Integrated Annual Report 2024(Online Ver.)
Group Core Strategies
To maximize corporate value, we will implement appropriate capital policies.
Group CFO
In FY2024, we kicked off our new Mid-Term Management Plan. The Group numerical management targets*1 in this new plan are to raise adjusted consolidated ROE to 13%–15% by FY2026, the final year of the plan, and to achieve an adjusted EPS growth rate of more than 12% over the plan’s three-year period.
As the Group CFO, I will work to optimize Group-wide capital allocation and improve capital efficiency. I am also committed to achieving these numerical targets through the business management of each Group company. As a measure to strengthen our approach, in FY2024 we created FP&A office as a specialized department for FP&A functions. By analyzing and providing recommendations on the management and financial conditions of each business, this office will employ a coordinated approach to improving results in each business and support the achievement of management targets.
Also, we will lend our ears to the opinions of capital market participants and execute an appropriate capital policy to maximize corporate value. I view all of the challenges the Group faces, whether financial or non-financial, to be my own responsibility and I remain committed to contributing to the further growth of the Group.
Last fiscal year, the Group was responsible for causing a major incident, mainly in the Domestic P&C Insurance Business, which led to the manifestation of various issues. In formulating the new Mid-Term Management Plan, we first took into account these circumstances and challenges, and reiterated our strong focus on customers, shareholders, employees, the community, and various other stakeholders. We then had the Domestic P&C Insurance Business revise its business model to prioritize the regaining of trust and the building of resilience. With the Overseas Insurance and Reinsurance Business driving Group growth in the interim, we developed a three-year roadmap for the Group that involves generating future growth through the wellbeing business.
Here I would like to explain our newly formulated Mid-Term Management Plan, focusing primarily on the finance strategy.
*1 IFRS basis; adjusted consolidated ROE excludes OCI
Review of numerical management targets in the previous Mid-Term Management Plan
First, I would like to review the previous plan, which serves as the starting point for the new Mid-Term Management Plan. During the previous plan, which kicked off in FY2021, as I mentioned above, management was rocked by the major misconduct in Japan in FY2023, the final year of the plan. Still, Group earnings were brisk, driven by the performance of the Overseas Insurance and Reinsurance Business, and even though we fell slightly short of our initial target for adjusted consolidated profit of ¥300 billion, the result of ¥291 billion yen marked a new record high.
In addition, adjusted consolidated ROE came to 9.2%, but considering the impact of financial market fluctuations in the previous fiscal year, this result was effectively 10.1%, meaning that capital efficiency reached our target level of 10% in the previous plan.
From a finance strategy perspective, we focused on reducing risks and reallocating the capital generated to growth areas. We also worked on extending attractive shareholder returns while maintaining a balance with growth investments.
We reduced risks in areas with low capital efficiency in Japan by more than we planned, mainly in terms of strategic stock holdings risks and interest rate risks. The capital generated from these risk reductions was effectively utilized across business domains to support high growth through the circulation of capital. More specifically, we transferred ¥200 billion in capital from the Domestic P&C Insurance Business to the Overseas Insurance and Reinsurance Business. This, along with the expansion of globally diversified investments through overseas credit investments, boosted profit by more than ¥15 billion. We also completed the acquisition of ND Software, a leading provider of nursing care systems, for the purpose of strengthening the foundation of our nursing care business.
As for shareholder returns, we steadily increased dividends in line with profit growth and flexibly carried out share buybacks, taking into account capital efficiency and other factors. During the previous Mid-Term Management Plan, dividends per share grew at an annualized rate of 21%, marking 10 consecutive years of dividend hikes. Moreover, as a result of acquiring treasury shares worth a total ¥180 billion, the adjusted EPS growth rate during the period of the previous plan was an annualized 16%, outpacing growth in adjusted consolidated profit.
By virtue of steady profit growth, improved capital efficiency, and enhanced shareholder returns owing to measures implemented during the previous plan, our valuation has significantly improved. The share price has risen sharply, reaching a market cap of ¥3.0 trillion, and is trading at a P/B ratio above 1.0x (J-GAAP basis). Going forward, by implementing the initiatives of the new Mid-Term Management Plan, we will also aim to achieve an adjusted P/B ratio of over 1.0x, which reflects the catastrophic loss reserve and other capital amounts.
Financial targets and strategy of the new Mid-Term Management Plan
As I mentioned earlier, the Group numerical management targets in the new Mid-Term Management Plan are to raise adjusted consolidated ROE to 13%–15% by FY2026, the final year of the plan, and to achieve an adjusted EPS growth rate of over 12% over the plan’s three-year period. These targets are based on International Financial Reporting Standards (IFRS). We are currently making preparations for the application of IFRS, starting with our end-FY2024 Annual Securities Report.
Now, I would like to discuss the details of our finance strategy for the new Mid-Term Management Plan.
Evolution of capital circulation management
The finance strategy of the new Mid-Term Management Plan calls for the evolution of “capital circulation management.” Capital circulation management, which is focused on improving capital efficiency, is a concept already established among leading European insurance peers. Simply put, it involves reallocating capital and funds from unprofitable areas to profitable ones to generate returns. A portion of these returns is then distributed to shareholders, while the remainder is reinvested to further generate high-quality profits, thereby setting in motion a virtuous cycle.
In capital circulation management, the holding company collects the profits generated by each business, aggregates this capital, and uses it for investments that contribute to the Group’s numerical management targets of adjusted consolidated ROE and adjusted EPS growth, as well as for extending attractive shareholder returns. Also, the holding company is responsible for reallocating capital to each business and monitoring financial results. I should also mention that in the new plan, we have established a policy to strengthen the remittance of capital and funds from each business to the holding company. In principle, we have adopted the approach of aggregating 100% of the annual adjusted profits at the holding company.
In each line of business, business operations are managed based on the capital that has been allocated. In particular, each business is responsible for taking risks that maximize capital efficiency and for steadily achieving ROE and other business-specific KPIs, thereby contributing to the achievement of the Group’s numerical management targets.
It should also be noted that KPIs include those that are directly linked to financial targets and those geared towards strengthening the business foundation. In the new Mid-Term Management Plan, significant emphasis will be placed on the latter as well.
In addition, based on the ROE target that we have set our sights on in the new plan, we have lowered the upper limit of the target range for the economic solvency ratio (ESR)—a measure of our capital adequacy—by 20 percentage points to 250%. With a capital policy that balances growth investments and shareholder returns, we will make sure we achieve the Group’s numerical management targets of adjusted consolidated ROE and adjusted EPS growth.
Next, I would like to touch upon the key points of capital circulation management.
Risk reduction and control
The primary focus of risk reduction in the new Mid-Term Management Plan is Japanese stocks. In February 2024, we announced the goal of reducing the balance of our strategic stock holdings to zero by the end of FY2030. In light of our discussions with issuers and other factors, we sought to reduce our amount of strategic stock holdings by at least ¥200 billion in FY2024, nearly three times the amount in the previous year. And for the period of the new Mid-Term Management Plan, our minimum reduction amount will be ¥600 billion. This minimum target has been set after considering mainly the timeline through to the end of FY2030, changes in the external environment surrounding industry strategic stock holdings, the balance with investment opportunities, and capital efficiency. However, given recent developments, including moves by issuers to accelerate liquidity, we will look to further step up the pace of our reductions in the run up to FY2030 and make preparations for investment opportunities.
On top of this, we will beef up our management of natural disaster risks in Japan and press ahead with plans to curtail unprofitable insurance portfolios.
Risk taking
We will allocate the capital strengthened through the reduction of strategic stock holdings to organic growth and M&As.
Also, in order to achieve the Group’s vision, we have established a risk appetite statement that clearly defines the risks we are willing to take and those we wish to avoid, from both quantitative and qualitative perspectives. We will therefore conduct disciplined risk taking.
Our exact approach to risk taking in the new Mid-Term Management Plan will include expanding our insurance underwriting risk exposure in high-margin segments, increasing credit investments as part of asset management risk taking, and leveraging risks for M&As and strengthening our business foundation.
As for M&As, we will adopt a stronger investment appetite than in the previous plan to prepare for a world in which we have reduced our strategic stock holdings to zero. In terms of investment targets, our policy will be to actively invest in areas that help us increase resilience and connect with customers and deliver connected services—the key objectives of the new Mid-Term Management Plan.
In the area of increase resilience, we will execute growth investments cautiously and dynamically, focusing on overseas insurance M&As, including large-scale deals, to scale up profits, improve ROE, and achieve geographical and risk diversification. And in the area of connecting with customers and delivering connected services, we will keep in mind M&As in the wellbeing business, contribute to sustained growth of the Group, focus on investment areas in which the SOMPO strengths can be leveraged, and expand our product and service platform.
M&A is not an end in itself but one of the means to improve capital efficiency. Therefore, in light of the trends in our market valuation, we will also turn our attention to investments that contribute to organic growth, particularly in the overseas insurance sector. Of course, not only investments, but business withdrawals will also be decided on with a disciplined approach.
Also, investments in human resources—indispensable to the execution of our Group strategy—have been positioned as one of the centerpieces of the Mid-Term Management Plan. Furthermore, we will also make solid investments in data and digital technologies that contribute to innovation and productivity improvements.
Asset management strategy
The weighting of asset management income as a percentage of the Group’s adjusted consolidated profit has been increasing year by year. In addition, asset management income has continued to steadily increase, in line with growth in overseas operations that have benefited from high interest rates. Compared to insurance underwriting, where profitability and profit stability have been declining due to the frequent occurrence of natural disasters and inflation in recent years, asset management as a foundation to support the Group’s adjusted consolidated profit level is growing increasingly important.
In the new Mid-Term Management Plan, while we will continue to appropriately diversify our investments with consideration for liabilities and liquidity, I believe it is important that we manage our asset management portfolio in preparation for the financial market volatility that is expected to arise during the transition to a “world with interest rates.” We will continue to prioritize the quality of our portfolio by maintaining a focus on safe investments while further advancing the portfolio diversification efforts we have pursued so far, such as the strengthening of overseas credit investments to enhance risk-return. In doing so, we will aim to improve the risk-return profile of our asset management portfolio, profitability, and increase resilience. As a result, we aim to achieve an annual growth rate of more than 10% in Group asset management income by FY2026, the final year of the new Mid-Term Management Plan.
During the period of the plan, our policy will be to further strengthen the integrated management of the Group. By enhancing Group asset management governance and risk management, we will build an efficient management framework in an effort to pursue efficiency, profitability, and resilience in asset management.
Shareholder returns policy
In principle, all of the profits generated by each business as a result of risk reduction or risk taking will be consolidated and managed by the holding company. Then, a portion of the consolidated capital will be returned to shareholders. We aim to provide shareholder returns in line with a basic policy of continuously increasing dividends through sustainable profit growth while taking both our financial soundness and the prevailing business environment into consideration. We also maintain the option of flexibly executing share buybacks depending on the share price and capital availability.
In the new Mid-Term Management Plan, 50% of adjusted consolidated profit will be paid as a basic return, and we will look to increase the total payout amount as profits grow by adding share buybacks to the total dividend amount. From FY2025, when we plan to adopt IFRS, the basic return will be based on 50% of the average adjusted consolidated profit from the last three years in order to enhance the stability and predictability of shareholder returns. In addition, we will basically aim to raise dividends in line with profit growth over the medium term and increase the ratio of dividends to the basic return.
In addition to the basic return, we will, in principle, pay an additional return of 50% of the after-tax gains on the sale of strategic stock holdings. Also, if the upper limit of the ESR target range is constantly exceeded, we will consider adjusting the capital level based on risk and capital conditions, trends in earnings, and the financial market environment, in an effort to further enhance the appeal of shareholder returns.
