required us to offer competitive products at competitive rates;

• Slowing demographic growth and an aging population in Japan, which have limited the overall growth potential of the individual insurance market in Japan, while providing growth opportunities for insurance products that respond to the needs of the elderly, such as third sector insurance;

• Limited growth in the number of automobiles in Japan, which has affected the growth potential for automobile insurance in Japan; and

• Improving economic activity in Japan, as Japan’s real gross domestic product grew by 3.2% in fiscal 2006, 1.9% in fiscal 2005 and 2.0% in fiscal 2004.

The following is a discussion of our results of operations in fiscal 2006 compared to fiscal 2005. For a detailed discussion of changes in our results of operations, see “—Results of Operations”.

• Total operating income increased in fiscal 2006 by ¥226,588 million, or 9.4%, to ¥2,635,685 million, reflecting primarily an increase in realized gains on investments and net investment income, partially offset by losses on derivatives.

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• Total operating cost and expenses increased in fiscal 2006 by ¥102,763 million, or 4.5%, to ¥2,405,254 million, reflecting primarily an increase in policy benefits and losses for life.

• As a result, income before extraordinary items and cumulative effect of accounting changes increased by ¥79,433 million, or 102.5%, to ¥156,960 million. The main reason for this increase was the low number of major natural disasters in Japan.

• Net income increased in fiscal 2006 by ¥65,001 million, or 70.7%, to ¥156,960 million. In fiscal 2005, net income included an extraordinary item amounting to ¥14,458 million, which was unallocated negative goodwill arising from the business combination with Nisshin Fire.

The following is a discussion of our results of operations in fiscal 2005 compared to fiscal 2004. For a detailed discussion of changes in our results of operations, see “—Results of Operations”.

• Total operating income increased in fiscal 2005 by ¥201,579 million, or 9.1%, to ¥2,409,097 million, reflecting primarily an increase in realized gains on investments and gains on derivatives.

• Total operating cost and expenses increased in fiscal 2005 by ¥247,240 million, or 12.0%, to ¥2,302,491 million, reflecting primarily an increase in losses, claims and loss adjustment expenses in our property and casualty insurance business.

• As a result, income before extraordinary items and cumulative effect of accounting changes decreased by ¥25,355 million, or 24.6%, to ¥77,527 million. The main reason for this decrease was an increase in losses, claims and loss adjustment expenses in our property and casualty insurance business, partially offset by an increase in realized gains (losses) on investments.

• Net income decreased in fiscal 2005 by ¥10,923 million, or 10.6%, to ¥91,959 million. In fiscal 2005, net income included an extraordinary item amounting to ¥14,458 million, which was unallocated negative goodwill arising from the business combination with Nisshin Fire.

We completed the merger of our property and casualty insurance subsidiaries, Tokio Marine and Nichido Fire, on October 1, 2004. The objectives of the merger were to maximize our corporate value by creating synergies, promoting a growth strategy which combines the strengths of both companies and increases efficiency through a larger scale of business, and to further reduce costs.

Economic Conditions

Our financial condition and results of operations are generally affected by economic conditions in Japan and, to a lesser extent, other parts of the world in which we conduct business.

While the Japanese economy faced a number of volatile and challenging economic trends and conditions over the last decade, it has been recovering in recent years, and such trend continued during fiscal 2006. Japan’s economic condition has been characterized by:

• Improving economic activity, as Japanese real gross domestic product grew by 2.0% in fiscal 2004, 1.9% in fiscal 2005 and 3.2% in fiscal 2006.

• A 6% rise in total levels of outstanding Japanese government debt from ¥781 trillion in fiscal 2005 to ¥827 trillion in fiscal 2006. However, ratings of Japanese government bonds by major rating agencies were raised from stable to positive subsequent to fiscal 2006, reflecting expectations that economic and financial conditions will improve, including an end to increases in government debt.

• A 34% decrease in corporate bankruptcy filings from 13,276 cases filed in fiscal 2005 to 8,759 cases filed in fiscal 2006. Total liabilities of these insolvent companies for fiscal 2006 totaled ¥5,749 billion, a decrease of 18.4% from ¥7,043 billion in fiscal 2005.

• A rise in the uncollateralized overnight call rate of the Bank of Japan to an average of 0.25% as of July 14, 2006, reflecting an end to Bank of Japan’s policy of maintaining near–zero interest rates in effect since March 2001.

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• Continuing but slower rate of decline in real estate values, with government-appraised land prices declining by an average of 2.7% for both residential and commercial areas in fiscal year 2006, compared to a decline averaging 4.6% for residential areas and 5.6% for commercial areas in fiscal year 2005.

• Significant improvement in equity markets, with the Nikkei Stock Average, which is an average of 225 stocks listed on the Tokyo Stock Exchange, increasing by 46.1%, to reach 17,059.66 during fiscal 2006, after having remained stable at 11,668.95 and 11,715.39 at the end of fiscal years 2005 and 2004, respectively.

• Significant exchange rate movements, as the value of the yen against the U.S. dollar fluctuated from a high of ¥104.41 to a low of ¥120.93 in fiscal 2006, from a high of ¥102.26 to a low of ¥114.30 in fiscal 2005 and from a high of ¥104.18 to a low of ¥120.55 in fiscal 2004.

The U.S. economy initially showed a continued positive growth but such growth gradually moderated as a result of a weakening housing market, higher interest rates and higher energy prices during fiscal 2006. The U.S. Federal Reserve decided to keep its interest rates steady at 5.25% as of August 8, 2006 for the first time following repeated rate increases over the preceding two years. U.S. equity indices such as the NASDAQ Composite Index and the Dow Jones Industrial Average generally remained stable in fiscal 2006.

The European economy showed stronger signs of recovery throughout fiscal 2006 compared to fiscal 2005.

In fiscal 2006, non-Japan Asia generally experienced strong growth.

Business Combination

On October 1, 2004, Millea Holdings merged two of its wholly-owned non-life subsidiaries: Tokio Marine and Nichido Fire. The merged subsidiary was renamed as Tokio Marine & Nichido. The merger did not affect our consolidated financial statements.

Business Alliance

Pursuant to an agreement reached in March 2003, we entered into a strategic alliance with Nisshin Fire and acquired approximately 31% of the total outstanding shares of Nisshin Fire as of February 2005. For U.S. GAAP financial reporting purposes, unallocated negative goodwill arising from the transaction in the amount of ¥14,458 million was recognized as extraordinary gain, which was reflected in our net income for the year ended March 31, 2005. Pursuant to an agreement reached in May 2006, Nisshin Fire will become our wholly-owned subsidiary as of September 30, 2006.

Critical Accounting Policies

The accounting policies that we follow when preparing U.S. GAAP consolidated financial statements are fundamental to understanding our financial condition and results of operations. Many of these accounting policies require management to make difficult, complex or subjective judgments regarding the valuation of assets and liabilities.

Our significant accounting policies are summarized in the notes to our U.S. GAAP consolidated financial statements included in this annual report. The following is a summary of our critical accounting policies.

Impairment of Securities Available for Sale

Under U.S. GAAP, we are required to recognize an impairment loss for “other than temporary” declines in the fair value of equity and fixed maturity securities available for sale. Determinations of whether a decline is other than temporary often involve estimating the outcome of future events. Management judgment is required in determining whether existing factors indicate that an impairment loss should be recognized at any balance sheet date. These judgments are based on subjective as well as objective factors.

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When it is determined that a decline in value is other than temporary, the carrying value of the security is reduced to its fair value, with a corresponding charge to earnings. This corresponding charge is referred to as an impairment and is reflected in “Realized losses on investments” in the consolidated income statement. See “—Results of Operations” for a discussion of the effects of impairments on our operating results for the years ended March 31, 2006, 2005 and 2004.

Among the factors that management considers when determining whether declines in the value of equity securities below their costs are other than temporary is the likelihood that those declines will be reversed. For marketable fixed maturities, management evaluates each of the securities and considers fundamental valuation issues such as credit deterioration of the issuer and other facts including the extent and period of time that the value of the securities is below cost. For marketable equity securities, management evaluates each of the securities and considers a variety of facts, including (i) whether the value of the securities continued to be below cost for more than 12 months, (ii) whether the value of the securities continued to be more than 20% below cost during any six-month period and (iii) whether there has been a decline in value to below 30% of cost as measured at the end of any fiscal year. For non-marketable equity securities and fixed maturity securities, management considers whether sharp declines in value over a short period of time reflect fundamental valuation issues such as the deterioration of the issuer’s financial position and credit rating.

When evaluating whether declines in the value of investments are other than temporary, management considers current and expected economic conditions. Management’s general expectation at March 31, 2006 was that economic conditions in Japan would continue to improve from the economic conditions that prevailed during the year ended March 31, 2006, when Japan’s real GDP grew at a 3.2% annual rate, and that interest rates would increase. Management’s general expectation at March 31, 2005 was also that economic conditions in Japan would improve from the economic conditions that prevailed during the year ended March 31, 2005, when Japan’s real GDP grew at a 1.9% annual rate. The level of impairment losses can be expected to increase when economic conditions deteriorate and to decrease when economic conditions improve. If the economy performs differently from management’s expectations, actual impairment losses could be different from the estimates.

After considering these and other factors, we write down individual securities holdings to fair value when management determines that a decline in fair value below the acquisition cost of the securities is other than temporary. See also “—Results of Operations—Year Ended March 31, 2006 Compared to Year Ended March 31, 2005” and “—Results of Operations—Year Ended March 31, 2005 Compared to Year Ended March 31, 2004”.

See note 3 to our consolidated financial statements for more information on the amortized cost and fair value of fixed maturity securities available for sale by contractual maturity and for the fair value of equity securities available for sale.

Valuation Allowances for Loan Losses

The valuation allowances for loan losses represent management’s estimate of probable losses in our loan portfolios. The evaluation process involves a number of estimates and judgments. Our allowances for loan losses consist of specific allowances for specifically identified impaired borrowers and general allowances for homogeneous pools of commercial and consumer loans, and other loans which are not specifically identified as impaired.

We use a credit rating system to determine the credit quality of our borrowers. Borrowers are graded using information believed to reflect their ability to fulfill their obligations. These factors are based on our evaluation of current and historical information as well as subjective assessments and interpretations. Emphasizing one factor over another or considering additional factors that may be relevant in determining the credit rating of a particular borrower, but which are not an explicit part of our methodology, could impact the credit rating we assign to that borrower.

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The allowance is based on two principles of accounting:

SFAS No. 114,	“Accounting by Creditors for Impairment of a Loan”, and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures”, which require that losses be accrued based on the difference between the loan balance and the present value of future cash flows or values that are observable in the secondary market; and
SFAS No. 5,	“Accounting for Contingencies”, which requires that losses be accrued when they are probable of occurring and quantitatively estimable.

We record specific allowances for loan losses when we determine that an individual borrower is not able to keep current with payments on its loans. Large groups of smaller balance homogeneous loans and other loans which are not specifically identified as impaired are collectively evaluated for impairment. For large groups of smaller balance homogeneous loans, we record “unallocated valuation allowances”, or general allowances, for loan losses to reflect loss contingencies underlying individual loan portfolios. Based on our past experience, it is probable that a certain percentage of our loans are impaired at any balance sheet date even if there is no specific loss information for individual loans. We calculate the amount of the general allowance for any period by taking aggregate loans, which excludes loans covered by specific allowances, for each credit category and multiplying the amount by the average of each category’s overall loan loss ratio in the past three years. This estimated allowance is then adjusted for qualitative factors in accordance with the current macroeconomic conditions prevailing at each period and current lending policies and practices. Since these qualitative factors reflect factors not present in the quantitative analysis, they are highly subjective. The amount of the general allowance has varied from year to year due in part to fluctuations in the historical loan loss ratios.

Determination of the adequacy of allowances for loan losses requires an exercise of considerable judgment and the use of estimates, such as those discussed above. To the extent that actual losses exceed management’s estimates, additional allowance for loan losses may be required that could have a materially adverse impact on our operating results and financial condition in future periods.

During the years ended March 31, 2006, 2005 and 2004, loan losses of ¥1,859 million, ¥5,961 million and ¥8,312 million, respectively, were recorded, which represented 0.37%, 1.13% and 1.36%, respectively, of the average loan portfolio during the period. As of March 31, 2006 and 2005, the allowance for loan losses was ¥9,227 million and ¥10,198 million, respectively, which represented 1.80% and 2.07%, respectively, of the outstanding loans.

Our loan portfolio consists mainly of loans to individuals and corporations resident in Japan. Therefore, the level of impairment losses can generally be expected to increase when economic conditions in Japan deteriorate and decrease when economic conditions in Japan improve. If the Japanese economy performs differently from management’s expectations, actual impairment losses could be different from the estimates.

Our loan portfolio also includes mortgage loans on real estate mainly located in Japan. While impairments on these mortgage loans are influenced by a number of factors, the level of impairment losses can be expected to increase when conditions of the real estate market in Japan deteriorate and decrease when conditions of the real estate market in Japan improve. If conditions of the real estate market in Japan differ from management’s expectations, actual impairment losses might be different from the estimates.

Valuation of Financial Instruments with No Available Market Prices

Certain assets and liabilities, including fixed maturity securities available for sale and financial derivatives, are reflected at their estimated fair values in our U.S. GAAP consolidated financial statements. As of March 31, 2006, 8.1% of the equity securities available for sale, virtually all financial derivatives and a small portion of the fixed maturity securities available for sale that we held in our investment portfolio were not listed or quoted, meaning there were no available market prices for these financial instruments.

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For financial instruments with no available market prices, we determine fair values for the substantial majority of our portfolios based upon externally verifiable model inputs and quoted prices, such as exchange-traded prices and broker-dealer quotations of other comparable instruments, and use market interest rates in determining discount factors. All financial models, which are used solely for pricing each financial instrument, must be validated and periodically reviewed by qualified personnel independent of the division that created the model.

We determine fair values of equity securities with no available market price based on various valuation techniques. These techniques generally commence with obtaining the investee’s financial statements and calculating an adjusted net asset value. Additional valuation techniques are then applied as appropriate and may include comparisons with similar companies which are listed and thus have available fair value information and/or the use of internal and external valuation experts. All internal valuations are prepared and then reviewed by two separate departments to ensure that the valuations are our best estimate of the investment’s fair value.

The fair value of derivatives is determined based upon liquid market prices evidenced by exchange-traded prices, broker-dealer quotations or prices of other transactions with similarly-rated counterparties. If available, quoted market prices provide the best indication of fair value. If quoted market prices are not available for derivatives, we discount expected cash flows using market interest rates commensurate with the credit quality and maturity of the investment. Alternatively, we may use model pricing to determine an appropriate fair value (for example, option pricing models). In determining fair values, we consider various factors, including time value, volatility factors and the values of underlying options, warrants and derivatives.

Fair value estimates are made at a specific point in time, based upon relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and changes in assumptions made could significantly affect these estimates. See “—Quantitative and Qualitative Disclosure About Market Risk”.

Amortization of Deferred Policy Acquisition Costs

We defer certain costs incurred in acquiring new business to the extent such costs are deemed recoverable from future profits. These costs are principally external sales agents’ commissions, in-house sales agents’ salaries, other compensation and other underwriting costs. For property and casualty insurance products, we defer and amortize (i.e., expense) these costs over the period in which the related premiums written are earned. For traditional life insurance products, we generally defer and amortize these costs over the premium paying period of the policy. For investment contracts, we defer and amortize these costs with interest, in relation to the incidence of estimated gross profits to be realized over the estimated lives of the contracts. We review our deferred policy acquisition costs periodically to determine if they are likely to be offset by future premium revenue recognition. If any of these deferred policy acquisition costs are not considered recoverable, we write off those costs in the current year. For the years ended March 31, 2006, 2005 and 2004, we did not have any material writeoffs of deferred policy acquisition costs reflected in our income statements.

Estimates of future gross profits are made at a specific point in time based upon relevant available information. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and changes in assumptions made could significantly affect these estimates.

Insurance Reserves

Loss, Claim and Loss Adjustment Expense Liability

Our loss, claim and loss adjustment expense liability represents estimates of future payments that we will make in respect of property and casualty insurance claims, including expenses relating to those claims for insured events that have already occurred as of the balance sheet date.

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As of March 31, 2006, our loss, claim and loss adjustment expense liability accrued by line of business was as follows:

Line of Business	Loss, claim and loss adjustment expense liability as of March 31, 2006
	(yen in millions)
Property and casualty business:
Voluntary automobile	¥	333,753
CALI		521,079
Fire & allied		95,546
Personal accident		46,436
Marine—Cargo & transit		31,926
Marine—Hull		28,914
Other		316,213
Loss adjustment expenses—unallocated		45,788
Total	¥	1,419,655

The establishment of our loss, claim and loss adjustment expense liability is an inherently uncertain process, involving assumptions as to factors such as court decisions, changes in laws, social, economic and demographic trends, inflation and other factors affecting claim costs.

We estimate loss, claim and loss adjustment expense liability for reported claims on a case-by-case basis, based on the facts known to us at the time reserves are established. We periodically adjust these estimates to recognize the estimated ultimate cost of a claim. In addition, we establish reserves in our property and casualty business to recognize the estimated cost of losses that have occurred but about which we have not yet been notified. When actual claims experience differs from our previous estimate, the resulting difference will be reflected in our reported results for the period of the change in the estimate. See “Business—Property and Casualty Insurance—Property and Casualty Losses and Reserves—Property and Casualty Reserves”.

As claims are reported over time, not all claims incurred during a fiscal period will be reported to us by the balance sheet date. Accordingly, we estimate incurred but not yet reported amounts using actuarial methods. We apply actuarial methods appropriate for each line of business. The majority of the loss, claim and loss adjustment expense liability is determined utilizing an incurred loss triangle method. Under the incurred loss triangle method, reported losses (i.e., paid claims plus case reserves) and loss ratios are tracked by accident year for each line of business to determine loss development factors. These historical loss development factors, along with any known or anticipated trends in claims development, are considered by management in determining the loss development factor to be utilized in calculating the appropriate level of reserve for the current fiscal year.

Changes in reported losses may affect our historical loss development factors, which in turn may affect our estimate of the amount of losses, claims and loss adjustment expense liability. For example, we estimate that a 1% increase in paid claims during the fiscal year ended March 31, 2006, together with a 1% increase in case reserves as of March 31, 2006, would have increased our aggregate losses, claims and loss adjustment expense liability as of March 31, 2006 by approximately 1.50%.

We consider property and casualty reserves expected to be paid after five years to be of a longer-tailed nature. Our longer-tailed balances consist primarily of bodily-injury claims. Settlement of claims involving longer-tailed reserves is inherently more risky and uncertain as claims cost may escalate as time progresses. We estimate that approximately 6.2% of our property and casualty reserves as of March 31, 2006 relate to claims that will be paid after five or more years.

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Claims for non-bodily injuries are generally relatively short-tailed, as they are generally expected to be paid within one to two years. Our actual experience under such claims generally does not differ significantly from our expectations, which helps to reduce the sensitivity of our overall property and casualty loss reserves to future developments and trends.

For the years ended March 31, 2006, 2005 and 2004, our adverse development for claims expenses for all lines of business related to prior years (net of reinsurance) was as follows:

	Year ended March 31,
	2006			2005			2004
	(yen in millions, except percentages)
Claims expenses recognized in the current year relating to prior years, net of reinsurance	¥	23,702		¥	5,140		¥	9,325
Claims expenses recognized in the current year relating to prior years as a percentage of opening reserves for losses, claims and loss adjustment expenses, net of reinsurance		2.39	%		0.58	%		1.18	%
Claims expenses recognized in the current year relating to prior years as a percentage of net incurred losses, net of reinsurance		1.86	%		0.39	%		0.83	%

Claims expenses recognized in the year ended March 31, 2006 relating to prior years were incurred principally due to changes in currency rates affecting reserves for foreign currency denominated policies and other adverse developments based on the latest experience in claim settlement. As set forth in the above table, subsequent development on prior years’ claims represented an immaterial portion of the current year’s claims expense for the periods presented.

Policy Benefits and Losses

We estimate policy benefits and losses using long-term actuarial assumptions of future investment yields, mortality, morbidity, policy terminations and expenses. These assumptions include provisions for adverse deviations and generally vary by characteristics such as type of coverage, year of issue and policy duration. Future investment yield assumptions are determined at the time the policy is issued based upon prevailing investment yields as well as estimated reinvestment yields. Mortality, morbidity and policy termination assumptions are based on our experience and on industry experience prevailing at the time the policies are issued. Expense assumptions are based on our general experience and include expenses to be incurred beyond the premium-paying period.

Shadow Accounting

Realized gains or losses on investments may have a direct effect on the measurement of insurance assets and liabilities. Realization of gains or losses on available-for-sale investments can lead to unlocking of deferred policy acquisition costs, present value of future profit and certain insurance liabilities, and in such situations, shadow accounting is applied to ensure that all recognized gains and losses on investments affect the measurement of the insurance assets and liabilities in the same way, regardless of whether they are realized or unrealized and regardless of whether the gains and losses are recognized in the income statement or directly in equity. If unrealized gains or losses trigger shadow accounting adjustments to deferred policy acquisition costs, present value of future profit and certain insurance liabilities, the corresponding adjustment is recognized in equity, together with unrealized gains or losses.

Earthquake Insurance

As of March 31, 2006, we had a contractual right to ¥113,054 million of funds held by Japan Earthquake Reinsurance, or JER, and since such amount had not been required to fund any significant earthquake losses, it was recorded as a deposit asset on our balance sheet.

51

The premiums earned (net of reinsurance), claims incurred (net of reinsurance) and the resulting profit for JER-related policies for the years ended March 31, 2006, 2005 and 2004 were as follows:

	Year ended March 31,
	2006		2005		2004
	(yen in millions)
Premiums earned, net of reinsurance	¥	6,158	¥	5,284	¥	4,930
Losses incurred, net of reinsurance		—		—		—
Profit as per above	¥	6,158	¥	5,284	¥	4,930

During the years ended March 31, 2006, 2005 and 2004, there were no significant earthquake events covered by our JER policies and we did not record any losses related to these policies. In the event that in future periods earthquake events covered by our JER policies occur, we may experience significant losses related to our JER policies.

Accounting for Deposit-Type Insurance Products

We allocate premiums for the indemnity and investment portions of deposit-type insurance products at the inception of the policy. The premium for the indemnity portion is calculated the same way that the premium for a traditional indemnity policy with no savings portion is calculated. The premium for the savings portion represents the present value of the lump-sum or annuity refund, discounted using the committed interest rate and the “total loss termination” rate. Total loss termination occurs when a full payout is made for the indemnity portion of the contract, in which case the policy terminates without any maturity refund being paid to the policyholder. The weighted average annual frequency of our total loss terminations for the three-year period ended March 31, 2006 was approximately 0.04%.

Premiums for the savings portion of the contract are accounted for as an increase to the liability for refunds captioned “Policyholders’ contract deposits”. At the end of each fiscal year, the present value of future payments of maturity refunds of contracts in force, net of the present value of the savings portion of future premiums, is accounted for as “Policyholders’ contract deposits”. The present value of future cash flows is calculated using the committed interest rate and the total loss termination rate, which are both set at the inception of the contracts.

Policy acquisition costs are not charged to the savings portion of the contracts. Costs associated with policy acquisition of deposit-type products are charged to the insurance portion and amortized over the contract period. This is based on the observation that there is no substantial difference in the level of policy acquisition costs depending on whether the savings feature is incorporated.

Securities Available for Sale

At March 31, 2006 and 2005, the fair value of our fixed maturity securities available for sale was ¥4,180 billion and ¥3,963 billion, respectively, and the fair value of our equity securities available for sale was ¥5,009 billion and ¥3,646 billion, respectively. Changes in the fair value of our securities available for sale can have a significant impact on our results of operations, as we are required to recognize losses for declines in fair value below cost that we determine to be “other than temporary” in nature. See “—Critical Accounting Policies—Impairment of Securities Available for Sale”.

For fixed maturity securities available for sale, we use quoted market values to determine fair value. If quoted market values are not available, we instead use quoted market values for similar securities. For equity securities available for sale, which include common stock and non-redeemable preferred stock, we primarily use quoted market prices to determine fair value. As of March 31, 2006 and 2005, approximately 87% and 83%, respectively, of our equity securities available for sale were listed on Japanese or foreign stock exchanges.

52

The following table shows the fair value of our securities available for sale, broken down by security rating, as of March 31, 2006:

	Fair value
	Fixed maturity securities		Equity securities (1)		Total securities		% of total securities available for sale
	(yen in millions)
Investment grade	¥	4,047,108	¥	3,841,454	¥	7,888,562	85.8	%
Non-investment grade		9,717		130,605		140,322	1.5
Not rated		122,972		1,037,371		1,160,343	12.7
Total securities available for sale	¥	4,179,797	¥	5,009,430	¥	9,189,227	100.0	%

(1) We classify equity securities based upon the issuer’s long-term bond rating.

The following table shows the fair value of our securities available for sale, broken down by security rating, as of March 31, 2005:

	Fair value
	Fixed maturity securities		Equity securities (1)		Total securities		% of total securities available for sale
	(yen in millions)
Investment grade	¥	3,880,861	¥	2,865,643	¥	6,746,504	88.7	%
Non-investment grade		2,704		52,575		55,279	0.7
Not rated		79,076		727,561		806,637	10.6
Total securities available for sale	¥	3,962,641	¥	3,645,779	¥	7,608,420	100.0	%

(1) We classify equity securities based upon the issuer’s long-term bond rating.

The following table shows gross unrealized losses on our securities available for sale, broken down by security rating, as of March 31, 2006:

	Gross unrealized losses
	Fixed maturity securities			Equity securities (1)			Total securities			% of total securities available for sale
	(yen in millions)
Investment grade	¥	(39,039	)	¥	(1,325	)	¥	(40,364	)	81.9	%
Non-investment grade		(8	)		(8	)		(16	)	0.0
Not rated		(1,974	)		(6,942	)		(8,916	)	18.1
Total securities available for sale	¥	(41,021	)	¥	(8,275	)	¥	(49,296	)	100.0	%

(1) We classify equity securities based upon the issuer’s long-term bond rating.

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The following table shows gross unrealized losses on our securities available for sale, broken down by security rating, as of March 31, 2005:

	Gross unrealized losses
	Fixed maturity securities			Equity securities (1)			Total securities			% of total securities available for sale
	(yen in millions)
Investment grade	¥	(41,209	)	¥	(1,035	)	¥	(42,244	)	84.1	%
Non-investment grade		—			(127	)		(127	)	0.3
Not rated		(17	)		(7,802	)		(7,819	)	15.6
Total securities available for sale	¥	(41,226	)	¥	(8,964	)	¥	(50,190	)	100.0	%

(1) We classify equity securities based upon the issuer’s long-term bond rating.

The following table shows gross unrealized gains on our securities available for sale, broken down by security rating, as of March 31, 2006:

	Gross unrealized gains
	Fixed maturity securities		Equity securities (1)		Total securities		% of total securities available for sale
	(yen in millions)
Investment grade	¥	40,750	¥	2,799,004	¥	2,839,754	86.0	%
Non-investment grade		301		66,038		66,339	2.0
Not rated		1,120		393,815		394,935	12.0
Total securities available for sale	¥	42,171	¥	3,258,857	¥	3,301,028	100.0	%

(1) We classify equity securities based upon the issuer’s long-term bond rating.

The following table shows gross unrealized gains on our securities available for sale, broken down by security rating, as of March 31, 2005:

	Gross unrealized gains
	Fixed maturity securities		Equity securities (1)		Total securities		% of total securities available for sale
	(yen in millions)
Investment grade	¥	52,608	¥	1,604,191	¥	1,656,799	86.5	%
Non-investment grade		14		20,161		20,175	1.1
Not rated		2,801		234,355		237,156	12.4
Total securities available for sale	¥	55,423	¥	1,858,707	¥	1,914,130	100.0	%

(1) We classify equity securities based upon the issuer’s long-term bond rating.

54

The following table shows the amounts and the periods of time for which securities available for sale have been in an unrealized loss position as of March 31, 2006:

	Gross unrealized losses
	Fixed maturity securities			Equity securities			Total securities
	(yen in millions)
Three months or less	¥	(10,176	)	¥	(3,003	)	¥	(13,179	)
Three months to six months		(3,950	)		(212	)		(4,162	)
Six months to nine months		(11,107	)		(12	)		(11,119	)
Nine months to one year		(951	)		(5,007	)		(5,958	)
Over one year		(14,837	)		(41	)		(14,878	)
Total	¥	(41,021	)	¥	(8,275	)	¥	(49,296	)

The following table shows the amounts and the periods of time for which securities available for sale have been in an unrealized loss position as of March 31, 2005:

	Gross unrealized losses
	Fixed maturity securities			Equity securities			Total securities
	(yen in millions)
Three months or less	¥	(3,343	)	¥	(852	)	¥	(4,195	)
Three months to six months		(4,718	)		(650	)		(5,368	)
Six months to nine months		(61	)		(598	)		(659	)
Nine months to one year		(320	)		(2,824	)		(3,144	)
Over one year		(32,784	)		(4,040	)		(36,824	)
Total	¥	(41,226	)	¥	(8,964	)	¥	(50,190	)

The following table shows the amounts and the periods of time for which fixed maturity securities available for sale have been in an unrealized loss position as of March 31, 2006, broken down by security rating as of that date:

	Gross unrealized losses
	Investment grade			Non-investment grade			Not rated			Total fixed maturity securities
	(yen in millions)
Three months or less	¥	(9,326	)	¥	(7	)	¥	(843	)	¥	(10,176	)
Three months to six months		(3,671	)		—			(279	)		(3,950	)
Six months to nine months		(10,299	)		—			(808	)		(11,107	)
Nine months to one year		(920	)		—			(31	)		(951	)
Over one year		(14,823	)		(1	)		(13	)		(14,837	)
Total	¥	(39,039	)	¥	(8	)	¥	(1,974	)	¥	(41,021	)

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The following table shows the amounts and the periods of time for which fixed maturity securities available for sale have been in an unrealized loss position as of March 31, 2005, broken down by security rating as of that date:

	Gross unrealized losses
	Investment grade			Non-investment grade		Not rated			Total fixed maturity securities
	(yen in millions)
Three months or less	¥	(3,343	)	¥	—	¥	—		¥	(3,343	)
Three months to six months		(4,717	)		—		(1	)		(4,718	)
Six months to nine months		(61	)		—		—			(61	)
Nine months to one year		(320	)		—		—			(320	)
Over one year		(32,768	)		—		(16	)		(32,784	)
Total	¥	(41,209	)	¥	—	¥	(17	)	¥	(41,226	)

The following table shows gross unrealized losses on and the fair value of fixed maturity securities available for sale that were in an unrealized loss position as of March 31, 2006, by contractual maturities at that date:

	Gross unrealized losses			Fair value
	(yen in millions)
Due in one year or less	¥	(1,130	)	¥	817,883
Due after one year through five years		(9,090	)		715,127
Due after five years through ten years		(13,050	)		483,256
Due after ten years		(17,751	)		447,051
Total	¥	(41,021	)	¥	2,463,317

The following table shows gross unrealized losses on and the fair value of fixed maturity securities available for sale that were in an unrealized loss position as of March 31, 2005, by contractual maturities at that date:

	Gross unrealized losses			Fair value
	(yen in millions)
Due in one year or less	¥	(3,007	)	¥	1,090,848
Due after one year through five years		(6,404	)		172,921
Due after five years through ten years		(4,910	)		235,144
Due after ten years		(26,905	)		343,324
Total	¥	(41,226	)	¥	1,842,237

The following table shows gross unrealized losses on our securities available for sale as of each of the dates indicated:

	As of March 31,
	2006			2005
	(yen in millions)
Equity securities	¥	(8,275	)	¥	(8,964	)
Fixed maturity securities		(41,021	)		(41,226	)
Total gross unrealized losses	¥	(49,296	)	¥	(50,190	)

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Set forth below is certain other information relating to our portfolio of securities available for sale as of March 31, 2006 and 2005:

• Investment concentration. As of March 31, 2006, we held investments, mainly equity securities, in Toyota Motor Corporation and its affiliates that were valued at ¥640.7 billion, representing approximately 14% of our consolidated stockholders’ equity as of that date. No other investment in a single company including its affiliates exceeded 10% of our consolidated stockholders’ equity as of that date. As of March 31, 2005, we held investments, mainly equity securities, in Toyota Motor Corporation and its affiliates that were valued at ¥401.2 billion, representing approximately 12% of our consolidated stockholders’ equity as of that date. No other investment in a single company including its affiliates exceeded 10% of our consolidated stockholders’ equity as of that date.

• Concentration of gross unrealized losses. As of March 31, 2006, Japanese government bonds accounted for 54.5% of our total gross unrealized losses on securities available for sale as of that date. The unrealized losses on these investments amounted to ¥26,872 million as compared to a cost basis of ¥1,702,396 million. As of March 31, 2006, two of our investments in equity securities of Japanese issuers accounted for 7.7% of our total gross unrealized losses on securities available for sale as of that date. The unrealized losses on these investments amounted to ¥2,687 million and ¥1,156 million, respectively, as compared to a cost basis of ¥16,000 million and ¥16,795 million, respectively. Based on our evaluation in accordance with our critical accounting policy “Impairment of Securities Available for Sale”, including the evaluation of the period of time during which the securities described above were in a continuous loss position, we recorded an impairment loss for such securities in the amount of ¥19,371 million for the year ended March 31, 2006. As of March 31, 2005, Japanese government bonds accounted for 53.2% of our total gross unrealized losses on securities available for sale as of that date. The unrealized losses on these investments amounted to ¥26,721 million as compared to a cost basis of ¥1,439,244 million. As of March 31, 2005, two of our investments in equity securities of Japanese issuers accounted for 6.2% of our total gross unrealized losses on securities available for sale as of that date. The unrealized losses on these investments amounted to ¥2,492 million and ¥598 million, respectively, as compared to a cost basis of ¥16,000 million and ¥16,795 million, respectively. Based on our evaluation in accordance with our critical accounting policy “Impairment of Securities Available for Sale”, including the evaluation of the period of time during which the securities described above were in a continuous loss position, we recorded an impairment loss for such securities in the amount of ¥12,226 million for the year ended March 31, 2005.

• Maturity profile. As of March 31, 2006, we held ¥1,090.0 billion of fixed maturity securities available for sale (measured at fair value) with an original term to maturity of ten years or longer and ¥3,090.0 billion of fixed maturity securities available for sale (measured at fair value) with an original term to maturity of less than ten years. As of March 31, 2005, we held ¥902.4 billion of fixed maturity securities available for sale (measured at fair value) with an original term to maturity of ten years or longer and ¥3,060.2 billion of fixed maturity securities available for sale (measured at fair value) with an original term to maturity of less than ten years. Fixed maturity securities with longer maturities are more sensitive to interest rate fluctuations than securities with shorter maturities.

• Non-traded securities. As of March 31, 2006, we held ¥525.8 billion of non-traded fixed maturity and equity securities. As of March 31, 2005, we held ¥500.8 billion of non-traded fixed maturity and equity securities. We monitor various information relating to the fair value of non-traded securities, including the net asset values and the credit rating of each issuer.

• Unrealized losses of fixed maturity securities. As of March 31, 2006, our unrealized losses of fixed maturity securities amounted to ¥41,021 million. As of March 31, 2005, our unrealized losses of fixed maturity securities amounted to ¥41,226 million. Such losses primarily resulted from changes in interest rates, and, consistent with our critical accounting policy “Impairment of Fixed Maturity Securities Available for Sale”, we recorded an impairment loss for such fixed maturity securities in the amount of ¥14,079 million for the year ended March 31, 2006.

57

In addition, based on our determinations in accordance with our critical accounting policy “Impairment of Securities Available for Sale”, during the years ended March 31, 2006 and 2005, we did not record any material loss in connection with sales of securities that were in an unrealized loss position at March 31, 2005 and 2004, respectively. See “—Results of Operations” for the analyses of unrealized losses.

Hedging for Deposit-Type Insurance and Life Insurance Policies

We enter into interest rate swaps principally as a means of managing our interest rate risk under deposit-type insurance policies and life insurance policies. In managing this interest rate risk, we periodically measure the fair value of substantially all of our related assets and liabilities, including those in respect of these derivative positions.

Since these derivative positions do not qualify for hedge accounting treatment under Statement of Financial Accounting Standard No. 133, or SFAS No. 133, we must recognize as gains or losses in our statement of income any changes in the fair value of these derivative positions. We may not, on the other hand, recognize gains or losses for any change in the fair value of our other related assets and liabilities. Accordingly, the gains or losses that we recognize in respect of these derivative positions in our statement of income, and the fair value of these derivative positions as reflected in our balance sheet and related notes to our financial statements, do not provide a comprehensive view of our financial exposure with respect to deposit-type insurance policies and life insurance policies.

As of March 31, 2006, our net unrealized losses in respect of investment contracts totaled ¥148 billion. Of this amount, ¥183 billion of unrealized losses were derived from deposit-type insurance policies issued by Tokio Marine & Nichido, a decrease of ¥44 billion from previous fiscal year. The level of unrealized losses of deposit-type insurance policies can be expected to decrease when interest rates go up. As of March 31, 2006, we had net unrealized gains of ¥3,252 billion on securities available for sale. We expect that these unrealized gains (or some portion of them) will be available to offset future losses in respect of investment contracts; however, our results of operations in future fiscal years could be adversely affected by our net financial exposure in respect of deposit-type insurance policies.

Accounting for US Dollar Denominated Annuity and Whole Life Policies

According to our policy of matching assets and liabilities to minimize foreign exchange rate risk, we have a fixed-income investment portfolio denominated in U.S. dollars to match our liabilities under our U.S. dollar denominated annuity and whole life policies. According to Statement of Financial Accounting Standard No. 52, or SFAS No. 52, the foreign exchange gains or losses on our foreign currency denominated liabilities under our annuity or whole life policies must be recognized in our statement of income while the foreign exchange gains or losses on the available-for-sale fixed maturity securities which support these foreign currency denominated liabilities are recognized in other comprehensive income as part of the fair value gains or losses on these fixed maturity securities.

For the year ended March 31, 2006, losses resulting from foreign currency translations on our U.S. dollar denominated liabilities under our annuity and whole life policies amounted to ¥19 billion and were recorded as other operating expenses. Our statement of income does not provide a comprehensive view of our financial exposure with respect to U.S. dollar denominated annuity and whole life policies and notwithstanding the recognition of this loss on our statement of income, we believe these transactions, which are designed to maintain a balance of our assets and liabilities relating to our U.S. dollar denominated annuity and whole life policies, to be economically reasonable.

58

Results of Operations

The following table, prepared on a U.S. GAAP basis, shows selected statement of income information for us for each of the periods indicated:

	Year ended March 31,
	2006			2005			2004 (1)
	(yen in millions)
Operating income:
Property and casualty:
Net premiums written	¥	1,974,646		¥	1,925,407		¥	1,945,246
Less increase in unearned premiums		22,342			29,757			85,043
Premiums earned		1,952,304			1,895,650			1,860,203
Life premiums		281,276			253,369			241,553
Net investment income		164,433			133,197			126,173
Realized gains (losses) on investments		175,197			86,750			(3,855	)
Gains (losses) on derivatives		(29,305	)		8,296			(36,755	)
Other income		91,780			31,835			20,199
Total operating income		2,635,685			2,409,097			2,207,518
Operating costs and expenses:
Losses, claims and loss adjustment expenses:
Losses and claims incurred and provided for		1,192,453			1,262,433			1,048,518
Related adjustment expenses		79,182			68,886			77,389
Total losses, claims and loss adjustment expenses		1,271,635			1,331,319			1,125,907
Policy benefits and losses for life		319,435			210,536			195,659
Interest credited to policyholders’ contract deposits		62,811			58,148			58,414
Policy acquisition costs		584,989			564,544			558,978
Other operating expenses		166,384			137,944			116,293
Total operating costs and expenses		2,405,254			2,302,491			2,055,251
Income before income tax expense, minority interests, equity in earnings of affiliated companies, extraordinary items and cumulative effect of accounting changes		230,431			106,606			152,267
Income tax expense (benefit):
Current		72,407			48,654			50,015
Deferred		3,771			(20,223	)		(630	)
Total income tax expense (benefit)		76,178			28,431			49,385
Minority interests (2)		1,078			648			—
Equity in earnings of affiliated companies		3,785			—			—
Income before extraordinary items and cumulative effect of accounting changes		156,960			77,527			102,882
Extraordinary items		—			14,458			—
Cumulative effect of accounting changes, net of tax (3)		—			(26	)		—
Net income	¥	156,960		¥	91,959		¥	102,882

(1) Certain amounts in our U.S. GAAP consolidated financial statements for the fiscal year ended March 31, 2004 have been reclassified to conform to the new classifications adopted during the fiscal year ended March 31, 2005.

(2) Minority interests for the fiscal years ended March 31, 2006 and 2005 are primarily related to the consolidation of Variable Interest Entities in the adoption of the revision to FASB Interpretation No. 46. See “—Recent Accounting Pronouncements”.

(3) The amount for the fiscal year ended March 31, 2005 is related to the adoption of a new accounting standard Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. See “—Recent Accounting Pronouncements”.

59

Year Ended March 31, 2006 Compared to Year Ended March 31, 2005

Our direct premiums written for property and casualty insurance for the fiscal year ended March 31, 2006, or fiscal 2006, were ¥2,002,522 million, an increase of 1.9% from ¥1,965,550 million in the fiscal year ended March 31, 2005, or fiscal 2005. Net premiums written for property and casualty insurance, which represent direct premiums written plus assumed reinsurance premiums minus ceded reinsurance premiums, were ¥1,974,646 million in fiscal 2006, an increase of 2.6 % from ¥1,925,407 million in fiscal 2005. The increase was primarily a result of an expansion of our overseas insurance business.

Property and casualty insurance premiums are recognized as earned on a pro rata basis over the terms of the policies. Unearned premiums represent the portion of premiums written which relate to the unexpired terms of coverage. After deducting the increase in unearned premiums of ¥22,342 million for fiscal 2006, premiums earned in fiscal 2006 were ¥1,952,304 million, an increase of 3.0% from fiscal 2005. The increase was mainly due to an expansion of our overseas insurance business.

Life premiums, which represent direct premiums earned plus assumed reinsurance premiums minus ceded reinsurance premiums, were ¥281,276 million in fiscal 2006, an increase of 11.0% from fiscal 2005. The increase primarily reflected an expansion of our traditional Japanese life insurance business, including comprehensive lifetime insurance and fixed term insurance.

Losses and claims incurred and provided for, or net loss incurred, for all property and casualty insurance in fiscal 2006 amounted to ¥1,192,453 million, a decrease of ¥69,980 million, or 5.5%, from fiscal 2005. The ratio of the total amount of net loss incurred to net premiums earned—the net loss ratio—was 61.1% in fiscal 2006, a decrease from 66.6% in fiscal 2005. This decrease was due primarily to a decrease in the number of major natural disasters in Japan.

Total operating costs and expenses, which represents the sum of losses, claims and loss adjustment expenses, policy benefits and losses for life, interest credited policyholders’ contract deposits, policy acquisition costs and other operating expenses, amounted to ¥2,405,254 million in fiscal 2006, an increase of 4.5% from fiscal 2005. This increase was primarily attributable to an increase in policy benefits and losses for life reflecting the expansion of our life insurance business.

Loss adjustment expenses in fiscal 2006 were ¥79,182 million, an increase of 14.9% from fiscal 2005. The ratio of losses, claims and loss adjustment expenses incurred to net premiums earned for all classes of property and casualty insurance was 65.1% in fiscal 2006, a decrease from 70.2% in fiscal 2005. This decrease was primarily attributable to a lower number of major natural disasters in Japan.

Policy benefits and losses for life increased by 51.7% in fiscal 2006 to ¥319,435 million. This increase primarily reflected a steady expansion of our life business, mainly the variable annuity business. The increase in policy benefits and losses for life of 57.1% in fiscal 2006 was larger than the increase in life premiums in fiscal 2006 since the increase of reserves that resulted from rising equity prices is recorded as policy benefits and losses, while the corresponding increase in assets that resulted from rising equity prices is recorded as gains on investments and not as life premiums.

Future policy benefits and losses include provisions for future policy benefits for life contracts and for unpaid life policy claims. The liabilities for future policy benefits are computed by a net level premium method using estimated future investment yields, withdrawals and recognized morbidity and mortality tables. For limited-payment contracts, which provide insurance coverage over a contract period that extends beyond the period in which premiums are collected, gross premiums in excess of the net premiums are deferred and recognized in income during the periods when the insurance is in force or when future benefit payments are expected to become due. Unpaid policy claims represent the estimated liability for reported and unreported losses on life policies on an undiscounted basis. We believe that our estimated provisions for future policy benefits and for losses at March 31, 2006 are adequate to cover our life insurance liability. However, our ultimate liability may vary from these estimates.

60

Interest credited to policyholders’ contract deposits increased by 8.0% in fiscal 2006 to ¥62,811 million. This increase was primarily attributable to an increase in provisions for U.S. dollar denominated annuities.

We incurred policy acquisition costs in fiscal 2006 of ¥584,989 million, an increase of 3.6% from fiscal 2005. This increase was primarily attributable to policy acquisition cost recognized in connection with the transfer to the government of the substitutional portion of our pension plan. See note 12 to our consolidated financial statements.

Other operating expenses increased by 20.6% in fiscal 2006 to ¥166,384 million. This increase was primarily due to losses resulting from foreign currency translation related to provisions for U.S. dollar denominated annuities. See “—Accounting for U.S. Dollar Denominated Annuity and Whole Life Policies”.

Net investment income in fiscal 2006 was ¥164,433 million, an increase of ¥31,236 million, or 23.5%, from fiscal 2005. This increase primarily reflected an increase in dividends received, reflecting improving equity market conditions.

Realized gains on investments increased to ¥175,197 million in fiscal 2006 from losses of ¥86,750 million in fiscal 2005. This increase primarily resulted from an increase in the prices of equity securities and the resulting gains on trading securities held in connection with our variable annuity policies.

The following table sets forth our gross unrealized losses on available-for-sale securities as of the dates indicated:

	Available-for-sale securities
	Gross unrealized losses as of March 31, 2006			Gross unrealized losses as of March 31, 2005
	(yen in millions except percentages)
Fixed maturity securities	¥	41,021		¥	41,226
Equity securities		8,275			8,964
Total	¥	49,296		¥	50,190
Gross unrealized loss as a percentage of total carrying amount		0.5	%		0.7	%

During the year ended March 31, 2006, some of the available-for-sale securities with unrealized losses at the beginning of the fiscal year were sold. These sales transactions resulted in a net realized loss of ¥1,866 million. At the beginning of the 2006 fiscal year, the corresponding gross unrealized losses for these securities was ¥2,539 million.

Furthermore, during the year ended March 31, 2006, management determined that with respect to available-for-sale securities with ¥68,667 million in unrealized losses as of March 31, 2006, an other-than-temporary impairment existed, amounting to ¥19,371 million. Management determined that this other-than-temporary impairment occurred during the year ended March 31, 2006 and the impairments have been charged accordingly to the income statement.

Losses on derivatives in fiscal 2006 were ¥29,305 million, as compared to gains of ¥8,296 million in fiscal 2005. These losses primarily reflected losses of ¥22,976 million on interest rate swap agreements. We utilize interest rate swaps in our economical hedging activities for our asset liability management and foreign exchange contracts to economically hedge our foreign currency exposure.

Other income amounted to ¥91,780 million in fiscal 2006, an increase of 188.3% from fiscal 2005. This increase was mainly due to gains recognized in connection with the transfer to the government of the substitutional portion of our pension plan. See note 12 to our consolidated financial statements.

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Income before income tax expense, minority interests, equity in earnings of affiliated companies, extraordinary items and cumulative effect of accounting changes increased to ¥230,431 million in fiscal 2006 from ¥106,606 million in fiscal 2005, an increase of 116.2%.

Income tax expense for fiscal 2006 was ¥76,178 million, an increase of 168.0% compared to fiscal 2005. The effective tax rate increased to 33.1% in fiscal 2006 from 26.7% in fiscal 2005. This increase in the effective tax rate reflected a decrease in tax credits for dividends received.

Income before extraordinary items and cumulative effect of accounting changes increased to ¥156,960 million in fiscal 2006 from ¥77,527 million in fiscal 2005, an increase of 102.5%.

We did not recognize any extraordinary items in fiscal 2006. We recognized extraordinary items of ¥14,458 million in fiscal 2005. This was due to the recognition of unallocated negative goodwill arising from the acquisition of Nisshin Fire. See “—Overview—Business Alliance”.

As a result of the foregoing, our net income increased to ¥156,960 million in fiscal 2006 from ¥91,959 million in fiscal 2005, an increase of 70.7%.

Year Ended March 31, 2005 Compared to Year Ended March 31, 2004

Our direct premiums written for property and casualty insurance for the fiscal year ended March 31, 2005, or fiscal 2005, were ¥1,965,550 million, a decrease of 0.7% from ¥1,978,555 million in the fiscal year ended March 31, 2004, or fiscal 2004. Net premiums written for property and casualty insurance were ¥1,925,407 million in fiscal 2005, a decrease of 1.0% from ¥1,945,246 million in fiscal 2004. The decrease was primarily a result of a decrease in voluntary automobile liability insurance premiums due to discounts in premium rates granted upon renewal of policies.

After deducting the increase in unearned premiums of ¥29,757 million for fiscal 2005, property and casualty insurance premiums earned in fiscal 2005 were ¥1,895,650 million, an increase of 1.9% from fiscal 2004. The increase was mainly due to continuing effects of contracts entered into in prior years.

Life premiums were ¥253,369 million in fiscal 2005, an increase of 4.9% from fiscal 2004. The increase primarily reflected a steady expansion of our life insurance business.

Losses and claims incurred and provided for, or net loss incurred, for all property and casualty insurance in fiscal 2005 amounted to ¥1,262,433 million, an increase of ¥213,915 million, or 20.4%, from fiscal 2004. The ratio of the total amount of net loss incurred to net premiums earned—the net loss ratio—was 66.6% in fiscal 2005, an increase from 56.4% in fiscal 2004. This increase was due primarily to an increase in the loss ratio of fire and allied lines insurance and voluntary automobile insurance resulting from major natural disasters in Japan as well as increased severity and frequency of losses paid.

Total operating costs and expenses amounted to ¥2,302,491 million in fiscal 2005, an increase of 12.0% from fiscal 2004. This increase was primarily attributable to increases in losses and claims incurred and provided for and policy benefits and losses for life.

Loss adjustment expenses in fiscal 2005 were ¥68,886 million, a decrease of 11.0% from fiscal 2004. The ratio of losses, claims and loss adjustment expenses incurred to net premiums earned for all classes of property and casualty insurance was 70.2% in fiscal 2005, an increase from 60.5% in fiscal 2004.

Policy benefits and losses for life increased by 7.6% in fiscal 2005 to ¥210,536 million. This increase primarily reflected an increase in life premiums.

Interest credited to policyholders’ contract deposits decreased by 0.5% in fiscal 2005 to ¥58,148 million. This decrease was primarily attributable to decreased sales of deposit-type insurance and the maturity of policies sold in previous years with relatively high interest rates.

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We incurred policy acquisition costs in fiscal 2005 of ¥564,544 million, an increase of 1.0% from fiscal 2004. This increase was primarily attributable to increased expenses due to the merger of Tokio Marine and Nichido.

Other operating expenses increased by 18.6% in fiscal 2005 to ¥137,944 million. This increase was primarily due to an increase in expenses relating to the merger of Tokio Marine and Nichido Fire, which occurred on October 1, 2004.

Net investment income in fiscal 2005 was ¥133,197 million, an increase of ¥7,024 million, or 5.6%, from fiscal 2004. This increase primarily reflected an increase in dividends received, reflecting improving equity market conditions.

Realized gains on investments increased to ¥86,750 million in fiscal 2005 from losses of ¥3,855 million in fiscal 2004. This increase primarily reflected an increase in realized gains on sales of equity securities.

The following table sets forth our gross unrealized losses on available-for-sale securities as of the dates indicated:

	Available-for-sale securities
	Gross unrealized losses as of March 31, 2005			Gross unrealized losses as of March 31, 2004
	(yen in millions except percentages)
Fixed maturity securities	¥	41,226		¥	42,986
Equity securities		8,964			10,425
Total	¥	50,190		¥	53,411
Gross unrealized loss as a percentage of total carrying amount		0.7	%		0.8	%

During the year ended March 31, 2005, some of the available-for-sale securities with unrealized losses at the beginning of the fiscal year were sold. These sales transactions resulted in a net realized loss of ¥4,948 million. At the beginning of the 2005 fiscal year, the corresponding gross unrealized losses for these securities was ¥4,087 million.

Furthermore, during the year ended March 31, 2005, management determined that with respect to available-for-sale securities with ¥62,416 million in unrealized losses as of March 31, 2005, an other-than-temporary impairment existed, amounting to ¥12,226 million. Management determined that this other-than-temporary impairment occurred during the year ended March 31, 2005 and the impairments have been charged accordingly to the income statement.

Gains on derivatives in fiscal 2005 were ¥8,296 million, as compared to losses of ¥36,755 million in fiscal 2004. These gains primarily reflected gains of ¥19,404 million on interest swap agreements, partially offset by gains from foreign exchange contracts in the amount of ¥12,752 million.

Other income amounted to ¥31,835 million in fiscal 2005, an increase of 57.6% from fiscal 2004. The increase was mainly due to the expansion of our temporary staff agency business.

Income before income tax expense, minority interests, equity in earnings of affiliated companies, extraordinary items and cumulative effect of accounting changes decreased to ¥106,606 million in fiscal 2005 from ¥152,267 million in fiscal 2004, a decrease of 30.0%.

Income tax expense for fiscal 2005 was ¥28,431 million, a decrease of 42.4% compared to fiscal 2004. The effective tax rate decreased to 26.7% in fiscal 2005 from 32.4% in fiscal 2004. This decrease in the effective tax rate reflected an increase in tax credits for dividends received.

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Income before extraordinary items and cumulative effect of accounting changes decreased to ¥77,527 million in fiscal 2005 from ¥102,882 million in fiscal 2004, a decrease of 24.6%.

We recognized extraordinary items of ¥14,458 million in fiscal 2005. This was due to the recognition of unallocated negative goodwill arising from the acquisition of Nisshin Fire. See “—Overview—Business Alliance”. We did not recognize any extraordinary items in fiscal 2004.

As a result of the foregoing, our net income decreased to ¥91,959 million in fiscal 2005 from ¥102,882 million in fiscal 2004, a decrease of 10.6%.

Business Segment Analysis

We derive our business segment information from our internal management reporting system used to measure the performance of our business segments. The business segments are Property and Casualty, Life and Other.

Property and Casualty. We write insurance policies, through our subsidiary Tokio Marine & Nichido, for the following internal reporting units: Marine; Fire and Allied; Voluntary Automobile; Personal Accident; Compulsory Automobile Liability Insurance (“CALI”); and Other, principally covering risks located in Japan. We evaluate the results of the segment based upon Japanese GAAP income before income tax expense, premiums written and loss ratio.

Life. This segment primarily assumes whole-life insurance, annuity and medical insurance. We evaluate the results of this segment based upon Japanese GAAP income before income tax expense.

Other. We engage in certain other businesses, including investment management business and foreign operations such as property and casualty and life businesses. Such other businesses are not significant on a segmental level.

In accordance with Statement of Financial Accounting Standards No. 131, our segment measures differ from our consolidated operating profits as defined under U.S. GAAP. As a result, our consolidated income statement and consolidated balance sheet have been prepared on a U.S. GAAP basis while our segmental analysis is measured on a Japanese GAAP basis.

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The following table sets forth our segment information for the fiscal years ended March 31, 2006, 2005 and 2004:

	Property and casualty			Life		Other		Total reportable segments		Elimination and adjustments		Consolidated
	(yen in millions except percentages)
2006:
P&C premiums written (1)	¥	1,892,754		—		85,942		1,978,696		(32	)	1,978,664
P&C losses paid (2)		(1,077,632	)	—		(39,889	)	(1,117,521	)	84		(1,117,437	)
P&C loss adjustment expenses paid (2)		(70,241	)	—		(3,420	)	(73,661	)	1,777		(71,884	)
Life premiums (3)		—		843,663		7,105		850,768		(83,955	)	766,813
Policy benefits and losses paid for life (3)		—		(121,544	)	(2,984	)	(124,528	)	84,409		(40,119	)
Underwriting expenses (3)		(572,078	)	(93,573	)	(41,958	)	(707,609	)	(40,254	)	(747,863	)
P&C underwriting profit		172,803		—		675		—		—		—
P&C loss ratio (4)		60.6	%	—		—		—		—		—
Investment income and realized gains on investment (3)		134,505		150,928		21,392		306,825		4,392		311,217
Other income (expenses)—net (3)(5)		(131,914	)	(801,430	)	(16,601	)	(949,945	)	10,566		(939,379	)
Japanese GAAP income before income tax expense	¥	175,394		(21,956	)	9,587		163,025		(23,013	)	140,012
Total assets (3)	¥	10,814,796		2,862,721		715,963		14,393,480		(133,460	)	14,260,020
2005:
P&C premiums written (1)	¥	1,883,332		—		41,783		1,925,115		(34	)	1,925,081
P&C losses paid (2)		(1,122,847	)	—		(21,263	)	(1,144,110	)	96		(1,144,014	)
P&C loss adjustment expenses paid (2)		(71,290	)	—		(2,547	)	(73,837	)	1,804		(72,033	)
Life premiums (3)		—		491,442		415		491,857		(60,306	)	431,551
Policy benefits and losses paid for life (3)		—		(94,681	)	(258	)	(94,939	)	60,671		(34,268	)
Underwriting expenses (3)		(592,222	)	(70,378	)	(24,728	)	(687,328	)	(29,307	)	(716,635	)
P&C underwriting profit		96,973		—		(6,755	)	—		—		—
P&C loss ratio (4)		63.4	%	—		—		—		—		—
Investment income and realized gains on investment (3)		168,409		40,792		8,980		218,181		(31,070	)	187,111
Other income (expenses)—net (3)(5)		(130,169	)	(372,524	)	6,652		(496,041	)	11,427		(484,614	)
Japanese GAAP income before income tax expense	¥	135,213		(5,349	)	9,034		138,898		(46,719	)	92,179
Total assets (3)	¥	9,306,281		2,055,024		357,908		11,719,213		(94,717	)	11,624,496
2004:
P&C premiums written (1)	¥	1,904,225		—		39,405		1,943,630		(21	)	1,943,609
P&C losses paid (2)		(943,640	)	—		(13,409	)	(957,049	)	97		(956,952	)
P&C loss adjustment expenses paid (2)		(75,630	)	—		(2,259	)	(77,889	)	1,629		(76,260	)
Life premiums (3)		—		358,140		607		358,747		(47,855	)	310,892
Policy benefits and losses paid for life (3)		—		(75,349	)	(477	)	(75,826	)	47,731		(28,095	)
Underwriting expenses (3)		(599,860	)	(57,866	)	(19,557	)	(677,283	)	(23,802	)	(701,085	)
P&C underwriting profit		285,095		—		4,180		—		—		—
P&C loss ratio (4)		53.5	%	—		—		—		—		—
Investment income and realized gains on investment (3)		101,079		33,107		9,765		143,951		(22,834	)	121,117
Other income (expenses)—net (3)(5)		(210,213	)	(257,829	)	(3,016	)	(471,058	)	22,050		(449,008	)
Japanese GAAP income before income tax expense	¥	175,961		203		11,059		187,223		(23,005	)	164,218
Total assets (3)	¥	9,077,139		1,680,809		320,338		11,078,286		(72,030	)	11,006,256

(1) P&C premiums written represents P&C premiums written in accordance with Japanese GAAP, except that it excludes premiums related to savings contracts.

(2) P&C losses paid and P&C loss adjustment expenses paid represent P&C losses paid and P&C loss adjustment expenses paid during the period in accordance with Japanese GAAP, except that it excludes case reserves and incurred but not reported accruals.

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(3) Calculated in accordance with Japanese GAAP.

(4) Ratio of losses and loss adjustment expenses paid to premiums written.

(5) Other income (expenses)—net includes the following:

(a) Change in liability for: unearned premium reserves; future benefits; case reserves; and incurred but not reported accruals;

(b) Premiums received on investment deposit contracts; and

(c) Other income and expenses on a net basis.

After application of items in (a) and (b) above, the amounts presented under the caption “Japanese GAAP income before income tax expense” in this table generally reflect premiums recognized on an earned basis and losses recognized on an incurred basis during the periods presented.

The following table sets forth our segment information for our P&C internal reporting units for the fiscal years ended March 31, 2006, 2005 and 2004:

	Marine			Fire and Allied		Voluntary Automobile		Personal Accident		CALI		Other		Total
	(yen in millions except percentages)
2006:
Premiums written (1)	¥	69,987		255,200		858,279		149,715		316,501		243,072		1,892,754
Losses paid (2)	¥	37,368		110,889		515,893		63,805		222,602		127,075		1,077,632
Loss adjustment expenses paid (2)	¥	1,722		4,232		36,832		4,750		16,584		6,121		70,241
Loss ratio (3)		55.9	%	45.1	%	64.4	%	45.8	%	75.6	%	54.8	%	60.6	%
2005:
Premiums written (1)	¥	65,021		245,583		854,048		149,615		328,847		240,218		1,883,332
Losses paid (2)	¥	34,069		181,422		521,525		60,287		192,041		133,503		1,122,847
Loss adjustment expenses paid (2)	¥	1,790		3,822		37,342		5,103		17,252		5,981		71,290
Loss ratio (3)		55.2	%	75.4	%	65.4	%	43.7	%	63.6	%	58.1	%	63.4	%
2004:
Premiums written (1)	¥	60,780		252,825		871,761		151,062		333,642		234,155		1,904,225
Losses paid (2)	¥	36,471		78,529		501,773		65,228		137,383		124,256		943,640
Loss adjustment expenses paid (2)	¥	1,843		3,075		41,279		5,407		17,530		6,046		75,630
Loss ratio (3)		63.0	%	32.3	%	62.3	%	46.8	%	46.4	%	55.6	%	53.5	%

(1) Premiums written represents premiums written in accordance with Japanese GAAP, except that it excludes premiums related to savings contracts.

(2) Losses paid and loss adjustment expenses paid represent losses paid and loss adjustment expenses paid during the period in accordance with Japanese GAAP, except that it excludes case reserve and incurred but not reported accruals.

(3) Ratio of losses and loss adjustment expenses paid to premiums written.

Property and Casualty Reporting Units

Set forth below is information relating to performance of our property and casualty internal reporting units on a Japanese GAAP basis for the year ended March 31, 2006 compared to the year ended March 31, 2005 and for the year ended March 31, 2005 compared to the year ended March 31, 2004.

Year Ended March 31, 2006 Compared to Year Ended March 31, 2005

Marine Insurance. Premiums written for hull and cargo insurance increased by 7.6% in fiscal 2006 to ¥69,987 million. This increase mainly reflected an increase in contracts related to import and export trading activity and the oil business. The loss ratio increased from 55.2% in fiscal 2005 to 55.9% in fiscal 2006, mainly due to an increase in losses paid related to typhoons and hurricanes.

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Fire and Allied Lines Insurance. Premiums written for fire and allied lines insurance increased by 3.9% in fiscal 2006 to ¥255,200 million. This increase was mainly due to an increase in sales of policies covering factory damage and earthquake insurance on a private basis. The loss ratio decreased from 75.4% in fiscal 2005 to 45.1% in fiscal 2006, primarily due to a decrease in losses paid related to major natural disasters in Japan.

Voluntary Automobile Insurance. Premiums written for voluntary automobile insurance, the largest line of our property and casualty insurance business, increased by 0.5% in fiscal 2006 to ¥858,279 million. This increase was primarily due to an expansion of coverage of individual policies such as for bodily injury. The loss ratio decreased from 65.4% in fiscal 2005 to 64.4% in fiscal 2006, mainly due to a decrease in losses paid related to major natural disasters in Japan.

Personal Accident Insurance. Premiums written for personal accident insurance increased by 0.1% in fiscal 2006 to ¥149,715 million. This increase was mainly due to an expansion of sales of medical and cancer insurance. The loss ratio increased from 43.7% in fiscal 2005 to 45.8% in fiscal 2006, mainly due to an increase in losses paid related to overseas traveler’s personal accident insurance.

Compulsory Automobile Liability Insurance. Premiums written for compulsory automobile insurance decreased by 3.8% in fiscal 2006 to ¥316,501 million. This was primarily due to decreases in premium rates reflecting a decrease in periodic automobile inspections. The loss ratio increased from 63.6% in fiscal 2005 to 75.6% in fiscal 2006. The loss ratio for our compulsory automobile liability insurance had temporarily decreased during the recent fiscal years as a result of the abolition of the governmental reinsurance scheme in fiscal 2003. The increase in fiscal 2006 reflects the normalization of the loss ratio to the level experienced prior to such abolition.

Other Insurance. Premiums written for all other types of property and casualty insurance, including liability insurance, workers’ compensation insurance, guarantee insurance, movable comprehensive insurance, aviation and miscellaneous pecuniary loss insurance, increased by 1.2% in fiscal 2006 to ¥243,072 million. This increase was mainly due to an increase in liability insurance premiums, partly offset by a decrease in workers’ compensation insurance premiums. The loss ratio decreased from 58.1% in fiscal 2005 to 54.8% in fiscal 2006, mainly due to an increase in premiums and a decrease in losses paid related to large claims.

Year Ended March 31, 2005 Compared to Year Ended March 31, 2004

Marine Insurance. Premiums written for hull and cargo insurance increased by 7.0% in fiscal 2005 to ¥65,021 million. This increase mainly reflected the high levels of Japanese import and export trading activity as well as an increase in premium rates in the United States. The loss ratio decreased from 63.0% in fiscal 2004 to 55.2% in fiscal 2005, mainly due to a decrease in losses paid related to large claims.

Fire and Allied Lines Insurance. Premiums written for fire and allied lines insurance decreased by 2.9% in fiscal 2005 to ¥245,583 million. This decrease was mainly due to additional reinsurance premium payments to reinsurers in connection with a large typhoon that occurred in fiscal 2005. The loss ratio increased from 32.3% in fiscal 2004 to 75.4% in fiscal 2005, primarily due to major natural disasters in Japan.

Voluntary Automobile Insurance. Premiums written for voluntary automobile insurance, the largest line of our property and casualty insurance business, decreased by 2.0% in fiscal 2005 to ¥854,048 million. This decrease was primarily due to discounts in premium rates granted upon the renewal of policies. The loss ratio increased from 62.3% in fiscal 2004 to 65.4% in fiscal 2005, mainly due to a decrease in premiums and increased severity and frequency of losses paid.

Personal Accident Insurance. Premiums written for personal accident insurance decreased by 1.0% in fiscal 2005 to ¥149,615 million. This decrease was mainly due to decreasing sales of long-term personal accident insurance. The loss ratio decreased from 46.8% in fiscal 2004 to 43.7% in fiscal 2005, mainly due to expanding sales of medical and cancer insurance, which has a relatively low loss ratio when compared with other personal accident insurance products.

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Compulsory Automobile Liability Insurance. Premiums written for compulsory automobile insurance decreased by 1.4% in fiscal 2005 to ¥328,847 million. This was primarily due to a decrease in renewals of policies, reflecting a decrease in periodic automobile inspections. The loss ratio increased from 46.4% in fiscal 2004 to 63.6% in fiscal 2005. The loss ratio for our compulsory automobile liability insurance had temporarily decreased during the recent fiscal years as a result of the abolition of the governmental reinsurance scheme in fiscal 2003. The increase in fiscal 2005 reflects the initial phase of the normalization of the loss ratio to the level experienced prior to such abolition.

Other Insurance. Premiums written for all other types of property and casualty insurance, including liability insurance, workers’ compensation insurance, guarantee insurance, movable comprehensive insurance, aviation and miscellaneous pecuniary loss insurance, increased by 2.6% in fiscal 2005 to ¥240,218 million. This increase was mainly due to an increase in liability and miscellaneous pecuniary loss insurance premiums, partly offset by a decrease in aviation insurance premiums. The loss ratio increased from 55.6% in fiscal 2004 to 58.1% in fiscal 2005, mainly due to major natural disasters in Japan as well as an increase in large claims.

Credit Losses and Non-Performing Loans

The continuing weak economic environment in Japan during the 1990s and the beginning of this decade have resulted in the deterioration of the financial conditions of Japanese corporate and individual borrowers and a high number of bankruptcy filings. A substantial portion of the affected credit extended by Japanese financial institutions is secured by real estate as collateral. The deterioration in credit and the continuing decline in the value of real estate led to a substantial increase in the amount of non-performing loans in Japanese financial institutions’ portfolios. Under these circumstances, Japanese non-life insurers, including Tokio Marine & Nichido’s predecessors, saw their non-performing loans increase, although not as much as other types of financial institutions. The main reason for this is that, in order to be able to make claims payments, Japanese non-life insurers are required to maintain high levels of liquidity compared with other types of financial institutions, which has meant that they have diversified their investment portfolios. After reaching a peak in the year ended March 31, 2003, the amount of non-performing loans at Tokio Marine & Nichido and other Japanese financial institutions has been decreasing.

The following table, prepared on a U.S. GAAP basis, shows our recorded investment in impaired loans and specific valuation allowances as of each of the dates indicated:

	As of March 31,
	2006		2005
	(yen in millions)
Recorded investment in impaired loans:
Mortgage loans on real estate	¥	9,001	¥	10,476
Unsecured loans		6,038		6,936
Total	¥	15,039	¥	17,412
Specific valuation allowances:
Mortgage loans on real estate	¥	3,025	¥	4,268
Unsecured loans		2,438		2,725
Total	¥	5,463	¥	6,993

In addition to the valuation allowances reflected in the table above, we have made additional allowances for other loans based on past loss experience and current economic conditions. These additional allowances were ¥3,764 million at March 31, 2006.

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Cash Flows

Year Ended March 31, 2006 Compared to Year Ended March 31, 2005

Net cash used in operating activities was ¥75,806 million in fiscal 2006, compared to ¥272,390 million provided in fiscal 2005. This change was primarily attributable to changes in trading securities, at fair value, partially offset by an increase of increase in losses, claims and loss adjustment expense reserve, net of ceded reinsurance. Changes in trading securities, which are recorded in cash flows from operating activities, reflected primarily an increase in investment deposits funded by policyholders, which is recorded in cash flows from financing activities. The increase in investment deposits funded by policyholders relates mainly to investment deposits made under variable annuity contracts, reflecting an increase in our variable annuity business. We invest these deposits mainly in trading securities, resulting in the change in trading securities. Excluding these transactions, net cash flows from operating activities were positive.

Net cash used in investing activities was ¥346,280 million in fiscal 2006, a small decrease when compared to ¥346,970 million in fiscal 2005. An increase in proceeds from fixed maturities available for sale redeemed, was largely offset by a decrease in proceeds from fixed maturities available for sale being sold. Additionally, cash used for investments purchased in fiscal 2006 decreased as compared to fiscal 2005, partially offset by an increase in cash used for short-term investments.

Net cash provided by financing activities was ¥464,187 million in fiscal 2006, compared to ¥71,838 million used in fiscal 2005. As discussed above, this increase in cash flows from financing activities resulted primarily from investment deposits made under variable annuity contracts, partially offset by an increase in withdrawals of investment deposits by policyholders.

The operating, investing and financing activities described above resulted in net cash at March 31, 2006 of ¥337,985 million, compared to ¥290,642 million at March 31, 2005, representing an increase of ¥47,343 million.

Year Ended March 31, 2005 Compared to Year Ended March 31, 2004

Net cash provided by operating activities was ¥272,390 million in fiscal 2005, compared to ¥439,061 million in fiscal 2004. This decrease was primarily attributable to a decrease of increase in unearned premiums, net of ceded reinsurance, a decrease in changes in trading securities at fair value, and an increase in net realized gains, partially offset by an increase and decrease of current income taxes payable and receivable.

Net cash used in investing activities was ¥346,970 million in fiscal 2005, compared to ¥253,397 million in fiscal 2004. This increase was principally due to an increase in cost of fixed maturity securities purchased, partially offset by an increase in proceeds from the sale of fixed maturity securities.

Net cash used in financing activities was ¥71,838 million in fiscal 2005, compared to ¥93,242 million in fiscal 2004. This decrease was mainly attributable to an increase in net cash provided by investment deposits funded by policyholders, partially offset by a decrease in cash received under securities lending transactions and an increase in cash used for the purchase of treasury stock.

The operating, investing and financing activities described above resulted in net cash at March 31, 2005 of ¥290,642 million, compared to ¥432,874 million at March 31, 2004, representing a decrease of ¥142,232 million.

Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51”, or FIN 46. FIN 46 clarifies when an enterprise should consolidate an entity that meets the definition of a Variable Interest Entity, or VIE, if that enterprise has a variable interest that will absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both. A VIE is an entity in which equity investors do not have the characteristics of a controlling financial interest or do not

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have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties, and may include many types of special purpose entities. In December 2003, FASB issued a revision to FIN 46, or FIN 46R. FIN 46R retains many of the basic concepts introduced in FIN 46. However, it also introduces a new scope exception for a certain type of entities that qualified as “business” as defined in FIN 46R, revises the method of calculating expected losses and residual returns for determination of a primary beneficiary and includes new guidance for assessing variable interests. We adopted FIN 46 for VIEs created after January 31, 2003 for the year ended March 31, 2004. We adopted FIN 46R for all VIEs for the year ended March 31, 2005. We do no believe that adoption of FIN 46R would have a material effect on our financial position or results of operations. See note 3 to our consolidated financial statements.

In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants, or the AcSEC, issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”, or SOP 03-1. AcSEC issued this SOP 03-1 to address the need for interpretive guidance in three areas: (1) separate account presentation and valuation; (2) the classification and valuation of certain long-duration contract liabilities; and (3) the accounting recognition given sales inducements (bonus interest, bonus credits and persistency bonuses). The effect of adopting SOP 03-1 was a charge of ¥41 million, net of tax of ¥26 million, which was reported as a “Cumulative effect of accounting change, net of tax” for the year ended March 31, 2005. This charge reflected the effect of establishing reserves for guaranteed minimum death benefit of our universal life-type contracts.

In December 2003, the FASB revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” to require additional disclosures related to pension plans and other postretirement benefit plans. While retaining the existing disclosure requirements for pensions and postretirement benefits, additional disclosures are required related to pension plan assets, obligations, cash flows and net periodic benefit costs, beginning with fiscal years ended after December 15, 2003. Additional disclosures pertaining to benefit payments are required for fiscal years ended after June 30, 2004. We have adopted the additional disclosure requirements in the financial statements. See note 12 to our consolidated financial statements.

In January 2003, the EITF released Issue No. 03-02, “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities”, or EITF 03-02. EITF 03-02 addresses financial accounting and reporting for a transfer to the Japanese government of a portion of a company’s pension plan which substitutes for the welfare pension plan administered by the Japanese government. We have adopted EITF 03-02 with respect to the transfer of the substitutional portion of our pension plan in the fiscal year ended March 31, 2006. See note 12 to our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, or SFAS 123R, which replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, or SFAS 123, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123R requires all companies to recognize compensation costs for share-based payments to employees based on the grant-date fair value of the award for financial statements for reporting periods beginning after June 15, 2005. In April 2005, the SEC deferred the required effective date for adoption to annual periods beginning after June 15, 2005. We adopted early SFAS No. 123R for the year ended March 31, 2006. The transition method was not necessary because we introduced a stock option plan in fiscal year 2006 for the first time. The effect of adopting SFAS 123R on the consolidated financial statements was not material because the new plan forms only a small part of compensation for our directors and corporate auditors. See note 13 to our consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, or SFAS 154. SFAS 154 replaces APB Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. This standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. We do not expect any significant accounting changes and corrections of errors at present.

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In June 2005, the EITF released Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights”. The Issue addresses what rights held by the limited partners preclude consolidation in circumstances in which the sole general partner would consolidate the limited partnership in accordance with generally accepted accounting principles absent the existence of the rights held by the limited partners. Based on that consensus, the EITF also agreed to amend the consensus in Issue No. 96-16, “Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholders Have Certain Approval or Veto Rights”. The guidance in this Issue is effective after June 29, 2005 for general partners of all new limited partnerships formed and for existing limited partnerships for which the partnership agreements are modified. For general partners in all other limited partnerships, the guidance in this Issue is effective for the first reporting period beginning after December 15, 2005. The effect of the adoption of this EITF Issue on existing partnerships that were modified and new partnerships entered into after June 29, 2005, was not material to our financial condition or results of operations. For all other partnerships, we are currently assessing the impact of adopting this EITF Issue.

In September 2005, the FASB issued Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts.” SOP 05-1 provides guidance on accounting for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments ”. The SOP defines an internal replacement as a modification in product benefits, features, rights, or coverage that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or overage within a contract. The implementation guidance is effective in the first fiscal year that begins after December 15, 2006. We are currently assessing the impact of implementing this guidance.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Instruments, or SFAS 155, which permits, but does not require, fair value accounting for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133. The statement also subjects beneficial interests issued by securitization vehicles to the requirements of SFAS 133. SFAS 155 is effective as of the beginning of the first fiscal year that begins after September 15, 2006. We do not expect that the adoption of SFAS 155 will have a material impact on our consolidated financial statements.

In November 2005, the FASB issued FASB Staff Position FAS 115-1 and FAS 124-1, or the FSP, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”. This FSP will replace guidance set forth in EITF 03-01 with references to existing other-than-temporary impairment guidance and will clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other than temporary, even if a decision to sell has not been made. The FSP carries forward the requirements in Issue No. 03-01 regarding required disclosures in the financial statements and requires additional disclosure related to factors considered in reaching the conclusion that the impairment is other-than-temporary. This new guidance for determining whether impairment is other-than-temporary is effective for reporting periods beginning after December 15, 2005. Adoption of this standard is not expected to have a material impact on our financial position or results of operations.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, or SFAS 156, which amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, or SFAS 140, with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS 156 is effective as of the beginning of first fiscal year that begins after September 15, 2006. We do not expect that adoption of SFAS 156 will have a material impact on our consolidated financial statements.

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In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of SFAS No. 109”, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently assessing the impact of adopting this interpretation.

Effects of Inflation

Our assets are generally not significantly affected by inflation, since a substantial portion of those assets is highly liquid. However, inflation may result in increases in our expenses, which may not be readily recoverable in the prices of services offered. If inflation results in rising interest rates and has other adverse effects on the capital markets and on the value of financial instruments, our financial position and profitability may be adversely affected.

Exposure to Currency Fluctuations

We conduct a portion of our business in currencies other than the yen, primarily the U.S. dollar. This business includes operations of marine insurance and certain reinsurance, as well as investments in financial products denominated in foreign currencies. If our exposure to currency fluctuations is not properly managed, we will be exposed to risk arising from the effects of fluctuations in exchange rates on the values of assets and liabilities denominated in foreign currencies. We seek to manage this exposure primarily by using forward exchange contracts, currency options and other derivatives. We also seek to control currency exposure by holding offsetting foreign currency positions in order to reduce the risk of loss from currency fluctuations.

Use of Derivative Financial Instruments

We use a variety of derivative financial instruments in the normal course of our business to reduce our exposure to the effects of fluctuations in foreign exchange, interest rates and market values on our equity portfolios. These instruments include foreign exchange contracts, foreign exchange forwards and futures, currency swaps and currency option contracts, interest rate swap and swaption agreements, equity index futures contracts, equity index option contracts and bond futures contracts.

Integrated Risk Management

We have adopted an integrated risk management system to measure, monitor and control risks inherent in our businesses. We use this system to establish acceptable levels of measurable risks for each fiscal year and to ensure the sufficiency of our shareholders’ equity in light of those risks. These risk amounts are monitored to ensure that they are maintained within permissible ranges based on our economic capital model and are reported to our senior management on a periodic basis.

As part of our integrated risk management system, our subsidiaries also conduct risk management based on our integrated risk management policy. Tokio Marine & Nichido, Tokio Marine & Nichido Life and Tokio Marine & Nichido Financial Life quantify market risk and asset-liability management risk, which are discussed in detail below under “Quantitative and Qualitative Disclosures About Market Risk”. We also identify and monitor the following risks:

• Property and casualty insurance risk

Risk of loss arising from fluctuations in the loss ratio and operating expense ratio expected at the time of calculating premiums.

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• Life insurance risk

Risk of loss arising from fluctuations in the mortality rate and operating expense rate expected at the time of calculating premiums.

• Credit risk

Risk of loss arising from a decline in the value of our assets (including off-balance-sheet assets), or the total loss of these assets, as a result of deterioration in the obligor’s financial condition.

• Real estate risk

Risk of loss arising from a decline in income from rentals or in the value of our real estate as a result of deterioration in the real estate market.

• Liquidity risk

Risk of loss arising from being forced to dispose of assets at a significant discount to prevailing market prices because of a shortage of funds, market disruptions or other unexpected events.

• Operational risk

Risk of loss resulting from inadequate or failed internal processes and systems or from external events.

Quantitative and Qualitative Disclosures About Market Risk

Property and Casualty Insurance Business

We conduct our property and casualty insurance business primarily through Tokio Marine & Nichido and its subsidiaries. A substantial portion of the investments relating to our property and casualty insurance business are made at the Tokio Marine & Nichido parent company level. Tokio Marine & Nichido’s subsidiaries conduct market risk management with respect to their own investments, and report the status of their market risk situations to Tokio Marine & Nichido on a regular basis. Except as otherwise noted, the following discussion as of and for the year ended March 31, 2006 relates to market risk management of Tokio Marine & Nichido only (and not its subsidiaries).

Market Risk Generally

Our property and casualty insurance business accumulates assets from premiums for the insurance policies it underwrites in advance of being required to make payments for claims under those policies as well as deposits for deposit-type insurance policies. Our property and casualty insurance business funds the benefits it provides under insurance policies with gains and income generated by its investment portfolio assets. These investments are subject to market risk but are managed under Tokio Marine & Nichido’s asset-liability management system.

Investment Objectives

Tokio Marine & Nichido invests premiums and deposits received from policyholders in various investments. Its principal investment objectives are to maximize its net asset value and maintain sufficient liquidity in its investment assets to meet insurance payment obligations while controlling risk within an acceptable range. It also seeks to safeguard the interests of policyholders and shareholders.

Market Risk Measurement

Tokio Marine & Nichido’s primary market risk exposure is to potential changes in interest rates and equity prices, as well as foreign exchange rates.

Interest rate risk. Tokio Marine & Nichido defines interest rate risk as the risk of loss in the fair values of interest rate sensitive instruments caused by changes in market interest rates. Tokio Marine & Nichido is exposed

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to interest rate risk due to its investments in fixed income instruments, particularly bonds, loans and other long-term investments. In addition, it is exposed to interest rate risk due to interest rate sensitive obligations and liabilities, including deposit-type insurance and long-term insurance policies. See “—Assets to meet future obligations”. Tokio Marine & Nichido is exposed to risks of loss because both the market value of fixed income instruments and the present value of its obligations and liabilities may vary when market interest rates fluctuate. The level of interest rate risk of Tokio Marine & Nichido as of March 31, 2006 slightly increased when compared with the level of interest rate risk as of March 31, 2005. This increase was primarily a result of a general change in the interest rate environment.

Equity price risk. Tokio Marine & Nichido is exposed to risks of loss due to equity prices because the value of its equity securities may decline. Most of Tokio Marine & Nichido’s equity investments are primarily in the Japanese market and are intended to be held for the long term. The level of equity price risk of Tokio Marine & Nichido as of March 31, 2006 increased when compared with the level of equity price risk as of March 31, 2005. This increase was primarily a result of increases in Japanese equity prices.

Foreign exchange rate risk. Foreign exchange rate risk is the risk of a loss in the fair values of instruments denominated in a currency other than the Japanese yen, Tokio Marine & Nichido’s functional currency, due to fluctuations of foreign exchange rates. Tokio Marine & Nichido is exposed to foreign exchange rate risk because some of the assets and liabilities are denominated in currencies other than the yen. If the value of a relevant foreign currency declines relative to the yen, the fair value of assets denominated in that foreign currency would decline when expressed in yen terms. If the value of a relevant foreign currency increases relative to the yen, the fair value of liabilities denominated in that foreign currency would increase when expressed in yen terms. Tokio Marine & Nichido’s primary exposure for foreign exchange rate risk is the U.S. dollar, euro and pound sterling. Between March 31, 2006 and March 31, 2005, there was no significant change in Tokio Marine & Nichido’s foreign exchange rate risk.

Tokio Marine & Nichido does not hold physical or derivative commodity positions.

We do not anticipate significant changes in the composition of Tokio Marine & Nichido’s primary market risk exposure or in how such exposure is managed in future reporting periods.

Market Risk Management and Risk Exposure Estimates

Tokio Marine & Nichido’s risk management department, which is independent of its asset management division, is responsible for implementing Tokio Marine & Nichido’s market risk management process. This process includes (i) establishing appropriate controls, policies and procedures relating to market risks; (ii) ensuring appropriate senior management oversight of market risk-taking and risk-controlling activities; and (iii) analyzing, monitoring and reporting market risks.

Tokio Marine & Nichido divides its assets under management into the following three categories for investment and risk management purposes, with investment and risk management policies tailored to each category:

• Assets to meet future obligations;

• Risk assets; and

• Other assets.

Assets to meet future obligations. Assets to meet future obligations are intended to provide reserves for insurance policies, including deposit-type insurance and long-term insurance policies. To ensure that Tokio Marine & Nichido can make required payments on those policies at maturity or lapse without regard to interest rate fluctuations, both the assets and the liabilities must be managed effectively. This is called asset-liability management. Tokio Marine & Nichido undertakes continuing efforts to further enhance its asset-liability

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management system and believes that it maintains a well-controlled portfolio that includes various bonds, loans and interest rate swap transactions used for hedging purposes.

In addition, to enhance its asset-liability management capabilities with respect to deposit-type insurance policies, Tokio Marine & Nichido groups investment deposit contracts primarily by type and duration of insurance policies. Each month, Tokio Marine & Nichido measures interest rate sensitivity for the assets and liabilities in each of these groups. Based upon these measurements, Tokio Marine & Nichido utilizes interest rate swaps in an effort to control the interest rate sensitivity in the assets and the liabilities in each group of investment deposits. As of March 31, 2006, Tokio Marine & Nichido had ¥415 billion net notional amount of interest rate swaps outstanding primarily to hedge its exposure in respect of deposit-type insurance policies. Commencing in April 2005, Tokio Marine & Nichido began to reduce its net notional amount of interest rate swaps and to increase its reliance on debt instrument assets to reduce interest rate sensitivity in respect of deposit-type insurance policies. As of March 31, 2006, the net notional amount of interest rate swaps outstanding in respect of deposit-type insurance policies had decreased by ¥488 billion, as compared to March 31, 2005.

The following tables show the effect of hypothetical changes in interest rates on the present value of the surplus in Tokio Marine & Nichido’s (parent company only) asset-liability portfolio, composed of assets to meet future obligations and reserves for insurance policies, including deposit-type insurance and long-term insurance policies, measured as the difference between the present value of its assets and that of its liabilities (before taxes and future policy dividends) as of March 31, 2006 and March 31, 2005. In its sensitivity analysis model, Tokio Marine & Nichido selects hypothetical changes in interest rates which are expected to reflect reasonably possible near-term changes in those rates. For these purposes, Tokio Marine & Nichido defines “near-term” to mean a period of up to one year from the date of its most recent consolidated financial statements. Actual results may differ from the hypothetical change in interest rates assumed in the following tables, especially since this sensitivity analysis does not reflect the results of any actions that Tokio Marine & Nichido would take to mitigate these hypothetical losses in fair value. Furthermore, the information presented in the following tables was prepared for risk management purposes and does not present the effect of actual changes in interest rates that have occurred in the past or may occur in the future on the financial condition, results of operations or corporate value of Tokio Marine & Nichido.

	Yield curve shift (1)
	As of March 31, 2006
	-1%			±0%		+1%			+2%
	(yen in billions)
General Policy Account	¥	(2.7	)	¥	0.0	¥	(3.3	)	¥	(8.5	)
Deposit-Type Insurance Accounts		(40.3	)		0.0		22.8			38.7
Asset-Liability Portfolio	¥	(43.0	)	¥	0.0	¥	19.5		¥	30.1
	Yield curve shift (1)
	As of March 31, 2005
	-1%			±0%		+1%			+2%
	(yen in billions)
General Policy Account	¥	(13.0	)	¥	0.0	¥	0.8		¥	(2.4	)
Deposit-Type Insurance Accounts		(28.3	)		0.0		23.9			41.5
Asset-Liability Portfolio	¥	(41.2	)	¥	0.0	¥	24.7		¥	39.1

(1) Based on the then-prevailing yield curve for Japanese government bonds on each of the dates indicated.

The change in interest rate risk sensitivity in respect of deposit-type insurance accounts between March 31, 2006 and March 31, 2005 is primarily attributable to a decrease in reserves for deposit-type insurance policies and to a general change in the market interest rate environment. Interest rate risk sensitivity of general policy accounts changed as shown in the above tables primarily due to a general change in the market of interest rate environment between March 31, 2006 and March 31, 2005.

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Assets to meet future obligations are exposed to credit risk and liquidity risk. Credit risk increases when the obligor’s financial condition deteriorates, resulting in defaults or other decline in the value of our assets. In addition to using a corporate rating system, Tokio Marine & Nichido manages credit risk with its Value-at-Credit Risk model to estimate credit risk. Tokio Marine & Nichido’s Value–at-Credit Risk model allows Tokio Marine & Nichido to simulate the quantitative effect of potential credit risk events on its financial condition. We believe this model provides Tokio Marine & Nichido a sound ability to manage its credit risk portfolio. Tokio Marine & Nichido manages liquidity risk by maintaining a portfolio of highly liquid investments and by managing its cash flows.

Risk assets. Risk assets are those investments that are primarily held to generate investment returns rather than for the purpose of asset liability management. Tokio Marine & Nichido’s risk assets include bonds, stocks, derivatives and foreign currency positions in the currencies of industrialized nations.

Each month, Tokio Marine & Nichido measures the risks that result from its risk asset portfolio utilizing the expected shortfall method, at a 99% confidence level over a one-year period. Under this method, Tokio Marine & Nichido estimates the expected loss in the fair value of its risk portfolio based on the occurrence of losses that are outside of the 99% confidence interval, as compared to the value-at-risk of that portfolio, which is estimated based on the occurrence of a loss at the 99% confidence level. Like value-at-risk, the expected shortfall method takes into account market factors to which the market value of the portfolio position is exposed (interest rates, equity prices and foreign exchange rates), the sensitivity of the position to changes in those market factors and the volatilities and correlation of those factors. This method also makes assumptions about market behavior. Assuming a normal distribution, the expected shortfall for the risk assets portfolio, at a 99% confidence level, is calculated based on an adverse market movement that exceeds the standard deviation by a factor of 2.67, while the value-at-risk for the risk assets portfolio, at a 99% confidence level, is calculated based on an adverse market movement that exceeds the standard deviation by a factor of 2.33.

The following tables present the expected shortfall for Tokio Marine & Nichido’s risk asset portfolio for the years ended March 31, 2006 and March 31, 2005.

	Expected shortfall for risk assets portfolio (1)
	Year ended March 31, 2006
Risk category	Average		High		Low		As of March 31, 2006
	(yen in billions)
Interest rate	¥	12.6	¥	14.7	¥	10.5	¥	10.5
Foreign exchange		34.3		40.3		23.6		39.1
Equities		59.3		67.2		52.4		64.7
	Expected shortfall for risk assets portfolio (1)
	Year ended March 31, 2005
Risk category	Average		High		Low		As of March 31, 2005
	(yen in billions)
Interest rate	¥	14.5	¥	20.1	¥	10.9	¥	10.9
Foreign exchange		18.6		22.3		16.4		22.3
Equities		46.3		52.6		40.7		45.7

(1) Calculated over a one-year period and based on a 99% confidence level.

Other assets. Other assets are those held mainly for the purpose of operating the property and casualty insurance business. The profitability of these assets is determined in an integrated manner with the profitability of insurance operations.

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At March 31, 2006, the market value of Tokio Marine & Nichido’s Japanese equity securities constituting other assets was ¥4,767.6 billion, which accounted for 48.6% of Tokio Marine & Nichido’s total investments across all portfolios. Consequently, Tokio Marine & Nichido’s net asset value tends to fluctuate considerably in accordance with price movements in the domestic stock market.

We estimated that a ten percent downward movement in the level of the Nikkei Stock Average would have caused a loss in the fair value of Tokio Marine & Nichido’s other assets of ¥400.4 billion as of March 31, 2006.

Life Insurance Business

We operate our life insurance business primarily through our subsidiaries Tokio Marine & Nichido Life and Tokio Marine & Nichido Financial Life. See “Business—Life Insurance Business”. The following are discussions of market risks relating to the two subsidiaries.

Tokio Marine & Nichido Life

Market Risk Generally

Tokio Marine & Nichido Life accumulates assets from premiums for the life insurance policies it underwrites in advance of being required to make payments for claims under those policies. Tokio Marine & Nichido Life funds the benefits it provides under insurance policies with income generated by its investment portfolio assets. These investments are subject to market risk but are managed under Tokio Marine & Nichido Life’s asset-liability management system.

Investment Objectives

Tokio Marine & Nichido Life invests premiums and deposits received from policyholders in various investments. Its principal investment objective is to effectively control the effect of interest rate fluctuation on the surplus, measured as the difference between the present value of its assets and that of its liabilities, and maintain stable net investment income.

Market Risk Measurement

Interest rate risk. Tokio Marine & Nichido Life’s primary market risk exposure is to potential changes in interest rates. Tokio Marine & Nichido Life defines interest rate risk as the risk of loss in the fair values of interest rate sensitive instruments caused by changes in market interest rates. Tokio Marine & Nichido Life is exposed to interest rate risk due to its investments in fixed income instruments, particularly bonds, policy loans and other long-term investments. In addition, Tokio Marine & Nichido Life is exposed to interest rate risk due to interest rate sensitive obligations and liabilities. See “—Assets to meet future obligations”. Tokio Marine & Nichido Life is exposed to risks of loss because both the market value of fixed income instruments and the present value of its obligations and liabilities may vary when market interest rates fluctuate.

Equity price risks. Tokio Marine & Nichido Life does not have a material equity portfolio.

Foreign exchange rate risk. Foreign exchange rate risk is the risk of a loss in the fair values of instruments denominated in a currency other than the Japanese yen, Tokio Marine & Nichido Life’s functional currency, due to fluctuations of foreign exchange rates. Tokio Marine & Nichido Life is exposed to foreign exchange rate risk because some of its assets and liabilities are denominated in currencies other than the yen. If the value of a relevant foreign currency declines relative to the yen, the fair value of assets denominated in that foreign currency would also decline when expressed in yen terms. If the value of a relevant foreign currency increases relative to the yen, the fair value of liabilities denominated in that foreign currency would increase when expressed in yen terms. Tokio Marine & Nichido Life’s primary exposure for foreign exchange rate risk is the U.S. dollar. However, Tokio Marine & Nichido Life’s asset-liability management seeks to maintain foreign

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currency denominated assets that approximately correspond to its foreign currency denominated liabilities. As a result, any change in foreign exchange rates that affects the value of Tokio Marine & Nichido Life’s foreign currency denominated assets is expected to have an approximately offsetting effect on the value of Tokio Marine & Nichido Life’s foreign currency denominated liabilities. Therefore, Tokio Marine & Nichido Life does not have material exposure to foreign exchange rate risk.

We do not anticipate significant changes in the composition of Tokio Marine & Nichido Life’s primary market risk exposure or in how such exposure is managed in future reporting periods.

Market Risk Management and Risk Exposure Estimates

As risks associated with managing assets and liabilities are becoming increasingly diversified and complex, Tokio Marine & Nichido Life continues to seek to enhance its risk management systems and to adopt more sophisticated methods to manage its various risks. Its risk management section, which is independent of Tokio Marine & Nichido Life’s asset management section, is responsible for implementing Tokio Marine & Nichido Life’s market risk management process. This process includes (i) establishing appropriate controls, policies and procedures relating to market risk; (ii) ensuring appropriate senior management oversight of market risk-taking and risk-controlling activities; and (iii) analyzing, monitoring and reporting market risk.

Tokio Marine & Nichido Life divides its assets under management into the following two categories for investment and risk management purposes, with investment and risk management policies tailored to each category:

• Assets to meet future obligations; and

• Other assets.

Tokio Marine & Nichido Life does not have a material trading portfolio.

Assets to meet future obligations. Assets to meet future obligations are intended to provide reserves for insurance policies. To ensure that Tokio Marine & Nichido Life can make required payments on those policies at maturity or lapse without regard to interest rate fluctuations, both the assets and the liabilities must be managed effectively. This is called the asset-liability management. Tokio Marine & Nichido Life undertakes continuing efforts to further enhance its asset-liability management system and it maintains a well-controlled portfolio that includes various bonds and interest rate swap transactions used for hedging purposes.

To enhance its asset-liability management capabilities with respect to insurance policies, Tokio Marine & Nichido Life groups life insurance and investment contracts primarily by type and duration of insurance policies. Each month, Tokio Marine & Nichido Life measures interest rate sensitivity for the assets and liabilities in each of these groups. Based upon these measurements, Tokio Marine & Nichido Life utilizes interest rate swaps in an effort to control the interest rate sensitivity in the assets and the liabilities in each group of insurance policies. At March 31, 2006, Tokio Marine & Nichido Life had ¥175.2 billion notional amount of interest rate swaps outstanding.

The following tables show the effect of hypothetical changes in interest rates on the present value of the surplus in Tokio Marine & Nichido Life’s asset-liability portfolio, measured as the difference between the present value of its assets and that of its liabilities (before taxes and future policy dividends) as of March 31, 2006 and March 31, 2005. In its sensitivity analysis model, Tokio Marine & Nichido Life selects hypothetical changes in market rates which are expected to reflect reasonably possible near-term changes in those rates. For these purposes, Tokio Marine & Nichido Life defines “near-term” to mean a period of up to one year from the date of its most recent financial statements. Actual results may differ from the hypothetical change in market rates assumed in the following tables, especially since this sensitivity analysis does not reflect the results of any actions that Tokio Marine & Nichido Life would take to mitigate these hypothetical losses in fair value.

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Furthermore, the information presented in the following tables was prepared for risk management purposes and is not indicative of the effect of actual changes in interest rates that have occurred in the past or may occur in the future on the financial condition, results of operations or corporate value of Tokio Marine & Nichido Life.

	Yield curve shift (1)
	As of March 31, 2006
	-1%			±0%		+1%		+2%
	(yen in billions)
Asset-Liability Portfolio	¥	(83.4	)	¥	0.0	¥	49.6	¥	77.7
	Yield curve shift (1)
	As of March 31, 2005
	-1%			±0%		+1%		+2%
	(yen in billions)
Asset-Liability Portfolio	¥	(58.0	)	¥	0.0	¥	37.5	¥	59.7

(1) Based on the then-prevailing yield curve for Japanese government bonds on each of the dates indicated and excludes assets in foreign currencies which are not material.

Between March 31, 2006 and March 31, 2005, Tokio Marine & Nichido Life’s interest rate risk increased primarily due to changes in the composition of its investment portfolio to include more short-term fixed income instruments in anticipation of a rise in interest rates.

Tokio Marine & Nichido Life’s exposure to credit risk with respect to its investment securities which are categorized as assets to meet future obligations is not significant as it invests primarily in government bonds and government-guaranteed bonds and does not invest in corporate bonds. Tokio Marine & Nichido Life is exposed to credit risk in the form of counterparty risk in connection with its interest rate swap transactions. Tokio Marine & Nichido Life manages credit risk that arises from its interest rate swap transactions by entering into collateral arrangements through credit support annexes and managing its collateral on a daily basis.

Other assets. Assets under this category are primarily policy loans and equity investments. The outstanding aggregate amount of policy loans as of March 31, 2006 was ¥30.2 billion. Policy loans are secured by policy liabilities and investment deposits under the respective policies. At March 31, 2006, the market value of Japanese equity securities in this portfolio was ¥0.08 billion, which accounted for 0.004% of the aggregate value of Tokio Marine & Nichido Life’s total investments across all portfolios. Consequently, the effect of price movements in the domestic stock market on Tokio Marine & Nichido Life’s investment assets is not significant.

Tokio Marine & Nichido Financial Life

Market Risk Generally

Tokio Marine & Nichido Financial Life accumulates assets for the variable insurance policies it underwrites in advance of being required to make payments under those policies. Tokio Marine & Nichido Financial Life funds the benefits it provides under variable insurance policies with purchase payments received as well as income generated by investment portfolio assets. The investment portfolio primarily consists of stocks, government bonds and corporate bonds, in both domestic and foreign markets. A significant portion of the benefits provided to policyholders under our variable insurance policies fluctuates depending on the performance of the investment portfolios, which are subject to market risk. Accordingly, policyholders generally take the market risk with respect to the performance elements of these policies. However, Tokio Marine & Nichido Financial Life also guarantees a portion of the benefits provided to policyholders for variable insurance policies, generally taking the form of either death benefits or annuity payment base. In the event the values of our applicable investment portfolios fall below the amounts we are required to guarantee under these policies, Tokio Marine & Nichido Financial Life will be required to fund the deficiencies from its own assets. Tokio Marine & Nichido Financial Life is therefore exposed to market risk with respect to the guaranteed portion of its portfolios and monitors to control this market risk as part of asset-liability management.

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Investment Objectives

Tokio Marine & Nichido Financial Life manages its investment portfolio assets for the guaranteed portion of its portfolios separately from the rest of its portfolios. Tokio Marine & Nichido Financial Life’s principal investment objective with respect to the guaranteed portion is to maintain net asset value and liquidity by controlling risk within an acceptable range.

Market Risk Measurement

Tokio Marine & Nichido Financial Life’s primary market risk exposure is to potential changes in equity prices, foreign exchange rates and interest rates.

Equity price risk. Tokio Marine & Nichido Financial Life is exposed to risks of loss due to changes in equity prices because the value of equity securities held by its investment trusts may decline. Equity investments held by investment trusts of Tokio Marine & Nichido Financial Life are in both the Japanese and foreign markets and are generally intended to be held for the long term. Between March 31, 2006 and March 31, 2005, the level of equity price risk of Tokio Marine & Nichido Financial Life increased primarily as a result of new sales.

Foreign exchange rate risk. Foreign exchange rate risk is the risk of a loss in the fair values of instruments denominated in a currency other than the Japanese yen, Tokio Marine & Nichido Financial Life’s functional currency, due to fluctuations of foreign exchange rates. Tokio Marine & Nichido Financial Life is exposed to foreign exchange rate risk because some of the assets held by its investment trusts are denominated in currencies other than the yen. If the value of a relevant foreign currency declines relative to the yen, the fair value of assets denominated in that foreign currency will also decline when expressed in yen terms. Tokio Marine & Nichido Financial Life’s primary exposure for foreign exchange rate risk is the U.S. dollar and euro. Between March 31, 2006 and March 31, 2005, the level of foreign exchange rate risk of Tokio Marine & Nichido Financial Life increased primarily as a result of new sales.

Interest rate risk. Tokio Marine & Nichido Financial Life defines interest rate risk as the risk of loss in the fair values of interest rate sensitive instruments caused by changes in market interest rates. Tokio Marine & Nichido Financial Life is exposed to interest rate risk due to its investments through its investment trusts in bonds. Tokio Marine & Nichido Financial Life is exposed to risks of loss because fluctuation of market interest rates affects bond prices. Between March 31, 2006 and March 31, 2005, there was no significant change in Tokio Marine & Nichido Financial Life’s interest rate risk.

We do not anticipate significant changes in the composition of Tokio Marine & Nichido Financial Life’s primary market risk exposures in future reporting periods. However, Tokio Marine & Nichido Financial Life may change the way it manages its risks through the use of hedging instruments or risk transfers as its exposure increases in future reporting periods.

Market Risk Management and Risk Exposure Estimates

The risk management committee of the board of directors of Tokio Marine & Nichido Financial Life is responsible for implementing Tokio Marine & Nichido Financial Life’s market risk management process. This process includes (i) establishing controls, policies and procedures relating to market risk; (ii) ensuring appropriate senior management oversight of market risk-taking and risk-controlling activities; and (iii) analyzing, monitoring and reporting market risk.

The guaranteed portion of Tokio Marine & Nichido Financial Life’s investment portfolios is intended to provide reserves for required payments under variable annuity and variable life insurance products. The required payments generally include guaranteed death benefits, and in some cases annuity payment base, and to ensure that Tokio Marine & Nichido Financial Life can make such required payments without regard to market fluctuations, both the assets and the liabilities must be managed effectively. Tokio Marine & Nichido Financial Life is continuing to implement a range of strategies to reduce market risk, including by modifying products,

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taking into account factors such as solvency margins and risk discount rates, creating new investment portfolios for certain products by increasing the ratio of fixed income securities, utilizing derivatives to hedge risks associated with certain products and preparing to expand reinsurance.

The following tables show the effect of hypothetical changes in equity prices, the present value of our foreign currency-denominated assets and interest rates on the present value of the surplus in Tokio Marine & Nichido Financial Life’s asset-liability portfolio, measured as the difference between the present value of its assets and that of its liabilities (after taxes) as of March 31, 2006 and March 31, 2005. Tokio Marine & Nichido Financial Life selects hypothetical changes in market rates which are expected to reflect reasonably possible near-term changes in those rates. For these purposes, Tokio Marine & Nichido Financial Life defines “near-term” to mean a period of up to one year from the date of its most recent financial statements. Actual results may differ from the hypothetical change in market rates assumed in the following tables, especially since this sensitivity analysis does not reflect the results of any actions that Tokio Marine & Nichido Financial Life would take to mitigate these hypothetical losses in fair value. Furthermore, the information presented in the following tables was prepared for risk management purposes and is not indicative of the effect of actual changes in equity prices, the present value of our foreign currency-denominated assets and interest rates that have occurred in the past or may occur in the future on the financial condition, results of operations or corporate value of Tokio Marine & Nichido Financial Life.

	Equity price change
	As of March 31, 2006						As of March 31, 2005
	-10%			±0%		+10%	-10%	±0%	+10%
	(yen in billions)						(yen in billions)
Asset-Liability Portfolio	¥	(5.5	)	¥	0.0