Strategy/Capital

Capital Policy

Basic Capital Policy

The Company’s Capital Policy is based on the Enterprise Risk Management (ERM) framework, and its Basic Capital Policy is to appropriately control the balance of capital, risk, and return to achieve a number of goals: maintaining robust financial health; achieving steady improvements in capital efficiency to grow profits to a world-class level and deliver adjusted consolidated ROE of 10% or more; and ensuring attractive shareholder returns (dividends and share buybacks) commensurate with both profit and share- holder equity levels.

figure:Capital, Returns, Risk　/　Improve capital efficiency Increase, shareholder returns, Improve risk-return ratio, Maintain financial soundness — Capital Policy Based on ERM Framework

Improving Capital Efficiency

To sustainably boost the Group’s capital efficiency, the Company has been executing M&As and other growth investments, and investing in digital technologies and other fields with high capital efficiency. To make these investments, we are using stable cash flows generated by our existing businesses, as well as capital generated by reducing risk. Through these initiatives, we aim to achieve our mid-term goals of increasing adjusted consolidated profit to ¥300.0 billion or more and improving adjusted consolidated ROE to 10% or higher by fiscal 2023, the final year of our new Mid-Term Management Plan. We have also set individual ROE goals for each of our businesses. By monitoring the initiatives these businesses implement, we intend to improve capital efficiency and increase the adjusted profits of the Group as a whole.

We set our target for adjusted consolidated ROE based both on our capital cost of 7% and on the average level of our global peers, as estimated by CAPM^*1.

*1 Capital Asset Pricing Model (CAPM) is a method used to calculate expected return using the following equation: risk-free rate + beta (sensitivity of our stock price to the stock market) × market risk premium

The Risk Appetite Statement (RAS) outlines our medium-term risk-taking policy, and is the basis on which we carry out initiatives to improve the Group’s risk profile, and steadily increase its capital efficiency. The RAS describes the approach to risk-taking we intend to take for each category of risk, based on their risk-return ratios. In line with the RAS, we will reduce strategic shareholdings that have low capital efficiency and reduce domestic interest rate risks by strengthening ALM. Our KPIs for the current Mid-Term Management Plan include reducing strategic shareholdings by approximately ¥150 billion and purchasing ¥300 billion of super-long-term bonds annually through our Domestic Life Insurance Business. We steadily carried out these initiatives in fiscal 2021, selling strategic shareholdings to the value of ¥50.1 billion, and purchasing super-long-term bonds worth ¥329.4 billion.

As part of the current Mid-Term Management Plan, we also plan to allocate management resources worth around ¥600.0 billion to growth investments that contribute to our Scale and Diversification and New Customer Value Creation core strategies.

For our Scale and Diversification strategy, we will invest in M&As and organic growth primarily in our Overseas Insurance and Reinsurance Business, with the aim of bettering our chances of achieving our management targets. For our New Customer Value Creation strategy, we intend to invest in creating a Real Data Platform (RDP) and in companies that possess digital and other advanced technologies, as well as in the healthcare domain, with the twin aims of contributing to the resolution of social issues and boosting growth over the medium to long term.

We have established a disciplined investment framework when it comes to considering M&As: we assess the consistency of any potential deal with our business strategy, and analyze any expected synergies; we have also set a hurdle rate that takes into account the weighted average cost of capital (WACC) based on financial leverage and the industry characteristics of the acquisition target.

figure:Direction of Risk, Reduce risk in areas with low capital efficiency, Improve capital efficiency of existing businesses, Execute growth investments in areas with high capital efficiency→Achieve adjusted consolidated ROE of 10%

*2 30-year maturity equivalent

Maintaining Financial Soundness

To maintain robust financial health, the Company manages capital based on the Economic Solvency Ratio (ESR), which compares capital and risk based on economic value.

In capital management, we set a target capital level— an ESR of 200% to 270%—and risk tolerance as a guide to appropriate capital levels from the perspective of financial soundness and capital efficiency, and we implement appropriate capital policies according to these ESR target levels. In calculating ESR, we take into account recent regulatory trends and disclosures by domestic and overseas insurance companies. Additionally, in order to enhance global comparability, we have adopted capital management methods that comply with international capital regulations and we are working to maintain financial soundness.

As of March 31, 2022, our ESR level was 246%. This falls within our target range, indicating that our financial health is satisfactory.

figure:March 31, 2022, Adjusted capital ¥3.5 trillion, Risk amount ¥1.4 trillion — ESR Status

figure:ESR Target range. 200%～270%　Continue efforts to improve capital efficiency. Deliver returns in line with Shareholder Return Policy. — ESR Status

Shareholder Returns

The Company aims to provide attractive shareholder returns, in line with a basic policy to continuously increase dividends through sustainable profit growth while taking both its financial soundness and the prevailing business environment into consideration. We also maintain the option of flexibly executing share buybacks depending on share prices and capital availability.

Our Shareholder Return Policy for the current Mid-Term Management Plan stipulates a basic shareholder return rate equivalent to 50% of adjusted consolidated profit, as well as supplementary returns depending on financial performance, the financial market environment, and capital conditions. In addition, we intend to steadily increase the total amount of returns (total dividends + share buybacks) through profit growth, increase dividends in line with this profit growth, and so raise the ratio of dividends to total payout. Based on this policy, we project an annual dividend of ¥260 per share in fiscal 2022, which comprises an interim dividend of ¥130 and a year-end dividend of ¥130. This marks an increase of ¥50 from fiscal 2021, and is the ninth consecutive year of dividend increases.

figure:Shareholder returns（Dividends, Share buybacks）＝Basic return + Supplementary return — Shareholder Return Policy

Note: Supplementary return will be provided in the following circumstances, depending on risk and capital conditions and outlook for the future. Cases for supplementary returns include:

When ESR constantly exceeds the target range
When it is required to maintain the previous fiscal year’s level of return, in cases where adjusted profit declines due to one-time factors such as natural disasters
When growth investments such as large-scale M&As are not expected
When improved capital efficiency, etc., is deemed necessary