Sompo Holdings Inc

TSE:8630

Earnings Call Transcript 2021-Q2

[Osamu Nose, executive]

Good afternoon, I am Nose from Sompo Holdings. Thank you so much for calling in despite of your busy schedule today. I am going to explain the results of the first half of FY 2020 and the guidance for the full year, mainly around numbers. For your information, the management, including CEO, are going to talk about the progress of the medium-term management plan and the direction of the next midterm plan in the web meeting to be held next week.

Let's get right into Page 2. This page shows the highlights. In the first half of FY 2020, consolidated ordinary profit has increased by JPY 13.7 billion to JPY 77.5 billion, mainly driven by the improvement of loss ratio on the back of people refraining from going out by car.

On the other hand, we have revised our guidance for the full year to consolidated ordinary profit of JPY 223 billion, and the consolidated net income to JPY 140 billion. We have scrutinized the impact from COVID-19, which resulted in the negative impact of around JPY 8 billion, which is JPY 6 billion better compared to the forecast at the beginning of the year, and incorporated the negative impact from natural disasters happening frequently overseas recently. Base profitability, excluding these impacts, is continuously solid.

With regards to the shareholders' return to this fiscal year's results, we have shown JPY 160, up JPY 10 year-on-year so far. However, we have revised it up to JPY 170 per share, which is up JPY 20 per share year-on-year.

Please turn to Page 4. This page shows the numbers of the results in the first half of FY 2020. I will go through the major points from the following page.

Please turn to Page 5. This shows underwriting profit of Sompo Japan. Thanks to the decline of the loss ratio of the voluntary automobile line, it increased by JPY 55.4 billion year-on-year.

Please turn to Page 6. Investment profit. In the last fiscal year, we posted gains from sales of bonds when interest rates fell, but we don't have that effect in this fiscal year. The income from funds declined due to the impact from COVID-19. As a result, investment profit was JPY 37.8 billion.

Please turn to Page 7. Let me go through the main points of consolidated ordinary profit. Other than underwriting profit of Sompo Japan and investment profit, which I have just explained, Sompo International posted provisions related to COVID-19. The policies in force of Himawari Life increased. And the productivity of nursing care business has improved. As a result, consolidated ordinary profit was JPY 77.5 billion, up JPY 13.7 billion year-on-year.

For your information, numbers shown for Sompo International include noise caused by posting changes in unrealized profits and losses of assets under local GAAP.

For consolidated net profit, please take a look at -- on Page 8 later on.

Please proceed to Page 9. Let me talk about the business forecast for FY 2020. As I mentioned at the beginning, we have revised our forecast, reflecting the impact from scrutinizing the impact from COVID-19 in more detail. Please go to the next page for the major changes in the division.

Please go to Page 10. This page summarizes the impact from COVID-19. In the initial guidance, we included negative JPY 14 billion as a negative impact from COVID-19 that we were able to surely estimate at that time. This time, we included the impact from lower loss ratio of voluntary automobile line of Sompo Japan and provisions posted by Sompo International, lower commission at Himawari Life, lower income from investments and so forth. As a result, we included around JPY 8 billion negative impact from COVID-19, which is better by JPY 6 billion compared to the projection at the beginning of the year.

For your information, at the end of the first half, the impact on the whole group was around JPY 5 billion as actual.

Please move to Page 11. On this page, let me supplement factors behind the division other than COVID-19 related. For Sompo Japan, we included the impact from the improvement of base growth ratio, mainly in new insurance lines other than the impact from COVID-19. For Sompo International, we newly included the impact from high frequency of nat cat overseas.

On Page 12, we are showing the breakdown of consolidated ordinary profit. On Page 13, we are showing historical progress rates for the past 5 years. On Page 14, we are showing numerical management targets, et cetera. So please refer to them later on.

This completes the explanation of the consolidated results. Next, I am going to explain about the domestic P&C insurance business.

Please turn to Page 16. This is the overview of the results of Sompo Japan. I will explain each item on the following pages.

Please turn to Page 17. This page shows net premium written. Due to the COVID-19, the personal accident was down because of the onetime factors, such as the lack of large policies for new products and others. The net premium written declined, excluding CALI and household earthquake. At the same time, with the higher rate that was changed in January 2020, the voluntary automobile is up, which is the major item. And as for fire insurance, due to the rate change in October 2019, it increased. So basis is stable.

Next page shows the loss ratio earned and incurred. As people stayed home, voluntary automobile loss ratio declined. First half earned and incurred loss ratio was 57.7%, down 5.3 points. Due to the same reasons, we expect the full year forecast to be lower. Next page shows the loss ratio written paid.

Please turn to Page 20. This page shows net expense ratio due to the consumption tax hike and others. First half net expense ratio was 33.8%, up 0.8 points. At the same time, the company expense is well-controlled.

Page 21 shows combined ratio. This is for your reference.

Please turn to Page 22. This shows investment profit. I already explained the first half results on Page 6. If I may add some comments on the reduction of the strategic holding stocks. In first half, we sold 22.5 billion spot shares, combined with the hedge by selling stock futures, the total reduction was JPY 61.5 billion. For the full year forecast, based upon the lower interest and dividend income due to COVID-19, we expect the investment profit to be JPY 110.6 billion, JPY 29.3 billion lower than initial forecast. As for the lower dividend from Sompo International, I might add that this would be under the elimination item on a consolidated basis.

Next page shows interest and dividend income and gains on sales of securities. Please turn to Page 24. This shows the list of business forecast of Sompo Japan. The following page, Page 25, shows the data related to automobile insurance. This is for your reference.

Please turn to Page 26. Some additional comment on domestic natural disasters. In the first half, gross incurred loss was JPY 63.5 billion. Net incurred loss was JPY 45.5 billion. There were impacts of the typhoon #10 and torrential rain in July, but with the functioning reinsurance coverage, those are mostly in line with initial forecast. The domestic natural disasters total number for the full year remains the same at JPY 60 billion.

Next page shows fund and reserve. This is for your reference. That's all for domestic P&C insurance. Let me move on to the overseas insurance.

Going to Page 29. This shows the overseas insurance. First half adjusted profit was JPY 7.4 billion, down JPY 20.2 billion as Sompo International booked underwriting reserve in relation to COVID-19 and the fund dividend lowered. For the full year, revised forecast is downward revision from JPY 51 billion to JPY 27.5 billion based on the same reasons.

Page 30 shows the highlight of business results by company.

Please turn to Page 31. Some additional comments on Sompo International business results. On this page, numbers are shown in U.S. dollars. First half top line, with the significant rate increase, was quite steady and strong. As for the adjusted profit, as I mentioned, in addition to the COVID-19 impact, there were impact from the natural disasters. As a result, adjusted profit declined year-on-year. Based on the same reasons, we revised the full year forecast.

Next page shows the overview of Sompo International business results. This is for your reference. That concludes the overseas insurance business. Let me turn to domestic life insurance.

Page 34. This is Himawari Life. Due to the COVID-19, the premium income declined, but with lower expense, the first half net income increased JPY 2.4 billion to JPY 11.9 billion. With the launch of new medical insurance products, the latest annualized new premium is positive year-on-year. Based on those factors, we made upward revisions to the full year forecast of ordinary profit and net income.

Next page shows the changing factors of net income of Himawari Life. Page 36 shows additional information about the adjusted profit. That's all for the domestic life insurance. Let me now turn to Nursing care and Healthcare.

Page 38. This shows nursing care and healthcare. In relation to COVID-19, we paid special allowances to the nursing staff. And as a result, the first half net income of nursing care business was JPY 2.3 billion, down JPY 0.2 billion. As for the full year, the speed of improvement of occupancy rate slows down. However, the net income expected for the nursing care is in line with the initial forecast.

We have the trend of occupancy rate shown on Page 39. That's all for the nursing care and healthcare.

Lastly, let me move on to the ERM and asset management on Page 41. This is the ESR status. In addition to rising stock prices and the interest rate, we try to reduce the strategic holding stocks and interest rate risk. At the end of September 2020, ESR was 248%. We continue to see the financial soundness.

On Page 42, we have the breakdown of adjusted capital and risk, this is for your reference.

Please turn to Page 43. Lastly, let me talk about asset portfolio based on the group consolidated basis. The following pages show the asset portfolio of Sompo Japan, Sompo International and Himawari Life. Those pages are for your reference. Each company has the portfolio based upon the stability forecast.

That concludes my presentation. Thank you for your attention.

[Unknown Executive]

The first questions are from SMBC Nikko Securities.

[Masao Muraki, analyst]

I am Muraki from SMBC Nikko Securities. My first question is on Sompo International. I'm on Page 31, you are showing the graph. At the top on the right-hand side, adjusted profit which was revised down and other factors behind. $175 million is the underwriting profit impact. Impact on COVID only is around $100 million. So in other areas, there should be some deterioration somewhere. You talked about natural catastrophes. But is there any risk going forward that this trend may continue in the future?

And on top of that, at the bottom on the left-hand side, top line assumption. At the beginning of the year, you were planning 13% increase of the top line at the beginning, but now you are revising up dramatically to 27% up year-on-year in terms of the top line. What has changed from the beginning of the year to now? So that's my first question.

[Osamu Nose, executive]

Mr. Muraki, thank you so much for your question. To your first question, Sompo International results and change from the initial guidance to this guidance. First, underwriting profit shows negative. As Mr. Muraki mentioned, they have put additional provisioning for the reserve due to COVID-19 in the first half. They have not received actual applications for the claims payment, but due to the events being canceled, they have put additional provisioning to the reserve this time. So that's the first impact.

And the second impact, as you alluded in your question, natural catastrophes, impact from nat cat is another factor for the deterioration. As you know, in this fiscal year, in the third quarter in particular, they had hurricanes. Because of that, in the United States, there's frequency increasing of natural catastrophes. Therefore, in the process of revising our projection, we have incorporated the impact from the higher frequency of natural catastrophes in the United States.

Does this continue in the future as a risk? To that question, in principle, we think this is one-off, natural catastrophe frequency is one-off. So we are working on diversification of the regions when we do the underwriting of policies. So we expect the natural catastrophe situation to improve going forward.

To your second question, which is about the top line assumption change, you are right. At the beginning of the year, we were assuming 13% top line growth. On the other hand, this time, we are assuming 27% top line growth, which is a significant increase. As I mentioned in the telephone conference in the past, when we make the initial guidance, the insurance business of SI assumed about 8% rate increase. And actually, at the end of the first half, from the beginning of the year, the price increase has been much higher, which is around more than 20% premium increase that they have been achieving. Therefore, we have revised our assumption for the top line growth as written on this page, in the process of revising our projection. I hope I answered your question.

[Masao Muraki, analyst]

My second question is a simple one. You announced dividend increase. At the end of the first half, have you studied the buyback? Have you discussed the potential buyback?

[Osamu Nose, executive]

Thank you for your second question. Mr. Muraki, your question was related to shareholders' return based upon the first half results. In the first half or at the end of the first half, in the company, we have studied whether we should do the buyback or not. And ultimately, we decided not to do it. That's because there may be some [ snow ] loss in the future, which is uncertain at this point.

In addition, when we think about shareholders' return, our concept is to return the flow of profit back to shareholders. Therefore, depending upon the allocation of the flow of profits, we decided not to do the buyback at the end of the first half. But instead, in May, when we close our financial book for the full year, we'd like to return bonds back to our shareholders, as usual. I hope I answered your question.

[Unknown Executive]

I'd like to move on to Ms. Tsujino of Mitsubishi UFJ Morgan Stanley Securities.

[Natsumu Tsujino, analyst]

So about the domestic auto business, the current status, year-on-year, JPY 40 billion improvement in the first half was achieved. So as of now, the full year forecast, what are the forecast? And what are you foreseeing right now for the full year? That's my first question.

[Osamu Nose, executive]

Thank you very much, Ms. Tsujino. First question is about the domestic voluntary insurance -- automobile insurance. For the full year, what kind of a situation do we expect for the full year? As you know, from April to May, during the state of emergency, the number of accidents significantly declined. And after the state of emergency was lifted, the reduction was not as much as April to May, but we continue to see the lower accidents year-on-year and this continued. And in the second half, we expect about 5% decline in the volume of accidents. Thank you for your question.

[Natsumu Tsujino, analyst]

So if you only look at the second half year-on-year, it's like JPY 10 billion improvement.

[Osamu Nose, executive]

Yes, you're correct.

[Natsumu Tsujino, analyst]

I see. My second question is about SI. On Page 31, it shows that the revision for SI is JPY 17.5 billion. And the breakdown is, first of all, COVID is JPY 10 billion and natural disaster, JPY 6 billion. Is that correct?

[Osamu Nose, executive]

Yes. As for the Sompo International, the revision from the first half to the full year is your question. In relation to COVID-19, before tax, JPY 12 billion is the impact of the booking of the provision, and the natural disaster impact is JPY 6 billion to JPY 7 billion. So as you pointed out, those 2 are major 2 factors. There's no question about that.

[Natsumu Tsujino, analyst]

So underwriting COVID-19, this is basically IBNR. It seems that the number could be very small. And in the U.S., there are fewer lawsuits in relation to BI, so credit and [ assurity ], and is this something that you expect to see in the future? Or do you already see something in -- during July to September time frame?

[Osamu Nose, executive]

Thank you. So for International, COVID-19 provision is what you are asking about. First, looking at the claims, it is still a couple of million dollars. So as you said, IBNR provision is what that is. And as for the second half, concerning BI, as we explained before, transparency or the lack of transparency in terms of the wording is not something that we are concerned about. But for example, BI in relation to the infectious diseases, this is something that we hold. So those are the claims that we expect in the future. So that is something that is included. That's one thing. Another thing is short -- rather than surety, it is a trade credit. Depending on how the economy does, we have some additional buffer of the provision. That is the current status.

[Unknown Executive]

Next questions are from Daiwa Securities.

[Kazuki Watanabe, analyst]

I'm Watanabe from Daiwa Securities. I have 2 questions. First question is on Page 10, impact from COVID-19. We are putting scenarios, what has changed from the last assumptions? We have concerns about the potential third wave of COVID-19 in Japan. How are you assessing the risk? And in the domestic market, voluntary automobile line, how much became higher compared to the previous assumption? That's my first question.

[Osamu Nose, executive]

Mr. Watanabe, thank you so much for your question. To your first point, which is scenarios related to COVID-19, what has changed from last time? At the beginning of the year, we thought COVID would be contained by the end of the year, and economic activities would resume gradually. That has been the scenario, as was written on the page before. But this time, it seems that COVID may not be contained by the end of the year completely. It's not realistic. It's difficult for us to assume full recovery of the economic activities. So we decided not to put any assumption behind the COVID situation.

And with regards to the economic activities, as mentioned by research institutes, GDP growth is going to be negative growth year-on-year. And on the investment side, we are assuming the continuation of the financial markets as of the end of September going forward. That's the answer for your first point -- first question.

[Kazuki Watanabe, analyst]

And the second question, which relates to the improvement of the voluntary automobile line. In the first half, the positive amount was around JPY 30 billion from the voluntary automobile line, after tax, JPY 30 billion positive impact in the first half. So how is it compared to the last time? How much have you increased from the last initial projection?

[Osamu Nose, executive]

Change from last time is as follows. First, in the last time, when we tried to forecast the impact from COVID-19, as you can remember, we only included impact from COVID-19 that we were able to estimate for sure. And we also showed some range, which includes potential impact that we could not foresee for sure. And due to the traffic volume change, there should be an impact, but we did not include that in the forecast, initially. So to your question, Mr. Watanabe, we assumed 0 loss ratio improvement. But we are now including the loss ratio improvement this time, which is JPY 30 billion.

[Kazuki Watanabe, analyst]

My next question is on ESR, Page 42. How much is the impact from the share price of Palantir? And ESR is near the upper line. Are you going to study the potential shareholders -- additional returns to shareholders in the future because ESR gets near upper limit?

[Osamu Nose, executive]

Thank you so much, Palantir impact, share pricing impact and ESR is near the upper limits. Is there any plan to adjust the capital? In terms of the Palantir share price, as you know, in the last term, this is a very important part of our data platform. So we invested in Palantir. And after the listing of Palantir, share price has been increasing. So the share price at the end of September was $9.5, which is plus 3 points on ESR, impacts on ESR was plus 3 points.

To your second question, the current level of ESR and a potential plan to adjust capital going forward. Under the current framework of the medium-term management plan, we have no plan to change the framework dramatically. So in the next midterm plan, right now, we are in the process of discussing what should be the policy of the shareholders' return. So in the IR meeting next week, we are going to show some direction or in May next year, when we announce our medium-term management plan, we are going to announce the details. We'll be able to explain in more details.

[Unknown Executive]

Next is from Mizuho Securities, we have Mr. Sato.

[Koki Sato, analyst]

This is Sato from Mizuho Securities. On Page 10, I have one question. Based on the accounting, the impact on the net income, it was already explained. In the previous briefing session, the -- based on the adjusted profit, what was the impact, could you explain that, I'm talking about the full year forecast?

Also, domestic P&C insurance on Page 10, on the right-hand side, up to first half, JPY 23 billion positive impact and JPY 12 billion for the full year. So second half is negative. Could you explain the factors behind those numbers? That's my first question.

[Osamu Nose, executive]

Thank you very much, Mr. Sato. First question is on COVID-19 impact on Page 10. We have a J-GAAP based one, but you're asking about the adjusted profit base and the full year forecast. First, the adjusted profit basis, let me explain now domestic P&C insurance full year adjusted profit number right now. So based on the adjusted profit, domestic P&C, JPY 28 billion positive. And as for the overseas insurance adjusted profit, minus JPY 19 billion for the overall overseas and SI is minus JPY 17 billion. Domestic life insurance, minus JPY 1.5 billion and nursing care, minus JPY 1.5 billion, the total is positive JPY 6 billion. So that is based upon the adjusted profit.

[Koki Sato, analyst]

So the second question is on the negative impact on the second half forecast. Could the ordinary underwriting reserve be one of the negative factors? So that's what I would like to ask in my question.

[Osamu Nose, executive]

So based on today's full year forecast, we do not expect the impact from the ordinary underwriting reserve.

[Koki Sato, analyst]

The second question is very simple one. You have Excel data sheet the reduction of the strategic holding stocks, and that was JPY 72 billion. I think originally, you said JPY 100 billion. So the reduction of the strategic holding stock, you lowered the target, and could you explain the reasons behind it?

[Osamu Nose, executive]

Yes. Thank you. So it's about the strategic holding stocks and our target of reduction of this -- for this year. As you said, concerning this, JPY 100 billion per year is something that we have been trying in medium-term management plan. And as for the first half, as you saw in my presentation, the spot sales, JPY 22.5 billion was the result in the first half. First half, we had the impact of the COVID-19. So negotiation and also the status of the counterparty companies, it was very difficult to make progress. In the second half, as we did then to now, we will be selling. So as for the lower number in the first half, we are not going to rush and try to fill the gap. So about JPY 2 billion is expected. But in fiscal 2018, we accelerated the sale of the strategic holding stocks. So JPY 500 billion in 5 years have already been achieved. And with that, that then, my answer to your question.

[Koki Sato, analyst]

A follow-up question. Just one point. So based on what you explained, do you have enough stock of shares that you can reduce? And next year and onwards, do you think you can go back to the level of JPY 100 billion per year? Is there a risk that you cannot go back to that level?

[Osamu Nose, executive]

Right. About the sale and the reduction of the strategic holding stocks in next year and onwards. About the next year and onwards, this should be in the next medium-term management plan. So to what extent we'll be reducing the strategy holding stocks, that is something that is being discussed right now. Well, the portion of the strategic holding stocks, the portion has not yet depleted. And as of now, we continue to aggressively negotiate about this. So our efforts in reducing the strategic holding stocks, we do not expect that this will be difficult to do in the next year and onwards because of the COVID-19.

[Unknown Executive]

Next questions, JPMorgan Securities.

[Wataru Otsuka, analyst]

I'm Otsuka from JPMorgan Securities. I have one question. My question is on the thinking behind the guidance for the next fiscal year. Towards the next fiscal year, are there any items to be changed from this year?

Page 25, domestic voluntary automobile insurance line, the combined ratio is somewhat too good. Because of the loss reduction, so this may come back up. And on Page 31, underwriting profit, due to natural catastrophes and COVID, there were impacts, but those impacts were one-off. So in the next fiscal year, there will be absence of those which will push up the earnings over the next fiscal year. Am I thinking those elements correctly?

[Osamu Nose, executive]

Mr. Otsuka, thank you so much. Changes from this year to next year, swing factors when we think about our projection for the next fiscal year. First, impact from COVID-19. Roughly speaking, what you have just mentioned is correct. Domestic voluntary automobile insurance, in the next fiscal year onward, what will be so-called the new normal in the next fiscal year onward, we don't know at this point. But assuming that decision does not change so much from here, under the state of the emergency, the loss ratio has declined so much in the voluntary automobile insurance in this fiscal year, but that may not repeat in the next fiscal year. But other than that, there is no same factor on a year-on-year basis.

For the overseas business, with regards to the COVID-related reserve, once we put the provisioning to the reserve for the next fiscal year onward, it's all clear. So it's all onetime. So this will recover because those are onetime elements and the same thinking for the natural disasters for Sompo International. Other than those, domestic P&C business, there are some portions where we don't know whether the impact is from economy or impact is from the COVID. But overall, in the next fiscal year, some of the COVID impacts may repeat, some of the impacts may not repeat. So I think we have some potential upside from this year to next year, considering all of those factors.

[Wataru Otsuka, analyst]

My additional question, if I may, Page 31. SI, premium pricing image in the next fiscal year. In this fiscal year, they have been successfully increasing the rates. Do you think they can raise the premiums continuously in the next fiscal year?

[Osamu Nose, executive]

Thank you for your question. In SI, for the next fiscal year, it's a year ahead, so I cannot assert for sure at this point. But judging from the current hardening cycle, meaning price increase cycle that is happening now, I think that will continue heading into the next fiscal year. On the other hand, they have succeeded in a dramatic rate increase this year. Are we going to see the same magnitude of the impact? It's too early to tell. That's all.

[Unknown Executive]

Next is Mr. Sasaki from BofA.

[Futoshi Sasaki, analyst]

A very simple one question. Besides COVID-19 additional provision that you booked, specifically, what kind of events do you foresee to do this, could you elaborate on that?

[Osamu Nose, executive]

Thank you very much, Mr. Sasaki. So the question about IBNR of the Sompo International. As I mentioned earlier, this impact of COVID-19, we have not yet received any claims. But depending on the exposure, we increased IBNR base conservatively. As for the items, as I said, the business interruption, the appropriate rate is set in some of the policies based on the infectious diseases and we expect some claims to come in. So we have some reserve for that. And credit trade, due to the deterioration of the businesses due to COVID-19, we increased the reserve in a conservative manner because we expect that.

[Futoshi Sasaki, analyst]

I'd like to know why now. So why did you increase the IBNR in relation to COVID-19 at this timing? In the previous briefing sessions, we understood that you mentioned that the COVID-19 impact on SI is limited. But probably in the previous briefing session, you already saw this COVID-19 impact. However, you are increasing the IBNR at this timing at the end of September. So what kind of events do you expect to occur?

[Osamu Nose, executive]

Yes. Thank you. So at the -- in the first half, what we considered is the situation of the Sompo International from January to June. At the time of the first quarter, January to March was included. So at the end of March, IBNR, there were no rational recognition to increase the provision. But April to June, many things became more clear. So this time, we decided to increase the provision that is the background.

[Unknown Executive]

Citigroup Securities, Mr. Niwa, please.

[Koichi Niwa, analyst]

I am Niwa from Citigroup. My question does not relate to the results of the first half. If you can comment, please, which is on the pricing strategy of the voluntary automobile business. At the beginning, you mentioned that you were starting to potentially lowering the price. But what will be the potential impact from lowering the premiums in the voluntary automobile business on the results going forward?

[Osamu Nose, executive]

Mr. Niwa, thank you so much for your question. Your question was on the pricing strategy of the domestic voluntary automobile business. Going forward, in 2021, in January, on the average, we are going to lower the price by 0.5% on the average, which has been reported in the media. And in the future, as Mr. Niwa mentioned, probably are you asking about potential refund that we see overseas? Or is there any advisory rate to go down in the future? I think those are the elements in your question.

But first, for retail policyholders, the discount grade will be improved for corporates. Annual result rating, discount grade will be improved. So to some extent, the premiums will be lowered in the form of better discount grades. Is there any impact to be incorporated in the advisory rating? It's up to the advisory rating organization. So we'd like to refrain from commenting. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]