Sompo Holdings Inc

TSE:8630

Earnings Call Analysis

Record Profits and Unchanged Guidance

Despite global challenges, we reached a record-high adjusted profit of JPY 242.6 billion, an increase of JPY 159.1 billion, with an 86% progress towards our full-year guidance of JPY 280 billion, indicating robust performance. We've also embarked on capital efficiency measures, including partially selling our stock holdings for a JPY 60 billion positive impact on after-tax profits and planning for a 1:3 stock split by end of March 2024. Auto insurance accident rates and repair costs have slightly exceeded expectations, with recent trends suggesting a potential normalization. Natural disasters and major accidents are tracking close to budget, expected at JPY 33 billion for the year. Overseas insurance is poised to achieve a record-high adjusted profit of JPY 163.1 billion, reflecting sound strategic management. Forward-looking, the focus is on consistent growth and long-term corporate value enhancement.

Record-High Earnings and Unchanged Full-Year Guidance Amidst Rising Accident Rates

As investors, we observed a stellar performance from the company up to the third quarter of FY 2023, with an adjusted consolidated profit surge to JPY 242.6 billion, marking a record high for this period and achieving an impressive 86% progression toward the full-year guidance of JPY 280 billion. Notably, despite this strong performance, the company upheld its full-year guidance, reflecting confidence in its projections and current strategy.

Strategic Moves in Capital Policy and a Stock Split to Enhance Liquidity

The company's strategy involved a judicious balance sheet management by partially selling held stocks, which favorably impacted the after-tax profit. They also announced a 1:3 stock split, effective end of March 2024, to increase the share price accessibility and liquidity, thereby potentially widening their investor base. These moves align with the investor's interests and indicate a proactive approach toward capital management and shareholder engagement.

P&C Insurance Stability and Auto Insurance Challenges

The progress in the domestic Property and Casualty (P&C) insurance business is on track with guidance. However, the auto insurance sector saw an uptick in accident rates year-to-date by 3.6% and repair costs per unit by 5.3%, nearly aligning with the full-year forecast. The company keeps a watchful eye on loss rates and aims to maintain this stability amidst these challenges.

Future Outlook: Increased Profitability and Stability

Looking ahead, there is an expectation of achieving a record high adjusted profit of JPY 163.1 billion in FY 2023, spurred by better-than-expected investment income, tax dynamics, and fewer natural disasters. The company is strengthening its reserves as a conservative measure against social inflation, showing a commitment to future profit stability and the potential for increased profitability in the coming years.

Impact of Natural Disasters and Shareholder Returns

The company reviewed the impact of recent natural catastrophes, including the Noto Peninsula earthquake and heavy snow in Kanto, with early-stage estimates suggesting manageable effects within the full-year budget of JPY 104 billion. The company maintains a steady trajectory in shareholder returns, with the dividend trend ascending annually, adhering to a policy of gradual and stable dividend growth.

Revenue Generation Strategies and Share Repurchases

The company has initiated strategies to deploy capital generated from the partial sale of Palantir's stock, involving future growth investments and increasing shareholders' returns. A portion of the proceeds may be used for a share repurchase program, demonstrating a strategic balance between investing for future growth and rewarding shareholders.

Agricultural Sector Performance Influenced by Previous Drought

The agricultural insurance segment, specifically crop insurance, was influenced by last year's drought, impacting the current fiscal year. The company has been increasing premiums, resulting in reflected earned premiums, which fortify the strategy to expand profit, especially with improved general loss levels reducing the pressure from natural catastrophe claims.

Earnings Call Transcript 2024-Q3

[Tsutomu Yamaguchi, executive]

I am Yamaguchi, Deputy CFO of Sompo Holdings. Today, I am going to explain the overview of the results of the third quarter of FY 2023, centering mainly on numbers. With regards to the management recognition on the big motor issue as well as curtail issue responds to them in the future, the direction of the next midterm management plan based on them and the business strategies are going to be explained in the IR meeting scheduled tomorrow, mainly by Mr. Okumura, the new Group CEO from April.

Now please turn to Page 3 of the presentation material. There are 3 key points we'd like to communicate today. First, adjusted consolidated profit increased by JPY 159.1 billion to JPY 242.6 billion, up until the third quarter of FY 2023. This is a record high in terms of the quarterly profit of the third quarter and the progress rate towards the full year guidance is 86%, which is very good. Drivers for the big profit increase were the absence of the COVID-19 impact, domestic P&C insurance business and the domestic life business and growth of underwriting income and the net investment income in overseas insurance and the reinsurance business. Second, we kept the full year guidance for FY 2023 unchanged at JPY 280 billion from the beginning of the year.

As I have just explained, we have made a very good progress so far up until the third quarter, and the flash report indicates that our overseas insurance business has resulted in the higher results than the plan for the full year on the local currency basis. On the other hand, the progress of domestic P&C insurance business has been in line with the guidance so far in terms of natural catastrophes and large losses. However, considering the fact that we need to keep our eyes on the incurred loss and others in the automobile insurance business continuously, we have not changed the full year projection.

Last point is about the capital policy. From the balance sheet management perspective, we sold stocks held by the holdings partially, which had around JPY 60 billion positive impact on the after-tax profit as we made a public release in December last year. As you are all aware, the capital gains from the sale do not affect consolidated adjusted profit. However, ESR has risen a little bit as a result of the sale. Based on the investors' expectation and others, we are starting to use generated capital for growth investments in the next medium-term management plan, and also use a part of it for the shareholders' return to improve the capital efficiency furthermore. We are going to decide on these points by May, when we announce the full year results and communicate to you then.

Let me add that based on the increase in the share price, expansion of the investor base and for the improvement in the liquidity of our shares, we have announced today 1:3 stock split with a record date of the end of March 2024. On the next page onwards, I am going to explain the key points of the current situation of the domestic P&C insurance business as well as overseas insurance business.

Please turn to Page 4. First is the status of auto insurance, natural disasters and the major accidents in the domestic P&C business. For auto insurance, the accident rate for December 2023 increased 3.6% year-to-date versus the previous year. Due to the impact of the year-on-year increase in October to November, the accident rate has been slightly higher than the assumption of the full year forecast. However, it has slowed down a tendency to settle down as it turned downward in the single month of December. As for the repair cost per unit, the year-to-date figure as of the end of December 2023 was up 5.3% from the previous year, almost in line with the full year forecast.

Natural disasters and major accidents continued to progress within the full year budget. Many people are still in a difficult situation following the Noto Peninsula earthquake that occurred on New Year Day, and we have increased our personnel to respond to the situation so that we can deliver insurance benefits to our policyholders as soon as possible. On the other hand, in terms of financial performance, natural disasters remain within the budgeted range for the full year, even taking into account the impact of this earthquake and the snow damage through January. We cannot, of course, be optimistic about the next 1.5 months. However, at this point, we expect the full year impact of natural disaster to land nearly our budget. The full year impact of major accidents is estimated to be JPY 33 billion. But as of January, the impact is about JPY 25 billion, meaning approximately 70% of the forecast.

Please move to Page 5. The following is a preliminary, but an estimate of our overseas insurance business for the full year of FY '23. We expect to achieve a record high adjusted profit of JPY 163.1 billion in FY '23, a significant increase. In addition, on a dollar basis, mainly due to fewer natural disasters than budgeted, higher investment income and the recognition of deferred tax assets following the introduction of corporate income tax in Bermuda, the adjusted profit exceeded the full year forecast. At the same time, Sompo International has taken a conservative approach and strengthened its reserves in Q4 in light of the current social inflation and other conditions.

As shown in the graph on the right, rate increases and thorough underwriting for profitability brought about the steady decline in the base loss show. We assume that profitability and the profit stability will further increase in the following years and beyond. This is the outline of the performance of FY '23 as I mentioned at the beginning of this presentation, I recognize that the group as a whole is making a steady progress. At tomorrow's briefing, Okumura, as a main speaker, will explain the direction of the management strategy for the next midterm management plan. In any case, we will continue to aim for steady growth and enhance our corporate value over the mid- to long-term basis, and we hope that you will continue to look forward to our efforts, and this is the end of my explanation.

[Operator]

Now we'd like to start the Q&A session. First, Mr. Muraki from SMBC Nikko Securities.

[Masao Muraki, analyst]

This is Muraki from SMBC Nikko Securities. My first question is on the automobile insurance business in Japan. I'm on Page 18. According to your presentation, the frequency was worse than your expectation in October and November. But in December, the frequency was better than you expected. I think this indicates the trend change. But would you please give me more color on the trend, on the frequency of the automobile business, including the forecast? My second question is on the premium increase, which is under the view. Would you please offer me more comments on the necessity and the timing of the premium increase, which is under review. That's my first question.

[Yasunori Kuroda, executive]

Kuroda speaking. Muraki San, thank you so much for your questions. First, in the automobile insurance business, you talked about the repair cost per unit, but the repair cost per unit has been trending according to the plan. And so the frequency is going to be the attention point. If you look at Page 4, on the left-hand side, we are showing the frequency and the number of reported claims as a trend. The frequency forecast for the full year is 2.5%. In fact, frequency was a little bit more in the first half. And in the second half, we are expecting frequency to go up by about 1%. And the following is not directly linked. But if you look at the number of reported claims below, in October and November, it was high. And in December, trends differed a little bit.

On the flash report basis, just for information, the number of reported claims was down by about 1% in January. So in terms of the frequency, as things will trend, as they have been trending, I think we can catch up to some extent. That's where we are at the moment. In terms of the premium increase, as of today, there's nothing that has been determined officially. So we cannot really assert one or the other. But after recovering the credibility from various issues and responding to various issues after that, as soon as possible, we'd like to increase the premiums to the appropriate level, reflecting the current inflation pace. So we are currently reviewing various options. That's the status as of today.

[Masao Muraki, analyst]

And you mentioned that a big business direction is going to be explained in the IR meeting tomorrow. But my next question is on the strategically held equity stocks. In your case, the balance of strategically held equity stocks is smaller compared to other companies. But still looking at the risk profile, exposure to strategically held equity stocks is pretty large. So regardless of big motor issue, but considering the curtail issues and so forth, including all of that, would you please comment on the potential acceleration of the sale of equity stocks and MS&AD has stepped up their comment on it. So would you please give me more comments on that particular issue?

[Unknown Executive]

Yes. With regards to the equity stocks, on December 26, Japanese FSA has issued the business improvement order to us. And that report indicated the fact that we have exposure to strategically held equity stocks as a traditional customer. And just recently, the Minister commented on this issue and the regulators' interest and regulators' involvement is becoming stronger these days. And as a matter, of course, the management team of our company has been the frontliner trying to reduce the strategically held equity stocks up to now. And also in the last fiscal year, we tried to reduce the exposure to 20% of the equity. And as I mentioned earlier, based upon the background, we are reviewing -- studying the strengthening of the sale of equity stocks by accelerating the pace of sale. That's under the review by the management. So that's the direction that I can comment today. But tomorrow, in the IR meeting, the management team may be able to give you more detailed explanation. So I'm going to hand the rest of this topic to the management team tomorrow.

[Operator]

So the next is Mr. Sato of JPMorgan Securities.

[Koki Sato, analyst]

Well, this is Sato of JPMorgan. I have 2 questions. So the first question is for the current fiscal year or for -- this time, you have included in the financial result of the big sell-down of the Palantir stock. Well, the reason for that liquidate stock is because probably before the sell-down, the mark-to-market value was about JPY 200 billion. So probably the concentration risk in one company was too big. Is that the reason why you decided to reduce your stake ownership? If that's the case, the Palantir stock price is still upswinging even compared to the time that you made the disposal. So that's -- the number of shares has decreased, of course. However, the further sell-down is the possibility depending upon the stock price movement going forward? That's the first question.

[Unknown Executive]

Thank you very much for your question. Well, regarding the Palantir stock price, as Sato San just mentioned, for us, we needed to think about the level of the risk on our balance sheet and also preparation for the volatility of the mark-to-market value. And when we see the stock price is coming back, we've made the decision to sell down. There were some voices that we heard from the investors about what we are going to do with that particular stock. So that was one of the reasons that we made the judgment. And as you said, the stock price has been coming up to really high level as high as over 20 U.S. [indiscernible]. So thinking about the risk on the balance sheet and, of course, while thinking about maintenance of our relationship with the Palantir, we still own about 40% of the shares that we have purchased so that for the future, at some point of time, we might make the judgment of sell down again.

[Koki Sato, analyst]

And then my question number two is for the overseas insurance business that you have strengthened the reserves. At the time of the planned revision, I think you have already factored that in. And this time, when we look at the figures, it's USD 575 million, which seems pretty big. So can you be much more specific? You talked about that you needed to respond to the social inflation, but this reserve is for which lines? And you've mentioned conservatively meaning that there is an expectation you have for the future release. So when you say conservative, it may be difficult for you to quantify, but by which means you are seeing a conservative. Can you provide some color on this?

[Unknown Executive]

Thank you very much for your question, Sato San. Well, this time, we have strengthened our reserve in order to strengthen our stability of the profit for the following years. So this was a positive action. What was included in there is for the policy portfolio of before 2019, the casualty and something close to longer-tail contracts -- well, as some of the media has mentioned, well under the pandemic, the economic reopening have been making the progress. In light of that, we thought that we are in little bit of the short. Of course, there is some calculation done by the actuaries of our company and also the audit firm has been looking at that. So within a certain range, for us, we think we have come to the level that we have made it stronger. Just thinking about the sense of the belief that the people will be able to feel we have come up to this reserve level. There were some positive impacts, so that for the year 2023 on a flash report, we have seemed to land at a higher level more than the budget.

[Operator]

Next questions are from Mr. Watanabe from Daiwa Securities.

[Kazuki Watanabe, analyst]

This is Watanabe from Daiwa Securities. My first question is on the progress of the adjusted profit, which is 86%, which is very high. What is the reason why you did not revise your guidance upward? And also, you said natural catastrophes have been within the budget. But would you please give me the estimated loss from the Noto Peninsula earthquake and heavy snow in Kanto in January?

[Unknown Executive]

Mr. Watanabe, thank you so much. We did not change our guidance at JPY 280 billion, we did not change it. And if you look at the breakdown by business, nursing care and seniors and the digital business has been trending in accordance with the plan. And our overseas business as shown on that page, on the yen basis, JPY 163 billion. And base of the business has been increasing, but there isn't an impact from the exchange rate. So I think it's been trending below about JPY 5 billion, which is visible at the moment, then the rest is Japanese P&C business. And our assumption is JPY 58 billion. In terms of the guidance, up to the third quarter, we have down JPY 75 billion. So you may think that we can overachieve it. But in our opinion, I think we are on track, roughly speaking towards our guidance of JPY 58 billion in the domestic P&C business, 2 perspectives.

First, compared to Q3, the profit in Q4 would not increase as much compared to Q3 because of number one, seasonality. For example, in the investment side of the business, we have dividends from equity stocks, which fall into the third quarter. And also, as you asked, natural catastrophes do not tend to happen so much in the third quarter, and there are many Nat Cat assumptions in Q4. And also due to the timing of the non-personnel cost, this is simply the timing, but there's higher non-personnel cost in Q4, which weighed on the profit in the fourth quarter. That's the first perspective.

And the second perspective, this JPY 58 billion, which is our guidance, where we are versus this guidance? As I mentioned earlier, frequency in the automobile business was a little bit higher in October and November, which impacts a little bit around low single-digit billions of yen. On the other hand, we can control non-personnel cost. So there are controllable expenses. So as a total, JPY 58 billion is, I think, the comfortable guidance at this point. So other than that, probably, for sure, is the FX impact. So that will be the variance and it's up to whether we are going to offset or not.

With regards to the natural catastrophes, if you look at Page 4, on the right-hand side, we are showing the cumulative basis up to January, and in January, it shows JPY 10 billion or so loss. And Noto Peninsula earthquake, this is only the early-stage assessment. But in the commercial line, I think impact is estimated to be about JPY 2 billion to JPY 3 billion as of today. And snow -- heavy snow in Kanto in February, on the next day, things recovered quickly in Kanto. So as we can presume, as of today, impact from the heavy snow in Kanto is going to be a few billions of yen more towards JPY 2 billion or so. And it's been pretty warm like today. So this JPY 104 billion, I think we are running in line with this assumption in total.

[Kazuki Watanabe, analyst]

My second question is on the stock split that you announced today. What is your intention of the stock split. And also, what is your stance of the dividend? You've been increasing the dividend by the unit of JPY 10 at that time. Would you please comment on it? Because I think probability of you being able to increase is quite high.

[Unknown Executive]

In terms of the stock split, there is this minimum investment unit recommended by TSE, which is about JPY 500,000. And this has been the effort-based sort of duty by TSE. And when the share price of our company exceeds JPY 5,000 and now it exceeds this minimum investment unit [ bar ] of JPY 500 billion for the first time after a while, but when the share price exceeds JPY 7,000 and being close to JPY 8,000, then the minimum investment tradable unit is going to be quite large. And the Tokio Marine has done the stock split 2 years ago.

So the management made a decision to respond to this issue this time. And the background of that is, as TSE mentioned, this is for retail investors so that they feel attracted by our share, investing in our share and the liquidity improves and the valuation will improve by this. Because of that, we made addition to do the stock split. You asked me about the dividend. And there is no dividend policy change due to the stock split per se. No change as of today. So we are going to continue with the current shareholders' return policy. And our dividend has been on the increasing trend every year, so we are trying to enhance shareholders' returns every year. That is our policy. So in accordance with the policy, we'd like to gradually and steadily increase our dividend.

[Operator]

Next is Sasaki San of Nomura Securities.

[Futoshi Sasaki, analyst]

This is Sasaki of Nomura Holdings. I have 2 questions. The first one is about the Page 3, you explained that the holdings sold the shares and gained JPY 60 billion of the profit. In the next midterm plan, this gain is going to be used for the future growth for the next midterm plan. Well, this event actually happened in March 2024, the fiscal March 2024. However, the proceeds are deployed for the next midterm plan period, not for the fiscal March 2024. What is the reason?

[Unknown Executive]

Well, the actual capitalization of cash was the month of December. So that was around the timing of almost in the fourth quarter. So whether it was possible for us to make the decision-making was probably the release of the shareholder return. The other options for the deployment of the cash, for example, for future growth or other options are currently in the process of examination by the leadership team. So for the next year and also the next midterm plan is going to be starting in the next fiscal year. So what kind of strategy we are going to show? Well, as I mentioned earlier, partially it may be used for shareholder return and our management team has the better direction. We think we'll be able to explain more in details in May. Did I answer your question?

[Futoshi Sasaki, analyst]

Understood. So the shareholder return for the fiscal 2024 -- the March 2024 is not getting direct impact. Is that correct?

[Unknown Executive]

Well, our shareholder return will be based upon the result of March 2024 and will be paid in May. So the partial Palantir's stock sell-down may be deployed for the share repurchase. So that's going to be a return of the shareholders to the fiscal March 2024.

[Futoshi Sasaki, analyst]

Now about the Page 5, there was another question in the previous person about the provision of the reserves. The amount is pretty good. Was it included in the initial plan? Because when I look at this number from 1 through 4 on this page, we'll probably end up with the results with the upside. And because of the buffer or the upside, have you decided to use that for the soundness of the balance sheet. Is that correct? If you could answer my question.

[Unknown Executive]

Well, as for the reserves, well, of course, we have fought for a lot of our land stake and provided for at an appropriate level. And after the first half, there were some additions. As a result, by the end of the fiscal year, the level of the reserve has achieved a stronger level in a conservative zone so that we think we have done in an appropriate range. Well, other factors are all independent so that, of course, each of them has been made as a forecast or get returns for investments. So as a result of that, as you see on this page, we have landed at the U.S. dollar base of $1,150 million. Well, if my explanation is not sufficient, then we will have Jim Shea of overseas business is going to attend tomorrow's meeting.

[Operator]

Next questions are from Mr. Okada from UBS Securities.

[Taiki Okada, analyst]

This is Okada from UBS Securities. I have a question about SI, your overseas operations. Looking at SI in commercial line, in particular, would you please give me your projection of the premium increase against your plan of 4% premium increase. In Q4, your result was 5.4% premium increase. And looking at the U.S. business structure, I think Sompo has been making a positive comment on it. So looking forward, would you please give me your view of the forecasted premium increase in the commercial line of SI? If possible, would you please give me your breakdown by property and casualty?

[Unknown Executive]

First, overall, the premiums for property lines have been hardening. This strong hardening trend is still continuing and casualty and [indiscernible] areas, which are the main business areas of SI, the premiums are on the increasing trend. On the other hand, there are specific business areas, such as D&O, where competition is being intensified. Therefore, premiums have been on the declining trend. That's the reality in some areas. But looking at overall, the sentiment has not really changed so much. However, since 3 to 4 years ago, the magnitude of hardening has become milder and milder.

So in this trend, in any event, the premiums are on the increasing trend overall. In any event, we would like to set the premiums at the appropriate level to offset the inflation cost. So we'd like to set the premiums at the perfect level. And I think you have to wait until the result announcement of the Q1 of SI, but when we announce our result of Q1, we are going to give you more color.

[Taiki Okada, analyst]

My next question is on the follow-up question. And this is something that probably you're going to disclose from now on. But do you think you can realistically assume premium increase concurrently at the level of 3% to 4% in the next fiscal year? Or is it not so easy? What is your feel?

[Unknown Executive]

Thank you so much for your question. Well, considering the inflation ratio, I think that will be the rough level that we have to really consider. And when we announce our results, and we are going to announce our guidance, we are going to reflect our view in the guidance and explain them.

[Operator]

Next is Mr. Otsuka of SBI Securities.

[Wataru Otsuka, analyst]

I am Otsuka of SBI Securities. Well, I'm not really have a -- I don't really have a question about the financial results. But my question is, what's the purpose of this conference call because conventionally, you have not had any call for Q1 and Q3. But this time, you have it. Why? Is it because you have had the good progress so that you wanted to communicate that result to the market? Or you decided to change frequency and do the call each quarter?

[Tsutomu Yamaguchi, executive]

Well, thank you for the question. This is Yamaguchi answering your question. So this time, it is kind of exceptional. As a schedule, well, it was the first half results of November that was extended to tomorrow. Well, for all of you, you must be very busy with a lot of IR meetings and the financial reporting is coming. But for the financial reporting with the figures, we thought that it is a good opportunity that we provide to show the figures today so that tomorrow, we can more focus on the strategy part for the Q&A. That was the purpose of having the call for the third quarter.

[Wataru Otsuka, analyst]

Okay. So tomorrow's IR meeting is going to be more on the strategy part then. Okay.

[Operator]

Next questions are from Mr. Sakamaki from Mizuho Securities.

[Naruhiko Sakamaki, analyst]

This is Sakamaki from Mizuho Securities. I have one question. On the SI business overseas, in particular, in the commercial side of the business, excluding natural catastrophe loss. My question is on the general loss. The natural catastrophes have been below your expectation, but general losses have been probably above your expectation. What is your take and feel on the trend of general losses in SI in commercial?

[Unknown Executive]

In principle, we've been increasing the premiums up until now, which are well reflected in the earned premiums. In that sense, looking at the level of general losses, the level has been at the level that is positive on expanding the profit. And looking at our results up to the third quarter, natural catastrophes are seem to be improving because of the big natural catastrophe, which was [indiscernible] in the last fiscal year, in absence of that is the improvement factor. And secondly, in the crop insurance, agri-insurance business, the drought last year has developed, which is impacting in this fiscal year. It's not going to impact in the next fiscal year, but we have that development from the drought last year. So excluding that, normal losses have been at the level that is profitable for SI in commercial.

[Naruhiko Sakamaki, analyst]

Understood. So can I understand that you do not have any plan to change your underwriting policy in the next fiscal year onward? Or you do not plan to review your underwriting policy overseas?

[Unknown Executive]

Well, however, we are trying to expand our businesses. We are trying to expand regions, and we are trying to enhance the regional diversification effect. So we are going to take various initiatives. But in terms of the discipline, it's going to stay the same, we are not going to change the discipline, which is to prioritize on the bottom line profit.

[Operator]

Are there any other questions? So we'd like to conclude the Q&A session. If you have follow-up questions, please contact IR department of Sompo Holdings. Thank you so much for participating in this call.

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