MS&AD Insurance Group Holdings, Inc. (8725) Earnings Call Transcript & Summary

Good afternoon, dear investors and analysts. Ladies and gentlemen, thank you for participating in MS&AD Insurance Group Holdings Fiscal Year 2025 First Information Meeting. I am Miyake from IR division of MS&AD Holdings to moderate this meeting. Thank you very much. Before we start today's meeting, I would like to give you some instructions about audio and presentation slides. The original audio is in Japanese, but for those who participate from webinar, you are able to use translator functions to have English audio. Please select from the translation button on Zoom and choose English. Today's presentation slides are uploaded on MS&AD's official website. Start from top page, choose Investors, IR Events. And please refer to Fiscal Year 2025 First Information Meeting section. Let me now introduce attendance from our group. This is Shinichiro Funabiki, Director and President, Group CEO. Starting from the left-hand side, Mr. Takuma Hayakawa, Executive Officer in charge of Asset Management and Financial Services; Satoru Tamura, Senior Executive Officer, Group CRO. To the right of Funabiki, Shigeo Kudo, Vice President and Executive Officer, Group CFO; Hironori Morimoto, Executive Officer in charge of International Business Planning. Today, based on presentation slides, Funabiki is going to give a presentation for the first 15 to 20 minutes. After the presentation, questions will be received for next 60 minutes or so in a Q&A session. We are scheduled to finish this meeting at 5:30 in the afternoon. Let us move to the presentation session. Mr. Funabiki?

Hello, everyone. I am Funabiki from MS&AD. Thank you for your kind participation. I was on podium last time to give presentation, but today, I'm in a different venue. I am sitting on the table, so let me stay seated. As of last year-end, merger of the 2 cooperating nonlife insurance companies was announced. So today, how we can trigger that event to drive growth in our group is going to be my first topic. Please see Page 5. It was a great apology of ours. Our company and also rest of the industry had issues such as price adjustments for corporate insurance, fraudulent claims by agencies and information leaks. Those series of events have occurred frequently. So I would like to deliver our deepest apology. In response to these issues, significant revisions have been made to regulations such as stricter enforcement of comparative recommendation on sales, the abolition of transitional measures for specific contract ratio regulations and the fee structure of corporate agencies and the easing of broker entry requirements. Some of those have made progress. And upon the amendment of insurance business load and also supervisory directives, we expect significant changes in the regulatory environment. These legal and regulatory changes will dramatically change the way insurance is sold in Japan and competition in the domestic market. To win in this new competition, it's crucial to quickly achieve effective underwriting, risk management, underwriting capacity and also right pricing power. We need to establish to be ready for a comparative recommendation on sales, so DX-based intent confirmation system. Such preparation must be done in an urgent way. So those were the requirements for our competition going forward. So in this changing competitive environment, in order to drive growth, we are going to merge the 2 companies as we decided. We will be hearing from you to listen to your questions. Regarding the business strategy of the newly merged companies, it is going to be a part of a group management plan for 3 years starting from fiscal year 2027. So we plan to complete the merger in April 2027. So the following 3 years will be the important years to drive growth in our plan. But this fiscal year marks the final year of our medium-term management plan. So the next fiscal year is going to be a single-year plan focusing on executing improvement plans and business transformation towards the merger. So in a single-year plan, we are going to state what is going to be the preparation and also directions. Therefore, today, I will explain the business transformation efforts initiated by the domestic insurance merger. Please see Page 6. The newly merged company will become #1 in the market share domestically. We are aware that as the #1 company, we are expected to be mission-oriented, to initiate transformation for Japan's nonlife insurance industry. So we're expected to have the pride and responsibility for such transformation. At the same time, we understand that expectation to become an insurance company capable of providing risk solutions that are recognized globally, not just domestically. To meet such expectations and to become such a company, we aim to be not only top tier in terms of scale, but also in terms of corporate value worldwide. Please see Page 7. To achieve profit growth that brings corporate value to world-class level, we first enhance group governance by the holding company. This is going to be our primary focus to start with. Until now, the holding company also played the role of a coordinator for the 2 core insurance companies, which inevitably hindered both risk-taking and speedy decision-making. So we would like to use this merger as an opportunity. We are going to drive growth and also at the same time, achieve discipline. So this is what I commit to structure such a group. And within the 3 lines of defense, the functions of the second and third lines will be consolidated. And together, we will be enhancing our talent base. And we also enhance planning and strategic functions to improve business models and the customer experience as well as advancing overseas business management. We will execute growth strategy led by the holding company in domestic life insurance, overseas business and financial services such as asset management. We will also lead a demonstration of competitive advantage and restructuring of business expense structures in the newly merged company, which will become #1 in domestic market share. Now let me explain the restructuring of business expense structures. This is going to be one of the key challenges for the newly merged company. So please see Page 8. Post-merger target for business expense ratio is to fall below 30%. This is a benchmark for global top tier. Through the merger, we anticipate significant reductions in future system operating expenses, aside from one-off expenses required for system developments, but operating costs for systems are going to be largely reduced as well as personnel expenses. In total, annual savings of over JPY 100 billion is expected. However, in order to fall below 30% in expense ratio, we need to achieve a reduction of above 2 percentage points from last fiscal year, realizing a reduction of approximately JPY 150 billion. So after establishing a newly merged company, expense is going to reduce by JPY 150 billion to achieve expense ratio under 30%. Achieving this target and the numbers based on our KPI is going to be the basis of our merger as well. To achieve a reduction of these financial targets, we will fundamentally review the structure of personnel expenses, property expenses and also agency commissions. For example, we will swiftly consider reducing the number of system requirements by streamlining the product lineup, reviewing the organizational structure to achieve optimal personnel allocation. So we need to have a solid -- thorough review in place, not just a simple integration, but how we are going to integrate must be worked out before actual implementation. And in terms of headcount, it is not just a mathematical exercise by percentage, but what business model we are going to achieve, and for that, what organization is going to be required and then what should be the right headcount. So such a rational number of headcount is to be established. So this is one task that must be done on our side. Regarding the agency commission system, today, legal regulatory and directives are in the process of amendment. So taking this opportunity, the role of agencies, there are functions. And in order to realize them, the definition of the agency operations must be made. And based on the requirements, the commission [ systems ] must be paid to agencies. So this structure must be reconstructed and redefined and also have consensus with agencies. In those 3 areas that I mentioned, where to change in what degree and how much reduction is possible, those are the very fundamental elements that we must account for. So how to make changes in these areas is one of the key challenges in the process of merger going forward. And we are having a very prudent and at the same time, bold discussions so that importance of accountability to shareholders is something that I will recognize. And also, this is a great impact on our employees and agencies, too, so forming a consensus amongst different parties. And then to the investors and shareholders, we are going to give explanation about how we are going achieve with this. Next, I want to talk about growth strategies starting from Page 9. Changes of regulations and rules that we expect to see will also bring about large transformation and changes in personal and also commercial lines of business. In the personal sector, the comparative recommendation on sales must be achieved. And this is one key challenge that we are facing. And in order to achieve this, DX -- how we are going to implement digitization is the most concrete measure that we have to achieve. Procedures that are required are now going direct in financial institution and other financial services. So starting from the confirmation of intent to closure of policies, we would like to pursue to be direct. This is the most important point concerning the key mainstay business in personal sector, which is automotive. Smooth procedures and also being compliant with amended regulations are going to be our key focus. Then in the commercial sector, leveraging data for underwriting and risk solution enhancement are the important points. Traditionally, each insurance company with its own economic rationale, share split was given. But the capacity provision on a stand-alone basis is going to be part of the competition going forward. Therefore capacity provision capability must be reestablished. This is going to be the most important point in terms of competitive edge. So what we can do to drive this capacity capability? We can utilize expertise from Lloyd's and also partnership with Berkley and know-how and insight how much we can maximize from such partnership. This is going to identify the winning opportunities for us. Then starting from last year, with overseas brokers and [ real estate ] companies' management teams, various times we had engagements to understand how we can drive the values that we can offer to our clients. In the area of commercial, due to the abolition of transitional measures for specific contract ratio regulations, there would be a great impact expected in the nature of competition. One key challenge is the survival of in-house agencies. So in-house agency strategies, such as inheriting the conventional in-house agencies, is part of our strategy that we are about to implement. I would like to mention a few points on life insurance business on Slide 10, please. In domestic life insurance in our group, we have MSA Life and MSP Life. We have 2 life insurance companies with distinct characteristics. How we can leverage such 2 life insurance companies within one group. We are in the process of drawing a growth strategy driven by life insurance capabilities such as enhancing capital efficiency through reinsurance, strengthening product development capabilities. And there are a lot of domestic life insurance players in Japan. So they are commoditized products as well in the market. So based on this view, what kind of partnership or restructuring we can we implement. We will be exploring all possible options. So we are in an important phase to draw the vision for such life insurance side of the business. And regarding overseas business on the right-hand side, Lloyd's and reinsurance America and Asia, we have existing businesses where we maintain underwriting discipline. And also as we see the market moving from hardening to softening site, we draw a growth strategy today. So now MS&AD are too merge, and as we invest in Berkley, WRB, we aim to establish a new business management model for overseas business. This is going to be initiated by the holding company to create a new business model to drive growth. So now considerations are underway. Next, please refer to Page 11. We're going to talk about sales of strategic equity holdings. So investors have frequently asked me whether a profit cliff will occur in fiscal year 2030 when the sales of strategic equity holding is completed. Should we expect such cliff? So how are you going to address that issue? So how can you prevent yourself from falling from the cliff? So I think -- yes, I think we -- I myself mentioned that there's going to be a cliff for 2030. So I guess it's my fault. But we need to take this into consideration in designing our management of this company, and we need to communicate that to the investors. So we are eyeing on 2030 to complete the sales of strategic equity holdings, and we want to speed that up, do that earlier if possible. And we are going to provide the return from such sales to our shareholders. And we are going to allocate the money as investment for growth, so we can speed up our growth towards 2030 and to remove the cliff or at least make the cliff, I mean, lower for 2030. So we do have initiatives for doing that. So that's the merger of 2 core insurance company and our investment to Berkley. On top of that, we are eyeing on strengthening our asset management capability. So we are going to strengthen our asset management business. That's another strategic priority for us. So I mean -- so the equity management. So I mean almost 100% of our domestic equity management was, I mean, strategic equity holding. So I mean we need to shift that to pure investment. So we need to restructure our asset management. How are we going to handle the money of nonlife insurance? How are we going to combine the money from life insurance? So we will have foreign currency-denominated assets outside Japan. How are we going to manage that? So these 3 different types of assets needs to be managed well. So I mean that's an issue for us, but that's an opportunity for us. So we need to really enhance the structure and capability for asset management. This is going to be a very future challenge for us to go into the future. So that's why we have nonlife insurance, life insurance and also we have financial service business, which takes care of asset management. We need to strengthen all these 3 areas. And that's how we will be achieving JPY 1 trillion in profit, JPY 10 trillion in market cap. So we need to work diligently in the coming few years to achieving that target. Let us move on to Page 13. I'm going to more specifically talk about the status of sales of strategic equity holdings. So as mentioned here, 84% of the issuers have agreed for us to sell down the strategic equity holdings. So there are a large cap and small cap in the issuers. So some of the -- we have had a consensus with almost all of the larger market cap issuers. So Nikkei average is quite volatile depending upon the quarter or month. So if we assume JPY 36,000 Nikkei average, so we are expecting to sell down further JPY 570 billion of strategic equity holding, which is going to bring down the balance to JPY 1.8 trillion. So please take a look at Page -- excuse me, Page 14. So okay. So we're going to, yes, reduce our strategic equity holding balance to JPY 1.8 trillion. So Page 14. So we are going to sell strategic equity holding and, I mean, finance our investment for growth. So the first step for doing that is the capital alliance investment into W.R. Berkley. So W.R. Berkley is the specialty insurance measure in U.S., world's largest insurance market. They have already established very high reputation. So in Japan, corporate insurance will change quite drastically. And in Asia, we are expecting acceleration in their economic growth. So in these 2 markets, we would like to leverage on the insight, know-how of Berkley, and we want to combine that with our network to strengthen our business to bring into reality the synergy. So at this point of time, our plan is to acquire 15% of W.R. Berkley's outstanding share. We are going to dispatch 1 director to Berkley. And from FY 2026, we are going to incorporate W.R. Berkley's profit into our consolidated statement. So how we have realized synergy, what is the impact on our P&L? So as soon as we are clear on the impact of W.R. Berkley's integration into us, we are going to make announcement on what that is going to look like. Please turn to Page 15. So we are making very good progress in investment into higher-return asset. Through the utilization of MSR established in New York, we are expanding investment primarily in private assets, increasing the balance of higher-return assets by JPY 350 billion year-on-year to now JPY 4.0 trillion. So additionally, we are expecting to increase the balance by approximately JPY 300 billion. So that's this fiscal year. Please turn to Page 16, status of growth investments and business investments. So we are progressing with the utilization of profit from strategic equity holding sales primarily through investment in WRB and the accumulation of higher-return asset balances. Like we have mentioned, the next round of next business investment would be, I mean, investment in areas where our group can leverage its strength such as international asset management business and investment in Asia. And we will invest into our next-generation system, invest to further enhance our productivity and improve investment into DX to further bring synergy. We have investment to innovation, and we can finance that by money we have gained through selling strategic equity holding. And these businesses will be a new source of profit for us from years 2030 onwards. Next, I'm going to talk about ROE and equity spread. Please take a look at Page 18. So we are going to improve, I mean, the profitability of our existing business. But at the same time, we are taking initiative for reviewing and reorganizing business portfolio. We will be very aggressive in doing that. In the last fiscal year, we have decided to sell our stake in Challenger, and we will always envisage this type of bold initiative. And we are going to further reduce our capital cost. We are continuously working on major risk reduction, including the advancement of strategic equity holding sales, asset liability duration matching and control of overseas natural catastrophe risks. So the shareholder capital cost of our group is based on 7% calculated by CAPM. But we will continue to effort -- continue effort to reduce the capital cost rate while being mindful of the shareholder capital cost rate suggested by our share price and other factors. Now I'm going to talk about shareholder return policy. Please turn to Page 19. No change in our shareholder return policy. So we will return 50% of group adjusted profits through dividends or share buyback. And the proceeds from accelerating strategic equity holdings will be returned to our shareholders in the form of special dividend. And we are going to continuously build up the dividend payout from year to year. So -- and we have the outlook for '25 on Page 21, 22. So the group adjusted profit of fiscal year 2024 increased by JPY 351.8 billion year-on-year. That's the record high, JPY 731.7 billion. So all regions, including domestic nonlife insurance, domestic life insurance and international saw profit growth. Of course, I mean, it's driven further by, I mean, very good focus of strategic equity holdings. And also, it owes to very strong performance of our international business. So our full year guidance -- please take a look at the graph on Page 10. So in domestic nonlife insurance, due to a decrease in strategic equity holding sales profit next fiscal year, we expect decrease in profit with the group adjusted profit forecasted to decrease JPY 60.7 billion year-on-year to JPY 671 billion. So -- but the blue bar, I mean, the profit from our international business will make up for the decline. So of course, there's going to be an impact on the -- from the volatility of Nikkei average. My last point, I'm going to talk about shareholder return again. So the total dividend per share for fiscal year 2024, combining ordinary and special dividends, will increase by JPY 55 year-on-year and be the same as the forecast totaling JPY 145 per share. That would be a full year payout. And the year-end dividend would be JPY 72.5. Additionally, we have decided to implement a basic return through share buybacks with a cap of JPY 145 billion, of which JPY 60 billion has already been executed midterm. So the dividend forecast for FY 2025 is an increase of JPY 10 to JPY 155 per share for the full year, of which JPY 120 will be ordinary dividends and JPY 35 will be special dividends due to accelerated strategic equity holding sales. So we will continue with the track record of continuous increase in the dividend payout. So share buybacks. So we plan to conduct an additional return of JPY 60 billion based on the current stock price level and funded by the sales of Challenger shares in addition to basic midterm return of JPY 55 billion. The share buyback for fiscal year 2025 will total JPY 200 billion, as stated on the slide. So like we have seen, we aim to expand shareholder return in line with profit growth from this fiscal year onwards. I would like to ask for your continued support and understanding. I would like to stop here for my presentation. Sorry for running overtime by a little. My apologies. Thank you.

Thank you very much, Funabiki-san. So we would like to now jump into Q&A. So if you are, I mean, attending in this room, please raise your hand physically. [Operator Instructions] Master of ceremony will be appointing you. When that happens, please identify yourself, state your company name and your name. [Operator Instructions] We would like to [indiscernible] question from as many investors as well. So I would like to limit to 2 questions for investors per person. So let's go into Q&A. Please raise your hand. SMBC Nikko, Mr. Muraki, you're the first to ask a question.

I'm Muraki from SMBC Nikko Securities. I have 2 questions. First of all, on Slide #8, domestic nonlife competitive landscape is what I would like to ask about. As you explained today, regulatory environment is changing so drastically. So how to protect quality insurance policies and expand business? In other competitors' information meetings, they talked about liquid market and a lot of leads available beyond the traditional relationship with existing customers. As you unwind your strategic holding and as we pursue merger activities, as you show on the left-hand side, you are to leverage [indiscernible] Mitsui Sumitomo Group. How to protect share from those key clients that you have today? And how to actually attack and win other companies' key clients? So I would like to hear about your strategy to win competition in the changing market. And then my second question is on Slide 16. JPY 2 trillion of facility for strategic investments, JPY 1.4 trillion is the remaining balance. So I'd like to know how you plan for this sum of money. Overseas -- international asset management is what you mentioned here. In the case of Berkley, are you going to purchase today's family stake so that you will be consolidating this business into your account? I think one idea is to have it for that purpose and keep JPY 2 trillion for growth. So what are you going to make use of this remaining JPY 1.4 trillion?

So let me start, and Mr. Kudo and Mr. Morimoto can follow if necessary. Regarding the change in competitive landscape, this is an opportunity for us, and we have to prepare ourselves. Of course, merger requires a lot of work, so it will make us busy, as you pointed out. But in our group, over the last 10 years or so, we have already conducted system commonization and standardization. So within merger activities, it's not going to be so labor-intensive as if we are acquiring or merging entity outside of the group. So the first line of defense will be gaining competitiveness whilst merger activities are underway. By becoming one company, capital can be enhanced, more information, more data to leverage, more capability to give proposals so that we can enhance the value that we can provide to the customers. So what value we are going to deliver is the next question. This is a basic nature of insurance business, the intrinsic value of insurance. Unlike the case of U.S. and Europe, data-driven underwriting is already common to design products and also to set prices. This very basic fundamental capability of insurance must be achieved. In this context, we signed a partnership with W.R. Berkley. And at Lloyd's, we have acquired know-how that we can leverage today. So assuming that situation is going to be here, we have sent a lot of staff from Japan at Lloyd's and also other international locations. There is a Japanese woman that is capable of underwriting in Lloyd's. And this woman was from our group. So at what phase, we are to realize value proposition is what I just described. But it's all about talent, our people, employees that will bring about such a value enhancement. So our effort to develop talents that we focused on in the last few years will actually bear fruit going forward. Regardless of the group, regardless of partnership we have with any insurance company, in every phase, we can leverage our efforts that we have made in the last few years in every aspect. Having said that, price is going to be the key factor for the comparative recommendation in future sales. Therefore, reducing our expense base is a very important goal to achieve. This going to be the winning factor in the future as well. So that is why we made a quick and fast decision to pursue merger, which is going to drive our strength going forward. Then regarding the strategic shareholding gains from sales, how we are going to allocate such gains from sales. Regarding investment, the missing piece for our group has always been North America. That is going to be fueled by our investment in Berkley. And globally, as we reinforce the structure in Japan by merger and also as we keep #1 position in Asia, and in Europe, in the Japan enterprise business, we already have #1 position. So in Europe, we also conduct a merger so that we have access to large enterprises and SMEs in a wider scale. In North America, we are making investment today. So global diversified structure and also in each region, what we established as core competence to expand the business? We have established a structure in a quite good magnitude. So the next thing that we have to do to structure ourselves is on the asset management side. The reason for this is already explained previously, especially foreign currency-denominated assets under management are on the increase. And also pure investment facility is going to be expanded. Therefore, asset management capability is increasingly important in our group. So out of this JPY 2 trillion, about JPY 600 billion was invested in Berkley. And then aside from that, if we are to invest in asset management business, probably it's going to be a relatively small scale, like around JPY 100 billion. But aside from that, we will be investing for the purpose of investment. The facility of investment itself is an investment. So this is the kind of allocation that I have in mind. Anything to add from my team? Kudo-san?

Thank you for your question. I think Mr. Funabiki covered almost all the important points. But let me add on his first point. Regarding Mitsui Sumitomo Group and Toyota, with leadership team of those companies, we had a frank discussion with some of the leadership team about their feedback on merger. With merger, more capital, more capacity, meaning we can expect better products, better services to be developed. So basically, that was a positive feedback I received from key clients regarding the merger. And as Mr. Funabiki mentioned, risk management and capital and underwriting capabilities are very important. And for the commercial market, this is a collection of a personal lines of business. So simplicity, user-friendliness and a simple procedure to close policies are very important. So we would like to refine in those areas so that we can meet the expectations of customers. And as you mentioned in the beginning, other companies have now these from totally untapped accounts. I can feel that as well. Well, large enterprises or companies from other groups that we did not have relationships also started to give this to us as well. Thank you.

From Morimoto-san on the international side. Regarding the international side, I have 2 points I want to make. So Muraki-san had a question about Berkley. We can save some portion for future stake top-up. With the founding family, we made an agreement, and based on that, our priority is to close a deal that is currently outstanding. So at this moment, I would like to refrain from making comments about the future -- forward-looking outlook. And regarding international, as you can find in this slide, in each location, in each market and countries, business unit can be enhanced by certain bolt-on opportunities if they are available. Thank you.

My name is Sato from JPMorgan. I have 2 questions. My first question, likewise to my previous predecessor, Page 8. So I just wanted to test the consistency of the message here. So you have been mentioning -- so you are going to do a comparative recommendation to sell your insurance and offer option to customers. So that's how the competition is going to evolve. So I mean as a connection of zaibatsu or corporate group or, I mean, the traditional capital alliance companies -- so you have -- I mean, talking about your conventional partner customers, and you are mentioning to protect that. But that's a bit inconsistent from the prior message, so change in the competitive landscape or you have a good relationship with Toyota, Mitsui Sumitomo Group. So isn't there any inconsistency in -- on one hand, the industry evolving, to get of such, I mean, traditional relationship, but you're still, I mean, focused on these traditional partners. And -- so Funabiki-san, I think you have had an interview article. I mean you are not simply thinking of restructuring, the reduction of headcount. But -- so the actual cost of labor -- can you bring down the actual cost of labor? If you are saying you can do that, how can we bring down the cost of labor? So that's my first point I would like to confirm. My second question is on Page 11. So I just wanted to check the assumption behind this graph. So as you shift to IFRS, so probably there's going to be an uplift of JPY 100 billion of adjusted profit because of shift to IFRS. That's excluding selling the strategic equity holding. I think I saw that in your presentation material maybe about 12 months ago. So does this include IFRS -- transition to IFRS -- effect -- impact of transitioning to IFRS? Or is there any other inorganic opportunity on the right side? So if there's anything -- I mean, for such inorganic growth opportunity [indiscernible] for 2030, can you suggest what they are?

The first question. So maybe this is not a very good slide. So it's not a very strong message that we are sending to mention some of our conventional partners' name like Toyota or SMBC. I'm going to improve this slide for the next presentation. Thank you for your insight. So headcount. So this is a very important point. Thank you for addressing that point. So many of our shareholders or external stakeholders, I mean, see positive value in the integration of 2 core insurance companies, I mean, so we can provide better insurance product. So they are foreseeing a very good synergy. And I hope -- I feel the need that our employee, I mean, thinks the same way. So after the merger, so our management policy strategy are more of a concrete -- I mean, product strategy, what sort of product will be sold through which agency in which manner. So we need to see -- present our business model very clearly and, I mean, show our employees how they will be engaged in the new business model. So we are going to make that overall vision clear and also, I mean, allow our employees to feel continuously engaged. So that communication with our employee would be very important. Now having said that, so what sort of work do you want to be engaged in the new company? And so we want our employees to understand where they will fall into. And we want them to make options, a very important decision on their future careers or, I mean, even personal life. We want to focus on what sort of new good company we are going to bring. And -- so of course, we will be presenting all the quantitative, I guess, vision or target to our shareholders. I hope that has answered your question. And what was the second question?

So I think your second question is on the numbers on Page 11. So impact of transitioning into IFRS is not reflected on this graph. I mean -- so it's, I mean, apple-to-apple in that sense. We are counting profit in a conventional [ way ]. And inorganic opportunity you have asked about. So I mean we are going to work out the concrete specifics in the near future. So this is just a future aspiration that we are showing here, not too specific. Thank you very much.

Next is from Mr. Watanabe from Daiwa Securities.

Watanabe from Daiwa Securities. I have 2 questions as well. One is on Page 26 regarding pricing strategy for domestic nonlife business. First of all, auto insurance. From other 2 peers, by the end of this fiscal 2025, auto price hike is part of the plan. Also for your group, what is your expectation for premium hike on auto? Regarding fire insurance business, you are touching profitability in time. Is there -- you don't think there is a need for further price hike in fire? Is that correct understanding? My second question is on Slide 70, please. On ESR, what is the current target range, which is 250%, this is your setting. In your current midterm plan starting fiscal 2022, initially, the upper end was 220%. But in order to set a buffer against business investments, it was raised to 250% in my recollection. So through WRB investment, as you identify large investment opportunities, are you going to reset this target range again? And with [indiscernible] introduction, if you are going to change your view on the excess capital, then please share that as well.

First, regarding auto and fire insurance premium rate setting, let me start by giving you some answer and comments. Across Japan, inflation rate was fully absorbed by previous rate hike. But for auto area, in auto industry area, the parts cost is on inflation, and the labor rate for the workers on those auto garages were relatively high. That is why there was impact on loss ratio. Without the premium hike, if there's other way to reduce loss ratio or other ways to break down the expense ratio. If there are no way for such as options, we might consider increasing premium high. But at this point, we don't have a plan to increase premium. Whether a decision was made or not, we have not made a decision on premium rate hike. I think this is a good estimation for you. And same can be said for fire business. Finally, single-year profitability is in scope and on horizon. But you prepare for future risk expansion. And in order to absorb cost of capital, what would be the right premium setting. That must be considered to determine the resetting of premium rates. Second question, please?

Thank you for your question. Regarding ESR upper end, as you pointed out, we have that -- we have taken that into consideration. We have not made any decision. But in relation to business investments, we are going to deepen our consideration regarding a possible change of upper end of ESR. Thank you.

In relation to ICS, which is part of your question, ICS and FSA's proposals were part of our consideration to come up with our own ESR. And we sophisticated this. So it's not that different, basically, but the way numbers are shown, a little bit different. So for us, at this moment of time, thinking about future shareholder returns and other parts to be taken into consideration, as mentioned here, our own model is going to be the base. But essentially, [indiscernible] also to be disclosed. So for -- if there are multiple ESRs, it's going to be difficult to make comparison. So we would like to deepen our consideration process going forward. Thank you very much.

The next person, from Mizuho, Mr. Sakamaki, you're up next.

This is Sakamaki speaking from Mizuho Securities. I have 2 questions as well. My first question, so -- I mean -- so from Page 12 onward and Page 40, so business investment. So if we can do a review on the business investment. So you have sell down the shares of Challenger. So since investing into Challenger, maybe Challenger didn't have too much of a presence inside your group, so this type of equity method investment. So you decided to sell down, again, your stake in Challenger. So what were the lessons learned from Challenger investment? And how are you going to incorporate that into your next business investment opportunity? How can you leverage on what you have learned from investing into Challenger? That's my first question. Second question is Page 35, so reinsurance. This is quite a -- so you have target for 2027. So gross net premium, JPY 5 billion. So maybe you're expecting higher growth. So what is your growth strategy when it comes to reinsurance -- growing reinsurance business?

We have -- we are based on nonlife insurance, and we want to be a comprehensive insurer, and we have been expanding our footprint globally. Especially in overseas, I mean -- so we cannot acquire a major player and take over the business. We are not focused on doing that because that's quite risky. So we have established the value in domestic market. We want to disseminate that to our global market, get return for that. So if you -- when we look into regional strategy, in which region, what we want to do, so we need to widely make investment and learn from the process. That has been a very important process of learning for us. So in the past few years, so if we wind back a few years, so that's what we have been doing. That's what we have done. And we need to make a decision whether we want to further increase investment into those areas. And I mean we need to make that decision in a certain time frame. So the Challenger's brand or region -- so I mean we decided, I mean, upon making that decision, to pull out from Challenger. So we do have, I mean, a number of different entities to which we are doing minority shareholder investment. We will be making a decision on whether we want to continue or exit at a certain point of time. So I mean -- so if we can [indiscernible] in North American market -- so from like Berkley. So I mean they are -- so there's a risk in acquiring such company who has a very big presence in the market. But we want to take that step and, I guess, take more substantial position in new overseas market. And so I think I would like to hand over the floor to you, Morimoto-san, for the second part of the question.

So just to add to what President has mentioned, in the holding company, one of the important KPI is ROI. So if there's any business which has not provided sufficient return in a certain time frame, we are going to make a strategic reexamination. And I mean we have done that with Challenger. Now your second question. So I mean you may see that the business is substantially growing. But the base of the business here is -- so we need to assume that in certain business, we should be able to make profitable reinsurance. And so the risks are becoming more sophisticated, I mean, diversified. And so -- and that's why there's increased need for reinsurance. So that's the context. So we have our head office in Switzerland. So I mean -- so the content portfolio has changed since [ MSME ] has acquired this business. So they have a very diversified region. So they have branch in Bermuda, Miami, New York. In Bermuda, they are covering all the South American nations. They have like [ 500 ] portfolio of about [ 5 million ]. And they have very diversified -- a very small-scale and diversified investment. And so they need to look into the risk and the underwriting margin. And they have a very planned approach in acquiring these businesses. So the current portfolio probably we can continue until 2030. So that's it for myself. Thank you.

Let's move on Ms. Tsujino from BofA Securities.

I'm Tsujino from BofA Securities. I have 2 questions. First question regarding dividend. Previously, profit cliff is going to be avoided was your message. And you have huge capital gains from equity sales. So this is a good challenge. But when it comes to dividend, relatively, it is quite committable. Therefore, avoid profit cliff by way of dividend is something that you could commit at an early stage so that through merger, you have to [ develop ] things going forward. I think this is a more simple story to pursue. Plus this Page 23, special dividend. It's a concept to moving here from there little by little. In straight way to put it, it seems like you are doing a very small calculation year after year. So we look at the total number. So on total number, what is a minimum increase that we'd like to achieve? What is your view? So looking at number from this year, it kind of makes sense. But with this image that you may have, at a certain timing, if you can share such image to the market, then people can feel more comfortable until the merger is fully completed. So on this point, regarding your decision on dividend, do you have any comments? Dividend is a cliff proof. Is this kind of a thinking that you may have? And second point is on -- early fiscal 2027 is the timing for the merger completion. And I know that you have various difficulties. But why was it not April '26? And system -- core system for operation and also product structure on retail, there are a lot of commonization and standardization already in place. So if you wanted to do it, it would have been relatively easy. That was a discussion that you used to have. So why this time frame -- time line? And until April '27, we are to wait. But if not today but at the early timing, I would like to hear from you about what kind of standardization is going to be expedited and also executed.

Regarding dividend commitment, of course, as a leader of the group, this is something that I want to make. So you will -- do my best for that. Regarding prior to merger, by merger, what kind of impact we can create is be the key for our dividend policy of the group and also source of profit. So how much impact from merger, how we are going to deliver it is going to be decided first before make commitment on dividends. I think this is a sequence. Regarding the time horizon, the schedule, having customer touch point on solicitation, marketing and claims payment, these are the important phases where commonization of one platform has been implemented. But regarding systems, all the details, all the operational processes are backed by the systems. Therefore, how to bring -- acquire costs and every single operating procedure must be centralized into a system. That means that a very careful and prudent preparation is required. Therefore, April 2026 was a little bit too soon to set as the time line. And starting from April, I think, is the most optimal solution. So that is why April '27 was set as a target date, which we thought was a pretty reasonable consideration process.

Next person, from Morgan Stanley MUFG, Mr. Takemura, you're up next.

My name is Takemura from Morgan Stanley MUFG. I have -- so 2 questions on the presentation -- so actually on 2 slides. So my first question is on Page 8, so what the merger will achieve, number two. So I think -- I mean, there has been -- this has been a communication before as well, this JPY 150 billion cost reduction, the initiative to reduce JPY 150 billion. So labor cost, property cost, agency commission, so how much would each of them be a contribution to JPY 150 billion? So which part of the cost reduction is a certainty? Which part of cost reduction is more uncertain in nature? So can you give me a bit more color on the cost reduction? That's my first question. My second question is on Page 10. So we have domestic life insurance and international business. I mean you talked about the strategic directive on these 2 businesses. My focus is on life insurance. You're talking about strategic partnership in the field of life insurance and on your international business. So you are going to talk about a significant update on management model. So could you elaborate on these 2? So what is the issue that you feel about the reality and which you are going to change through these initiatives?

JPY 150 billion cost reduction, so how are we going to achieve that? So the biggest cost reduction would be IT system cost or expenditure on IT system. So the operation cost for IT or when we want -- so development cost for revising or developing new -- revising product, developing new products. The costs for operating a cloud server, these costs are coming up. So by integrating the 2 core companies into one, there should be a potential for cost reduction. So we need to ascertain what -- how much would be the reduction and what sort of product lineup or portfolio should be designed or sales process to maximize the cost reduction here. So I mean we need to look at the business side and the IT system, look at them in parallel to get an optimized solution for how we are going to reduce the cost. And that's what we are doing right now. As a result, the organization or headcount, I mean, will change accordingly. So probably our -- the way we have our sales channel -- our sales change would change. So all these items are connected to each other. What is the business process, the new business process that we put in place, and the cost reduction amount would be significantly impacted. Because if you leave things as, I mean, the cost will continue to swell -- grow. So we need to stop that. And at the same time, I mean, we need to look into how much reduction we can realize. How can -- reduction of cost we can realize. And what was the second question? Oh yes, life insurance business. So in Japan, so there are many life insurers and the products are being commoditized. So if we have these 2 of our life insurers, I mean, they are making -- striving to sell their products from day to day. But if we look into the growth -- further growth of their profit -- so we need to be quite bold and aggressive in pursuing options for our life insurance business here in Japan given where we are. And I mean -- so in some countries and region, the regulation is going to change, including reinsurance. The interest rate is going up. And given that backdrop, so how can we, I mean, ascertain the position we should be taking as early as possible? We need to start making a decision, and that's where we are right now. And so our organizations outside Japan -- so MS had their own international or overseas business. Berkley -- we have invested into Berkley. And we have now a global diversification. So -- and now, I mean, is the time to really -- I mean, give serious thought on what should be the global business structure and organization. And we need to come up with an optimum solution here as well. So there are a lot of different options that we may pursue. So I mean when we integrate the 2 core nonlife insurance companies, at the same time, we need to look into optimizing our organization outside Japan, overseas. So that's how I see the situation. Anything you want to add?

So our overseas business has grown to -- so that we can assume JPY 200 billion business profit. So in the last 2 years, Transverse, First Capital, Amlin, so we have invested into these 3 firms. And now we are going to invest into W.R. Berkley. So the environment in which we operate outside Japan has significantly changed because of these acquisitions. And -- so I mean, for instance, I mean -- so Japan has a way of rotating people after a certain term of time. Can we simply apply that management to our overseas business? Maybe not so -- like as mentioned on the slide. So we have to have a multinational human resources, which are already inside, I mean, MS&AD Group. And we need to come up with a system to maximize the -- or leverage these talents. And we need to look into our strategic importance, and we need to group, I mean, our organization. So I mean we haven't yet decided anything. So we want to design our organization so that we can sustainably grow in the future. And that's where we are right now. Thank you.

Next is from Tokai Tokyo Intelligence Labo, Mashima-san?

I'm Mashima. Regarding merger, I think probably it's hard to give me a clear answer at this point of time. But there are redundancy in terms of offices and branches, I believe. But still, in order to benefit from merger, you need to consolidate those branches and offices. So for those redundant offices and branches, what is the idea at this moment? That is my first question. And another question on merger as well. Nonlife actually tends to have a lot of members of labor union. So high participation in the union amongst other sectors in the financial services. As of end of March, you announced on the merger. So between the management and the labor union, has there been discussions? So 2 questions.

The branches and offices, like sales offices, right? Upon merger, obviously, we will only have one organization. So in one branch, there will be a consolidation so that the people from 2 companies will start working together. That is a big assumption, I guess. Aside from this answer, are there any follow-ups regarding office consolidation?

Then in that case, timing is going to be April -- by April '27, offices will be consolidated?

Yes. Of course, we start from where we can do because of the space constraints. And also, there are legal requirements that we need to meet. So optimal structure is going to be implemented from where we can start, including head office. So this is what we are going to do in terms of the office consolidations and branch consolidations. And as for -- so that is where we are making preparation today. Regarding the mindset of our employees, union executives and the management, there has been coordination. And of course, union members, young members, many of them are positive about this merger. Better outlook, better expectation. This is my recognition. Honestly speaking, more than I expected, there was an even greater percentage of labor union members who have positive view about this merger. Thank you.

Any other question? From Citigroup Securities, Niwa-san, you're up next.

My name is Niwa, I'm from Citigroup Securities. So asset management and long-term breakdown of your profit, that's where my question is going to be. So I mean -- [indiscernible] 2030. So I'm looking at Page 42 of your presentation, so asset management. So higher-return assets -- so what's the practical return you're expecting from higher-return assets? So I guess that's the basis of my question. So my interest is -- so credit cycle is very difficult to control, but you have a low credit exposure. So this is a risk that you can afford to take. But can you start getting into this field at this point of time -- from this point of time? Because we have cycle. So -- and we need to be mindful of the cycle in designing portfolio. This would be more of a tactical consideration. What will be a target for return, [ DNP ]? So if there's any thought on these points, please enlighten us. And my second question is relevant to Page 11. Once your AUM becomes JPY 1 trillion, so what will be the breakdown of JPY 1 trillion profit? So what's the breakdown? So I mean a year ago, we expected 50-50 split between domestic and overseas business, but maybe that mix has changed. And what's the breakdown between the life and nonlife business? And respective ROE -- so I mean, how would the respective businesses would look like in terms of ROE compared to the group average?

Okay. So cycle management for our asset management, probably it's going to be technical in nature. So maybe I can have Hayakawa-san answer to that question. So we are selling strategic equity holding, and the proceeds or money from the selling will be shifted to asset management to an extent. And we are going to build an organization for doing that -- system for doing that. So that's our mission. And how can we build a very clever organization? Hayakawa-san, could you elaborate on that point?

Thank you for the question. So credit -- I think your question had rather focused on credit. It's not necessarily the case that when we come up with some number -- so we always stress on overseas credit. But I mean are we going to look like that 2030? Maybe not. So we have to look into interest gap between overseas and Japan and other investment considerations. So when we make explanation, usually -- so I mean -- so we say, I mean, we buy a lot of foreign bond IG. And also, we always talk about investing into private assets. So those are the 2 focuses that we always talk about. And our group companies, each and every one of the group -- so I mean -- so there are different colors of progress. So I mean -- so we have a vehicle, which is very aggressively investing into private equity. And so they have a very long J-curve. I mean we need to be engaged in for a long period of time to get a decent return. So -- and so we are getting more and more of IG dry powder. So -- and we want to sell this dry powder. And the other group companies -- so they lag behind in entering private equity. So I mean they've been -- they are not doing that for 20 years. So I mean they want to invest into private equity. But I mean -- so in order for, I guess, more prompt cash flow, they have to focus on private debt instead of private equity. And there's a term credit bubble. So we need to be careful about that. So -- but I mean it's not that we have to go for private debt. I mean if there's no issue with J-curve effect, I mean, maybe there are who are willing to invest into private equity, so private equity that we are trying to sell on a secondary basis. So probably -- I mean we were trying to sell something like that would generate cash flow in 2, 3 years. Maybe we can, I mean, sell that into one of our group companies. So that's how we want to do asset management. If we just purely look into credit, so it's -- yes, I mean, maybe you may feel skeptical. But there should be an opportunity probably at a certain point of time before 2030, but we are not going to make a substantial move into that class of asset. Asset management -- so we have asset manager. So we say we are going to invest into asset managers. One is for getting asset management fee as a source of revenue. And we can reduce the outgoing fee payments to outside our group by bringing in these asset managers into our group. And what we can gain there -- for instance, in our current situation, our life insurance, do we want to have that reinsured? Or do we want to own that and manage? So which would be more capital efficient? And during the term, so we need to look into what will be the market cycle during that time. And so that's -- that will be the basis of the decision on whether we want to seek to reinsurance or do we want to retain. So -- and that would be -- increased number of options in our capital management. And we need to target companies who are worthy of such operations when we look into M&A. So yes, we will be very mindful of the cycle when we make any investment.

The second part of your question, so the concept around this graph. This is not based on market science. So the weight of overseas business, increasing. That's because -- I mean, we had struggled with [ MSME ] at a certain period of time. But now -- so we have learned a lot about cycle management, about the risk through those difficulty. So how are we going to build profit outside Japan in overseas market? We have higher level of confidence in so doing after we have learned. So we have more confidence. In the future, at a certain point of time -- so I mean -- so we are going to see a decline of some of the soft market. But -- so -- but I mean we see that as a group, and we are beginning to see what sort of action we should be taking. And I guess that confidence is, I mean, yes, I mean, represented in a larger blue bar. So maybe this is not a very precise calculation, although, we are confident in growing our overseas business and the profit. Now it's not that we are pessimistic about domestic market here in Japan. We are going to have a change in regulation and more intense competition. We are going to have more and more competitive bid, retail, commercial. The unit price will come down. Maybe in a certain point of time, unit prices would come down for retail and commercial, but there's going to be higher demand for insurance. So -- especially in the field of commercial. So when we talk about company management -- so we make a very solid communication -- it's an -- we didn't have too much opportunity of making communication about the risk and insurance. We are experiencing such opportunity. So for instance, some of the agency owned -- broker agencies, even if there's an opportunity for transition, I mean -- so I mean -- so we will have more risk manager based on a better understanding on insurance. And that's an increased number of opportunity of translating risk into insurance, more interest, focus on insurance. It's like what happened in the United States. So the property and casual -- so it's an opportunity for nonlife insurance to start growing. We had an inflection point. So that's why in this situation, we have to focus on how we can present a better value through our insurance. So I mean when people did not know of the risk or some other company took care of the risk by retained earnings, they were not tapping into insurance as their risk management tool. But now like in the United States, our culture is going to change. The corporate culture is going to change in focusing on leveraging our insurance to manage to control these risks. And as an insurance, we need to leverage on that opportunity. We need to be able to address the issue of our corporate customers. And when we can do that, the insurance market in Japan will be a very large insurance market comparative to GDP. So I mean -- so the U.S. has a much higher weight of the insurance market compared with the weight of GDP. And I mean Japan is right now faced with opportunity for becoming like the United States. And that's why we are investing in this field. So maybe for domestic market, we could have been more aggressive and proactive. So maybe from the next time around on, I want to be more precise in conveying this message.

So I understand very well your outlook for growth. What about ROE? So what would be the ROE for your domestic business and versus overseas business?

So it depends on how we define E, the denominator of the acquisition. So I mean overseas, we are going to see, I mean, softer and softer market. So probably ROE seemingly will come down. But when the market is becoming more softer -- so the share of company who has solid cycle management is going increase. MS&AD can increase our soft market share in overseas market as well. And now when the market hardens, we can leverage on the market share to gain more profit. That's overseas. Domestic, so we have assets in Japan. So -- and the money we are going to allocate to asset management depends on what class of asset. So we have assets like -- we are ramping down our assets, equity or real estate. So I mean in Japan, the denominator, the equity is shrinking. And if we can gain more return from growth of the market -- so even in Japan, even with declining population, we can continue to enhance our ROE. So I mean I see this as an opportunity even in Japan as well. Thank you, Niwa-san.

Thank you, Niwa-san. So I see the name [ Sasaki ] from Zoom.

Two brief quick questions. Upon the merger of the 2 companies, how are you going to structure your system if there's any decision made? You have several mainframes within the group. Are you going to use public cloud to make it light for the entire group so that you can reduce the running cost? If there has been any decision made, please share with me. Second question. You have used [ Key Connect ]. So [indiscernible] with a connected car. You have achieved a track record on a connected car strategy. From digital network perspectives, in your Toyota business, will there be anything different as part of the evolution in the connected car strategy?

Regarding the system question for our core operating system, I think that there has been a symmetry between MS&AD. So in opportune, AD will be joining MS, and what is unique to AD will be in linkage with API. So we will be shifting more toward one of the 2 companies so that we can optimize and minimize the cost and labor and time required for merger. And as for areas other than mainframe, before thinking about what you are going to make use of, what business we are going to deliver so that we can narrow down in picking up a necessary system. This is how we are going to optimize our cost.

This current AD system is going to be abolished? Or are you going to use something temporary so that afterwards the cost is going to be reduced?

First of all, as a result of the system integration, JGAAP-based extraordinary losses incurred or not is going to depend on what we make use of and what we abolish. We are sorting them out today. So if there are anything they abolish, then it's going to be part of the [ next ] one-off loss. On the other hand, making 2 into 1 will definitely reduce the running costs. And regarding connected car strategy, which is your second question, the telematics cars is part of a unique feature of AD. Therefore, in the coming era, we're -- in line with the technological evolution, what would be the optimal insurance products are changing constantly. So what we have so far developed as technology will be fully utilized to come up with a product as a result of remake after merger. This is part of the consideration today. This is current status. If there are anything to add? [ Sasaki ], did I answer your question?

For example -- just as an example, if you ride on a Toyota car, there's a network sort of [indiscernible]. You can purchase an insurance product from your company. Would that be possible in the future?

This vision, of course, we have. But in terms of the cost benefit, how effective would that be to customers? Is that going to be usable service? Those are the questions that we always ask ourselves. And in terms of technical feasibility, the product we have today are the best ones that we can offer today. I think that's how you can take it.

Thank you very much, [ Sasaki-san ]. Anyone else with question? Okay. I think everyone has asked their question. So we would like to close the Q&A at this point of time. So any questions that you are not able to present here today could be taken by the IR team. Please contact us without hesitation. And also we are going to send you a very simple survey for -- in light of improving the quality of our presentation into the future. I'd like to ask for your cooperation. So FY 2025 first information meeting of MS&AD Holdings will be closed. Again, thank you very much for your participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]