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

Thank you very much for joining us today for the telephone conference of Sompo Holdings. I am Kuroda from IR. I am back in IR after 3 years, and look forward to dialogues with you. Nice to see you again. I and Mr. Kamei, the IR Manager, are going to explain FY 2021 results and the guidance for FY 2022, which we announced today, mainly in terms of numbers based on the presentation material for about 20 minutes. And then I'll take questions from you. With regards to the business strategies, Group CEO, COO and senior management will explain in the IR meeting to be held next week. I would like to get right into the explanation. However, I may mention about the future outlook, which is based upon the current projections. So please be advised that the actual results may be different from the outlook. Please turn to Page 2. This page shows the highlights of FY 2021 results. Consolidated net income increased by JPY 82.3 billion to JPY 224.8 billion. And adjusted consolidated profit was JPY 261.3 billion, the record high for 2 consecutive years, mainly driven by profit growth of Sompo Japan and SI Commercial P&C. In our guidance for FY 2022, we assume absence of some of the COVID-19 impact in Sompo Japan, while SI Commercial will achieve increase in net written premium on the back of rate increase. As a result, we are guiding adjusted consolidated profit of JPY 260 billion, which is the same level as the previous year. Net income is forecasted to go down to JPY 145 billion, which is mainly due to the reactionary decline from capital gains we recognized from the sale of Palantir stock held by the Holdings last year. Let me add some comments on the shareholders' return we announced today. As you can see in the public release, we decided on the buyback of JPY 58 billion. This will make the total shareholders' return ratio for FY 2021 58%. In addition, we forecast the dividend for FY 2022 to be increased by JPY 50 per share to JPY 260 per share on the back of the progress of the group's business performance. This forecast will be the increase in dividends for 9 consecutive years. Now I'm going to hand it over to Mr. Kamei for the detailed explanation since he has the better voice than mine.

Hi, everyone. I am Kamei. Please turn to Page 4. This page shows the overview of FY 2021 results. I am going over the main points on the next page onwards. Please turn to Page 5. This page shows the underwriting profit of Sompo Japan. Core underwriting profit increased by JPY 17.7 billion to JPY 120.2 billion, reflecting the decrease of natural catastrophe impact in Japan, offsetting the negative impact of JPY 10 billion from the absence of loss ratio improvement due to COVID-19. On the other hand, underwriting profit declined by JPY 3.3 billion due to the increase in catastrophic loss reserve. Please turn to Page 6. This page is on the investment profit. Investment profit increased by JPY 16.8 billion, mainly driven by higher net interest and the dividend income from distributions from funds and so on. Please turn to Page 7, consolidated ordinary profit. Other than underwriting profit and investment profit of Sompo Japan, which I have already explained, mainly due to top line growth of Sompo International and absence of the COVID-19 impact as well as the impact on partial sale of stocks held at the Holdings, consolidated ordinary profit increased by JPY 100.4 billion to JPY 315.5 billion. For your information, figures for overseas group companies include noise arising from accounting for changes in unrealized profits and losses of assets under Sompo International local accounting standard. Please refer to Page 8 for consolidated net income later on. Please turn to Page 9. Let me next explain main points of the business forecast for FY 2022. We forecast consolidated ordinary profit of JPY 235 billion, JPY 80.5 billion lower year-on-year due to the absence of gain from the sale of stocks held at the holdings and so on. Consolidated net income is forecasted to be JPY 160 billion, JPY 64.8 billion lower year-on-year, while we forecast adjusted consolidated profit to remain at the same level as FY 2021 at JPY 260 billion. I am going to explain in more details about the main points of business forecast for FY 2022 on the following page. Please turn to Page 10. These are the main points of the business forecast for FY 2022. Sompo Japan expects underwriting profit to increase by JPY 15.9 billion as improved profitability in fire and allied lines offsetting the absence of COVID-19 impact of loss ratio improvement. Overseas insurance expects adjusted profit to increase by JPY 38.1 billion, with absence of one-time loss factors of around JPY 11 billion seen in Sompo Seguros, in addition to higher net premiums earned in SI Commercial. Himawari Life and Sompo Care expect steady growth. From Page 11 to Page 13, we are showing the breakdown of consolidated ordinary profit, historical progress rates over the past 5 years, and the numerical management targets, et cetera. So please take a look at them later on. This completes my explanation on the consolidated results and guidance. Next, we'd like to move on to the explanation of domestic P&C insurance business. Please turn to Page 15. This is the overview of FY 2021 for Sompo Japan. I will explain each item on the following pages. Please turn to Page 16, net premiums written. Net premiums written, excluding CALI and household earthquake increased by JPY 38.2 billion. Main drivers were: revenue increased by 6.9% year-on-year in fire and allied lines due to rate optimization and strong performance of casualty and other lines, up 4.2% year-on-year, centering on the core product, Business Masters Plus. Our main voluntary automobile line has seen a decline in revenue in fleet policies, which was offset by rate optimization, which resulted in almost the same level of the top line year-on-year. Please turn to Page 17. This is the net loss ratio on earned incurred basis. Despite the increase in the automobile losses, stemming from the moderating impact of COVID-19, domestic nat cat loss came down, resulting in an improvement of loss ratio by 0.8 percentage points. For FY '22, although we expect further increase in traffic by revising the rate for fire and allied lines and taking other measures, we expect the loss ratio to be similar to that of FY '21. Next page is the loss ratio on premium basis. So please take a look at your convenient time. Please turn to Page 19. This page illustrates the net expense ratio. And for FY '21, it was almost flat over the previous year at 34.5%. When adjusting for the depreciation cost associated with the cutover of the new enterprise system, net expense ratio and company expense ratio both improved by 0.5 percentage points year-on-year. For FY '22, we expect further improvement on the net expense ratio to 34.4%. Please refer to Page 20 for a combined ratio at your convenient time. Now please proceed to Page 21. This is the investment profit and loss. The performance for FY '21 was already explained using Page 6. The investment profit for FY '22 is projected to be JPY 126.7 billion, reflecting less gains on sales of securities and JPY 11 billion increase in hedging costs, among other factors. During FY '21, we reduced the strategic stock holdings by JPY 50.1 billion on market value basis, achieving our target in the plan. Please refer to the next page on the details of interest and dividend income as well as gains on sales of securities. Page 23, please. This slide is the business forecast for Sompo Japan. Page 24 provides indicators for the automobile insurance business. And Page 25 covers indicators for the fire and other casualty insurance business. Please turn to Page 26. Let me offer some additional comments on domestic natural catastrophe situation. For FY '21, net incurred loss for nat cat in Japan was JPY 74.4 billion. For FY '22, given the recent trend with natural catastrophes, we are projecting the loss at JPY 83 billion. Next page is referential data on funds and reserves. Please have a look, as needed. That is all for the domestic insurance business. Now let me switch gears to present the overseas insurance business on Page 29. This is the performance overview of the overseas insurance business. Adjusted profit for FY '21 benefited from sales growth, driven by rent increase at SI Commercial and consolidation of diversified group insurance business as well as the absence of the COVID-19 impact, which was observed in the previous fiscal year. The positive impact in total was roughly JPY 14 billion, and adjusted profit grew by JPY 31.8 billion to JPY 61.8 billion. For FY '22, we projected adjusted profit to grow by JPY 38.1 billion to JPY 100 billion. SI Commercial will enjoy increase in the net premium earned and one-off factors from last year, such as [indiscernible] Sompo Seguros will be absent. And those will be the main factors for profit growth. Page 30 illustrates the year-on-year changes behind the adjusted profit, and Page 31 outlines the performance highlights by regions. Please refer to them as needed. Please turn to Page 32. This is some additional information on the performance of SI Commercial. All the numbers on this slide are indicated in U.S. dollars. The adjusted profit for FY '21 achieved a substantial growth of $380 million due to top line expansion driven by rate increase and increasing retention ratio as well as the absence of the COVID-19 related losses. For FY '22, adjusted profit is expected to grow due to top line growth, driven by further rate improvement and net written premium from last fiscal year turning into net premium earned and combined ratio improving by 3.2 percentage points. Page 33 indicates the loss ratio and expense ratio for SI Commercial, and Page 34 shows the financial data. So please refer to them as needed. That is all for the overseas insurance business. And now let's move on to the domestic life business on Page 36. Here is a snapshot for Himawari Life. The adjusted profit for FY '21 was JPY 33.6 billion, reflecting growth of the protection-type in-force policies. The FY '21 annualized new premium increased by JPY 5 billion, led by strong sales of Insurhealth Products, such as the new cancer policy launched last October, which reached the sales of 130,000 policies. Page 37 illustrates the changes behind the net income for Himawari Life, and Page 38 to 41 of referential data on Himawari Life's business. Please refer to them later at your convenient time. That is all for domestic life business. And now let me move on to the nursing care and seniors business on Page 43. This is your nursing care and seniors business. FY '21 adjusted profit for Sompo Care was down by JPY 1.4 billion to JPY 5.9 billion due to the absence of tax benefits enjoyed in the previous year, an increase in COVID-19 related costs, among others. For FY '22, we project sales to grow by JPY 14.9 billion, thanks to the consolidation of Nexus Care and occupancy rate improvement of 1.8 percentage points. Please refer to Page 44 for the trend on occupancy rate. That is all for the nursing care and seniors business. Last but not least, I'd like to move on to the topic of ERM and asset management on Page 46. This is the ESR status. In addition to the rise in domestic interest rate, the buildup of profit and reduction of strategic stock holdings and interest risks resulted in ESR standing of 246% at the end of March 2022. We continue to see no issue in our financial soundness. Please refer to Page 47 for the breakdown of logistic capital and risk at your convenient time. Now please turn to Page 48. Last slide for me is the group's asset portfolio. From the next page onwards, information on the asset portfolio of Sompo Japan, SI Commercial and Himawari Life are shared. So please take a look later. All the companies are managing the portfolio, focusing on stability. This will conclude my presentation. Thank you for your attention.

Now we'd like to move to the Q&A session. Starting with Mr. Muraki from SMBC Nikko Securities.

My name is Muraki from SMBC Nikko Securities. I have 2 questions for the guidance of FY 2022. My first question is on the international overseas business, where you expect close to JPY 100 billion of profit, I'm on Page 34. You are explaining assumptions for SI Commercial. For this fiscal year, you are assuming extremely low combined ratio, which is 90.7%, quite a low combined ratio being assumed in the guidance for the international business, which is lower compared to the industry average. But would you please give me more color on the assumptions behind this low level of combined ratio assumption? Specifically, what factors and in what magnitude are you assuming in terms of Russia/Ukraine war and impact on inflation? And how large is the impact from inflation are you including in this guidance? And would you please give us the sense of the probability of you achieving this combined ratio level?

Mr. Muraki, thank you so much for your question. Kuroda, speaking. So with regards to the combined ratio, improvement and assumption for SI Commercial, as you pointed out correctly, in 2021, combined ratio was 93.9%, but we are assuming it to improve to 90.7%, 3.2 points improvement for FY 2022. So here are the assumptions. The impact from Ukraine and Russia impact. We assume almost no impact on the top line of SI. With regards to the loss incurred side, in principle, we do not anticipate any impact. But there is a certain exposure to underwriting in that region in terms of the trade credit and also aviation insurance. But for the aviation insurance policies, this region is not our forecasted geographic region. So impact is close to zero. With regards to the trade credit, there's certain exposure in that region. But as of the end of Q1, we reviewed policies in that region. And it turned out that if you put the provisioning to the reserve of about JPY 1 billion to JPY 2 billion, it will be enough. So that's reflected in Q1, but those are the assumptions that we have included in our guidance. With regards to the impact from inflation, to some extent, we are assuming an impact from inflation in terms of the loss incurred, personnel cost and the non-personnel cost. But in terms of the absolute amount, it's going to be around mid few billions of yen, which is assumed as an assumption in the guidance. And including impact from the rate increases that we have done in the past and the price increases that we are planning to do in this fiscal year, there's a significant contribution for the improvement of the combined ratio. That's a big factor. And the majority of the improvement comes from simply the rate increase, therefore, premium earned increased. And expense ratio is well controlled. So I think there's a good possibility of achieving that level. And for the rate increases that we have done in the past, simply we can just reflect that in the premiums earned. So that's almost for sure. And for this fiscal year -- actually, in the last fiscal year, rate increase on the gross basis was 16.2%. In this fiscal year, we are assuming about 8% rate increase in this fiscal year. On top of that, if we see more impact on inflation, then we are going to include that in the magnitude of rate increase that we are going to do in this fiscal year. So this 8% rate increase assumption is somewhat conservative. That is our view as of now. And when the Q1 ends -- actually, we -- when Q1 ended, we included [indiscernible] the end of Q1, not the last minute at the end of March, but SI has succeeded in a rate increase of about 10% or more. So 8% price increase being assumed can offset, to some extent, inflation impact.

Understood. so with regards to the rate increase that you have just explained, I think this is the impact, not in this fiscal year, but from the next fiscal year onward. But impacts from war and inflation may make the hardening cycle linger for a while. There's such a view. But what is your company's view on those factors, which may contribute positively to the length of the hardening cycle?

Yes, Mr. Muraki, from your perspective, those factors will contribute positively to the hardening cycle. However, we don't have the specific amount of impact right now. We have to really see how the hurricane season develop, and we have to really see the nat cat trend. But in 2021, there was a certain level of cat loss on the global basis. And the factors that you have mentioned may surface, then those are the items which may be positive on the rate increase in this fiscal year.

My second question is on the domestic P&C business. In particular, fire and allied business line. I'm on Page 25, and regular loss ratio, 46.7%. It has declined to 46.7%, and there are impacts on rate increases and you are taking various actions. And I'd like to know the insurance -- reinsurance cost situation. Would you please give us more color on assumptions behind the loss ratio assumption? In addition, according to this guidance, how large is the underwriting loss, are you assuming in this fiscal year for the fire and allied line? And when do you think you can turn it around into profitability?

Thank you so much, Mr. Muraki. In the fire and allied business line, assumptions behind the loss ratio, as you mentioned correctly, excluding natural catastrophes, we are assuming those ratio to improve by about 5% -- 5 points. And a big factor for this improvement is obviously the impact on the rate increase that we did last year and the year before last year. Also, in this fiscal year, we plan to do the price increase, although we have not decided officially and finally yet. But as Nikkei newspaper covered, we plan to continue to increase premiums. So we assume impact from that. And up until last year, we had certain level of ordinary loss, such as thunder lightning stroke or probably it's due to the teleworking. We saw the impact from the loss from brakeage and contamination or damage. So we are not having the excessively optimistic assumption behind this loss ratio level. So the base for the loss ratio improvement is the growth in the earned premiums, and we are assuming about the same level of loss incurred as the level of last fiscal year. With regards to the reinsurance cost in this fiscal year, we are projected to be almost flat. Although, as usual, we cannot give you the details about the reinsurance scheme. But reinsurance scheme has been within the fine-tuning scale. So there's not so much impact from the reinsurance cost variance. Lastly, with regards to the underwriting profit, in this guidance, in the fire and allied business line, we are assuming negative JPY 28.1 billion underwriting loss, including positive factors from rate increases that we have done in the past. And we see the impact on the rate increase that we are going to do this year. So at the earliest, we think we can turn it into profitability either in 2024 or 2025. I think we can turn the business into profitability. But our targeted combined ratio for fire and allied line is 95%, but we expect that we make a certain improvement in that way.

The next question is from Mitsubishi UFJ Morgan Stanley Securities. Mr. Tsujino, please.

First, I want to ask about the overseas business, Sompo International. For some time, you're projecting a combined ratio to come down. And I think it's really going to come down. Can you the reason why? Is it because of the product mix? Which area do you expect to see an improvement in the loss ratio? And looking at the natural catastrophe loss, I think, compared to last fiscal year, for the new year, I think you're projecting a small decline. I'm assuming that the nat cat loss expectation is not going to be. So can you explain those points?

Yes. Thank you for your questions. Regarding the SI combined ratio, as I said earlier, the previous rate hikes are helping to grow the net premiums earned. So those are becoming very effective. In terms of our product, we are seeing an increase in the casualty line and also some specialty policies. And for those products, the net premiums earned, it's steadily growing. And they are quite sizable in terms of portion. So that's the main reason contributing to better combined ratio. And for cat losses, for last fiscal year, the nat cat loss in the overseas business was JPY 53.9 billion. And for this fiscal year, for SI, the nat cat loss budget is at JPY 64 billion. And basically, this does not imply that we are increasing nat cat exposure. But actually, the whole business is growing, so the cat exposure is being reduced. But as a natural consequence of the growth of the overall business, the nat cat loss is expected to go up. But despite that, we are projecting this level of combined ratio.

I see. On your reinsurance business, the casualty portion is really increasing in the year that just ended?

That is correct.

So can I ask you what kind of risk you're taking?

It's basically products like the liability insurance you see in Japan. So that accounts for most of that risk.

I hope to get more details later then. And also, you announced a dividend hike of JPY 50. And is it just for this fiscal year? Or are you planning to repeat that for next fiscal year?

Well, thank you for that question. I think it's about the shareholder return policy and the dividend hike. For last fiscal year, there were multiple factors, but we believe that fundamental earning capability is enhanced. So we wanted to reflect that into our dividend. And that's why we increased the amount of the dividend hike to JPY 50. And thereafter, we have not made any decisions. So I cannot say by how much we are going to raise the dividend. But on the basis of that is that with the shareholder return policy, as the profit grows, we want to focus on dividend payment. And then the current midterm management plan, we're trying to promote scale and diversification. As a scale growth, we're comfortable in raising the dividend amount. And with more diversification, that will lead to better stability on the profit. Right now, our payout ratio is low 30%, but we'll be comfortable in raising the payout ratio with more stability in the profit. So if the business grows steadily, then we are thinking of that kind of a dividend increase on the horizon.

Okay. Lastly, looking at the domestic adjusted profit. The projection for this fiscal year is JPY 120 billion. And it will be down by JPY 37.3 billion year-on-year. Is it because the COVID-19 impact is going to be subsiding, and the loss is mainly on the auto policies are going to normalize? Is that the reason?

And looking at Sompo Japan's adjusted underwriting profit, I take the cat loss reserve and the incurred nat cat losses from the underwriting profit and the adjusted underwriting profit is going to be JPY 204.2 billion versus last year's JPY 202 billion. So it's almost flattish.

Can you elaborate anything on that point?

Yes. Thank you for the question. And I think your question is about the profit outlook for the domestic P&C business for FY '22?

Yes, that's correct.

Well, in our projection, like you pointed out, the COVID-19 impact is going to subside mainly in the auto rate losses are expected to go up. So on a profit basis, roughly speaking, we expect a negative impact of JPY 25 billion from that factor. On the other hand, we are also conducting what we call the earnings structural reform. And this is mainly going to be focusing on raising the rate for the fire policies. So this somewhat offset the negative impact. So what else is coming down is going to be your question. One is the dividend and interest income from the fund. Last year, the PE funds were doing very well, and I think that's going to normalize this year. That's our projection. And also the U.S. rate is increasing. So the hedging cost for Sompo Japan is expected to be JPY 10 billion. So that's another negative factor. And also on the non-personnel expenses, we are investing for business-related initiatives, for instance, to broaden our product offering. So those spending would have an impact on the profit. And on the cat loss reserve, we are going to slightly increase the cat loss reserve. But, the main factors are the items that I mentioned earlier.

Next questions are from Mr. Watanabe from Daiwa Securities.

Hi. My name is Watanabe from Daiwa Securities. I have 2 questions. My first question is on the impact from foreign exchange. For the year just ended, due to the depreciated yen, what was the negative impact from the valuation of loss reserves denominated in foreign currencies? And what positive impact are you assuming from the depreciated yen in the current new year?

Mr. Watanabe, thank you so much for your questions. About the loss reserve, we had a minus JPY 4.9 billion impact in the last fiscal year from the depreciated yen. And as we have been explaining from the past, on the asset side, we have assets denominated in foreign currencies. And impact was positive of about JPY 5 billion, offsetting the negative impact in all. So on a group basis, our overseas business performance translated into yen contributed positively to the profit by about JPY 1.7 billion, that's the group FX impact on the group basis. For this fiscal year -- new fiscal year, we are assuming a certain level of positive impact from the FX in overseas operations. So from overseas operations, in this fiscal year, we expect JPY 5 billion impact on the adjusted profit basis. From the exchange rate, positive impact.

My second question is on the material, Page 32, SI retention policy. If I look at this table, in 2022, you are assuming 68.8% retention ratio. In this fiscal year, you are assuming a rate increase of 8%, and it's more profitable. So I wonder if there's more upside to this 68.8% retention policy assumption? Is it conservative? Or do you think this level of retention is realistic?

Thank you so much for your question. First, as you can see on Page 32, this excludes crop insurance. So we expect retention ratio, excluding crop, to be flat. With regards to the crop insurance retention, for the year ended, retention was 61.6%. But now we have better visibility of diversified policies. So we'd like to increase the retention to 65%. And as you mentioned, Mr. Watanabe, for regular retention, we expect it to be flat, excluding crop. But in this new medium-term management plan, in fact, this is the level of retention that we've been targeting at in the midterm business plan. So this has a good chance of achieving. For 2022, our assumption for premiums. In 2021, this plan was actually made back in November and approved by the company, and then we are disclosing it now. But there was some top line increase in November and December. So in that sense, this plan for 2022 may be somewhat conservative from that perspective. Therefore, for now, retention ratio is put as an assumption at the targeted level, but we have rate increases planned. And as you asked earlier, looking at the combined ratio by each business line, looking at the profitability, we can adjust and change, if needed. And if needed, we are going to disclose the reviewed or revised figure, if needed, after the end of the first half.

Next question is from Mr. Sato from Mizuho Securities.

This is Sato from Mizuho. I would like to ask 2 questions. One is on the results from our fiscal year. Checking up the domestic P&C business, I think you have some upside on the adjusted profit basis versus the projection from last November?

That was quite substantial. And I think, on pretax basis, on the underwriting profit, there was an upside of about JPY 30 billion.

Can you give us some breakdown on this upside and also some background? And it seems that the nat cat loss was pretty much in line with the budget. And for the foreign-denominated exposure or the yen depreciation, I think it was slightly negative on the incurred basis. So the normal loss has come down. And also, I think the business expenses were much lower because in November, I think you revised up or you changed your projection to increase the expenses. But why did it come down versus November?

The recurring net GAAP versus November, as you said, we did have substantial upside from domestic P&C business, like you pointed out. And the items that you said are the correct ones. For one, we have to talk about the impact of COVID-19. Because back then, we expected a certain level of economy reopening. And we also thought that the accident rate of the loss would slightly normalized. So in a way, the plan may have looked conservative also a projection back then, but we had the Omicron variant, and the reopening of the economy was not active as expected. So the loss came down, and it turned out to be a higher profit for the full year. And also on the non-personnel expenses, we did not expect more activities after Omicron. And given the circumstances, we did have some conservative projections. And regarding the impact on the underwriting profit, the loss incurred investment expenses were those impacting the profit. On an after-tax basis, the positive impact was about JPY 20 billion to JPY 23 billion versus the projection from November. And also another factor is on the investment side. When we announced our first half results, we also revised up this projection. Last fiscal year, the fee funds were very active. And there is some offset, but we also had some positive factor coming from the currency. So on the investment side, the upside was about JPY 11 billion to JPY 12 billion. And those are the main factors impacting the profit.

Thank you for clarifying that. My second question is on SI again. A combined ratio of 90.7% is very low, as we discussed earlier. And I think the expense ratio is also quite low. And I believe in your midterm management plan, you did not expect expense ratio to come down by that much. So this projection is very low. What is the background to that? And also another question related to SI is the following. And with the conflict in Russia and Ukraine, the commodity prices and the agro crop prices are going up. And at SI, the rate renewal may not have fully reflected that price hike. But with the crop prices going up, is that baked into your current business plan?

Thank you, Mr. Sato, for your questions. Regarding the expense, we have made tremendous efforts, including primitive initiatives. And in reality, we are truly containing expenses. So personnel expenses were quite contained and suppressed. So for FY '22, the cost will be somewhat impacted by inflation, but we expect the personnel expenses to go up in FY '22. But to date, the expense ratio had been quite high, and we have been making efforts to reduce that. The last fiscal year, we were able to enjoy the fruit of those initiatives. And also regarding the crop prices, this will be positive for our top line for the crop insurance business. The current business plan was put together at the end of last year. So the crop price of the year-end level is somewhat reflected in the plan. Also in reality, I think around end of February, are the renewals of the rate. So as the current business are trending upward compared to the plan back in the year-end, so if the price -- crop prices have been increasing, as you said, then that would have some upside. And with that in mind, we will consider our retention strategies.

Next, we have Mr. Otsuka from JPMorgan Securities.

My name is Otsuka from JPMorgan Securities. At first, I'd like to confirm something about the buyback just announced this time, which is JPY 58 billion. Am I right in understanding that this is the base return? In the first half, you did the capital adjustment or additional return, which was JPY 20 billion. This portion of the additional return of the first half is not included in JPY 58 billion. Am I right?

Mr. Otsuka, thank you so much for your question. You're right. Your understanding is correct. The first half JPY 20 billion was the complete additional return, and this buyback is the base return.

Understood. Probably, the management is going to mention next week in the IR meeting, but does that mean that conditions were not met for the additional buyback this time?

Actually, we don't have any strict rule digitally or strictly. We make always a comprehensive decision considering various factors. For the additional return each quarter, we discuss thoroughly and then the Board discusses in each quarter, we look at the appetite for growth investments. And this time, since we did the additional return last time, we have not disclosed additional return this time. But depending upon the recommendation, we are going to continue the additional return possibilities always in the future.

Understood. My second question is just to confirm the detailed items on Page 21. Specifically, your plan for this fiscal year, gains and losses on derivatives, which is expected to deteriorate by about JPY 10 billion. Is that due to the foreign exchange hedge costs? On the same page, the profit and loss from sale of stocks, you expect it to go down? Does that mean you expect less distribution from funds. Am I right? Also additional question on Page 15. Looking at Sompo Japan plan for this fiscal year, there are many extraordinary items assumed in the guidance. So would you please go over that.

Thank you so much for your questions. First, with regards to your first question on Page 21, gains and the losses on derivatives. The hedge cost of Sompo Japan is expected to go up by about JPY 11 billion. So that's almost fully explained by the hedge cost increase of Sompo Japan. And your next question was on the capital gain. In total, it's JPY 38.1 billion, and we are assuming JPY 26.6 billion for Sompo Japan. And that's on the stock of sale. It's related to unrealized gains of each name. So that's one reason. And also on the bond side, in the various operations, we are assuming a certain level of capital loss from sale of bonds. And also extraordinary items of Sompo Japan, which are on Page 15, JPY 47.8 billion extraordinary items. We expect a dividend from SI of JPY 49.1 billion, and that's been eliminated.

Oh, I see. So on the consolidated basis, the size of this extraordinary item is not so large on a consolidated basis. Am I right?

That's right.

Next question is from Mr. Sakamaki from Nomura Securities.

This is Sakamaki from Nomura Securities. I have one question. Earlier, you talked about the dividend policy and how we are raising our dividend in terms of absolute amount. But in terms of total return rate, how do the dividend account for vis-a-vis the total return rate? And what is the pace of raising the payout ratio going forward? You may be explaining that next week, but what is the -- or your thoughts around dividend?

Thank you, Mr. Sakamaki for your question. Next week, we will have our CFO and also other members of the management team to certainly communicate with you. And we have not come to a conclusion of what kind of target we would like to have for dividend payout. We did discuss that as a topic. But as I said earlier, as the stability of the profit goes down, we believe we also need to raise the payout ratio. So steady payout ratio, somewhere between 30% to 40%, is something that we would like to achieve. Close to 40% is something that we would like to consider. But at this point, nothing has been finalized. But that is the story of what we are considering for dividend.

Next questions are from Mr. Sasaki from BofA Securities.

Sasaki speaking from BofA Securities. I have 2 questions. My first question is on assumptions around our voluntary automobile business line for this fiscal year. Oppositely, from last year, due to the reopening and also there may be some impacts from travel-related promotion campaigns, what assumptions are you including in the guidance for this fiscal year? And in Japan, there may be some inflation of cost of components of automobiles and the labor cost of repair body shops may be increasing. So I think the level of inflation has come to the level that cannot be ignored. So are you assuming all of those, including reopening impact?

Let me explain the assumptions. First, the cost per unit increase. Probably this is an inflation impact you can call. But at the moment, we see the cost per unit, which is increasing, by about 1% to 2% in Japan at the moment. So this cost increase per unit is being assumed as an assumption in the guidance. So you can calculate 1% to 2% increase on the magnitude of total business size of JPY 1 trillion. And relating to reopening, there are different views in terms of the impact on reopening, but it depends on how completely we can get out of the COVID situation. But the decline in the loss incurred versus 2019 is about 8% less loss incurred versus 2019. So for the year just begun what is our assumption for the loss incurred? Roughly speaking, we are assuming loss incurred to be less by 3% versus 2019. So my answer to your question, Mr. Sasaki, we expect traffic to go back to a good extent, but not completely. Well, we have our own internal logic. Basically, we think laser demand and consumer traffic will recover to a good extent in this fiscal year. That's being assumed as an assumption. But on the commercial side, because of the work reform, such as [indiscernible] that we are doing for ourselves and the promotion of teleworking, people commute less to work. And looking at the car traffic. Car traffic may come back to the previous level. Referring to reports of various in think tank organizations, there may be some business impact on the loss of [indiscernible] auto. So less by 3% in terms of the loss incurred versus 2019 is perceived to be new normal.

Understood. My second question is on the international business. Since January, capital market has been wildly volatile, so rate hikes, exchange rates, credit shifts. In your current guidance, what are the assumptions of those have you incorporated? You said that you made this guidance back in November, but this market moves after January. To what extent have you incorporated in your guidance?

Thank you so much for that question. In terms of the interest rate, SI investment and also reporting bonds of Sompo Japan, duration is not so long. So there's not so much strong interest rate impact that we have incorporated. And our assumption rate of FX is the exchange rate prevailing at the end of March. And those are assumptions that we have incorporated in our guidance.

Next question is from Mr. Majima from Tokai Tokyo Research Center.

This is Majima speaking. Can you hear me?

Yes.

I have one question. Related to the Russia/Ukraine exposure and the projection for claims payment, what happened if things get out of control? And for example, the Russian government confiscates all of the assets of your customer that resides in Russia, is it may be perceived a 100% loss? And if you have to pay for that as insurance claim, that would not have a huge impact because the size of the asset in Russia is not that big. Is that the right understanding?

Well, at this point, maybe the best way to answer your question is that we don't have that kind of projection at this point. But even if something like you said happens, all of our exposures will not be wiped out. So even under our worst-case scenario, the impact is not expected to be huge.

I see. So banks offer exposure to Russia, do you share such kind of data?

Well, overall, the exposure will be few tens of billions of yen, but lower than JPY 50 billion. But they all lead to losses, at this point, our projection is that it's not going to be huge.

Next is from Mr. Okada from UBS Securities.

This is Okada from UBS. I have one question. I'm looking at Page 20 of your presentation, the combined ratio on incurred basis. This fiscal year, projecting 93.7%, in the midterm management plan, the target is 91.7%. So vis-a-vis this target, there is still a gap. So how do you assess this 93.7% combined ratio for this year vis-a-vis the target under the midterm business plan?

Thank you for that question. In that sense, there is still some gap vis-a-vis the midterm plan target. But right now, we are trying to conduct what we call the earnings structural reform, and we are working to improve the profitability. And also on the underwriting side or on the claims payment side, we are trying to leverage on digital technology. And we are trying many things on AI, and that's been quite effective. So in addition to those 2 major pillars, we also would like to further reduce the cost by [indiscernible] so that we can be closer to our target for combined ratio. So we are making all of efforts as a company.

And with that, we are close to the end of the call. If you have any further questions, please reach to our IR team. So with that, we would like to end the earnings call. Thank you very much for your participation today. [Statements in English on this transcript were spoken by an interpreter present on the live call.]