T&D Holdings Inc (TDHOF) (Q1 2027) Earnings Call Highlights: Strong Profit Growth and ...

Negative Points

• Surrender and lapse rates increased at all three life insurance companies, with Taiyo seeing higher surrenders in the bank assurance channel.

• New policy sales declined year on year at Taiyo and TDF, with Taiyo's bank assurance channel significantly impacted by OTC sales stoppage.

• Fortitude's Q1 performance was below budget due to lower alternative investment income and an increase in expected credit loss provisions.

• Daido Life's new business value progress rate appears weak due to a slower product mix, with J-type products having higher margins but slower sales.

• Foreign exchange sensitivity remains a risk, with a JPY1 appreciation reducing adjusted group profit by approximately JPY0.5 billion.

• Operating expenses increased at both Taiyo and Daido due to higher personnel costs, IT investments, and policy-related expenditures.

• TDF's new policy sales declined due to lower sales of single premium individual annuities.

• The company faces uncertainty in forecasting alternative investment income, which is highly dependent on individual fund performance and market volatility.

• Daido Life's surrender and lapse rate increased due to inflation-driven policyholder fund needs and product switching, though July showed improvement.

• The pace of bond replacement is ahead of schedule, but the company cannot confirm whether the total volume will increase, limiting upside visibility.

Q & A Highlights

Q: What are the key drivers behind the surrender and lapse rate trends at Taiyo and Daido Life, and is there any change from previous trends? A: Satoshi Ito, General Manager of IR, explained that at Taiyo Life, surrenders increased in the bank assurance channel while the sales rep channel remained stable. The trend is unchanged from last year, driven by policies like 'My Kaigo' reaching the point where surrender value recovers after five years. However, the newer 'Nagaiki My Kaigo' product is not seeing a rise in surrenders. For Daido Life, the higher surrender rate is due to two factors: customers facing premium payment difficulties due to inflation, and policyholders switching to the new J-type product launched in June of the previous year. Notably, in July, surrenders and lapses were unchanged from the previous year, indicating the impact of the product switch has cycled through.

Q: How is the performance of alternative investments across the group, and why was the quarterly performance at T&D United Capital (42%) relatively weak? A: Ito noted that while the quarterly performance at 42% was weak due to mark-to-market accounting on private equity, the alternative investments at Taiyo and Daido have been strong, with combined Q1 returns running JPY5-6 billion ahead of plan. He clarified that accounting standards differ: 42% marks to market with a three-month lag, while Taiyo and Daido recognize realized income. Private equity is particularly strong, and private debt is on par with budget. For Fortitude, the PE and inflow fund performance is not great but is average compared to the industry.

Q: What is the outlook for Fortitude's earnings in Q2, and what were the one-off factors impacting its Q1 performance? A: Ito stated that Q1 performance was below budget due to lower-than-expected investment income from alternatives, and a flash report for Q2 is not yet available. He identified the increase in the provision for expected credit losses as a one-off negative factor, amounting to approximately negative JPY2 billion year-on-year. This was driven by rising interest rates increasing unrealized losses, which he believes is a one-off event. He suggested that a simple run-rate for the closed book would be around JPY8 billion per quarter, versus the actual JPY5 billion.

Q: How are the new policy sales at Taiyo Life trending against the plan, particularly regarding the halt of OTC sales at financial institutions, and what is the impact on core profit? A: Ito confirmed that the decline in bank assurance sales is in line with the budget, and the impact on core profit is also as planned. The reduction in OTC sales lowered commission fees by JPY2 billion, but assumed operating expenses also dropped by JPY3 billion, resulting in a net negative impact of about JPY1 billion on core profit. The sales rep channel is also performing in line with plan, with strong sales of senior products and new single premium products.

Q: Is the progress of the yen-denominated bond replacement ahead of the plan, and what is the impact on interest income? A: Ito confirmed that the JPY2.5 billion annualized increase in interest income from the bond replacement is slightly ahead of the plan. He also noted that the loss from the bond replacement is ahead of schedule, and combined with Taiyo and Daido, interest and dividend income is about JPY1 billion above the budget for Q1.

Q: Why is the progress of the currency hedge impact on core profit so different between Taiyo and Daido Life, and what are the other factors behind the changes in core profit? A: Ito explained that Taiyo's hedge impact is progressing ahead because it reduced its hedged foreign bond balance last year, leading to a pronounced yield improvement in the first half. Daido's progress appears slower because its hedged balance is increasing and hedge costs have been higher than budgeted. Regarding other factors, Taiyo had a large reversal of retirement benefit provisions in Q4 of the previous fiscal year, making this year's Q4 look worse on a year-on-year basis. Daido also had a similar reversal last year, and Q1 this year had lower death benefit payments.

Q: What is the outlook for Daido Life's new business performance, given that the value of new business progress appears weak? A: Ito stated that Daido's new policy amount declined only 1% year-on-year, which is solid given the strong comparison from the J-type product launch last June. On a flash report basis, July was a good month, and year-to-date July has caught up with the full-year plan. The weak progress rate for the value of new business is due to a slower product mix, as the higher-margin J-type is progressing slower than planned, and sales results were weak up until June.

Q: Is the high progress rate of insurance underwriting profit at Taiyo and Daido Life due to overperformance against the plan, and will this continue in the second half? A: Ito confirmed that both companies are outperforming their plans. Daido Life is benefiting from lower death benefits than planned. Taiyo Life is seeing improvements due to lower operating expenses from timing differences and a reversal of retirement benefit reserves due to strong pension asset management performance. He noted that the margin is also improving against the plan.

Q: Given the changes in the interest rate and FX outlook, is there any possibility of a change in the investment policy, and how confident are you in the alternative investment income estimates? A: Ito stated there will be no material change to the investment policy, which will continue to focus on ALM and selling down strategic shareholdings. He noted that FX sensitivity has declined because Daido Life has hedged future interest and dividend income. Regarding alternatives, he said it is difficult to forecast as it is highly dependent on individual investments, but noted that hedge funds are currently enjoying relatively good performance due to high market volatility.

Q: Can you explain the year-on-year changes in operating expenses for Taiyo and Daido Life, and what is the current status and morale at T&D Financial Life? A: For Taiyo Life, the JPY1.5 billion decline in operating expenses includes a JPY2 billion reduction from OTC-related fees, offset by a JPY500 million increase from higher sales staff remuneration and IT costs. For Daido Life, the JPY2.5 billion increase is due to higher personnel and IT system costs. Against the budget, the biggest factor is a timing difference of about JPY1.5 billion. Regarding T&D Financial

For the complete transcript of the earnings call, please refer to the full earnings call transcript .