Sony Financial Group Inc. (8729) Earnings Call Transcript & Summary

Thank you for joining us today for Sony Financial Group, Inc.'s earnings briefing for the first quarter of fiscal year 2026. I am Kuriyama from the Finance Department. I'll be serving as the moderator today. Now let me introduce today's speaker. Today's main speaker is Corporate Executive Officer and CFO, Sadahiko Hayakawa. First, Hayakawa will give a presentation for about 10 minutes, followed by a Q&A session, during which we will answer the questions that we received. Please note that we are only accepting questions from institutional investors, analysts and other corporate entities. Please note that during the presentation and the Q&A session, the presenters camera will be turned off and only the presentation slides will be displayed. We appreciate your kind understanding. Now over to you, Mr. Hayakawa.

Thank you for joining us today. First, I would like to express my heartfelt sympathy to those affected by the Kumamoto earthquake that occurred on July 28 as well as to those whose daily lives have been disrupted. We pray for everyone's safety and for the swiftest possible recovery of the affected areas. The key points of this financial report are as follows: Group consolidated adjusted net income for FY '26 Q1 was JPY 31.5 billion, up 44% year-on-year. In the life insurance business, adjusted net income increased 34% year-on-year to JPY 23.1 billion, mainly due to a decrease in repo cost and increase in CSM amortization. In the non-life insurance business, adjusted net income increased 43% to JPY 4.9 billion, mainly due to the effective cost control and increased revenue. In the banking business, despite an increase in operating expenses such as advertising costs, adjusted net income increased 2.3x year-on-year to JPY 4.2 billion, mainly due to an improvement in net interest income. The full year forecast of consolidated adjusted net income for FY '26 remains unchanged from the previous forecast at JPY 110 billion. The forecast of consolidated profit before income taxes is JPY 37 billion, an improvement of JPY 57 billion from the previous forecast. This is due to the fact that Sony Life has revised its assessment of bonds earmarked for sales as part of its efforts for improving financial soundness, resulting in an expected loss on sale that is lower than initially anticipated as well as the inclusion of a gain on the sale of SP.LINKS, formerly Sony Payment Services Inc., an equity method affiliate of Sony Bank. We currently view the impact of Kumamoto earthquake on consolidated results as limited at this time. We will now move on to an overview of each business segment. First, regarding Sony Life. Annualized premiums from new policies for FY '26 Q1 decreased 6% year-on-year to JPY 38.0 billion, mainly due to lower sales of the variable individual annuities, SOVANI. In terms of products, sales of single-premium whole life insurance with Market Value Adjustment, MVA, launched in this February have significantly exceeded expectations. In addition to offering competitive credited interest rates, this product provides customers with flexibility to choose either Japanese yen or U.S. dollars as a policy currency. Its features designed to meet asset management and wealth transfer needs have also contributed to the acquisition of corporate business owners in their 50s and 60s as well as senior customers. Regarding operating performance for FY '26 Q1, we view the momentum in new business acquisition as having slowed due to factors such as weaker sales of SOVANI and corporate insurance products through the Lifeplanner channel, partly due to increased sales efforts for this new product, targeting customers seeking more stable returns in the rising interest rate environment as well as intensifying competition with products from other companies in the agency channel. While we expect the impact of the new product to continue for the time being, sales to corporate customers have recently shown signs of improvement and will further strengthen our efforts to promote protection-focused sales activities. Regarding the product mix of new business CSM at the end of FY '26 Q1, the ratio of capital-light protection-type products has risen to 52%. CSM amortization for FY '26 Q1 increased 7% year-on-year to JPY 41.6 billion. We believe this reflects the steady transformation of our product portfolio toward higher-margin products with faster CSM amortization patterns, particularly targeted at corporate customers. Regarding the expansion of our sales channels network, progress toward our target is generally on track for both the number of Lifeplanner sales specialists and number of agency supporters. The annualized surrender and lapse rate for FY '26 Q1 was 5.5%, representing a slight increase from the same period of the previous year. Although lapse rates declined overall from the previous year, they have remained elevated for foreign currency-denominated insurance products and savings-type products classified as onerous contracts under IFRS. This reflects factors such as yen depreciation, rising interest rates and increased sales activities targeting individual customers following the launch of the new product. Given the market developments, particularly interest rates and the resulting changes in the customer behavior towards financial products, we believe it is important to continue closely monitoring lapse trends going forward. In response, we will continue to provide thorough consulting-based follow-up tailored to customers' needs, enhance the value we deliver to customers and further strengthen cross-selling of product -- protection-type products.

I would like to provide an update on Sony Life's verification to customers for prevention and early detection of misconduct. The initiative is progressing as planned towards our next disclosure scheduled for mid-September. As of today, notification letters have been sent to substantially all of the approximately 2.8 million customers subject to the verification process. During the course of the verification process, 2 cases involving the misappropriation of customer funds by former sales representatives in connection with insurance business activities were identified. Accordingly, on August 4, Sony Life issued a notice regarding these cases for the purpose of raising awareness among customers encouraging vigilance. We sincerely apologize for the inconvenience and concern caused to our customers and other stakeholders. We will continue to verify the facts thoroughly and remain committed to preventing recurrence and providing appropriate support to affected customers. At this stage, we have not seen any notable increase in policy surrender requests from customers or in the turnover of Lifeplanner sales specialists resulting from our announcements and the series of media reports. In addition, we do not currently expect any material impact on our full year financial results. From an operational perspective, however, new customer acquisition activities by Lifeplanners, particularly in the corporate market as well as Lifeplanner recruitment activities have been somewhat subdued. We'll continue to closely monitor developments going forward. Next, regarding Sony Assurance. Direct premiums written for FY '26 Q1 increased 15% year-on-year to JPY 56.1 billion, and the combined ratio improved approximately 1 point to 85.5%, indicating continued growth in both top line revenue and profit. For the Auto Insurance, despite increases in average claim payouts and accident rate, we have maintained high profitability through ongoing premium rate revisions and rigorous control of operating expenses. Last month, we implemented our largest-ever rate increase, yet supported by high-quality customer service and high customer satisfaction, we have maintained a retention rate of over 90% for existing policies. Regarding Fire Insurance available exclusively online, business is expanding steadily with direct premiums written increasing 40% year-on-year. As part of our group-wide collaboration initiatives, we began selling rental property Fire Insurance developed by Sony Small-Amount and Short-Term Insurance in July. The product has gotten off to a strong start, contributing to the acquisition of new customers, including younger customers in their 20s, a demographic that our group is aiming to strengthen. Next, regarding Sony Bank. The yen deposit balance at the end of FY '26 Q1 stood at JPY 3.9 trillion, remaining virtually unchanged from the end of the previous fiscal year FY '25. Foreign currency deposit balances decreased slightly from the end of FY '25 to JPY 760 billion due to the yen depreciation. However, the total deposit balance, including yen deposits held by customers with foreign currency accounts remained pretty much unchanged at JPY 2.2 trillion, maintaining a high level. In addition to improved net interest margin driven by rising interest rates, we'll continue to operate our business with a focus on securing profitability backed by a high-quality customer base supported by high average balance per account and the large share of foreign currency deposits. As part of the group-wide collaboration and as part of a BaaS deployment, leveraging the characteristics of our new cloud-based core banking system, we plan to launch an instant account opening service for Sony Life customers starting this October. In our exploratory initiative, we established a trust subsidiary in the U.S. on July 10 after receiving conditional approval from the Office of the Comptroller of the Currency as part of our efforts to commercialize the issuance and management of U.S. dollar-denominated stablecoins. The group consolidated ESR at the end of FY '26 Q1 decreased 4 points to 173% compared to the end of FY '25. During this first quarter, ESR faced downward pressure due to the payment of the dividend as well as the impact of further increases in interest rates and changes in the shape of the yield curve at the ultra-long end. Nevertheless, we have been able to keep ESR within our target range, supported by the earlier-than-planned execution of measures, including approximately JPY 120 billion of bond sales. As presented at the IR meeting in May, we will work to strengthen our financial foundation by steadily implementing financial measures over the next 2 years for the fiscal year ending March 31, 2028. Regarding the regulatory ESR introduced at the end of FY '25, the preliminary figure on a group consolidated basis as of the end of FY '25 was 190%, which is 13 points higher than the internal management ESR. Here, I would like to summarize the overall situation. At Sony Life, we remain firmly committed to enhancing business quality, which forms the foundation of our management. To achieve sustainable growth in corporate value, we are making steady progress in our mid- to long-term initiatives, including improving our product mix as we work towards transitioning to an ERM-based management framework that integrates profitability, financial soundness and risk management. We'll also continue to steadily execute measures to strengthen our financial foundation with the aim of enabling Sony Life to return to a sustainable earnings growth trajectory during the next mid-range plan period. At Sony Assurance, we continue to benefit from strong business momentum. In the direct auto insurance market where steady growth is expected, we've been able to combine #1 market share with profitable top line growth. At Sony Bank, we have continued to operate the business with a strong focus on profitability, supported in part by improved lending and deposit spreads resulting from higher interest rates. Finally, I would like to touch on our share repurchase program. We believe the share repurchase has been effective in helping stabilize the supply and demand balance of our shares following the listing. [indiscernible] continuing rises in interest rates, we have proceeded with these repurchases after carefully considering the impact on financial metrics such as ESR and have repurchased a total of approximately JPY 70 billion. From the perspective of shareholder returns, there's been no change in our policy of prioritizing dividends, and we aim to continue steadily increasing our dividend payment. That concludes my remarks.

That concludes our presentation. Now I'd like to move on to Q&A session.

Now SMBC Nikko Securities, Mr. Muraki, please go ahead with your question.

Muraki from SMBC Nikko Securities. Page 19, loss component is I'd like to ask about. The loss recognized on the right and left in total, JPY 7.3 billion. And at the beginning of the period, JPY 29 billion was the forecast that you said. And the fourth quarter, the losses are likely to be recognized more. So it seems that the pace is faster than usual. So how much impact would this loss component have on the full year financial results?

Thank you very much for your question, Mr. Muraki. As for loss component, you have asked the question. So this is of high interest to all of you. So I'd like to ask -- talk about surrender situation, which I referred to in my presentation or I'd like to ask Hayakawa to answer that question. And in the first quarter and loss component, the JPY 7.2 billion, which went through the P&L and compared to first quarter last year, which recorded JPY 4.6 billion, so this was an increase from last fiscal year. So based on that assumption, the surrender impact has been seen. And in other words, as for interest rate trends, at least for the quarter, we have a hedge over the adjusted profit. So there is some impact from the surrender situation. So let me update you on the surrender situation. In the presentation, I referred to this, but for the first quarter, on an annualized basis, as you can see, 5.5%. So overall surrender rate is improvement from the 5.7% from last fiscal year, but yen has lowered and dollar has increased in terms of currency. But it may be difficult for you to see. But in the -- compared to the last quarter, the overall rate has been declined and the dollar increased and yen lowered. And in the first quarter surrender assumption compared to that, the actual rate has been a bit down. But with regard to the impact from this, as I said in the presentation, in February, we have MVA-incorporated product that was launched, but there were some contracts that were signed in the past. And in the sales follow-up, there has been some replacement from the past policy to the new ones and then the surrender rate has increased because of that. And dollar has increased, but there was some impact from this new product. And for corporate products, the surrender number has not increased, but we have to closely monitor that, and that's what we're doing. And the surrender situation and adjusted net income, what are the relationship between these two from the beginning of this fiscal year. As for the overall surrender rate, this has been within the expectation more or less. But if you look at the breakdown, the loss component occurs the pre -- policy under IFRS in the contract group of this type, we have seen some increase in surrender rate. And I'm repeating myself, but the interest rate environment has changed at large, and that has had an impact, as I said in the presentation. But for the first quarter, the new product impact has been seen because of the switchover from the past policy to the new product. So there was onerous contract -- this has been classified as onerous contract. So it may be difficult to see this. And the new product impact from the next fiscal year, we have to also closely watch this in the second quarter and look at the situation and keep up with that. And the adjusted net income that we have presented, what would be the impact on that? In a quantitative basis, at the end of the fiscal year, the insurance assumption will be reviewed and IFRS accounting is adopted. So there could be a negative impact. So from the beginning of this fiscal year, there will be an increased downward pressure. That's what we see. So compared to the beginning of this fiscal year, the Sony Life full year forecast for net adjusted income has been under downward pressure. Of course, consulting follow-up is something that we have to closely watch and that's what we are going to do. As for the consolidated adjusted net income, if you look at that, then we have shown the first quarter results. But as for noninsurance and bank, there has been some natural disaster impact for non-insurance, but there could be upside potential rather than the downside. But as for the overall forecast, we have said that the forecast will remain unchanged. But as for -- especially the onerous contract that -- from the surrender, we have to look at that and also, we have to look at the new product impact as well, and switchover from -- among the customers from the past one to the new product. So that concludes my answer.

We'd like to take the next question from Mr. Sato from JPMorgan Securities, please.

Yes. This is Sato from JPMorgan. I have a follow-up question. For the onerous contract, the group of those onerous contracts in year -- this fiscal year's plan, compared to the pace of deterioration you saw last year, what kind of a deteriorating pace are you expecting as a base case scenario for this fiscal year? And vis-a-vis that base case scenario, how is the onerous contract trending? I would assume that the June end ultra-long end JGB, the 40 years that you benchmark did not spike that much. But now it's getting closer to 4%. So for the following quarter, the loss component could be bigger compared to Q1. Would that be the case? So can you confirm those, please?

Thank you, Koki Sato for your question. I think your question was a trend against the base case scenario and the Q2 loss component for Q2 with rising interest rate. So to respond to your question, this may be overlapping with my previous response. But the base case scenario we had, the surrender rate expectation was for the onerous contract from FY '24 to '25, we saw a pickup in the surrender rate, and we expected a similar trend for FY '26. And for the contracts that are not the onerous contracts, we expect the surrender to be similar to what we saw in FY '25. So that's how we have built up the forecast for the adjusted net profit. So that said, when we look at the trend just for Q1, for the onerous contracts, like the yen-denominated whole life, the surrender for such product is increasing to a relatively high level. So for that, compared to the initial outlook, there could be some downside as we review expectation for the insurance business for the year-end. But we also need to consider the impact of the new product launch in Q1, so we will continue to closely monitor the trend of the surrender in Q2. And with the 40-year JGB yield going up, what would be the loss component for Q2, I think, was the other part of your question. The impact on the net adjusted profit on a quarterly basis coming from the rate hike is -- also has been hedged. Of course, it's not 100% full hedge, but for Q1, the yield curve shape has changed. So we need to monitor that impact as well, but to a certain extent. The impact on the loss component coming from the rate increase has been mitigated by hedging. [indiscernible] do you have anything to add?

Yes. The hedge does not reduce the loss component, but the negative coming from loss component that will be mitigated by the hedge. So I think that was explained by Hayakawa [indiscernible]. So for the adjusted net income, we do have hedge.

Also if that's the case in Q1, the shape of the yield curve changed. So after hedge, what was the impact? So if you net out the hedge impact, what was the impact on the P&L for Q1?

Yes. As you can see here for Q1, the analysis of the changes for increase and decrease, first on the Sony Life, we have a negative JPY 2 billion for the increase in loss components and then plus JPY 2 billion on the adjusted net income with the interest rate hedge. So in terms of the impact on the adjusted net income, it's been hedged. And the change in the yield curve cannot be 100% fully hedged, and we have to monitor that going forward. But there's a track record in Q1, the hedge actually offset the negative coming from the loss components. So -- but if we look at the year-on-year change, it's unchanged. So if we just look at the loss component, the increase on the loss component was nearly fully hedged by the gain on the hedging policy. Is that correct? Yes, that is correct. So if you look at the year-on-year change, there was a little less than JPY 2 billion of positive coming from hedging for the adjusted net income.

Next question, please. BofA Securities, Tsujino, please.

First of all, it's not really my question, but the loss component on a P&L basis, a little more than JPY 8 billion. But on the slide, if you add these up, that would give us JPY 7.3 billion. So the difference between these two is the hedge profit gain, which is classified under a different item. Is that what you're saying?

Well, what you are seeing now on Page 19, it's just on a footnote you see that as for the loss recognized, the reinsurance impact has been also included. So that may be the difference that you've seen.

So if that's the case, then on the P&L basis, what is included in loss component and what is not?

So the difference that you talked about is basically the recovery from reinsurance is the one. And what you see on the slide is the one that subtracted reinsurance. And what does that reinsurance mean that the policies in force the block reinsurance that you ceded from the U.S. dollar. That is what is included.

Well, now my question. The Sony Payment gain on sale is about JPY 10 billion after tax and that is not included in net adjusted income, but included in pre-adjusted net income. And in this revision, the loss on the JGB sale has been lower than expected. And together with that, you have revised your full year forecast. And with the divestiture of Sony Payment, this is an extraordinary one. So this is not included in adjusted net income. That's what I understood. But in reality, you have received cash and the proceeds has been recognized, and that is not included in the dividend calculation. That -- what is the reason? Maybe I should ask one question at a time. One question per person is the limitation.

Thank you for your question. For SP.LINKS financial impact under IFRS basis, pretax profit is about JPY 11 billion and post-tax, slightly more than JPY 7 billion. And as you said, as for adjusted net income, it is not included in adjustment items. So pretax income has been revised under IFRS and SP.LINKS has contributed JPY 11 billion approximately. And for full year forecast, JPY 57 billion upside has been added, but if JPY 11 billion is from SP.LINKS, then the remaining is the loss on sale of Sony Bank bonds and the loss on sale of the bonds has been actually improved. And the background for that is that FVO bonds under IFRS on the balance sheet has been mark-to-market. But at the beginning of the period, we had assumed the sale of other bonds, but we have reviewed the bonds to be sold and FVO bonds has been included after the revision. And so adjusted income has been revised upward from the previous forecast.

What is the intention of not having this included in the profit? Well, 40% to 50% of the adjusted net income is a dividend that you have to pay. And with this realization of the profit, why did you not change the assumption? Because if the profit was JPY 7 billion, then you could have neglected. But you have -- we just wanted you to explain in more detail.

Thank you for the clarification. The 45% to 50% of the adjusted net income, which is the payout ratio, that is the yardstick that we still have. But on the other hand, at the IR briefing meeting, in May, we have said this, but before listing, we have not been paying any dividends to shareholders. And IFRS-based adjusted net income was the one that we have quoted, but we have got listed and now we started paying dividends. And this still remains a yardstick, but the dividend EPS is more of the focus. So we have presented JPY 8 per share this time. So against IFRS adjusted income, the payout ratio still has to be 40% to 50%. That is our yardstick. But if you look at the essential funds for dividends, the SFGI statutory profits that are available for distribution is the one that we're looking at. And in Sony Bank, SP.LINKS gain on sale at the moment, our assumption is that within the bank, the capital of the bank still has challenges. So we have to allocate some to this capital. And then the funds for divestiture will be -- also proceeds from that divestiture will be used for growth for the bank. So we're not assuming the back-to-back increase in the dividends because of this gain. So as [ SFGI ] dividends, at the moment, we don't have any intention to show that the dividends will be reviewed. That's all.