Tokio Marine Holdings, Inc. (8766) Earnings Call Transcript & Summary

Since time has come, let us begin the meeting. Thank you very much for attending Tokio Marine Holdings Investors Conference in the first half of FY '20 despite your busy schedule. I am Ishiguro from IR Group, and I will be the moderator of today's conference. Before we begin the meeting, let me explain today's format. To avoid infection risks of COVID-19, we decided to hold today's meeting via live streaming as well as telephone. We know this is inconvenient, and we thank you for your understanding in advance. We're holding this meeting today with a minimum number of staff members in this conference room in order to prevent the infection. Our executives will take off their masks during this conference for better audio quality. Also, due to the communication environment, there will be some time lag between video and actual audio. So if you wish to ask questions, please connect with the teleconference system in advance and also mute yourself for the live streaming service, and all the audio can be heard through the telephone line. And let me introduce to you today's attendees. From Tokio Marine Holdings, we have Mr. Satoru Komiya, Group CEO; Executive Vice Presidents, Mr. Takayuki Yuasa and Mr. Makoto Okada; Senior Managing Executive Officer, Mr. Hirokazu Fujita; Mr. Akira Harashima; as well as our Managing Executive Officer, Mr. Kenji Okada. From TMNF, we're also joined by President and CEO of Mr. Shinichi Hirose; Managing Executive Director, Mr. Tadashi Handa; Managing Director, Mr. Shingo Kawaguchi; as well as President of TMNL, Mr. Katsumi Nakazato. A total of 10 executives are on the podium today. Now first, group CEO, Mr. Komiya, will make a presentation based on the material, which we uploaded to our website today before we entertain your questions. And this conference is scheduled to end at 5:30 p.m. So with that, Mr. Komiya, the floor is yours.

Hello, everyone. I am Komiya. Thank you very much for attending today's briefing on Tokio Marine Group business strategy. I would also like to express our appreciations for your continuous support to our company. We have been holding this conference on a regular basis as a precious opportunity to communicate with you in person. To prevent the spread of COVID-19, it is unfortunate that we have to hold today's meeting like this, and we thank you for your understanding in advance. Last week, we announced our full year results. And today, I would like to discuss our financial performance, current issues, which affect our business performance and our company's responses against the issues. First, before I share with you, our mid- to long-term management strategies as to how we intend to enhance our corporate value as well as actual progresses to date. And just as usual, in the latter half of today's conference, we would like to entertain your questions and comments as much as time allows. Let us now begin from Page 3 of the presentation material. In FY '19, the adjusted net income became JPY 286.7 billion, as a result of major natural catastrophes for typhoons in Japan for 2 consecutive years as well as COVID-19 in this calendar year. As of the end of the first half, we revised our guidance to JPY 305 billion, excluding the impact of COVID-19, which I'm going to touch upon later on. And the impact certainly includes the bottom right, JPY 17 billion on this slide, our underlying performance was almost in line with the revised forecast in our view. Next, please turn to Page 4. As we announced last week, our projections for FY '20 are not available at this point. There are so many uncertainties as to when COVID-19 will be contained, through what avenue economic activities will recover and how significant the impact could be. Regulatory or political development in Western countries is also unclear. Under these circumstances, with a lot of uncertainties, even if we try to, we find it difficult to make a reasonable calculation on the impact of COVID-19 to our earnings. So we would like to wait before the situation becomes clearer, and we will promptly disclose a reasonable projection once it becomes available. And we believe that the business performance this time around was different and unconventional. And therefore, today, I would like to share with you underlying business performance that we are expecting this time without factoring in the impact of COVID-19, as well as our views on the impact of this pandemic. First, excluding the impact of COVID-19, as indicated in the left chart with the bar on the right, adjusted net income in FY '20 is expected to reach JPY 410 billion, up by JPY 40 billion from FY '19. This is because of the favorable business trend, both inside and outside of Japan, absence of the increase in reserve provision for social inflation and crop/medical stop-loss business last fiscal year, on top of the new consolidation of Pure Group. And I believe it is fair to say that our underlying earnings level is being enhanced as planned toward achieving the targeted JPY 400 billion to JPY 450 billion adjusted net income under the midterm business plan. Next, please move on to Page 5. As for the impact of COVID-19, from January through March this year, as you can see in the top half here, negative impact to our international business is estimated to be JPY 5 billion plus JPY 32 billion, or JPY 37 billion, in total, and for domestic business, JPY 4 billion plus JPY 20 billion, or JPY 24 billion in total, as shown in the bottom half. To break this down further, in the international underwriting business, claim payments amounted to JPY 5 billion mainly for event cancellation insurance. Investment side was also affected by JPY 32 billion, which is mainly valuation losses of U.S. equities. These numbers will be reflected to our FY '20 Q1 result. Inside Japan, on the other hand, in addition to claims paid to some special products on the underwriting side, impairment loss on equities on our investment book was incurred. In total, negative JPY 24 billion was already reflected in our FY '19 fourth quarter results. Next, please turn to Page 6. This slide is a qualitative description of COVID-19's major impact to Tokio Marine, our current situations as well as our response. As I explained earlier, it is difficult, very difficult to assess the impact of COVID-19 beyond the actual losses incurred during the first 3 months of the year. But still, assuming a scenario where, for instance, the current situation will continue through the end of June. And from that point onward, economic activities will gradually recover for the remaining 6 months of the year toward the end of the year, then we believe the impact on the underwriting business will be approximately negative JPY 30 billion to JPY 40 billion in FY '20, mainly related to event cancellation business overseas, as indicated here. However, impact of this pandemic is uncertain and unclear. And therefore, this number could go up or down significantly. And also, the scenario itself may turn out to be wrong. That is the reason why our earnings projections are not available at this moment. Now please move on to Page 7. COVID-19 will also affect our investment, particularly in credit risks. The asset, mainly managed by Delphi, accounts for 16% of our total asset, or approximately JPY 4 trillion as shown on the slide here, backed by long-term and stable insurance liabilities with highly predictable cash flow. Delphi has been managing assets with a basic view to hold them until maturity regardless of short-term market fluctuations, while adjusting allocations flexibly ahead of the market trend. I believe their investment characteristics and style are well-known in the market. This slide shows the long-term track record of Delphi. In normal times, they have steadily achieved the investment returns of approximately 5%. At the time of the GFC, or global financial crisis, the return dropped to approximately 2%, but it still did not fall below 0, as you can see here. When it comes to a question of -- and I believe that we'll be able to demonstrate their capability once again this time around as well. When it comes to a question of whether the COVID-19 impact to financial market, will be even severer than the global financial crisis, it will depend upon responses by governments and central banks as well as write-off ratio, amongst others. And there are so many different views on these points. Under these circumstances, while assuming possibilities of short-term impact to our business, we intend to contain the impact within the assumed risk boundary, and still aim at securing long-term stable income without being confused by market fluctuations. So as I explained, it is very difficult to estimate the impact of COVID-19. But what I can share with you is that while we are aware of various loss estimates made in trade, paper and others and our company, for sure, will also be affected to a certain extent, given that we operate insurance business globally, we still view this as an earnings event and not a capital event. Also, our group has built a strong financial base, highly diversified portfolio and sophisticated expertise through organic growth and M&As. And we believe these strengths and characteristics will not only help us get past the impact of this pandemic, but rather allow us to take advantage of these situations as opportunities over the mid to long term. Next, I would like to discuss our response to natural disasters on Page 8. Shown on the left is our recognition on natural catastrophe risks. In FY '19, we were hit by major natural catastrophes for 2 consecutive years. But the net incurred losses were approximately JPY 200 billion, which is a once in 5 to 10-year type of event in our risk models and still within our expectations. Our response to natural catastrophe risks is shown on the right. As I explained previously, our core policy for risk management here should be geographic and business diversification. As a result, although it is not insignificant, the impact to our income was successfully contained to approximately 20%. We have also secured appropriate reinsurance and catastrophe reserves to the reasonable extent from an economic perspective in a well-balanced manner. Furthermore, we need to improve profitability of fire insurance business. Last November, in this conference, I shared with you our resolve. Naturally, we will take actions based on the advisory rate revision and address challenges associated with the long-term duration of the business. On top of that, to make the fire insurance scheme, which is vital in the Japanese society, more sustainable, we would like to drive unconventional and comprehensive initiatives. Next, please turn to Page 9. Social inflation in the U.S. had some impact to Philadelphia's business in FY '19. And our countermeasures are as shown on the right. During FY '19, based on the rising trend of the loss cost, we reviewed the reserves for all the policies in force and increased provisions on the best estimate basis through our best effort. On top of that, we took other measures appropriately, including rate increases bigger than the projected loss cost and market average and reduction of exposure, as indicated on the slide. Next, please turn to Page 10. This slide shows our track record as to how we have enhanced our capabilities. Over the past 1 decade, Tokio Marine have steadily implemented management strategies to improve profitability of underwriting business along with acquisitions. By tackling various challenges, our earnings capabilities and ROE have increased in a sustainable manner as demonstrated here. And currently, we are well on our way to achieve the next set of growth through further promotion of group-wide integrated management and development of products, services and business models by leveraging various technologies. Fundamentally, we pursue sustainable long-term profit growth. In the short run, we might be affected by COVID-19. However, as top management, we are confident that the business model and underlying capabilities that we have built to date are robust in the long run, and we are well positioned for the next set of growth. And because of the time like this, we would like to enhance our basic strength and deliver our commitment that we have made, both internally and externally, that is to develop a flexible, robust and caring company with high resilience. Next, please move on to Page 11. Our basic policy on shareholder return is to pay dividend and increase the total amount of dividend sustainably in accordance with profit growth. Earning projections for FY '20 are not available at this point because of lack of clarity related to COVID-19. But as I explained so far, without factoring in the impact of the coronavirus, our underlying earnings are steadily enhanced. Therefore, following our basic policy, for FY '20 we're planning to increase our dividend by JPY 10 to JPY 200 per share, which is going to be an increase of dividend for 9 consecutive years. Next, please turn to Page 12. To measure capital soundness, we use ESR, based on which we manage our capital in a disciplined manner consistently. As indicated at the top right here, as of the end of March 2020, our ESR declined by 20 points to 153%. But this is due to deterioration of market environment related to the spread of COVID-19 and the impact of Pure Group acquisition. Since this ESR is still within our targeted range, we will continue to consider business investment or additional risk-taking opportunities or return to shareholders flexibly as we have done to date. If I may add furthermore, although we do not show specific numbers, restricted capital such as MCEV of domestic life business, cat loss reserve as well as net asset of international subsidiaries, is affected by natural catastrophes and decline in interest rates for the past 1 to 2 years. Excluding such impact, our core capital-based ESR has not declined as much, and we still have adequate capital buffer in our view. As the market outlook is very unclear because of COVID-19, and because we want to secure capital for future growth investment, we decided not to adjust the capital level this time around. Next, please turn to Page 13. This slide shows our target KPIs under the current midterm plan, our future goals and progresses to date. We would like to surely achieve these targets and goals to earn investors' trusts furthermore. Next, please go to Page 14. We believe our efforts, so far, have earned certain level of appreciation from investors. As a result, our total shareholder return is above those of our peers or market average, and our EPS growth rate is comparable to our peers. Next, I will discuss our mid- to long-term management strategies. Please turn to Page 15. As indicated at the very top of this page, Tokio Marine is aiming to become a global insurance group, which delivers attractive value to all stakeholders. To achieve that, as we communicated before, we run up this spiral staircase, if you will, or a growth cycle of organic growth, portfolio review, business investment and shareholder return in a speedy manner. Divestment of TMR in FY '18 as well as business investment that we executed in FY '19, including acquisition of Pure Group in the U.S. and Caixa in Brazil are good examples of the actual execution of our policy. And through such activities, we would like to surely realize stable double-digit ROE and high shareholder return. Next, please proceed to Page 16. This page shows our track record, both inside and outside of Japan for the past 10 years. We have built a stable earning base in Japan, as shown at the top half, while also capturing high-growth potential overseas, as indicated in the bottom half. Profit has increased in both domestic and international business. As a global insurance group, we have steadily enhanced our capabilities, as you can see on this page. Next, please move on to Page 17. I want to take this opportunity to remind you that diversification of portfolio is job zero for the company's strategy. Please take a look at the graph on the right side of the slide that looks like an alligator's mouth. By diversifying our portfolio in geography, business and product offerings, the company has grown sustainably while controlling risk volume appropriately. Going forward, we will continue to diversify risk globally to further advance and stabilize our business platform so that the company's business foundation will be unshakable no matter what and resilient, which is how an insurance company ought to be. Page 18 illustrates the ROE trend as a result of all the above. The company has increased ROE, horizontal axis, while containing volatility, vertical axis, by enhancing profitability and diversifying risk through M&As in the United States and Europe. We are currently in the upper right quadrant, approaching our peers in ROE level. We will aim for higher -- even higher ROE towards our goal. Let me take you through each business, and please turn to Page 19, starting with domestic non-life business. The company over the years has outperformed the market in growth and continue to grow market share. We already excel others in business efficiency. In spite of that, over the long term, we intend to further reduce workloads by another 20% to 30% in a planned manner. Let me elaborate on this point on Page 20. Left-hand side, auto insurance, our main line of business has enjoyed year-over-year top line growth every year. Not only has the number of policies of insured automobiles greatly outperformed the market as seen above right; unit premium, bottom right, has grown steadily by increasing coverage. While some worry of shrinking of the auto insurance market, we think it is possible to maintain profit for the time being. Having said that, however, with decline in population and impacts from car sharing or autonomous driving over quite a long period of time, the market is expected to shrink. Our strategy is to seek growth in non-auto lines, while we buy time as described. Please turn to Page 21. While specialty insurance is growing recently, as shown on bottom left, its penetration rate is still low, as you see above right. We think this is a market with big growth potential. And now as you see on the right, in the center, we have stepped up our effort to address this market by tying up with 3 commerce and industry associations and promote sales of packaged products to SMEs. We are confident in what we are doing. Please turn to Page 22. From over 10 years ago, we have been working on streamlining of operations, such as reducing office work in sales-related area by 30% ahead of others. This has led to competitiveness of the company. In order to further accelerate this initiative, we are cutting our way into streamlining conventional administrative work and customer inquiry responses by utilizing digital technologies. Now, with COVID-19, we are embarking on new work styles as well. In the wake of this, by fiscal year 2026, in-house office work will be reduced by another 20% to 30%. Time and people who will be freed up as a consequence will be allocated to higher value-added work. This is our thinking. And next is international business on Page 23. Starting with developed markets. The Mark Company has already established its position as a top 10 insurer in the United States, the world's largest insurance market. We have also come to a point where we can show our presence in the market as a top player in specialty insurance. Furthermore, by taking a bottom-focused approach in business operations, growth and profitability outperform the market. This is where Pure Group joins us this year, which we believe will further drive growth. Please turn to Page 24. Acquisition of Pure Group announced last October has been completed this February. CEO Ross and a talented team experienced in the high net worth insurance market will continue to run the business. PMI is on track. And discussions are underway to create synergy. I'm excited about the future of the company. Next is Page 25, Lloyd's. In the process of reorganizing our European operations last year, KILN refocused on areas of strength, Lloyd's business, to improve profitability under Chris and Bud. Refinement of policies and portfolio was implemented, such as withdrawing from unprofitable lines, selective underwriting and rate increases. This was not an easy path, but has led to KILN seeing significant profitability improvements and become Lloyd's top 5 syndicates. Please take a look at Page 26. Next is emerging markets. We have taken actions in regions or markets where there is a sizable market and high growth potential. As a result, Brazilian operations have grown to generate JPY 10 billion in profit with other markets growing as well. These 7 market together garner 12% in profit overseas. Our strategy will continue to be implemented steadily to develop numerous revenue streams. Our progress in fiscal year 2019 is shown on Page 27, left-hand side. In Brazil, we agreed to set up a joint venture with Caixa Group, a dominant player in the housing loan market, to start operations from February next year. On the right-hand side, in Thailand, integration of existing subsidiaries with Safety acquired in fiscal 2018 was completed in February. A new company with #3 market share in the country will finally start full operation. Let me take you through our M&A strategies. Please turn to Page 28. It's been about 20 years since the company expanded into a non-Japanese business overseas. As you can see, our strategy has been steadily and consistently implemented. We will continue to be disciplined and strategic in engaging in M&A. In the meantime, business portfolio will be constantly and strategically revisited. Through this iterative process, we intend to establish an even better business portfolio with profit growth and diversification. Please take a look at Page 29. Currently, 80% or more of income from international business comes from the United States, and the drivers are the 3 North American entities we acquired. Since joining our group, they have been outpacing the market in growth and steadily increasing profit. This year, we have a new addition, Pure Group. By leveraging on the strength of each entity, we should be able to drive further growth. Please open to Page 30. Advantages of bolt-on M&As is that we have in-depth understanding of the company based on a long-term business relationship. In addition, since there is already a relationship of mutual trust with the management team of the company to be acquired, success rate is high. HCC has experience and know-how from over 50 bolt-on M&As. By leveraging our international group company's insight and experience, we have been successful in creating a more robust business model. In FY '20, one M&A and one exit has been executed. There is an abundant transaction flow. Please look forward to further success. Please turn to Page 31. This slide shows our M&A strategy and criteria. At this moment, we are focusing on PMI with Pure Group. Now having said that, we are keeping our eyes on good transactions in developed markets as well as in emerging markets that help us diversify risk globally, build good relationships with them so that we can take action when the opportunity comes. We will make sure we are prepared. Regarding M&A, we will continue to maintain a disciplined approach, as always. Please turn to Page 32. We have been leveraging talents, their expertise and a global network acquired through M&A in group policies and strategies, the fruit of which is seen in the form of synergies. Group synergies are seen mainly in 4 areas, as shown on the left, with $318 million in annual profit contribution most recently. We have not only filled the gap created by divesting TMR, but have been able to grow even more. Please turn to Page 33. So far, I have covered our management policy and business strategy. And from here, I will take you through our approach to ESG, which can be referred to as the foundation of our management policy and business strategy. Our sustainability. As you see on the top of the page, through the business of providing safety to customers, the company has been solving social challenges, and in return have grown together with our customers. For example, we are extending help to our customers and society by providing cover for business interruption due to event cancellation or closure -- temporary closure of business from COVID-19, let alone damages from natural disasters. Now is a time for an insurance company to stand by the customers. As you can see, our initiatives on sustainability matches our business purpose and indispensable in achieving sustainable growth for the company. Regarding climate change, which is particularly seeing a rise in interest, the company is squarely facing the issue. Some of our main efforts are shown on Page 34. As an insurance company, as an institutional investor and as a global company, we intend to change the world through business so that people can live in comfort and be involved in that transition and support it. Please look at both Pages 35 and 36. The key to governance is, in a nutshell, in promoting diversity and spreading our core identity. By appointing diverse and top-class talent acquired through M&A, among others as global co-heads, members of global committees, and in each area of expertise, in short leveraging expertise across the group or incorporating into group strategy and policy, we are maximizing the group's comprehensive capabilities. This enables our group strategy or policy to be more robust and address challenges more flexibly. We promote active participation by women and young generation to enable people of quality and passion regardless of nationality, gender, or age to be engaged. Page 36. The more diverse we are, the more critical it is to have a core identity that brings the team of diverse people together. We have always acquired companies with a shared value of striving to make the world a better place through business. On top of that, in order to further spread the group common culture to be a good company, there are various initiatives, such as town hall meetings where serious topics are discussed in a casual manner. This is done throughout the world. Such efforts have led to enhanced employee engagement year-over-year, but there is -- this is an endless effort. For example, we are now affected by COVID-19. And obviously, we will overcome it, but the post-corona world is highly likely to be quite different. No matter what the circumstances are, we will continue delivering values and grow. The basis for this is our people and our culture. This remains unchanged. I will lead the company, also as the Chief Culture Officer, to create a company that is second to none in passion and sense of unity. Before closing, let me summarize my thoughts at this moment. As an insurance company, our business foundation should be unshakable no matter what. To that end geography, business and product diversification will be pursued even more by further analyzing and studying risks. Acquisition of Pure is a demonstration of that. Aligned group management will further be promoted and enhanced. Insurance is people's business. Through past M&As, we were able to acquire good businesses. But more than that, we were able to gain access to quality talents and expertise and diversity. This is the greatest benefit we were able to enjoy, the talents who've joined the group and their expertise will be leveraged on a global basis. Our management will be one team, to continue to firmly execute our strategy towards maximizing corporate value and shareholder value by addressing any change in a flexible manner, and thereby respond to stakeholders' expectations and mandate. Your continued support and understanding is very much appreciated. Thank you for listening.

Mr. Komiya, thank you very much. And now we would like to entertain questions.

First question is from Mr. Muraki, SMBC Nikko Securities.

This is Muraki from SMBC Nikko. Thank you very much for the full-fledged presentation. You touched upon this in your presentation, but when it comes to COVID-19 and its impact to your management, I would like to ask 2 questions here. Now first, on Page 17. For risk diversification, you have been promoting the portfolio policy. And what kind of impact are you assuming here? So far, I believe that for domestic P&C, equity risks and also rate risk in life operation have been reduced. And overseas, on the other hand, you have been taking and also expanding specialty risks as well as credit risks in my understanding. Now over the past 6 months or so, when it comes to interest rates of domestic life business, it declined, however, overseas, I believe that your exposure, risk exposure, has increased quite a bit. Now in terms of -- in order to enhance ESR as well as ROE going forward, where are the areas where you would like to actually release the capital? And where are you planning to reinvest the capital too, going forward? Please give us a future direction. Secondly, this is a somewhat midterm question. But on Page 29, you are showing your U.S. business. And I would like to ask you how you are seeing the impact to the U.S.-based business. Last year, there was a provisioning related to social inflation. And this year, I believe that related to COVID-19 and also there has been some credit risk losses. And also rates are now coming down, which I believe is going to impact your performance as well. Going forward, with less demand for insurance-related to COVID-19 as well as rates and also your relative position within the market, how do you think the COVID-19 is going to affect your business and also your position in the market?

On your first question, based on COVID-19, how we intend to promote our capital management going forward, looking at the risk appetite or allocation with a view to enhance ESR going forward as well as ROE. I would like to invite Mr. Yuasa, our CFO, to take the question.

Yes, this is Yuasa, and I would like to take your first question with regards to risk diversification. On the underwriting side, so far, we have done global diversification. And this geographic diversification is something that we have worked on. However, this is not really working effectively because COVID-19 is really spreading across the entire world. However, we would like to continue to diversify risks across different lines of business so that we'll be able to achieve stable growth going forward. And on the investment side of our business, on the other hand, as you have rightly pointed out, mainly because of the credit risks, our ESR for the past 6 months declined. However, in terms of our asset management policy, as Mr. Komiya mentioned in his presentation, we would like to essentially manage the assets in order to achieve long-term and stable income backed by insurance liabilities. And based on that policy, we have been taking credit risks. And of course, this time around, within a certain period, if a recessionary situation is to appear, then, of course, our credit spread is to shrink. However, within the ERM framework, as Mr. Komiya mentioned with the phrase of the risk boundary, we have set a certain risk framework. And the impact that we are feeling this time around is still within the risk boundary. So this was actually not a surprise to us. And the credit risk itself is something where we can expect high return. And also, there are some short-term fluctuations or volatility in the market. However, without being confused by short-term volatility, we have been trying to achieve stable income, which we do not intend change as a policy going forward. And of course, going forward, it has assumed that similar situations could repeated going forward. And even if those situations are to be repeated, and if we would like to rather reduce the risk -- credit risk, then we wouldn't have invested in credit risk assets to begin with. And therefore, we would like to control the risk, and we would like to reduce business-related equities, so that we'll be able to rather reinvest the resources to credit risk as well as others, where we can expect certain level of returns going forward.

Now to your second question, the impact of COVID-19 to U.S.-based business, what is our view, and what is our policy or potential change in policy. That is your second question. Now for this, I would like to invite Mr. Harashima, Co-Head of International Business, to take this question.

Thank you very much for your question. This is Harashima. Now with regards to the impact of COVID-19, as mentioned already, now first on the underwriting side, related to claim payment there, we believe, will be certain level of the impact that we will be affected with. And on the investment side, investment income is expected to decline, which I believe is another aspect of the COVID-19's impact to our business. Now when it comes to the post COVID-19 situation. Now first, with regards to Philadelphia, as it was explained already, with regards to social inflation, last year we did the increase in provision in order to be prepared for the claims outstanding. And also, as explained earlier with regards to rate increase, we have achieved the rate increase more than to offset the rising trend of the loss cost. And furthermore, we have been lowering the underwriting limit in order to strengthen our underwriting discipline to better control the risk. And when it comes to the rising medical costs, on the other hand, at HCC, again, we increased reserves. And since last year, we have been increasing rates more than to offset the rising loss cost. So because we have been taking those countermeasures already adequately, and we are continuously strengthening our countermeasures. And I would also like to add that on Page 48 and Page 50 of the presentation material indicates that different companies have different strengths, respectively. And those strengths include strong business model and also competitive advantages. We would like to leverage those strengths furthermore. And also, as a group, we have solid financial platform. So even post-COVID-19, we would like to continue to leverage. And we believe that we should be able to continue to leverage the strength furthermore. And also, this has been reinforced furthermore, but we are actually seeing hardening of the rates in the market. And so this hardening of the market is actually a positive, major opportunity for us as well. So we would like to take advantage of the strengths of our group. And while certainly, there will be some negative impact of COVID-19, however, looking ahead, the post-COVID-19 situation, we rather would like to find positive opportunities so that we'll be able to achieve positive growth, post-COVID-19.

Thank you very much, Mr. Muraki, for your questions. Thank you very much for your response. Now to when COVID-19 will be prolonged and how do we want to coexist with the COVID-19. And what about the post COVID-19 situation, I don't think that we'll actually go back to where things were in FY '19. Now based on that assumption, we have been trying to do sort of 3C analysis or we would like to check once again as to where our competitive advantages lie, how the market is expected to change, and what are the strengths as well as the weaknesses of our group. And vis-a-vis us, what about our competitors? We will continue to study all of these. However, again, the core value of our group will remain unchanged. And also high level strategies could be fine-tuned as necessary going forward. However, in terms of the basic policy, and also countermeasures -- in terms of the countermeasures, they are rather tactics. And therefore, we would like to act flexibly. What I believe is important is to squarely face the challenges that we are faced with and take countermeasures one by one at respective group companies level. And I believe that is what we need to focus on at the moment. Thank you for your questions.

Next question Tsujino-san from Mitsubishi UFJ Morgan Stanley Securities.

I have 2 questions. First question, ESR, understanding of credit risk. I'm sure you've already heard that. And yet, according to what we've heard, we saw this decline. And the sensitivity to credit risk is common sense in Europe. And looking at the movements, rather than showing credibility, I think you should have shown the sensitivity to credit risk. Why were you not showing this? Why was not this made available? The understanding of management team was -- well Mr. Komiya was saying that. But maybe you missed something. And risk -- having a risk management is very meaningful. And I think you come to realize that. But what was the actual situation? And the sensitivity of credit risk, I would appreciate if you could show that to us. That's my first point. And my second point is a similar story. According to what we heard today, 153% ESR. But so, so what? That's the message that I got today. And true the restricted capital has gone down, but the natural catastrophe hasn't hit that much and so forth. So it was the restricted capital that was impacted -- that impacted this. But 99.9% without UFR, USR, your level of ESR is extremely high. And if I may give just one example. 2019, January, Zurich Insurance, 120-something-percent, 99.5%. Solvency, SST, it was like 20 -- 200%. That was the numbers. So what was the capital adjustment or buyback or dividend payment? What was the reason why you didn't do that? I really want to hear the truth from you. Well, you might respond and say that, okay, we raise our dividends. But other companies have been doing share buyback and so forth and total dividend payout, they have their restrictions. But it might so turn out that the top 5 syndicates in Germany -- in Lloyd's, in Lloyd's, you said, and John Neal, on the 24th of April, said that insurance companies are going to face a terrible situation with COVID-19, and there are lawsuits. So as an industry, they're trying to do something about this. And the -- and you are not paying dividend until October or November. This the atmosphere that we are in, and that could have had some impact on your decisions. This is my second question.

Thank you very much for your questions, Tsujino-san. First question on the ESR, particularly with regards to credit risk. And taking that into account, what was our forecast and put together, and how would that be related to our policy? What is our thinking? And second question, end of March, ESR was 153% has gone down to that level. And capital level adjustment, a shareholder return, going forward, what is our honest thinking on that? I would like to share -- I have been sharing actually my honest feelings with you. But I want to invite Mr. Yuasa, our CFO, to respond to your questions.

Thank you for your question about the impact of credit risk on ESR. As I said, in terms of risk volume, it was actually in line with what we anticipated. We had already anticipated such a level of risk. But this time, partially was quite big because this was such a sudden change. And so diversification was an area that had quite a big impact, bigger than what we expected, should I say. And as for sensitivity. We are aware of your views, the views that you've shared to us. And therefore, we hope that we can make those information available. But Delphi investment, for example, depending on credit ratings or asset classes, with widening of spread. Actually, it's not working in linear with it. So it's very difficult if we could provide you with an accurate information, but we would like to deliberate on that. Think about it. And now as for the 153%, capital level adjustment was not done on this point. And here, what we normally do and what we normally show, our way of thinking towards shareholder return, basically, we will look at this ESR level. And also, taking into account the financial market and the capital market trends and also look at the business investment opportunities, to reach a comprehensive decision, we have always described us this way. But looking at the current situation, we have COVID-19. And so the financial market part piece is very unclear. And that's why we do not make a decision of making capital level adjustment. Just for your reference, looking at global peers, some have announced a share buyback but have withdrawn that. And that, I think, is more of a standard amongst the global peers. So our decision, I do not think, is wide apart from what the thinking of our global peers. And that is all for me.

And this is Komiya speaking again. As for ESR, Mr. Yuasa has given you the response. But ESR is a very important tool, guideline for business management. But that does not mean that we will automatically make a decision based on ESR. Of course, we will refer to ESR. And based on the situation, core capital base ESR, or also look at the market environment and depending times and make a comprehensive decision. And for dividend, we will look at our underlying business. We want to see gross dividend payout. And for share buyback, for capital adjustment, we will consider on a case-by-case basis. And in terms of, case-by-case basis, we have in transparency because of the COVID-19 and the new investment and new risk taking, we're taking into account. And at this particular point in time, we did not reach the conclusion of making any capital level adjustments. Tsujino-san, I hope I answered your question.

Yes. Page 12. You can see the sensitivity ESR. So if you have the capital credit risk sensitivity, please share it with us.

I do not have it with me, the sensitivity of credit risk. And we would like to reconsider how we show it. I would like to take this home as a homework.

Next, Mr. Watanabe from Daiwa Securities.

This Watanabe from Daiwa Securities. I would like to ask 2 questions. First, with regards to rate increase opportunities as well as time frame overseas, you touched upon the hardening of the market. But when it comes to, I believe that the premium rates are now doubled. When it comes to post COVID-19, to what extent do you think that the rates could be increased? And how long do you think that you'll be able to enjoy the benefit of that? If you could perhaps give me some quantitative guidance on this, that will be appreciated. And I was thinking that perhaps this rate increase post COVID-19 could be a major tailwind for you. That's my first question. Secondly, do you see the downward trend in terms of the M&A valuation, and do you see any change in terms of opportunities available in the bolt-on type acquisition as well. So what are the current views, as well as your views on the potential or current changes with regards to M&A landscape, particularly post COVID-19?

Yes. Your first question is related to rate increase, and second question is pertaining to post COVID-19 M&A strategy. The first question will be addressed by Mr. Harashima, Co-head of International business.

This is Harashima. Thank you very much for your question. With regards to rate increase overseas, since last year, the market has been -- the market trend has been turned around to harden. And particularly post -- because of COVID-19, the hardening is progressing furthermore. So we believe that we have certainly got into the very full-fledged hardening cycle of the rate. Of course, the magnitude of rate increase is different depending on which particular line of business that you look at, you can't really generalize. In some areas, the rate increase is almost as big as 2x. While in other lines, it is increasing by double digit. So it depends on the lines of business. And it is difficult at this point in time as to what extent the rates could actually go up in different lines of business. And the other part of the question, time frame, is another piece, which is very difficult to be foreseen at this point in time. However, for a foreseeable future, we believe that this hardening is going to continue to be seen in the market. Now looking at the hardening as well as softening of the market over a longer period of time, now this time around, the financial platform of insurance companies could be affected because of COVID-19 this time around. And given that, I believe, that the market will continue to trend with a hard cycle in place for a foreseeable future. And again, this hardening of the market is a major opportunity for us. So as you also alluded, when it comes to after or post COVID-19, we would like to translate that into the expansion of underwriting profit. That's what we would like to aim for going forward.

On this point, I would like to check with Mr. Kawaguchi, our CRSO, to see whether you would like to make additional comments with regards to reinsurance part of the market, in particular, globally.

Yes, with regards to reinsurance, even before the development of the COVID-19, the market was starting to harden already. And in particular, for the past 2 consecutive years, massive losses were incurred related to natural catastrophes and wind and flood and also other natural catastrophe reviews got hardened as a background to that. And also reinsurance companies underwriting discipline have been changing. Conventionally, they were rather topline oriented in order to grow market share. However, they have changed their attitude to some extent in order to focus more on the bottom line, in our view. And therefore, the reinsurance market itself has been changed to embrace hardening of the rates. And based on that, when it comes to, in particular, fire insurance business for wind and flood risks in Japan on the direct underwriting as well, in October last year, we increased rates. In this fiscal year as well, we would like to continue to consider and increase rates furthermore. Because of the reinsurance cost itself, we believe that we also need to consider increasing direct underwriting rates furthermore as well.

And with regards to your second question of our M&A strategy, particularly post COVID-19, when it comes to M&A, I believe that you are more interested in the M&A landscape outside Japan. So I'd like to give the floor to Mr. Harashima, Co-head of International business.

Yes, with regards to M&As, internationally, we have looked at opportunities, both developed and developing markets conventionally. And last year, in developed markets, we decided to acquire Pure Group. And in emerging market, on the other hand, we decided to form a joint venture with Caixa in Brazil. The basic underlying thinking behind this will continue to remain unchanged even post COVID-19. And when it comes to the impact of COVID-19, I'm sure that this is going to be -- the impact will be felt in different parts of the world. And therefore -- well, we try to foresee how things will develop COVID-19, we also need to rush up our strategy furthermore. And with regards to valuation or pricing, insurance companies' valuations are now on the decline currently. And again, trying to foresee how things will develop post-COVID-19, we would like to properly calculate corporate value in order to formulate solid M&A strategy of Tokio Marine Group.

Our basic strategy of M&A is to diversify risks furthermore and to capture more growth potential. Therefore, overall, the valuation might be declining. However, we need to also be mindful of the risks associated there as well. And we, therefore, would like to focus on companies with strong intrinsic value, the types of companies that will be able to withstand the current situations and still survive in the market. And there are 3 principles that we have embraced. And based on those principles, we would like to decently look at opportunities. Thank you.

Next Mr. Sato of Mizuho Securities.

This is Sato of Mizuho Securities. Both of my questions are related to ESR, and I want to ask from a different angle. Actually, my impression is exactly the same as what Tsujino-san explained earlier. The numbers that you have disclosed so far, the impression it could give to others and what the top management has explained today, there's still a gap between the two. Understanding of separate fluctuation factors, that's fine. But last year, it was 170 -- 197% and then it has gone down to 153% in just 1 year. What is your take on the extent of the impact of this big drop? That's my first question. And second question is that there is volatility involved in ESR in this index. And what happens if you go below target range? I mean, this framework that you have, is it appropriate? This is my second question. Let's say the subordinated bonds of JPY 100 billion can be issued. You would have gone down below 150%. And if companies like Pure, which has a big -- quite a big goodwill on their business. And if you acquire that kind of company, even if the valuation was appropriate, it can have significant impact on ESR. So from that perspective, following this range -- target range, and being incorporated in the capital policy, is this appropriate? Is this appropriate or not? This is my second question.

Thank you very much for the question. I would like to invite Mr. Yuasa, our CFO, to answer your questions.

This is Yuasa speaking. For the past 2 years, big decline in ESR has been recorded. But as I mentioned, there was a big impact from nat cat. And looking at each fiscal year it was, as expected, within our expectation, but we had the big nat cats 2 years in a row. And while this is a restricted capital, this has dropped. And therefore, to a certain extent, something that were unexpected did occur. And in the meantime, interest rates. Some time ago, when BOJ took the 0 industry policy, we took a position in line with the interest rate position, and therefore, that had a negative impact. And so here, again, some reality turned out to be something we did not anticipate. So some surprise there. But as for the latter, hedging rate has increased in order to be better prepared for interest rate fluctuations. And so to a certain extent, more or less, I think we are prepared for that. But the fact that ESR has dropped. Well, this has dropped because of unanticipated things have occurred and therefore, has dropped to this level. So in the second part of the question, with regards to what would happen if we are below 150%. And again, this is explained on Page 12. If we are below 150%, we will aim to recover capital levels through accumulation of profits. This is described on Page 12. And just because we hit below 150%, that doesn't mean that we will not make any risk-taking or business investments. It's not that rigid. Restricted capital has decreased. That was the major reason for the drop in ESR. And as Mr. Komiya mentioned, the whole of ESR is something that we will keep track on -- based on a disciplined manner, but also core capital based ESR and also capital level -- we will be looking at the market environment as well as outlook for business investments going forward. And so we will -- that strategic consideration of all these different factors. And as shown here, underlying earnings is quite strong. And therefore, we can achieve -- seek accumulation of profit going forward. And that's -- those are the factors that we'll be taking into consideration. So just because ESR goes below 100%, that doesn't mean that we will not make any shareholder returns or make any business investments. But this KPI, going forward, is it the right KPI to use going forward? As you suggested from accountability perspective, this is something that we would need to have second thoughts on, reconsider. And we would like to propose something that will be easier for you to follow, but this is our current approach, and this is how we will make decisions on business investments and additional risk taking.

Please, please continue.

To confirm, ESR that has been disclosed. Once this has started to go down, restricted, you -- I have an impression that you tend to refer to restricted capital as a reason. And if that is the reason, why don't you return to the prior definition? Because I have an impression that you are running the company based on a definition that you used before in the past. So which one are you referring to in running the company?

Well, basically -- this is Yuasa speaking. Basically, ESR that we disclose at this moment, this is what we refer to and take a disciplined approach. For example, 150% to 210%, the target range, the lower we are in the target range, maybe we take a different approach from what we are, where -- if we are at a higher of the target range, but we take a comprehensive approach.

This is Komiya speaking. ESR is very, very important, but that does not mean to say that we will automatically apply it. ESR, when it goes down, what were the factors that led to the decrease and so forth. Those factors are analyzed before making any business investment decisions or making additional risk taking. ERM, which is very strict, and therefore, we will stick to it. And what is most suitable for the business? This has been studied in the past, and we will continue to study, to consider what will be most appropriate for the company.

Next, Mr. Otsuka from JPMorgan. Please.

Yes. This is Otsuka from JPMorgan Securities. Thank you very much for the detailed explanations. I have 2 questions. The first question is pertaining to Slide 18 of the presentation material. Now Mr. Komiya, you talked about checking your competitive advantages. And I'd like to ask you specifically -- well, of course, this is really the result of your analysis. But compared to global peers, when it comes to your company's competitive advantages, what are they? What in your view? Now JPY 30 billion to JPY 40 billion impact of COVID-19 that you are mentioning, do not seem to look too big compared to what was announced by global peers. Some of the companies have actually disclosed potentially much bigger losses to be incurred by COVID-19, globally speaking. So perhaps including that point as well, again, when you say that you want to -- that you would like to check your competitive advantages, what are they? Please clarify the point. That is my first question. And secondly, on Slide 13. You're aiming to achieve JPY 500 billion adjusted net income. And to get there, what about your next midterm business plan? You're trying to manage business for a stable and sustainable profit growth. I understand it very well. And this fiscal year is the final fiscal year under the current midterm business plan, which I'm sure will be followed by the next midterm business plan. So under the next midterm business plan, what are the areas that you would like to focus on in order to ultimately get to JPY 500 billion? I'm not really asking the specific target that you will be aiming at under the next midterm business plan. But assuming JPY 30 billion to JPY 40 billion losses, which certainly is going to be a negative factor to the profit. And because the market is now hardening, if you increase the rates that you might be able to offset the COVID-19's impact. And Mr. Komiya mentioned, also, that you are well prepared or you are well positioned for the next set of growth. And you also mentioned that you could translate the COVID-19 situation rather into positive opportunities for your further growth. So can you elaborate on those points as well?

Yes. Thank you for the questions. The first question is particularly comparison vis-a-vis global peers. So I'd like to invite Mr. Harashima to take your question. But both domestically, internationally or globally, with a highly diversified risk portfolio, I believe, is our base, say, strength and competitive advantage. Of course, depending on the cycle, some of our operating companies are doing well, while others are probably not. However, overall, as a group, I believe that we have much more solid management platform in place as a group. And second, within -- even within the U.S. market, as mentioned by Mr. Yuasa, our CFO, we are very well diversified across different lines of business. We are engaged in various types of business, including our specialty business that will be furthermore enhanced with the acquisition of Pure Group. So even within U.S. portfolio, we are highly diversified, which is, I believe, another competitive advantage of our group. And when it comes to post COVID-19, of course, the market trend as well as customers' behavior, all of these things need to be looked at. So we would like to reconsider what could be, again, our competitive advantages in post COVID-19 situation. But if there is any additional comments, Mr. Harashima, you would like to make with regards to our competitive advantages, vis-a-vis global peers, please?

Yes, thank you for the question. Comparing ourselves to global peers, the -- due to COVID-19, some losses are expected to be incurred. And of course, different types of announcements are being made by global peers. Some companies have just announced first quarter results, while others have shown rough estimate on full year potential impact. And of course, there are different assumptions being used in different calculations. So we can't really make an apple-to-apple comparison here. However, as you have pointed out, we have certainly referred to what was disclosed by our peers. And comparing our estimates to those of our global peers, we believe that we are comparable -- or perhaps our estimation on losses incurred will be slightly smaller than those of our global peers. Now with regards to future growth, on Page 47, you can actually see a slide on our international insurance business. Toward further growth, we have been establishing a business foundation. And as shown at the top here, the 3 factors: robust specialty franchises and diversified business portfolio, and superior capital strength with appropriate ERM being established, these are, we believe, the strengths that we have. So internationally, as mentioned earlier as well, even in the post COVID-19 situation, I believe that we'll be able to rather find positive opportunities for growth. So by harnessing this strength, we would like to achieve further growth.

On your second question related to the next midterm business plan, as the current fiscal year 2020 is the final year under the plan, you asked a question with regards to the next midterm plan to be kicked off in the next fiscal year. Our target is achieving JPY 500 billion with the ROE of 12% in the future. And what will be the positioning of the next midterm business plan, Mr. Yuasa, our CFO, is going to respond to that question.

Now we are right in the midst of trying to devise the next midterm business plan. So unfortunately, I won't be able to share with you details just yet. However, with regards to the impact of COVID-19, putting aside the issue of whether it is going to be contained over short-term or not, it could actually get prolonged. However, after a certain period of time, I believe that the impact of COVID-19 will be finished. It will not be felt anymore. However, what is perhaps more important is how we want to address the market that will surface post COVID-19. The next midterm business plan should cover the 3-year long period, starting from the next fiscal year, in our current view, and we would like to certainly look at situations post COVID-19 to see the specific strategies we would like to implement under the plan. However, as Mr. Komiya mentioned earlier, basically, that's also our competitiveness or our strength, we believe, will remain unchanged. So we would like to make the best use, make the most out of our advantages. And those advantages include the fact that we have highly diversified portfolio with expertise, sophisticated expertise. And building on those strengths, we believe that we'll be able to create a business model that should allow us to achieve further growth. And under the next 3-year long midterm plan period, how do we intend to maneuver ourselves toward the future goal of JPY 500 billion? Of course, the market is currently hardening. And so how much organic growth we can actually achieve and how much M&A can be actually realized, those are important pieces of the puzzle to get to our future goal. But when we finish the next midterm business plan, we believe that we -- we hope that we'll be able to share with you more specifics as to how we can actually get to the future goal of JPY 500 billion more specifically.

Now first of all, we would like to achieve JPY 500 billion net income with ROE 12%. That is the next major goal that we would like to aim for. And I most certainly mentioned that we are well prepared or positioned to achieve next set of growth, both vertically and also horizontally. We have established various task forces, including international executives. And I briefly touched upon this 3C, but we have expertise and talents globally, as well as brand equities as well as networks, franchises, platforms of our group companies across the entire world as well as underwriting expertise. Of course, there could be perhaps some weaknesses. However, by looking at those strengths that we have, we currently are trying to put together the next set of business strategies. And what kind of plan we will be implementing starting from 2021, of course, we launched the new plan. We have less than 12 months remaining now. And of course, during the course before we launch the plan, we would certainly like to monitor how the situations related to COVID-19 will develop. However, without being confined with the views on the COVID-19 situation too much, we would like to develop our next midterm business plan.

Next is Niwa-san from Citigroup Markets Japan.

Fire insurance, domestic market, and risk management of COVID-19 -- can you hear me?

Yes, we can hear you.

The first question is on Page 8. Domestic fire insurance, profitability improvement. What are the KPIs that your management is looking at? If you could specifically show that and also talk about target going forward. The non cat cycles, above and beyond. Where will the loss rate settle at around benefits? And there could be prices and the social environment, that is not very favorable. Economic environment, that is not very favorable, that could be a downside. But where will you settle around? That's my first question. And my second question is, looking at COVID-19 being controllable from -- becoming controllable from a different perspective. How did Tokio Marine interpret COVID-19, the second wave or the third wave, if these future waves potentially come, will the impact of COVID-19 on the company, not change, in other words, from around March to May period? Within the management team, what are the discussions that took place? And what kind of change or non-change did you have for the midterm plan? I want to ask these questions in order to understand how robust you are in the mid and long term.

Okay. Thank you very much for the first question on the profit improvement in fire, I want to invite Kawaguchi-san. And the second question on -- during COVID-19 or post COVID-19 risk profile question, CRO, Okada-san; and also CFO, Mr. Yuasa, will supplement CRO, Mr. Okada. First question, profitability improvement of fire insurance, Kawaguchi-san, please.

This is Kawaguchi speaking. For fire insurance, as you know, for 2 years in a row, we've had natural -- significant natural catastrophes 2 years in a row. And the insurance rate at this moment is not enough. This is actually a common understanding wildly in the public -- in public. And nat cats are becoming more severe and houses, buildings are becoming obsolete, old. And the current interest rate situation is certainly not enough. There's a lag. And last year, 7% rate hike was implemented. And for this year, a similar level of rate hike will also be implemented. As for KPI, as a matter of fact, internally, we are using ROR, loss ratio, combined ratio, is not used directly as a management KPI. Of course, they are very important KPIs, that is for sure. In principle, this year, once again, we will have a rate hike once again. As a result, combined ratio to go below 100% If we could achieve that level, that will be quite positive. But as you pointed out, there could be negative downturn in the economic situation because of COVID 19. And to what extent will rate hikes be accommodated in the market, is something that we need to take into account. And we are working on a possible rate increases going forward to achieve combined ratio of below 100% as soon as possible.

The second question, risk profile under COVID-19. This is a very difficult question. What kind of risk stress is being applied on COVID-19 pandemic. Let me ask Okada-san to respond to that.

COVID-19 is pandemic. And in our risk management, we look at risk management on a comprehensive manner, integrated risk management. And we also look at natural catastrophe risks, among others. And with the COVID-19, after March, as part of our stress test effort exercise, we are looking at underwriting risk and insurance premium risk and the insurance market risk. Those stress tests are being conducted. And as a result, as Mr. Corona -- Mr. Komiya said, COVID-19, we have confirmed is a capital event. And Mr. Yuasa, do you have anything to add?

As Mr. Okada just mentioned, in principle, this is an earnings event not a capital event. And so looking at the results of cat stress test, we should have no problem in business management. Even if we consider possible deepening of the pandemic, we are not expecting to see a significant negative impact on management.

If I may additionally ask related to risk management, I think this was mentioned earlier, but social inflation is seen in the United States, social issues. This, I think, you've seen in the United States, for example, will this be taken into account?

What your question is, is about controversial, political or industrial issues in the United States that you're talking about?

Yes, those are my questions.

Let me invite Co-head for International, Mr. Harashima to respond to that question.

Thank you very much for your question. Overseas, especially in the United States, COVID-19-related and insurance-related political actions are taking place. And this is, as Yuasa-san correctly pointed out, there are a lot of actions taking place. For example, in business interruption, people asking for deductible or anything related to workers' compensation and so forth. And with regards to these trends, we are watching carefully, attentively. As for BI, business interruption, their exception from obligation will not be given. This is actually something that is related to the foundation of insurance, and this is not expected to happen in the United States. That is not expected.

On that question, Mr. Okada, who became CRO from April, and people who are responsible for legal in Europe and the United States, have set up a task force to collect and gather information. And we're working on countermeasures so that we can address this group-wide. There is a breadth of information from different angles, different perspectives in this task force. And we are watching very carefully with very strong interest on what -- how things will develop in Europe and the United States. I hope we answered your question.

Since the time has already come to actually finish this conference, this is going to be the last question. Mr. Sasaki from Merrill Lynch Securities.

Yes, this is Sasaki from Merrill Lynch. My first question is pertaining to the impact of COVID-19. So I just like to get a clarification. This, we -- you, in your view, is an earnings event, basically. But retroactively, retroactive payment of claims, which is discussed recently. Considering those potentials as well, have you come to the conclusion, this is going to be seasonally an earnings event for you? And secondly, with regards to your views on capital efficiency of the U.S. business. I think the funds to take pandemic risks, based on the government's fund and the insurance funds, should be developed in the current discussion. And I believe that private entities are solicited to participate in the fund as well. If it's pandemic, then of course, the fund itself is actually not going to be a diversified fund, and that is going to take up some capital. And if that is something that you're going to do, then, of course, capital efficiency will go down and ESR would also be negatively affected. So do you see a need for capital increase or raising for your U.S.-based entities as well? What is your view on that?

Yes. With regards to your first question, are you referring to as for the scenario -- stress tests, have we looked at what you mentioned as part of the scenario, is that why you would like to check? I would like to ask Mr. Okada to take the question.

Thank you for the question. We are currently monitoring various situations at the moment. But with regards to the policies where we have the obligations to pay claims, we have applied the stress test, and that's what we referred to in our stress test exercise.

In your second question, you're referring to perhaps a so-called pandemic pool and its relation to the capital efficiency of our U.S.-based entities. Is that what you would like to clarify?

Yes, exactly. Yes, exactly. That is my point. Yes. So currently, the discussion is currently underway for pandemic pool. And if capital is needed, and I believe that yes you do have to raise capital. And I believe that is going to affect the capital efficiency as well as restricted capital. So what is your view on that?

All right. With regards to pandemic pool, discussion in U.S. and also Europe is currently underway, and we certainly are aware of that. It's a pandemic. So we believe that it will be extremely challenging for 1 private entity or company to just cover that. And therefore, maybe based on collaborations amongst the private companies and also with the participation of public capital as well, creating a pandemic pool is something that should probably be considered. However, it's very much dependent upon how it is going to be designed for what purpose. And from that perspective, we're currently looking at that discussion. But looking at the U.S., what is our view on that? I'd like to ask Mr. Harashima to add more on that point.

Yes, thank you for the question. With regards to pandemic, there are various things being discussed, which include the so-called pandemic pool. Now after 9/11 the terrorism pool was established. And I think the underlying concept is very similar to that. And discussions are currently underway, and it is not determined that the pool itself is going to be established. And what is going to be covered under the pool is not decided either. And therefore, we would like to look inside to see what is going to be covered, and then we would like to decide on our attitude toward it. Do we want to participate in that pool or not? At this point in time because we don't know what is going to be included in the fund, nothing has been decided on our part. So accordingly, whether we would increase or raise capital for our U.S.-based entities, of course nothing is decided at the moment. So we would like to closely monitor the situation as we go along.

So with this, we would now like to conclude Tokio Marine Holdings Investors conference in the first half of FY '20. If you have additional questions, please do not hesitate by contact us to IR group. Once again, thank you very much for your attendance despite your busy schedule. Once again, thank you very much for your attendance, and please stay safe. Thank you, everyone.