Portfolio restructuring crystallizes unrealized gains in Q1; JARVIS Tokyo reaches ~JPY 80M monthly revenue run-rate, confirming growth trajectory

Summary

Q1 FY3/2027 delivered record-high quarterly results, with recurring revenue of JPY 21.4B (+17.4% YoY) and recurring profit of JPY 3.53B (+267.5% YoY). The profit surge was primarily driven by ~JPY 1.7B in equity capital gains from investment portfolio restructuring, combined with the ~JPY 400M roll-off of AXA Direct policy migration costs. Management explicitly noted that the profit level includes one-time items, while emphasizing the full-year plan (recurring profit of JPY 5B) remains on track. In-force policies reached 1.41M (+7.1%) and the combined ratio improved to 95.5% (▲2.4pt), underscoring the solid fundamentals of the insurance business.

Key Points (Earnings Takeaways And Growth Actions)

• Management Strategy And Market Assessment
  • Loss ratio increases are recognized as structural, driven by an aging policy portfolio, advancing veterinary medicine, and general price inflation
  • Management indicated that premium rate revisions are under concurrent review
  • The ESR target of 210% is acknowledged as somewhat conservative, with management open to recalibrating the target
• Near-Term Business Progress And Drivers
  • Q1 new policies of 60K were effectively down YoY ex-AXA migration, primarily due to softness in pet shop sales as Golden Week and other leisure demand surged
  • Pet shop channel is described as recovering from Q2 onward
  • Matching services saw profit decline due to rising online ad CPCs and flat search volumes; AI investment aims to drive a Q2+ recovery
• Strategic Initiatives And Inflection Points
  • On the investment side, cash was shifted into short-term JGBs to boost income yield, while unrealized gains were crystallized and redeployed into equities
  • Joint development with Ariake Japan for a new pet treat line, "7Days Food Puree," slated for launch
  • JPY 1B share buyback completed on July 27, executed in line with the JPY 6B shareholder return allocation under the medium-term plan

Outlook And Strategy

• Full-year guidance maintained: recurring revenue of JPY 81B (+9.7%), recurring profit of JPY 5B (+41.1%); management stated that investment gains are substantially booked in Q1
• Catastrophe reserve reversals were front-loaded from Q2 into Q1, with no impact on full-year profit
• JARVIS Tokyo has reached monthly revenue of ~JPY 80M (annualized ~JPY 1B), targeting full-year revenue of JPY 3.7–3.9B through growing case volumes and capturing advanced care demand
• White-label (OEM) partnerships expanded to 8 companies, continuing to build diversified distribution channels
• A JPY 3.06B dividend (capital transfer) from Anicom Insurance to the holding company is planned; already factored into the mid-term plan's cash allocation, though surplus could be directed toward incremental shareholder returns
• Cumulative "Doubutsu Kenkatsu" health check tests surpassed 1M, expanding the data foundation for preventive insurance

Positive Factors

• Record-high Q1 recurring revenue and recurring profit; in-force policies surpassed 1.41M, demonstrating a robust insurance growth platform
• Combined ratio of 95.5% (▲2.4pt) and expense ratio of 31.0% (▲4.5pt), revealing the underlying earnings power post-AXA migration cost roll-off
• JARVIS Tokyo reached ~JPY 80M in monthly revenue within its first year of operations; while slightly behind plan, the growth trend remains intact
• Retention rate sustained at a high 88.3%, supported by loyalty enhancement through "Doubutsu Kenkatsu"
• Hikari Tsushin (18.78%) and Dalton (14.83%) continue to accumulate shares, creating upward pressure on valuation from a shareholder composition perspective
• IP portfolio expanded to 30 patents (12 in image recognition AI, 12 in genetics/food, etc.) with 163 named inventors

Concerns

• E/I loss ratio of 64.5% (+2.1pt) continues its upward trajectory; portfolio aging and medical cost inflation are structural headwinds unlikely to reverse in the near term
• Of the JPY 3.5B Q1 recurring profit, investment gains (~JPY 1.6B YoY delta, net) and catastrophe reserve reversals (~JPY 700M YoY delta) are one-time in nature; profit levels are expected to decline materially from Q2 onward
• Matching services posted revenue and profit declines due to deteriorating ad efficiency and flat closings; timing of AI investment payoff remains uncertain
• Veterinary hospital operations posted a recurring loss of JPY 191M, burdened by JARVIS Tokyo development costs, with no explicit timeline for breakeven
• Dalton has signaled potential activist proposals (dividend increases, buybacks, independent director appointments, etc.), raising the risk of escalating shareholder return pressure
• ~70% reliance on the pet shop channel creates new policy volatility risk from competition with leisure/travel spending

Performance Highlights

Q1 FY3/2027 consolidated recurring revenue was JPY 21,403M (+17.4% YoY, comparable basis), and recurring profit was JPY 3,530M (+267.5% YoY). Insurance underwriting revenue of JPY 16,714M (+5.9%, comparable basis) was supplemented by investment income of JPY 2,252M (+521.8%), driving the top-line beat. Net income was JPY 2,433M (+274.0%).

Segment Performance (Synergy-Creating Businesses)

• In-Force Policies: 1,411,711 (+7.1% YoY)
• New Policies: 60,125 (▲13.9% YoY; prior-year Q1 included ~8,000 AXA migration policies)
• Retention Rate: 88.3% (flat YoY)
• E/I Loss Ratio: 64.5% (+2.1pt YoY)
• Combined Ratio (Earned Premium Basis): 95.5% (▲2.4pt YoY)
• Net Investment Income: JPY 1,942M (investment income JPY 2,252M less investment expenses JPY 310M)
• Doubutsu Kenkatsu Applications: 62,985 (+0.0% YoY)
• Affiliated Veterinary Hospitals: 7,057 (+0.9% YoY)

Q&A List

• Q: On asset management — it appears you booked equity gains and loaded up on JGBs. What was the rationale for increasing bond holdings?
  A: The increase in JGBs was not a change to the existing investment portfolio. Rather, we shifted idle cash into short-term JGBs to generate incremental income. For the existing portfolio, as previously communicated, cash from maturing bonds has been tactically redeployed into equities. While the overall composition may appear to show a higher JGB weighting, the actual changes are a cash-to-short-term-JGB shift and a partial reallocation from bonds to equities.
• Q: You booked substantial realized gains. Is there potential for full-year upside versus plan, including possible unrealized loss disposal?
  A: We crystallized unrealized gains and brought them into Q1, but unrealized losses also exist, so we will manage the overall portfolio by balancing the two. We are partially evaluating the disposition of unrealized losses as well, targeting a balanced outcome within overall earnings. That said, things are progressing in line with plan, and we believe it is reasonable to assume that investment-related profit recognition is substantially complete as of Q1.
• Q: What was the rationale for setting the ESR management target at 210%? It appears somewhat high relative to other listed P&C and life insurers.
  A: Frankly, when we considered where other insurers would likely set their targets, we anticipated they would come in around 200%, and we ended up being a bit conservative. We intend to evaluate whether to reset this 210% target as we move forward.
• Q: You plan to receive a JPY 3.06B dividend from Anicom Insurance at month-end. How will the holding company deploy this cash — specifically, how much will go toward buybacks?
  A: In the cash allocation framework established with the medium-term plan, total shareholder returns — dividends plus buybacks — are set at JPY 6B. This allocation was predicated on capital transfers from Anicom Insurance to the holding company in conjunction with ESR changes, so this transfer is already factored in. We will proceed in line with the JPY 6B framework, while considering incremental returns from any surplus as one possible option.
• Q: Under the mid-term plan's cash allocation, with JPY 4B earmarked for dividends and JPY 1B in buybacks already executed out of the JPY 6B shareholder return envelope, that leaves only JPY 1B. Is there no potential upside, including from ESR calculations?
  A: The consolidated ESR target is 210%, and our current capital position is running slightly above that. There is a discussion around how much of this excess capital should be directed to shareholder returns. At this stage, we are treating it as part of the broader cash allocation framework and intend to present our approach after deliberating the appropriate split among growth investments, business foundation strengthening, and shareholder returns.
• Q: On page 23 of the materials, new policy count is below prior year even excluding AXA. Is this driven by market conditions?
  A: Approximately 70% of new policies come through the pet shop channel, and this channel underperformed in Q1. Pets and leisure/travel tend to be inversely correlated — when leisure and travel are strong, pet sales weaken. Q1 this year saw a surge in travel activity around Golden Week, which dampened dog and cat sales at pet shops. That said, underlying pet demand remains stable over the long term, and on a near-term basis, the channel has already returned to a strong recovery trajectory in Q2, so we see no cause for concern.
• Q: What is the rationale for closing/downsizing existing hospitals?
  A: There are broadly two reasons. First, we are concentrating resources on advanced care at JARVIS Tokyo. Second, from a business portfolio profitability perspective, we are closing hospitals with poor unit economics while seeking to drive revenue and profit across the veterinary hospital segment as a whole. We are making closure and downsizing decisions on a case-by-case basis for select primary care hospitals.
• Q: Can you elaborate on the drivers behind the worse-than-expected loss ratio increase? What is the outlook going forward?
  A: There are two main drivers. First, the average age of the ~1.4M policy portfolio is gradually rising. Because premium rate curves flatten at older ages, a higher average age structurally pushes up the loss ratio. Second, inflation, which has two sub-components: general price inflation, where veterinary clinics themselves are raising fees; and the advancement of veterinary medicine, where the share of clinics equipped with CT and MRI has grown from ~10% to 20–30–40%, driving up per-case medical costs. These are all structural factors, but on the advanced care front, JARVIS Tokyo's approach of capturing that revenue within the Anicom Group is intended to act as a brake on loss ratio increases. Additionally, given price inflation, we are concurrently pursuing premium rate revisions to contain the loss ratio.
• Q: As expectations build for expanded buybacks, could the rising ownership stakes of existing major shareholders become an obstacle?
  A: It is true that executing buybacks and canceling treasury shares would mechanically increase existing shareholders' relative ownership. However, we do not formulate capital policy based solely on the current shareholder composition. We aim to enhance corporate value by carefully balancing growth investment, business foundation strengthening, and shareholder returns — evaluating the holding company's cash position and determining the appropriate scale of buybacks and investment accordingly.