T&D : Top Message

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Integrity can be translated into the Japanese words seijitsu, shinshi, or koketsu. I believe that integrity is an essential quality of an organizational leader. Since I became President in April 2018, I have always been conscious of integrity. Rather than pursuing immediate profit and top line, I have earnestly worked on management measures that facilitate improved Group corporate value from a medium- to long-term perspective.

The first thing I focused on after becoming President was creating revenue sources other than the domestic life insurance business. Embodying this vision was the closed book business ("CB business") initiative, and we decided to invest in Fortitude in 2019.

The next thing I worked on was formulating the Group Long-Term Vision. This was driven by a sense of crisis caused by the stagnant share price. Identifying the low capital efficiency rate as being the largest factor behind the stagnant share price, the underlying idea of the Group Long-Term Vision is to improve the share price by enhancing capital efficiency through the upgrading of Group capital management, in addition to sustainable growth in the domestic life insurance business and investment in growth areas such as the CB business. Furthermore, while indicators based on economic value, such as value of new business, are growing, we also acknowledge that the slow growth in indicators based on financial accounting, such as underwriting profitability, is a challenge. For this reason, we decided to embrace management that is based on both economic value and financial accounting.

During the IR Meeting held on May 29 this year, we reinforced the content of information disclosure and explanation and outlined past efforts to improve capital efficiency, as well as future tasks and policies. Many investors and analysts told us that they were able to truly feel how T&D is changing. While much of what I am about to discuss will overlap with the IR Meeting,

I would like to take this opportunity to once again look back over our management to date and give my own thoughts on the future of Group management.

Review of FY2022

In FY2022, there were two main factors that put downward pressure on profits-more hospitalization benefits paid due to the COVID-19 pandemic and increased currency hedging costs due to widening interest rate differentials between Japan and overseas. There was a difficult environment to account settlement during the fiscal year, with the full year Group adjusted profit being revised downward from the initial forecast of 106 billion yen to 90 billion yen when first half accounts were disclosed.

Most of the hospitalization benefits payments related to COVID-19 infections, which was a factor in the downward revision, were payments for so-called "deemed" hospitalizations. April 2020 saw a lack of sufficient hospital beds due to an increased number of infec- tions, and some patients had to receive treatment at an accommodation facility or at home under the supervision of a doctor or other medical profession. These patients were treated the same as hospitalizations under the policy terms and conditions, and payments for "deemed" hospitalizations refers to the special treatment of making these cases eligible for hospitalization benefits, etc. While this was a negative factor in profit terms, we were able to fulfil our mission as an insurance company in the time of the pandemic-protecting policyholders. I believe our sense of responsibility as an insurance company greatly increased. On the other hand, it is a fact that it was the kind of phenomenon that we had not envisaged when designing insurance products, and I believe we need to put it to use when developing products and managing risks in future.

The increase of currency hedging costs was signifi-

cantly higher than our conventional expectations. Our Group has been working on reducing hedged foreign bonds since FY2021, and we will keep an eye on the situation and work on making further improvements to our portfolio.

Steadfast promotion of the Group Long-Term Vision

As mentioned above, we faced a severe external environment. Nevertheless, like I stated at the beginning of this message, we will steadily promote improvements to capital efficiency, one of the pillars of the Group Long-Term Vision. Essential to improving capital efficiency is creating stable capital through the core domestic life insurance business, releasing capital through reducing assets and liabilities with a low return relative to risk, and returning this capital to shareholders at the same time as improving the base profitability by redirecting investments to growth.

New policy sales results in the life insurance business grew year-on-year across all three Group companies for the second year running since the start of the Long- Term Vision, securing a standard much higher than FY2019 before the COVID-19 pandemic. New policy acquisitions are the source of future accounting profits, and I am proud of our strong new policy sales results, which is our major strength amidst the sluggish new policy sales results of our competitors.

Regarding recovery of allocated capital from

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assets and liabilities with low return relative to risk, we are steadily implementing the following measures: (1) Ceded reinsurance of the negative spread block, (2)

Reducing interest rate risk, (3) Reducing hedged foreign bonds, and (4) Reducing strategic shareholdings. In the two years since launching our Long-Term Vision, we have managed to reduce risk by around 78 billion yen. Together with the surplus expansion through the same measures, this contributed to a +15 pt increase in ESR. The ceded reinsurance of the negative spread block would have previously been a difficult measure to decide on as it entails recording a large negative in our accounts in the short term, but we judged it to be a necessary measure from the perspective of improving capital efficiency. This was also largely due to the background of our conviction that ceded reinsurance is an effective tool for an insurance company's financial strategy and capital management through the investment in the CB business that we started in 2019.

Regarding the CB business, which is positioned as a growth business, we made additional investments in Fortitude totaling to around 60 billion yen from 2022 to 2023, bringing our cumulative total investment in the company to approximately 140 billion yen. While there are fluctuations due to the financial environment, the CB business accounts for around 20% of Group adjusted profit, and has grown to become the second largest source of profit after the domestic life insurance business, thereby raising the level of the Group's consolidated profit.

Redevelopment of shareholder return policy

FY2022 was a year of working on advancing our capital management. We thought that we could not

strengthen Group governance without increasing the efficacy of capital management and that we needed to flexibly allocate group management resources and boldly conduct management to circulate the Group's capital. Driven by these strong beliefs, we redeveloped our capital management by raising awareness internally and through engagement with the market.

Concerning our policy on shareholder returns, we recognized issues in three areas: (1) predictability, (2) return level, (3) dual criteria for economic solvency ratio (ESR) and Core ESR. Throughout the year, we held thorough discussions within the company, particularly with the Board of Directors, as well as communicating with investors and analysts. In addition to integrating Core ESR and ESR, we organized shareholder return into (1) Return from periodic profit (50-60% of Group adjusted profit), and (2) Additional return based on capital levels. Moving forward, we will strengthen

Shareholder Returns

(1) Returns from periodic profit

50 to 60% of Group adjusted profit

• (2) Additional returns based on capital levels

• When ESR consistently exceeds 225%, a judgment will be made taking into account the followings;
• • Potential for growth investment
  • Cash flows
  • Impact of temporary interest rate increases
• When other capital efficiency improvements, etc. are judged to be necessary

returns in line with this policy. At the same time, we will proactively consider investments that will bring a revenue rate higher than the capital cost and that will help strengthen existing Group business.

Share valuation

Our share price has risen around 60% from 1,426 yen at the end of March 2021, which was the beginning of the Group Long-Term Vision, to 2,311 yen at the end of July 2023. The PBR has also recovered from 0.5x to over 1x. However, since PBR does not take into account retained liabilities and value of in-force business unique to life insurance companies, we recognize that P/EV, which is based on EV, which represents the corporate value of life insurance companies, is important as a share price valuation index for life insurance compa- nies. P/EV increased from the 0.2x range at the end of March 2021 to the 0.3x range. However, needless to say, the 0.3x range is not satisfactory. We believe that the uncertainty of future profits included in the value of in-force business on EV is a discount factor to some extent. However, we recognize that what this valuation essentially means is that when EV is considered as capital, the market is evaluating that the profit level is not yet sufficient and the capital is not fully utilized. As a result, I believe it will be necessary to further promote efforts towards our Group Long-Term Vision goal of improving capital efficiency in future.

Improving capital efficiency

While both boosting profit and controlling capital are important in order to improve capital efficiency, the most important factor is boosting profit.

Our Group's present measures to improve profits can

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assets with relatively high credit ratings, backed by the expertise of co-investor Carlyle. Although there is a certain degree of volatility due to the financial envi- ronment, we believe that stable excess returns can be achieved over the medium to long term.

While we will also pursue new investment opportunities that contribute to risk diversification, we will make prudent investment decisions while confirming that IRR and ROI exceed the cost of capital and keeping in mind the cash flow of the CB business as a whole. Through these three profit improvement measures, we will first steadily achieve the Group Long-Term Vision target of 130 billion yen in Group adjusted profit for FY2025, following which we hope to achieve further profit improvements.

Pursuing Group synergies

In April of this year, for the first time since the establishment of HD, we aired a TV commercial as a Group. The promotion of integrated Group management is essential if we are to achieve further profit growth beyond the 130 billion yen Group adjusted profit mark and look ahead to the next 10 to 20 years. In FY2023, the third year of the Group Long-Term Vision, we would particularly like to accelerate initiatives in this field. Concerning this point, I would like us to revisit the objectives outlined when the Group integrated, namely: "strengthen the life insurance business by maximizing the strengths and uniqueness of the three companies' business models," and "aiming for continuous growth and earnings expansion by combining group management resources, improving management efficiency, and making strategic concentrated investments." The Group has so far placed more emphasis on the former

and has not yet achieved sufficient results in the latter, and we believe that there is much room for improve- ment. To be specific, for the corporate and asset management divisions, which share many common operations, there is room for improvement both in terms of cost reduction and improvement in the quality of operations through sharing within the Group. In par- ticular, with respect to asset management, the Group's general account assets are approximately 15 trillion yen, and a 1.5 billion yen pre-tax profit improvement can be expected from a 1bp yield improvement alone, so we believe the benefits of the integration will be significant. From 2021, a portion of Taiyo Life and Daido Life's alternative investment functions have been transferred to T&D Asset Management, and we are gradually expanding the assets under management. In addition, we would like to reiterate our intention to promote the mutual use of real estate within the group.

We believe there is significant room for group synergies in terms of strengthening the life insurance business. Currently, each of the three life insurance companies is taking measures to expand contacts with customers, but the possibilities are vast when considering the Group as a whole. While we are strengthening cross-selling among Group companies, what we are particularly looking forward to is the expansion of customer touchpoints through the pet insurance business, and we believe that we can achieve unprecedented results by utilizing Pet & Family as a starting point for the expansion of Group customer touchpoints.

A certain amount of friction is inevitable with regard to business integration, and the group's internal discussions to date have produced many reasons why integration cannot be done and disadvantages of integration.

Reflecting on these points, the holding company intends to take a strong leadership role in implementing business integration from the viewpoint of Group optimization.

Developing Group management personnel

The development of Group management personnel who can think in terms of group optimization is one of the most important issues for the future of our group, and is a theme that we are currently focusing on. A point that I consider to be particularly important in this context is experiencing the operations of the holding company and operations of Group companies other than one's own company. While it is obviously necessary to become familiar with the operations of the company you have joined, this is not enough from a Group management perspective. It is necessary

to develop a Group perspective by experiencing the operations of Group companies. In order to generate Group synergies, we strongly feel that collaboration among subsidiaries needs to be strengthened and that the management of each subsidiary also needs to have a group perspective. From the viewpoint of employee success, we believe it is significant to expand the field to the entire Group, rather than limiting it to only the company the employee belongs to.

Additionally, while it is needless to say that the integrity I mentioned earlier is needed for personnel who will take on Group management, I believe another essential characteristic is being able to engage in constructive dialogue with the market. Market opinions can sometimes go too far, and we do not believe that all of them are correct. However, there are many things we can realize through dialogue with the market, and we will continue to place importance on this going forward. We