T&D : Strategic Investment into Closed Book Business together with AIG and The Carlyle Group - Minority Investment into Fortitude Group Holdings in the U.S. - （1,470KB）

Strategic Investment into Closed Book Business together with AIG and The Carlyle Group

- Minority Investment into Fortitude Group Holdings in the U.S. -

T&D Holdings, Inc.

(Code Number: 8795, TSE First Section)

November 26, 2019

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Contents

1.	Strategic Significance for T&D Group	4
2.	Investment Overview	8
3.	Overview of Fortitude Group Holdings	12
4.	Financial Impact on T&D Group	18
Appendices	20

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Abbreviations of company names used in this presentation

T&D Holdings, Inc.	T&D Holdings, T&D group, We or Our
Taiyo Life Insurance Company	Taiyo Life
Daido Life Insurance Company	Daido Life
T&D Financial Life Insurance Company	T&D Financial Life
T&D United Capital Co., Ltd.	T&D United Capital or TDUC
American International Group, Inc.	AIG
The Carlyle Group L.P.	Carlyle
Carlyle FRL, L.P.	Carlyle FRL
Fortitude Group Holdings, LLC	Fortitude
Fortitude Reinsurance Company, Ltd.	Fortitude Re

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Today's Key Points

	 An initial strategic investment into closed book business, which is one of the
Strategic	newly focused business areas in the medium-term management plan
(FY2019 to FY2021)
Significance
 In addition to capturing earnings, through this investment, aim to achieve
for T&D Group
	diversified business portfolio by leveraging acquired expertise in the closed
	book business and pursuing synergies with our domestic business
	 Acquisition of 25% ownership interest in Fortitude
Investment	• Investment Amount: USD 586 million (JPY 63.7 billion, USD 1 = JPY 108.69*)
Overview	• Carlyle FRL to also acquire 51.6% ownership interest in Fortitude
	 Fortitude to become an equity method affiliate of T&D
	 Fortitude is a reinsurance holding company which owns Fortitude Re, a
Overview of	Bermuda-based reinsurer
• AIG and Carlyle currently hold 80.1% and 19.9%, respectively
Fortitude	• Fortitude Re reinsures AIG's life / non-life closed book
	• Aims for strong growth by acquiring closed books from insurers other than AIG
	through the involvement of Carlyle
	 Funded through cash on hand together with external financing (Not planning
	to fund through equity financing but considering the issuance of
Financial	subordinated bonds)
Impact on T&D	 The negative impact on our group solvency is expected to be limited
	 Any impact on our group's consolidated financial results for FY2019 would be
	promptly disclosed upon identification

Notes: (*) Based on Telegraphic Transfer Middle ("TTM") as of November 22, 2019

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1. Strategic Significance for T&D Group

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Positioning in the Medium-term Management Plan

• Closed book business is positioned as one of the new focused business areas in our medium-term management plan, and this transaction is our initial strategic

initiative of this business area

Strategic Investment into

closed book business

(this transaction)

(Area with a high affinity to life insurance business)

	Diversification of
Asset	revenue sources	New
management
Synergies	business	Synergies
business

Diversification of Business Portfolio

Pet	Synergies between life
insurance business and digital
insurance
insurance business
Business
(non-life)

Strengthen Core Businesses (improve insurance profitability further)	(New specific
								markets)
								Building new channels
								for domestic life
								insurance business
								Synergies
								Digital
	Taiyo Life		Daido Life		T&D Financial	insurance
						Life	business
	Households		SME market	Independent
	market				insurance
					agent market
	Senior segment		SMEs		Affluent segment (upper
(approximately 35 million		(approximately 1.9		mass market and higher,	Millennial segment
		about 11.7 million
	people)		million companies)		households)	(to account for half of the working-age
			Senior segment (to expand until 2040s)
			population by 2025)
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Strategic Rationale for Investment in the Closed Book Business

• Closed book transactions are already commonly seen in the mature insurance markets in the UK and US
• Recently, this type of transaction has also been active in Europe and is likely to become common in Japan, which has a matured insurance market, as well

Background of development of closed book business in the UK and the US markets

Seller

Buyer

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• Continued low interest rate environment
• Strengthened capital regulations
• Increase in policy administration costs
• Demands from capital market for further capital efficiency

→ Need to separate non-strategic businesses

• Optimize administration by consolidating closed book / improve asset and capital management
• Benefits from risk diversification

→ Value enhancement

6

• Rapidly changing Japanese insurance market
• Business environment / trends in Japan (demographics, financial market and regulatory trends)

We expect development of the closed book business in Japan (our potential opportunities) by providing solutions to Japanese insurers (such as supports to separate non-core businesses / runoff blocks)

Key Benefits from the Investment

• In addition to capturing earnings through this investment, aim to achieve diversified business portfolio by leveraging acquired business expertise and pursuing synergies with our domestic business

Illustration of possible benefits from the investment

Strategic investment into Fortitude

Capture earnings

• Contribute to our group consolidated profits by capturing earnings, in addition to our group domestic life insurance businesses (diversification of revenue sources)

Leverage acquired

expertise in closed book

business

• Obtain business expertise through strategic partnership with Fortitude
• Also expect to collaborate with Fortitude (including in Japan)

Pursue synergies with domestic business

• Pursue diversification of our risk profiles by changing mix of business lines and regions, etc. (aims to improve capital efficiency in medium-term)
• Also look for closed book transaction opportunities in Japan

Diversifying our Group Business Portfolio

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2. Investment Overview

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Investment Overview

	 Acquisition of 25.0% ownership interest in Fortitude from AIG which
	currently holds 80.1%
Overview	• Acquisition through T&D United Capital (TDUC, our wholly owned subsidiary)
• Carlyle FRL to acquire 51.6% ownership interest
	 Upon closing of the investment, T&D will account Fortitude as an affiliated
	company through equity method
Investment	 USD 586 million (JPY 63.7 billion, USD 1 = JPY 108.69*1)
Amount	• 25% of 1.00x book value, as adjusted*2, as of 12/31/2018
Condition of	 Subject to approvals from relevant regulatory authorities and other
Completion	customary closing conditions
Time of	 The transaction is expected to close in mid-2020
Completion
	 T&D to appoint directors to both the Boards of Directors of Fortitude and
	Fortitude Re
Others	 T&D to dispatch a liaison officer and trainees
 Considering establishing a subsidiary in the U.S. to strengthen management
	of potential overseas affiliates on the condition of receiving required
	approvals from relevant regulatory authorities
(Source) Fortitude Re's financial statements as available on the Bermuda Monetary Authority ("BMA")'s website

Notes: (*1) Based on TTM as of November 22, 2019

Notes: (*2) Represents net assets (US-GAAP) less USD (719)mn the total of AOCI and after-tax gain/loss from the fair value of embedded derivatives, less the planned non-proportional dividends to AIG (USD 500mn). In addition, up to USD 125mn (equivalent to 25% of USD 500mn for non- proportional dividends) would be added to the investment amount if not paid by the later of closing or by May 13, 2020

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Transaction Structure

• T&D (TDUC) and Carlyle to acquire an ownership interest of 25.0% and 51.6% respectively in Fortitude from AIG which currently holds 80.1%
• • Carlyle will contribute its existing 19.9% ownership into Carlyle FRL
  • As a result, Carlyle FRL will hold 71.5% ownership in a pro-forma basis

Pro-forma ownership structure

AIG

T&D

Limited

Carlyle

(TDUC)

Partners

19.9%

51.6%

Carlyle FRL

3.5%

71.5%

25.0%

Fortitude

(U.S. reinsurance holding company)

100%

100%

Fortitude Group Services

Fortitude Re

(U.S. Corporate function )

(Bermuda reinsurer)

10

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Partnership with AIG and Carlyle

• We have built a long-term close relationship with both AIG and Carlyle in the domestic insurance business
• • We are sharing our commitment to and views for Fortitude's long-term sustainable growth
  • • AIG is a leading global insurance organization and operates in more than 80 countries and jurisdictions
    • Daido Life (group company) has a longstanding relationship with AIG General Insurance Company in Japan since 1971
    • Carlyle is a global investment firm with USD 222 billion of assets under management across 365 investment vehicles*
    • Daido Life (group company) maintains a long-term relationship with Carlyle since the commencement of Carlyle's investment activity in Japan

Notes: (*) As of September 30, 2019

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3. Overview of Fortitude Group Holdings

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Strengths of Fortitude

	Stability/	 One of the largest reinsurance platforms in Bermuda with reinsured
	run-off lines from AIG
	Soundness	• Demonstrating adequate economic value-based soundness imposed by
		Bermuda regulator
	Insurance	 Long-dated and stable liability portfolio consisting mainly of payout
	annuity policies
	liabilities	• Enjoys capital benefits from its diversified mix of businesses (life and
		non-life)
	Asset	 Expect excess returns from an investment portfolio strategy based
	Management	on long-dated and stable liabilities
	Growth	 Pursuing growth by acquiring closed books from insurers other than
	AIG
	Strategy /
	 Experienced management team benefiting from Carlyle's
	Team
	involvement supporting its growth strategy
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Overview of Fortitude

• Fortitude Group Holdings is a reinsurance holding company which owns Fortitude Re, a Bermuda-based reinsurer
• • One of the largest reinsurance platforms in Bermuda with AIG's legacy insurance run-off lines

Fortitude Group Structure

Overview of Fortitude

Fortitude

Insurance holding company (U.S.)

	Fortitude			Fortitude Re
	Group Services
			Reinsurer
	Corporate function
			（Bermuda）
	(U.S.)

(Source) created by T&D based on company disclosures

Name	Fortitude Group Holdings, LLC
Founded	2018
Headquarters	New York, the U.S.
Representative	James Bracken, CEO
Main business	Insurance holding company（closed book
business）
Major	AIG:80.1%, Carlyle:19.9% (Current)
Shareholders
Book Value*1				Dec. 2018
	US-GAAP			2,125
(USD million)
	BV, as adjusted*2			2,344
Net Income*1				FY2018		FY2019Q3 YTD
	US-GAAP		(507)		4,083
(USD million)
	NI, as adjusted*3		367		329

(Source) Fortitude Re's financial statements as available on BMA's website, Carlyle's disclosure related to its equity investment

Notes: (*1) Represents results of Fortitude Re

Notes: (*2) Represents net assets (US-GAAP) less USD (719) mn in FY2018 of the total of AOCI and after-tax gain/loss from fair value of embedded derivatives (adjusting tax impact of 21%), less the planned non-proportional dividends to AIG (USD 500 mn).

Notes: (*3) Represents net income (US-GAAP) less USD (875) mn in FY2018 and USD 3,754 mn in FY2019Q3 YTD, respectively of net realized and unrealized gains/losses (adjusting tax impact of 21%) mainly related to change in fair value of embedded derivatives

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Overview of Fortitude (cont'd)

• Reinsures the majority of AIG's life / non-life closed books mainly comprising single premium annuity blocks
• Expects excess returns from investment portfolio strategy based on long-dated and stable liabilities

Composite of investment portfolio	Insurance liabilities by line of business
(As of Dec.31, 2018, Unit : USD mn)	(Reserve basis as of Dec.31, 2018, Unit：USD mn)
Others	Non-Life
19%	11%
AUM*	Insurance
liabilities
40,595
35,204
Corporate and	Life/Annuities
other bonds
89%
81%

(Source) created by T&D based on company disclosures

Notes: (*) Pursuant to reinsurance contracts between Fortitude Re and AIG, assets backing insurance liabilities ceded to Fortitude Re are held by the ceding companies, and only investment returns and risks from these assets are attributable to Fortitude Re. These assets are recognized as embedded derivatives and account for 90% of the total assets of Fortitude Re

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Overview of Fortitude (cont'd)

• Net income under US-GAAP fluctuates significantly due to the impact of gains / losses from the fair value as a result of change in interest rates, credit spreads and so on, while net income (as adjusted) have been stable
• • Under US-GAAP, assets held by the ceding company to collateralize the reinsurance arrangement, which account for 90% of Fortitude Re's assets, are treated as embedded derivatives. They are evaluated at fair value, which could significantly affect Fortitude Re's net income

Composite of net income	Trend in net income
(Unit : USD mn)	(Unit：USD mn)
		Net income
		(US-GAAP)
4,083	Net income
			(US-GAAP)	1,362	1,423
			1,298

367		Net income
	(as adjusted)
▲ 507		329*1	Net income	94	114
			(as adjusted)
			122
2018	2019Q3 YTD	2019Q1	2019Q2	2019Q3
Full year			(3 months)	(3 months)	(3 months)
Net Income (as adjusted)	Realized capital gains/losses (after tax)＊2,3	Unrealized gains/losses (after tax)＊2

(Source) Fortitude Re's financial statements as available on BMA's website, Carlyle's disclosure related to its equity investment

Notes: (*1) Amount may not total due to rounding

Notes: (*2) Adjusting tax impact of 21%

Notes: (*3) Including gains / losses on derivatives

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Overview of Fortitude (cont'd)

• Aimed at growth through further acquisitions of closed books from insurers other than AIG
• • Carlyle to support Fortitude's strategies by leveraging its expertise as a global investment firm

The Growth "Mechanism" of Fortitude through Closed Book Consolidation

Managing both Life &	 Enjoy benefit from lower capital requirement through diversification
Non-Life Insurance	achieved by consolidating various insurance liabilities

	Economies of Scale	 Enjoy economies of scale by reinsuring AIG's insurance policies
	Sophisticated Asset	 Pursue efficient asset liability management with support from
	Management	Carlyle
	Solid Business	 Solid management based upon business foundation succeeded from
	AIG (including reinsurance contract with AIG, management / key
	Foundation
	persons led by James Bracken, CEO）
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4. Financial Impact on T&D Group

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Consideration / Impact on Financial Results

• Funded through cash on hand together with external financing
• • Not planning to fund through equity financing but considering the issuance of subordinated bonds
• The negative impact on our group solvency is expected to be limited
• We will promptly disclose any impact on our group's consolidated financial results for FY2019*1 upon identification
• • Since the timing of the completion for this transaction is undetermined and Fortitude's net asset value can fluctuate significantly from valuation changes, the impact to our group's FY2019 consolidated financial results cannot be determined
  • Considering Fortitude to become an equity method affiliate of our group, we consider adjusting profits for shareholder returns*2
  • No change is expected for FY2019 dividends at this time

Illustration of Fortitude's net asset value (equivalent to 25%) and realized gain/loss from amortization of goodwill at the completion

Fortitude's net asset value (equivalent to 25%) may

fluctuate mainly due to operational results and net

Adjust unrealized	realized and unrealized gains/losses
				Adjusting
gains/losses resulting				Negative
			profits for
mainly from fair value
			goodwill	shareholder
change and add
					return less
transaction cost
					gain/loss
					Goodwill	from the fair
					value, etc.
December	Acquisition	March	June	September	Latest quarter end
2018	value	2019	2019	2019	before the closing

Notes: (*1) If the transaction is completed within FY2019, goodwill will be recognized (Amortization impact will be excluded from the calculation of the adjusted profits for shareholder returns)

Notes: (*2) Represents net income (US-GAAP) less net realized and unrealized gains/losses (adjusting tax impact of 21%) mainly related to change in fair value of embedded derivatives

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Appendices

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Appendix 1: Overview of the Closed Book Business

• The closed book business is a business model that acquires closed books carved out from other insurers due to changes in the business strategies and product portfolios resulting from the transforming business environment, and generates income by enhancing values of the closed book acquired from other insurers
• • Closed book is a block of in force policies for products that are no longer sold (run-off) by an insurer
  • In Western countries (especially in the UK and the US), there has been an increase in the number of closed books due to changes in such background

	Insurer A	Insurer B	Insurer C
Challenges : Lower capital efficiency
and profitability, and increase in policy	Closed	Closed	Closed
management costs due to reduced	book a	book b	book c

scale

Value-up process（varies by insurer）

• Cost efficiency through economies of scale
• Improvement of investment returns
• Risk diversification within in-force book
• More efficient structural set-up

Closed book

a/b/c

Closed book insurer

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Appendix 2: Closed Book Market Outlook

• In the US insurance market where Fortitude places high priority, approximately 10% of total life/non-life insurance liability is assumed to be a potential target of a closed book transaction, which is expected to expand further going forward
• We also expect a possibility of closed book transactions to happen in Japan considering the current insurance market trend and business environment

Closed Book Market Size in the US

Total Life / Annuity Liability

Approximately USD 5.8tn

closed book

Approximately

USD 0.6tn

(Source) T&D Estimate

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Total Non-Life Liability

Approximately USD 1.3tn

closed book

Approximately

USD 0.3tn

Appendix 3: Assumptions on the Purchase Price

• Purchase price is 25% of 1.00x the Book Value (as adjusted) (USD 2,344mn) as of Dec.31, 2018
• • Book Value (as adjusted) is based on Fortitude's Book Value (US GAAP) adjusting non- recurring and non-operating items

Fortitude's Book Value (as adjusted) Valuation Bridge as of Dec.31, 2018 (Unit : USD mn)

		▲194
	925	▲500
	▲12	2,344
2,125
Non-cash	T&D to acquire:
	valuation	USD 586mn
	difference	(25％ Ownership)

Dec.31, 2018	AOCI *	Fair Value of the Tax Adjustment	Non-	Dec.31, 2018
U.S.GAAP Book		Embedded	for Fair Value of	Proportional	Book Value
Value		Derivative	the Embedded	Dividend	(as adjusted)
			Derivative	(to AIG)	Acquired

(Source) Fortitude Re's financial statements as available on BMA's website

Notes: (*) Accumulated Other Comprehensive Income

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Contact Information

T&D Holdings, Inc.

Group Planning Department

Investor Relations Division

Phone: [phone]

This presentation contains forward-looking statements with respect to the financial conditions, results of operations, and business of the company.

These assumptions and forward-looking statements involve certain risks and uncertainties resulting from changes in the managerial environment.

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