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Edited Transcript of 8729.T earnings conference call or presentation 12-Nov-19 7:30am GMT

Q2 2020 Sony Financial Holdings Inc Earnings Call

Tokyo Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Sony Financial Holdings Inc earnings conference call or presentation Tuesday, November 12, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Eigo Nasu

Sony Life Insurance Co., Ltd. - SVP

* 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

* Koki Sato

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

* Masao Muraki

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

* Natsumu Tsujino

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

* Tatsuo Majima

Tokai Tokyo Research Institute Co., Ltd. - 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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I am Kiyomiya from Sony Financial Holdings. I would like to explain about consolidated financial results for first half of FY '19 in accordance to this presentation materials.

Please turn to Slide 4. I would like to explain some highlights about the Sony Financial Group's financial results for first half of FY '19. In each of the 3 main businesses, ordinary revenues and ordinary profit outpaced our expectations, and consolidated operating performance is progressing ahead of our forecast. At Sony Life, lower sales of family income insurance caused the new policy amount to decrease year-on-year. Insurance acquisition costs fell as a result, leading to a year-on-year increase in ordinary profit.

New business value and the new business margin were down from the previous quarter, mainly owing to a decline in the U.S. dollar interest rates and the changes in the product mix. We expect new business value to be higher than in first half, thanks in part to contributions from corporate products, which we recommenced sales in August. At Sony Assurance, sales of automobile insurance were robust, and mortgage loans drove performance at Sony Bank.

Next slide, please. Next, I'd like to explain about the consolidated operating performance. Ordinary revenues increased 3.9% year-on-year to JPY 894.4 billion. Ordinary profit increased 26.4% to JPY 59.6 billion.

Next, I'd like to explain about operating performance of Sony Life. Next slide, please. Sony Life's ordinary revenues increased 3.5% year-on-year to JPY 806.8 billion due to higher insurance premium revenue, mainly from single-premium insurance, despite a decrease in net gains on investment in the separate account. Ordinary profit rose 29% to JPY 48.6 billion as costs related to the acquisition of new policies fell due to a decline in the new policy amount and profit rose in tandem with expansion of the policy amount in force.

Next slide, please. New policy amount decreased 19.7% year-on-year to JPY 2,536.4 billion due to lower sales of family income insurance. Annualized premiums from new policies increased 1.8% to JPY 38.6 billion due to a favorable sales of U.S. dollar-denominated insurance despite lower sales of term life insurance and variable life insurance for corporate customers.

Next slide, please. Policy amount in force increased 1.5% from the previous year-end to JPY 50.3 trillion. Annualized premiums from insurance in force increased 1.6% to JPY 903.2 billion, of which the figure for the third-sector products was up 1.0% to JPY 199.4 billion.

Next slide, please. The lapse and surrender rate was down 1.11 percentage points year-on-year to 2.25% due to a decrease in cancellation of policies with certain customers canceling existing policies and taking out new family income insurance and other policies, as premiums were revised in line with revisions to the standard mortality tables in February 2018.

Next slide, please. Core profit remained essentially flat year-on-year to JPY 57.5 billion due to an increase in provision of policy reserves for minimum guarantees for variable life insurance despite an increase in profits owing to growing policy amount in force.

Please turn to Slide 12. The number of Lifeplanner sales employees was 5,119, up 3 from the previous quarter and down 28 from the previous year. Sony Life will work to expand its business scale through stringent recruiting of Lifeplanner sales employees and further enhancing their productivity.

Next, I would like to explain about operating performance of Sony Assurance. Next slide, please. Sony Assurance ordinary revenues expanded 5% year-on-year to JPY 60.6 billion, due mainly to an increase in net premiums written for mainstay automobile insurance. Ordinary profit increase of 5.9% year-on-year to JPY 5.7 billion.

Next slide, please. Net premiums written increased 4.9% year-on-year to JPY 59.3 billion due to stable sales of mainstay automobile insurance.

Next slide, please. The sum of 2 ratios remained essentially flat year-on-year to 86.2% due to a decline in E.I. loss ratio, driven mainly by a lower car accident ratio despite an increase in expense ratio.

Next, I would like to explain about operating performance of Sony Bank. Next slide, please. Sony Bank consolidated basis ordinary revenues increased 11.5% year-on-year to JPY 24.5 billion, due to increases in such income as interest on loans in line with growing balance of mortgage loans and higher interest income on investment securities. Ordinary profit increased 20.6% to JPY 5.6 billion, for the same reasons as ordinary revenues.

Next, I would like to explain about operating performance of Sony Bank nonconsolidated basis. As of September 30, 2019, customer assets amounted to JPY 2,553 billion, up JPY 69.7 billion from March 31, 2019. Of this amount, the yen deposit balance amounted to JPY 1,979.9 billion, up JPY 40.6 billion, due mainly to an increase in newly accumulated funds via the increased number of accounts. The yen-denominated balance of foreign currency deposits amounted to JPY 449.3 billion, up JPY 29.7 billion due mainly to an increase in U.S. dollar deposits in line with the appreciation of the Japanese yen. The loan balance expanded JPY 95.2 billion to JPY 1,839.3 billion due to a steady increase in mortgage loans.

This concludes the explanation of the results of 3 companies. Please turn to Page 19. Forecast of consolidated financial results for FY '19 is unchanged from the forecast announced on April 26, 2019.

Next, I would like to explain about the Sony Life's MCEV as of September end 2019. Please turn to Page 21. Sony Life's MCEV as of September 30, 2019, was JPY 1,691.9 billion, up JPY 40.6 billion from June 30, 2019, due mainly to a change in interest rates and acquisition of new policies. New business margin for the second quarter FY '19 was 3.8%, down 1.6 percentage points from the fourth quarter FY '19, mainly owing to the decline in the U.S. dollar interest rates and the changes in the product mix. New business value for second quarter for FY '19 was JPY 14.8 billion due to a decline in new business margin.

Please look at next slide. Sony Life's MCEV as of September 30, 2019, was JPY 1,691.9 billion due to a decrease in yen interest rates and dividend payments to shareholders, despite an increased contribution from numerators of the core ROEV formula, new business value and expected existing business contribution. Consolidated adjusted ROE for the first half for fiscal 2019 was 2.7%. We currently expect consolidated adjusted ROE for fiscal '19 to be below our initial forecast of 6% but above 5%. The dividend forecast for fiscal 2019 is unchanged at JPY 65 per share.

This concludes my explanation. Thank you.

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Questions and Answers

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Operator [1]

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We now like to start the Q&A session. The first question is from Mr. Muraki of SMBC Nikko Securities.

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

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My first question is about new business value of Sony Life on Page 21. It was JPY 14.8 billion in Q2. How much did increase in last-minute sales of U.S. dollar-denominated products right before the reduction of premium rate negatively impacted? And how much recovery do you expect after the impact disappears when sale of corporate products resume in Q3 onwards?

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Eigo Nasu, Sony Life Insurance Co., Ltd. - SVP [3]

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I am Nasu from Sony Life. First of all, about U.S. dollar-denominated single premium whole life, we revised the premium rate in October. So as you said, single premium contract increased before the revision of the premium, but we cannot disclose profitability of individual products. We resumed the sale of corporate products in October. So we expect a new business value for full year, including second half, to be high end of the JPY 60 billion to JPY 70 billion range. We expect to see a bigger increase of new business value in the second half than the first half.

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

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My second question is about the impact of making Sony Life AEGON and SA Reinsurance wholly owned subsidiaries on this year's financial results, as is written on the footnote on Page 19. I think you said in the past that you would generate gains on step acquisition initially, and there will be amortization costs going forward.

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Unidentified Company Representative, [5]

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It will be finalized at the time of full year account closing at the end of March. But we understand that the gain on step acquisition is small, and we value the goodwill to be JPY 6 billion or so. We assume that goodwill to be amortized over 20 years, and we think that its impact is minimal this year as well as next year onwards.

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

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And about tax in relation to this, we heard that Sony Life AEGON has a lot of tax loss carryforward. But how are you going to monetize it? It can be easily done if they emerge with Sony Life. But if they do not merge, did you think it is difficult to benefit from DTA?

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Unidentified Company Representative, [7]

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It depends on whether they merge with Sony Life or not, but we cannot answer that question as we were assuming a merger would take place. So I cannot comment any more than that.

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Operator [8]

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Next question is from Mr. Watanabe of Daiwa Securities.

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Kazuki Watanabe, Daiwa Securities Co. Ltd., Research Division - Research Analyst [9]

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I have 2 questions. The first one is about new business value on Page 21. What was the monthly trend in Q2, July, August, September, respectively? And also, you explained that you can expect it to increase more in the second half than the first half. What are the assumptions about the market?

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Unidentified Company Representative, [10]

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In the case of Sony Life, we evaluate new business value based upon the interest rates every month. It declined in August more than other months because the interest rate was very low. As for the forecast for the second half because we resumed the sale of corporate products, we expect the new business value to increase more than the first half. But our assumption for the interest rate is neutral and not much different from September.

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Kazuki Watanabe, Daiwa Securities Co. Ltd., Research Division - Research Analyst [11]

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My second question is about foreign currency-denominated products on Page 30 and 31. Now foreign currency products are growing in the recent annualized premiums from new business, and foreign bonds are increasing in securities investment. I would like to ask you about the duration of both asset and liability, respectively.

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Unidentified Company Representative, [12]

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On the asset side, yen duration is about 22 years, and the foreign currency duration is a little longer, 25 years.

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Kazuki Watanabe, Daiwa Securities Co. Ltd., Research Division - Research Analyst [13]

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Is the duration of assets and liability matched?

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Unidentified Company Representative, [14]

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Well, internally, we are working on ALM so that we can contain interest rate risk on the asset side.

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Kazuki Watanabe, Daiwa Securities Co. Ltd., Research Division - Research Analyst [15]

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Is it 25 years on the liability side as well?

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Unidentified Company Representative, [16]

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We cannot answer the question about the liability side. But I will not say it is close to that of asset side. But because we are selling whole life as well, we have some long-duration products. We cannot answer about the duration of the liability side.

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Operator [17]

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Next question is from Ms. Tsujino of Mitsubishi UFJ Morgan Stanley Securities.

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Natsumu Tsujino, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [18]

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The first question. You said that you assume new business value for FY '19 will be high end of JPY 60 billion to JPY 70 billion range. But if you can achieve the same amount of new business value in Q3 and Q4 as that of Q1, it will be JPY 66 billion on a full year basis and impact of interest rates is almost neutral. If you compare June with September, interest rates have steepened. So it should not be a negative factor. Then we can assume that the Q1 level of new business value will continue in the second half and that sales of corporate products will not increase sharply all of a sudden. Is that assumption correct? And can you share any updates after October such as the share of corporate products in total sales of new policies?

And the second question. I personally do not place importance on profits on the statutory accounting basis, but you did not change your full year forecast this time. In the initial forecast, you have a conservative estimate on the provision cost related to the variable insurance. But in reality, the provision cost was smaller than expected. So the progress rate in terms of ordinary profit appeared to be high. So you did not change your full year forecast. Then what negative factors are you assuming in the second half?

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Unidentified Company Representative, [19]

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About your first question, well, the new business value in the first half was JPY 32 billion. Together with the second half, we are expecting it to be between JPY 60 billion to JPY 70 billion, and we expect some recovery in the second half but not a sharp increase in -- increase from first half.

Looking at the recent sales trend in October, the sales ratio between retail and the corporate products was 82, and it is about the same ratio as the time before the suspension of sale of corporate products. And we did not revise our full year forecast because as of the end of first half, each company has not used up the expenses that they had assumed. And P&L may fluctuate in the second half.

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Natsumu Tsujino, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [20]

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Do you mean that you did not change your full year forecast, although the progress ratio of net profit in the first half was 62% because situation may change in the second half?

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Unidentified Company Representative, [21]

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Yes. Judging from the situation of the first half, we thought that there may be some unexpected factors in the second half. So we did not change the forecast.

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Operator [22]

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Next question is from Mr. Majima of Tokyo Tokai Securities.

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Tatsuo Majima, Tokai Tokyo Research Institute Co., Ltd. - Senior Analyst [23]

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I have a similar question. But you said that the decline of U.S. dollar interest rate is one of the reasons why new business margins substantially declined in Q2. Yes, it declined after Q1. And in Q2, it declined even further. I remember you said before that about the foreign bonds of Sony Life, decline of U.S. dollar interest rate does not impact MCEV very much because assets and liability match. So my first question is why did the decline in the U.S. dollar interest rate impact a lot this time?

My second question, you told us in the outset that products in foreign currencies changed premium rates. If I'm not wrong, single payment whole life in Japanese yen also changed its rate in October. So on this rate of return is, by and large, 0. That -- since you are selling almost no Japanese yen products, the rate change starting from October 1, will have almost no impact on your sales mix in the second half. Am I correct assuming this way? So these are the 2 questions, please.

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Unidentified Company Representative, [24]

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In regard to your first question about the new business margin, I think we are asking about the new business margin. During the second quarter, the dollar interest rate declined more than the Japanese interest rate, 30-year interest rate and on the U.S. dollar side declined about 50 basis points on average for 3 months in Q2 compared with an average number for 3 months in Q1. With this point in mind, besides the ALM, including the existing policies, the new policies margin was affected by this.

As for your second question, Sony Life change as of October its rate of single premium whole life in the U.S. dollar, but we are not selling single premium product in Japanese yen. So it will not have an impact.

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Operator [25]

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Allow us to move on to the next question. Mr. Sato from Mizuho Securities, please?

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Koki Sato, Mizuho Securities Co., Ltd., Research Division - Senior Analyst [26]

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Yes. This is Sato from Mizuho Securities. I have just one question. Sony issued its CEO letter in September and that was referencing to its policy toward Sony Financial stocks. According to this, Sony intends to strengthen management systems of Sony Financial to expand shareholder returns and further information on disclosure. So I appreciate if you could expand on the shareholder returns and the information disclosure efforts. I would like to know what kind of collaboration your executives are having with Sony. Appreciate if you could help me in this regard to the extent possible.

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Unidentified Company Representative, [27]

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The Sony CEO letter explains the 3 components in the financial business operations, namely: the governance and shareholder returns and the information disclosure. As for shareholder returns, we are starting this theme all the time among the financial group and the Board members. We are to discuss on how we can execute shareholder returns. So there's not much difference in this regard. We are to further discuss the issues moving toward end of the fiscal year.

In regard to more information disclosure, the idea is, by having a good communication with our investors, we wish to further increase our corporate value. We would like to further improve our IR activities or further improve the disclosure materials and others. We'd like to make further efforts in order to strengthen our disclosure all the time.

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Operator [28]

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Next, I would like to invite Mr. Otsuka from JPMorgan. Mr. Otsuka, JPMorgan, please.

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Wataru Otsuka, JP Morgan Chase & Co, Research Division - Analyst [29]

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Yes. This is Otsuka, JPMorgan. Consolidated ordinary profit grew JPY 259.6 billion from JPY 47.2 billion in the first half FY '18. I appreciate if you could expand on the changing factors you identified on ordinary profit such as no impairment of the investment securities on a full year basis. So I heard earlier. So please explain the actual numbers and ups and downs in the first half.

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Unidentified Company Representative, [30]

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As for Life, initial costs now we estimated to acquire a new process turn out to be much lighter than we had assumed. And this had a positive impact on ordinary profit.

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Wataru Otsuka, JP Morgan Chase & Co, Research Division - Analyst [31]

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How about non-life and bank, just briefly, please?

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Unidentified Company Representative, [32]

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Yes. First, Sony Assurance. Though we had natural disasters and such as Typhoon 15 in the first half, we were able to absorb the impact by other factors. We were able to secure profit growth. It was better than the original forecast.

As for the second half, when our Typhoon 19 hit us, for Sony Assurance, most of the impact comes from the automobile insurance. It was vehicle damages, so we are assuming the impact from the natural disaster. I think the impact here is going to be more in the second half. With this, no changing factors in place. We've had a good progress in the first half, better than we had forecasted. The second half factors would offset the upward factors so decided not to change the forecast for the full year basis.

As for banking, the reason for the growth in the first half year-on-year basis was the robust mortgage loan business. Revenue and fee income from the mortgage loans pushed up ordinary profit. With the U.S. interest rate lower and investing power with the foreign currency in the deposit. So we expect its profit margin would become smaller. So we decided not to change the full year forecast.

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Wataru Otsuka, JP Morgan Chase & Co, Research Division - Analyst [33]

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If I may have a second question, you had an assumed impairment of JPY 4 billion for a clear view on the stocks for the full year basis. Please give me the latest update on ClearView situation.

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Unidentified Company Representative, [34]

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We have not assumed impairment in the outset of FY '19, but we had our impairment of JPY 3 billion. And this became a factor of pushing down profit as much as JPY 3 billion. But at the same time, as I said earlier, we had less initial cost for the new policies, and we use lesser spend in the first half. So all in all, the first half had a better progress vis-à-vis the original forecast.

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

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Let me double check. As shown on Page 6, Sony Life for ordinary profit grew almost JPY 10 billion. Does this include the ClearView's impairment? Am I right assuming that your expense would go up in the second half compared with the first half cost be carried into the second half not on quarter-on-quarter basis, but in terms of year-over-year basis, please?

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Unidentified Company Representative, [36]

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And the fact is for the increase of JPY 10 billion are besides less amount of the initial cost for the new policy acquisition. Policy In force grow, contributing to the growth of profit because it was process based upon the Japanese GAAP.

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Operator [37]

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Next, I'd like to have Mr. Tsujino, Mitsubishi UFJ Morgan Stanley Securities.

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Natsumu Tsujino, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [38]

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I have one question. You had a plan to increase dividend at least JPY 2.5 for your increased dividend. You need to achieve consolidated ROE of 7%. As of now, you seem to have a long way to go. Shareholders' returns are now improving little by little, and you told us you will continue to consider it.

And with the second impairment of ClearView, it is fair for me to say that, generally speaking, your overseas investment is not going well. Your domestic business is expanding. You are controlling our risks quite firmly. With all these factors in mind, I wonder if you can to get more returns not only to your shareholders but also to your parent company, Sony. Am I right to assume that you may consider those ideas moving toward the end of this fiscal year?

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Unidentified Company Representative, [39]

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We are now having a series of dialogue, not only with Sony, but also with a variety of investors. Some investors are asking for more returns. Some told us, we do not have a clear capital policy. So we are always thinking about how best we can actually cope with this situation. So it's very important for us to address these issues all the time. As of now, no final decision has been made. But now we are quite willing to addressing these issues.

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Operator [40]

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Thank you for your contribution. So this concludes our Q&A session.

[Statements in English on this transcript were

spoken by an interpreter present on the live call.]