Read Sompo Holdings' capital policy: Zero cross-shareholdings and seriousness about shareholder returns

[Summary]

Rather than being a domestic non-life insurance company, Sompo Holdings (8630) is now more easily understood as an ``insurance group that is evaluated based on capital policy.''

The market is mainly looking at three things:

*Shareholder returns based on adjusted consolidated profit *Additional return through sale of cross-shareholdings

• Growth investment centered on overseas insurance, nursing care, and digital

Particularly significant is the reduction in cross-shareholdings.

Sell ​​cross-shareholdings, free up capital, and use some of it for share buybacks and dividends. This may sound like a pretty capital efficiency story, but it is actually a story about dismantling old business practices in the non-life insurance industry.

In this article, we will summarize Sompo's adjusted consolidated profit, return formula, sale of cross-shareholdings, growth investment, and risks that investors should be aware of.

What is different about Sompo?

Sompo Holdings is an insurance group with Sompo Japan at its core, which includes overseas insurance, domestic life insurance, nursing care, etc.

However, the Sompo that investors are currently watching is a little different from the traditional "domestic non-life insurance stocks."

The focus is on how capital is used.

Reduce cross-shareholdings. Clarify redemption rules. Allocate capital to overseas insurance and wellbeing areas. These movements are progressing simultaneously.

Insurance companies are industries with large balance sheets. That is why capital policy has an easy effect on stock valuation. It would be a bit of a waste to look at Sompo only based on the dividend yield without looking at this.

There are reports that the company name will be changed to "SOMPO Group" in April 2027. On the other hand, in the official company profile as of May 2026, the company name is "SOMPO Holdings, Inc." In this article, the listed company name will be the current Sompo Holdings.

The key to finance is “adjusted consolidated profit”

When reading Sompo's shareholder returns, the first indicator to keep in mind is "adjusted consolidated profit."

This is a profit indicator that smoothes out temporary fluctuations unique to insurance companies, rather than using accounting net profit as is. In non-life insurance, profits and losses fluctuate significantly due to factors such as natural disasters, reserves, the stock market, and gains on sales of cross-shareholdings. When looking only at net income, it is easy to mix up whether it is due to earning power or temporary factors.

Therefore, Sompo uses adjusted consolidated profit as the standard for shareholder returns.

Organized on a draft basis, the idea goes like this:

Key point
= Key point
Key point
Key point
- Key point
+ Key point

Catastrophe reserves and price fluctuation reserves are items typical of insurance companies. This is a reserve fund to prepare for typhoons, large-scale disasters, and stock market fluctuations, which can push up or push down profits depending on the year.

The important thing here is to exclude the gain from the sale of cross-shareholdings from basic profits.

Even if you make a profit by selling cross-shareholdings, that is not the earning power of your core business. If you look at sales profits as just "earning power", you are seriously mistaken. Sompo also separates this.

However, the sale proceeds will not disappear.

This will serve as the source of additional returns that will come later, that is, stock buybacks. This is what is interesting about this company's capital policy.

Shareholder returns are highly formulated

Sompo's shareholder return policy is quite easy to understand.

The official IR states that the basic return is 50% of the three-year average of adjusted consolidated profits, and as a general rule, an additional 50% after tax of gains and losses on sale of strategic stocks, etc. will be returned.

The formula is as follows.

Key point
= 3× 50%
+ 50%

The first half is the return that comes from normal earning power. It mainly serves as the basis for dividends.

The second half is the return from the sale of cross-shareholdings. This is likely to lead to expectations for share buybacks.

This two-tiered structure is quite easy to handle from an investor's perspective. Dividends grow with profit growth. If the sale of strategic stocks progresses, additional returns are likely to be generated. Furthermore, because we use a three-year average rather than a single year's profit, the system is designed so that returns do not suddenly collapse even if profits temporarily fluctuate due to a major disaster or market fluctuation.

Of course, it's not a complete vending machine.

Share buybacks also depend on stock price levels, capital status, and financial market conditions. The official policy also leaves room for adjustments to capital levels based on risk and capital conditions, performance trends, and financial market conditions.

Still, companies that have demonstrated a formula for calculating returns are likely to be evaluated favorably by the market. It's much easier to read than the vague statement "We prioritize shareholder returns."

The dividend increase story is strong. However, the essence is not only about dividends.

Based on company forecasts, Sompo is expected to increase its dividend in the fiscal year ending March 2027, and based on reports, it is expected to increase its dividend for the 13th consecutive year.

This is a really strong material.

Many investors who look at non-life insurance stocks look at stable dividends, share buybacks, and improved ROE as a set. In the case of Sompo, there is a basic return rule, so if profits grow, dividends tend to grow as well.

However, personally, I think it's a little shallow to view Sompo simply as a dividend increasing stock.

The essence is that selling cross-shareholdings will lighten the balance sheet, improve capital efficiency, and as a result will have an effect on ROE and EPS.

Dividends are easy to understand. However, what stock prices will really react to is the extent to which improvements in capital efficiency continue.

Reducing cross-shareholdings to zero is a story of destroying the old structure of the non-life insurance industry

The biggest issue in Sompo's capital policy is the reduction of cross-shareholdings.

The domestic non-life insurance industry is an industry with strong relationships with commercial insurance, agency networks, and business partners. Therefore, cross-shareholdings, so-called cross-shareholdings, tended to remain.

This structure may have had commercial significance in the past.

However, from the perspective of capital markets, it is a different story. This is a factor that fixes shareholder equity, lowers ROE, and makes capital efficiency look bad. Moreover, the cross-holding structure of non-life insurance companies itself has come under scrutiny due to the issue of advance adjustment of insurance premiums for companies.

In its official CFO message, Sompo has set a market capitalization of 6 trillion yen, adjusted consolidated profit of 500 billion yen, and zero cross-shareholdings as targets for FY2030.

It's pretty heavy here.

Selling cross-shareholdings is simply asset disposal. However, in the case of Sompo, it is clear that a portion of the proceeds from the sale will be used for additional returns. That's what the market is paying attention to.

sell stocks. Capital is freed up. There will be room for share buybacks. ROE will be easier to improve.

Because you can see this chain, selling strategic stocks becomes a catalyst.

What does "additional return of 50% of sale proceeds" mean?

An additional 50% of profits and losses on sales of strategic stocks will be returned after tax.

This sentence is at the center of Sompo's investment story.

Normally, even if you sell cross-shareholdings, it is up to the company to decide what to use the funds for. Should it be used for growth investment, for loan repayment, or as retained earnings? From an investor's perspective, it is unclear whether selling alone will lead to shareholder value.

Sompo says that in principle, half of that amount will be used for additional refunds.

Of course, actual share buybacks are subject to flexible decisions. There is no need to force purchases when stock prices are expensive, and there is also a balance with M&A and capital regulations.

Still, it is important to note that profits from sales and returns are connected.

This is because it becomes easier for the market to see that ``this strategic stock sale will return money to shareholders.'' This is where it differs from just replacing assets.

Pillars of growth investment are overseas insurance, nursing care, and digital

Not all capital generated from the sale of cross-shareholdings will be returned to shareholders.

Sompo will also allocate capital to growth investments. The pillars to look at are overseas insurance, nursing care, and digital.

Key point
  ├── shareholder returns
│ └── Key point
  └── growth investment
        Key point
        Key point
└── digitalKey point

What is important here is that the company is not just about giving back.

Where can we create the next source of profit while increasing capital efficiency? If you don't look at this far, you can only see half of Sompo's evaluation.

Overseas insurance is a growth engine that complements the maturation of domestic non-life insurance

The domestic non-life insurance market is mature.

Auto insurance, fire insurance, business insurance. All of these are large markets, but given the declining population and maturation of the domestic market, it will not be easy to maintain high growth over the long term.

This is where overseas insurance comes in handy.

Sompo positions overseas insurance as a pillar of growth for the group. This is an area where we can capture risks and returns that are different from those in Japan, such as European and American commercial insurance and reinsurance, and emerging markets.

Geographical diversification is very important for insurance companies. If we rely solely on Japan, we will be susceptible to natural disasters, regulations, and the domestic economy. If overseas insurance grows, it can be expected to not only diversify revenue sources but also reduce volatility for the entire group.

However, overseas insurance is not an easy growth business.

Acquisition prices, underwriting discipline, catastrophes, reinsurance markets, foreign exchange. There are many risks to consider. The larger the scale of an acquisition, the more difficult it becomes to integrate it.

The market is looking forward to this, but at the same time is a little skeptical. That's healthy.

Nursing care/well-being is modest, but typical of SOMPO

The nursing care business, centered on Sompo Care, does not look like a flashy growth stock.

Labor shortages, wage increases, on-site workloads, and regulations. The nursing care business is not an easy business no matter how you look at it.

However, there is a meaning in Sompo having nursing care.

Insurance, nursing care, health, retirement funds. Although these appear to be separate markets, they are actually connected. In Japan, where the population is aging, having on-site nursing care data, customer contact points, and service management know-how are assets that insurance companies cannot ignore.

Sompo is also working on the use of technology in nursing care settings, dementia-related services, and support for balancing work and nursing care.

It may be a bit misleading to evaluate this point based solely on short-term profit contribution.

In addition to improving the profitability of the nursing care business itself, how far will the connection with insurance, healthcare, and data utilization progress? That is the focus in the medium to long term.

It is better not to be overconfident in digital/RDP just yet.

Sompo's digital strategy often talks about the Real Data Platform, or so-called RDP.

The idea is to analyze data obtained from insurance and nursing care sites and use it to improve underwriting, prevent accidents, improve efficiency at nursing care sites, and develop new services. The relationship with US Palantir Technologies is also often seen in this context.

I understand the idea.

Insurance companies have data on accidents, disasters, medical care, nursing care, and lifestyle risks. If we can utilize this effectively, we can move from being a company that simply pays insurance claims to a company that prevents risks.

However, to be honest, this is an area that the market has not yet fully priced in.

Data business is easier said than done. Can it actually be sold externally? How effective is it in improving insurance profits? How much can productivity at nursing care sites increase in terms of numbers? That still needs verification.

There are expectations. However, it is too early to become bullish on RDP alone.

When looking at Sompo, it is more realistic to consider digital as "room for upside" and look at the current evaluation based on capital policy and insurance income.

Numbers investors should look at

If you follow Sompo, dividends are not the only numbers you should look at.

At the very least, I would like to check the following items:

In particular, adjusted consolidated profit and sales of cross-shareholdings are easily linked to returns.

Rather than buying based only on the dividend yield, it is better to look at where the return capital is coming from. Sompo is a company that is relatively easy to read.

What are the risks?

Sompo's capital policy is attractive, but there are risks.

First, there are natural disasters.

As a non-life insurance company, we cannot avoid the effects of major typhoons, heavy rain, earthquakes, etc. Although it is smoothed out by reserves, it does have an effect on investor psychology.

Next is the underwriting risk of overseas insurance.

Overseas insurance is a growth engine, but profits can fluctuate significantly if a major disaster, inappropriate underwriting, or post-acquisition integration failure occurs. Overseas growth is not always a smooth upward trend.

And then there is the progress of selling cross-shareholdings.

If the pace of sales slows, expectations for additional returns will also fade. On the other hand, if you sell too quickly, you may run into problems with the market environment and the sale price. This is where I would like to see progress.

In the nursing care business, personnel costs and securing human resources are also important issues.

Even if efficiency can be improved through nursing care technology and the use of data, the labor-intensive nature of the worksite remains. If we underestimate this point, we will misjudge the hurdles to improving profit margins.

Summary: Sompo is not a “return stock” but a “capital reallocation stock”

Sompo Holdings is not just a high dividend/dividend increase stock.

Of course, increasing dividends and buying back shares are important. The company's shareholder return policy is also quite clear.

However, what is even more important is the structure of reducing cross-shareholdings, moving fixed capital, returning some of it to shareholders, and allocating some of it to overseas insurance, nursing care/well-being, and digital.

In short, this is a capital redeployment stock.

While having a mature business in domestic non-life insurance, we will improve capital efficiency, increase profits in overseas insurance, and create the next business contact in nursing care and digital. Not everything will go well. In particular, digital and nursing care monetization are areas that the market still views with skepticism.

Still, as long as there is a reduction in cross-shareholdings to zero and a return formula, Sompo has a theme that is easy for investors to follow.

Dividend yield is not the only thing to look at.

Pace of sales of strategic stocks, adjusted consolidated profit, share buybacks, ROE, overseas insurance profit growth. If you follow these five points, it will be easier to see where Sompo's stock valuation will change.

From 2026 to 2027, whether Sompo will be seen as a "financial infrastructure company that continues to improve capital efficiency" rather than an "insurance company". We are at that crossroads.

Source/Reference

• SOMPO Holdings “Shareholder Returns (Dividends/Stock Acquisition)”
• SOMPO Holdings “Group CFO Message”
• SOMPO Holdings “What kind of group?”
• SOMPO Holdings "Company Profile"
• SOMPO Holdings “Nursing Care Business”
• Diamond Zai "SOMPO Holdings announces 13th consecutive year of dividend increase"