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

Hello, everyone. My name is Okada. Thank you very much for taking the time to join us today despite your busy schedule. Also, I sincerely appreciate your continued support to Tokio Marine Group. Without further ado, let me begin. Please turn to Page 2 of the materials. Here, I have summarized into 3 main points, what I would like to convey to you today. The first point is about KPIs after IFRS adoption. Tokio Marine Holdings will switch to IFRS accounting standards at the end of fiscal '25. The reason is that by adopting IFRS, our financial results will be on an economic value basis. Compared with JGAAP, IFRS will more accurately reflect our underlying state of the business in the financial results and economic value-based numbers matches our ERM approach, which is at the core of our management. Also for stakeholders, moving to IFRS will make our disclosures simpler and easier to understand compared with our past method of adjusting JGAAP specific number, thereby improving transparency and comparability with global peers. In addition to the change in accounting standards, we will also revise the definition of our KPIs after IFRS adoption so that comparison with global peers becomes easier than before. Specifically, adjusted net income, which is our profit indicator, will be based on IFRS financial numbers and will exclude capital gains and losses from asset management. In short, the profit indicator will be defined as underwriting profit plus investment income, which is the same definition adopted by global peers for their profit KPI. Adjusted ROE will also be aligned with the global peers' definition. That is the numerator will be the adjusted net income I just explained, and the denominator will be net assets, excluding unrealized gains and losses on financial assets and insurance liabilities from IFRS financial numbers. Reflecting such definition changes, our KPI levels after IFRS adoption will be adjusted net income for fiscal '24 actual basis to be approximately JPY 805 billion, fiscal '25 forecast to be around JPY 840 billion. Adjusted ROE will be around 13% in both fiscal '24 and '25. The second point is about the DPS growth. Dividends remain the main means of shareholder return and the policy to sustainably increasing DPS in line with profit growth will not change even after IFRS adoption. Within that, while we have traditionally used the 5-year average of adjusted net income as the basis for dividend payment, this time, we will shorten it to 3-year average. This is because, as explained earlier, since capital gains on losses will be excluded from adjusted net income under IFRS, profit on a single year basis is expected to be less volatile compared to the current profit definition. Also, after IFRS adoption, due to the change in accounting standards, gains from sales of business-related equities will no longer be included in statutory accounting profit and adjusted net income. However, through continued profit growth in our core business, we will sustainably expand source of dividends and continue to achieve DPS growth in line with top-tier EPS growth. The third point is about capital policy. First, regarding share buybacks. Since last year, we have announced that we will achieve 2% EPS growth through share buybacks. We will continue to use this as a standard while reserving some flexibility in execution by comprehensively taking into account market conditions, M&A pipeline and other factors. Next, regarding ESR, which serves as one of the factors for considering capital policy, with the introduction in Japan of a new capital regulation based on the concept of ICS or international capital standard, at the same timing as migration to IFRS at Tokio Marine from the end of fiscal '25, we will revise the definition of ESR. It will emphasize consistency with the new capital regulation and comparability with global peers. Furthermore, we will position ESR as an indicator of financial soundness and set our target level as equivalent to the lower end of the current target range, a minimum level required for maintaining AA- rated capital adequacy, which would be 190% or higher. On the other hand, we will abolish the upper end of the target range, which we have. Currently, we are significantly advancing the sales of business-related equities, releasing capital that can be used for growth investment, risk taking or shareholder returns. Under such a situation, to continue achieving top-tier EPS growth and raise ROE to the global peer level, it is essential not to decide on use of capital just because ESR exceeds the upper limit, but rather to carefully determine whether the use of capital in any certain way contributes to further profit growth and ROE improvement. This is exactly the concept of our capital policy, as explained before, and our stance of continuing to put capital to work in a disciplined manner has not changed at all. Now I would like to explain each of these points in a little more detail. Please turn to Page 3. The definition of KPIs after adoption of IFRS is as explained earlier. Let me go over the major differences from the current definition. First, regarding adjusted net income. With the transition from JGAAP to IFRS, gains on sales of business-related equities will no longer be included in profit. Insurance liabilities will be evaluated based on economic value that represents the profitability and strength of our business. Post IFRS adoption, capital gains and losses from asset management will not be included. This is because our investment is based on long-term stable income management that takes into account the characteristics of insurance liabilities. Therefore, excluding capital gains and losses from temporary market fluctuations is in line with our strategy and more appropriately demonstrates the strength of our business. This definition is also consistent with global peers profit indicators. Adjusted ROE will also be changed consistent with global peers. To be more specific, unrealized gains and losses on financial assets and insurance liabilities will be excluded from the denominator of ROE and will include goodwill and intangible fixed assets, which are excluded under the current definition. As shown on Pages 4 and 5 of the slide deck, our performance against the newly defined KPIs are adjusted net income approximately JPY 805 billion for FY '24 and approximately JPY 840 billion for FY '25 and adjusted ROE approximately 13% for both FY '24 and '25. Please turn to Page 6. Dividends will continue to be the basis of our shareholder returns. There is no change to our policy of sustainably increasing DPS in line with profit growth. And the averaging period of adjusted net income, which is the source of dividends, will be shortened from the current 5 years to 3 years. I have already explained this. Therefore, DPS for FY '26, the first year of IFRS adoption will be determined using a 3-year average of IFRS-based adjusted income from FY '24 to '26. Even after the transition to IFRS, we will continue to achieve top-tier EPS growth and achieve DPS growth consistent with that. In fact, as shown in the bottom of Slide 6, the 3-year IFRS base adjusted net income that will serve as source of dividend for FY '26 is JPY 805 billion in FY '24 and JPY 840 billion according to FY '25 forecast, which already exceeds the JPY 805 billion in source of dividends for FY '25. Given the solid performance of our business today, dividend pool for FY '26 will naturally be larger than FY '25. The amount of DPS for FY '26 will be calculated based on the results for FY '25 and the profit plan for FY '26 on an IFRS basis and is scheduled to be announced in May next year. To achieve DPS growth that is consistent with the newly defined EPS growth explained today, we will take a holistic approach that will include payout ratio. Lastly, but not least, let me cover ESR. Please turn to Pages 7 and 8. Our company has, over the years, aimed to maintain a capital level equivalent to AA rating, and this stance will remain unchanged after the introduction of new capital regulations. To directly reflect this stance, ESR will be redefined. Our current definition of ESR uses a 99.95% value at risk as the confidence level of risk calculation. To be consistent with the new capital regulations and to emphasize comparability with global peers, we will change to using a 99.5% value at risk going forward. Secondly, change regarding restricted capital. Based on the idea of indicating capital available for new business investments and shareholder returns that are not included in the business plan, we have previously calculated ESR by excluding restricted capital from net assets and reflected expanded risk taking in existing businesses over the next year as part of our business plan in our risk calculation. To be consistent with the new capital regulations and to facilitate comparability with global peers, we will now change these calculations to not exclude restricted capital from net assets and not reflect risks taken in existing businesses that are incorporated in business plans in these calculations. The new ESR level reflecting this change in definition will be as shown in the center of Page 7, 285% as of the end of March 2025. As our goal of maintaining an AA-rated capital level remains unchanged, our ESR target based on the new definition will be 190% or higher, which is equivalent to the lower limit of 100% in the current definition target range. While the ESR level will change with the change in definition, our approach and discipline toward capital policy will remain intact. Capital generated through organic growth and portfolio review will be allocated primarily to M&A and risk taking that contribute to further profit growth and ROE improvement. In the absence of such opportunities, we will consider expanding shareholder returns as we have no intention to hold on to unnecessary surplus capital. Our approach regarding share buybacks will also remain unchanged. As previously announced, share buyback will be executed flexibly, comprehensively considering the level required to boost EPS growth by 2%, market conditions, M&A pipeline, including bolt-ons and risk-taking opportunities and others are taken into account. That is all from me. By taking accounting standards and the definitions of KPIs, our disclosure should more simply and clearly reflect our capabilities. This will also make it easier for our stakeholders to understand. While these changes will affect the numbers and their appearance, our management strategy or business operations will not change. We will continue to steadily implement our management strategy and achieve world-class EPS growth with high confidence and further improve ROE through EPS growth and a disciplined capital policy. It is with a strong will that we will manage our business. Your continued support is very much appreciated. [Statements in English on this transcript were spoken by an interpreter present on the live call.]