Hello. I am Okumura, Group CEO. Thank you very much for joining us today. First of all, last fiscal year, the series of problems emerged, and twice in the year, though we received the business improvement orders. I have to extend my apology for causing the inconveniences for the stakeholders. Our company in Sompo Japan, from the end of February to March, we presented the plan for business improvement to the FSA. It is not just the recurrence preventive measures or plan. It is to revamp our corporate culture, we are going to work on those actions with unwavering resolve. Today, we are going to present new mid-term management plan. By implementing this plan in a speedy manner, we would like to regain trust from the stakeholders. Without further ado, I would like to explain about new mid-term management plan.
Please look at the executive summary. I would like to start by reflecting the previous MTMP. Based on that, we are going to move on to new plan. What kind of process we went through to develop this new plan, I would like to touch upon that as well. In the previous plan, we worked on scale and profit, we worked on improvement of resilience. For the health and nursing care, we worked on new challenges. As to adjusted profit, we hit the record high. Adjusted ROE, we reached our target of 10%. The share prices went up. PBR on a JGAAP basis exceeded one. Meanwhile, when the environment is changing so significantly, we could not adapt speedy manner to those changes, we were forced to change our business model, and that is our fiscal year 2023.
The executives of the group got together many times to discuss our market, our future going forward, and what should be our plan and the targets. This is what we have been working on, namely, connect with customers and deliver connected services, and for health, wellbeing, and financial protection for the future. In that context, for the coming three years, we have two keywords. Vision. To realize this vision, we are going to increase resilience furthermore, and connect with customers and deliver connected services. With these two keywords, we are going to work on this new MTMP. There are three core businesses, domestic P&C, Sompo Japan, for example. The new Sompo Japan. It is not just resolved to create new Sompo Japan, but we are going to recreate Sompo Japan for the coming three years.
For overseas insurance and reinsurance, over the past 10 years, it turned out to be the growth driver for the group. The business expanded. For the coming three years, we are going to work on global geographical expansion and the underwriting, the stronger underwriting, and increase the AUM. The business is going to drive the whole group. As to wellbeing, as we are going to touch upon later on, by business, like Himawari Life, and healthcare services, and nursing care services. Rather than that, we are going to work on the people, and we are going to accompany our customers through their lifetimes to solve their problems in those areas. As to financial strategy, we are going to strengthen the management with circulated capital. In providing services, it is all by the human beings.
We are going to make drastic investment in the human resources. As to strategic shareholding, as we discussed in the IR meeting in February, we are going to make it zero by 2030. The milestones are for the coming three years, we are going to reduce it by JPY 600 billion. That is our commitment. At the same time, we are going to accelerate communication with the issuers to reduce risks. For shareholders' return, the sustainable profit growth is one thing, and at the same time, the 50% of the other sales gains will be used for additional payout. Next, the numerical targets, mainly two for FY 2026. ROE will be raised to 13%-15%. During the new MTMP period, the EPS growth, the CAGR, above 12%. I'd like to give you more details as to achievements and the challenges of the previous plan.
As you can see here on this slide, in the previous plan, we worked on the strengthening the resilience, the profitability improvement, and risk diversification. We worked on strengthening our resilience, especially in the previous MTMP. We expanded the overseas business and improved the profitability. Through that effort, I believe that we have come to the next step as a group company. For domestic P&C, we were faced with various issues and problems. Meanwhile, as to the improvement of the fire and allied line, we were steadily improving the profitability there. On the uniqueness side, Insurhealth has been the focus to combine the insurance and the health-related services. We are going to continue to do that, support our customers. The nursing care, we are the largest nursing care operator in Japan, and we have been working on improving the quality.
As a result, Himawari Life, we could expand customer bases and for nursing care, in order to maintain the sustainable nursing care, we have been working on future nursing care. Later, we are going to give more details about the shareholder return, market risk reduction, gross investment execution. All the concerned people, including myself, there are lots of things that we need to reflect upon as a group. Through the implementation of recurrence prevention measures, our first priority is to regain trust. Not only that, because the preventive measures alone would not be sufficient. To make Sompo Japan reborn, we need SJ-R initiatives. It is restart and reborn, revolution about Sompo Japan, it is about the corporate culture transformation, and the revamping of business model. We are going to work on that with an unwavering resolve. Please look at page eight.
As to shareholders' return, in short, the transparent policy. We acted on words based on transparent return policy. Total return increased more than 20% during the plan period. As to DPS, for 11 consecutive years, it increased. The very agile share buyback led to EPS growth exceeding 13% of adjusted consolidated profit. EPS growth was 16%. Next page. Let me repeat. I'm sorry, on page 10. Risk reduction, especially reduction in strategic shareholding and interest rate risks. These are the two major factors. As you can see in the bar graph in the middle, the accumulation of profit and reduction in risks, these two combined generated the capital, which is allocated for the shareholders' return and investment for future, striking a good balance between the two.
For overseas insurance business, the transfer of JPY 200 billion of capital transfer, not only for the investment purpose, but also the flexible underwriting has been supported. The capital increase was used for that objective as well. For nursing care, not only as an operator, but also an access to the industry itself has been reinforced through the acquisition of ND Software . The investment in the digital area is continuing as well. Please look at page 12. As a result, during the previous plan, those initiatives paid off to some extent. Total shareholders' return was at a very high level. The corporate value and the PBR improved, as shown here. That is for the results of the previous MTMP, and we have discussed our new plan. Please look at page 14.
Again, numerical targets as to ROE, 13%-15% in 2026. Adjusted EPS growth, CAGR of 12%. As I mentioned earlier, three businesses, domestic P&C, overseas insurance, reinsurance, and wellbeing, we have those KPIs. For our domestic P&C FY 2024, we will squat temporarily for upfront investment for the future. ROE 8% at least exceeding cost of capital in FY 2026. Overseas insurance, it is the growth driver for our group, and continuous high ROE and stable growth are expected from overseas business. Wellbeing, life, nursing care, beyond those segmentations, we are going to achieve connect with customers and deliver connected services. Page 15. In developing this new plan, parameters in three years and five years, I thought would be very difficult because of effects, rates, and the share prices because of these factors.
When it comes to mega trend, that will be not so different. We discussed that and based on the existing environment, where we would like to go, and that's what we discussed. For example, population, demographics, that could be interpreted as business opportunities, or it could be interpreted as negative factor or the threat because the population is decreasing. Globally, population will increase, and in the aging society in Japan, we will certainly see some new needs emerging. The inflation longer for higher, and that would lead to loss cost or the reserve issues. For these issues, through disciplined underwriting and rating and financial foundation and stronger BS, we can address those potential issues. For inflation, even when it lasts for a long time, when the interest rate goes up, then we can increase our interest-related revenue. We discussed that as well.
On page 16, in the domestic business, we were faced with a series of problems. There have been potential reasons for that, but I myself think that when the business environment was changing, we could not break away from some bias, traditional bias in terms of the corporate culture or the industrial practice. We put so much burden on the people on the front line. The people on the front line had to make some stretches. Going forward, we would like to go proactive way. We are going to change things by ourselves. We need to go forward in doing that. The recurrence preventive measures and the business improvement plan, we are going to implement that. Not only on the management side, but also holdings and the supervisory oversight organization will support that effort to regain trust.
Meanwhile, the preventive measures alone will not be sufficient. As I mentioned earlier, at Sompo Japan, SJ-R, this is a company-wide project to transform our business and business model. Page 17. This is the vision and role of the new midterm management plan. On the right-hand side, we have Sompo's purpose. The future field to be is health, wellbeing, and financial protection. To realize that going forward, country and regions beyond those segments, Sompo P&C, or the entity like that should be created. The objective there is not only scale merit or the economy of scale. Either it is commercial or consumer, the center of excellence that should be deployed horizontally. Of course, regulations could be different, the languages could be different, but when you look at customers, our customers go overseas more and more.
On the consumer side, borderless services or risks such as cyber risks, those risks exist beyond borderlines, country borders. We need to go beyond the borderline to provide health and wellbeing. Also, on the health and nursing care side and after-retirement financing, these three concerns in the aging society to apply solutions to those problems, we should not think about each one of them, but in a combined manner, and that is what Sompo Wellbeing represents. In order to make that happen during this plan period, during these three years, we are going to accelerate our paces. Rather than preparatory period, we are going to accelerate our efforts during those three years. The key was there, as I mentioned, increased resilience, and connect with customers and deliver connected services. Page 18, please.
As I said earlier, here we have three business areas, new Sompo Japan, overseas insurance and reinsurance, and Wellbeing. The group-wide governance, stronger governance will support all of them, the shared strategy, finance strategy, circulated capital, the investment in human resources, human resources strategy, and the data digital strategy. These initiatives will be accelerated. Please look at page 19. Going forward, we would like to establish an entity, Sompo P&C, beyond country border and regional borders. Axis here, let me repeat, center of excellence and economy of scale, especially group optimal retention, group optimal reinsurance strategy, and group optimal asset management. Those merits are expected here. As to Sompo P&C for the coming three years, Sompo Japan is going to work on SJ-R and on the overseas side. As the growth driver for the group, it is expected to lead the whole group.
Page 20. This is the outline of SJ-R for new Sompo Japan. Of course, our first priority is to regain trust. The business foundation reform, the culture reform, governance and quality improvement, talent development, and data-driven organization. Based on these things, we are going to work on the portfolio reform, sales reform, in the claims department. I said when I was involved in the nursing care, the CS is important, but without ES, we cannot implement CS. For the claims services reform, we raise satisfaction level of customers. For that, we need to raise satisfaction level of our own employees using data and digital. We work on the better efficiency and the adequacy of benefit payouts. It is not really cost reduction, rather it is cost control through new work styles, and the technology supporting that effort.
The vision of a business and sales and the sales offices, all of these things, I believe, should be revisited. Through those initiatives, combined ratio is expected to be improved by 4 points or so, we are going to reduce the number of offices by 84. We believe that we can achieve it through the new work style. Page 21, please. Through those initiatives, FY 2026, 8% ROE, we are going to achieve ROE 8%. At the same time, combined ratio, less than 95%. As to risk controls, the domestic typhoons and the natural disaster controls, the risk associated with strategic shareholding will be controlled. For fire and allied line or the automobile, the insurance line, I have to say that their business environment is changing so significantly. There is a risk to fix things through long-term contract. We need to re-recognize that risk.
In other words, by reviewing long-term contract, we would like to apply more flexible underwriting or change underwriting the policy. We would like to change our portfolio that way. Page 22, please. Overseas insurance and reinsurance. I repeat that it is growth driver and geographical expansion, disciplined underwriting, and expansion of AUM that will bring about further growth. Jim is here with us today, please ask questions to him. When he became the CEO, well, there is an M&A as one option, but it depends on market conditions and the counterparts. Important thing is to what we work on is the organic growth that we need to work on. That should be our basis.
If there are chances out there, if there is a good target with a nice fit in terms of the strategy and culture, we'd like to implement some M&As as well. Page 23, for overseas insurance, ROE 13% or more, a CAGR of 10% growth for the adjusted profit, the combined ratio low 90%.
Next is page 24, regarding Sompo Wellbeing. In short, because of the categorization of business, it is people-centered. We would like to evolve it into a business that is centered around people. We would like to accompany our customers throughout their life and with the hope of people that they want to continue to be healthy, we would like to support them through this business. In order to do so, we would like to focus on the slogan, "Connect with customers and deliver connected services." Connect data, connect services, connect our businesses. At the same time, we would like to be connected deeply with our customers for a long time, we would like to also be connected with our partner companies. For wellbeing, what do we want to accomplish through the wellbeing business?
In the aging society, there were three concerns that people feel regarding their health expectancy, life expectancy, as well as whether they can receive nursing care, as well as finances after their retirement. Towards their concerns, we would like to ensure that we provide solutions that directly address their concerns. Next page, please. Page 25, please. Through our Insurhealth services, for those customers who are interested in health, we have about 1.7 million Insurhealth contracts in place right now, and there is a mechanism that will enable customers to become healthier so that they can become increasingly healthy. We have a mechanism accounted for in our product that will support this.
In our nursing care business as well, with low birth rates and an aging society, and with a supply and demand gap in nursing care that's likely to expand even more. We don't want to sacrifice quality, but also would like to enhance productivity by using data, and extend heartful nursing care services. This is what we're already doing. Having said that, when it comes to wellbeing, when we want to accompany our customers over their lifetime, what we have felt is there are a variety of missing pieces. Organically and inorganically, we would like to fill the gaps through the wellbeing business. For example, the customer base. At Himawari Life, there's about 1.7 million Insurhealth policies. We would like to double this or triple this.
We would like to offer services that support people's health, we would like to widen the categories we are able to address. For those people who want to become healthier, we would like to have a mechanism that will cause behavioral change. Also for nursing care, it's not just now, but looking out into 10 years' time or 20 years' time, for those people that may require nursing care down the road, we would like to create a business model so that they could feel assured to receive nursing care services. To address these challenges, the wellbeing business will address these challenges in the next three years thoroughly. We are thinking about a variety of measures right now, and when it becomes visible and when we are able to share it with you, we would like to share the details. Please turn to page 27.
It's about promoting capital circulation. Of course, we do believe that we have focused on this from the past, but we would like to optimize the group even more so that high capital efficiency areas can be the areas of focus where we transfer our capital to. In principle, the remittance ratio is set at 100% so that we can flexibly promote capital circulation through this structure. Please turn to page 28 where we talk about risk reduction. I talked about this earlier as well, but during the medium-term management plan, JPY 600 billion will be the minimum target in reducing strategic holding stocks. We will be having communication with the issuers, and we believe this is very important. Going forward, we will strengthen communication and accelerate communication with the issuers so that we can flexibly take risks.
If we come across growth opportunities, we would like to ensure that opportunity can be captured. If necessary, accelerate our efforts in risk reduction. Please turn to page 29. In this way, through risk reduction, how are we going to allocate our group capital? Briefly, simply put, first is for organic growth, whether it be for the overseas underwriting business or domestic P&C business. Portfolio reform will be done in a data-driven way so that we could do better underwriting. For the risks we would like to take, we would like to proactively allocate capital. For M&A opportunities, we would like to engage in opportunities in a disciplined way so that we can enhance our corporate value. That is our belief. Disciplined M&A will be the assumption.
In overseas, in order to regionally expand and in order to acquire new capabilities, we would like to pursue opportunities. Like mentioned earlier, wellbeing, extending people's healthy lifespan, as well as removing concerns around nursing care, we would like to acquire pieces or services that we don't have. We would like to acquire those businesses through M&A. Furthermore, from a group-wide point of view, we would like to invest into talent, personnel, as well as digital, which we believe are very important investment areas. Please turn to page 30. Here is our investment strategy. Up until now, we talked about the conglomerate premium to transfer capital and take on credit risk overseas in turn. This time around in the midterm plan, in particular, there are no major changes, but it's about accumulating our AUM and on a group-wide basis, take optimal risks.
From that point of view, we believe that risks that can be taken are. There is still more space to take on more risk. Next page is about human capital investment. We sell intangible products, whether it be healthcare or P&C or life insurance, and it's each and every one of our employees that offer these products and services. We would like the expertise of our people to be enhanced. In order to do so, we created a fund that is worth JPY 30 billion to invest into human capital. We are in the process of reducing strategically owned shares, and we are going to revise our strategies on seconding our employees so that we can differentiate, through our core business, meaning mainly through underwriting. We would like to look at areas like disaster prevention, and we believe we need more talent that have the expertise.
For wellbeing, there is a world that we haven't yet seen. In an aging society, the services we provide, the talent that support this business needs to be acquired or developed. Also in the future, Sompo P&C and Sompo Wellbeing, across businesses and beyond borders, when we want to create a new type of business structure, we will be addressing a variety or a diverse range of cultures and languages. We need a base to mutually understand each other even better. From that perspective, we would like to invest into DEI as well and also have training around it. We will be preparing more opportunities. The purpose is the employee and the company. We want both to be able to develop together. That is the environment we would like to provide. Page 32, please, where we talk about data and digital strategy.
This is an area where I have personally a strong passion about. I do believe it's very important. Up until now for better underwriting, we have been using Palantir's Foundry, and we have been using these services in disaster prevention related areas. However, in short, what we want to achieve in the next three years is we would like all of our employees to feel the impact of digital transformation. So that's how much I would like to elevate our employee base too. Because we have Palantir and because we have ABEJA that have edgy state-of-art technologies that have different corporate cultures compared to us, they are our peers. Therefore, there's much to learn from them. And by using their solutions, we believe we could offer new values to our customers. In the data and digital strategy, these are the measures we would like to implement. Page 33, please.
Here is the shareholder return policy. So basically through profit growth, we would like to increase returns. That is the basis of our policy. And to investors and shareholders, we would like to enhance your visibility so that 50% of gains on sales of strategic shareholdings, 50% of that will be included as additional return. We have also reduced the ESR target range from 270% to 250%, accounting for EPS growth as well as higher ROE. And with this, we would like to achieve our commitments by fiscal 2026. The next page talks about governance. In all of the businesses, we would like to ensure that we steadily are able to make progress, and as we do so, governance reinforcement is important. In Japan, there has been many challenges regarding governance issues. They have been pointed out.
In light of this, we have been implementing a variety of measures, but simply put, one is having independent eyes are extremely important at the, of course, the Holdings level and also at Sompo Japan level. At the Holdings level, an independent director, Mr. Higashi, has started to serve as the Chair of the Board of Directors meeting. For Sompo Japan, we have established independent directors. In order to separate supervision as well as execution, I am the Chair of the BOD. And we also have, regarding communication between Holdings and Sompo Japan, we have seriously taken into account the feedback we got about communication challenges. Therefore, there are now more people that are concurrently serving dual positions. We don't have individual rooms.
We are currently changing the layout of a floor so that the executives of both companies can be on the same floor and don't have private rooms. So in this, by implementing these measures, we would like to pursue our efforts to regain trust. On the next page, I'm not going to go through each and every item here regarding recurrence prevention measures. We don't want to leave everything to the executives, but on a regular basis at the BOD, we would like to support the measures and keep them in check. Sompo Holdings, which is the Holdings company, the same thing applies. Update will be provided regularly to the Board of Directors meeting so that it can be confirmed.
Regarding industry rules, there has been meetings by experts that is progressing, but as a Sompo Group, we would like to try to be a step ahead and not just wait, so that we, regarding rules and practices of industry, can be at the forefront in making changes. On page 36. For in order to continue our business, we believe this is a big premise. And therefore, for ESG, we have been creating a roadmap so that we continue to make progress. And we believe we will continue to make steady progress as a commitment to society. Last page is page 37.
In the new midterm management plan, in order to make steady progress on the plan, and so that profitability can sustainably grow, and so that ROE and EPS can increase and capital cost can be reduced by making these efforts, we would like to focus on enhancing corporate value over a sustainable period. Cu rrently, JPY 3 trillion is our market cap, which we would like to eventually raise to JPY 6 trillion. We hope that you can support us down the road, and we hope you can have high expectations towards the Sompo Group. Thank you very much.
Okumura-san, thank you. Now we would like to entertain your questions. Mr. Muraki from SMBC Nikko.
Thank you very much for the presentation. First question is about domestic, the P&C, and the second question is about overseas insurance, especially the allocation of the capital. On page 42, you talk about improved profitability, and 44, the sales reform. So you have been focused on top line, and you are emphasizing the shift from that focus in terms of corporate culture. How do you recognize the issues for the Sompo Japan, and could you please elaborate on how you are addressing that in this new plan? Second question is page 50. As Mr. Okumura explained, so you allocate more capital for high efficiency area. In the previous plan, you transferred JPY 200 billion from Sompo Japan to overseas to take mainly credit risks.
In this new plan, based on the page 50, retrospectively, the overseas capital seems to increase by JPY 200 billion to JPY 300 billion. But also, you are talking about increasing underwriting in Europe as well. How much capital are you going to use for overseas business and to get how much business? How much improvement in profit do you expect?
So for Ishikawa-san, for the domestic P&C, and for overseas, Hamada-san, for capital allocation and business strategy by Jim. Starting with domestic P&C, FY 2024, in complying the business plan, the things became clear what we have to do. As I mentioned earlier in my presentation, even if we take the action right now, if there is long-term contract, we might not be able to see effect within this fiscal year.
That said, for automobile insurance, loss cost is increasing, labor cost is increasing, of course, we need to reduce cost. That is with the good pricing and the rate increases. In addition, the new work style and other measures should be taken, and Ishikawa-san is going to explain about that later. As to overseas, actually, if there are opportunities to take new risks, we can always allocate capital for that. When we were developing our business plan, we are going to use the existing capital to its full for the add-on branding. For the investment side, that we can act on investment activities with the current capital. Of course, when we reduce risks, including selling the strategically held shares, we will generate some capital, and we do not want to hesitate to allocate capital for new opportunities.
Ishikawa-san, could you please talk about the domestic policy?
Yes. First, the current situation facing Sompo Japan or the industry as a whole. First of all, the practices in the industry, we need to break away from that is the biggest theme for us. Based on the problems that happened, we would like to implement measures to regain trust, that is the Sompo Japan status. As of the end of the current midterm plan, we are going to have a unique and resilient company, for that, we have SJ-R. There are two aspects for SJ-R. First, financial, the effect and the initiatives to make that happen. First, the portfolio reform and sales reform. As pointed out by the authorities, claims services reform. Also pointed out by the authorities and outside the committee, culture, governance, and the talent development and data-driven.
Of course, some of them might not directly lead to the immediate effect, we are going to work on reforming business foundation as well. The earnings and the business, the foundation reform, that will be the key for SJ-R. As Mr. Okumura said, FY 2026, at the end of this new plan, we are going to achieve 8% of ROE and based combined ratio 95%. For portfolio reform, what is it? There are three concepts prepared. The profitability, stability, and agility. As to profitability, in the past, we were doing segment-wise control. Pricing, underwriting, reform were done in the past as well. Here we are talking about strengthening those initiatives. In the past, underwriting policy by policy or for the whole business line, rates were changed. Our initiatives tend to be extremes.
Now, we are going to divide low efficiency and high efficiency areas, for both of them, we are going to improve profitability. We have been focused on top line, that pushed down profitability. The second element is stability. As you know, the biggest risk driver is typhoon for domestic business. The more fire policies you write, the more the risk amounts increased. Here we would like to control risks. For example, the exclusion of the flood and the typhoon risks. We would like to control the size of the business line. For the agility, reflecting on the previous plan, the environment changed significantly because of inflation. Even when we changed the rates, because of the existence of long-term contracts, we could not see the effects immediately.
Automobile or fire insurance, which has many long-term contracts, and by reducing the ratio of such contracts, we can strike a better balance, and that is the main body for the portfolio reform. Supporting all that, the corporate culture of Sompo Japan should be changed. Thank you.
Capital allocation, Mr. Hamada, then the business strategy for overseas business by Jim, starting with Hamada-san.
I am Hamada, CFO. On page 50, overseas ROE, I would like to explain about that. When you look 13.1% for 2023, and more than 13% for 2026. It seems that the ROE is not really improving with these two numbers. As Mr. Okumura said t he remittance. In other words, remittance from business to the holdings is, in principle, 100%. We collect it at holdings and allocate it in a flexible manner. Up until we decide what we are going to use it, Holdings does not have any asset management function.
Whether we are going to use it overseas or at home, it is not decided yet. In practice, in reality, the remittance will be 60% of the profit and the remaining 40% is going to be held at Sompo International to manage that asset. The ECR, 160% is the minimum target for overseas, and their balance sheet has an abundant capital. As a result, ROE does not seem like improving. With 100% remittance, about 16% of ROE is achieved when the remittance rate becomes 100%.
Jim, about the growth strategy.
Just to clarify your question, was it about the growth strategy in Europe or the capitalization of the European legal entity?
I think the Europe piece is just one example. I want to make sure which area or which products are you looking for as growth. I think that from the page 50. The Europe part seems to be the biggest contribution. That's the reason why I just mentioned Europe.
Yes. I think when you look at the footprint of Sompo International, the vast majority of the business came from global reinsurance, the U.S., and London. I specifically did not say the U.K. We see opportunities to invest and grow in other parts of the U.K. outside of London. We see opportunities to continue to expand in offices in the U.S., which have micro markets that we don't participate in today. You are correct. The vast majority of where we see the organic growth coming from is continental Europe. We have an opportunity to participate in some of the largest commercial insurance P&C markets in the world, in Germany and France. We've opened offices in Spain, Switzerland, and Italy. We see a real opportunity because we're starting from such a very small base, as historically, we've only serviced Japanese interests abroad.
We see the opportunity to grow in the European marketplace. The second one is in Canada, which is the seventh-largest P&C marketplace. We had no presence there other than servicing a handful of Japanese interest abroad account. From a product perspective, we'll continue to see growth in the reinsurance, but you've seen our reduction, and the dependency on the cat business has declined. We see opportunities depending on the market, and right now, we see increased rates coming out of the U.S. in the casualty liability area as well as property. We'll wait and see what happens in the remainder of this year in terms of activities. We foresee that that rate environment will continue for at least through this year, and if not into next year.
The next person is Watanabe-san from Daiwa Securities, who had his hand up.
This is Watanabe from Daiwa Securities. Thank you very much for the presentation. Regarding shareholder return, I have two questions from separate angles. One is about recurring profit. Page 63, when I look at that page, adjusted EPS at its definition before and after IFRS introduction looks the same. When you look at page four and page eight and compare the two slides, adjusted EPS, it looks like it's up by JPY 30. What is this difference? Also on page 33, the new policy status after IFRS, adjusted consolidated profit and a three-year average will be used. 2023, 2024, 2025 IFRS average EPS, and then profits, post profit, is that going to be added on? That's my first question.
On page 33, from a stock point of view, 250% is the new target for ESR. For 250%, if you exceed this, specifically how is your return policies going to change? Can you walk us through this one more time?
Thank you, Watanabe-san. Regarding pre- and post-IFRS introduction, our CFO, Mr. Hamada, will explain. For ESR, the range will be reduced. If constantly we see ourselves exceed ESR, Hamada-san will also explain about this. I didn't really understand your first question. Were you talking about page 63, and are you comparing with page four?
On page 63, you talk about post-IFRS- Adjusted our profit and compare the two, and they look the same, IFRS net income, IFRS adjusted profit. When you look at page eight, where JPY 293 is FY 2023 and IFRS EPS is JPY 325. It looks like it's boosted by JPY 32. Why is it boosted by this amount? Is there a factor supporting this?
Well, under the new medium-term management plan, the ultimate targets are stated under IFRS standards, but the original FY 2023 results, as well as our outlook for FY 2024, is on a current standard basis. That is why it's a little bit hard to understand, and apologies for that. First, going to page 63. In the financial statements, the Tanshin, when we announced our financial results the other week, we're going to be switching over from FY 2025, probably one year ahead of our peers when we switch over to IFRS. We're running all of these estimates. As seen on page 63, for adjusted profit, it says there is an X there.
We will look at IFRS net income and we will look at the changes from the financial market. We're deciding what to put in and what to put out. After we go to IFRS net income, it's completely different from the current adjusted profit. After IFRS, the profit levels should be boosted, and that's a general thing. Yes, the ultimate target should be greater. For example, for ROE, FY 2023 results were 9.2%, but on an IFRS basis, it is 11.8%. The numbers get better, basically, slightly. Next. After IFRS and shareholder return, the total return payout on about the average three-year question. Where is the return page? 33. At the bottom, there's a footnote. We're talking about next fiscal year onwards, so that's why it's in small letters at the bottom. From various angles, we are analyzing the IFRS numbers.
As often said, the volatility will become greater. As volatility becomes greater, it's more about offering predictability and engaging in shareholder return. That is why we want the average numbers on a three-year basis because we will be reducing volatility by announcing adjusted profit, but even so, we have set our targets at average of latest three years. Regarding the details of the impact of IFRS, we will be giving out those details from next fiscal year, and at that moment, we will be going through our shareholder return policy one more time. Finally, the maximum of our target range, we are reducing it to 250%. From our point of view, it required a lot of effort to reach this level. It's based off our determination to raise our ROE, and that is why we reduced the target range for ESR to 250%.
ESR, as of end of FY 2023, was 251%. It has already exceeded the upper limit of the new target range in light of the recent financial market. We would like to have some more buffer. However, at the interim period, this fiscal year, we are simulating that it may reach close to 260%. The upper limit will enable us to enhance ROE and to reduce the denominator. In what way are we going to offer shareholder return? Is it going to be through share buybacks or increased dividends? I think that was the point you were trying to get at through your question. From this medium-term management plan, we will be focusing more on EPS growth. Therefore, we are assuming that it will be additional share buybacks.
We will also look at what our peers are doing, and we will also listen to you through the communication we have to see whether we should do dividend increases or share buybacks. Right now, we're thinking more of share buybacks.
One thing I would like to confirm is regarding 50% of the gains from strategic shareholdings. Are you going to be allocating that return on a single year basis?
That is true. Yes, correct. In my head, when I said share buybacks means its basic return where it's not dividends, as well as 50% of gains on sale of strategic holding stocks, as well as capital adjustment when we exceed 250% in ESR. There's three forms of buybacks. Thank you very much.
Thank you, Kazuki-san. JPMorgan, Koki-san, please.
Koki from JPMorgan, I have the questions. I think it is getting rather difficult to talk in comparison with the peers. At the same time, the P&C, the major three companies, announced their results. I think it is understandable that the domestic, the profitability goes down. As to dividend increase compared to other two peers, has been slower. Also, reduction pace in strategic shareholding, the JPY 600 billion at least over three years. That pace, compared to the peers, looks a bit slow. Looking at what peers are doing, are you going to do some catch-ups in these points? That's my first question. Second question, I would like to ask a question about overseas business. On page 54, you talk about business ratio, loss ratio, expense ratio and loss ratio. The forecast combined ratio 2026, 93.8%.
This level, do you think this is a comfortable level, 93.8%? Because in the previous plan, the target was 88%. By increasing retention, you wanted to improve profitability, I understand. Of course, there are some external factors, including inflation. 93.8% combined ratio, do you think that this is a sustainable level? Or, in the midterm, that you are going to aim at less than 90%, so this 93.8% is just a milestone?
Koki-san, thank you for the question. As to your first question, we need to think about different factors. Of course, I think that we need to accelerate because the peers are doing more. Of course, that is one of the factors that we need to think about. At the same time, communication with the issuers is very important.
For the corporate governance code, from the capital return basis, we were thinking that it is good to have those shares. The 2023, we thought that we need to reduce the level of strategic shares. We need to explain about that to the issuers. Of course, there are market conditions, business conditions, and what is our growth strategy. We would like to see a good timing in a flexible way. For Sompo Japan people, we would like to say that we need to have more communication. We are committed to JPY 600 billion reduction, we know that compared to the peers, it's rather slow, some people say. As to your second question, I would like to have Jim to answer that question. For the previous plan, we thought that the combined ratio will continuously improve.
The market cycles, inflation, and post-COVID era, in compiling this plan, we had various discussions. This business plan here is very realistic and reasonable, I think, from the supervisory point of view. I don't know. I would like to ask Jim, too, how he thinks about it.
I'm sorry.
Yes, please.
About the dividend in comparison with the peers. Our dividend, EPS growth, we increase our DPS. FY 2024, unfortunately, we start with decrease in profit. Over three years, EPS growth is expected to be more than 12%. From JPY 100 to JPY 112 for EPS growth. By using sales gains from the strategic held shares, we would like to increase the DPS. Kazuki-san asked that question as well. We are focusing on EPS and buyback.
In the dialogue with you, if we think that the DPS would be appropriate, it is possible that we increase DPS furthermore. As to strategically held shares, as Mr. Okumura said, we had lots of discussions. On page 28, under the JPY 600 billion, we said that we are going to accelerate the pace. We are committed to JPY 600 billion, but ESR upper limit of 250%, we are going to look at the investment opportunities. Potential investment opportunities. This JPY 600 billion is the minimum, and we might accelerate the pace of reduction. Thank you.
Jim, please.
Thank you for your question. Well, before I would look at 2023 and realize that this was a cat year, that was less than what we would normally plan. If you look at the planned period, we plan for the cat losses to be normalized. This reflects a reduction in the attritional and the large losses, the non-cat losses. Secondly, I believe we are entering a softening market. We've seen this cycle last probably longer than in prior cycles, it is prudent to assume that we're going to see rate reductions. It'll be a question of an underwriting strategy to make sure we maintain the right risks at the right price. I believe this is realistic. I believe it does reflect a continuous focus on underlying loss ratio excluding cat. Keep in mind, it does normalize for the cats going forward.
To your comment on the 88 combined, in addition to that was the target. I believe when that target was set, we hadn't acquired the larger AgriSompo business, and AgriSompo business traditionally runs around 95%. Given its size, it did increase the pressure on the combined ratio post the plan. Secondly, we didn't plan on the organic investments that we discussed in the expansion. That reflected about 2 points, almost 2 points on the expense and combined ratio. I think we came fairly close when you normalize for things that we could foresee and couldn't foresee. I do think going forward, it's achievable, but a good combined ratio as the market declines. Thank you.
As to strategic shareholdings, I need a small clarification. On page 28, JPY 1.8 trillion of balance and also JPY 200 billion for this fiscal year, I think the holding of retirement benefit under trust that is included. I think that is not recorded as company gains.
During the new plan, new management plan, I think that we are talking about JPY 100 billion or so are the deemed amount. I understand that the other sales gains would not be so big for the size of the actual amount to be sold. As to retirement benefit trust, the strategically held shares included in retirement benefit trust is in the scope of reduction plan, but the size and other factors are not to be disclosed. Thank you for your understanding.
Next person is Sakamaki-san from Mizuho Securities, please.
Sakamaki from Mizuho Securities. I have two questions. The first question is regarding inorganic investment opportunities. Basically, you are going to pursue organic growth in your plan. Before this meeting started, when I looked at some interviews, inorganic investment opportunities overseas, it seems that the appetite is growing a little stronger. That's the impression I got. Regarding this appetite, is it actually stronger than before? Also the risks associated with strategically owned shares by reducing it, does that mean that you'll be able to pursue greater acquisition opportunities? Can you give me some flavor on that? My second question is about the domestic P&C business and auto insurance and improving profitability. ROA 8%, ROE target is 8%, but how are you intending on improving profitability for the auto insurance business?
Because you missed a round of price increases for this business. In your midterm management plan, how much will you be able to catch up with your peers? That's the intent of my question.
Thank you for your question, Sakamaki-san. For inorganic opportunities, whether it be overseas or wellbeing, that is what we're mainly thinking about in pursuing these opportunities. For overseas, in the previous midterm management plan, a certain degree of inorganic growth funds or capital, there was a budget in place, but this time around, because we are going to accelerate our efforts to sell down strategically held stocks, different scale may be possible. Of course, there are no specific deals like company A or B. However, reviewing our list as well as expanding our shortlist of targets is what we are working on as we speak.
However, for underwriting as well as when it comes to corporate values, we need to have a good fit or else I don't think M&A is desirable. Compared to the previous midterm management plan, we would like to widen the scope to look at M&A opportunities. That's the answer to your first question. If Jim has anything to add, please go ahead.
Reiterate what Okumura said, we meet with investment bankers regularly. We look at virtually every opportunity that comes to market. We weigh, how does it complement our existing portfolio? Is it redundant with some of our portfolio? Looking at, I think that over the past three years, the price to value and opportunities were very slim. We do focus on them on a regular basis.
Thank you, Jim.
For domestic auto and specific measures, Mr. Ishikawa will speak about it. As you rightly pointed out, for rate increases, we skipped around, and during that time, labor cost as well as increased, and we also have been impacted by inflation. We do need to engage in rate increases. We also talked about becoming more flexible and reviewing the term of our policies, and how we're going to adjust that is something we continue to have discussions on. Ishikawa, would you like to add anything?
Like you rightly pointed out, due to inflation, repair average cost has been increasing, and due to more traffic, we have been seeing more accidents or losses. That's where we are with the auto business. In addition to that, it was last month, I believe.
When it comes to hail, secondary perils of that nature, those incidents have also been affecting the profitability of the auto business. As Mr. Okumura explained, we passed on the revisions in January. We are currently trying to make adjustments. For 2025, January, we are targeting that timing to increase our rates. By revising our products and by doing more micro-segmentation, we would like to ensure we are planning to do those types of revisions. By implementing these measures by the end of 2026, we would like to reduce the combined ratio to below 100%. That is all for me.
Thank you, Mr. Sakamaki. Sasaki-san from Nomura Securities on the website, followed by Majima-san from Tokai Tokyo Intelligence Laboratory.
Hi, it is Sasaki at Nomura Securities. Thank you for this opportunity to ask questions. On page four, I would like to understand the graphs here. FY 2023, JPY 325 EPS. Here we are talking about JPY 320 billion of profit for 2026. That will be the JPY 450 billion at the profit, the level in 2026. Am I right to understand that way?
For this fiscal year, adjusted, the profit goes down temporarily. On the right-hand side, on page four, FY 2024, the bar graph goes down a little bit. In 2025, the bar graph will jump up, making a steep line from 2024. Mr. Hamada, please.
Futoshi-san, thank you. From this plan, we stopped to have the actual amount as target. ROE and EPS ratio are shown here to you. As the JPY 450 billion or so level, as Sasaki-san mentioned, I would say a little bit lower than that. The denominator will be smaller, and as a result, CAGR would be more than 12%. In other pages, both for domestic P&C or overseas insurance business, CAGR 10% or more than 10%. The yardstick number is that the 10% CAGR profit aggregation year-on-year, and through share buyback, denominator will be smaller by 2%-3%. The result is shown here on this page four. As to domestic P&C business, you are right. FY 2024, it dips a little bit, and 2025 and 2026, we expect the significant increase in profit.
More than 50% comes from automobile and fire and allied pricings, 30% from SJ-R additional effect. Roughly speaking, that is the picture.
Understood. Thank you. Second question is page 21. I would like to understand this graph. For domestic P&C profitability, this year is the bottom, and next year and year after next will go up sharply through various measures. I understand. In that process, what is the pace of rate increases or frequency? For example, on how to deal with the right number of other corporate-related fire insurance. Maybe you would like to discontinue unprofitable policies, and how much rate increases are expected. Could you please elaborate on that point? Drivers for the improvement of Sompo Japan, could you please plainly explain about them as much as possible? Thank you.
Thank you. For domestic P&C, as Mr. Ishikawa said, the rate increases for automobile and for fire and allied.
In the previous plan, we worked on the improvement of the profitability, still, we need to go further. We need to take more measures. For the corporate side, commercial side, there are some urgent matters to address through stronger underwriting. Either we need to deal with that. Ishikawa-san, could you please explain about the more detailed schedule?
The growth driver for the new plan, new midterm management plan. One of the factors is portfolio reform, as I mentioned earlier, and that includes automobile and the fire insurance rate increases and impact coming from that. The biggest effect is for the automobile insurance and the fire insurance product revision. October for the fire and for automobile, January next year are the timeline for the revision. Effect coming from those revisions, and of course, it is very probable that we will see positive effects through good pricing.
Our claims department is also reforming itself to improve productivity and at the same time adequate the benefit payout, and we need a mechanism to do that. Sompo Sigorta, the Turkish entity, the approach there is being leveraged so that we can improve productivity of claims department. Pricing plus claims sections improved productivity or combined ratio, the vis-à-vis FY 2023, 4 percentage point improvement from to 95%. As to ROE, the rest to denominator, namely capital allocation and risk reduction. ROE 8% is to be achieved by the end of 2026. Thank you.
If possible, could you please share with us your way of thinking? The P&C companies are selling the strategic shareholdings, and they will not engage in excessive collaboration with outside entities. I think that would change the relationship between insurance companies and the other business corporations. Do you have that in your mind? Do you think that will have any effect on the other top line, such potential changes are reflected in this new plan? That is my follow-up question.
I think Ishikawa-san has the direct feel about that because he visits those corporate clients. To be a normal insurance company without relying on excessive support because of the strategic shareholdings relationships, I think that we will go that way. It's a frequently asked question. Based on my experience working overseas, our own risk appetite or underwriting principles are the first, and then the capacity that we can use for our customers or coverage that we can provide to our clients. I think each insurance company has to think about that to allocate capital or to launch products. The Japanese market is kind of a Galapagos island isolated from the rest of the world, and we need to change that.
As I mentioned earlier, without waiting for the results of the discussions of experts panel, we need to step forward. For that, of course, we need to develop the talents for underwriting and the operational aspect so that we can really support our customers. We have a good example, at Sompo International, SI Commercial. For the retail side, this ensures adequate claims management system, and we are going to introduce that into Japan as well. Ishikawa-san, any supplementary comments?
Yes, thank you. At this moment, I think it goes without saying that the expertise of insurance or technology associated with insurance, that will be the factor for people and companies to choose an insurance company. The commercial practice or any changes on the front line, the excessive support that will be gone. That is not reflected in a plan at this moment as specific numerical effects. For example, in the auction, the underwriting, the criteria changes, and the co-insurance, we will see some changes. Because of these changes, we will be feeling some impacts, but not just us, the whole industry will be impacted. As Mr. Okumura said, our mission, our work is how to develop and improve the expertise skills.
We said that we are going to set aside JPY 30 billion to develop the skills of our talents, so that in the commercial area, we would like to win over the peers because of better professionality.
Thank you very much. I understand.
Thank you, Mr. Sasaki. Going back to the room, from Tokai Tokyo Intelligence Laboratory, Mr. Majima, please.
This is Majima from Tokai Tokyo. First question is about the organization. In one magazine, your company as well as there was some fraud related to this article, and the magazine was saying that there should be some signs that appear prior to fraud occurring. When you are engaged in management, you probably are not focusing as much on execution. In the past year or two, have you been identifying any signs? Because of the development of AI lately, it is able to do a diagnosis on corporates clearly. For your company, by leveraging AI, for example, I'm sure that you have implemented AI already.
Trying to manage signs before something happens, would you be interested in applying AI for that purpose? Secondly, for auto insurance, you were talking about improving the profitability is hard because there's a lot of long-term contracts, the people who sell vehicles, their agents often sell long-term policies. Of course, single year contracts are better. For those who sell vehicles want to engage in longer term policies, I think that's the conflict of interest. Is it possible to make the duration shorter?
Thank you very much for your question, Majima-san. Regarding the first question, I would like to answer that question first, then regarding digital utilization, Mr. Narasaki will take that question. For auto insurance, Mr. Ishikawa will respond.
Regarding the series of fraud that occurred, we received business improvement orders twice, and it was for the first time in our corporate history that this has happened. From a holdings point of view, as well as from Sompo Japan's point of view, we believe that our organization was rather homogeneous. Personally, including myself, I think I did have a status quo bias. We were always thinking it should be okay, and based off our value sets, things should be this way. We had a strong mentality in that regard. That is something we regret. Like I mentioned under corporate governance, sorting out the various rules and regulations and being able to have employees speak out and escalate issues is important. This is an obvious thing we need to do.
Also, we need to compare ourselves amongst common sense in society, and that is why we need to promote DEI internally. At the management level, having an outside eye through independent directors is something we need to leverage more of. It's not just one single thing. It's about incorporating a number of measures that we could detect signs that are not good at the work site level at an early stage. We had a mechanism before where the issues were not being escalated. We would like to ensure that we have a corporate culture that will enable people to speak out, as well as nurture a corporate culture that will facilitate this. Regarding digital, Mr. Narasaki, do you have anything to speak about?
I am the CDO. My name is Narasaki. Thank you for your question.
Just to add a few comments to Okumura's comments. For AI, including LLM, amongst our peers, we do believe that when it comes to putting it into practice, we are quite ahead. We are proud of that. Regarding organizational structure or management or risks and managing that, meaning, we are not able to do that overnight with AI to detect early signs of something happening. That means that AI cannot substitute the management of a company. Having said that, regarding mistakes or risks in our operations, of course, we are able to run a side check or a back check by leveraging AI. We have been doing so already by a certain degree. With SJ-R, along with what we're going to be doing with SJ-R, we would like to put more AI into practice.
Operational processes, if there are any mistakes or we would like to address them, and we would like to reduce the amount of rework through automation as well as to refine our system so that we can avoid people doing overtime and instead have AI do the work on their behalf. That's my response regarding your question on AI. For Palantir, it is now more of an AI company rather than a data analysis company. By leveraging Palantir, we have been working on improving underwriting profitability. JPY 12.5 billion is the actual financial reported as well as accounting-based numbers, or the impact we've been seeing over the course of the past three years in total. That's how much productivity gains we have been able to see. We have been applying Palantir to other lines of business now.
It might not be answering your question directly, but we are focused on enhancing productivity as well as making our operations more efficient. We would like to continue to leverage AI, leading the industry. This is an effort which will be ongoing. Thank you.
In addition to that, for anomalies and detecting them at an early stage, we will be doing that through our operational processes in underwriting as well as claims payment. We would like to incorporate the power of digital. Ishikawa, please.
For auto insurance and your question about long-term contracts or policies. Like mentioned earlier, when there is a long-term policy, from a flexibility standpoint, rate increases, there is a time lag until we're able to see the impact materialize.
Regarding the necessity of long-term policies, we do believe it is important by a certain degree because of housing loans as well as car inspection systems. Also regarding the distribution channel, we need to look at its attributes. That is the reason why we have been selling long-term policies in the past. For auto, approximately 60% is long-term, and for fire, 90% of the policies are long-term. Therefore, how are we going to do about the change is something. For example, automatic policy renewals are new types of products we're starting to offer. Also, reducing the amount of long-term policies, it's not going to just happen superficially, but the one-year products, we want to offer services that will make the customers feel that coverage is better and the services you receive in single-year policy is better.
By developing those types of products, we would like to be chosen by the customer base. That is the kind of product development we would like to engage in. Thank you.
Thank you, Mr. Majima. It is coming to the end of this meeting. Last question from Mr. Niwa of Citigroup Securities.
Here is Niwa of Citigroup Securities. Market cap and ROE. On page 37, JPY 6 trillion of market cap. Could you please elaborate on that? How strongly are you sticking to this number? What is the formula behind this JPY 6 trillion? What is the timeline to achieve this amount? How strongly are you sticking to it?
For the other composition scheme, how are you going to incorporate the other shares or the market cap as a KPI? My second question is, compared to the other global peers that you are going to target at the ROE level of global peers, that's what you said in the meeting in February. The 20% is the comfort zone, and it is coming up a little bit. Do you think that your plan is rather conservative, or do you think that the actual effects of various measures initiatives will come a bit late? Could you please evaluate your own ROE-related initiatives?
As to market cap, we are very stick to this, the JPY 6 trillion level. The PBR, less than 1 for valuation. From that point, I became part of the management. The PBR 1 is just the milestone that we just pass on.
We need to satisfy the expectation of the other market. We need to go beyond the PBR 1 on adjusted profit basis. 13%-14% is the milestone for the midterm. As to in the context with global peers, different people might use different definitions, but the weight of the domestic business is rather big in our case. Of course, there are risks there, and there are differences in terms of risk-free rates. It's not that we can go jump to 20% level overnight. That's why we said on the midterm, maybe not in three years. For example, in an area like wellbeing, if we have capital light business generating certain level of profit, then the PER will change, and of course that will change PBR as well. That's what we expect.
Mid to long-term basis, even given the market differences, that we would like to catch up with the other global peers. Hamada-san, any supplementary comments?
As to JPY 6 trillion, IFRS net asset JPY 4 trillion times the 1.5, that's the formula. The PBR is still less than 1, we need to do more. ROE, of course, the key here is to improve the domestic P&C business. As to ROE, while we are thinking about the new midterm plan over the past one year, since we are going to be based on IFRS, we need to look at what the global peers are doing. The 15% has been used as benchmark. The whole market is getting better, and 13%-15% level, simply put, without any investment in growth and only with organic growth, and ESR discipline being respected, we can achieve 13%.
In addition, if we have M&A activities, then we will be able to reach 15% level. Given the current domestic P&C situation, I think that is a stretch that we can make. As we repeatedly said, as main theme, the current domestic P&C, the various pricings and fluctuations, and we are now at the trough. Year after year, we have the natural disasters, and we have the COVID. Because of different factors, the actuals were less than the budgets, and overall level has come down a little bit, and the loss cost is increasing. Reference rates have been the weak point. We need to work on long-term contracts, and we need to have more risk selections. We need to change the actions, first of all, through SJ-R.
From FY 2027, when we are going to see full effects of those measures, we will be able to share better numbers.
As we have passed our given time, we would like to now conclude this meeting. If you have any additional questions, please contact our IR department. For the respective businesses, the business CEOs will take an opportunity to speak about their strategies under the new midterm management plan on a separate day. We would like to inform you accordingly. Thank you once again for attending today.