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Edited Transcript of 8729.T earnings conference call or presentation 13-Feb-20 6:30am GMT

Q3 2020 Sony Financial Holdings Inc Earnings Call

Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Sony Financial Holdings Inc earnings conference call or presentation Thursday, February 13, 2020 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hiroaki Kiyomiya

Sony Financial Holdings Inc. - MD & Director

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Conference Call Participants

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* Kazuki Watanabe

Daiwa Securities Co. Ltd., Research Division - Research Analyst

* Koichi Niwa

Citigroup Inc, Research Division - Director and Analyst

* Koki Sato

Mizuho Securities Co., Ltd., Research Division - Senior Analyst

* Masao Muraki

SMBC Nikko Securities Inc., Research Division - Senior Analyst & Global Financial Strategist

* Natsumu Tsujino

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst

* Wataru Otsuka

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [1]

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This is Kiyomiya from Sony Financial Holdings. I am delighted to explain our consolidated financial results for the third quarter FY '19 using the materials distributed to you. Please turn to Slide 4.

First, I would like to go through the highlights of the third quarter of FY '19 for the group. The results for the 9 months until the third quarter end exceeded our projections, so we revised upwardly our full year forecast for ordinary revenue, ordinary profit and the profit attributable to owners of the parent. We also made an upward revision of our full year dividend forecast to be JPY 70 from JPY 65 per share. Going forward, we will determine dividends while aiming for an amount equivalent to approximately 30% of consolidated adjusted profit.

Sony Life's new policy amount for the 9 months and up until the third quarter decreased year-on-year due to a drop in the sales of family income insurance. Ordinary profit increased mainly as costs fell for the acquired new policies and profit rose in accordance with the expanded policy amount in force.

New business value for the 3 months in the third quarter grew quarter-on-quarter thanks to the revised premium rates of single-premium U.S. dollar-denominated whole life insurance and also thanks to the relaunched sales of corporate products. The new business margin went up mainly due to a change in product mix.

Next slide, please. Now I will explain the group's consolidated operating performance. Ordinary revenue was JPY 1.426 trillion, up 26.3% year-on-year. Ordinary profit was JPY 81.2 billion, up 9.7%.

Next, I will go through the operating performance of Sony Life. Next slide, please. Sony Life ordinary revenue was JPY 1.2951 trillion, up 28.7% year-on-year. This was driven by the improved investment performance in the separate account and the higher insurance premium revenue mainly from the single-premium insurance.

Ordinary profit. Costs related to the newly acquired policies fell and profit rose in accordance with the expanded policy amount in force. These factors more than offset, firstly, the effect of a deterioration in profit on derivative transactions to hedge market risks for available-for-sale securities in the general account. Secondly, a rise in operating expenses and then a profit deterioration caused by the market fluctuations and others in the variable life insurance. All in all, it became JPY 66.6 billion, up 10%.

Next slide please. New policy amount due to the decline in the sales of family income insurance became JPY 3.8282 trillion, down 16.7% year-on-year. Sales of term insurance and variable insurance for corporate customers declined but the U.S. dollar-denominated insurance sold well, making the annualized premiums fell, new policies remained flat year-on-year at JPY 57.2 billion.

Next slide please. Policy amount in force became JPY 50.9 trillion, up 2.7% from the end of the previous fiscal year. Annualized premiums from insurance in force became JPY 911.6 billion, up 2.5%.

Next slide please. The lapse and the surrender rate became 3.3%, down 1.41 percentage points year-on-year. This was driven by the declining trend in canceling policies among certain customers. They canceled existing policies and joined new family income insurance and other policies as premiums were revised in February in 2018.

Next slide please. Core profit became JPY 93.7 billion, up 47.1% year-on-year due to a decrease in the provision of policy reserves for the minimum guarantees for variable life insurance and also due to the profit increase in tandem with the expanded policy amount in force.

Next slide please. Ordinary profit became JPY 66.6 billion, up 10%. Though the net gains deteriorated on hedges and variable life insurance, core profit actually grew. Sony Life increased its hedged ratio in FY '19 with a greater emphasis on suppressing capital fluctuations based on economic value, which is much closer to the actual growth in the life insurance business. However, policy reserve is different between the Japanese GAAP and economic value-based valuation. This makes the Japanese GAAP accounting profit more susceptible to market conditions.

Next slide please. The number of Lifeplanner sales employees became 5,047 (sic) [5,074], down 45 from the last quarter end and down 32 from December 31, 2018. Sony Life will endeavor to expand its business scale through a more stringent recruiting of Lifeplanners and further improve their productivity. Next, I will explain operating performance of Sony Assurance.

Next slide please. Ordinary revenues for Sony Assurance increased 4.9% year-on-year to JPY 90.5 billion due mainly to an increase in net premiums written for mainstay automobile insurance. Ordinary profit grew 2.9% year-on-year to JPY 7.6 billion, mainly due to reversal of the catastrophic reserve despite the negative impact of a higher loss ratio.

Next slide please. Net premiums written was up by 4.9% year-on-year to JPY 88.8 billion due to stable sales of mainstay automobile insurance.

Please turn to the next slide. The sum of the 2 ratios was up by 0.6% year-on-year to 87.8% due to an increase in the loss ratio on the earned-incurred basis. Now I would like to move on to explain about the operating performance of Sony Bank.

Next page, please. Consolidated ordinary revenues for Sony Bank expanded 8.8% year-on-year to JPY 36.7 billion due to increase in such income as interest on loans in line with the growing mortgage loan book and higher interest income on investment securities. Ordinary profit increased 15.7% year-on-year to JPY 8.1 billion for the same reasons as ordinary revenues.

Using the next slide, I would like to walk you through the results for Sony Bank on a nonconsolidated basis. Customer assets amounted to JPY 2.6253 trillion, up JPY 142 billion compared to the end of last fiscal year. The yen deposit balance was JPY 2.0478 trillion, up by JPY 108.4 billion, due mainly to an increase in newly accumulated funds with increased number of accounts. The foreign currency deposits translated into yen amounted to JPY 451.9 billion, up JPY 32.3 billion largely driven by an increase in time deposits. The outstanding loan balance increased by JPY 130.3 billion to JPY 1.8744 trillion due to a steady growth in mortgage loans. This concludes the explanation of the results for the 3 companies.

Please turn to Slide 19. Let me now go through the guidance for the full year. We revised up the earnings guidance as the ordinary revenues, ordinary profit and profit attributable to owners of the parent for the first 9 months of the year exceeded the projections made at the beginning of the fiscal year. The reason for the upward revision of the ordinary revenues is due to better-than-expected investment performance in the separate account and higher premium income, mainly from the single-premium policies in the life insurance business. Ordinary profit has also been revised up due mainly to better-than-expected results from all the businesses. In the life insurance business, the acquisition cost of new policies fell, which more than offset the impact of an impairment loss on available-for-sale securities in the general account and a deterioration in net gains or losses stemming from market fluctuations in the variable life insurance.

From Slide 21, I would like to explain about our dividend outlook. The full year dividend forecast has been revised up to JPY 70, an increase of JPY 5 from JPY 65 per share from the previous announcement on April 26, 2019. There is no change in our policy to determine dividends with a focus on economic value-based profit indicators, and we will continue to aim for a stable increase in dividends in line with earnings growth over the medium to long term.

In making decisions over dividends, we will look at consolidated adjusted profit instead of consolidated adjusted ROE that was previously used. We will determine the future dividend paying due consideration to the business environment and growth of our group and aim for approximately 30% payout from the consolidated adjusted profit.

Using Slide 23, I would like to explain Sony Life's MCEV. Despite the negative impact of interest rate fluctuations, Sony Life's MCEV remained unchanged compared to the previous quarter at JPY 1.6929 trillion, due mainly to the acquisition of new policies. New business value for the third quarter of fiscal '19 increased to JPY 17.1 billion from the previous quarter, thanks to the rate revision of U.S. dollar-denominated single-premium whole life insurance policies and resuming sales of policy for corporate clients. New business margin was up by 1.3 percentage points to 5.1%, due mainly to a change in product mix.

Next slide please. Despite the MCEV growth stemming from the new business value and expected existing business contribution, Sony Life's MCEV as of December 31, 2019, declined to JPY 1.6929 trillion due to interest rate fluctuation and dividend payment.

This concludes my presentation. Thank you very much for your attention.

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Questions and Answers

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Operator [1]

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Let us now begin the Q&A session. First, I will have Mr. Muraki from SMBC Nikko Securities.

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Masao Muraki, SMBC Nikko Securities Inc., Research Division - Senior Analyst & Global Financial Strategist [2]

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My first question is about the dividend you recently changed. According to this page, Page 21, correct me if I'm wrong, but you have not changed medium-term dividend policy this time. In other words, you are still aiming a steady increase in dividends. But now you are telling us you are going to aim for an amount equivalent to approximately 30% of the adjusted profit. How binding this volume is going to be going forward. That's what I'd like to know. Say, let us assume that interest rate has come down in the next fiscal year, and you are not growing your adjusted profit. In this case, the dividend increase was up. You may say -- unless there are no extreme cases taking place, you are still going to assume for the minimum dividend increase as much as JPY 2.5, which has been the case so far. So now I'd like to inquire your basic thought behind those things.

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [3]

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Allow me first to respond to your dividend question. Yes. At this time, we have changed our dividend guidance aiming at about 30% of the adjusted profit. But we did not change our midterm policy. We still maintain our basic idea that in principle, we will increase dividends based upon the business expansion. As you have indicated, with the interest coming down, new business value, which accounts for the most of the adjusted profit will come down. Yes, you are right there, but if the session is going to be temporary, in principle, we should be able to increase the adjusted profit by revising the premiums, thus pushing up the adjusted profit. So we will not have to decrease the dividend in principle. And there will be no change as for this basic stance.

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Masao Muraki, SMBC Nikko Securities Inc., Research Division - Senior Analyst & Global Financial Strategist [4]

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A follow-up on the dividend growth. The idea for the minimum of JPY 2.5 per year has gone completely. Please let me know about this. Would you say you are still having this basic assumption?

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [5]

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Yes, in regard to JPY 2.5 -- in regard to the ongoing future dividends, again, we would rather explain it in the next term, we are still maintaining our yen not to decrease dividends but increasing dividends. But we cannot say anything about anything specific at this point of time.

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Masao Muraki, SMBC Nikko Securities Inc., Research Division - Senior Analyst & Global Financial Strategist [6]

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My second question is about the new policies value on Page 39. What is your real -- or true earnings and capacity for the current new policies. Looking at this chart particularly, I can tell that you have a rather high level last year. But if I may say, this was brought about due to the switching between the family income and medical insurance through your sales activities. And I'm just wondering how -- if this -- the JPY 17 billion is going to be [true to] your performance level. Or would you say that you have any plan to increase this level by launching a third sector and other new products next fiscal year? Please share your thoughts in this regard.

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [7]

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Happy to respond to your questions from Sony Life. For the full year for FY '19, we are assuming for the higher end of JPY 60 billion for the new business value. So with the current and interest rate, our base is going to be JPY 17 billion or somewhat higher. This is going to be our baseline. That's all from me.

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Masao Muraki, SMBC Nikko Securities Inc., Research Division - Senior Analyst & Global Financial Strategist [8]

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Are you planning to launch any new products and which may push up new business value.

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [9]

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Yes, we are starting new products to be developed. But I have nothing I could share with you at this point of time.

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Operator [10]

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Ms. Tsujino, Mitsubishi UFJ Morgan Stanley Securities, please?

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Natsumu Tsujino, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [11]

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What are the major factors for the improved new policy EV in the third quarter particularly on a quarter-on-quarter basis? I appreciate if you could explain which specific product sales went up or down. In the second quarter, you had a good business with your U.S. dollar-denominated product before the premium revision. But I would say it did not actually contribute much to the increase in EV for new policies. So I would like to inquire here, what are the major reasons for the numbers you are exposing to us. My second question is about the minimum guarantees on hedging for the variable insurance. You told us there is going to be some hedge error. I haven't finished my calculation, but given the anticipation on the MCEV, so I would like inquire what kind of error are you having. If I'm not wrong, I think you had some error taking place in the hedge space. I'm just wondering whether or not you are having the same problem right now. This is my second question. My third question here is, you told us you all explained your policy about the shareholders return in May. Again, MCEV has been referred to on many occasions. Again, new policy EV is not growing, but EV as a whole is growing. If that is going to be the case, do you say you can opt for the stable dividend payment? This could be one idea. I'm just wondering whether or not you agree to this idea.

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [12]

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Allow me to respond to your first 2 questions from Sony Life. New business value for the third quarter increased 20% over the second quarter. Reasons for this is, first, we had a premium revision for the U.S. dollar-denominated whole life product. And secondly, we launched the product for corporate customers, which help us to push up their volume, particularly in term deposition. I think they are making contributions of 50%, respectively. In regard to your question concerning the hedging operations for variable insurance. Starting from the current fiscal year, we made a shift to control capital fluctuations based upon economic value in regard to the hedging for minimum guarantees for variable insurance. And the hedge gap is easier to take place, dependent upon the EV and the difference between the statutory accounting and U.S. GAAP. For the 3 months in the third quarter, we had about JPY 3.5 billion on the negative side. With the hedge position taken in accordance with the economic value, if the market is good, namely high stock price and cheaper yen, variable insurance performance goes up and we will get a somewhat negative impact on the statutory side. That's the position we are taking. So this JPY 3.5 billion negative is not necessarily coming from hedge operations. Rather, it is the gap between the statutory accounting and economic value. It was caused by the different impacts coming from hedges. I would like to explain our dividend level in May or around. We are now looking into the numbers of next fiscal year's business plan as well as in our midterm plan projection. We are now assuming for the 30% level of adjusted profit. So we need to better understand the profit contributions from Sony Assurance and Sony Bank to further study our dividend level going forward. This needs to be done before we say anything concrete in front of you.

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Natsumu Tsujino, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [13]

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I'm just wondering if you could quantify the impact from the relaunch sales for corporate customers. Say, in terms of the premiums year-on-year or quarter-on-quarter, I wonder if you could help me with the specific numbers here.

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [14]

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Well, at a high level, actually, looking at the new businesses between individuals and corporations. So before and after, actually, the ratio was -- individual versus corporations was 80 to 20 in terms of new policy amount. But after the relaunching, we have come back to this level. The third quarter of FY '19 has come back to the level of the second quarter FY '18.

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Operator [15]

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Next, I would like to have Mr. Watanabe from Daiwa Securities.

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Kazuki Watanabe, Daiwa Securities Co. Ltd., Research Division - Research Analyst [16]

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Yes. This is Watanabe from Daiwa Securities. I have 2 questions. First, I would like to double check on this 30% or around dividend payout ratio. Is this going to be truly exact? You told us earlier that in principle you will not decrease dividends. I was able to appreciate the fact that there is going to be a downward rigidity. Then how about -- what's going to happen due to the interest factors? Again, DPS actually 30% or around. Actually, your profit may go up much bigger than you had expected. So I appreciate if you could share your thoughts in regard to this in upside case.

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [17]

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Yes. With the interest going up, we could have a temporary increase in our adjusted profit, but may I remind you that we still have a belief in the stable dividend growth. When we increase dividend rapidly at one point, we rather wish to avoid declines in the dividend afterwards. If it is not a temporary one, if we knew it will continue, then we will first raise the level then increase the dividend. But if it is temporary, then we should try to restrict the level of increase so that we can go for a stable dividend growth.

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Kazuki Watanabe, Daiwa Securities Co. Ltd., Research Division - Research Analyst [18]

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So what exactly is the difference between the conventional thinking of using consolidated adjusted ROE to determine the level of dividend versus the new approach you have introduced, which is to aim for roughly 30% payout from the consolidated adjusted profit?

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [19]

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We changed the reference to consolidated adjusted profit because we believe that would make it easier for you to forecast the level of dividend to a certain extent as we disclose the progress of profit every quarter. The numerator will be the same, but consolidated adjusted ROE could change subject to denominator MCEV. In that sense, I believe we have enhanced the transparency of our guidance.

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Kazuki Watanabe, Daiwa Securities Co. Ltd., Research Division - Research Analyst [20]

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You do not disclose the guidance on adjusted profits now, but will you be giving guidance going forward? Will you also disclose the progress of adjusted profit in the earnings flash report?

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [21]

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We already disclosed the progress on the adjusted profit. Going forward, we will consider offering some form of full year guidance.

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Kazuki Watanabe, Daiwa Securities Co. Ltd., Research Division - Research Analyst [22]

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My second question is regarding asset management on Page 33. Your exposure to foreign bonds has increased. Could you tell us the reason why? Is it to match the growth on the liability side, namely the foreign currency-denominated insurance policies? Or is it because you are trying to pre-hedge based on some outlook? Also from the outset of the year, U.S. rates have dropped significantly. What is the impact on the new business value of the foreign currency-denominated insurance policies?

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [23]

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For the assets in foreign currency, the proportion of U.S. Treasury bonds is higher than in fiscal '18. As you pointed out, it is partially due to pre-hedging for the new business as well as the growth we saw, particularly with the single payment foreign currency-denominated insurance policies for the first 3 quarters of the fiscal year. Due to these reasons, the exposure to foreign bonds has increased this fiscal year. The interest rates have declined in the fourth quarter, but thanks to pre-hedging we believe the impact on the value of new business will be limited.

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Operator [24]

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Next, I will take questions from Mr. Sato from Mizuho Securities.

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Koki Sato, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [25]

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My first question is just for my confirmation. I believe the change in economic value of MCEV from September end to December end was due to a change in the economic assumptions. Is it correct to assume that the decline over the 3-month was mainly due to the decline on the asset side, reflecting the rise in the interest rate?

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [26]

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Regarding the 3-month change in EV, impact of the fluctuation in yen interest rate was roughly JPY 40 billion. It was largely the flattening of the curve rather than the actual level of interest rate that impacted the asset and yen rate had a negative impact of approximately JPY 40 billion. In addition to the impact stemming from the interest rate, change in the stock price, currency and volatility had a positive impact of JPY 20 billion. So net-net, the total impact was roughly negative JPY 20 billion.

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Koki Sato, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [27]

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My second question is not directly related to the third quarter results. You have disclosed the actual figure on the lump sum accumulation of contingency reserve you will make as a result of merging AEGON Sony Life and suspending to seed reinsurance. After making the lump sum provision, what would be the normal level of provision or reversal of the contingency reserve as well as the trend? Would the impact on the EV be limited from this merger and the suspension of seeding reinsurance?

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [28]

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We are just starting to examine our business plans related to the merger of AEGON Sony Life and the liquidation of the reinsurance company, SA Re. The specific strategy after the merger will be presented at Sony Life's 2020 corporate strategy meeting as part of the overall strategy. Having said that, I believe the merger will have limited impact on MCEV, ESR and statutory solvency margin.

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Operator [29]

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Now I will take questions from Mr. Niwa from Citigroup.

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Koichi Niwa, Citigroup Inc, Research Division - Director and Analyst [30]

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I'd like to ask a question about the number of Lifeplanner sales employees in your life business for which you have a target to increase the number to 5,700 over the medium term. I believe that you have not been able to really grow the headcounts as you focus on quality in recruiting. What are the measures that you are currently taking? And then what's the time line for achieving the medium-term target?

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [31]

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Based on current hiring conditions, we expect the number of Lifeplanner sales employees to decrease slightly at the end of fiscal '19 compared to the end of fiscal '18. We were unable to secure candidates as we had planned for this year. Stringent recruiting was one of the reasons, but we will continue to strengthen recruiting activities while continuing to focus on the quality of the candidates.

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Koichi Niwa, Citigroup Inc, Research Division - Director and Analyst [32]

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Next question is about your banking operation around some topical issue. In your mortgage loan business, how do you control the risk associated with loans extended for investment properties? Can you tell us what kind of qualitative measures you have in place to prevent any wrongdoing, including the items on the checklist? What are some of the risk factors that you are currently monitoring? Sony Bank originates loans for investment properties, and I would like to refer to the [Applus] case.

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [33]

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Sony Bank extends the loans on condos for investment purposes in collaboration with [Jax]. Sony Bank conducts its own credit screening. We contact the customers directly to check that documents required for loan application, such as annual income certification have not been tampered by the real estate brokers. In addition, Jax provides guarantee so they also conduct their credit screening process. Sony Bank uses information only available for the banks and for the credit screening. So in a way, we have 2 lines of defense to prevent any fraud. With the rising land price, the cap rate is on a declining trend for the investment properties. We check the yield on locations around different railway lines to avoid the concentration of new loans in a low cap rate area, and the portfolio is checked in a holistic manner through the Risk Management Committee. There is no room for any fraud to happen and there has never been such case in the past. The profitability is good and the operation contributes positively to the business performance.

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Operator [34]

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Next, I will take questions from Mr. Otsuka from JPMorgan.

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Wataru Otsuka, JP Morgan Chase & Co, Research Division - Analyst [35]

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I'll switch the topic slightly from the financial results and would like to ask you about your strategy for the next fiscal year. Mr. Kiyomiya mentioned that the company is working on the numbers now so an overall strategy would be appreciated. It's been almost a year with the new Board members and you will be conducting the first annual shareholders' meeting and the announcement of the full year results as well as the guidance for the new fiscal year. I'm sure that the new Board members have been discussing on various topics. Could you share with us what are the factors that you may incorporate in your strategy or any new information that you may start to disclose. For instance, would you be more transparent on how you think about the level of capital buffer which you have not made open to date. Please let us know what you can share with us at this point.

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [36]

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With the new Board members, we are currently discussing on how we should think about dividend and appropriate level of capital. We will share the information with you when we reach a conclusion. Operating companies are working on their respective business strategies so we hope to be able to present the contents at the corporate strategy meeting.

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Wataru Otsuka, JP Morgan Chase & Co, Research Division - Analyst [37]

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Just to confirm on that point. As for the time line, would you have come to a specific decision before the corporate strategy meeting and have something concrete to share?

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [38]

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The next major announcement will be at the time of announcing the financial results and holding the corporate strategy meeting. So we see that as the next target date.

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Operator [39]

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Since there are no further questions, Mr. Kiyomiya would like to make one final remark.

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Hiroaki Kiyomiya, Sony Financial Holdings Inc. - MD & Director [40]

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The challenging environment remains unchanged, but all the companies are growing their respective business. We hope to continue to enjoy your enduring support. Thank you very much for joining us today.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]