As it is time, we would like to start the session. Thank you for joining us for the Tokio Marine Holdings IR briefing for the second half of FY 2025 in spite of your busy schedules. I will be serving as the moderator. I am Ishiguro, Head of Global Communications. Today's session is held in a hybrid format where participants are joining both in person and online. The moderator is giving announcements for the Japanese audience. Let me introduce the executives joining us today. From Tokio Marine Holdings, Group CEO, Mr. Masahiro Koike. Vice President, Director, Group CFO, Mr. Kenji Okada. Vice President, Director, Co-Head of International Business, Mr. Kichiichiro Yamamoto. Managing Executive Officer, Group CSUO, Ms. Mika Nabeshima. From TMNF, President and CEO, Mr. Hiroaki Shirota. Senior Managing Director, Mr. Hiroshi Sakiyama. From Anshin Life, President, Mr. Shuji Asano will be joining.
We will first start with an opening presentation by our Group CEO, Mr. Koike, using materials posted on our homepage, after which we will open the floor for questions. We are scheduled to end at 2:30 P.M. Japan time. Koike-san, you have the floor.
Good afternoon, everyone. Thank you very much for joining Tokio Marine Group's business strategy meeting today. Today, following the outline on page 2 on your material, I will spend approximately 30 minutes explaining Tokio Marine's management and business operations. After that, I would like to take questions and comments from all of you as long as time permits. Looking forward to this meeting. Please turn to slide number 3. Six months ago, at our May IR briefing, I had the opportunity to greet you and share my commitment. It has now been five months since I assumed the role of Group CEO.
During this time, I have been traveling extensively both domestically and internationally, striving to spend more time at the front lines, the very source of our company's value creation. Through town hall meetings and other forums across various locations, I have engaged in dialogues with many employees, both domestically and internationally. This aligns with the realization of our unique sustainability management as described on this slide, which starts with our employees. Specifically, employees who are deeply committed to fulfilling our purpose of protecting customers and society in times of need serve as the starting point for all activities. Through providing high quality products and services, we contribute to solving the challenges faced by our customers and society. As a result of being of service, we ourselves achieve sustainable growth and deliver solid returns to our shareholders and all stakeholders.
Since our founding, we have cherished this unique Tokio Marine value creation model. I strongly feel that momentum is high among our employees across all domains, domestic and overseas, and solutions to continuously evolve this model, pass it on to future generations, and deliver value to all stakeholders. After receiving feedback from our employees that are direct and sometimes very straightforward, these voices help me to enhance and move Tokio Marine even further into the future. Please turn to page 4. Today, we have two key messages to share with you. The first is the robustness of EPS growth. Our track record over the past five years has been trending among the best globally, and fiscal 2025 is keeping its underlying growth trend. Furthermore, while some lines in international business centered on North America showed some signs of softening, they remain resilient.
Japan P&C is also progressing steadily amid major industry-wide transformation, so each business continues with their strong performance. DPS will expand in line with this robust EPS growth, and this will remain unchanged even after the adoption of IFRS in FY 2026. The second point is ROE improvement. Currently, we are midway through our journey toward raising ROE to global peer level. After adopting IFRS, our ROE will stand at around 13% on an apple-to-apple basis with our peers. We will continue to strive to further enhance ROE through profit growth and disciplined capital policy. Within this context, our current ESR stands at 155%, providing ample firepower for growth investments or shareholder returns.
While we recently announced two bolt-on M&A deals, we have raised our annual share buyback program to JPY 240 billion after comprehensively reassessing factors such as the uplifting effect to EPS growth and other M&A deals in the pipeline. Now, let me move on to explaining the main points. Please turn to page 5. This slide shows our EPS growth track record. As you can see, our five-year CAGR of 19.9% is among the world's best. Furthermore, as indicated in the lower right, our EPS growth volatility is also the lowest, demonstrating that we have been achieving stable growth. Please turn to page 6. Here, the right side of the slide shows our EPS growth plan compared to peers. Our plan of 8% or more is at competitive level with peers, and our current performance is also progressing steadily at 8.9% growth.
Now, let's delve deeper into the drivers of our world-class EPS growth, which are the organic growth of our core business and our M&A activities. Please turn to page 7. Our current profits are largely comprised of international business and Japan P&C business, and the underlying trend remains solid. For FY 2025, we expect results to largely align with our initial plans, and we continue to believe our midterm targets are achievable. Going into a bit more details, within the international business, while we see some impact from softening and changes in the operating environment, such as lower premium rates, our portfolio is resilient. We believe we can continue to achieve growth with expansion of underlying profit as the main driver.
Furthermore, in the Japan P&C business, the effects of previous rate increases will significantly materialize in FY 2026, so we are also seeing achievement of the midterm plan as solid. Please turn to page 8. Regarding organic growth in our international business, as shown in the center of the slide, our North American operations, which account for 90% of profit, achieved profit growth over and above our peers in both underwriting in orange and investment in green. Although there are some softening in certain categories and the operating environment is rather difficult for asset management, we have revised our current FY 2025 profit projection upward by 2% on a currency-neutral basis. Please turn to page 9. Our North American underwriting business consists of two main lines, specialty P&C and employee benefits. As shown on the left side of the slide, we have a high competitive advantage.
The right side of the slide shows the portfolio composition of these lines, clearly demonstrating a highly diversified structure. This was not built overnight. Looking at recent rate trends, a remarkable 75% is comprised of lines with stable rates, meaning these lines are relatively unaffected by the current soft market conditions. While we are not immune to rate cycles, our robust underwriting framework has enabled us to build a highly resilient portfolio. In order for us to continue to achieve meaningful and superior profit growth, we will maintain and solidify the strength in our portfolio. Please turn to page 10. This chart, which I am attaching for reference purpose, illustrates the history of the rate cycle in the North American commercial market and the profit growth of our North American operations.
As you can see, our North American business has a track record of achieving sustained and stable growth over a prolonged period by leveraging both underwriting profits and investment gains and losses to navigate rate cycles. Now, let me explain our two main lines of business in North America and our asset management activities. Please turn to page 11. First, our specialty P&C line comprises over 100 lines of business, forming a diversified portfolio with low correlations. We apply our strength, a disciplined underwriting strategy to this portfolio, vigorously executing risk selection and pricing based on the rate environment. This commitment to sustainable business operations in a forward-looking manner, and the strict adherence to a strategy of no excessive underwriting or expansion, has led to the consistently favorable combined ratio levels shown on the slide, and the achievement of profit growth exceeding our peers.
We also view the meaningfully limited impact of the Los Angeles wildfires that occurred earlier this year, compared to our peers, as further evidence of our disciplined underwriting strategy. Please turn to page 12. Next, the employee benefits line consists of TMHCC's medical stop loss and Delphi's disability insurance, among others. The key to this line is steadily expanding the top line while stabilizing the combined ratio around 95%. Furthermore, leveraging our strength in highly specialized absence management service, we have gained strong support from customers and achieved stable profit growth. Please turn to page 13. Next is regarding North American investment. Regarding asset management income or income gains, we are showing AUM times yield as factors. First, concerning AUM, as shown in the center of the slide, it continues to grow at around 10%, supported by our strong insurance business.
Regarding the income yield on the left side of the slide, we are consistently achieving yields approximately 2% above the market by leveraging the strength in credit investment possessed by our central asset management subsidiary, Delphi. We intend to continue monitoring the credit market movements and carefully and appropriately seize investment opportunities. Please turn to page 14. Having explained our North American operations thus far, I would also like to touch upon our Brazilian operations from the perspective of building a global portfolio. Brazil now accounts for 7% of international business profits and is growing very strongly. The competitive edge over Brazilian operations lies in disciplined underwriting capabilities and DX/IT technological expertise. Leveraging these strengths, we achieve price competitiveness and risk selection through agile rate adjustments and high profitability through rigorous cost efficiency. The slide shows the combined ratio top line and, as you multiply the two, the underwriting profit.
Each figure clearly demonstrates its overwhelming strength. Currently, for FY 2025, performance is again exceeding the initial plan. Please turn to page 15. Regarding our overseas M&A strategy, we have achieved growth through M&A and continue to search for more as a means to further diversify our portfolio and acquire competitive strengths. At the same time, we have consistently adhered to our principles for acquisitions, the three principles, as you can see here, and a disciplined in and out strategy. This policy remains unchanged. To update you on how we see the current landscape, we see an increase in deal opportunities, both large and small, partly due to softer rates and other factors. However, we also see that valuations for large M&A deals remain appreciated. Meanwhile, we continuously update our list of candidates we wish to bring into our group and actively pursue necessary actions.
We believe that when all conditions, including timing, align, this will lead to results. Amidst this, I am pleased to report that we have two recent bolt-on acquisitions to share with you this time. Please turn to page 16. First is the U.S. collector vehicle insurance business acquired by Philly in the U.S. Collector vehicle insurance is a niche auto insurance segment where Philly excels, targeting specific vehicle types like classic cars. Enthusiasts of these vehicles typically handle their cars with great care. Through product and service design, this market maintains a low loss ratio of around 50%. Furthermore, against the backdrop of increasing retirements among the baby boomer generation, the market is expected to continue to grow strongly. Philly had long aimed to expand its business in this area and has now acquired a business from Ignyte Insurance, which holds number 2 position in this field.
Acquisition price is $615 million with gross written premium at approximately $160 million. This acquisition not only expands our customer base, but also provides us with advanced underwriting expertise and talent, further enhancing our specialization. We therefore have high expectations for our growth in this market. Please turn to page 17. The second acquisition announced last week on the 21st of November is of Agrihedge, a U.S. company providing fee-based services to livestock producers. The acquisition price is $970 million. Its fee income is approximately $100 million. In addition to incorporating the company's fee-based businesses, such as insurance agency service and derivative brokerage service into our revenue stream, we are also acquiring solution providing capabilities, including consulting service for the agricultural industry. This will further enhance TMHCC's competitive advantage in the agricultural and livestock insurance market.
This will not only enforce TMHCC's underwriting capabilities, but this will also lead to solutions business. Therefore, this acquisition is very meaningful for the entire group. Next, I will explain our Japan P&C business. Please turn to page 18. As shown on the left, top 3 companies account for approximately 90% of the Japanese P&C market. Among the three, TMNF's profitability or combined ratio has been the lowest by a significant margin in the last decade. Our lines of business consists of two-thirds personal and one-third commercial. The strengths of our personal lines lie in our flexible rate increase capabilities that beat inflation, as in the case of auto insurance in October this year, and our quality distribution with high productivity.
In our commercial lines, we have unique strengths such as global standard underwriting capability and expertise, refining together with our European and American group companies, and our ability to provide solutions enhanced by welcoming ID&E into the group. Japan's P&C market is undergoing major transformation as it moves away from its past way of doing business legacy, and this will bring about significant changes in the competitive environment. As we transition to a business environment where success is defined by the intrinsic values of an insurance company, we take this as an opportunity. We will continue to refine our capabilities even more to further increase our advantage. Let me give some color from several perspectives. Please turn to page 19. First, let's look at our ability to implement rate increases. While rate cycles in Europe and the U.S. vary by lines of business, they are generally softening.
Japan, however, is seeing the opposite. Market is hardening. The left shows auto insurance. Due primarily to inflation, last year's combined ratio was the highest level in the past 10 years. In response, we implemented a rate increase last October, last month, ahead of our peers. Thanks in part to our agents' strong customer relationships, we were able to minimize the impact on policy renewals after the rate increase as expected. The effects of this rate increase will be significant in FY 2026, and we will continue to strive to stably achieve a combined ratio below 95%. On the right is fire insurance. As a result of implementing rate increases almost every year since 2019, our combined ratio has improved to the 80% range. In FY 2025, we expect to finally achieve an ROR of 7% or more, or profitability equivalent to the cost of capital.
We will continue to stay relentless to make improvements. Please turn to page 20. Let me take you through the structural reform of distribution, which is the core of our renew initiative to transform TMNF into a new company. This will have the greatest impact on expense ratio. There are two major initiatives. First, regarding completely eliminating the so-called two-tier structure or having our own employees perform agency work, our dialogue with all 40,000 agencies is progressing smoothly, and we expect to completely eliminate by the end of fiscal 2026 as planned.
From FY 2027, we, together with agents, will provide products and services to customers under a new task allocation scheme based on operational quality standards. This is the second point. Our staff are working hard to complete discussions with all agencies, with the aim of completing the effort by the end of FY 2025. As a result of these efforts, we plan to reduce the expense ratio to less than 30% on a current JGAAP basis and to around 26% on an IFRS basis. Please turn to page 21. Our initiative to improve our insurance underwriting portfolio by implementing thorough profitability measures is progressing smoothly. Specifically, we have carefully examined our portfolio and identified low profitability policies as Tier 2 and Tier 3. In terms of volume, this accounts for approximately 8% of the JPY 1 trillion in fire and specialty insurance premiums.
For Tier 2, we are taking measures by category. For example, we are categorizing into solar power generation facilities and old properties and taking measures that are effective for each category. For Tier 3, where profitability is particularly challenging, we are taking more in-depth measures on an individual contract basis by raising rates and reducing excessive capacity provision in order to rationalize large-scale unprofitable policies. The key is that we are implementing these initiatives based on our purpose without downsizing or falling into a shrinking equilibrium. In fact, our top line has actually increased, and our bottom line will also improve by JPY 14 billion under the current midterm plan. Next is page 22. In response to changes in customer values and behaviors, we are focusing on diversifying distribution channels.
Specifically, we changed the name of our direct channel, EDSP, to Tokio Marine Direct Insurance, incorporating the Tokio Marine name, and launched a full-scale advertisement campaign. After the brand was refreshed on October 1st this year, number of contracts and premium income in auto for October alone were both 1.2x higher than the previous year, and I feel it is going well. The direct market is expected to continue to expand, so we aim to achieve growth that significantly outperform the market. Please open up page 23. Next, turning to the use of AI and data. The use of AI and data is an important initiative that can unlock great potential in the evolution of the insurance business models. We are exploring ways to utilize AI and data that are tailored to the nature of business models of each region and business, and are also promoting practical initiatives.
For example, in our Japan P&C business, where 70% of the business is made up of standardized commodity lines, we are using AI for standard tasks, such as call centers and responding to inquiries from agents, thereby improving customer experience and reducing expense ratios. In our international business, proprietary AI developed and leveraged for underwriting auto insurance in Brazil enhanced our capabilities. We are also seeing positive outcome in North America, where specialty lines for businesses are the main focus through sophistication of underwriting and claims payment. These are some examples of domain-specific AI utilization. This year, we established the AI-HUB within holdings, which is already responsible for cross-group planning and development support. By harnessing the group's collective expertise, we aim to further enhance the strengths of each company's business model. We will continue accelerating these efforts.
Please turn to page 24 for details on our Solutions business. Once again, the Solutions business is a business anticipated to play a key role in our continued advancement and represents a major growth opportunity for the future. We are pleased to welcome ID&E into our group in the area of disaster resilience to reduce losses and risks. It is no exaggeration to say that this is an important page in the history of sustainability management as a company in the insurance business. Up until now, we have been making preparations in the solutions area, expanded our capabilities, and steadily made effort. The fact that we have welcomed ID&E into our group demonstrates that the vision we have conceived is by no means a self-centered delusion. While challenging, it is indeed achievable.
These steps to pursue the business with strong commitment and persistent effort have similarities with the path we have taken in expanding our international business, as shown at the bottom. Like our international business, we want to firmly develop the Solutions business into the group's next major pillar by committing with a strong sense of purpose. Please turn to page 25. It has only been six months since ID&E became a wholly owned subsidiary, but this is the summary of collaborative approaches to our customers. First, in the area of private sector disaster prevention, TMNF selected 150 companies that are at high risk of disaster or highly sensitive to risk and made joint proposals to enhance disaster resilience to 40. We are starting to see orders come in. Recurrence prevention initiatives are also based on insurance payments in the event of disaster. This is also underway.
Because there were a few natural disasters in fiscal 2025, we, in other words, us and ID&E, were able to develop detailed strategies for specific approaches, although actual results are yet to be seen. In the public sector, shown at the bottom, we are beginning to close some deals by adding TMNF's capabilities to ID&E or by tapping into TMNF's network. Collaboration between different companies and co-creation of value is unchartered territory for us, therefore not easy and will take considerable amount of time. However, as anticipated before the acquisition, we feel confident that we can work together to contribute to improving the resilience of society as a whole. I hope that through these efforts, we will also be able to make our own insurance underwriting portfolio more resilient. It was a very promising first six months. Please turn to page 26.
I talked about each of the businesses, and from here I will talk about group management and capital strategies. I will start with ROE. As mentioned at the IFRS briefing held at the end of September, after the adoption of IFRS, our ROE level on an apples-to-apples comparison with global peers is around 13%, 1-3%, and we are currently on the journey to raise ROE. As shown on the right, realizing top-tier EPS growth. Based on this, transforming our business portfolio, including by leveraging M&A and expanding our Solutions business, including fee business. We will steadily implement these steps to raise ROE. Please turn to page 27. Regarding dividends, once again, the basis of our shareholder returns is dividends, and we will continue to increase DPS sustainably in line with profit growth.
After the adoption of IFRS from FY 2026, gains and sales of business-related equities will no longer be included in adjusted net income. Through the sustained expansion of average adjusted net income, which is our source of dividends, we will continue to achieve world-class EPS growth and DPS growth consistent with it. There will be no change to this policy even after the adoption of IFRS. Please turn to page 28. Lastly, on share buyback. First, our current ESR as of the end of September 2025 is at a robust level of 155%. In May, we announced our share buyback forecast for FY 2025 at JPY 220 billion. However, after comprehensively considering factors such as the level required to boost EPS growth by 2%, announced bolt-on transactions, another M&A in the pipeline, we have now decided to raise the annual amount by JPY 20 billion to JPY 240 billion.
We will continue to implement a disciplined capital policy. Finally, I would like to once again express my sincere gratitude to all our stakeholders, including our shareholders and investors, for the support that has enabled us to carry out our business. Thank you very much. As a truly global company with roots in Japan, we intend to work to continuously improve our corporate value while refining our global integrated group management. We appreciate your continued support. That is all for me. Thank you for your kind attention.
Koike-san, thank you very much. From this point onwards, I would like to receive questions from the participants, and I would like to limit the number of questions to one question per person at a time. Those people at the venue, I will point to you and please wait until the microphone comes around to you. The English-speaking participants online, there is a chat box at the bottom of your screen, and you can ask your question in the chat box. If you want to cancel your question, you can also say that you will be canceling your question in the chat box. We may not be able to answer all of your questions due to the time limitation. In case we have no time to answer your questions, global communications will get back to you later on. Now I'd like to open the floor. SMBC Nikko Securities, Muraki-san, please.
My name is Muraki from SMBC Nikko. Thank you for this opportunity. Since I am limited to ask one question, I'd like to go back to page 3. At the very beginning of your presentation, you said that you want to be evolving your business model so that you can pass it down to the future generations. I'd like to know a bit more on that point. If you foresee the next five years or maybe six years, and you look at how Tokio Marine is today, and how would you like to change that in the next 5- 6 years? On page 38, I am seeing the very familiar slide. Kiln, Philly, which were acquired at the, Sumi-san, and then through Nagano-san's times and also Komiya-san's times, you have expanded your footprint.
Not only underwriting, but you have always been mindful of diversification as you executed investment as well. MS&AD and Sompo Holdings, they are getting into the reinsurance market in U.S. MS&AD and Dai-ichi Life Holdings have made minority investment to asset management business as fee business. AXA SA, who you index yourself to, they don't like complexity in business. To simplify their portfolio, they have sold their asset management business. In the course of next few years, including M&A opportunities, what are the areas that you want to strengthen or geographical areas that you want to strengthen and other areas where you don't want to strengthen so much? Or maybe a form of investment that you want to avoid perhaps in the next 5- 6 years.
Thank you for the question. Let me answer your question. 5- 6 years or even further out, how do we want to evolve ourselves into the future? In the Domestic Insurance business, also International business, and also the newly established Solutions business, in each of these three businesses, they all need to evolve in their own ways. While that is the aspiration, what we want to do is that we need to be purpose-driven. We want to continue to be purpose-driven and also further diversify the portfolio. That's where we attach the importance. The major pillars to do that would be the Solutions business. Because Solution business, it is a form of providing safety and security to customers and make sure we are at the service of each local community. This is outside of our underwriting business.
It's something that is outside of the traditional area, but we want to expand and further enhance the Solutions business. After ID&E Holdings, we would like to look into further organic creation, as well as seek for more M&A opportunities also in this Solutions business. The second major pillar is the further risk diversification to be done globally. Because right now, as Muraki-san mentioned, we began in year 2000 for our full scale globalization, and we have been diversifying risk globally. Right now, about 65% of profit actually comes from international business. This 65%, about 90% of 65% of the profit is actually from the U.S. I have just introduced our Brazilian business. We have some businesses in Europe, and we also want to create another major pillar within the international division for further profit contribution.
While we are surrounded by uncertainties, we want to become even more resilient on a global scale. I said that we want to provide safety and security. We want to expand our ecosystem based on safety and security. I reiterate, we need to be purpose driven. Our employees need to feel the worth in working for this under this banner, and that's what will excel our enhancement, and that's how we can expand our ecosystem. In the next interim plan, I'm sure there will be more details to be shared with you, including some numerical targets we will have to this aspiration.
Thank you very much.
Any other questions? Watanabe-san from Daiwa Securities.
Watanabe from Daiwa Securities. I have one question. This is on page 70 of the handout. Private credit. On the left-hand side, you show the exposure of AUM. Within CRO, there is lending and the overall exposure across the group, how much is it? On page 72, at the time of global financial crisis, Delphi was able to remain in a positive territory. Why was that possible? If you could explain that. Thank you.
There were two questions. Let me ask Mr. Okada, our CFO, to respond to your questions.
This is Okada speaking. Allow me to respond to your two questions. First, with regards to private loans, the exposure of the group today in terms of AUM, it is JPY 600 billion. To the second part of your question, track record, this is before global financial crisis. It was in 2012 that we acquired Delphi. Due diligence at the time of M&A, we did check how it went. Even at the time of Lehman shock or global financial crisis, insurance liability was backing its liabilities. There were no issues with liability. Therefore, even if there were volatilities in market, they did not have to go through a fire sale. Credit risk and liquidity premium, they were able to address appropriately. That is why they were able to maintain a high return even during the global financial crisis.
Thank you.
Thank you. Any other questions from the floor? Takemura-san from Morgan Stanley MUFG Securities, please.
Thank you. My name is Takemura from Morgan Stanley MUFG Securities. I have some questions regarding slide number 26. I was able to capture your image very well by this slide. When you are aiming for the global peer level ROE, number 1, which is the top-tier EPS growth, this, I believe, is going to become the biggest driver towards achieving that level of ROE. Related to that, one thing I want to confirm with you is that the direct insurance, while you want to grow your direct insurance, by growing direct business, how much impact will it bring to the overall profit and what is the loss ratio, what is expense ratio associated with your direct business?
The second is that at the bottom of the slide, you are also showing some financial leverage, and yours is 3%. In a way, perhaps if you take the equity plus debt, the leverage that you are using now is about 3%. Compared to the peers, you are at a very different level in terms of financial leverage. But over the medium to longer term, what do you think would be the appropriate level of financial leverage for Tokio Marine?
Thank you for the question. Two questions, right? Direct insurance, impact of direct business and also financial leverage, what is the definition and also what we think is appropriate level. The first question will be answered by Okada-san, our CFO.
Regarding direct insurance, Tokio Marine within the direct players, we are smaller than some of the others. The top-line level from the most recent years, it is still loss-making on single year basis. Over the medium to longer term, we want to grow the top line perhaps to a JPY 50 billion level so that it will start to make a positive profit contribution to the entire group. As a leading investment towards that, we are making some advertisement promotion this year. But we are starting to see the good impact of those, and so we want to ride on the momentum in order to turn the business profitable as soon as possible.
On the leverage question, on 26, the ratio of hybrid capital within the net asset. Including the senior financing, this is the hybrid portion out of the net asset. As for the issuance of hybrid bonds, I know each company make their own decisions. In case of Tokio Marine, in 2020, when we acquired PURE, we had issued hybrid bonds. Basically, for large-scale M&As, if we need to add up some capital, sometimes we consider issuance of hybrid bonds. This is not for the recapping purpose, and it is not that we have a target for how much hybrid bonds we should utilize. It is only when you compare this versus ROE. We just wanted to draw your attention to the differences in the financial leverage levels of Tokio Marine versus the peers.
Sakamaki-san from Mizuho. Next question.
Thank you for taking my question. Sakamaki from Mizuho. With regards to growth through M&A, I have one question. Going forward, will there be an acceleration of growth through M&A compared to the past in terms of capital adequacy or execution capability to execute M&A? For example, 4- 5 bolt-ons have been executed in the past, but the number of M&As could be executed in a year. Will that be accelerated going forward? What is the current capability of the company? How do you see it? This is my small first question. My second question is with regards to Solutions business. You have targeted Solutions business, and so goodwill might have increased. I think higher growth through M&A is needed going forward in that sense. By utilizing leverage, is it possible to further accelerate the growth of the companies you acquire? Two questions.
Thank you very much for those questions. International business is where we are contemplating on M&A. I will ask Mr. Yamamoto, Co-Head of International, to respond to that question.
Yes, this is Yamamoto speaking. Sakamaki-san, thank you for those questions. In terms of the trend of M&A going forward, I think was your question. As you correctly pointed out, from around the year 2000 we have been engaging in M&As. In terms of our capability to engage in successful M&A, yes, indeed, it has grown. But the key is depending on the market, how many available deals will there be? From that perspective, looking at the current market, the condition, the number of potential transactions is definitely increasing, and this trend is expected to continue going forward. Let me give you some color. The insurance market is heading towards a softening. For example, PE funds that have certain deals.
Before softening, they will be willing to sell them off. That is for sure. Even the businesses that are currently under insurance companies, ahead of softening of the market, they want to make their business more resilient, and therefore the non-core business could be sold off. We are seeing such trends emerging, and that is why we are seeing more potential deals available in the market. That has led to the two deals that we have reported to you. But underwriting discipline and the acquisition criteria, we will definitely stick to it, and it all depends on the price, whether it will meet our level. But when there is a rise in opportunity, there could be deals that will fit our criteria. There are still some that are in the pipeline that we are currently working on. We are hoping that there will be more opportunities in the future.
I hope I answered your first question.
With regards to the second question, I think the question was on CIH. There is a solution aspect to it. What is the synergy in the solution business?
This is Yamamoto speaking. I want to also respond to the second part of your question. With regards to Agrihedge, if you could please turn to page 17 of the material. Goodwill is increasing. Whether we are expecting high growth, I think is the question. On the left-hand side of page 17, as you can see, the business Agrihedge has high potential for growth. The main reason for that is, this is the agriculture and livestock business insurance. Especially for cattle livestock, the penetration of insurance is not high at this moment. That has led to the high growth in the past.
Similar growth is expected going forward. As you correctly pointed out, there is goodwill or intangibles, but the high growth that will meet the intangibles is expected. Also another unique strength of this company is that it is not just hedging insurance or derivatives, but for the farmers, we will be able to offer solutions to the farmers. In other words, analyzing the risk of price volatility, so providing training for that and coverage for that. It is a packaged solution to the farmers, which is a strength. Combined with that, we expect strong and high growth. That is all for me.
Thank you. If I could briefly follow up on that. Page 87. Further growth through flexible capital policy it says. That does not mean that we will utilize hybrid bonds in order to create a source for further M&A. Depending on the opportunities. If there are opportunities out there depending on the size, are we able to be flexible?
That is what is shown on page 87. As was mentioned by Yamamoto-san, we will stick to the three principles of M&A. This policy remains intact, which I think is extremely critical. For the Solutions business, having such a company in our ecosystem, of course we are expecting a synergy impact to co-create value. Therefore, we will be pursuing our strategy in line with the intentions that you have mentioned in your question.
Sato-san from J.P. Morgan Securities, please.
My name is Koki Sato from J.P. Morgan Securities. As a major interest, I am looking at the surplus you have, about JPY 2 trillion. From the end of March, it must have increased even more. In this situation, how much longer are we going to tolerate this level of surplus? That is my interest. In that sense, under the new definition, there is not going to be the upper limit to the target range. But you are not showing your ROE target, so I do not think the situation is so good. You have ample surplus. Over how much of a time would you be able to put it to work or return it to shareholders? Of course, shareholder return over and above what you have done historically to adjust this level. Any ideas on how to use the surplus?
From CFO, Mr. Okada, please answer the question.
Thank you for the question. First of all, under IFRS, the ESR range, as it was explained and as you reiterated, we are going to be removing the upper threshold in terms of our target range. Capital is important in order to grow our EPS, and also, as a result, we want to make the ROE to be on the global peer level, as you show on page 26. The IFRS-based ROE as of today is about 13%. Then through the measures 1, 2, and 3, we want to enhance this even further by raising the ROE. That is one way to prove that we are doing efficient capital management in terms of ROE target with the introduction of IFRS, and also the timing for the midterm plan do not align.
Therefore, in the current midterm plan, if you go to page 30, under the current definition of ROE, we are showing some targets, 20% including business-related equities, or 14% without. Then we want to make sure that we achieve those targets under the original ROE as we indicate here. Then in the next midterm plan, under IFRS, starting from fiscal 2027, in May of 2027, we will be refreshing our ROE target according to the new IFRS-based definition. That is the timing at which we will be disclosing our new ROE target to all of you.
Thank you.
Majima-san from Tokai Tokyo.
Thank you for taking my question. My question this time around is the financial institution agents or relationship with financial institutions or banks, or more specifically with MUFG. Under MUFG, there is MUSD, an insurance agent, which I think is the largest financial institution-affiliated agent in Japan. Share buyback, TOB, or share buyback, TOB was conducted and equity-related relationship, I think, will be diluted going forward. But there have been some issues in terms of a relationship with banks. Banks, I think, with regard to their relationship with insurance companies, I have a sense that they are willing to kind of distance themselves from insurance companies. Also, there is a call to not provide excessive favors and looking after each other. Especially when it comes to insurance business with MUFG, how is that going to evolve going forward? That is my question.
In the case of Sumitomo Mitsui, they have a major agent called Ginsen in July, that has been established. Therefore, there are certain companies that are trying to enhance the relationship, strengthen the relationship. I am asking what your view is.
Thank you for your question. I will ask Mr. Shirota, who is the President of TMNF, to respond to that question.
Thank you very much for the question. This is Shirota speaking. I am not exactly sure whether I have a good understanding of your question. Mitsubishi, MUFG, unwinding of business-related equities. Mitsubishi Bank and insurance business, what is our view on the business relationship with the company? Is that your question?
Yes.
I see. What we are working on is unwinding of business-related equities and also revisiting secondment of our staff. With regards to the business customs that we have had over the years, we are working to unwind it. Even if it is within the same group, we are addressing it the same way. Having said that, we will not have equity ownership type of relationship, but as an important partner, as a financial institution, we want to be selected by our customers. That stance remains unchanged.
By correcting our relationship, we want to further work together in order to be preferred by our customers. Just because it is an agent of a financial institution, it does not mean that we are going to change a relationship with them. It is an appropriate level of competition that we want to seek further growth. I hope I answered your question.
Well, in terms of net premiums written with these major financial institutions, is that growing or decreasing?
I do not think I recall properly, but in terms of financial institution channel, it is growing vis-à-vis other channels. That is my understanding.
Thank you very much for that.
Okay. Niwa-san from UBS, please.
My name is Niwa from UBS. I have a question regarding the North American business on page 9. Please tell me. On the right, if I look at the pie chart within this, the stable rates lines of business, you have much of your business coming from the stable rates environment. Regarding this, if you have any lines where competition is intensifying, please let me know which lines those are. Is it the relaxing or the underwriting discipline by the players? If there is a background serving to that, please let me know the environment because of alternative capital and because of the distortion and relaxing of the underwriting discipline by the MGAs. I hear about these stories in the market. If you have any viewpoint on what is happening in the North American market, let me know.
Should I still see that these are stable rating business or is it that there is more pressure to be imposed on the underwriting profit even in those rather stable lines?
Okay, Yamamoto-san in charge of international business, please answer the question.
My name is Yamamoto. Niwa-san, thank you for the question. Here, situation is different for each line of business. I cannot make a blanket statement. Due to various reasons and factors, some competition is intensifying, things moving in the other direction, more pressure being imposed on bottom line, et cetera. As long as looking at the lines we have, we do not see any relaxation of the underwriting discipline in any of the lines we have. However, according to the market, for example, D&O and Cyber, at one time, there was escalated premium rate, and that improved the profitability. Now it is coming down and competition is intensifying. That is because MGAs and also the new entrants are coming into the market, and that is what had intensified the competition.
Finally, in North America, the rate decline has stopped, but these are the cases where competition intensified due to new entrants, and there was higher pressure imposed on the bottom line. That is one case. Another case I would like to introduce with you for a different reason, when we talk about profitability, is that where it says MSL. This is Medical Stop Loss. This is related to medical expenses, which continue to inflate. This is a single-year renewal basis, and so you can change the rate each year at the timing of renewal. However, we need to look at the underlying performance, the results, and make sure that we get adequate rates. That is how we look at the Medical Stop Loss.
As you mentioned, recently, depending on some lines of business, the uniqueness appears in different regions, and sometimes the rates are stable or volatile all for different reasons for line by line. For each lines of business, we need to look at the uniqueness. We need to keep our underwriting discipline. And if on the market side, due to increase in the new entrants and intensified competition, et cetera, as Masahiro Koike, our CEO, mentioned, we will not be doing any excessive underwriting because we need to keep our bottom line, and that will still continue to be the stance of Tokio Marine Group.
Let me just add something to that. As Kichiichiro Yamamoto mentioned, competition is intensifying in some areas of business. So when we do the underwriting for certain lines of business, perhaps achieving the top-line goal has become rather difficult. However, looking at the bottom line, at least in line with the midterm plan that we have shared with you, we will be able to achieve the midterm plan targets.
Thank you very much.
Let me see if there are any further questions. BofA, Tsujino-san has her hand up by phone.
Thank you for taking my question. My first question is kind of a follow-up to Koki Sato's question earlier. Year ending March 2027, former standard 14% is achievable in the old ROE, and capital adjustment might not be necessary. From May 2027, under the new target, there is a target for the year ending March 2029. If there is a target, you will be making that judgment of whether you are going to have a target will be sometime in the future. So we should be waiting for that patiently. Is that what you are saying? Am I hearing you properly? That is my first question. My second question is improvement in Japan P&C. You also talked about your plans. But in specialty, every year, there is always this big large account, large loss. Large loss every year. Are you able to price properly?
It is usually Japanese companies, in the international market, large losses. Compared to non-Japanese P&C companies, aren't you offering a low rate? That is my question and concern. Of course, if there is a challenge, there is room for improvement, which is, I think, also quite favorable. Those are my two questions.
Thank you for your questions. There were two questions. With regards to your question on ROE, I will ask Kenji Okada, CFO, to respond. The second part of your question on specialty, I will ask Hiroshi Sakiyama to respond to that question.
Yes, this is Kenji Okada speaking. My response kind of overlaps with what I said to Koki Sato. From fiscal 2026, IFRS will be adopted officially, and therefore in May of next year, for the full year plan for 2026. If we achieve the full year target of 2026, the ROE target will also be disclosed on an IFRS basis. In the meantime, the current midterm plan, which started at JGAAP, next year will be the final year. So I think it will be kind of a reference basis. By JGAAP basis ROE improvement from three years from 2024, whether that is achievable or not, will also be disclosed. At the time of the closure of FY 2026, we would like to do a recap in the same way.
So the ROE level, how are we going to raise ROE? With regards to our next target, it will be in the next midterm plan. In other words, each business unit and each group of companies will deliberate on this for the next midterm plan. The target will be announced in May of 2027.
Now, when it comes to capital level adjustment, of course, achieving the level at the target is extremely critical. But the ESR level and contribution to EPS growth and the business investment pipeline, we want to be flexible by thinking about it on every six months. We will be mindful of the ROE level, but also look at the capital level, and those factors will be taken into account in deciding on the shareholder return for next fiscal year. Basically, we are contemplating on maintaining our shareholder return policy for next fiscal year. Thank you.
Sakiyama from TMNF. Tsujino-san, thank you very much for your question. Your question, I think, pertains to the increase in IBNR in the U.S. We are seeing losses in specialty this fiscal year. So IBNR increased in North America last year in property. For example, in auto, this, I think, is unthinkable in Japan, but JPY 10 million or more development took place in the U.S. for auto. There were delays in litigations in the U.S. and damage has increased. So IBNR has been developed next year. We have taken enough countermeasures.
Last fiscal year, I think, is part of your question. But this year, again, a similar trend is occurring in specialty in North America. Actually this year, losses that occurred 10 years ago, loss has developed. What occurred in last fiscal year was excess layer where TMNF was underwriting, but this time it is an umbrella type, which is under primary insurance coverage in Japan. All of a sudden, which is something that goes back 10 years ago and has all of a sudden developed.
In other words, the nature of IBNR or losses is different last year and this year. What is common is loss developing for prior year losses. From 2023, social inflation trends have been taken into account in North America. We have strengthened underwriting, and reducing the limit and so forth. These initiatives are implemented in a disciplined manner. Therefore, in our underwriting policies today, we do not have major concerns. I hope I answered your question.
This is Koike speaking. I would like to briefly supplement. With regards to the first question, Mr. Okada said it well. We will be setting our ROE for the next midterm plan. But in the meantime, investment to our business is our top priority. But if there is a lack of opportunity, we will revise on a six-month basis flexibly. Now, when it comes to the second part of your question, you said Japanese companies overseas and low rates Japan business overseas. Well, I think you are right. But in the past three years, we have been able to improve our profitability quite significantly. Today, in terms of the competitive landscape, local companies in the United States, there are cases where there is an underbid, where we will lose our account. That is what we are seeing lately.
Thank you very much.
On telephone, we have Sasaki-san from Nomura Securities. It is your turn now.
My name is Sasaki from Nomura Securities. On page 24, let me ask you a question. In this plan, the Solutions business, you want to scale up your Solutions business. What I wanted to ask you is, what is the size that you are thinking of? To what level do you want to grow this business to? Also, where would be your monetization point?
What ID&E used to do, is it through the consultation fee mainly that would feed it to the profit? Or is it that the bundle sales of insurance policies that would enhance your profit growth? Where would be your monetization point? If possible, when I hear of solution, I think of asset management. Outside of Japan, other insurance companies who have their names listed, when they have a good competitive asset management business, valuation tends to be higher. But, if I look at Tokio Marine for the next five to 10 years, is asset management a part of your expansion story? Do you have any of that kind of ideas right now as you want to scale up the business?
Okay. First, regarding Solutions business, let me answer the first part of your question. When we talk about Solutions business, in terms of the size that we are thinking of, as Okada-san mentioned, towards the next midterm plan, we will be more realistically and on a detailed level, we will share with you our target in terms of the size of the business. In terms of the monetization points, there will be various and diverse monetization points. One is similar to what ID&E used to do or what Agrihedge is also doing, which is through consultation fee. That would be a fee business. That will be one monetization point. The second I can think of is collaboration with Insurance business. Whatever we do may lead to expansion of underwriting. Underwriting profit is another.
Furthermore, if we want to create new values, we want to seek for new potential of growth in those new areas, but that is not so easy. To begin with, the fee income and also the expanded underwriting will still be the main contributors. But when we talk about Solutions business, it is not that we are only looking into fee business. That is not the correct way to look at it, because ID&E, for example, they provide consultation, they have the urban planning, and they also have Energy business. Energy business is not necessarily fee business. They are doing the Energy business themselves. There are various ways to contribute to security and safety. We just need to mix and match these different components that would best contribute to the growth of the group.
Is asset management a meaningful target for the future years? As you know, we have TMAM, Tokio Marine Asset Management, within the group. Do we want to expand this kind of business?
I would not be ruling out the option of doing so, but right now, asset management business itself is not at the center of the focus right now as we look into the future.
Thank you very much.
Next question, on phone, SBI Securities, Otsuka-san.
Otsuka from SBI Securities. I hope you can hear me.
Yes, loud and clear.
Top page. In your story of value creation, I definitely would like to ask this question to you, Koike-san. In order to realize your purpose, what do you think is lacking? If I ask it the other way around, what do you think needs to be changed on a short-term basis? Or what will take time but has to be changed over the medium and long term? If I could have your views on that. I kind of asked a similar question six months ago, but I hope you could respond to this question.
Yes. Thank you very much for your question. In order to realize our purpose, what is missing? What has to be changed? Rather than saying what is missing, I think this is something that I said when I assumed the position. For Tokio Marine Group, the business model evolution is what we need. We have been in the insurance business and generating intrinsic value and offer value to our customers and society. We have been focusing on that. But in addition to insurance, through Solutions business, we will offer a sense of safety and security. Changing the mindset, I think, is something that will require major change.
And also, the products offered as solution by bringing ID&E into a group, and the preparation company that is currently being developed, that is how we want to materialize the Solutions business. The lineup, the product mix of solutions is also extremely critical. We need to enrich our offerings. What will make this possible is the employees, the aspiration, should I say, of our employees. As I said at the outset, I have been holding town hall meetings in the south side of Japan, and I am sensing the strong passion amongst our employees. The members that are working to change the business model, I feel that they also are very enthusiastic about this.
When you ask me the question of what is lacking today, I would say that the products that we can offer in Solutions business, I think that would be a short answer to your question.
Understood. Thank you very much. Kind of a follow-up question, sorry about that. Page 24. This is a very easy-to-understand chart on page 24. Appreciate. You were talking about employees' mindset and aspirations. Apart from that, I also want to ask a question from a capability perspective. The page 24 at the bottom, this is about acquiring International business, but Solutions business, this is outside of insurance intrinsic value, and it is a non-insurance M&A. Not just a mindset change, but capability, I think, has to be added. Anything to add on that?
Yes. Thank you for that. For Tokio Marine Holdings, how are we going to manage the Solutions business? That is very critical. I did not say that we are missing something on that, because we have welcomed ID&E in the group, and we have already built up that capability within PMI. Applying common sense as an insurance company, there are areas that are not working well. That is definitely an area where we are striving to deliver in the Solutions business, which is new to us. But by having this new company into our group, ID&E, allows us to come up with a more flexible way of thinking, and value creation-wise, definitely this is going to bring about some positive impact.
Understood. Thank you very much for that. I look forward to that capability within your group. Thank you.
Thank you very much. Any other questions? Watanabe-san from Daiwa, please.
ROE and adjustment of the denominator. Sompo Holdings, who has already begun IFRS, the unrealized gain becomes part of the capital, and that makes the denominator bigger. As you sell down your equities, the E, which is the denominator side of the equation, gets bigger and bigger. Apart from EPS or ROE, any capital adjustment you are planning to do for that, the denominator side. Also, when you review this every six months, is it so that you can adjust it for more than 2% of your market cap?
Okada-san will answer the question.
IFRS, with the introduction, we have revisited, changed the definition of ROE, and then the denominator side of the equation. When a gain is unrealized, it does not get included in the denominator. However, once we sell the equities and it becomes cash, it does get included in the denominator. In the next midterm plan, towards fiscal 2029, as we need to be selling down our equities to zero, we have factored in that the denominator is going to get bigger. Even including that, we want to bring up the ROE to the global peer level, and that will be part of the new midterm plan starting from 2027.
As capital adjustment, the appropriate level of capital from our perspective, in a multifaceted manner, we look at the level of ROE, and also what we want to prioritize, which is the business investment, the M&A pipeline, and also in the current plan, there will be some contribution to the growth of EPS. We want to look at these factors comprehensively. Rather than including ROE to those targets, by doing what I have mentioned, we want to be raising up the ROE so that we make a midterm plan and then we review the situation every six months. That is what I foresee.
When you do that, 2% of market cap and adjustment over and above that level, would you still do it even if it is at that scale?
EPS growth, we are aiming for 8% or more. 1%- 2% will come from the adjustment. 2% is the level that we are thinking of in terms of contribution to EPS. Once we move on to the next midterm plan, we still really haven't started discussing that in details yet. Do we set the target for EPS growth? Are we going to be setting the target for how much of ROE growth? Also share buyback, are we going to be announcing any plans related to share buyback? Those have yet been discussed internally.
Are there any other questions? If not, can I ask Mr. Koike to give a closing remark?
Yes. Thank you very much for joining us in spite of your busy schedules. Through our exchanges with you, we, I think, are able to receive ideas and hints on how to grow our business going forward. I might be repeating myself, but we want to deliver a growth evolution that is true to our identity and grow our business. Solutions business, Domestic, P&C, and International business. We don't exclude the possibility of welcoming new companies through M&A. With good governance in place, we'll make sure to further grow our businesses so that we will evolve and grow as a global company with roots in Japan. Your continued support is very much appreciated. Thank you very much.
With this, we would like to conclude the IR briefing for the second half of FY 2025. Thank you very much for joining us today.