Sompo Holdings, Inc. (8630) Earnings Call Transcript & Summary

Thank you so much for your introduction. Good afternoon, ladies and gentlemen. I'm Sakurada. So I have enough social distance, so please allow me not to wear a mask, while I'm speaking. The results of FY 2020 for the first half and the revision of the guidance for 2020, we have just announced those last week. So today, I'd like to explain to you the progress of the medium-term management plan and the direction of the medium-term management plan, which begins next year. Please turn to Page 3. Let me first touch upon the progress of the midterm plan. In this fiscal year, although we had an impact from COVID-19, we have pushed forward the group transformation, such as expanding global and nursing care businesses and the digital strategy. We have pushed forward the group-wide transformation. In addition, we have strongly pursued further profitability, centering on the domestic P&C business to enhance resilience upon the rise of the frequency of large natural catastrophes. As a result, adjusted consolidated net income for FY 2020 is expected to be JPY 200 billion, up JPY 35.6 billion compared to FY 2015. Furthermore, we are expecting JPY 200 billion, which is additional JPY 35.6 billion compared to FY 2015. We have explained in May this year that we plan to increase the dividend by JPY 10 per share because we wanted to wait and see the actual impact from COVID-19. However, our current forecast indicates the outlook for strong fundamentals in the medium term. Therefore, we revised it up to the increase by JPY 20 per share year-on-year. Please look at the next page for the details on that shareholders' return policy later on. Please go to Page 5. Please proceed to Page 5. For the details of the shareholders' return, please take a look at Page 4, but please proceed to Page 5. Let me touch upon impact from COVID-19. In the initial guidance for FY 2020, we included negative JPY 17 billion on the adjusted profit basis as the high probability impact, while we did not include additional potential impact, which we have shown. This time, based on the current situation, we scrutinized the impact. As a result, we included positive JPY 6 billion as an impact in FY 2020. The major reasons are: the improvement of accident rate of brand automobile line of Sompo Japan due to the lower traffic volume, the provisioning for the outstanding claims payment in Sompo International and so on, thanks to well-disciplined underwriting in Sompo International, which I'm going to touch upon later. The impact from COVID-19 has been limited compared to our peers. We'd like to take COVID-19 lemon into lemonade to enhance vigilance furthermore over the group, towards the environment, and accelerate the evolution of the group, capturing changes in the society early on. Next, please go to Page 6. Each business has a different magnitude of impact from COVID-19, but fundamentals as a group are firm. I evaluate highly the accelerated speed of growth and diversification of the group we have achieved as a result of a speedy decision-making, driven by business owner system we introduced in this mid-term plan period. As a holding company, we'd like to demonstrate further leadership to realize our vision in this rapidly changing environment. On the next page onwards, let me talk about the progress of each business on the midterm plan. Let's start with domestic P&C business. Please turn to Page 7. Domestic P&C business has been impacted by consumption tax hike, frequent large natural catastrophes and so on. So now we are working on earnings structure reform to enhance resilience, specifically through rate optimization, profitability improvement in the corporate lines and the business expense reduction by headcount efficiency. We expect profit improvement by close to JPY 20 billion in FY 2020. These initiatives will continue in the next medium-term plan period onwards. We are in the process of calculating specifically how much we expect as benefits from those initiatives going forward, but we aim to accumulate more than JPY 60 billion in total, which we talked about a year ago. Domestic P&C business is still the largest vehicle of the group, and it continues to drive the scale and the diversification for the group in the future. Please turn to Page 8. Let me next talk about overseas business where Sompo International is the platform. After the acquisition, Sompo International has achieved average of 25% top line growth annually, driven by hiring underwriters, activity and rate hikes higher than the market. High growth of Sompo International is attracting talented underwriters in the industry. We have been able to enhance the bench strength with quality. As an evidence of that, as you can see on this page, the impact from COVID-19 is better controlled compared to our peers. Going forward, in the market, which has turned into the [ hardening ] trend, leveraging high skills, we plan to expand retention at the appropriate rate, combined with disciplined M&As to achieve escalated profit growth. Please turn to Page 9. One of the big strengths of Sompo International is the specialty know-hows. Among them, Sompo International is unique in that they have a group insurance business, which generate stable profits with low correlation with natural disasters such as hurricanes. In this fiscal year, we acquired Diversified Corporation, which is ranked fourth in terms of market share in the United States, which is the largest group insurance market in the world. With this acquisition, Sompo International's share in the group insurance increased to the top level, the first or second, and we achieved more diversification within the United States. On the global front, we have promoted AgriSompo platform where we leverage Sompo International's know-hows on the global network of Sompo. Through these initiatives that contribute to profit accretive scale and diversification, Sompo International is going to drive the growth of the group and provide solutions to climate change risks as a group insurance market leader, which are initially related to SDGs. Please turn to Page 10. Life business. In the domestic life business, under the concept of Insurhealth, in which life insurance and the functions to support customers' health are combined, we developed balanced new products and provided new values. In addition to dementia insurance and income protection products we have been providing, we launched a new medical product with services to prevent customers from becoming seriously ill in this fiscal year. At the initial launch, we were constrained by refraining from face-to-face sales activities due to COVID-19. However, since we have put in place online marketing system, sales are increasing steadily. By promoting products to support customers' health, we'd like to contribute to extend healthy life expectancy of customers while pursuing growth of our Life Insurance business. Lastly, let me talk about Nursing Care business. Please go to Page 11. In the Nursing Care business, we worked on improvement of productivity as well as remuneration of staffs to achieve stable profitability. We also worked on the social challenge, which is at supply and demand gap of nursing care workers. In addition, towards the social challenge of senile dementia, we developed solutions as a group such as dementia insurance and Sompo Smile Aging program to prevent from the deterioration of cognitive functions. Furthermore, we have been challenging to utilize real data of residents using Nemuri SCAN or sleep scan or Paramount Bed. While we have been working in those areas, we at last encountered a potential to speed up those initiatives exponentially, which is the technology of Palantir. We do the joint venture, and we started to invest in Palantir. Please turn to Page 12. In June this year, we made our investment into Palantir, a company with strength in data analytics. Palantir is renowned for its capability in data integration and analytics. They have been providing solutions to governments around the world and also major companies. Since their direct listing in September, the share price has been firm, including today's share price. This is a reflection of the level of sophistication they built with their data analysis skills. Through our investment into the company, we formed a solid and long-term partnership with Palantir, with which we can maximize the value of our vast real data. In sum, we believe we obtained a powerful foundation for realizing a real data platform vision. Next, let me elaborate later. Let me give you some specific examples. Next, let me explain on the principles of the next midterm management plan on Page 14. First, let's look back on the current material management plan, which are 6 months ago. So we are in now the final stage. We have made reasonable achievement on group transformation, including other portfolio transformation with the acquisition of Endurance, progress on profitability reform on the domestic P&C business and promotion of generating our profit with Nursing Care business. And also promoting the big data strategy and digital strategy showcased by investment into Palantir. At the same time, we identified the new challenges for the next midterm management plan. For instance, securing the stability of performance in the wake of more severe natural catastrophes and proposition of new services and value to help solve social issues and reform on corporate culture to support the gradual evolution. These are the areas where we need to do more work. So we need to actively engage in those new corporate culture in order to proceed with further growth. On Page 15 onward, we show you our initiatives. To date, we have worked on transformation as we identify the external environment to be in the area of VUCA. With the spread of COVID-19, we have been reconfirming that we are now truly in the VUCA area. And compared to their previous megatrend, the awareness and the behavior of the individual and the society has significantly changed with the environment with corona. And I believe this will not change in the future. As a result, new normal, which requires corporate resilience is imagined with heightened importance on data strategy and the need to respond to diverse stakeholders, including the earth itself. What was expected in 5 or 10 years or even 20, 50 years' time has been brought forward rapidly due to COVID-19, and those issues are right in front of us. And on Page 16, I want to talk about the principles of the next midterm management plan. Our vision to build the impact for security health and wellbeing remains intact. We believe that the path taken was the right one. The path to build the theme park was the right direction, and the current trend will be on our side. Looking at the next 3 years under the next midterm business plan. In addition to further growth and better profitability, we aim to deliver sustainable corporate value by going beyond the boundary of insurance business to solve social issues, while we aim to operate an SPG business management. On the next page, I will talk about the cycle of pursuing economic value and generating new social value. Please turn to Page 17. In the current mind-term business plan, we have held the concept of theme park. The theme park not only adjusted the diverse need of our customers, but also must build a position to offer specific solutions for social issues such as changing natural environment and aging society with declining growth rate. Well, for the Sompo, we ourselves must become a platform. And by expanding the partnership, we will raise the feasibility of the concept to build new ecosystems. It's also important to achieve the commercial feasibility of the real data platform. As I mentioned earlier, we are not just looking at the short-term profit over a few years, but I would also like to take a long-term view to build a sustainable business using our real data platform and monetize the mechanism. Also we want to create such mechanism as well as develop the future market. That is going to be our challenge. Repetition of such cycle leads to further expectation and appreciation of our existence. And we'll also help to enhance the sustainability of the society as a whole. On the next page, I like to talk about the basic strategies. Please turn to Page 18. The first strategy under the next midterm business plan is still in diversification to obtain resilience. With more focus on earnings structural reform, we aim to further enhance the economics of the domestic P&C business. High earnings growth with the overseas insurance business in the wake of a hardening market and our subsequent strategy to increase retention would be the other growth driver. So that is about obtaining resilience. The second strategy is to generate new customer value to embody the concept of theme park. As I have been saying, through the real data platform, or RDP, we will solve social issues. And at the same time, it will generate profit by monetizing on the opportunity. I will give you more details on the real data platform later. The last one is the works on innovation to underpin the group evolution. By overhauling the HL system and the way people work, we aim to achieve a big leap in enhancing the productivity and also define the purpose of the individuals and also create a pool of talent with diversity so that it can be capitalized for the business. Please turn to Page 19. By aggregating Palantir's data analytics technology and the vast real data that resides within the group, we aim to provide solution that helps to solve social issues. I will give you one specific example of our validation project that we are doing right now on how real data platform can be applied on the nursing care business. Please turn to Page 20. Our Nursing Care business generate a wide variety of data from vital data, medication data and sleep data, among others, around the clock. So it's data generated from 80,000 patients and also 25,000 caregivers who are working at a facility to generate this data 24/7. To date, we have not been able to fully utilize the data being generated. However, with the data analytics POC, which started with the relationship with Palantir, we are now able to capitalize on the SaaS data with speed. For instance, we are developing the model for detecting signs of potential accidents at the facilities of -- or indications of deteriorating physical conditions. This solution helps to improve the productivity at our nursing care homes. In addition, we will be able to offer this solution to other nurse income operators, which is 60,000 operators in Japan. In the nursing care industry, there is a way we refer to as a 3:1 model, which limits the number of patients. One care provider can look after to 3. The conservative outlook with higher probability of becoming the reality on supply-demand gap in the nursing care market, suggest as shortage of 500,000 care providers in 2025. This is a huge challenge for Japan, and the predictive model can potentially help to solve this issue. We were hoping to be able to offer you more examples in May next year. And last but not least, I would like to talk about the management framework on Page 21. Together with the sustainable enhancement of ROE and earnings, we will strive to expand the shareholder return. To that end, we will continue our plan for organic growth and disciplined investment for growth, including M&A. In executing the growth investment, it's important to control the risk in capital. On that note, we will continue to reduce the strategically held holdings and further reduce the interest rate risk by matching the duration for our domestic Life business. This will conclude my presentation. Please now take a look of the various data as a reference at your convenient time. In May next year, we will be announcing the details on the numerical targets of our new midterm management plan. We are now in discussion to sophisticate the plan. We hope that you will continue to uphold your expectation for our growth and also support our SDG business management so that we can help to solve the social issues. Thank you very much.

Thank you, Mr. Sakurada. So this will conclude the presentation from our side. Next, we would like to move on to Q&A session.

[Operator Instructions] First questions are from SMBC Nikko Securities. Mr. Muraki, would you please start your questions?

I am Muraki from SMBC Nikko Securities. I have 2 questions. My first question is on the Nursing Care business. I'm on Page 8. You explained about strong top line growth. You explained about the drivers for the strong top line growth. But for this fiscal year in particular, even though earned net premiums have grown, I don't see a strong profit growth in this fiscal year compared to the plan. It seems like profit overseas is not growing as much as planned. So in the next fiscal year, because in this fiscal year, you have this strong top line growth, I expect strong profit growth in the next fiscal year. What is the level of the profit that you are expecting for the next fiscal year? I'm on Page 6 now, so adjusted profit overseas. So how much level of adjusted profit are you expecting for the next fiscal year from overseas business? My second question is on Palantir. Listening to Palantir's results announcement, Mr. Alex Karp explained and talked about Mr. Sakurada, CEO. What types of communication are you having recently with them? In the nursing care business, you explained in this meeting today, but including your main business, insurance business and the nursing business, what are the other areas where we can utilize and build data platform? That's my second question.

Mr. Muraki, thank you so much for your questions. I am Kawauchi, let me answer your questions. First, in this fiscal year, we achieved rate increase of 25%, which is very high. However, when we look at the level of profit, it's weaker compared to our initial plan. What is the reason? And relating to that, what is the level of the profit that we expect for the next fiscal year? So those were your questions. So my answers are quite similar to both of those questions. But first, in this fiscal year, we succeeded in increasing the rate by 25%. However, we have not been able to fully defect that in the net earned premiums. So the timing of booking that as net earned premium will be in the next fiscal year onward. And that's one reason why our profit impact was a bit smaller compared to the top line growth. In the next fiscal year onward, net earned premiums will be roughly JPY 90 billion on the full basis in the next fiscal year, or onward, and that will improve the loss ratio as well as the expense ratio. And for this fiscal year, as you pointed out, we had impact from COVID-19. In addition, we had impact from hurricanes and other natural catastrophes. So those are the impact in this fiscal year. Now for the next fiscal year, we are in the process of scrutinizing the specific figures for the next fiscal year. So we have to defer from talking about that, but we have JPY 90 billion, and we have new business, which will push up the profit level over the next fiscal year. Thank you.

Mr. Muraki, let me answer the second part of your question. Without COVID, I should have met Alex Moore and Peter Thiel, co-head of -- CEO of Palantir. I wanted to see him more. But most recent communication I had was 2 weeks ago. Was it Zoom or video conference? We had communication for part a little bit less than 1 hour. And in the discussion I had with them, the biggest theme we discussed with Alex was real data platform, the ins and outs of the real data platform and what types of solutions we can generate from that. And Alex and his team, Palantir, what types of technologies can they provide to us, why nursing care? The reason is because we have the massive amount of real data in the nursing care business. And we have huge potential to provide solutions -- generate solutions using the real data. So nursing care is a business where we can commercialize to the external world, and they are very excited in a very positive way. And these solutions probably can be sold abroad. We should not really talk about doing this data business abroad before we succeed in Japan. We have to really succeed in Japan first. I don't think our main business is insurance only anymore. We should not really stay only in the insurance business as our main business. Of course, it's an important business, but we are pursuing theme park for real data platform. So P&C business is very critical, very important, but we are going to combine that with technologies of Palantir in areas such as underwriting. So instead of recruiting many underwriters to do the underwriting process, we have data, for example, image data, voice data, characters. We have many types of data that we can use to make an instant decision, it's almost like dream technology. So we'd like to utilize those technologies supplemented by human resources. So underwriting is one area. And we can better utilize technologies of Palantir in areas such as boundary, which is a package product. They can customize that package product to us. And we can use that package for all sorts of digital making. Management, human resource. So we can have a partnership with them in the sense to generate profits by selling to external customers. And also, we have one area of partnership that we can utilize with them to improve efficiency internally. So we can use it in the Life business, Nursing Care business, let alone P&C business, in various areas. Another point, Sompo International, we are using Sompo International as a global platform, and we'd like to combine that with Palantir Technologies. We are currently studying what we can do, what we can generate from that. So it's too much exaggeration if I say the dream technology, but this company has the name value in the world. So while looking at the data that we have, they also think about what they can do with us. So that's what I'm thinking at the moment.

I have a follow-up question on the Palantir Company. At some point in the future, if you really were away completely from the insurance-centric thinking, but my question is on ESR. Your unrealized gains are JPY 210 billion, which is 13 points when I translate that amount of unrealized gains into ESR. If you're on an investment firm, you don't have to care so much about it. But as a price fluctuation risk from one name, one share, it's quite high. So from the perspective of shareholders' return or risk management, how should we interpret the price volatility risk of the Palantir that could really swing your ESR?

' Technical answer can be provided to you from CFO later on. But I am aware of such a risk. The other day, in the Global ExCo meeting, we talked about the needs that we need to keep monitoring. And in some cases, we have to reduce the amount of risk or we have to realize and realize gains from now on. But at the moment, the impact on ESR, what immediate needs to take shareholders' written action are not under study at the moment.

I'm Hamada. You're exactly right. We have a large amount of unrealized gains, and it's been increasing, but a higher share price means higher risk amount. So ESR impact is still limited. It's less than a few points. So Mr. Sakurada mentioned about the retention policy. But if you have to think about anything, it will be the potential investment opportunities such as M&As. That's something that we have to think about. At the moment, we are not thinking about doing anything with the Palantir shares from the perspective of ESR only.

Sorry, I have one more question.

Sorry, I have one more answer to supplement. With [indiscernible] you talked about and you asked about investment in Palantir as a parent company. But as you know, we have a joint venture company called Palantir Japan together with Palantir, which is 50-50 joint venture company, and CEO of that company is Mr. Narasaki, which is CDO of Sompo. And we have business opportunities to be generated from the joint venture company. And the business opportunities that could be generated from that company are not small. And I'd like to report to the market as soon as the amount becomes available.

I am Tsuji. Muraki-san, thank you so much for your question. You asked about potential areas where we can utilize the partnership with Palantir other than nursing care. So let me make a comment on that briefly. So P&C, Life, Healthcare business, so those are the areas where we can also utilize our partnership with Palantir. For example, Himawari Life. They are trying to support the health of policyholders. That's their concept, that's their slogan. But for example, sports clubs, medical institutions or clinics, utilizing the data from those locations. For some people, the MI figure is normal, but some people have high blood sugar level. What types of exercise programs can we recommend to them? That's one example of the area where we can utilize data analysis. In Sompo Japan, of course, we can use it in underwriting area. In the Nursing Care business, the whole industry is facing the shortage of labor issue. So if we can develop a solution, then we have an opportunity to sell the solution to other nursing care operators. That's one possibility. That's all. Thank you so much.

We like to take a next question. The next question is from Mr. Tsujino from Mitsubishi UFJ Morgan Stanley.

My first question is, in the presentation in November last year, you mentioned that you want to improve the underwriting profit by JPY 60 billion in a few years. Also as a part of that, how much did you achieve this fiscal year? I know there was some impact from COVID-19 but excluding that, how much improvement can we expect for this fiscal year? And also in addition to that, the price increase that we have achieved to date? And also the -- recently, there has been some media report about the price hikes. So can you explain about the impact of those price hikes? And also, my second question is regarding Sompo International. There are a few unlucky events, and I know that this year with COVID-19, you do not have the great working risk for the year so that was good. But last year, there was an impact of JPY 7 billion after tax with the prior development, and also there was an impact on the crop insurance and natural catastrophe was also quite significant. And you also had the prior development for natural catastrophe last year as well. So the natural catastrophe risk for Sompo International may not be in a comfortable level. And the -- you mentioned that you have a great underwriting capability at Sompo International, but it seems like there's some improvement. So what are your measures going forward for further improvement?

So let me address the first question, from Hamada. A year ago, we said that with the domestic P&C business, we want to improve the earnings by pretax JPY 60 billion with the underwriting business. And as Mr. Sakurada mentioned earlier a little bit, at this point, though the next midterm management plan, we want to make a further improvement. That is in our plan, including nat cat, there are some negative factors. So we have to look at both the positive and the negative side to come with the numbers. And for fiscal 2020, what was the achievement? Internally with the managerial numbers, for fiscal '20, what were the target of reducing costs by JPY 19.1 billion? In the first half, we were able to achieve about JPY 10.7 billion, which is nearly half. So for the full year, we believe we will be able to achieve a target. And also, going forward for the full year policies, we are planning to increase the premium. So going forward, the impact may be bigger than JPY 60 billion. 6 months later when we announced the details of the next midterm business plan, we may be able to offer more specific numbers. And regarding the rate revision, for the auto policies in January this year, we increased our rate. And with that, we had an impact of JPY 20 billion after-tax full year policy. October last year and also January next year, we'll be increasing the rate. And together, the impact will be JPY 30 billion approximately. Also for the auto policies, in January, we will slightly lower the premium rate.

Regarding the overseas business, I will answer your question from Kawauchi. As mentioned, for this year, the natural or another natural catastrophe impacted our business. And that may have led to the volatility of the business. I think that was the question. To prevent that, as a major direction, initially, at Sompo International started as a reinsurance company for nat cat. But as a direction, the strategy is to increase the direct underwriting and to expand the portfolio and diversify the portfolio. So with that, what we are doing right now is to increase the rate. We have been achieving 25% increase in the rate. That will impact our premium next year. And with the business expansion, we acquired Diversified, which is the group insurance. And with the acquisition of Diversified, with this being added to the group, we will be able to expand the size, and that will lead to a stability in the profit of the crop insurance. And now with a Diversified and also SIS business, there's less overlap of geography. So we will be able to diversify the portfolio. The drought and the price drop is something that nat crop insurance is covering. The correlation with the hurricane is slightly different. So in that sense, we will be able to diversify the risk within SI. On top of that, as we explained earlier, with the increase in rate, we may have mentioned this before, but the way we can take an appropriate rate, we have decided to increase our retention. So from 2018, for 3 years in a row, we have been able to increase the rate. And we believe that now is at an optimal level. So going forward, we will be increasing the retention to stabilize our business. Thank you. Ms. Tsujino?

So earlier, you said that next year, you have some remaining impact with the auto policies and also new impact from the policy. What would be the aggregate impact of those 2? I'm talking about the price revision.

For the impact of the pricing, mainly for auto and fire policy, for '21, we expect positive JPY 30 billion impact for fiscal '21. And compared to fiscal '20, I think the impact will be about JPY 23 billion. Did we answer your question, Ms. Tsujino?

Next questions are from Daiwa Securities, Mr. Watanabe.

I am Watanabe from Daiwa Securities. I have 2 questions. My first question is on the thinking behind the next medium-term management plan. You talked about exponential session last year, adjusted consolidated profit of JPY 300 billion. Are you going to set as a target in the next midterm plan? And about the positioning of the data business, are you going to separate that as one independent business unit, or are you positioned on the data business as a supplemental business to support other businesses? And the second question is on the shareholders' return, which is Page 4. ESR is near the upper limit of the target range. So are you going to think about potential adjustment of the capital level by taking the shareholders' return action in the next midterm plan period? So thank you so much. Those are the 2 questions.

Thank you. To your first question, you have 2 questions in the first area. So the second question is going to be answered by CFO. So short answer to your question is yes. We pay attention to that. But we have not made an official decision as a company yet. So the contents and the mix cannot be disclosed today. But to your question, in early-stage of 2020s, we pay attention to that as a target so that we achieve that in early 2020s. Your second question, and the question one, what is the positioning of the data business? Wonderful question. Data strategy, data business, what are those? In each business unit, we have to enhance the resilience, we have to enhance the efficiency, we have to enhance the CX. To do that, we thought we need digital technologies. But when we think about it, it's almost nonexistence of the data technology if you apply that concept. So regardless of areas, digital is like blood for humans. It's necessary, indispensable for any businesses, manufacturing, distribution, retail. Digital is indispensable. Without it, we cannot even talk about any strategy. So we noticed that basic fact. So we have really generate profits from the digital itself. That's why, last, we found this Palantir, and we share the same philosophy with them in alliance with Palantir, it's in many areas. One, we are working with them to strengthen each business or to generate more profit in each business. But as I mentioned earlier, we have a joint venture company as well, 50-50 joint venture company, who addresses the digital business itself. So we have to generate profits from digital business alone. So answer is both. We have to use digital to enhance the X in each business, but as the fifth pillar, we have to position our digital business incorporated in the real data platform, Domestic plc, Life, Global, Nursing Care and Digital. In some cases, health care may be added on top of it. So security will be in the safety theme park. That will be completed. That's all.

Let me answer your second question relating to shareholders' return. ESR is near the upper limit of the range of capital. How do we think about capital adjustment potentially? So let me answer overall question relating to our shareholders' policy. In the first half, we did not announce our buyback, which seemed to be a bit negative surprise to the market, which impacted the share price, I assume, looking back. But in the first half, we showed potential increase of the profit. And then dividend yield is somewhat inferior to our peers. So we prioritized on the dividend increase to make a correction in relative terms against others. Next, what we have to think about the most is our target adjusted profit of JPY 200 billion that we think we can achieve at the beginning -- at the end of the year. We thought we included some conservatism, and we have to really complete achieving this final figure in the final year of the medium-term management count. Once we achieve this, then I think the market has evaluated positively the commitment we have made to shareholders' return, and we are going to walk the talk at the end of the mid-term plan period. Towards the end of the year, ESR is 248%, which is near the upper limit of the range towards the end of the year. So we are in the process of discussing the potential capital allocation in the medium term. In February, when we have the Global Executive Committee, we are going to make a decision. For example, considering the market hardening of the global business, profitability is improving. So there's a possibility of taking more risks organically. And also, we have potential possibilities of M&As. And the COVID environment, according to Mr. Nigel Frudd, for coming 1 year, we will see quite a large number of opportunities that are worthwhile studying. And real data platform is another area where we can invest potentially in Japan. So we are going to study the level of appetite in those areas. And we have no intention to have excessive level of capital. Of course, we have to apply some discipline. But in the next midterm plan period, how much capital do we want to have, including buffer? We'd like to decide that. And then I would like to decide as a company the shareholders' return policy and announce it in May. Of course, we are going to compare the level of shareholders' return compared to our peers. So ESR is near the upper limit. So for this fiscal year, that's true. So we have to decide the shareholders return for this fiscal year. And half of the reason why it's near the upper limit of the range is due to the rise of interest rates and share price. So how are they going to move towards the end of the year? Are they going to move backwards towards the end of the year? We acquired Diversified. And the impact from the acquisition of Diversified hasn't been affected fully in ESR yet. So we'd like to confirm the level of ESR at the end of the year. ESR may be a bit lower at the end of the year compared to the level now, but we are going to return considering the ESR level. Finally, how do we think in the medium term? So far, we did not think about capital adjustment. We only applied a return in relation to flow profit. But relating to ESR, there are other things we have to consider, such as credit ratings. We cannot just think about ESR when we think about shareholders' return. But as a fact, ESR is close to the limit. So in the next medium-term management plan, if this happens or that happens to ESR, we should do this and that for shareholders' return. We have to think about some clearer role, which is easier for the market to understand. We have to think about that. But we are going to discuss in the company and then announce to you in May.

May I? Watanabe-san, I'm Tsuji. Thank you so much for your question. About the capital level or potential adjustment of the capital, Mr. Hamada, CFO, has answered from the shareholders' return policy and from the perspective of the next medium-term management plan. In the next midterm plan, you asked about our attention level to JPY 300 billion. The CEO, Group CEO, clearly mentioned that, yes, we pay clearly attention to JPY 300 billion. There is a close relationship between the ESR level and the JPY 300 billion profit target. In this fiscal year, our target is JPY 200 billion adjusted profit. We launched 2010. So it's been 10 years since the launch of the company. So we are going to get to JPY 200 billion for the first time in the history of JPY 200 billion. And then we are trying to achieve JPY 300 billion in the next term management plan period. We have to do some acquisitions to reach JPY 300 billion. We are preparing for potential M&As. When we do M&As, the goodwill will happen, and goodwill is excluded from capital. So it depends on the level of PVR. When we do acquisitions, it depends. But according to the current calculation, yes, ESR is close to the upper limit. But when we think about achieving JPY 300 billion target, we have to also think about M&A possibilities and opportunities. And we are not in the stage where we are studying the potential so-called capital adjustment, considering the M&As, as a potential and the JPY 300 billion.

Next question is from Mr. Otsuka from JPMorgan.

This is Otsuka from JPMorgan. I have 2 questions. I want to ask about M&A on Page 21. You talked about the overseas of big M&A and also bolt-on M&A. And in the next midterm management plan, I thought that M&A is going to be focusing on the overseas market. But on Page 21, when we look at the slide, I think you are maintaining the existing policy. But looking at the view of industry midterm management plan, you had the Endurance acquisition, building SI and also building platform. So the position of the overseas business has really changed. Also, I'm sure that you are looking for M&A just to pursue scale. So regarding the overseas M&A, can you share with us what kind of direction that you are trying to pursue? That's my first question. My second question is regarding Page 7. For the domestic P&C business, reforming your earnings structure. The right point, I think, is optimizing the pricing, the 4-year policy and also you have the details, components of that. But for the whole industry, is this a common challenge or issue or I think this is going to be a common issue for the whole industry? If that is the case, we came back at the history, if you are too profitable, then you will go into the price reduction cycle. So I figure you have some internal efforts to improve the productivity and also expand the top line, that's your own strategy. But if this number can be realized, the whole market will improve, and then the whole market will go into the price reduction cycle. Plus -- so I was wondering if there is that risk. Can you elaborate on this diagram reflecting on that potential risk?

So this is Kawauchi speaking. Otsuka-san, thank you for your questions. Regarding the overseas M&A strategy, as you have indicated in 2017, we acquired Endurance, and that was a large-scale M&A. And we used that function to load our global platform for P&C and also retail platform. We have been expanding that platform function. And as for the direction going forward, at this point, our plan is as follows. Looking at the current SI portfolio, we want to focus on diversifying our policies for specialty insurance and also expand the scale further. In terms of geography, a [ foreign ] contribution is other priority. So looking at the valuation, I believe we still have strong interest in the advance market. And Nigel Frudd is taking the lead on looking at opportunities. And we will continue to monitor the opportunity for the overseas M&A strategy. That's all I can say about this question. And on Page 21, regarding our investment, this is the investment overseas and also investment for new businesses. The balance -- so generally speaking, the overseas M&A offers a better capital efficiency and also immediate impact. And also, in terms of recouping the return, it may take more time but we would have to invest into new businesses with an intention to solve the social issues. So those are the major agendas that we would like to address in the next midterm management plan. And as for the pricing, you are correct. So with the earnings structure reform, we also reflect the potential price hike or the price reduction. That is not visible at this point yet. So those are reflected. So for the auto policies, this fiscal year was a special year. And as for how we see the future from next year. Now with COVID-19, we may say that April, May was abnormal. But right now, the accident rate and also the clients paid is less by roughly 10%. More people are working from home and the work style is changing. So I think with that, the accident rate is not going to go back to the previous level immediately. So over the medium term, I believe the older policies will be in the price reduction cycle. Nothing has been decided yet, but our outlook is that the exit rate is going to improve further, and the pricing will come down. On the other hand, for the fire policies, we have the nat cat and also in the last few years, there was an increasing number of incidents for damages for the housing, for water leakage, for instance. So we have been changing the rate. So for the foreseeable future, I believe with the fire policies, this is still in the rate hike cycle. And we will not be in a situation where we are generating too much profit. So we will have a close sight on a combined ratio to have a simulation 2 or 3 years out to set the price.

Next questions, Sasaki-san from BoA Securities.

Bank of America, Sasaki speaking. My question is in the data business. I have 2 questions. First question, how much business impact are you expecting from the data business? I don't mind revenue, top line profit in how many years as you like. What is the expected business impact from the data business, please? In addition, probably, the amount of data is going to be data or [indiscernible]. Then probably, you have to think about the investments in IT systems. How do you think about system investment requirement? That's my first question. And compared to other platforms, I think you have to compete against them in the future. How are you going to acquire your data? Among various platforms, I hear that it's a challenge for them to get the data. Compare it to other platforms, what is your competitive edge in terms of the data touch points? Where are the data touch points that only you have compared to other peers that will put you in the advantageous position?

Thank you. Your first question is on the business impact. I'd like to take some more time to quantify the impact. We are in the process of POC and we have just begun the joint venture company with Palantir. So we do have a business plan, but it's not something that we can immediately disclose today, but real data platform is the ideal picture that Sompo Holdings is aiming at. And business impact is very important. And the positioning of that business is quite large. There's an issue of the time frame. So we have to really think about the time frame. For that, also, would you please allow me some time, I am seriously thinking about the time line and impact. As I mentioned earlier, not only the Palantir, but we have other tie-ups with other companies. This are players such as One Concern, NatCat Prediction model. One Concern is at the top-notch in the world in that area. And OS for autonomous driving, 1 of the 4 -- big 4 in the world, which is TR4, we have the investment in that company. And in the area of DX and CX, the company who has their excellence know-how DNA. So we have tie-ups with them. So there will be many qualitative impacts that we can expect. But probably, you'd like to know how much monetization can we do over what time frame? So please allow me some time. And compared to other real data platforms, in the world, what is the level of the positioning of our company compared to them? We are not planning to be a platform. That's not our intention. And when I said real data platform, there's a significant meaning in the real data. [ GAFAM ] for example, who have the virtual data on the Internet in the unit of peta, they acquire that amount of data and analyze the data. That's not the business model that we are thinking about. How are we going to acquire the data? What are the touch points? From the different perspective, real data platform is the primary existence. And what are the sources of the data? So sources are from 5 businesses: one, P&C business, where we can have access to the low accident data, various data there; second, Life business, mobility data, mortality data; and third, nursing care, which is the largest data source. We have daily more than 100,000 pieces of data every day. And then next, digital business, where we can utilize digital technologies to analyze efficiently. So the sources are businesses that we have and also the touch points where we can gather the data. And our safe security and well-being. As a theme park, we acquired real data from existing vehicles and provide solutions. That's the ultimate goal that we are trying to achieve. So of course, insurance is the most important business, but I would like to say beyond insurance, that's the real data platform. That's the difference between us and other competitors. So including nursing care, the amount of real data we have in the whole world, there are not so many companies other than us. To be honest with you, we have this much of data, real data, to be honest with you. Thank you.

I'd like to ask you a follow-up question. For example, looking at the monetization model of general platforms, they monetize for merchandising sales or they monetize from advertisement, either 1 of the 2. But when you think about monetization, by utilizing data well, bypassing the agents, distributors, is it possible for you to think about directly selling to end users? Is there such a concept?

I do not deny that concept. There is such a concept. But if you go on that path, it's easy for anybody to do. With regards to the monetization, when we think about 50 years, 100 years for Sompo Group, not 10 years or 20 years, but 50 and 100 years for us to keep surviving in the area of new capitalism, new globalism. We have to really manage the business by paying attention to SDGs, we must. So Japanese social challenge, which is nursing care and natural catastrophe, we have to provide solutions to them or how to prevent those from happening or minimize those from happening. Using the digital data platform, we'll be able to provide solutions. We are going to able to provide the services and solutions. So in that sense, as COO, Mr. Tsuji touched upon a little bit earlier. For example, there are about 60,000 nursing companies in Japan, but there are only a few of them who have the number of locations as many as we do, 500 locations. Therefore, there are only a few of them who have the data of close to 100,000 per day. So we have to provide solutions and know-hows to other operators so that other operators' efficiency increases or to mitigate the migration of the seriousness of the senile dementia. The subscription model or outright sales, consultation model, whatever the model is, we have to monetize. We should be able to monetize while contributing to the society. So that's the gist of building a theme park for security, health and well-being. Of course, we can sell something in addition to the core services. From the top of my head, for example, our insurance is with the diagnosis of senile dementia, and we can charge additional premium, of course. But by providing such a simple product, we cannot solve the social problem. So Mr. Sasaki, you raised very important points. So well taken. So we are going to explain in a better way to the market -- in the very convincing way in the future.

Next is Mr. Majima from Tokai Tokyo Research Center.

I have 2 questions. Regarding the new business, in September, you made Sompo [ Oaks ], the B2B auction business. So this is putting by the damaged vehicles by natural catastrophe to the auction site. And that helps to push up the profit. How much profit are you expecting from this new business? And this, I guess, is a platform business. So I guess you can put other products onto the auctions, apart from vehicles. And so you're thinking about doing the auction business other than [indiscernible]? My next question is regarding Tier 4 that you mentioned earlier. I believe this is an equity method affiliate of the group. For this stake, is it right to understand that you are not expecting equity affiliate earnings over the short term? I also believe that there are other investors like [indiscernible] Group and [ Angel Funds ] who would normally think about excess strategies. So in the future, are you considering something like IPO for Tier 4?

Thank you for your question. Regarding the profit for Sompo Oaks, I don't have it on hand. But it's going to be a few hundred millions of yen in terms of volumes. So the profit contribution is not going to happen immediately. The auction AI technology is something that we are trying to leverage on, so that we have access to market outside of the secondhand car auction business. But we have not been able to realize any of those other plans. And Tier 4 is an equity affiliate at this point. And ultimately, at this point, we are not thinking specifically about potential IPO of Tier 4. And we are not considering to take the majority of the equity. So in the auto autonomous driving, where our technology is still unknown, we want to explore the opportunity with DR4 to see the potential technology, so that we can reap the benefit of our expertise in the space. So that's the intention behind our investment. So at this point, we are not thinking about the exit strategy or increasing our stake. It's kind of a neutral strategy at this point.

Next question is from Mr. Niwa from Citigroup.

This is Niwa from Citigroup. For your domestic P&C business, I think you have been embarking on business transformation. So my first question is around the expenses for domestic P&C business. In the current midterm management plan, you have been promoting a future innovation project. So what is your progress of the system development? What was the impact? Initially, you were planning to improve the expense ratio by 2 percentage points. And my second question on the expenses is, you have explained the potential for the real data platform business. So what do you have developed and what you're developing on the RDP in the new world? Are they achieving the asset impairment test criteria and would they be feasible? And my next question is a little bit abstract. I mentioned about the speed of business transformation. I believe -- or it seems that adjusted profit is reaching its limit. And in the next midterm management plan, there is no major change in the framework of your strategy. I believe that, as the CEO said, you are going into the right direction. And I can see the attractiveness of the data business opportunity. But in terms of the speed for business transformation, I don't think there is a difference between traditional financial institution. So how, as a CEO, would you assess the progress on the speed of business transformation? And as the data platform is still deemed in too simple, are you going to be able to fully leverage on that capability?

So regarding the domestic P&C business, let me talk about the IT system development project. I, Hamada will explain. The development itself is showing good progress. And at the end of this fiscal year, for the personal accident, we will be switching to the mutual innovation project. Until the completion of the project, it will require another few years. But at this point, we are seeing a good progress. And the impact is still managed by the managerial EBITDA, but the improvement should be around 2 percentage points. And because this is a long-term project, there is the risk of this project becoming outdated, that is the biggest risk for this project in our view. Also while proceeding with the project, there may be an emergence of new technology and what we have been working on becomes wasted. And as a business model, a new business model emerges in the digital field. And what we have developed may be wasted. So we are monitoring those risks and assessing the potential risk. At this point, the current system can easily connect with the external system and the internal components are being modularized. So the connectivity with external system is very high. And the interface with the line, for example, can be connected. So customers can purchase the policies through the line platform. And whenever there are new channels on your product, most of what we're doing on the richer innovation project can be used. So we are monitoring that point to move forward. Did you say conversion or the transformation of the group? And I think the intention behind your question is, as we aspire to be a real data platform, business where we use data, we have domestic P&C and other business lines or the other businesses, would that be able to keep pace with technology or digital? And would the businesses be able to adopt the new technological capability? And I think that was the question. But from a different angle, looking at the Japanese companies and also global companies, in the general market, people say data is money, and data is new oil. But companies using data or which are generating profit other than the [ GAFAM ] model does not only exist. The [indiscernible] in China have a good structural model. So for their patient, they use the AI to offer the best advice for medical treatment, and introduced the best doctors or the best medical institutions. But because of the legal framework, this cannot be provided in Japan. But what they are doing is not real. So they are using the superficial data to make some forecast, to expect the needs and the wants of the individuals, and they try to recommend that. This is not real data. This are virtual data. So when trying to sell the offering using real data, we have to overcome this one criteria, which is now being discussed at the digital agency. So how much cleansing is required for data so that it can be used for business first purposes? And what kind of content do we need to cut from the individuals? Can that be used for different purposes other than that individual? Also, when asked that are we progressing with the group transformation, we will first have to clear that hurdle. I think this is now being discussed in the government, including the initiative to salvage digital agency. So the current landscape is subject to how much real data one company has and how much [indiscernible] can be done on that data. And after the data is being cleansed, what kind of solution can be provided using that real data? So those are the 3 main pillars. And the biggest resource is going to be whether a company has the real data or not. And in that sense, in Japan or the global market, there are no other company like ourselves who has a vast database. And if the customers use our solution, they can become healthy or if one uses our data, then the dementia may improve or it can slow down the progress of dementia. And by having diagnosed with their data, it can reduce the dementia being emerged, more driving. And when there is a natural catastrophe, the [ measurability ] or the severity of the nat cat can be reduced with our technology. So there could be various solutions. How do we set the price for those solutions? How do we deliver that to that market? Is it going to be subscription or a premium payment? Or is it going to be attached to services like nursing care? And we may be able to offer the service to other players in the same industry. So we have to be clever, the competition has just started. But the biggest key point is how quickly we can obtain the real data in vast amount. So we cannot wait for that endeavor. I guess at this point, that's all I can say. Thank you for the question.

So from a different angle, may I ask a follow-up question? The current medium-term management plan adjusted profit of JPY 200 billion. Do you believe the progress to JPY 200 billion had enough speed so that you can achieve the next target of JPY 300 billion including M&A?

So right now, we are now putting together the plan for the next major management plan, so we can give you just a general view. But we had a major M&A like Endurance. But without such a major M&A, we want to achieve JPY 300 billion with just organic growth. But obviously this is a stretch target for all the businesses. So realistically, we probably will not be able to ship this without any M&A. So we will make a more specific decision, including our discussion over capital allocation.

Thank you very much for your questions. Now we'd like to close the meeting. If you have additional questions, please contact IR team. Thank you so much for calling in. Thank you so much for participating. Thank you.