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

Thank you very much for the kind introduction. I am Kengo Sakurada, Group CEO of Sompo Holdings. The emcee said the presentation will take 30 minutes, but I will try to be brief so that we can allocate more time for Q&A. So I'd like to first thank all the participants for taking time out of their busy schedule to join our IR meeting today. Our first half results and revised full year guidance for fiscal '21 were announced on November 19. What I'd like to achieve today is to help you understand the progress of the midterm management plan that started this fiscal year. After my presentation on the progress of the management's targets and the various initiatives carried out so far, we will have some time for Q&A. Now please turn to Page 3. First and foremost, I'd like to share my thoughts on Sompo's purpose-driven management as a group CEO and seek your understanding on this concept. This slide illustrates how the pursuit of purpose will lead to sustainable growth for Sompo. At Sompo, we believe that the pursuit of a theme park vision is the very essence of our purpose. In other words, pursuing the theme park for security, health and well-being will guide us to solve social issues and ultimately contribute to a sustainable society. In addition to conducting businesses that contribute to security, health and well-being such as insurance and nursing care, we will build our proprietary real data platform, or RDP, from these businesses. By evolving the RDP into a monetizable business model, we will increase corporate value. And I think this is the way for us to meet the expectation of the investors. And through these initiatives, we would like to enhance the corporate value and accelerate the cycle of reinvesting the value generated from the theme park vision. You may find something similar to this diagram presented from the other companies, except for the RDP component. Sompo is unique in that we have a nursing care business. We are very exceptional in that sense, even in a global context, and we have real data generated from the nursing care and insurance business and a second-to-none ability to analyze the data sets. We'll capitalize on this strength to realize our purpose and achieve sustainable growth. And as you can see in the center of this diagram, it is the group's employees who have their own personal purposes that underpin the realization of these goals. Each employee is required to clarify personal purposes while enhancing engagement. And from the Nominating Committee and the Remuneration Committee, I have been mandated with missions, and this is one of my important missions. And I will explain how we are working on it later. Please turn to the next page. This slide shows the overall picture of the midterm management plan and summarizes the progress made in the first half on the 3 strategies in the underlying business foundations. I will give the details later. But in general, we have made steady progress. As I explained in May, we have been sharing among the management team the intent of showing results of each initiative set forth in the plan to the investors quantitatively with evidence, and I believe that led to a good progress. Please turn to the next page. As announced on the 19th, we achieved record high profit for the first half of the year. We have also revised our full year earnings guidance, and we are off to a very good start towards reaching our midterm management plan target of JPY 300 billion in adjusted profit. It's only been 6 months since the start of the midterm management plan, and we will continue to show our progress objectively based on this group management targets. From the next page, I will go through our group strategy. Please turn to Page 7. Scale and diversification is one of the 3 core strategies under the midterm management plan. I will explain the details of each businesses later, but the top line growth has been outpacing the plan. This is due to pricing measures and new product launches in the domestic P&C business and rate increases in the overseas insurance business, which stands out with its very good growth. In the domestic life insurance business, we expect top line growth triggered by the launch of a new cancer product and we expect the growth to be higher than the expectation. The combined ratio, an indicator of profitability, is still far from the level targeted in the midterm management plan. This is mainly for the insurance business. The combined ratio from the insurance business is still far from the level targeted under the midterm management plan, but we will thoroughly execute the profit structure reform in domestic P&C business and profitability improvement measures in overseas insurance business. Now please turn to the next page. We are expanding the scale of our business -- insurance business, both in Japan and overseas, backed by the progress of various initiatives, including rate hikes. We have been achieving a high annual growth rate of just under 7%. In this first half, a high year-on-year growth rate of just under 10% was achieved. In particular, the growth overseas has been remarkable, and the business has more than tripled compared to the period before the acquisition of the former Endurance, now known as Sompo International. Furthermore, the ratio of the overseas insurance business is increasing against our total business portfolio. Despite the general perception of the insurance industry being a mature industry with no prospects for future growth, Sompo has actually achieved such strong growth. And we'd like to lead this to a steady growth of bottom line, and this will be an important measure for us to achieve our vision under RDP. The overseas business ratio and risk diversification ratio, which are the numerical targets for diversification, are showing strong start. We expect the overseas insurance business to contribute more to adjusted profit in the current fiscal year than the last. And the overseas business ratio is steadily progressing towards the FY '23 target of 30% or more. At the result meeting in May, we explained the 5 focus areas and the road map for RDP, which will be the pillar for creating new customer value. Our goal in terms of business lines is to exceed JPY 500 billion in the medium to long term. And with this road map, the nursing care RDP is expected to spearhead the overall initiatives. And so today, I will shed the spotlight on the nursing care RDP and explain the current status. This slide illustrates the RDP business model for the nursing care business. Japan is facing the modern social issues of declining birthrate, aging population and shrinking working population. Against such backdrop, Sompo is taking on the challenge of creating new value to solve social issues using the nursing care business as POC verification opportunity. So that you will have a better picture of our initiative, we made a video showing the significance of working on nursing care RDP with Palantir, our RDP partner, and the details of our efforts at nursing care facilities. After the video, I will provide more details on the next page. So please take a look at the video. [Presentation]

So that was how we are using the real data platform in our nursing care business, and I hope you now have a better image on what we are trying to achieve. Let me also share the development status. Product development is underway for this product in 3 steps: data visualization, systematization of expertise, getting the know-hows and the expertise from well experienced caregivers. And using those data, we would like to make a predictable nursing care as these are the important steps that we are taking under development. We have already deployed the product to 24 facilities within our group, and the development is aligned with an easy workflow on site, achieved approximately 1,000 hours of internal dialogue with Palantir, our partner, and with ABEJA's talented engineers. ABEJA is a blue chip company when it comes to IT. At this point, we have already developed 8 modules, and half of them are planned to be commercialized after verification and validation. We are also working to create solutions that are truly necessary for nursing care providers by having external nursing care facilities actually use the system and give us feedback from the user's perspective. There are about 60,000 nursing care homes, and we hope that we can offer a necessary service to those facilities. We have been able to shape the nursing care RDP to a certain extent through a process of trial and error in agile development. We have confirmed that there are still a number of issues to be addressed before we can commercialize the nursing care RDP. Setting the price is one of them. We believe that the 20% productivity gain can save the labor cost by JPY 10 million to JPY 20 million per facility for an average fee base nursing home. And predictable care function will be offered as an additional value proposition, and we plan to set an appropriate price in commensurate with the benefits that can be delivered. As the initial step, the target launch of the nursing care RDP is set for FY '22. And by combining solutions with real services for nursing care facilities, we aim to create a business for several tens of billions of yen. And as a next step, we will form an ecosystem with nursing care peripheral businesses and provide solutions overseas with the aim of achieving a medium to longer-term target of JPY 100 billion. In addition to the nursing care RDP, we will continue to provide objective evidence of our progress in other areas as well and contribute to the resolution of social issues as the one and only real data platform, while aiming to achieve our medium- to long-term target of being a globally well-known company in this space. We are aiming for JPY 500 billion in terms of size. And nursing care business is a challenge for the government, and there has been many policies and initiatives considered. Enhancing the service efficiency and the level of solution is necessary for an improvement in the nursing care business and also to offer this abroad. We believe Sompo can spearhead this kind of initiative to be the role model in this market. And we decided on the capital allocation of JPY 600 billion as growth investment in the current midterm management plan. The capital will be spent to increase the certainty of achieving management targets and to further promote RDP, and we expect to use it actively. We will definitely focus on discipline while investing with a firm eye on long-term future growth. The bottom left shows our investment performance to date. We have only made 2 relatively small overseas deals so far. And we will continue to seek opportunities versus M&A to ensure that we achieve our adjusted profit target of JPY 300 billion under the midterm management plan. We have a list of many opportunities that we are screening with discipline, including ones in the magnitude of a few hundred billions of yen. In the digital domain, we have been investing to create new businesses. Our CDO, Mr. Narasaki, is well versed in the digital business, obviously, and is deeply embedded in the human network of the industry. We are making progress in collaborating with our investees by leveraging our discernment in various digital fields, including that of our CDO. And digital investment is intended to use the tech company's technology for our business. But as you can see on bottom right, the financial value of our investments is also expanding as the investors' businesses grow. As a tech-oriented company, that is the goal that we are aiming. And in the recent Global Executive Committee, we had a thorough discussion on this topic. Please turn to the next slide. On the left side of the page, the direction of risk by area during the midterm management plan is shown. Results for the first half of the fiscal year were in line with the sense of direction. At present, we are communicating actively more than before between holdings and group companies to establish the optimal way of risk-taking for the group as a whole. And in the middle of the slide, you can see that we are making steady progress in reducing domestic interest rate risk and strategic shareholdings, which we disclosed numerical targets on. We will continue to improve the capital efficiency of the entire group and aim to achieve our target of 10% or more adjusted consolidated ROE. Please turn to the next page. As indicated in May, Sompo's shareholder return policy is to return 50% of adjusted consolidated profit as basic return and to provide supplemental returns flexibly, depending on circumstances. This is the first time that Sompo has decided to buy back JPY 20 billion of its own shares as a supplemental return for the interim period. As shown in the center of the diagram, this amount will be added to the basic return to be determined in May next year based on the current fiscal year's financial results. The reason for the supplemental return is that, as indicated in the lower left frame, due to the partial sale of Palantir shares, the company's immediate capital surplus is expected to stably exceed the level at the time the plan was formulated. We will continue to provide attractive returns to our shareholders, taking into account the business environment and capital situation while emphasizing capital efficiency. Please turn to the next page. Regarding the new way we work, which is one of the 3 basic strategies of the midterm management plan, we would like each and every employee in the group to overlap their My Purpose with Sompo's Purpose. And this should lead to the realization of the overall purpose through engagement and overwhelmingly higher productivity. One of the key initiatives to enable the overlapping of the group's employees, My Purpose and Sompo's Purpose, is to hold town hall meetings with employees. Since the start of the meetings in September, we had 7 of them, and I personally was a part of it, communicating with a total of about 10,000 people viewing the communication I have had with the group employees, I felt firsthand that these efforts would build up to improved employee engagement. And this is something we learned from COVID-19, which was a new way of communication and a new management tool. I was able to feel this firsthand, and I also felt this was the new normal. So going forward, I would like to continue on to use this tool in a proactive way. In addition to this increased engagement, further growth for Sompo requires innovation in which diversity and inclusion is inevitable -- where inclusive diversity is inevitable. By accelerating D&I, we will accelerate our efforts to achieve innovation and growth. And as a real data platform, we would like to ensure we are able to realize this vision. Please turn to the next page. Regarding SDGs in business management, we have established materiality KPIs that are linked to our strategy for realizing the purpose, and we are working on them. And I am sure that our investors are already well aware of the contents, but we have fundamentally revised the annual report this year, positioning it as an important information disclosure tool for communication to investors and other stakeholders. We hope you take a look. We believe that the annual report is an important information disclosure tool to deepen understanding of Sompo's unrealized financial value. The value to resolve social challenges will turn into cash through monetization eventually in the future. That is what we believe in. And we would like to ensure that we are able to have people understand this in a deeper way. So we will continue to brush up the contents of the annual report to make it more appealing to our investors. Please turn to the next page. With regard to the change of the overseas insurance business from John Charman to James Shea, the transition was carried out with speed and without confusion based on the succession plan as of September 1. In addition, we launched the Value Communication Team in August called VCT. This goes back to improving our unrealized financial values. We will collaborate within the group to improve unrealized financial value through purpose-based management and the promotion of sustainability. We will engage to resolve social issues, and we would like to communicate, which is our mission to engage with our stakeholders. So the VCT will partner with divisions internally in order to effectively communicate. With that, they will work to enhance our brand value and corporate value with our multi-stakeholders. That's it for the group strategy, and I'll now explain strategies by business. For your reference, Page 20 shows the progress of KPIs by business. Please turn now to Page 21 where we talk about the domestic P&C insurance business. The results of earnings structure reform have been steadily reflecting in the progress of business performance with particularly good progress in the measures against high losses, and the results have already exceeded the initial plan. Also so far, the impact from natural disaster losses have been trending within our assumptions. For top line, we continue to make progress in our efforts to optimize premium rates. In addition, sales of packaged products for small- and medium-sized companies, which cover various risks surrounding them, have expanded, contributing to steady growth. Regarding earnings structure reform, we are working on improving underwriting by utilizing Palantir, our partner's technology and the effects of these efforts are steadily materializing, and we will continue to have good expectations going forward. From the next page onwards, the progress -- please turn to Page 24 next. In contrast to the domestic business, in the overseas insurance business, it has been a year of major natural disasters ever since 2017, including major hurricane landfalls and flooding in Europe. Even in such an environment, we expect to achieve the initial plan for our mainstay SI Commercial P&C business. Although the pace is slowing down, the insurance market continues to harden against the backdrop of frequent natural disasters and the ultra-low interest rate environment. In SI Commercial, the hard market is proving as a tailwind, and top line is growing strongly. In addition, by diversifying the policy portfolio and improving profitability, SI Commercial continues to generate profit growth as a growth engine for the group. The following pages describe SI commercial's top line and profitability, including a comparison with peers. I hope you could refer to the momentum that the business has. Please now turn to Page 27 where we talk about the domestic life insurance business. Adjusted profit in the domestic life insurance business is making steady progress here as well. In addition, efforts to reduce interest rate risk, which I mentioned earlier in the capital policy section, are also progressing well. Annualized new premiums appears to be lagging slightly against plan as the plan had anticipated the start of sales of the new cancer insurance product in the second half. However, on the other hand, compared to the level of pre-COVID-19, ANP is trending favorably. And even when compared to Q1 disclosure from peers, we have exceeded their results significantly. In October, we made a good start by launching the new Insurhealth type cancer insurance product as planned. We are promoting initiatives to make it a catalyst for the second half of the year. In the next page, we explain the progress of key indicators. Now please turn to Page 29 where we talk about the nursing care and seniors business. Due to the state of emergency declaration, there was a slight delay in the progress against numerical targets in the first half. On the other hand, the environment is improving at present, and we will accelerate our efforts in the second half of the fiscal year on the premise of the safety of our users and employees. Adjusted profit for fiscal 2021 is expected to reach the beginning of year plan. And one of our KPIs, occupancy rates, are expected to exceed the beginning of year forecast of 90.8% by a wide margin due to greater sales activities. For initiatives in the nursing care and seniors business, apart from nursing care RDP, please refer to the next page for your reference. Now please turn to Page 31. For digital, in the digital business, we established Sompo Light Vortex as a core company. We have started to work on commercialization of digital solutions such as product development, sales, et cetera, by collaborating with start-ups with cutting-edge technologies. Also, as a group, we were selected as one of the DX companies to watch in 2021, jointly by the Ministry of Economy, Trade and Industry and the Tokyo Stock Exchange. We will continue to engage in dialogues with digital technology partners and actively promote the group's digital transformation. And like I mentioned earlier, we will strive to become a tech-oriented company by generating a track record. Finally, please turn to Page 33. Here is the link to the nursing care RDP video, which we showed earlier. The video is posted on Palantir's website. So I hope you can take a look. The next page and following pages are reference materials, including various data and excerpts from the first half financial results disclosed on the 19th. This concludes my presentation. Now I'd like to take any questions you may have. We will continue to do our utmost to achieve the management targets of the midterm management plan, and we will report our progress to investors in an objective, evidence-based manner. Thank you very much for your attention. Thank you.

Thank you very much, Mr. Sakurada. This will conclude the presentation from our side. Now we'd like to move on to the Q&A session. So the first question is from Mr. Watanabe from Daiwa Securities.

This is Watanabe from Daiwa. I have 2 questions. The first one is on Page 15 regarding your supplementary return. Your ESR is within the target range. Why did you decide to do an additional return? And with the proceeds of Palantir's sales, did the ESR go up? Is that the reason? Or is the additional return due to an increase in cash balance? And my next question is on Page 18, regarding the succession plan. So for the overseas insurance business, you had a change in the CEO. And I think the market appreciates the strong leadership of Mr. Sakurada. But do you have any comments on your own succession plan? Do you have any candidate to succeed your position?

This is Hamada, the CFO. Watanabe-san, thank you very much for your question. Let me respond to your first question. So we decided to do an additional return of JPY 20 billion. So this is partially due to the operational sales of the Palantir stocks, but we looked at the total capital base to decide on this return. The key point was that there was some capital surplus, and we had looked at the capital surplus position versus our JPY 600 billion investment plan. As the relevant cash balance, we have looked at their capital base. So with Palantir's stock sales, we gained the proceeds of JPY 50 billion -- over JPY 50 billion in cash. And this was principally used to the Light Vortex company, and the cash is reinvested for next growth. And with the capital surplus, we felt that if there is a room for us to return the capital to the shareholders, we will do so. And that was the basis of the current decision.

And let me respond to your second question. As you know, we have a committee-based governance structure, so including the succession plan and also the nomination of the CEO and also the resignation of the CEO will be decided by the Nomination Committee. They have the full authority for that. And just to give you some facts, myself included, all of the leadership here today and also all the business owners, both overseas, domestic P&C, domestic life business and nursing care business. Regarding the candidates of our respective business owners, we have a list, which has been submitted, and discussion is taking place. When, who, at what timing, I don't have the authority to share that information, and we don't have the Chairman of the Nominating Committee. So we will not be able to offer you the answer, but we will appoint the right person at the right timing. So that is all I can say. But to that date, I would try to fulfill my role. Thank you.

The follow-up on the first question. So in that sense, even if the ESR is within the target range, there is a possibility for you to conduct a supplementary return. Is that right?

Yes, that is the right understanding.

Thank you very much for your question, Mr. Watanabe. Next, from SMBC Nikko Securities, we would like Mr. Muraki to ask a question.

This is Muraki from SMBC Nikko Securities. My first question is about Page 13. You mentioned Palantir as well as other investments into other digital areas, and you talked about capital. And my question is about how much capital you are considering on deploying? Page 14 for noninsurance businesses, you said that capital allocation is going to happen at a certain degree. And 1 year ago for Palantir, from a risk management point of view, you started discussions on what you are going to do. And 1 year after, you sold about 20%. Going forward, on an ongoing basis, are you going to continue to reduce risk? That's one question. And for other investments, I think you do have quite a lot of unrealized gains. So by recycling it, are you going to move it towards new investments and new partnerships? Can you share with us your thinking around this? That's my first question. And my second question, if I may go on, my second question is about the international business for Page 7 and top line. It seems that top line has exceeded your expectations quite substantially, so has the loss rate as well. It has been exceeding plan. Since you formulated the midterm plan, not many years have past yet. And for upward revisions for -- whether it be top line or for revisions of the combined ratio, to lift it higher, do you think there will be a need to do so? That's my question.

Well, this is Hamada. I will take your first question then. First of all, for Page 13 and the JPY 600 billion growth investment that you pointed out, by a certain degree, we will be investing into the insurance business as well as into the digital areas as well. For Palantir shares and the way we are going to treat it going forward as one single stock name, the weight in our portfolio is quite heavy, still. So there is stock fluctuation risk. Therefore, over the medium term, Palantir shares need to be reduced. That is our view. However, at this point in time, to be honest, we don't have a plan to divest shares even more, and we do share this with Palantir. But in order to build RDP, the unrealized gains, if possible, can be deployed. That's one of the options, so that we could use it for other digital investments. So we will look at which areas we can invest in as we decide to make further reductions of Palantir shares. And as shown on Page 13, financially, we have been successful in other non-Palantir investments as well. We have established Sompo Light Vortex for this reason, actually, meaning that for digital investments, we would like to collaborate with new technologies for -- that is the aim of doing this. But because we are able to benefit financially, we would like to circulate that so that we could deploy it for the next digital investment. And that is why we set up Sompo Light Vortex. Do you have anything to add, Mr. Narasaki?

As Mr. -- I would like to make some follow-on comments to what Mr. Hamada said. Looking at the right-hand side of Page 13 and at the bottom, there are some numbers available here. Ex-Palantir, we have been making total investments worth approximately JPY 30 billion in the past, and the current equity value is approximately JPY 60 billion. And it has been calculated in a conservative way. We do invest into start-ups as well as venture capitals as well. The aim of our investments is a strategic return that will contribute to RDP. But for investees or venture capitals, I should withhold giving you the exact numbers, but the return comes double to what we have initially invested. And also for the start-up investments, some of the investees have already went to market and IPO-ed. And Wejo, that is on the screen, has -- went to market. And now it's publicly traded. And there are other investees where an IPO exit is already visible. So in a conservative way, the start-up part can also double our investments. So to your point, as you rightly said, we would like to recycle our investments so that we could reinvest into other areas. So we would like to recognize the gains while we invest in other areas so that we could pursue further strategic return. So at one time, we are trying to achieve 3 things. That's all for me. Thank you.

And Mr. Muraki, for the overseas business, I would like to respond to your question. This is Okumura speaking. For top line, the rate increase environment is favorable, and we are trying to leverage that. And we have been able to see so far a top line that exceeds our plan. But for the combined ratio, it is relatively high compared to our plan, as you said. And one reason is because of cat losses. Compared to our expectations, it is exceeding by JPY 10 billion. That's what we're assuming. For the fourth quarter, we haven't been seeing that much yet. So it might go below our expectations in the end, but the loss ratio has been going up due to this reason. So our plans going forward, there are some positive factors and there are some factors that we need to watch out for. So for the positive factor, as Mr. Sakurada mentioned earlier, the rate increase environment, we were a little bit pessimistic about it, but it's becoming tighter lately again. So it should -- it is exceeding the level of loss cost. One thing we need to be cautious about, there are 2, one is cat trends, natural disaster studies, especially hurricanes. And we need to have a close watch on them. And we're not just going to estimate numbers in a conservative manner, but we also need to revise our portfolio, whether it be geography or a line of business or attachment points and increasing the attachment point. So we are taking various types of countermeasures. And the other is inflation as well as social inflation, past year underwritings and the loss developments from past years. We need to strengthen our reserves. That may be the case. Or we may have to close it early by strengthening claims handling. So inflation and social inflation might turn out to be negative factors, but we believe the rate increases that are happening now as well as the margin improvements will be able to offset the negative factors. So this year in May, we did explain some numbers. And we do believe there is a high probability of achieving them next year as well.

Just wanted to confirm some numbers. It might be centered around Palantir. But according to your calculation, ESR should go up if unrealized value -- unrealized gains are realized. It's hypothetical, but how much should ESR go up if all the unrealized gains were recognized? Is it going to be 10 points? Or is it going to be otherwise? And you also talked about past underwritings and the developments, if there were to be cost inflation. So when do you do reserve studies at SI? And when are those results reflected in your P&L?

For ESR, first of all, Palantir alone, if the full amount were to be divested, ESR should go up by 15%. And if you were to include other elements, it would be within 20 points.

For SI reserves, we do it by quarter. Actuaries, the claims people as well as our management, our underwriting people, checks the data, and we come up with our best estimate.

If that's the case, for the revised plan and risks associated with it, I guess it's not that significant for this year.

The numbers that we have set forth at the interim period should not be that different from the final results. But Q4 hasn't yet closed. So we would like to closely monitor the trends.

Thank you for the question, Mr. Muraki. Next is from Mitsubishi UFJ Morgan Stanley, Ms. Tsujino, please.

You mentioned about JPY 600 billion for investment for growth, and you mentioned some surplus on ESR. So I think at this time it was 255%, and your target ranges from 200% to 270%. So whatever exceeds 200%, is that the surplus? And you have JPY 770 billion at present. And vis-a-vis that, you have a buffer, and it can still secure JPY 600 billion. Is that your thought process? Could I confirm that? And if that is the case, I think the -- because the sensitivity is on the interest rate, because even if the equity price drops, it does not have a material impact. So I guess that means that you do have a substantial room at surplus. But based on that, how much share buyback can you expect for the year? It seems like it's kind of your intuitive feeling to decide on that, but can you elaborate on how you make the decision? And overseas, the top line is growing substantially, and I guess it's partially due to the rate hike. And except for the nat cat loss, the combined ratio has not come down significantly. So I guess you are taking new risks. The risk amount is increasing. But with this kind of a risk increase on a consolidated basis, even with the rapid growth, this risk increase will be offset by diversification. Is there going to be a need to allocate further capital to Sompo International going forward?

Yes. This is Hamada speaking. I will answer your first question. So the rough calculation that you pointed out is correct. So we have the adjusted capital of JPY 3.5 trillion, and the risk is about JPY 4 trillion. So if we say 200% is minimum, then JPY 700 billion will be the capital surplus based on ESR. But I think we explained this when we changed the target range, and we are monitoring our ESR so that we can avoid the rating agency to downgrade this. And at this point of interview, the capital surplus may be relatively small. But the thinking behind the additional return this time is that originally, we had allocated JPY 600 billion of growth investment. And to maintain this, every year, we will have to look at the profit growth and the capital increase and how the risk amount is increasing. So we do the simulation every year. And for this fiscal year, the original simulation versus original simulation in the first 6 months of the year, we had the sales of the Palantir stocks. And also, we had seen an increase in the unrealized gain substantially. Roughly speaking, we had additional JPY 50 billion in the capital base versus our original plan. So we could have returned all of that, but the market price portion will be impacted if the equity market comes down. So based on that, we decided to do an additional return of JPY 20 billion.

So this is Okumura speaking on the overseas business. The top line is growing for sure. And the loss ratio is relatively high, and this is because of the cat loss. And also other portfolio is shifting from global cat to global casualty. So that is why the loss ratio is slightly higher than expected. And regarding the sufficiency of the capital base, when we made the midterm management plan and our own business plan for the next 3 to 5 years, we are using the internal rating calculation for ESR or the ECR based on the Bermuda calculation, we will be exceeding 150% by -- for our margin. So in terms of organic growth, based on the current business, we thought that we'd not need to ask for additional capital. But if you're going to do a bolt-on M&A or if you're going to accelerate the risk-taking, then between the holdings and the businesses, we may discuss every potential capital infusion.

On a consolidated basis then, even if the overseas business grows this much, the risk increase will be offset by diversification, is that right? And also, it means that you had a significant exposure to natural catastrophe overseas, but you're trying to shift the portfolio. How much are you going to reduce the cat exposure?

Well, first on the overseas insurance business, in the real terms, yes, it is increasing. But in terms of percentage points, looking at our business portfolio, the cat risk weight is decreasing. For example, with the reinsurance global cat, in 2017, when we acquired the business, the exposure was about 14% to 15% within the total portfolio. And now in 2025, that exposure is close to 5%. And with Hurricane Ida, when a similar nat cat was hit and comparing our net loss in the industry's loss, our net loss this time is much lower compared to the past. And this is due to the revised underwriting policy and also our reserving policy. And also on a quarterly basis, we monitor if the portfolio structure is what we intended it to be. So we do not have a clear target or threshold. But looking at the annual earnings, we want to make sure that the cat loss will be within the annual earnings for our portfolio. Did that suffice your question, Ms. Tsujino?

So the overseas risk is increasing. But on a consolidated basis, the risk amount for consolidated basis will be offset by diversification. Is that right?

Yes, that is right.

Thank you, Ms. Tsujino. Next person is Mr. Otsuka from JPMorgan Securities.

This is Otsuka from JPMorgan. If it's possible, I would like you to take one question at a time.

Yes, that's fine. Please go ahead.

Okay. My first question is about Page 5. I'm looking at Page 5 right now. For risk diversification ratio, which you have started to quantify from this midterm management plan, my question is about Page 5. As you set forth here, the improvement rate as well as the level is what I would like to ask about. Looking at what you're doing from the outside, you are saying you're making steady progress. But in the next 6 months, are you going to be able to see 1 percentage point progress each? And would that mean that you're making steady progress? So my question is about speed of improvement. And for the -- you are already making improvements against the fiscal year 2020 actuals, which is your goal for the final year. How high do you think you can go? If there were high nat cat losses overseas or in Japan, from the outside, how can we feel assured that you are making up for it through other businesses? Can you give us some flavor on that? That's my first question.

Thank you, Mr. Otsuka, for your question. For the risk diversification ratio, we're talking about scale and diversification, which is one of our core strategies. As we set this as one of our core strategies, we thought about how we can show how we have diversified. So that is why we introduced this ratio. Regarding the ultimate level we are going to go after, we actually haven't yet come up with an answer. So we would like to constantly be able to have a strong diversification in the business so that we can be a well-diversified group. That's how far we have come so far. Of course, in 2023, according to our simulations, we are able to see where we are going to reach, but we are not sure yet if that's going to be the ultimate goal we want to reach. So this may not answer your question, but we just want to say at least that we want to see the results to be better compared to the previous year. And we are not able to quantify the final goal yet.

So for example, diversification of business through large M&As or through RDP and value creation and more contributions from that, theoretically speaking, you should be able to see a higher risk diversification ratio, right?

Yes, that is correct.

Okay. My second question is about Page 10. I'm looking at Page 10. 6 months ago, at this kind of briefing, I think you discussed this as well. So you have 5 focus areas of RDP right now. And with respect to the speed of business and the response you're feeling from your engagement is what I'd like you to share with me. For the nursing care area, I did get the impression that you are making good progress. But for the other focus areas such as disaster prevention and mitigation as well as mobility, how much response or progress are you making? And for the speed you are seeing in each of the businesses, do you think the rate of how you're progressing is fine? Or do you think you need to accelerate your efforts?

Thank you very much for your question. This is Narasaki speaking. I will take the second question you asked. So we did explain a lot about nursing care RDP, and you might be wondering if we're doing well on the other focus areas. The feel we have is that I actually joined the company 5 years ago from the outside. But when it comes to Sompo Japan insurance or the P&C business and mobility and resilience RDP, the business processes of Sompo Japan is extremely large in scale, and I'm really feeling that firsthand. What I mean by that is RDP is a product. Before we develop it to sell it externally, we have Foundry for internal digital transformation and for better productivity. We are utilizing Foundry quite a lot, and what we would like to do through this is we would like to ensure -- we have been seeing contribution to bottom line already. So we are working on that. And as we work on the developments to create it as a solution product in the area of mobility and resilience. So we are putting together a lot of creative triggers together with Sompo Japan. So we were trying to generate effects in -- internally so that to outside customers and to outside markets, we have started to gain visibility that the product has far more impact on the external markets and customers. So whether it be Sompo Japan or Sompo International, in the area of agriculture, we have a product called AgriSompo and a new solution product that we can add on is being developed right now. For the details, we have been able to -- I'll give you specific examples at today's IR meeting. But after nursing care RDP, we believe RDP products that are comparable to nursing care RDP or even better than nursing care RDP products are currently in the works. But we would like to ensure that we thoroughly use the products internally first to generate good results and then turn it into a solution product. So it is taking a little bit longer time than the nursing care area, but that's how gravity it has. So that's all for me.

If that's the case, it seems that the feel you're getting is that compared to 6 months ago, you were talking about monetization by selling it externally. And you were talking about the 4 phases that you would like to go through. The final stages are Level 3 and Level 4, but I guess you are now prepared to leapfrog to Level 3 or 4.

Yes. You could view it that way because we're already at the end of the third quarter. Now we are at a stage where the product can be shared as a product, presumably next fiscal year than this fiscal year, but that's the rate at which we are working right now.

Okay. So briefly, one more add-on question. In the area of mobility or disaster prevention and mitigation, when you look at other companies, whether it be domestic or overseas, when it comes to data analysis, I am sure that each and every company does that. So are you seeing intensification of competition? Or do you continue to have an upper hand? If you can briefly take that question, too.

Well, some parts of it is confidential. So I'm not able to give you the details of this. But personally, I can say that we are 1 or 2 steps ahead of other competitors.

And next, Mr. Sato from Mizuho Securities, please.

This is Sato from Mizuho Securities. Can you hear me?

Yes.

I have 2 questions. The first question is for the final year of the MTMP, you are aiming for JPY 300 billion for adjusted profit. After 6 months, I think the progress may imply that there could be some upside. Do you agree with that? As I'm not asking if this is going to be far higher than JPY 300 billion, but I'd like to look at the situation closely to see in which part of the business you may be outpacing your plan. For example, on Page 22, you talked about the profitability structure reform, and you have partially revised the guidance for this fiscal year. So if this is not front loading the future impact, I think you can continue to enjoy positive upside, mostly overseas. The rate hike environment is better than your original pessimistic view. And I think you've been able to increase the top line for this fiscal year. So given that, is that going to have some upside impact on your final target for FY '23? And my second question is on specific topic. With the revised plan, looking at your Brazil business, it seems that your loss expectation was lowered quite significantly. I think this is backed by many factors. I think you're planning to build up the reserves. And in this way, for the emerging markets and the retail business, now it's under SI Holdings, what are the new challenges that you expect? And what kind of countermeasures, which you need to deploy? So are there any business units outside of Brazil that seems to be challenging where you have to take on some countermeasures?

Yes. This is Hamada speaking. Thank you for the question. Let me address your first question. So your understanding is broadly right. So the biggest driver of our profit is the earnings structure reform and also growing the top line for overseas. And in the previous 6 months, the progress was better than expected. So I think that's a positive factor. And for this fiscal year, the net cat loss was very moderate, and we cannot foresee how this will trend 3 years from now. But in the current situation, intuitively, the current accident rate, I noted today, there is some impact coming from COVID-19. And going forward, with the resurgence of travel, the traffic may come back again. But ultimately, I think with the changes happening in the society, the loss ratio will not come back to the previous levels. So what we can expect 3 years from now, I think this part will be a positive factor. So that will be the change in assumption for 3 years out.

So on your second question regarding the revised guidance for Brazil and also impact on the retail business. This is Okumura speaking to address that question. So for our business in Brazil, we had to revise down our guidance. But by the end of this fiscal year, we will be cleaning up the balance sheet. So the resolve and vision of the accelerated amortization, depreciation will be completed. And also, other retail companies are shifting under SIH, and that's what happened back in 2019. And after that, SIH's function leaders like the CFO and also internal audit person are directly communicating with the retail business. And after the issue happened in Brazil, obviously, the results are audited for each of the businesses, but the issue that we saw in Brazil happened. So we are now doing an overall review for the whole business. And at this point, we don't see anything like Brazil where we have to do the reserve for the prior year development.

Thank you very much, Mr. Sato. Next person is Mr. Niwa from Citigroup.

This is Niwa from Citi. I have a question about the RDP, the real data platform, as well as overseas retail, which might be similar to the previous questions. So first question is about Page 12. On the left-hand side, you show a diagram. In the CEO's comment, you were saying several tens of billions of yen in fiscal 2022 as well. So my question is, how much is the unit price is going to be? And how much number of operators are you assuming? Is it going to be 400? Is that the basis of your calculations? If you have any numbers that you have for this fiscal year, I was just wondering how we should estimate the size of the business and how we should break it down. And 6 months ago, at the briefing, you were saying that you would like to make a comment at appropriate timing regarding profits. So RDP for nursing care or for the overall RDP segment, can you give me more commentary on it? Next is for overseas retail, which is overlapping with Mr. Sato's question. But for the overseas retail segment, can you once again walk us through the positioning of it? You were saying that you are promoting earnings structure improvement. But for Brazil as well as for Turkey, where there are an unsteady outlook in the geopolitical situation, are you -- should we look at this business through the view of applying insurtech and so forth going forward? So please share with us your expectations.

Thank you, Mr. Niwa, for your questions. First of all, on Page 12, Mr. Sakurada was referring to we are going to launch nursing care RDP in fiscal 2022. And ultimately, we would like to reach several tens of billions of yen, not necessarily for fiscal 2022. I think reaching several tens of billions of yen in fiscal 2022 is something we can't commit to. So regarding our assumptions for Page 12, we did have internal discussions on our side, too. And of course, we don't want to -- we didn't want to put in numbers that were inappropriate. And as Mr. Sakurada mentioned in his presentation, by implementing this per facility, how much cost can be reduced was what we tried to work out and how much of pay are we able to receive and return. So we looked at that. And also for the number of operators, we do know the total number of operators nationwide. And for digital devices or ICT, we thought about the operators who can actually go through the digital transformation. So that is why our initial target is 400 or so companies. So our calculations are based off this. So when you do the calculation, it doesn't reach JPY 10 billion -- JPY 100 billion yet, but as we show under others in the non-RDP peripheral areas, we are expecting to generate some income as well as developing the business overseas and so forth.

So if I may follow up on that. This is Mr. Tsuji. Thank you very much for your question, Mr. Niwa. As was just explained, I would like to talk about the current status of the business. For nursing care RDP, we have a CDMO team who is engaged in marketing. And as Mr. Sakurada mentioned in his presentation, currently, there are 8 operators to which we have been proposing plans. We are having discussions with them. So the teams are starting from there individually. As a next step, we would like to transform to pull-type marketing. For example, I'm having booths at exhibition or doing digital marketing. So these are the things we are currently planning for, and that's the stage we're in right now. So for the monetization schedule, it is exactly as Mr. Hamada explained. Thank you.

So my second question is about overseas -- was about overseas retail.

So this is Okumura. I would like to take your question. As you know, in the past, we used to support that Japanese corporations going abroad. So that was one of the reasons why we were going overseas. But whether it be developed or emerging markets or SI commercial and retail, now their missions are to generate profits as well as to diversify risks and contribute to our performance. Turkey is the most advanced in their skills and culture. We are trying to develop that out to the other retail markets. But as you pointed out, there is geopolitical risk, and there are -- there is something like a currency rate depreciation like what happened 2 days ago. And single company efforts are not able to control that kind of risk. So thinking about what we can do, one is scale expansion as well as diversification when looking at the overall retail business. And in doing so, what we are engaging in right now is new channels and new markets. We are trying to advance into them together with insurtech companies. So developing new channels as well as new markets is what we're working on. Whatever the case may be, when it comes to currency rate depreciation, which is a huge headwind, and when you're doing business on a U.S.-denominated or yen-denominated way, it is hard to see -- figure out the growth prospects. But overall, we would like to think about risk diversification from the retail business as well.

Thank you, Mr. Niwa. Next, Mr. Majima from Tokai Tokyo Research Center, please.

My first question is regarding the purpose-driven management. The employees engagement is something that you'd like to enhance, and I think a visualization of that is a key challenge for you. What kind of measures are you taking to visualize the employees' engagement? Also, Tokyo Hokkaido -- [ Tokio Marine Nichido ] has a motivation club -- linked motivation club. What are the measures you're taking? My second question is regarding digital. Another player for digital will be AI. How are you going to utilize AI as part of your digital strategy? In regards to the usage of AI, you may be slightly behind. For the insurance business, for P&C claims handling, AI is used to detect the fraud claims payment. But what is your thought on using AI? And regarding Foundry, I think you put the priority on utilizing Foundry for the nursing care business. But in the second half of the year -- nursing care business is important. But with the COVID-19 situation, I think analysis on the pandemic is something significant for the society. The new cases have stabilized. So I guess utilizing Foundry for COVID-19 analysis may not be needed. Is that the case? So those are my 2 questions.

Regarding the first question and the need for engagement and also the purpose-driven management, within the Board members, which are mostly outside directors, we had a very thorough discussion. And my mission -- or 3 mission from the Remuneration Committee and the engagement is one of the key mission that was provided to me. And regarding the measurement of engagement, there was no particular instruction. And if we used our own KPI to measure the level of engagement, it may not be significant as a data point. So we're using the Gallup's data sets, and we are simply measuring the engagement to share the level of engagement today. But what's important is the background, which led to such results. So for example, within the headquarter, the engagement index may be high. But on site for digital or nursing care or the insurance business, the on-site engagement, if it is low, that is going to be an issue. So that's the kind of discussion that is taking place. So we are using Gallup's tool. And the result that will be used, I think, is going to be the key for implementing the purpose-driven management for different companies. And we will try not to be self-centered on that point. And on your second question, I think Mr. Narasaki would like to answer your question.

Taking a long time, but I would try to simply answer that. So this is Narasaki speaking. And I was surprised that you said for AI initiatives, we are behind because among the 3 mega insurance companies in Japan, I think we are most advanced. To could give you some -- a very simple example. We are partnering with ABEJA, who is the top company in deep learning globally. And we are the largest shareholder for ABEJA, and we are using ABEJA's AI and deep learning internally. I think other companies will also have some partnership, but the relationship is not as deep as ours. And on your second point, regarding the data analysis, I hope not to be misleading, but AI and data analysis is not 2 separate things. The data analysis is not done by analysts. It's done with AI and deep learning as Palantir's Foundry is a type of AI in a way. So for this, with the spread of COVID-19, and you mentioned about the analysis on the spread of COVID-19, with the Sompo Japan and Sompo Group as a whole, Foundry was introduced to Kanagawa prefecture, and this was used to analyze the COVID-19 situation in the prefecture. And we also have the government, which is utilizing these AI capabilities. So to the other municipalities, this is penetrating as a service. So the data analysis, not just on the COVID-19 situation, but for other purposes, is something that we are already providing.

Thank you, Mr. Majima. So we are trying close to our given time. So the next question will be the final question. It will be a question from Mr. Sasaki from BofA Securities. The question is through the chat box. So I will read his question on his behalf. For nursing care RDP, for -- I felt that the path to profitability has become clearer. In order to accelerate your efforts to scale, do you have any intention to receiving external capital or bringing it to market? Will that be part of your discussions? Especially, if you're going to export it out to overseas, you will probably need an overseas partner. So can you share us your views?

Maybe I should take that question. Thank you very much for your question, Mr. Sasaki. It is exactly as you've just pointed out. So I'm not saying with who, and I'm not going to say any company name, but there are many inquiries that are being presented to us. But what's important here is before we scale up, we have had this discussion thoroughly at our Board, but we need to put priority on quality. And if we focus on quality, we believe we'll be able to expand in quantity as well. So for nursing care, too, we believe we have now gained visibility around what nursing care RDP is all about. We still have a lot to do. But ultimately, we would like to export in the future, and we would like to create a marketing and research team. And we do already have that kind of team available. And I think it's going to happen mainly in Asia, but we are working on it as we speak. So there are many challenges we are facing. However, there are a lot of opportunities. Compared to when we were just doing insurance, I can say we are getting quite a lot of increase these days, although I am not going to detail right now. Thank you very much for that question.

Thank you very much, Mr. Sasaki. So as time has come, we would like to bring the meeting to a close. If you have any additional questions, please present your questions to our IR team. Thank you very much for participating today.

Thank you.