- Q1With respect to the impact of CRE loans on your financial results, what are the outstanding balance by loan-to-value (LTV) ratio in the office sector and the projected capital loss ratio as of the end of September? In addition, why did you choose this timing to recognize the loss? It seems that your timing of recognizing provisions is late compared with U.S. banks and other companies.
- A1
We cannot show you the loan balance data by LTV. The capital loss ratio is projected to be 10.4% for the all CRE loans and 16.5% for the office sector by the end of 2024. The outstanding balance of CRE loans is USD11.5bn, of which the office sector represents 30%. In the office sector, the average capital loss ratio is approximately 40% for the loans for which we have a concern about their principal repayment and interest payment. Its breakdown is as follows: the loans whose capital loss ratio is in the 20% range account for approximately 20%; those with the capital loss ratio in the 30% range account for about 25%; those with the capital loss ratio in the 40% range account for around 35%; and those with the capital loss ratio over 50% account for roughly 20%.We understand that the differences in the timing of provisioning compared with U.S. banks and other companies mainly result from the characteristics of respective portfolios and different accounting standards adopted. Given that the prolonged market downturn has been placing greater-than-expected pressure on borrowers, we have recently made more conservative estimates in posting CECL provisions in comparison with the conventional practice of recognizing CECL based on the projected rise in values after the implementation of business plans.If, after consultations with accountants, we find that there is any portion that cannot be posted during the fiscal year 2024, we will recognize such portion as a capital loss in 新しいカジノ 入金不要ボーナス5.
- Q2On the full-year EI loss ratio of auto, are you keeping the projection almost as it was originally projected, when excluding Nat Cats?
- A2
Our revised projection for the loss ratio of auto excluding Nat Cats expects slight deterioration from the original projection, but it is generally unchanged from the original projection disclosed at the IR meeting in May.
Although we expect both accident frequency and severity will slightly deteriorate, we have not made any material change to our original projection of a 4% fall in accident frequency given the plateauing of surge in driving after the end of the COVID-19 pandemic and a 4% rise in accident severity mainly due to the impact of inflation. - Q3Regarding your TOB for Integrated Design & Engineering Holdings Co., Ltd. (ID&E), what is its impact on adjusted income and on ESR? Also, what kind of synergies can you expect with your insurance business?
- A3
We decided to merger ID&E because we found a considerable strategic significance in acquiring and developing the capabilities of ID&E which has engineering technology that is directly connected to improving the resilience of society. Our decision is based on our needs to simultaneously increase our capabilities through collaboration with other companies participating in the Disaster Prevention Consortium CORE.
As for the synergy, as we engage in pre- and post-incident areas related to disaster prevention, we expect that gaining ID&E’s solution development ability, which has been our challenge, will create mutually complemental value propositions.On the impact on ESR, given that ID&E’s net assets were just shy of JPY84.0bn and PBR 1.17 times as of September 30, the value of their goodwill is limited. Being a consulting company that has a low capital load, their impact on our ESR is also limited. - Q4On CRE loans, you previously explained that their impacts would be limited due to the uniqueness of DFG, despite concerns existing in the U.S. market. What has changed that has led you to adopt the recent conservative approach? Please explain the change in your approach including its background.
- A4
We invest in CRE loans on the assumption that sponsors will execute business plans and increase the value of properties. However, some of the sponsors have recently experienced financial difficulties and have gone bankrupt or found it difficult to continue their business plans. Given this situation, we have estimated reserves by adopting a conservative assumption that does not factor in value increases or the execution of business plans by sponsors. This is the difference from the past.
- Q5What are your views on the future risks of the International business from the aspects of underwriting and investment, respectively?
- A5
Underwriting may be affected by social inflation, especially in the US. Jury verdicts demanding huge compensation payments temporarily decreased partly due to the COVID-19 induced court closures. With the reopening of courts, however, the number of such verdicts has been on the rise, especially in the US. We need to closely monitor this trend. We will continue taking measures including underwriting measures such as risk selection and rate increases and the provision of appropriate reserves.
On investment, we project a cumulative loss of USD1.2bn on CRE loans by the end of the current fiscal year. We currently do not expect any loss of a similar size for other assets. - Q6On the outlook of the U.S. business, there are concerns about underwriting downside risks such as the recent progress in an out-of-court settlement between the airplane leasing industry and an insurance company. Has there been any change in your view on the outlook of the U.S. business, such as a shortfall in the provisioning of reserves?
- A6
Currently, we are not aware of any major concern regarding reserves.
In terms of the underwriting rate environment, rate increases have slowed for property insurance. For casualty insurance, rate increases are continuing in general lines such as liability, while rates are going down for some lines including D&O, excess workers’ compensation, and financial lines. We consider that we need to continue monitoring closely these changes in the rate environment. Our Group companies have been able to increase their rates at a pace exceeding their plans. - Q7Can we consider that the acquisition of ID&E will increase your company’s presence in the target markets in the disaster prevention and reduction area, which you said you were aiming to achieve at the IR meeting in May? ID&E does not seem to specialize only in disaster prevention and reduction. Can you tell us the background to the acquisition, including its synergy?
- A7
Through our collaboration at the Disaster Prevention Consortium CORE, we have already confirmed that ID&E’s technologies and perspectives related to disaster prevention have a high value and can offer added value if we incorporate them into pre- and post-incident areas. The acquisition of ID&E will therefore dramatically increase our ability to engage with the disaster prevention and reduction area. Furthermore, by expanding the areas in which ID&E has strengths using our business foundation, we will be able to access larger markets and a larger customer base. We intend to create added value that is more than insurance in both these aspects.
- Q8On the status and outlook of the sales of business-related equities, has there been any change to your plan to halve your holdings of business-related equities in three years and to eliminate them in six years? You have revised upward your sale plan for business-related equities for the current fiscal year from the original plan. Is this due to individual factors? Do you expect to achieve your overall plan earlier than in six years?
- A8
Currently, business-related equity sales are progressing smoothly, including their progress in terms of their book value. For now, we will maintain the milestone of halving our holdings of business-related equities by 2026, which we stated in our medium-term plan. With this in mind, we will accelerate sales where possible through negotiations with issuers. We have recently revised upward our annual sale plan of JPY600.0bn to JPY750.0bn. This reflects the sales agreements which were under discussion at the start of the fiscal year but have been reached subsequently and the situation of share prices, among other factors.
- Q9Regarding synergy with ID&E, I understand that the company’s earnings are skewed to January to March due to its business structure that relies on public works. Will this become a factor that increases volatility of your consolidated financial results?
- A9
We are aware that one of the earnings characteristics of construction consulting services is that more earnings tend to arise in winter. ID&E, however, has grown over the last 20 years, by gradually increasing their earnings over a long time. Furthermore, their earnings are less volatile and will become a source of stable income, in comparison with the earnings characteristics of insurance underwriting, because ID&E mainly gains income from consulting fee.
Aside from the disaster prevention and reduction area, we can expect synergy between ID&E’s urban space business and our mobility business (新しいカジノ 入金不要ボーナスne Smart Mobility) and between ID&E’s energy business and our decarbonization business. By covering pre- and post-incident areas with ID&E’s technological prowess from many aspects, we hope to offer services under one roof and create and develop a new business that is significant and highly impactful in the Japanese society.
These information materials are prepared based on the currently available information for us and described subject to our predictions and forecasts carried out at the time of preparation.
It must be noted that what is described therein does not guarantee our future business performance and carries certain risk of misjudgment or uncertainty.
Accordingly, you are kindly requested to bear in mind that there may be a possibility of sizable divergence between the actual business performance in the future and that of our predictions or forecasts described therein.