We aim to improve capital efficiency by optimizing group capital allocation through more sophisticated business management and flexible capital transfers.
Improving capital efficiency by optimizing group capital
One of the top priorities of the Medium-Term Management Plan (2022–25) is to improve capital efficiency, and we will promote the optimization of capital allocation to each business in the Group.
First, we will allocate capital to more efficient businesses through more sophisticated business management and flexible capital transfers. This highly efficient investment will increase profits and capital, which will then be used to invest in more efficient businesses, thereby increasing returns to shareholders.
In addition, we will improve corporate value by clarifying issues in each Group company’s business and promoting initiatives to resolve these issues.
Specific measures for sophisticating business management
Specifically, we will strengthen the monitoring of return on risk (ROR) and value added (VA) for the various businesses of each Group company. For those businesses that do not meet an ROR equivalent to 10% of Group Adjusted ROE, we will clarify the issues and consider and promote measures to improve ROR.
For businesses that cannot be expected to improve and have low growth potential, we will consider the possibility of withdrawing from them, and allocate the capital to more efficient businesses. The review focuses on companies that 1) continue to fail to generate sufficient earnings relative to their capital costs and are not expected to improve, 2) are not expected to contribute to the Group in terms of synergies and other benefits, and 3) are not expected to grow in the markets where they operate.
The holding company is always aware of the capital that can be transferred by each Group company, and the method of transfer will be envisioned in advance. This will enable us to be poised to flexibly allocate capital to more capital-efficient business opportunities, such as investments in growing businesses.
Policy on Investment in Existing Businesses and New Businesses
Regarding the business investment policy, we will consider investments that lead to the expansion of corporate value, including bolt-on type investments. Specifically, we will efficiently implement three types of business investments to expand corporate value: IT investments and other investments to strengthen competitiveness, M&A and other investments to diversify and expand our business portfolio, and start-up investments and other investments to create new business areas. All investments will be considered with a clear awareness of the capital cost (7%) and with an emphasis on investment returns.
Capital Strategy Risk Reduction
MSI Aioi Life has completed its efforts to reduce interest rate risk by promoting ALM through increased investment in ultra-long-term bonds, with the hedge ratio (interest rate sensitivity of assets* / interest rate sensitivity of liabilities) at a level of approximately 100% as of the end of FY2021.
At the same time, we will continue our efforts to reduce the peak risk of strategic equity holdings by ¥100 billion per year (more than ¥400 billion in total during the Medium-Term Management Plan (2022–25)), aiming for a weighting of less than 10% of consolidated total assets and less than 30% of risk volume.
To mitigate the volatility of profit, we are working to reduce overseas catastrophe risk, aiming to reduce periodic profit/loss impact by 20% in FY2022 compared with the previous year.
*The change in market value when interest rates change 0.5 percentage point
We will maintain financial soundness equivalent to an AA rating, invest for sustainable growth, and provide stable shareholder returns.
The Group aims to maintain financial soundness equivalent to an AA rating, and as a guideline, we have set an appropriate level of ESR at 180%–250%. In the Medium-Term Management Plan (2022–25), the upper limit of ESR was raised by 30 percentage points to accumulate capital to support business investments.
The ESR as of March 31, 2022, was 228%, a decrease of 7 percentage points from the previous year, as a result of the redemption of subordinated debt and more advanced measurement of the amount of risk. We will continue to balance risk-taking for sustainable growth and shareholder returns, but we would like to expand shareholder returns if there are no special business investment projects or if the ESR consistently exceeds 250%.
We will return 50% of profits to shareholders through dividends and share buybacks.
In the first stage (FY2022–23) of the Medium-Term Management Plan (2022–25), we will return 50% of Group Adjusted Profit. In the second stage (FY2024–25), we will return 50% of base profit for shareholder return* to shareholders through dividends and share buybacks.
Moreover, we will flexibly and tactically implement additional returns based on market trends, the business environment, capital conditions, and other factors.
Guidelines for considering additional returns include cases where ESR consistently exceeds the upper limit of the target range, where stable returns are maintained when income declines due to large-scale natural catastrophes, etc., and where efficient investment for growth cannot be foreseen.
Regarding shareholder return for FY2021, we decided to increase the annual shareholder dividend by ¥25 from the previous year to ¥180 per share and to repurchase a total of ¥75 billion of our own shares, resulting in a dividend yield of 4.5% and a shareholder yield of 7.9%. For FY2022, we expect to increase the annual dividend by another ¥5 to ¥185 per share. We will continue to aim for stable shareholder returns by increasing corporate value through sustainable growth.
Note: Base profit for shareholder return = Net profit on an IFRS basis − Adjustments*
from net profit on an IFRS basis + Gain/loss on sales of strategic equity
*Impact of market fluctuations, deferred effects of new policy expenses, gains/losses
on unfavorable contracts, amortization of intangible assets, goodwill impairment