Japan Post Insurance Co., Ltd. (7181) Earnings Call Transcript & Summary

Please look at Page 1. I am Tetsuya Senda, appointed as President of Japan Post Insurance in January of this year. Thank you very much for attending our financial results and corporate strategy meeting today. First of all, I express my sympathy to those who have been infected with COVID-19 and extend my sincerest condolences to those who have lost their dear ones. Besides, please accept my apologies for conducting this meeting in the form of a conference call due to the influence of the recent spread of the COVID-19 infection and any inconvenience that this may have caused to you. As this is my first briefing session since I took office as President, I wanted to have a face-to-face meeting. But considering the risk of having everyone gather here, we have decided to hold this meeting in the form of a conference call. Your understanding will be much appreciated. Regarding the solicitation quality issues, our past initiatives to create an appropriate scheme for quality control were insufficient which has caused a great deal of concern to all of our stakeholders, including shareholders and customers, since last year. As a person who has been appointed as President under such a circumstance, I am aware that I am being called upon to regain the trust of our customers at our highest priority and rebuild our business foundation while achieving our growth strategies. I hope to, once again, pursue the products and services that are unique to Japan Post Insurance and to take the command in regaining trust and promoting business improvement. Please look at Page 2. For the first half of the meeting today, I would like to give the summary and financial results for the fiscal year 2019. In the second half, I'll share the forecast for fiscal year 2020 and future initiatives. Afterward, I would like to answer any questions you may have. Please look at Page 4. In fiscal year 2019, we have spread our management resources to deal with the solicitation quality issues since last July. Our top priority was to provide recompense for customers' disadvantages. Furthermore, in last December, we received business suspension and business improvement orders causing considerable concern to shareholders. Nevertheless, by sharing a sense of crisis within the Japan Post Group, we have been making progress to date in our policy investigations and business improvement plan. With regard to sales personnel, discipline is being carried out based on impartial criteria. Meanwhile the sales personnel whom we judged to be able to maintain their sales personnel eligibility are undergoing training so that they can restart insurance sales. On the other hand, in terms of financial results, net income per share increased significantly year-on-year. However, we recognize that this increase was not a result of making favorable progress in our initial management plan, but a temporary upswing in profits, which has been materially impacted by the decrease in expenses for sales and underwriting as a result of refraining from sales activities and other factors. Therefore, we have decided to pay a dividend of JPY 0.76 per share, an increase of JPY 4 from previous fiscal year. That is the amount we initially forecast. Please look at Page 5. This is a summary of the impact that the changes in the business environment have on the finances. In short, our measurements to counter the solicitation quality issues are making good progress. In addition, the impact of the spread of the COVID-19 infection and the accompanying deterioration of the market environment do not damage the financial results and the financial soundness in any significant way. With regard to the solicitation quality issues, the elements to restart sales activities, those are responses to customers, disciplinary action against sales personnel and the establishment of a checking system are progressing well. We recognize the impact of the spread of the COVID-19 on the payment of insurance claims to be limited considering the current status of the infection. According to our internal stress test, we have confirmed that we can maintain sufficient soundness even if the disease continues to spread. With regard to asset management, although the market has been changed and deteriorated caused by the spread of the COVID-19, since most of our return-seeking assets are hedged foreign bonds, we recognized JPY 370.1 billion of net annualized gains on available-for-sale securities for fiscal year 2019. We also maintained high financial soundness with a solvency margin ratio of 1,070.9%. The reason why we are able to generate stable profits even under these hard circumstances is that the life insurance business is a stock business and that we have accumulated a huge customer base that we have contacted so far. However, the current circumstances in which new policies cannot be acquired will impact the financial foundation of the company in the medium to long term. And we will give priority to resolving the solicitation quality issues and aim to restart ordinary sales activities. Please look at Page 7. Next I would like to explain the summary of financial results. Net income for the current period was JPY 150.6 billion, increased by JPY 30.2 billion year-on-year due to the decrease in expenses for sales and underwriting as a result of decreased new policy sales and positive spread in investments. Despite an increase in net income, both EV and value of new business declined year-on-year due to changes to noneconomic consumptions, such as expense in surrender and lapse, deterioration of economic variances due to the spread of the COVID-19 infection and decrease in new policy sales due to refraining from proactive sales proposal and business suspension. As I explained, EV and the value of new business declined in the fiscal year ended March 31, 2020, despite an increase in net income. We are aiming to generate stable profits in the medium to longer term rather than a single year increase in income as a result of onetime factors. We hope that such an effort will eventually lead to increases in EV in the value of new business. Please look at Page 8. Next I would like to explain the results of asset management. The left chart shows the amount of return-seeking assets and the ratio of them to total assets. We are expanding investments in return-seeking assets within the scope of risk buffer under risk appetite policy, principally based on ALM. At the end of March 2020, balance of return-seeking assets, such as stocks and foreign bond, was JPY 9.9 trillion or 13.9% of total asset. As a result, we attained 1.82% investment return in fiscal year 2019 despite some market volatility arising from the spread of the COVID-19 infection since February 2020. The average assumed rates of return was 1.69%, reflecting the effect of reduction of assumed rates of return. As a result, a positive spread of JPY 80.4 billion was achieved. Please look at Page 9. I would like to report on our financial soundness. JPY 1,797.3 billion contingency reserve as well as JPY 858.3 billion reserve for price fluctuations were provided with a view to ensuring sound and stable management into the future against the risks of business environment change, not least the spread of the COVID-19 infection and associated deterioration in the market condition. While gradually increasing the proportion of return-seeking assets, we are still maintaining fair soundness with solvency margin ratio at 1,070.9%. As I explained, we will keep watching the impact of the spread of the COVID-19 infection. The internal stress test has proven that we will maintain insurance benefit solvency and financial soundness in the event of the pandemic scenario. Please look at Page 10. As mentioned earlier, EV and value of new business declined year-on-year due to changes to noneconomic assumptions, such as expense in surrender and lapse as well as deterioration of economic variances adversely affected by the spread of the COVID-19 infection, decrease in new policy sales due to refraining from proactive sales proposal and business suspension. Please look at Page 11. This page shows movement analysis of EV. To cope with this decreased EV, we must be focused on the 2 challenges, namely securing and expanding value of new business as well as securing volume of policies in force, which has significant impact on the expense assumptions. We regard EV and value of new business as 2 important indicators of corporate value. We are aiming to improve these indicators by materializing and steadily implementing the management policies and strategies, as mentioned later. Please look at Page 12. Next I would like to mention ESR. We regard ESR as an indicator for reference over the medium to long term because it does not affect the level of the capital adequacy at the time of measurement. Therefore, we decided to maintain a dividend forecast of JPY 76 per share for fiscal year 2020. However, for ESR, as of the end of March 2020, as shown here, we will control it adequately through multiple measures, including the growth of EV and capital enhancement. Please look at Page 14. With regard to the financial results forecast for fiscal year 2020, as we decided not to set sales target and not to monitor the achievement rates even after restarting sales activities, we anticipate continuous decline in expenses for sales and underwriting due to decrease in new policy sales as same as in the fiscal year 2019. Meanwhile, we have announced decreased financial results forecast due to the decrease in projected expenses for policy administration, et cetera, along with continuous decrease in policies in force and a decrease in interest and dividend income under the deteriorating market environment. Please look at Page 15. I would like to explain the shareholder return. Since we regard the distribution of profit to shareholders as an important policy of management, we will do it stably to meet shareholders' expectation while solidly fulfilling obligations to policyholders without fail. Specifically, we aimed for stable dividends per share while considering earning prospects and financial soundness. As for the dividends for fiscal year 2020, we plan to pay an ordinary dividend of JPY 76 per share, in line with the dividend targeted for the final year of the medium-term management plan. We will be striving to ensure long-term profitability as basis for stable shareholder return through materializing the growth strategies to be described later. Please look at Page 17. These are the details of the measures to address the solicitation quality issues that we will undertake in the fiscal year. The items stated in the lower right under the headline, key new measures, are being successfully implemented to improve the solicitation quality control scheme. Additionally, as already announced, we will not monitor the achievement rates of sales targets in this fiscal year. In the meantime, we will transform our past management style that overly focuses on new sales figures into one that dedicates to establishing and embedding proper sales methods, which will help sales personnel develop their capabilities to accurately communicate to customers and enhance the strength of the post office distribution channels. Based on these initiatives, we aim for growth in the medium to long term by providing better products and services as well as appropriate processes. The additional report prepared by the Special Investigation Committee in March 2020 contains the interviews by sales personnel who have been able to maintain both sales results and solicitation quality. This means that if we were to nurture similar human resources going forward, it will be possible for both Japan Post Insurance and Japan Post to conduct appropriate sales and achieve growth together. Please look at Page 18. This is a summary of the measures that we have recently taken in response to the spread of the COVID-19 infection. Needless to say, in the state of emergency, as a life insurance company, we will continue to maintain our essential services upon giving due consideration to the health and safety of employees and provide quick and steady economic assistance to customers. Moreover, it has already taken measures such as supporting the cash management for our customers, such as small- and medium-sized enterprises, sole proprietary through loans as well as investing in bonds, which support COVID-19 measures. In terms of asset management, in light of growing uncertainties over the market outlook, we will closely monitor the market environment and endure cautious risk-taking more than ever. The current situation has made us aware of the necessity for providing non-face-to-face services in various business domains. I believe that the possibility for such services will further expand. While we have been promoting the utilization of digital technology, including the online procedures at My Page, we are considering the further utilization to provide an environment for insurance services, including various procedures in insurance consultations, can be provided without constraints of time and place. It may be difficult to understand the necessity and the importance of the social role played by life insurance at normal times. Once a situation like this happens, however, we can provide quick and steady economic assistance to customers. I hope that we will continue to fulfill such a role going forward. Please look at Page 19. This slide shows the basis for the next medium-term management plan, starting the next fiscal year, which we are engaged in internal discussions currently. We will strive to improve our corporate value by securing adequate scale of business along with profitability over the long term, such as 5 or 10 years, by achieving intrinsic growth in insurance underwriting, the core over life insurance business, even if we start of sales activities may result in a temporary decrease in profit on a single-year basis. Based on this long-term approach, the first order is to make our business foundation rigid again through reconstructing post office channel, strengthening relationships with existing customer base and developing products for that purpose. Those are the strengths that we have acquired to date. Regarding sales channels, it will require further discussions with Japan Post, but we intend to reinforce our commitments to improving the sales and management structures at the post offices and to provide necessary support in order to secure sales force with solicitation quality more than ever before. As I explained earlier, regarding utilization of digital technology, the spread of COVID-19 reminds us for the importance of non-face-to-face interface with customers. From now on, we are considering to expand online procedures and to integrate face-to-face and digital interface in accordance with each solicitation process. This concludes my explanation. We sincerely ask and appreciate your further understanding and continued support. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]