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MarketScreener Homepage  >  Equities  >  Tokyo Stock Exchange  >  T&D Holdings, Inc.    8795   JP3539220008

T&D HOLDINGS, INC.

(8795)
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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)

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11/25/2019 | 06:28pm EDT

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

Copyright T&D Holdings, lnc. All Rights Reserved.

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

Copyright T&D Holdings, lnc. All Rights Reserved.

1

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

Copyright T&D Holdings, lnc. All Rights Reserved.

2

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

Copyright T&D Holdings, lnc. All Rights Reserved.

3

1. Strategic Significance for T&D Group

Copyright T&D Holdings, lnc. All Rights Reserved.

4

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)

Copyright T&D Holdings, lnc. All Rights Reserved.

5

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

Copyright T&D Holdings, lnc. All Rights Reserved.

  • 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

Copyright T&D Holdings, lnc. All Rights Reserved.

7

2. Investment Overview

Copyright T&D Holdings, lnc. All Rights Reserved.

8

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

Copyright T&D Holdings, lnc. All Rights Reserved.

9

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

Copyright T&D Holdings, lnc. All Rights Reserved.

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

Copyright T&D Holdings, lnc. All Rights Reserved.

11

3. Overview of Fortitude Group Holdings

Copyright T&D Holdings, lnc. All Rights Reserved.

12

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

Copyright T&D Holdings, lnc. All Rights Reserved.

13

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

Copyright T&D Holdings, lnc. All Rights Reserved.

14

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

Copyright T&D Holdings, lnc. All Rights Reserved.

15

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

Copyright T&D Holdings, lnc. All Rights Reserved.

16

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)

Copyright T&D Holdings, lnc. All Rights Reserved.

17

4. Financial Impact on T&D Group

Copyright T&D Holdings, lnc. All Rights Reserved.

18

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

Copyright T&D Holdings, lnc. All Rights Reserved.

19

Appendices

Copyright T&D Holdings, lnc. All Rights Reserved.

20

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

Copyright T&D Holdings, lnc. All Rights Reserved.

21

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

Copyright T&D Holdings, lnc. All Rights Reserved.

22

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

Copyright T&D Holdings, lnc. All Rights Reserved.

23

Contact Information

T&D Holdings, Inc.

Group Planning Department

Investor Relations Division

Phone: +81-3-3272-6103

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.

Copyright T&D Holdings, lnc. All Rights Reserved.

24

Disclaimer

T&D Holdings Inc. published this content on 26 November 2019 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 25 November 2019 23:27:02 UTC

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