Described below is the summary of Q&A session with institutional investors and securities analysts at the FY2020 results conference call held on May 20, 2021.
- Q1Why wasn’t the capital adjusted despite 127% ESR as of end of March 2021? If the profit accumulates further, ESR should rise further towards the end of the fiscal year. What was the reason for setting the limit at 100 billion yen?
Our existing approach towards the adjustment of level of capital has been determined by comprehensively considering the market environment and business opportunities, etc., so long as it stayed within our target range. We will basically follow a similar approach in the new mid-term plan, but whereas the adjustments were made biannually (in 1H and 2H), we have presented the 100 billion yen budget at the beginning of the fiscal year as the amount set to be used in combination with the business investment to improve transparency and make adjustments in a more flexible manner. As you are aware, if we accumulate steady profits and do not see a good opportunity for large M&A transaction, ESR will increase, and we will determine the adjustment of level of capital by comprehensively considering the capital level and market environment, etc. If the capital exceeds the upper limit of 140%, an action such as business investment or shareholder return will be mandatory.
- Q2What are the Auto insurance underwriting profit for FY2019, FY2020, and FY2021, and the figures adjusted for catastrophe loss and provisions of underwriting result for the first year?
Auto insurance underwriting profit for FY2019, FY2020, and FY2021 were 97.1 billion yen, 78.7 billion yen, and 118.6 billion yen, respectively, and excluding catastrophe loss and provisions of underwriting result for the first year, 88.6 billion yen, 172.3 billion yen, and 84.0 billion yen, respectively.
- Q3With respect to the shareholder return, whether a bolt-on M&A will be executed is not certain during the fiscal period, so how will you operate within the 100-billion-yen budget for the total amount including the capital adjustment?
As you stated, it is difficult to determine whether a bolt-on M&A will be executed during the fiscal year. However, the level of capital is to be adjusted flexibly during the fiscal period, and our policy on business investment is to actively consider and execute if a good opportunity presents. As a result, the total amount may not fall within 100 billion yen in some cases.
- Q4What is your approach towards shareholder returns from the next fiscal year onwards? Will you be bound by the amount of 100 billion yen established this time?
We are continuously seeking for better methods in terms of flexibility and transparency and would continue to review our methods for the next fiscal year onwards through discussions with market participants.
- Q5Excluding natural catastrophe and various reserves, etc., domestic underwriting profit seems to have deteriorated. Was this caused by auto?
As you stated, it is due to the expected deterioration of auto insurance from the impact of COVID-19. Auto C/R for FY2019, FY2020, and FY2021 was 60.8, 54.3, and 61.1, respectively, and FY2021 figures can be seen as based on average annual level.
- Q6Please explain the trend for reinsurance costs.
We cannot provide specific figures, but due to the recent trend of natural catastrophes, the reinsurance cost increased significantly at the renewal in FY2020, and increased at the latest renewal in April 2021, albeit to a lesser extent.
- Q7Please explain your approach towards natural catastrophe risk exposure.
We have always believed that perpetual reinsurance for natural catastrophe will result in loss of reinsurance margin and prioritized global risk diversification. We will continue to purchase cover for capital event but determine earnings coverage with consideration to economic rationale.
- Q8Am I correct to understand that the level of capital will be adjusted regardless of the timing of earnings announcements, etc.?
Yes. We will flexibly make adjustments.
- Q9Is the acquisition of SSL announced at the beginning of 2021 included in the 100-billion-yen budget for FY2021?
No. Bolt-on M&A and small- and medium-sized investments executed between today and the earnings announcement day for FY2021 will be included.
- Q10What is your view on the impact of COVID-19 for FY2021? Is the amount included in the waterfall diagram on the FY2021 Projection on slide 5?
For FY2021, specific amount of impact cannot be presented due to the difficulty of identifying and aggregating the COVID-19 impact. However, we believe a prolonged pandemic may have certain level of impact on underwriting and asset management in Japan and overseas. Waterfall merely indicates the impact in FY2020, as stated in the slide. The adjusted net income waterfall at the bottom of page 5 differs from the amount stated in the FY2020 COVID-19 impact on page 6 due to the change in definition for adjusted net income to exclude the impact of FX and the provision of underwriting result for the first year.
- Q11Will the progress and road map for the medium- to long-term target (milestone) of “adjusted net income of over 500 billion yen and adjusted ROE of around 12%” be explained at the IR meeting next week?
Yes. We will provide explanation on our initiatives towards the medium- to long-term target (milestone) and confidence in achievement of the milestone, so please look forward to it.
- Q12Am I correct to understand that you will indicate whether future bolt-on M&A and small- to medium-sized investments are within the budget of 100-billion-yen capital adjustment?
For future transactions, we are not expecting to indicate whether they are within the budget. We do not have specific thresholds for investments included in the budget, but based on past investments, we expect to see transactions mainly around tens of million to 100 million dollars in size, with the investment of 200-300 million dollars once every few years.
- Q13Considering the possibility of future bolt-on M&A, am I correct to understand that not the full 100 billion yen will be spent during the fiscal period?
The level of capital is to be adjusted flexibly during the fiscal period, and our policy on business investment is to actively consider and execute if a good opportunity presents even if 100 billion yen is spent during the fiscal year. Consequently, we may spend 100 billion yen for the adjustment of level of capital during the fiscal year, and the aggregated amount with the business investment may not fall within 100 billion yen in some cases.
- Q14When you are considering a bolt-on M&A, will the information deemed to fall within insider information? From the perspective of insider trading rules, am I correct to understand that when you are considering an M&A that may constitute insider information, you cannot execute shares buyback?
Considering the size of our bolt-on M&A, it will not call under insider information, however, this is a matter of law and it is difficult to provide an accurate answer here. Either way, we will implement appropriate measures in accordance with the law.
- Q15Please explain the payout ratio underlying the ordinary dividend of 215 yen for FY2021.
Dividend payout ratio is 43% to adjusted net income based on the new definition, and 47% to profit based on financial accounting.
- Q16For the new ESR, you will be using figures after deduction of restricted capital in the same manner as you did in 2017 and earlier. What was the reason for increasing the upper range from the previous 130% to 140%?
Under the new criteria, the upper limit of the target range is treated differently from the past when ESR after deduction of restricted capital was being used, and we will definitely take an action if the maximum range is exceeded. Considering these changes, we increased the upper limit.
These information materials are prepared based on the currently available information for us and described subject to our predictions and forecasts carried out at the time of preparation.
It must be noted that what is described therein does not guarantee our future business performance and carries certain risk of misjudgment or uncertainty.
Accordingly, you are kindly requested to bear in mind that there may be a possibility of sizable divergence between the actual business performance in the future and that of our predictions or forecasts described therein.