T&D Holdings, Inc. (8795) Earnings Call Transcript

First of all, I would like to present the key highlights of the financial results for the second quarter. Group adjusted profit amounted to JPY 70.1 billion versus the full year forecast of JPY 146 billion, with a progress rate of 48.1%. Sales results of new policies of all three life insurance companies increased year-on-year, showing good progress against the plan. Surrender and lapse rate increased year-on-year in Taiyo and Daido and decreased in TDF. Value of new business as the combined total of the three life insurance companies amounted to JPY 97.9 billion, with full year forecast of JPY 168 billion, in the progress of 58.3%. Group MCEV amounted to JPY 4,269.5 billion. ESR was 228%. There is no change in full year earnings forecast. Please turn to the next page. The key revenue and profit items of each company for the second quarter are shown in the table. Taiyo Life and Daido Life recorded increased adjusted profits, while T&D Financial Life and T&D United Capital posted lower profit compared to the same period of the previous year. Please turn to the next page. This page shows the breakdown of group adjusted profit and difference from net income. As I explained in the first quarter, the gain on negative goodwill was recorded in connection with the consolidation of All Right Small Amount & Short Term Insurance, this item has been excluded from group adjusted profit. Next page, please. This page shows key performance indicators of the 3 life insurance companies, both Taiyo Life and Daido Life saw an increase in their core profit. Both companies recorded capital gains on sale of domestic and foreign equities. However, Taiyo Life recorded losses on sale of bonds due to reduction of foreign holding -- foreign bond holdings. Daido Life posted losses on sale of bonds mainly due to switching of bond holdings as part of its cash flow matching strategy. T&D Financial Life posted lower earnings due to a decline in surrender and lapse games, which resulted from a decrease in policies achieving their target amount. Please turn to the next page. The charts describe factors contributing to changes in core profit, both for Taiyo and Daido decreased currency hedge costs and increased interest dividend income contributed to an increase in core profit. This effect was partially offset by an increase in operating expenses. Next page, please. Average assumed investment yields of Taiyo Life and Daido Life were 1.34% and 1.22%, respectively. Please turn to the next page. T&D United Capital's adjusted profit decreased by JPY 15.9 billion year-on-year to JPY 0.6 billion. Please turn to the next page. This page describes the quarterly trends in the profit and loss of closed-book business. The main factors behind the decrease in profits in the second quarter include: firstly, underperformed in the variable annuity block due to unhedgeable basis risks; and secondly, the universal insurance block recorded losses due to the valuation method of additional policy reserve. In the third quarter, losses due to the valuation method of policy reserves are expected to be eliminated. Adjusted profit of Fortitude in the third quarter is being calculated, and the preliminary number will be presented in the November 28 IR meeting. In September, T&D United Capital received a dividend of JPY 11.7 billion from Fortitude. Please turn to the next page. At Taiyo Life, annualized premiums of new protection-type policies increased year-on-year. While surrender and lapse rate increased mainly due to the increase in the agency channel, the annualized premiums of in-force protection-type policies increased from the end of the previous fiscal year. Please turn to the next page. New policy amount of Daido Life continued to be strong and achieved a year-on-year growth. While surrender and lapse rate rose. Most of the increase in surrender and lapse was attributable to a temporary uptick in policy replacement following the June launch of the new product, the Advanced Cancer Coverage J-Type. Due to strong new business performance, policy amount in force increased from the end of the previous fiscal year. Please turn to the next page. Annualized premiums of new policies at T&D Financial Life increased year-on-year. Also, the surrender and lapse rate declined due to a decrease in policies reaching their target values for foreign currency-linked products, resulting in an increase in annualized premiums of policies in force compared to the end of the previous fiscal year. Please turn to the next page. Group MCEV increased by JPY 323.8 billion from the end of the previous fiscal year to JPY 4,269.5 billion, mainly driven by the accumulation of new business value, rise in domestic and overseas stock prices and domestic interest rates and the adoption of LDTI at Fortitude. The combined new business value of the three life insurance companies increased by JPY 10.2 billion year-on-year to JPY 97.9 billion, mainly due to higher new policy amount and rising domestic interest rates. The new business margin was 9%. A breakdown of MCEV by company is provided on Page 15, the factors contributing to changes in Group MCEV on Page 16, and sensitivities on Page 17. Please turn to Page 18. This page presents the status of the investment at Taiyo Life and Daido Life. The combined amount of domestic and foreign equity sales by the two companies was approximately JPY 143 billion against a full year plan of JPY 180 billion. Daido Life's interest rate matching ratio increased to 85%. Taiyo Life's interest rate matching ratio reached 100%. Please turn to the next page. This page shows the status of foreign currency denominated bonds. The reduction of hedged foreign bonds is still in progress primarily by Taiyo Life. Please turn to Page 21. This page describes the status of net valuation gains and losses on general account assets. Unrealized losses on domestic bonds have increased due to rising domestic interest rates. Please turn to the next page. Starting from fiscal year 2025, the disclosure on strategic shareholdings include not only those held by Taiyo and Daido, but also shares held by other consolidated subsidiaries. As of the end of September 2025, the ratio of strategic shareholdings to net assets stood at 18.6%, reflecting an increase in the market value of the holdings. We will continue to work on reducing our strategic share holdings to 0 by the end of March 2031, except those related to business partners and collaborators. Please turn to the next page. Sale of stocks reclassified from strategic shareholdings to peer investment purposes is in process as part of efforts to reduce equity risks. As of the end of September 2025, 49% of such shareholdings was digested on a cumulative basis. Next page, please. From the current quarter, some factors in the investment in Viridium is shown. As of the end of September 2025, the ESR declined to 228% from the end of the previous fiscal year. While surplus increased, this reflects investment in Viridium, along with increased mass surrender due to higher domestic interest rates. Here, there are no changes in the full year earnings forecast for the fiscal year ended March 31, 2026. For the remaining 6 months of the fiscal year, the group adjusted profit is expected to decrease by approximately JPY 0.47 billion for every JPY 1 appreciation. A break down the focus of each life insurance company is provided on Page 26, other major topics on Page 28 and overseas credit assets on Page 29. This concludes the briefing of financial results for the 6 months ended September 30, 2025. And from here on, we would like to start the Q&A session.

First like to take question from Muraki-san of SMBC Nikko Securities.

This is Muraki of SMBC Nikko Securities. I have two questions. First question is related to the progress of the performance on Page 4 to the right-hand side, you have shown progress rate. Fortitude United, the progress rate has deteriorated and universal insurance-related P&L, I think it will come back in the third quarter. But still, I believe there is a distance to the full year plan, where do you think you can absorb this underperformance? And also conversely, the profit from the sale of Nuernberger, if you can book them in the current year, then I believe you have JPY 15 billion after-tax profit, so that will be an outperformance. So can you talk about the outlook, whether you can book this profit in the current fiscal year? That is my first question.

Muraki-san, thank you for your question. First, in the first half, the slowness of the progress, how are we going to compensate for that going forward. Firstly, it's positive spread. On Page 26, we have shown the information, both Taiyo and Daido's positive spread is strong, and this will continue into the second half. Alternative P&L, there are variances, but interest rate increase and the portfolio rebalancing will contribute to the yield improvement. And the equity dividend, there are increasing number of companies increasing their dividend. So in the second half as well, we believe the positive will continue to be strong and possible for outperformance. The sale of the equity, we will continue -- and we expect that the profit coming from the equity sale will continue to be recorded. For others, T&D United Capital, as Muraki-san pointed out, the impact of universal insurance will be eliminated in the third quarter. And in the second half, we expect gradual recovery. And in the first half, the factor for negative performance was alternative P&L, it was rather not good in the first quarter. In the second quarter, there is some recovery, but in -- compared to the medium- to long-term expected return, it is still lower. So we believe it may take some time for full-fledged recovery. But compared to the first half in the second half, T&D United Capital will clearly start to recover. On Nuernberger, first -- once TOB is successful, then the approval by the authority will be necessary, and we are not certain whether that will happen within this fiscal year, it may be brought forward to next fiscal year. And your question on the profit outperformance once that happens in the current fiscal year, basically, we are focused on risk reduction in the future, and we are to rebalance our portfolio. So we are selling yen bonds along with cash flow matching, we are to reduce interest rate risk. So even when Nuernberger's sale, our profit is booked. It's not going to create a major outperformance for the current year. This concludes my explanation.

My second point is surrender and labs. Daido had a positive effect from a new product? And what is the status versus the plan?

Thank you for your question. Versus the plan, how is a surrender and lapse trending. First, both Daido and Taiyo, it is higher, meaning deteriorating for Daido Life, as Muraki-san pointed out, there is a switchover to J-type new products, that is the major factor. But on this point, this was launched in June. And so currently, there is a switch increasing, but that will stabilize gradually. In the second half, we expect surrender and lapse to decline. This switch over although there are labs and surrender, the in-force balance is increasing from economic value-based perspective, this is a positive impact we do not consider this to be a major issue. On the other hand, Taiyo Life, so-called over-the-counter cancellation lapse is increasing. It is due to the interest rate increase, and this trend will likely to continue into the second half. The sales staff channel in line with last year versus the plan, it is slightly higher, but the budget was a little bit ambitious, so or year basis, it's flat.

In Taiyo, matching rate 100%, you mentioned that about the surrender ratio is staying at a high level the JGB sales, do you think that is necessary to control the matching ratio?

Thank you for the question. On that point, the matching ratio is increasing, but the -- due to interest rate rise, calculation, the duration of the liability has shortened, and there is some impact from that. From a cash flow perspective to prepare for rate increase we have a certain cash position converted to short-term bonds, so we can accommodate.

We will now move on to the next question. Tsujino-san from BofA Securities.

First, regarding TDUC. Under closed-book business that is measured at fair value, I have a question. You mentioned that the performance of alternatives has been weak. And I believe part of that is due to fair value adjustments. If you have any numbers showing, for example, how much of a positive impact you had last year? And how much of a negative impact you have this year? I would appreciate it if you can share that with us. And second while EV for new businesses are performing well, we have also seen an increase in surrenders. Looking only at the second quarter, the variance between assumptions and results resulted in a loss of roughly JPY 16 billion. a decrease in EV split between Taiyo and Daido, as you explained earlier. If possible, I would like to understand the breakdown for Daido, part of the impact is due to policy replacements from J-type. But even if new business increases, the replacement effect reduces the net figure, meaning the overall net contribution is smaller. I would like to know how much of this impact is attributable to replacements. Also surrenders at Taiyo are increasing. Given the high interest rate environment, you should have assumed a certain level of surrender rates. And for bancassurance in particular, you revised the assumptions last year. Even so, surrenders are coming in above assumptions. Does this mean the assumptions themselves were not quite appropriate. Do they need to be reviewed? Any thoughts on this matter?

Thank you, Tsujino-san. Regarding your first question, we added some new disclosure material this time. On Page 44, in the third line from the top, we added a section showing the profit loss for alternatives I hope that will be helpful. As you can see, performance was quite poor in the first quarter, but has improved somewhat in the second quarter. As for your second question regarding the variance between the assumption and the actual surrender rates. The deviation increased in the second quarter. The breakdown is a little less JPY 7 billion negative for Taiyo. A little over JPY 7 billion negative for Daido and just under JPY 2 billion negative for TDF. For Taiyo, about JPY 1 billion of the negative impact came from a policy replacement involving J-type. The remainder stems mainly from the L-type products. The surrender assumptions are designed to cover designed to coverage to a 10-year average and the current surrender levels are worse than that average, resulting in negative deviations. For Taiyo, senders have exceeded the assumptions reviewed last year due largely to higher interest rates. We plan to review the assumptions again at fiscal year-end after observing trends through the second half. That is all from my side.

So just to confirm, it's not the type, but you said that the impact of replacements for Daido was JPY 1 billion, correct?

Yes, that is correct. There was a JPY 1 billion negative deviation related to that.

And the rest is due to the gap versus the 10-year average, right? Regarding Taiyo and Daido, when you review the assumptions at year-end, could this lead to additional negative impacts in the order of tens of billions of yen?

Thank you for your question, Tsujino-san. As I mentioned earlier, Taiyo recorded a negative deviation of just under JPY 7 billion in the second quarter. And for the first half, it is around JPY 10 billion. So as you pointed out, reflecting this in the assumptions, you indeed have a certain impact. That concludes my answer.

Regarding Page 44, which you mentioned, which I am looking at now, which part corresponds to the fair value gains and losses. All of this reflects a fair value measurement. In this case, a market value fluctuations flow through the P&L. So the changes in fair value are recorded there. So the interest and dividend income and the mark-to-market losses are both included under other. And essentially, we should focus on the net figure. Is that correct?

Yes, exactly. The market value fluctuations are included here as well. And the figures like JPY 5.6 billion or JPY 10.4 billion for alternatives, they include market fluctuations. Ultimately, it's all aggregated together.

Next, we would like to take questions from Watanabe-san of Daiwa Securities.

This is Watanabe of Daiwa. I have two questions. First is on the judgment of guidance adjustment. In the last year, you made a judgment to make upward revision in the third quarter in the current fiscal year, do you also judge in the third quarter, including the profit of from sale of Nuernberger. And on Daido Life in the second quarter, there is a loss booked from the sale of the bonds even if Nuernberger is not booked in the current year, can you achieve the plan? Second question on Page 29, you have private credit information. Taiyo and Daido amounts to JPY 217 billion and Fortitude also invest 11%. Given the recent environmental changes, do you intend to strengthen the provision through collaboration with Carlyle, you're going to expand the underwriting can discipline and maintain and can you take good risk?

On the guidance, we can say that we should monitor the situation. It's possible that we will review, but as of today, there is nothing definitive. Next is on the loss on sale. It's not that it is to match the profit from Nuernberger sale, but it is due to cash flow matching in the second half as well. We will continue with cash flow matching the capital level will depend on the market environment and other earnings. So as of today, I cannot comment on the capital. On the credit investment, we do not believe that there is a need to build up provisions in the future with Carlyle, we invest jointly on Fortitude, and we have been collaborating in exchanging views during the past 5 years. Carlyle is very prudent when it comes to investment, and it has a history of overcoming market crisis and abundant experience and very careful in investing. So in the credit market environment, we have been views, and we are not excessively optimistic what high-quality portfolio is maintained. We believe we can maintain a strong discipline. And I believe that we can further enhance the investment performance.

Just one point to confirm the capital loss in Daido. This is not related to Nuernberger, and it's possible in the second half as well. Full year JPY 31 billion capital profit and loss. Is it possible that this will not be achieved.

Watanabe-san, thank you for your question. This will depend on the market status. So it's possible that this will not be achieved. In that case, do you plan to offset with other factors such as positive spread to maintain the planned adjusted profit. the positive spread is growing. So even without capital gain bottom line profit is achievable.

We will now move on to the next question. Sato-san from JPMorgan Securities.

This is Sato from JPMorgan Securities. My first question concerns the reduction of equity risk. At the beginning of the fiscal year, the combined domestic and foreign equity exposure was around JPY 410 billion, roughly 5%, and there was a plan to reduce it to JPY 400 billion during the fiscal year. Could you tell us where the equity risk stands as of now? And if we were to bring it down to JPY 400 billion, how much additional selling would be required. If you have any such estimates, please share them. My second question is not directly tied to this quarter's results. But recently, Fortitude's profit volatility has been quite high. Regarding this, have there been any discussions about taking more active measures such as hedging or portfolio adjustments or like some other companies, broadening the scope of market-related adjustments to create a more stable and visible profit KPI? I would appreciate it if you can provide way with some insight into this matter.

Thank you for your questions, Sato-san. First, regarding the JPY 400 billion equity risk. I do not have the exact number with me today, so we will provide a follow-up later. For this fiscal year, the annual equity sales plan for Taiyo and Daido combined was originally JPY 180 billion, but we executed most of it ahead of schedule in the first half. As stated on Page 18, we sold JPY 243 billion, meaning we have already achieved the plan ahead of schedule. Given that market valuations have risen. We believe we are steadily approaching the JPY 400 billion level when factoring in these early disposals. Regarding Fortitude's volatility, as you rightly pointed out, the main drivers are fluctuations in alternative investments and variable annuities. For the latter, the balance in the separate account has been steadily declining and is already below the level at acquisition. It will take time but we expect volatility from variable annuities to gradually subside. As for volatility in alternatives, we evaluate these investments based on medium- to long-term returns. So short-term volatility is unavoidable. We do not intend to suppress short-term volatility at the expense of long-term returns. Likewise, we have no car plans to revise the scope of adjusted profit. That is all from my side.