Thank you very much for joining us today for the telephone conference of Sompo Holdings. I am Kuroda from IR. I am back in IR after three years and look forward to dialogues with you. Nice to see you again. I and Mr. Kamei, the IR manager, are going to explain FY 2021 results and the guidance for FY 2022, which we announced today, mainly in terms of numbers, based on the presentation material for about 20 minutes, and then take questions from you. With regards to the business strategies, Group CEO, COO, and Senior Management will explain in the IR meeting to be held next week. I would like to get right into the explanation. However, I may mention about the future outlook, which is based upon the current projections, so please be advised that the actual results may be different from the outlook.
Please turn to page two. This page shows the highlights of FY 2021 results. Consolidated net income increased by JPY 82.3 billion- JPY 224.8 billion. Adjusted consolidated profit was JPY 261.3 billion, the record high for two consecutive years, mainly driven by profit growth of Sompo Japan and SI Commercial P&C. In our guidance for FY 2022, we assume absence of some of the COVID-19 impact in Sompo Japan, while SI Commercial will achieve increase in net written premium on the back of rate increase. As a result, we are guiding Adjusted consolidated profit of JPY 260 billion, which is the same level as the previous year.
Net income is forecasted to go down to JPY 145 billion, which is mainly due to the reactionary decline from capital gains we recognized from the sale of Palantir stock held by the holdings last year. Let me add some comments on the shareholders' return we announced today. As you can see in the public release, we decided on the buyback of JPY 58 billion. This will make the total shareholders' return ratio for FY 2021 58%. In addition, we forecast the dividend for FY 2022 to be increased by JPY 50 per share to JPY 260 per share on the back of the progress of the group's business performance. This forecast will be the increase in dividends for nine consecutive years. Now I'm going to hand it over to Mr.
Kamei for the detailed explanation since he has, the better voice than mine.
Hi, everyone. I am Kamei. Please turn to page four. This page shows the overview of FY 2021 results. I am going over the main points on the next page onwards. Please turn to page five. This page shows the underwriting profit of Sompo Japan. Core underwriting profit increased by JPY 17.7 billion- JPY 120.2 billion, reflecting the decrease of natural catastrophe impact in Japan, offsetting the negative impact of JPY 10 billion from the absence of loss ratio improvement due to COVID-19. On the other hand, underwriting profit declined by JPY 3.3 billion due to the increase in catastrophic loss reserve. Please turn to page six. This page is on the investment profit.
Investment profit increased by JPY 16.8 billion, mainly driven by higher net interest and the dividend income from distributions from funds and so on. Please turn to page seven. Consolidated ordinary profit. Other than underwriting profit and investment profit of Sompo Japan, which I have already explained, mainly due to top line growth of Sompo International and absence of the COVID-19 impact, as well as the impact from partial sale of stocks held at the holdings, consolidated ordinary profit increased by JPY 100.4 billion- JPY 315.5 billion. For your information, figures for overseas group companies include noise arising from accounting for changes in unrealized profits and losses of assets under Sompo International local accounting standard. Please refer to page eight for consolidated net income later on. Please turn to page nine.
Let me next explain main points of the business forecast for FY 2022. We forecast consolidated ordinary profit of JPY 235 billion, JPY 80.5 billion lower year- on- year due to the absence of gain from the sale of stocks held at the holdings and so on. Consolidated net income is forecasted to be JPY 160 billion, JPY 64.8 billion lower year on year, while we forecast Adjusted consolidated profit to remain the same level as FY 2021 at JPY 260 billion. I am going to explain in more details about the main points of business forecast for FY 2022 on the following page. Please turn to page 10. These are the main points of the business forecast for FY 2022.
Sompo Japan expects underwriting profit to increase by JPY 15.9 billion as improved profitability in Fire and Allied Lines, offsetting the absence of COVID-19 impact of loss ratio improvement.
Overseas insurance expects Adjusted profit to increase by JPY 38.1 billion, with absence of one-time loss factors around JPY 11 billion seen in Sompo Seguros, in addition to higher net premiums earned in SI Commercial. Himawari Life and Sompo Care expect steady growth. From page 11 to page 13, we are showing the breakdown of consolidated ordinary profit, historical progress rates over the past five years, and the numerical management targets, etc. Please take a look at them later on. This completes my explanation on the consolidated results and guidance. Next, we'd like to move on to the explanation of domestic P&C insurance business. Please turn to page 15. This is the overview of FY 2021 for Sompo Japan. I will explain each item on the following pages. Please turn to page 16. Net premiums written.
Net premiums written excluding CALI and household earthquake increased by JPY 38.2 billion. Main drivers were revenue increase by 6.9% year-on-year in Fire and Allied Lines due to rate optimization and strong performance of casualty and other lines up 4.2% year-on-year, centering on the core product Business Master Plus. Our main voluntary automobile line has seen the decline in revenue in fleet policies, which was offset by rate optimization, which resulted in almost the same level of the top line year-on-year. Please turn to page 17. This is the net loss ratio on earned incurred basis. Despite the increase in the automobile loss rates stemming from the moderating impact of COVID-19, domestic net loss came down, resulting in an improvement of loss ratio by 0.8 percentage point.
For FY 2022, although we expect further increase in traffic by revising the rate for Fire and Allied Lines and taking other measures, we expect the loss ratio to be similar to that of FY 2021. Next page is the loss ratio on written premium basis, so please take a look at your convenience. Please turn to page 19. This page illustrates the net expense ratio, and for FY2021 it was almost flat over the previous year at 34.5%. When adjusting for the depreciation cost associated with the cutover of the new enterprise system, net expense ratio and company expense ratio both improved by 0.5 percentage point year-on-year. For FY 2022, we expect further improvement on the expense ratio to 34.4%. Please refer to page 20 for combined ratio at your convenience. Now please proceed to page 21.
This is the investment profit and loss. The performance for FY 2021 was already explained using page six. The investment profit for FY 2022 is projected to be JPY 126.7 billion, reflecting less gains on sales of securities and JPY 11 billion increase in hedging cost, among other factors. During FY 2021, we reduced our strategic stock holdings by JPY 50.1 billion on market value basis, achieving our target in the plan. Please refer to the next page on the details of interest and dividend income as well as gains on sales of securities. Page 23, please. This slide is a business forecast for Sompo Japan. Page 24 provides indicators for the automobile insurance business, and page 25 covers indicators for the fire and other casualty insurance business. Please turn to page 26. Let me offer some additional comments on domestic natural catastrophe situation.
For FY 2021, net incurred loss for Nat cat in Japan was JPY 74.4 billion. For FY22, given the recent trend with the natural catastrophes, we are projecting the loss at JPY 83 billion. Next page is reference data on funds and reserves. Please have a look as needed. That is all for the domestic insurance business. Now let me switch gears to present the overseas insurance business on page 29. This is a performance overview of the overseas insurance business. The Adjusted profit for FY 2021 benefited from sales growth driven by rate increase at SI Commercial and consolidation of Diversified Crop Insurance Services, as well as the absence of the COVID-19 impact, which was observed in the previous fiscal year. The positive impact in total was roughly JPY 14 billion, and the Adjusted profit grew by JPY 31.8 billion to JPY 61.8 billion.
For FY 2022, we project the Adjusted profit to grow by JPY 38.1 billion to JPY 100 billion. SI Commercial will enjoy an increase in the net premium earned, and one-off factors from last year, such as the drawdown of DTA at Sompo Seguros will be absent, and those will be the main factors for profit growth. Page 30 illustrates the year-on-year changes behind the Adjusted profit, and page 31 outlines the performance highlights by regions. Please refer to them as needed. Please turn to page 32. These are some additional information on the performance of SI Commercial. All the numbers on this slide are indicated in U.S. dollars. The Adjusted profit for FY 2021 achieved a substantial growth of $380 million due to top-line expansion driven by rate increase and increasing retention ratio, as well as the absence of the COVID-19 related losses.
For FY 2022, Adjusted profit is expected to grow due to top line growth, driven by further rate improvement and net premiums written from last fiscal year turning into net premiums earned, and combined ratio improving by 3.2 percentage points. Page 33 indicates the loss ratio and expense ratio for SI Commercial, and page 34 shows the financial data. So please refer to them as needed. That is all for the overseas insurance business. Now let's move on to the domestic life business on page 36. Here's a snapshot for Sompo Himawari Life. The Adjusted profit for FY 2021 was JPY 33.6 billion, reflecting growth of the protection type in-force policies.
The FY 2021 annualized new premium increased by JPY 5 billion, led by strong sales of Insurhealth products, such as the new cancer policy launched last October, which reached the sales of 130,000 policies. Page 37 illustrates the changes behind the net income for Sompo Himawari Life, and pages 38-41 offer referential data on Sompo Himawari Life's business. Please refer to them later at your convenient time. That is all for domestic life business. Now let me move on to the nursing care and seniors business on page 43. This is our nursing care and seniors business. FY 2021 Adjusted profit for Sompo Care was down by JPY 1.4 billion- JPY 5.9 billion due to the absence of tax benefit enjoyed in the previous year, an increase in COVID-19 related costs, among others.
For FY 2022, we project sales to grow by JPY 14.9 billion, thanks to the consolidation of Nexus Care and occupancy rate improvement of 1.8 percentage point. Please refer to page 44 for the trend on occupancy rate. That is all for the nursing care and seniors business. Last but not least, I'd like to move on to the topic of ERM and asset management on page 46. This is the ESR status. In addition to the rising domestic interest rate, the build-up of profit and reduction of strategic stock holdings and interest risk resulted in ESR standing of 246% at the end of March 2022. We continue to see no issue in our financial soundness. Please refer to page 47 for the breakdown of Adjusted capital and risk at your convenient time. Now please turn to page 48.
Last slide from me is the group's asset portfolio. From the next page onwards, information on the asset portfolios of Sompo Japan, SI Commercial, and Himawari Life are shared. Please take a look later. All the companies are managing the portfolio focusing on stability. This will conclude my presentation. Thank you for your attention.
Now we'd like to move to the Q&A session, starting with Mr. Muraki from SMBC Nikko Securities.
Hi, my name is Muraki from SMBC Nikko Securities. I have two questions for the guidance of FY 2022. My first question is on the international overseas business, where you expect close to JPY 100 billion profit. On page 34, you are explaining assumptions for SI Commercial. For this fiscal year, you are assuming extremely low combined ratio, which is 90.7%, quite low combined ratio being assumed in the guidance for the international business, which is lower compared to the industry average. Would you please give me more color on the assumptions behind this low level of combined ratio assumption? Specifically, what factors and in what magnitude are you assuming in terms of Russia-Ukraine war and impact on inflation?
How large is the impact from inflation are you including in this guidance? Would you please give us the sense of the probability of you achieving this combined ratio level?
Thank you. Mr. Muraki, thank you so much for your question. Kuroda speaking. With regards to the combined ratio improvement and assumption for SI Commercial, as you pointed out correctly, in 2021, combined ratio was 93.9%, but we are assuming it to improve to 90.7%, 3.2 points improvement for FY 2022. Here are the assumptions. The impact from Ukraine, Russia impact, we assume almost no impact on the top line of SI.
With regards to the loss incurred side, in principle, we do not anticipate any impact, but there's a certain exposure to underwriting in that region in terms of the Trade Credit and also Aviation Insurance. For the Aviation Insurance policies, this region is not our forecast geographic region, so impact is close to zero. With regards to the Trade Credit, there are certain exposure in that region, but as of the end of Q1, we reviewed policies in that region. It turned out that if you put the provisioning to the reserve of about JPY 1 billion-JPY 2 billion, it will be enough. That's reflected in Q1. Those are the assumptions that we have included in our guidance.
With regards to the impact from inflation, to some extent, we are assuming an impact from inflation in terms of the loss incurred, personnel cost, and the non-personnel cost. In terms of the absolute amount, it's going to be around a few billion JPY, which is assumed as an assumption in the guidance. Including impact from the rate increases that we have done in the past and the price increases that we are planning to do in this fiscal year, there's a significant contribution for the improvement of the combined ratio. That's a big factor. The majority of the improvement comes from simply the rate increase, therefore premium earned increase. Expense ratio is well-controlled. I think there's a good possibility of achieving that level.
For the rate increases that we have done in the past, simply we can just reflect that in the premiums earned. That's almost for sure. For this fiscal year, actually, in the last fiscal year, rate increase on the gross basis was 16.2%. In this fiscal year, we are assuming about 8% rate increase in this fiscal year. On top of that, if we see more impact from inflation, then we are going to include that in the magnitude of rate increase that we are going to do in this fiscal year. This 8% rate increase assumption is somewhat conservative. That is our view as of now.
When Q1 ends, actually, when Q1 ended, we included the situation as of the end of Q1, not the last minute the end of quarter March. SI has succeeded in rate increase of about 10% or more, so 8% price increase being assumed can offset to some extent inflation impact.
Understood. Thank you. With regards to the rate increase that you have just explained, I think this is the impact not in this fiscal year, but from the next fiscal year onward. Impacts from war and inflation may make the hardening cycle linger for a while. There is such a view. What is your company's view on those factors which may contribute positively to the length of the hardening cycle?
Yes. Mr.
Muraki, from your perspective, those factors will contribute positively to the hardening cycle. However, we don't have the specific amount of impact right now. We have to really see how the summer hurricane season develops, and we have to really see the net cat trend. In 2021, there was a certain level of cat loss on the global basis, and the factors that you have mentioned may surface, then those are the items which may be positive on the rate increase in this fiscal year.
Thank you so much. My second question is on the domestic P&C business, in particular, Fire and Allied Lines. I'm on page 25. Regular loss ratio, 46.7%. It has declined to 46.7%. There are impacts from rate increases, and you are taking various actions.
I'd like to know the insurance, reinsurance cost situation. Would you please give us more color on assumptions behind the loss ratio assumption? In addition, according to this guidance, how large is the underwriting loss are you assuming in this fiscal year for the Fire and Allied Lines? And when do you think you can turn it around into profitability?
Thank you so much, Mr. Muraki. In the Fire and Allied business line, assumptions behind the loss ratio, as you mentioned correctly, excluding natural catastrophes, we are assuming loss ratio to improve by about 5%, 5 points. The big factor for this improvement is obviously the impact from the rate increase that we did last year and the year before last year. Also, in this fiscal year, we plan to do the price increase.
Although we have not decided officially and finally yet, but as Nikkei newspaper covered, we plan to continue to increase premiums. We assume impact from that. Up until last year, we have certain level of ordinary loss, such as a thunder, lightning stroke, or, probably it's due to the teleworking, we saw the impact from the loss from breakage and contamination or dirt damage. We are not having the excessively optimistic assumption behind this loss ratio level. The base for the loss ratio improvement is the growth in the earned premiums, and we are assuming about the same level of loss incurred as the level of last fiscal year. With regards to the reinsurance cost, in this fiscal year, we are projected to be almost flat.
Although, as usual, we cannot give you the details about the reinsurance scheme. Reinsurance scheme has been within the fine-tuning scale, so there's not so much impact from the reinsurance cost variance. Lastly, with regards to the underwriting profit, in this guidance, in the Fire and Allied business line, we are assuming - JPY 28.1 billion underwriting loss, including positive factors from rate increases that we have done in the past, and we see the impact from the rate increase that we are going to do this year. At the earliest, we think we can turn it into profitability either in 2024 or 2025.
I think, we can turn the business into profitability. Our targeted combined ratio for Fire and Allied Lines is 95%, but we expect, that we make certain improvement in that way.
Understood. Thank you so much.
Mr. Muraki, thank you so much for your questions. The next question is, from Mitsubishi UFJ Morgan Stanley Securities. Ms. Tsujino, please.
Yes, thank you for taking my question. First I want to ask about the overseas business, Sompo International. For some time, you're projecting a combined ratio to come down. I think it's really going to come down. Can you explain the reason why? Is it because of the product mix? Which area do you expect to see an improvement in the loss ratio?
Looking at the natural catastrophe loss, I think, compared to last fiscal year, for the new year, I think, you're projecting a small decline. I'm assuming that the net cat loss expectation is not going to be that big, so can you explain those points?
Yes, thank you for your questions. Regarding the SI combined ratio, as I said earlier, the previous rate hikes are helping to grow the net premiums earned, so those are becoming very effective. In terms of our products, we're seeing an increase in the casualty line and also some specialty policies. For those products, the net premiums earned is steadily growing. They are quite sizable in terms of portion, so that's the main reason contributing to better combined ratio.
For cat losses, for last fiscal year, the net cat loss in the overseas business was JPY 53.9 billion. For this fiscal year for SI, the net cat loss budget is at JPY 64 billion. Basically, this does not imply that we are increasing our cat exposure. But actually, the whole business is growing, so the cat exposure is being reduced. But as a natural consequence of the growth of the overall business, the net cat loss is expected to go up. But despite that, we are projecting this level of combined ratio.
I see. On your reinsurance business, the casualty portion is really increasing in the year that just ended.
That is correct.
So can I ask you what kind of risk you're taking?
It's basically products like the liability insurance you see in Japan. That accounts for most of that risk.
Okay, I hope to get more details later then. You announced a dividend hike of JPY 50. Is it just for this fiscal year, or are you planning to repeat that for next fiscal year?
Well, thank you for that question. Also, I think it's about the shareholder return policy and the dividend hike. For last fiscal year, there were multiple factors, but we believe that our fundamental earnings capability is enhanced, so we wanted to reflect that into our dividend. That's why we increased the amount of the dividend hike to JPY 50. Thereafter, we have not made any decisions, so I cannot say by how much we are going to raise the dividend.
On the basis of that, with our shareholder return policy, as the profit grows, we want to focus on dividend payment. In the current mid-term management plan, we're trying to promote scale and diversification. As the scale grows, we're comfortable in raising the dividend amount, and with more diversification, that will lead to better stability on the profit. Right now, our payout ratio is low 30%. We will be comfortable in raising the payout ratio with more stability in the profit. If the business grows steadily, then we are thinking of that kind of a dividend increase on the horizon.
Okay. Lastly, looking at the domestic Adjusted profit, the projection for this fiscal year is JPY 120 billion, and it will be down by JPY 37.4 billion year-on-year.
Is it because the COVID-19 impact is going to be subsiding, and the losses mainly on the auto policies are going to normalize? Is that the reason? Looking at the Sompo Japan's Adjusted underwriting profit, I take out the cat loss reserve and the incurred net cat losses from the underwriting profit, and the Adjusted underwriting profit is going to be JPY 204.4 billion versus last year's JPY 202 billion, so it's almost flattish. Can you elaborate anything on that point?
Yes, thank you for the question. I think your question is about the profit outlook for the domestic P&C business for FY 2022. Yes, that's correct.
Well, in our projection, like you pointed out, the COVID-19 impact is going to subside, and mainly the auto-related losses are expected to go up. On a profit basis, roughly speaking, we expect a negative impact of JPY 25 billion from that factor. On the other hand, we are also conducting what we call the earnings structure reform. This is mainly going to be focusing on raising the rate for the fire policies. What else is coming down is going to be your question. One is the dividend and interest income from the fund. Last year, the PE funds were doing very well, and I think that's going to normalize this year. That's our projection.
Also, the U.S. rate is increasing, so the hedging cost for Sompo Japan is expected to be JPY 10 billion. That's another negative factor. On the non-personnel expenses, we are investing for business-related initiatives, for instance, to broaden our product offering. Those spending would have an impact on the profit. On the cat loss reserve, we are going to slightly increase the cat loss reserve. The main factors are the items that I mentioned earlier.
I see. Thank you for that answer.
Thank you, Ms. Tsujino.
Next questions are from Mr. Watanabe from Daiwa Securities. Please go ahead.
Hi. My name is Watanabe from Daiwa Securities. I have two questions. My first question is on the impact from foreign exchange. For the year just ended, due to the depreciated yen, what was the negative impact from the variation of loss reserves denominated in foreign currencies? What positive impact are you assuming from the depreciated yen in the current new year?
Mr. Watanabe, thank you so much for your questions. About the loss reserve, we had -JPY 4.9 billion impact in the last fiscal year from the depreciated yen. As we have been explaining from the past, on the asset side, we have assets denominated in foreign currencies. Impact was positive of about JPY 5 billion, offsetting the negative impact all in all.
On the group basis, overseas business performance translated into yen contributed positively to the profit by about JPY 1.7 billion. That's the group FX impact on the group basis. For this fiscal year, new fiscal year, we are assuming a certain level of positive impact from the FX in overseas operations. From overseas operations in this fiscal year, we expect JPY 5 billion impact on the Adjusted profit basis from the exchange rate positive impact.
Thank you so much. My second question is on the material page 32, SI retention policy. If you look at this table, in 2022, you are assuming 68.8% retention ratio. In this fiscal year, you are assuming rate increase of 8% and it's more profitable.
I wonder if there's more upside to this 68.8% retention policy assumption. Is it conservative, or do you think this level of retention is realistic?
Thank you so much for your question. First, as you can see on page 32, this excludes crop insurance. We expect retention ratio excluding crop to be flat. With regards to the crop insurance retention, for the year ended, retention was 61.6%, but now we have better visibility of diversified policies. We'd like to increase the retention to 65%. As you mentioned, Mr. Watanabe, for regular retention, we expect it to be flat excluding crop. In this new Mid-Term Management Plan, in fact, this is a level of retention that we've been targeting at in the Mid-Term Management Plan.
This has a good chance of achieving. For 2022, our assumption for premiums in 2021, this plan was actually made back in November and approved by the company, and then we are disclosing it now. There was some top-line increase in November and December. In that sense, this plan for 2022 may be somewhat conservative from that perspective. Therefore, for now, retention ratio is put as an assumption at the targeted level, but we have rate increases planned. As you asked earlier, looking at the combined ratio by each business line, looking at the profitability, we can adjust and change if needed. If needed, we are going to disclose the reviewed or revised figure if needed after the end of the first half.
Understood. Thank you so much.
Thank you.
Mr. Watanabe, thank you so much for your questions.
Next question is from Mr. Sato for Mizuho Securities.
Thank you. This is Sato from Mizuho. I would like to ask two questions. One is on the results from our fiscal year. Looking at the domestic P&C business, I think you have some upside on the Adjusted profit basis versus the projection from last November, and I think that was quite substantial. I think on pretax basis on the underwriting profit, there was an upside of about JPY 30 billion. Can you give us some breakdown on this upside, and also some background? It seems that the net cat loss was pretty much in line with the budget. For the foreign-denominated exposure or the yen depreciation, I think it was slightly negative on the incurred basis. Also, the normal loss has come down.
I think the business expenses were much lower because in November, I think, it revised up, or it, changed the projection to increase, the expenses. Why did it come down versus November?
Regarding the gap versus November, as you said, we did have substantial upside from domestic P&C business, like you pointed out. The items that you set are the correct ones. For one, we have to talk about the impact of COVID-19 because back then we expected a certain level of economy reopening, and we also thought that the accident rate or the loss would slightly normalize. Also, in a way, the plan may have looked conservative, but that was our projection back then. We had the Omicron variant, and the reopening of the economy was not active as expected.
The loss came down and it turned out to be a higher profit for the full year. On the non-personnel expenses, we did expect more activity after Omicron. Given the circumstances, we did have some conservative projections. Regarding the impact on the underwriting profit, the loss incurred in business expenses, how were those impacting the profit? On after-tax basis, the positive impact was about JPY 20- JPY 23 billion versus the projection from November. Another factor is on the investment side. You know, when we announced our first half results, we also revised up this projection. Last fiscal year, the PE funds were very active. There are some offsets, but we also had some positive factor coming from the currency.
On the investment side, the upside was about JPY 11 billion-JPY 12 billion, and those are the main factors impacting the profit.
I see. Thank you for clarifying that. My second question is on SI again. Combined ratio of 90.7% is very low, as we discussed earlier. I think the expense ratio is also quite low. I believe in your Mid-Term Management Plan, you did not expect expense ratio to come down by that much, so this projection is very low. What is the background to that? Also another question related to SI is the following. With the conflict in Russia and Ukraine, the commodity prices and the agro crop prices are going up.
At the SI, the rate renewal may not have fully reflected in that price hike, but with the crop prices going up, is that baked into your current business plan? Those are my questions.
Yes. Thank you, Mr. Sato, for your questions. Regarding the expense, we have made tremendous efforts, including proactive initiatives. In reality, we are truly containing our expenses. Personnel expenses were quite contained and suppressed. For FY 2022, the cost will be somewhat impacted by inflation, but we expect the personnel expenses to go up in FY 2022. To date, the expense ratio had been quite high, and we have been making efforts to reduce that. Last fiscal year, we were able to enjoy the fruits of those initiatives.
Also regarding the crop prices, and this will be positive for our top line for the crop insurance business. The current business plan was put together at the end of last year. Also, the crop price of the year-end level is somewhat reflected in the plan. Also, in reality, I think around end of February, there were renewals of the rates. As the current business are trending upward compared to the plan back in the year-end. If the crop prices have been increasing as you said, then that would have some upside. With that in mind, we will consider our retention strategies.
Thank you.
Mr. Sato, thank you for your questions.
Next, we have Mr. Otsuka from J.P. Morgan Securities. Please go ahead.
Hi, my name is Otsuka from J.P. Morgan Securities. Thank you. At first, I'd like to confirm something about the buyback that you have just announced this time, which is JPY 58 billion. Am I right in understanding that this is the base return? In the first half, you did the capital adjustment or additional return which was JPY 20 billion. This portion of the additional return of the first half is not included in JPY 58 billion. Am I right?
Mr. Otsuka, thank you so much for your question. You are right. Your understanding is correct. The first half, JPY 20 billion, was the complete additional return and this buyback is the base return.
Understood.
Probably, the management is going to mention next week in the IR meeting, but does that mean that conditions were not met for the additional buyback this time?
Actually, we don't have any strict rule digitally or strictly. We make always a comprehensive decision considering various factors. For the additional return, each quarter, we discuss thoroughly and then the board discusses in each quarter. We look at the appetite for growth investments. This time, since we did the additional return last time, we have not disclosed additional return this time. But depending upon the situation, we are going to continue the additional return possibilities always in the future.
Understood. Thank you. My second question is just to confirm the detailed items on page 21.
Specifically, your plan for this fiscal year, gains and losses on derivatives, which is expected to deteriorate by about JPY 10 billion. Is that due to the foreign exchange hedge cost? On the same page, the profit and loss from sale of stocks, are you expected to go down? That does that mean you expect less distribution from funds? Am I right? Also, additional question on page 15. Looking at Sompo Japan plan for this fiscal year, there are many extraordinary items assumed in the guidance. Would you please go over that?
Thank you so much for your questions. First, with regards to your first question on page 21, gains and losses on derivatives. The hedge cost of Sompo Japan is expected to go up by about JPY 11 billion. That's almost fully explained by the hedge cost increase of Sompo Japan.
Your next question was on the capital gain. In total, it's JPY 38.1 billion, and we are assuming JPY 26.6 billion for Sompo Japan, and that's on the stocks sale. It's related to unrealized gains of each name. So that's one reason. Also on the bond side, in the various operation, we are assuming certain level of capital loss from sale of bonds. Also, extraordinary items of Sompo Japan, which are on page 15. JPY 47.8 billion extraordinary items. We expect a dividend from SI of JPY 49.1 billion, and that's being eliminated.
Oh, I see. So on the consolidated basis, the size of this extraordinary item is not so large on the consolidated basis. Am I right?
That's right.
Thank you so much.
Mr. Otsuka, thank you so much for your questions.
Next question is from Mr. Sakamaki from Nomura Securities.
This is Sakamaki from Nomura Securities. I have one question. Earlier, you talked about the dividend policy and how we are raising dividend in terms of absolute amount. But in terms of total return rate, how would the dividend account for vis-à-vis the total return rate? And what is the pace of raising the payout ratio going forward? You may be explaining that next week, but, or your thought around dividend?
Thank you, Mr. Sakamaki, for your question. Next week, we will have our CFO and also other members of the management team to directly communicate with you. We have not come to a conclusion of what kind of target we would like to have for dividend payout. We did discuss that as a topic, but as I said earlier, as the stability of the profit goes up, we believe we also need to raise the payout ratio. Steady payout ratio, somewhere between 30%- 40% is something that we would like to achieve. Close to 40% is something that we would like to consider. At this point, nothing has been finalized, but that is the spirit of what we are considering for dividend policy.
Thank you. That's very clear.
Thank you, Mr. Sakamaki, for your question.
Next questions are from Mr. Sasaki from BofA Securities. Please go ahead.
Hi, Sasaki speaking from BofA Securities. I have two questions. My first question is on assumptions around our voluntary automobile business line for this fiscal year. Oppositely from last year, due to the reopening, and also there may be some impacts from, travel-related promotion campaigns. What assumptions, are you including, in the guidance for this fiscal year? In Japan, there may be some inflation of costs of components of automobiles, and the labor cost of repair body shops, may be increasing. I think the level of inflation, has, come to the level that cannot be ignored. Are you assuming all of those, including reopening impact?
Thank you so much. Let me explain the assumptions. First, the cost per unit increase.
Probably this is an inflation impact you can call, but at the moment, we see the cost per unit, which is increasing by about 1%-2%, in Japan at the moment. This cost increase per unit is being assumed as an assumption in the guidance. You can calculate 1%-2% increase, on the magnitude of total business size of JPY 1 trillion. Relating to reopening, there are different views in terms of the impact on reopening. It depends on, how completely we can get out of the COVID situation. The decline in the loss incurred versus 2019 is about 8%. 8% less loss incurred versus 2019. For the year just begun, what is our assumption for the loss incurred?
Roughly speaking, we are assuming loss incurred to be less by 3% versus 2019. My answer to your question, Mr. Sasaki, we expect traffic to go back to a good extent, but not completely. Well, we have our own internal logic. Basically, we think our leisure demand and consumer traffic will recover to a good extent in this fiscal year. And that's being assumed as an assumption. On the commercial side, because of the work style reform, such as work style reform that we are doing for ourselves and promotion of teleworking, people commute less to work and looking at the car traffic. Car traffic may not come back to the previous level.
Referring to reports of various think tank organizations, there may be some business impact on the loss of voluntary auto. Less by 3% in terms of the loss incurred versus 2019 is perceived to be new normal.
Understood. My second question is on the international business. Since January, capital markets have been wildly volatile. Rate hikes, exchange rates, credit shifts. In your current guidance, what other assumptions of those have you incorporated? You said that you made this guidance back in November, but this market moves after January. To what extent have you incorporated in your guidance?
Thank you so much for that question. In terms of the interest rates, SI investment and also falling bonds of Sompo Japan, duration is not so long.
There's not so much strong interest rate impact that we have incorporated. Our assumption rate of FX is the exchange rate prevailing at the end of March. Those are the assumptions that we have incorporated in our guidance.
Thank you so much.
Thank you. Mr. Sasaki, thank you so much for your questions.
Next question is from Mr. Majima from Tokai Tokyo Research Center.
Yes, this is Majima speaking. Can you hear me?
Yes.
I have one question. Related to the Russia-Ukraine exposure, and the projection for claims payment, what happens if things gets out of control? For example, the Russian government confiscates all of the asset of your customer that resides in Russia. As it may be perceived as 100% loss, and if you have to pay for that as a insurance claim, that would not have any huge impact because the size of the asset in Russia is not that big. Is that the right understanding?
Well, at this point, maybe the best way to answer your question is that though we don't have that kind of projection at this point. Even if something like you said happens, all of our exposures will not be wiped out. Even under our worst-case scenario, the impact is not expected to be huge.
I see. Banks offer exposure to Russia. Do you share such kind of data?
Well, overall, the exposure will be few tens of billions of JPY, but lower than JPY 50 billion.
Would they all lead to losses?
At this point, our projection is that it's not going to be huge.
Thank you.
Thank you, Mr. Majima. Next is from Mr. Okada from UBS Securities.
Thank you. This is Okada from UBS. I have one question. I'm looking at page 20 of your presentation, the combined ratio on a earned incurred basis. On this fiscal year, you're projecting 93.7%. In the Mid-Term Management Plan, the target is 91.7%. Vis-à-vis this target, there is still gap. How do you assess this 93.7% combined ratio for this year vis-à-vis the target under the Mid-Term Management Plan?
Yes, thank you for that question. In that sense, there is still some gap vis-à-vis the Mid-Term Plan target. Right now, we are trying to conduct what we call the Earnings Structure Reform. We are working to improve the profitability. Also on the underwriting side, and on the claims payment side, we are trying to leverage on digital technology. We are trying many things on AI, and that's being quite effective. In addition to those two major pillars, we also would like to further reduce the cost by D X so that we can be closer to our target of a combined ratio. We are making all of the effort as a company.
Thank you. That's very clear.
With that, we are close to the end of the call. If you have any further questions, please reach to our IR team. With that, we would like to end the earnings call. Thank you very much for your participation today.