Sompo Holdings Inc

TSE:8630

Earnings Call Transcript 2022-Q2

[Osamu Nose, executive]

Ladies and gentlemen, thank you very much for joining us to the conference call of Sompo Holdings. I am the speaker today, the Head of IR, Nose. Based on the material, I will go through the presentation for about 20 minutes and then proceed to the Q&A session. For your information, with regards to the progress of the medium-term management plan, CEO and the management team will talk about it in the IR meeting to be held on November 25, next week.

Now let's get right into Page 2. This page shows the highlights. In the first half of FY 2021, consolidated ordinary profit increased by JPY 113 billion to JPY 190.5 billion, driven by higher profit of Sompo Japan and Sompo International as well as gains from partial sales of stocks held at the holdings. We have revised our full year forecast for FY 2021 upward to consolidated ordinary profit of JPY 267 billion and consolidated net income of JPY 178 billion. Main reasons for the upward division include the impact from the partial sale of stocks in addition to reflecting the progress of each business area.

With regards to the shareholders' return, we have disclosed today, as you can see in the public release, we decided to conduct the buyback of JPY 20 billion. This is the additional return in line with our shareholders' return policy because the latest capital surplus is expected to stably exceed the estimated level being assumed in the medium-term management plan.

Please turn to Page 4. This page shows the review of the first half of FY 2021. I am going to go through the major points on the next page onwards.

Please turn to Page 5. This page shows the underwriting profit of Sompo Japan. Underwriting profit increased by JPY 11.9 billion year-on-year, driven by a decrease in the domestic natural disasters, in spite of some rebound from the loss ratio decline due to the impact from COVID-19.

Please turn to Page 6. This page is on the investment profit. Investment profit has increased by JPY 13.8 billion year-on-year, mainly due to an increase in net interest and the dividend income on the back of higher distributions from the funds.

Please turn to Page 7. Consolidated ordinary profit. Other than underwriting profit of Sompo Japan and investment profit I explained on the previous pages, we had the impact from the top line growth from Sompo International and the higher profit from the absence of the COVID-19 impact we had last year, in addition to the positive impact from partial sale of stocks held at the holdings. As a result, consolidated ordinary profit increased by JPY 113 billion year-on-year to JPY 190.5 billion.

Let me add that the numbers of our overseas subsidiaries include some noise associated with accounting for the changes of unrealized gains and losses of assets under the local accounting principles of Sompo International. We show the consolidated net income on Page 8. So please take a look later on.

Please turn to Page 9. Let me next talk about our full year forecast for FY 2021. As I mentioned at the beginning, we have revised our guidance upward, reflecting the impact on the partial sale of stocks held at the holdings and the progress of each business area.

Let me explain in more details, the main points of the division on the following page. Please turn to Page 10. We have revised our guidance for Sompo Japan, reflecting the decline of large losses in the first half and steady net interest and the dividend income. We have also incorporated the impact from partial sale of stocks held at the holdings in consolidated adjustments and others.

On Page 11, we show the breakdown of consolidated ordinary profit. On Page 12, we show the historical progress rates of quarterly results. On Page 13, we show numerical management targets on the adjusted profit basis. Please confirm them later on. This completes the explanation of the consolidated results and the forecast.

Next, let me move on to the explanation about the domestic P&C business. Please turn to Page 15. First off, the overview of the results of Sompo Japan. Let me explain each item on the next page onwards.

Page 16, please. This page shows the net premiums written. Net premiums written, excluding household earthquake [indiscernible], increased by JPY 20.8 billion year-on-year. In addition to the increase in net premiums written in fire, driven by optimization of pricing, we are keeping the momentum in other lines. Net premiums written in auto, our main product segment, trended steadily with the benefits from pricing optimization.

Please turn to Page 17. Net loss ratio on the earned incurred basis. While accident rate rose due to the partial decline in the COVID-19 impact, earned incurred loss ratio improved by 0.9 point to 56.8% due to a decrease in the domestic natural disasters. The earned income loss ratio forecast for the full year is roughly around the same level as the assumption we had at the beginning of the year. We have the loss ratio on the written basis on the next page. So please take a look at later on.

Please turn to Page 19. Here is net expense ratio. Net expense ratio of the first half increased by 0.1 point to 34.0%, mainly due to depreciation cost of new systems. But the ratio, particularly company expense ratio, is in good shape against the plan. Full year forecast is 34.9% or up 0.1 points against initial forecast. Please check the Page 20 later for combined ratio.

Please turn to Page 21. Investment profits and losses. I explained about the first half results on Page 6. As to strategic holding stock, JPY 5.9 billion worth spot was sold. Combined with stock future hedge, strategic holding stock was reduced by JPY 19.9 billion. The full year forecast, factoring in a good level of net interest and dividend income is JPY 141.1 billion or up JPY 20.4 billion against initial forecast. Please refer to the next page for the details of interest and dividend income and gains and losses on sales of securities.

Please turn to Page 23. Business focus of Sompo Japan. Please refer to the next page, Page 24, as well, which illustrates automobile insurance-related data.

Please turn to Page 25. Let me give supplementary information about domestic natural disasters. Gross incurred loss in the first half was JPY 28 billion and net incurred loss was JPY 26.5 billion. While there was some impact from torrential rain in August, damaged by typhoons decreased. As to full year forecast of domestic natural disaster, it's set at JPY 73 billion, factoring in potential impact from snow. Next page is reference data of funds and reserves. Please check it later.

So much for domestic P&C business, moving on to overseas insurance business. Please look at Page 28. Overseas insurance. Sompo International saw its profit increase with increasing revenue due to rate increase, less impact from the pandemic compared to last year and improving investment results, mainly driven by these factors, adjusted profit of overseas insurance was JPY 35.1 billion or up JPY 27.7 billion year-on-year. Given natural disaster impact, including Hurricane Ida and the performance progress of overseas group companies, full year adjusted profit is expected to be JPY 56.5 billion. Please look at Page 29 later for business results by region.

Please turn to Page 30. Some additional comment for business results of Sompo International. The figures on this page are in the U.S. dollar. In the first half, top line grew steadily with rate increase, increasing share of profitable products and consolidation of diversified U.S. crop insurance company. And as I mentioned earlier, adjusted profit progressed steadily, supported by increasing revenue, easing pandemic impact and improving investment results. Full year adjusted profit is expected to be in line with initial forecasts with impact such as U.S. hurricane Ida in reflected.

Next page shows numerical data of Sompo International for your later reference. So much for overseas insurance business, please move on to Page 33 for domestic life insurance business. Himawari Life. With in-force business of protection-type product increasing, adjusted profit of the first half increased by JPY 0.4 billion to JPY 18.5 billion. New business, in particular, insure health product, grew steadily with revenue increasing by 16% year-on-year.

Net income in the first half decreased by JPY 1.8 billion, partly due to business expense increase along with new business increase. As a result of reviewing each item based on performance progress, full year forecast of net income and adjusted profit remains unchanged from the initial forecast. Next page shows increase and decrease factors of net income of Himawari Life. And Page 35 gives additional information on adjusted profit. Please check those pages later.

So much for domestic life insurance business, please move on to Page 37 for nursing care and seniors business. Nursing care and seniors business. Last fiscal year, we paid out extraordinary allowance to the facility staff due to the COVID. With no such impact in the first half of this year, adjusted profit of nursing care and seniors increased by JPY 0.2 billion to JPY 2.5 billion. With a steady improving occupancy ratio, full year forecast of adjusted profit for nursing care and seniors is expected to be in line with initial forecast. Please check Page 38 for the trend such as occupancy rate.

So much for nursing care and seniors business, lastly, please move on to Page 40 for ERM and asset management. Skipping some pages, please go to Page 40.

The status of ESR. As of the end of September 2021, ESR stood at 252%. Accumulated profit and reduced strategical shareholding and interest rate risk paid off. Our financial soundness remains intact. Please check Page 41 later for the breakdown of adjusted capital and risk.

Please turn to Page 42. Lastly, group consolidated base asset portfolio. The following page show asset portfolios of Sompo Japan, Sompo International and Himawari Life. Please read them later. The portfolio of each company remains focused on safe investment.

That concludes my presentation. Now we move on to Q&A session.

[Operator]

The first question is from Mr. Muraki, SMBC Nikko Securities.

[Masao Muraki, analyst]

This is Muraki from SMBC Nikko. My first question is on your capital policy. On Page 40, you are explaining that partial sale of Palantir stocks. How much percentage points have you included from that in ESR? And thank you so much for this additional buyback and the return to shareholders. But what is the condition and a circumstance where we can expect additional more return?

I think in the new medium-term management plan, you have shown 4 triggers. For example, ESR above 275%, no large M&As and necessity to improve capital efficiency. But what was the trigger that was infringed that triggered you to make a decision on the additional return? So that's my first question on the capital policy.

[Unknown Executive]

Mr. Muraki, thank you so much for your question. In the material, we simply say a partial sale of stocks held at holdings. But due to the partial sale of Palantir stocks, the impact on ESR, that was your question. And also the trigger triggering the additional return. So those are the 2 questions we received from you, Mr. Muraki.

So to your first question relating to the partial sale of stocks of Palantir, what has been the impact of that on ESR. On Page 40, if you look at other factor, plus 13 points. On the left-hand side of that, about half, which is about 6 points, were the impacts from partial sale of stocks in Palantir. ESR has increased, driven by the partial sale of Palantir stocks. So that's the answer to your first question.

And has been the trigger or criteria for the additional buyback of JPY 20 billion. In the IR meeting in May, we explained that in addition to the base return, if a certain condition is met, we are doing the additional return. We explained that policy in the meeting back in May. But this time, out of triggers, what was the trigger, which became the reason for the additional buyback. The details will be explained in the IR meeting next week on November 25. The management team is going to explain specifically other factors requiring capital efficiency improvement.

What's the trigger specifically for the additional buyback this time. As I mentioned at the beginning, we can assume the stable capital surplus, which is stably above our assumption in the medium-term management plan. So we decided to use that to additionally return to shareholders. I hope I answered your questions.

[Masao Muraki, analyst]

Moving on to the question on SI, Page 31. Combined ratio was revised down by 2.3 points. So is it only due to the natural catastrophes? Or last year, I think you devised it down, too. But natural catastrophes, assumptions at the beginning of the year [indiscernible], how do you set the budget at the beginning of the year? Do you think how you compile a budget at the beginning of the year is appropriate, so you are devising it down? So how do you evaluate your ability to appropriately assess the natural catastrophes at the beginning of the year?

[Unknown Executive]

Mr. Muraki, thank you so much. Your question was about the division of the combined ratio for Sompo international. So how do we assess the budgeting at the beginning of the year? Well, unfortunately, we decided to revise our combined ratio assumption downward. But as you pointed out correctly, the large components are natural catastrophes. So those are the major reasons.

And if you look at the below part, underwriting profit this time compared to the initial forecast to the current forecast, about $100 million downward, the division was made. And this is almost by and large, not through catastrophe, in particular, Ida in Q3 and the flood in Europe. So most of the $100 million revision was due to those natural catastrophes.

But looking back in 2020, last year, from the underwriting profit to underwriting profit at this time, we have factors such as impacts of COVID-19. But other than that, due to the top line increase, steadily, profit has been increasing. Underwriting profit has been increasing. And on the base, excluding COVID, base such as crop insurance, natural catastrophes, excluding COVID-related impact, the base fundamental insurance products are better, and loss ratio can be improved in 2021 versus 2020.

So we are controlling the loss ratio continuously very well. So compared to the track record from the past that Muraki you saw in the past, I think it's getting better. It's getting improved. So that's my answer to your second question.

[Operator]

Next question is from Mitsubishi UFJ, Ms. Tsujino. Ms. Tsujino, please.

[Natsumu Tsujino, analyst]

The domestic natural disasters forecast has been declined, but still on the high level for the winter. Is it because that there are some uncertainties? And also in Japan, Sompo Japan, the loss ratio, excluding natural disasters, is raised. What is the background? Is it just a one-off whether because of the other large losses or the other middle-sized, the losses were the driver for that?

[Unknown Executive]

Ms. Tsujino, thank you for the question. So your first, the budget of the domestic natural disaster, please look at Page 25. As you pointed out, for the first half, JPY 26.5 billion. Against that, the [indiscernible] JPY 73 billion as revised forecast.

As I mentioned at the beginning, in the second half, there's potential snow damage. As of the end of last year, there was some snow damage, which was quite a big size for the first time in a long time. So this is to prepare ourselves for the same level of snow damage. That is the answer to the first part of your question.

The second part of your question at excluding natural disasters and the EI loss ratio in the first half was on the rise. First, about automobile insurance. The impact from COVID compared to the last year, this year, the impact remains but not as big as the last years.

[Unknown Analyst]

For the sake of time, I'm asking about the forecast for -- the full year forecast, okay?

[Unknown Executive]

For the second half, the automobile loss ratio were in the March, we -- there's some reactionally rise that is factored in. And for fire insurance, there is a part which is not really covered as national disasters. I mean there are small letter disasters, which could increase in the number. So as a result, excluding natural disaster, EI loss ratio is expected to go rise.

[Operator]

Next questions are from Mr. Watanabe from Daiwa Securities.

[Kazuki Watanabe, analyst]

This is Watanabe from Daiwa Securities. I have 2 questions. My first question is to confirm your capital policy. JPY 20 billion buyback, am I right in understanding that this is the additional buyback? So if you apply 50% total return ratio, then additional buyback can be expected when you announce your results in May. Am I right?

[Unknown Executive]

Mr. Watanabe, thank you so much for your question. About the capital policy or shareholders' return policy, this JPY 20 billion additional buyback that we have just announced. As I explained at the beginning of the year, this is the additional return. So this return, which is 50%, we usually return based upon the flow earnings at the end of the year, but this JPY 20 billion is in addition to that. And at the end of the year, adjusted profit will be returned as a base return. And if necessary, we are going to study the possibility of the additional return, if necessary.

And as Mr. Muraki mentioned, according to the full criteria that Mr. Muraki mentioned, we are going to study the potential additional buyback.

[Kazuki Watanabe, analyst]

Understood. My second question is on the natural catastrophes overseas. In Q2, what was the actual number? And what is the budget for the full year? And then Hurricane Ida, European flood, would you please give me the breakdown of each natural disaster of the total budget -- of natural disasters for the overseas business?

[Unknown Executive]

Thank you so much, Mr. Watanabe. Natural catastrophes numbers overseas, in the third quarter, Ida happened and also floods in Europe. In total of the 2, the total was JPY mid-20 billion; Ida, JPY mid-10s, billion; and the European floods, less than JPY 10 billion, but high single-digit billions of yen. And the overseas budget for natural catastrophes for the full year, we are assuming JPY 60 billion. And the breakdown is as follows: SI and other overseas, JPY 55 billion; Sompo Japan, JPY 5 billion. So that's a breakdown of the total JPY 60 billion.

[Operator]

Next, Mizuho Securities. Mr. Sato, please.

[Koki Sato, analyst]

It's Sato of Mizuho Securities. I have 2 questions. First question is about your fundamental earning capability. That's what I would like to know. So in May, you publicized the group adjusted profit, and that included some COVID impact incorporated. And how much of it is included in the revised forecast at this time? And also other than COVID factors such as the release of the deferred tax asset in Brazil and other so-called the one-off factors, how much or how many of them exist?

[Unknown Executive]

Thank you Sato. So your question is about our fundamental earning power and also the COVID and other one-off factors. Starting with the impact from the pandemic. So in this revised forecast, the impact from the COVID in terms of adjusted profit is about plus JPY 19 billion. And clear to the initial forecast of the year, it is a little bit below JPY 10 billion. The future is pushed up by automobile net profit increase and so on.

And next, as to one-off factors, what kind of one-off factors? So as you mentioned in your question, this Brazil-related factor and many of them are one-off factors, which will not give any negative in next year and onwards. It will not leave any big impact on the next years and onwards.

And as to COVID, how much impact will come next year? That's uncertain. Compared to the pre-COVID, there's some level impact of COVID. If we assume it, the COVID impact that could lead to the positive impact because of the absence of that impact.

And as to localized events such as the thunder storms, which are quite small in size, and if such a small incident did not occur, then that would be -- the contribute to the final results. So -- and that's also applied to overseas and the Brazil factor, if it's not realized, that will be positive.

And for the other investment, the profit, which is good this year and if that is not recurred next year, it will be negative. So the earnings structure reform is paying off, and the other revenue is increasing overseas and these positive factors will remain next year and onwards. Thank you Second question.

As to SIs, the revised plan, the gross premium is raised greatly compared to the midterm plan target. It is coming very close to it. So is it sustainable or not? And also, when you look at the net premium, retention rate is actually declining, while the plan is to improving it. And is the background for that.

As do Sompo International, the sustainability of top line growth and also the net premium, so the retention rate or the difference between gross and net and thinking about that, that's the second question. I think the environment data is remaining very well. Compared to fiscal year '20, the fiscal year '21, the rent increase pace itself is slowing down, but the environment is good for the hike of the rates. So it's not that the next year top line is going to decline, that is not assumption. As to the plan for the next year in May, we are going to issue that plan. It's not that we are seeing some factors which would be shade on the top line increase next year.

As to retention rate, as you know, from December, the crop Insurance Company, diversified that has been consolidated. And right after -- well, this is still immediately after the consolidation, so much of the business is ceded. So it looks like the aviation rate is different from the actuation rate. But without crop insurance, retention rate increase the to increase retention rate, that effort initiatives still continues.

[Operator]

Next questions are from Sasaki from Bank of America Securities, Japan.

[Futoshi Sasaki, analyst]

This is Sasaki from Bank of America Securities. I have 2 questions. My first question is on the rate increase of SI. In January, next round, at the moment, what is your view on the next round of price negotiations in January or renewal January? Probably market expects that price increase magnitude is going to be smaller, but there are some people in the market who think that rate increase is going to be as large as one that is being achieved by SI. So what is your view on the magnitude of price increase?

And secondly, you talked about partial sale of stocks in Palantir. But you don't have to give me detailed numbers, but would you please give me the reasons why you have sold. You have gone out of the lockup period, is that the reason? Looking at you, together with Palantir, my impression is that you are working well with them, like investing together with them. But what is the background of why you have sold partially stocks in Palantir.

[Unknown Executive]

Mr. Sasaki, thank you so much. To your first question, what is our view to the rate of renewal increase in January. As you mentioned, there are 2 camps of people in the market, 2 different opinions, yes. As of now, we don't have the firm view, but January 1 renewal is going to be quite solid continuously. That's what we feel at the moment.

Of course, the accident without accident and the frequency of [indiscernible], the pricing will be different. And compared to the rate increase that has been achieved by SI up to the end of last year. It's possible that the pace of increase may slow down, but we are not assuming a sudden rate decline from January 1.

To your second question about the reason in the background why we decided to sell partially our stocks in Palantir? As you mentioned, Mr. Sasaki, collaboration with Palantir has been making a very good progress. We are working together in the project relating to RDP and we have projects where we are jointly investing, as we mentioned. So at the working level and at the CEO level, we have a very close good relationship with them. So when we formed the capital alliance at the beginning. Actually, the strength of the relationship has become much stronger. So in this environment, so we started to invest in Planta to strengthen the relationship with them. But we don't need to depend so much on the capital relationship. We have a good established relationship now without depending so much on the capital relationship and also exposure to one name has become quite large.

So from the risk management perspective, we decided to partially sell. And also, in the IR meeting in May, our CEO mentioned that we need new investments in the digital area. We have a policy to sell partially stocks in Palantir to use process from the sale to invest in new digital areas.

And that was another reason why we decided to sell partially.

[Futoshi Sasaki, analyst]

Understood. So is it the only sale? Or are you planning to sell more?

[Unknown Executive]

Well, about the potential sale in the future or not, in the IR meeting next week, would you please ask that question to the management team. But basically, if necessary, we'd like to sell our shares in Palantir and use proceeds from the sale to invest in digital areas. So there's no change to that strategy. But we don't have any concrete strategy or new strategy that we can share with you as of now.

[Operator]

Next question, Mr. Otsuka from JPMorgan Securities.

[Wataru Otsuka, analyst]

Otsuka, JP Morgan Securities. I have 2 questions. First question is about dividend. So it remains intact and why it's not changed as adjusted profit is revised up?

[Unknown Executive]

Thank you for the question. So for the other dividend payout, that remains unchanged. As to dividend, so the JPY 40, the increase per share was shown at the beginning of the midterm plan. So rather than increasing the payout even more, we decided on JPY 20 billion additional buyback. And for fiscal year '21, if we continue to accumulate the adjusted profit, then that will be -- that will contribute to -- that could contribute to the basic -- the return to the shareholders or additional buyback that we are going to make a decision as the time comes. So if you'd like, you can ask the question to the management next week at an IR meeting.

[Wataru Otsuka, analyst]

And as to the second question, is the simple question. The JPY 148.7 billion and the JPY 210 billion for the full year, the consolidated adjusted profit. And at this level, that is -- seems to be rather high. And could you please talk about the background of these numbers?

[Unknown Executive]

So for this time, the revised forecast, for example, natural disasters, it is rather difficult to have the right assumption. But the last year, the snow damage was more than we had expected. So for the second half, we are on the conservative side for the snow damage. But our if we turn out to be wrong, then we would be very happy. And then we can accumulate more adjusted profit.

So the 50% of the other basic return and for that as well, we can increase the source for the return to shareholders. So the risk factors for the second half, natural disasters and what about market risks in the first half, the dividend from the fund is contributing, but you do not expect it as a big positive factor for the second half. For the first half, that it is realized to some extent. So -- and it is incorporated as part of the factors for the region for the full year. But if the market gets better, and we do not assume that the market will improve further in the second half, but you do not expect the market will go down either. At this moment, such assumption is not factored in.

[Osamu Nose, executive]

Now is near the ending time for this conference call. So I would like to close the conference call. If you have additional questions or follow-up questions, please contact our IR team. So this completes the conference call. Thank you so much for your participation.

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