Described below is the summary of Q&A session with institutional investors and securities analysts at the FY2022 results conference call held on May 19, 2023.
- Q1On your capital policy, Tokio Marine currently has a healthy ESR of 124% and their earnings and ROE are also projected to be very strong. You will build up approx. JPY600bn capital this fiscal year (FY), even excluding gains on the sale of business-related equities (which does not lead to the accumulation of capital). Given this situation, I want to hear your thinking on the future capital policy.
- A1
The basis of our shareholder returns is dividends, and we plan to steadily increase our dividend payments in line with profit growth. On share buybacks, we will not set any target for our total shareholder return ratio; instead, we will execute share buybacks based on a comprehensive consideration of factors such as the level of our ESR, M&As in the pipeline, our business environment, and our ROE target. Our ESR is almost at the same level as it was a year ago. After comprehensively considering these conditions, we have decided to execute share buybacks worth JPY100bn at this stage, which is the same amount of share buybacks we executed in FY2022. Going forward, we will consider reviewing the amount of share buybacks based on the accumulation of profits, the situation of business investments, and other factors.
- Q2What impact will interest rate fluctuations have on your earnings plan for FY2023?
- A2
The impact of the rising U.S. interest rates on our earnings is mainly coming from an increase in hedging costs due to a rise in income returns and a widening interest rate gap between Japanese and the U.S.
On income returns for the whole Group, we project to raise by +JPY110bn to JPY800bn in FY2023 vs JPY690bn in FY2022.
Meanwhile, we expect the hedging costs of our three domestic businesses, namely TMNF, TMNL and NF, to increase by +JPY45bn to JPY90bn in FY2023 vs JPY45bn in FY2022.
Net incomes after hedging costs are expected to fall from FY2022 result for the domestic businesses; however, net income returns are projected to remain positive and will firmly be in the positive territory for the whole Group. - Q3DFG seems to expect a profit growth of +JPY21.5bn in FY2023. What factors are behind this growth? Does it reflect impairment losses and an increase in provisions for CRE loans?
- A3
The main factor behind the 21.5bn profit growth is an increase in investment income capturing the positive market environment. This plan also considers impairment losses on CRE loans and other elements.
In FY2022, key businesses in North America together posted impairment losses of c. -JPY20bn. We expect our impairment losses slightly exceeding this amount in FY2023. - Q4The loss ratio of domestic auto insurance excluding natural catastrophes (Nat Cats) was 60% in FY2022 and is estimated at c. 63% in FY2023 (although this figure has not been disclosed). This means that you expect the loss ratio excluding Nat Cats to deteriorate by a little more than 2pt. What are the factors behind this projection? The margin of deterioration seems greater than that of other companies.
- A4
We have not compared it with other companies. However, the main reasons for the deterioration of our loss ratio are mainly coming from the reversal of takedowns of prior year reserves in FY2022 and the impact of the current inflation.
- Q5On domestic auto insurance, please tell us your future pricing strategy based on the current situation of loss costs.
- A5
Our loss costs are currently increasing due to an increase in traffic volume following the recovery of economic activities after the COVID-19 and the impact of inflation. We therefore plan to raise our premium rates in January 2024. Given that auto insurance has the characteristic of having only small earnings fluctuations, we will continue working toward stably generating earnings.
- Q6On page 6 of “FY2022 Results and FY2023 Projections,” the actual result of “Other” in FY 2022 grew by +JPY14.4bn vs the February projection. What are the reasons?
- A6
It was mainly due to technical factors. One factor is +JPY5bn difference in managerial accounting between financial accounting and business unit profit of a Singaporean life insurance business. In addition, there were +JPY5bn FX gains in relation to TMNF’s dividends received from their overseas subsidiaries and other gains. Because the February projection only reflects the preliminary results of key businesses, it is unavoidable to have some discrepancies.
- Q7DFG’s profit is projected to grow to c. JPY140bn in FY2023, which is equivalent to TMNF’s profit. I understand that DFG’s business model is focusing on investment. Are there any risks?
- A7
As you pointed out, DFG’s investment income is growing significantly. At the same time, their underwriting profit is also currently doing well. DFG carefully manages their investment risks through the diversification of their portfolio and the implementation of stress tests. While DFG is presently increasing the outstanding balance of CRE loans, they can take appropriate actions in emergencies because their team of specialists who are able to select attractive projects & sponsors and have a good judgment manage their investments, and because they are basically a single lender. In addition, the fact that insurance liabilities that have long-term predictability are the source of their investments enables them to hold on to their investments until the market recovers.
Given these factors, we have no concern about major risks for DFG on a stand-alone basis. Furthermore, at the Group level, because the diversification effects have grown to nearly 50%, even if something happens at DFG, its impact on the soundness of the entire Group will likely be limited. - Q8It seems that TMNF did not change their budget for Nat Cats. How big was the rise in reinsurance costs in this context? Two other mega insurers seem to have raised their Nat Cat budgets.
- A8
With the hardening of the reinsurance market, our reinsurance costs have been on the rise. However, thanks to a review we conducted in FY2022 on our earnings cover ahead of other companies and the implementation of cycle management which includes the abolish of inefficient programs in FY2023, we have been able to control the rise in reinsurance fees with almost no increase to the risk volume.
Tokio Marine accelerated business expansion overseas to reduce the impact of Nat Cat risks in Japan. This has led to the progress in risk diversification and has enabled us to implement flexible cycle management supported by the risk diversification we have achieved. We believe that these factors have resulted in a difference in our Nat Cat budget compared with other companies.
We set our Nat Cat budget based on factors such as past Nat Cat payments and our risk model. For FY2023, our budget is JPY73bn, which is the same amount as the previous fiscal year. - Q9Given the inflation and sharp increase in reinsurance fees, your top-line revenue plan for North America seems conservative.
- A9
We do not project the same rate of profit growth in FY2023 as in the previous year given the easing of the hard market environment and the rise in reinsurance costs. It is not Tokio Marine’s style to chase top-line growth at any cost; however, we will leverage our strength, which is the ability to choose risks, and take risks where we should do so, so that we can achieve further profit growth. The situation of rate increases varies from one business line to another. While hardening is continuing in property, the speed of rate increases is slowing in some specialty items and D&O has started to soften.
- Q10As for the sale of business-related equities, Tokio Marine always stays ahead of their own projections, as seen in your recent announcement of the acceleration of the speed of the sale of business-related equities a year ahead of the original plan. What makes you enable to do this?
- A10
We began discussing accelerating the sale of business-related equities in the autumn two years ago based on a view that we needed to use the precious capital our shareholders entrusted with us in the areas that would raise our ability to achieve our purpose. Based on such discussions, we have recently decided to sell business-related equities worth JPY150bn in FY2023, achieving a year earlier the “acceleration of the speed of sale by 1.5 times from the next medium-term plan,” as we announced in November last year in our IR briefings. Given that the environment surrounding issuers is changing, we will continue thorough discussions with our investees and execute the sale of shares worth JPY600bn in the four years to and including 2026. The year 2026 is only a waypoint. We will continue their sales beyond 2026.
- Q11As for page 28 of “FY2022 Results and FY2023 Projections,” please describe in detail what factors will lead to a profit growth of +JPY16.4bn at TMNF.
- A11
The JPY16.4bn profit growth can be broken down to the following: an increase of slightly over +JPY20bn in underwriting profit and a fall of -JPY5.7bn in investment income. Of the underwriting profit, the improved result in fire insurance will have the largest impact. Investment income is projected to fall due to the estimated rise in hedging costs.
- Q12Your FY2023 profit plan is very aggressive with a projection of adjusted net income of JPY670bn. What is your projection from FY2024 onward? The outlook does not appear great, given the inflation and the end of premiums rate hardening and interest rate rises overseas and the easing of profit improvement in domestic fire insurance which have been driving the growth to date.
- A12
In FY2021, we posted adjusted net income exceeding JPY500bn and an adjusted ROE of approx. 12%, which we had announced as our mid to long-term targets in 2017. Thereafter, our mid to long-term goals are to achieve EPS growth comparable to our global peers through sustained profit growth, or more specifically to achieve an EPS growth of 5-7% steadily, and to raise our ROE at a level comparable to our global peers.
While we intend to present quantitative plans under the next medium-term plan next year, we want to continue realizing EPS growth comparable to our global peers based on the organic growth of our business. On M&As, we will remain patient about large M&As, but we are pursuing every possibility for bolt-on M&As. We will prepare our plans for the FY2024 and beyond based on this premise.
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.
