T&D Holdings Inc

TSE:8795

Earnings Call Analysis

Lifeco Company Reports Strong Profits and Future Growth Potential

Lifeco Company reported an adjusted profit of JPY 81.8 billion, exceeding its forecast of JPY 117 billion. The customer surrender rate has increased, impacting new business value, now at JPY 87.6 billion against a target of JPY 160 billion. MCEV rose to JPY 4,154.9 billion, with earnings projections remaining steady despite anticipated Q3 losses of around JPY 1 billion. The company has targeted JPY 130 billion in adjusted profit for next year, expressing confidence in achieving this aim amid favorable profitability trends.

Strong Performance Amid Fluctuations

The earnings call for T&D Holdings showcased a solid performance with a group adjusted profit of JPY 81.8 billion, surpassing their full-year forecast of JPY 117 billion. This uptick was largely due to an increase in sales from new policies across their three life insurance companies, although there was a noted rise in surrender and lapse rates. These figures reveal that despite a challenging market environment, the company is managing to enhance profitability.

Valuation Metrics and Growth Prospects

The margin of new business in terms of value has significantly declined, recording JPY 87.6 billion compared to the full year forecast of JPY 160 billion. This shortfall signals potential headwinds, especially concerning customer retention with an increased surrender rate of 4.55% for Taiyo Life and 8.07% for Daido Life—up approximately 0.3 percentage points year-on-year. However, T&D Holdings maintained its full-year earnings and dividend forecasts, instilling a level of investor confidence amidst these fluctuations.

MCEV Growth and Investment Strategy

The Market Consistent Embedded Value (MCEV) saw an impressive rise of JPY 51.6 billion to JPY 4,154.9 billion. This is indicative of positive long-term sustainability in terms of future cash flows. Despite the adjustment challenges, the life insurance companies are crafting a well-structured investment strategy that includes maintaining cash flow matching to minimize interest rate risks.

Balance Sheet Strength and Risk Management

T&D Holdings reported an increase in its Excess Surplus Ratio (ESR) to 245%, a clear sign of improved financial health largely attributed to rising domestic interest rates. The company is proactively addressing unrealized losses associated with foreign bonds and Japanese Government Bonds (JGBs), indicating a committed approach to risk management.

Future Outlook and Market Challenges

Looking ahead, T&D Holdings anticipates recording a loss of about JPY 1 billion in the consolidated results for Q3, signaling potential volatility in earnings. Moreover, factors such as foreign exchange sensitivity were highlighted, where every JPY 1 appreciation in the Japanese yen could lead to a decrease of JPY 440 million in group adjusted profit. Despite such risks, the company remains focused on strategic asset management and achieving the long-term financial goals set in their five-year vision.

Investor Sentiment and Strategic Updates

During the Q&A session, executives hinted at optimism for the following fiscal year with indications of achieving a projected JPY 130 billion profit target. This forward-looking sentiment, coupled with a robust approach to mitigating investment and liquidity risks, presents a balanced narrative for investors considering T&D Holdings’ stock amidst market fluctuations.

Earnings Call Transcript 2025-Q2

[Unknown Executive]

I am Satoshi Ko, General Manager of IR Department of T&D Holdings. Thank you very much for joining our results conference call. The material is updated on the company website in the IR section, IR event. For the first 10 minutes, I will provide you a presentation using the presentation material, which will be followed by Q&A. Now let me start. Please turn to Page 3.

I will explain the points of the financial results. Group adjusted profit amounted to JPY 81.8 billion against the full year forecast of JPY 117 billion, exceeding the plan. Sales results of new policies of all 3 life insurance companies increased compared to the plan. Meanwhile, surrender and lapse rate has risen. Value of new business amounted to JPY 87.6 billion against the full year forecast of JPY 160 billion.

Group MCEV increased by JPY 51.6 billion from the end of the previous fiscal year to JPY 4,154.9 billion. ESR was 245%. There are no changes in full year earnings forecast and dividend forecast. In addition, in the consolidated results for the third quarter of FY 2024, the company is expected to record a loss of approximately JPY 1 billion as adjusted profit from [indiscernible] September quarter of 2025. On the fiscal year-to-date basis, the company expects to be adjusted profit of roughly JPY 16.2 billion for Q3. Please turn to the next page.

Group [indiscernible] profit increased by 46% year-on-year to JPY 81.8 billion. By company, 3 domestic life insurance companies and T&D United Capital saw an increase in profit. Adjusted EPS increased by 50.9% year-on-year, exceeding the growth rate in adjusted profit, partially owing to the effect of a decrease in the number of shares from the share buyback. Please turn to Page 6.

Page 6 shows the key results of the Life Insurance companies, and Page 7 shows the core profit and positive spread. As shown on the right on Page 7, positive spread and core profit increased, due mainly to a decrease in currency hedging cost at Taiyo Life and an increase in interest and dividend income at Daido Life. At both companies, capital gains for the second quarter look positive, standing at JPY 1.4 billion for Taiyo Life and JPY 22.4 billion for Daido Life, with loss on sale domestic and formats offset by gains on sale of domestic and foreign stocks. Please proceed to Page 8.

At Taiyo Life and Daido Life, average assumed investment yields were 1.15% and 1.26%, respectively. Please turn to the next page.

Adjusted profit for T&D United Capital increased by JPY 1.2 billion year-on-year to JPY 16.1 billion. Please turn to the next page.

A loss of approximately JPY 1 billion is expected in the company's consolidated results for Q3 of fiscal 2024 as [indiscernible] adjusted profit for the July, September quarter of 2024. In addition, including earnings of affiliates of roughly JPY 31 billion is expected to be recorded as accounting profit as a result of a recovery in net assets were fortitude in financial accounting due to an increase in gain on valuation of bonds resulting from lower U.S. interest rates.

The amount of approximately JPY 31 billion may fluctuate substantially in the full year results, depending on changes in used interest rates. By the end of 2024, dividend of roughly JPY 7 billion is expected to be paid from 42 to TDUC.

The status of commercial mortgage loan is shown on the slide. Now please turn to the next page. Sales results of Taiyo Life were shown on this page. Annualized premium protection-type new policies has progressed in line with the plan due to strong sales in the Asian channel. Annualized payments-based surrender and lapse rate was 4.55%, an increase of 0.3 percentage points year-on-year due to an increase in surrenders in the Asian channel. Meanwhile, the rate decrease compared to Q1 of FY '24. Please turn to the next page.

New policy amount of Daido life progressed well and increased significantly year-on-year, mainly due to attentive consulting sales activities that comprehensively cater to customers' diverse needs for coverage. Surrender and lapse rate was 8.07%, an increase of 0.32 percentage points year-on-year. Meanwhile, policy amount in force increased from the previous fiscal year and due to favorable performance of new policy amount. Please turn to the next page.

Annualized premiums of new proceeds of T&D Financial Life progressed well beyond the plan, owing to favorable sales of single premium individual annuity. Although surrender and lapse rate increased year-on-year, due to an increase in surrenders of foreign currency-linked type products that reach target yen value and convert it to yen-denominated insurance, annualized premiums of policies in force increased. Please turn to next page.

Group MCEV, excluding valuation gains and losses related to Fortitude, increased by JPY 51.6 billion from the end of previous fiscal year to JPY 4,154.9 billion. Total value of new business of the 3 companies decreased by JPY 700 million year-on-year to JPY 87.6 billion. New business margin was 7.9%.

Page 16 shows the details of MCEV of each of the 3 life insurance companies. Page 17 illustrates the factors causing movements in group MCEV excluding valuation gains and losses related to Fortitude. Group MCEV increased to JPY 4,154.9 billion, mainly due to the accumulation of value of new business and rise in domestic interest rates. Please turn to Page 19.

This page shows status of investments of Taiyo Life and Daido Life. In the first half of the year, the company sold approximately JPY 103 billion in domestic and foreign stocks and combined total of the 2 companies. The interest matching rate of Daido Life increased by 8.9 percentage points from the end of the previous fiscal year to 75.3% at the end of September 2024. In addition, the interest matching rate of Taiyo Life was 85%. Please turn to the next page.

Status of foreign currency denominated bonds is as shown on the page. Taiyo Life and Daido Life have continued to reduce hedge foreign bonds. As a result, both companies have already implemented a reduction of approximately JPY 292 billion in total during the first half of the current fiscal year. Please turn to Page 23.

The ratio of strategic shareholdings to net assets as of September 30, 2024, was 16.8%. We aim to achieve a balance of 0 strategic shareholdings by the end of March 2031, excluding those business partners and collaborators. Please turn to the next page.

We are proceeding with the sales of issues that have been reclassified from strategic holdings to shares held for pure investment purpose. In the course of reducing equity risk, the cumulative total of sales came to 33% by the end of September 2024. Please turn to the next page.

ASR As of the end of September 2024 has risen from the end of previous year to 245%, due to an increase in surplus as a result of rise in domestic interest rates and the acquisition of new policies. Please turn to Page 27.

There is no change in full year earnings broadcast for the year ended March 31, 2025, breakdown of the earnings forecast. So the 3 life insurance companies are stated on Page 28. Regarding foreign exchange sensitivity for the second half of the current fiscal year, appreciation of Japanese yen by JPY 1 results in the loss of JPY 440 million in group adjusted profit. Page 29 shows other key topics.

This concludes the briefing of financial results for the 6 months ended September 30, 2024. We will now like to proceed to the Q&A session.

[Operator]

The first question will be from Mr. Muraki from SMBC Nikko.

[Masao Muraki, analyst]

This is Muraki from SMBC Nikko. I have 2 questions. First, regarding the progress rate. It is 70%, but you did not change the full year guidance. What is your outlook on the investment product for the second half?

On Page 22, for the foreign bond and the unrealized losses on those assets, we have made progress in dealing with the unrealized losses. However, you still have some unrealized losses. And also for the JGB holdings, the unrealized losses is now over JPY 600 million. In the first half, both for the foreign bonds and JGBs, you have recorded loss on sales. But in the second half, would you be incurring similar cost or with your outlook? And how will that impact to the progress of the profit? That's my first question.

[Unknown Executive]

Muraki-san, thank you for your question. So regarding the second half investment profit. We'll continue our ALM strategy in the second half. For the new money, we will continue to hold on to the ultra-long bond. And depending on the situation, in order to promote cash flow matching, we will refer the policy reserve matching bonds. And on this point, Muraki-san, you mentioned dealing with lag losses. But that is not our intention because our intention is cash flow matching to reduce the interest rate risk, so we will not do any trading in order to deal with the unrealized losses.

And for the foreign bond, in the first half, we front-loaded our activity to deal with them. So for the second half, it will be flattish. And lastly, on the equity holdings. The original plan at the outset of the year for both 2 life companies was to sell JPY 70 billion, respectively, of domestic and foreign equities. And on this point, in the first half, on Life front-load data selling activity selling JPY 80 billion. So for Daido, the second half, the sales of equity will be flattish.

For Taiyo in the first half, the sales was JPY 20 billion. So in the second half, JPY 50 billion of sales will be conducted. And depending on the situation, we may do a little more, and that is our investment strategy for the second half.

[Masao Muraki, analyst]

Then my understanding is that compared to the first half, in the second half, you will not be incurring big losses in the sales. Also you have maintained your full year guidance. But as a trend, you are enjoying some of our performance, vis-a-vis, the business plan?

[Unknown Executive]

Yes, that is correct.

[Masao Muraki, analyst]

That's very clear. My second question is on Page 18 regarding the interest rate increase. So sorry to ask a very detailed question on the sensitivity. The 50 basis increase implication is 0 or slight negative? And from the end of March, the sensitivity has changed for those life companies. And for Taiyo and Daido do, what is the actual sensitivity to the interest rate today? Can you give me some update, please?

[Unknown Executive]

Yes, Muraki-san, thank you for your question. Also looking at the sensitivity to the interest rate for both Taiyo and Daido. For Taiyo, it's negative. For Daido, it's positive impact. And for Daido Life, we have been promoting cash flow matching. So the sensitivity to the domestic interest rate has gone down.

For Taiyo Life, the sensitivity is negative, and this is because of the following reasons. Normally, when the interest rate goes up, you look at the sensitivity of both the asset and the liability side. And normally, the sensitivity on the liability side is bigger as a higher interest rate has a positive implication. But this time, for Taiyo, the sensitivity on the liability side has been declining.

And there are 2 reasons behind this. One is in the calculation of the EV from this fiscal year, we have started to reflect the impact of the mass surrender risk. So an interest rate goes up, the value of in-force business goes up. And with that, the mass surrender risk will go up, which will increase the required capital. And with the unhedgeable risk going up, with the rate hike, the increase in the value of the in-force business is muted.

And another reason is the option and the time value of financial options and guarantees. With the rate going up, the option and the time value of the financial options and guarantees have gone up in terms of sensitivity, and that is also meeting the growth in the value of in-force businesses with more savings safe product with average investment yield depending on the rate and the investment yield, this kind of trend will be observed. That will be my answer to your question.

[Operator]

Next question comes from BofA Securities. Shinichiro-san, please.

[Shinichiro Nakamura, analyst]

I'd like to pose a question related to the status of surrender. In terms of the amount of surrender has been on the rise. Also on a Q-on-Q basis, the surrender's ureters impact on the actual results as well as the assumption, there has been a negative impact by JPY 28 billion result.

Now going forward, will we continue to see this negative impact? What is the current status? Also for the insurance-related negative impact, does that include not only the surrendering lots, but also impact of operating expenses? If that is the case, what is the current state? And also the operating expenses, which is the current status, if you can give us more color. That is my first question.

Second question relates to Fortitude. The September quarter, it was in deficit by JPY 1 billion. Please give us the background to that. So those are my 2 questions.

[Unknown Executive]

Thank you very much, Shichiro-san, for the questions. As for the current status of surrender., So for Taiyo and Daido alike, we are seeing rise in terms of the surrender. Now for Taiyo, for the surrender for the in-house sales rep channel, it has been steadily on the decline. However, for the OTC channel, it is staying at the high level.

Now moving on to Daido life. Now because of the deterioration of the financing of the corporates, April was the peak of the repayment of the so-called Zero-Zero financing. So we have seen a decline since April. However, the decline pace has been somewhat slow, but we shall continue to see a base decline. So we have seen surge in the surrender in Q2 as opposed to Q1.

Why? Because we have more new policy amount in Q2. So as we promote these sales activities, there's definitely a rise in needs to revisit some of the projection from the customer's POV. So we shall see more policy replacement, hence, rise in surrender.

So although we are seeing increase in the new business, we are seeing a surge in the surrender. However, for Daido Life, if you can see this bar graph here. In comparison to the rise in surrender, we have seen higher rise in the new business. And we are seeing increase both in terms of the in-force amount as well as in-force A&P. So the sales activities in general has been quite brisk.

Now in terms of the EV assumptions. So JPY 23.1 billion was the impact we have seen. And of course, the biggest impacts come the surrender from Daido Life. So how do we calculate the assumptions for the surrender for Daido Life? So for the recent 12 months, we have the surrender rate. So in the course of 5 years, it would converge into the past 10 years average. That is surrender scenario that we have in mind.

Now this time around, we have seen surge in terms of the surrender. Why? Because we lag behind by 3 months. So what we have reflected is the 12 months actual up until June end of this year. So that actual amount has been factored in. So we have seen surge in the rise in surrender for Q1 that has been incorporated into the assumption. So that is why we have seen deterioration in the surrender rate and that has led to the negative impact in terms of the insurance assumptions.

Now moving on to Taiyo Life. So we have dramatically revisited the surrender rate for the OTC channel. So we are seeing a higher surrender for the products we have sold in the back, but that has been already reflected in terms of the variance between the surrender and the actual. That is minus JPY 6 billion.

Also for the operating expenses, Taiyo and Daido, we have seen a rise. So that rise in the operating expenses, it is reflected on the assumptions of EV.

[Shinichiro Nakamura, analyst]

So in terms of the operating expenses, so what is the magnitude of that increase? So I believe the number referred to 6 months.

[Unknown Executive]

Yes, all the numbers we have provided is for 6 months. So for the 6 months numbers, the assumptions for the operating expenses, taiyo and Daido combined, it's about JPY 10 billion or so. Daido actually takes up a larger proportion.

In terms of the impact of the surrender, Daido has been quite large, and there has been a time lag by 3 months. And there has been a spike for the June quarter, so that is incorporated. So that is the impact.

So it has been on the decline, but it's still hovering at the high level.

[Shinichiro Nakamura, analyst]

So this high level, will we continue to see that for the next 6 months as well. So would that actually pose a negative impact in the following quarters? I am somewhat concerned about that.

[Unknown Executive]

So the rise in the surrender ratio. Actually, we have fully already accounted for further deterioration trend of the surrender. So we are not expecting a significant deterioration going forward. It has been factored.

[Shinichiro Nakamura, analyst]

Next question relates to TDAC. Q3 was minus JPY 1 billion. So for Q2, it was JPY 17.2 billion. And there has been revaluation of the FX. So for Q2, we used the number as of June end. So we have actually revisited that by the FX as of September. So that's negative of JPY 2 billion. So if you would exclude this factor, it will be plus JPY 1 billion. It is still low, though. So why that is the reason?

[Unknown Executive]

First of all, it's a variable annuity because, of course, we cannot hedge those completely. So we have seen a negative impact there. Another point relates to insurance assumptions.

So we will revisit this in Q3. So this negative portion is only several hundred millions or so, not so large. Aside from that, alternative income, real estate-related investment, not so large in terms of amount, but there was a slight negative impact. So there was a fairly large hedging rate.

[Shinichiro Nakamura, analyst]

I wasn't quite aware the environment is in such ways that we shall see these hedge errors. Was that the case? Would it be so significant? Sorry, it's just a question. So hedges, the impact and some of the loss incurred from the alternative real estate. So are you allocating similar numbers?

[Unknown Executive]

So actually, the largest impacts comes from the variable annuity. So in comparison to the previous quarter, there has been a minus -- large minus. But the initial plan was JPY 10 billion. And in terms of the cruising speed, we are looking at JPY 13 billion or so.

So if you divide that 4, every quarter, it's about JPY 3 billion or so. So that is down to JPY 1 billion because of the FX revaluation. So that was the biggest impact.

[Shinichiro Nakamura, analyst]

Understood.

[Unknown Executive]

May I add this, for the variable annuity in the first half, so that is for the June end, we have seen some upside because of the hedging error. But now we have seen a sort of a rebound back. So also, Q3 was a negative. But if we would see on a full year basis, it is somewhat flat. So it's kind of a reactionary sort of a downturn from the surge in Q1.

[Operator]

Next question is from Mr. Watanabe from Daiwa Securities.

[Kazuki Watanabe, analyst]

This is Watanabe from Daiwa Securities. I have 2 questions. On the first 1 is on Page 10 regarding Fortitude paying JPY 7 billion of dividend to TDAC. To date, Fortitude is focusing more on growth. So capital was allocated. But now you're getting dividend paid from Fortitude. So what is the reason behind this? And the next question is on Page 29. You have 2.4 million shares that belongs to the untraceable shareholders, which is quite sizable. Also, how would you treat this if you sold this to the market? Would you be repurchasing the shares? So how would you treat these shares of the untraceable shareholders?

[Unknown Executive]

Watanabe-san, thank you for your question. Regarding the dividend from Fortitude. Originally, from FY '25, we had planned to get dividend from Fortitude. So this was front-loaded. And they are now able to pay dividend because of the level of the sufficient capital base and also the outlook for the profit and also the opportunity for new book acquisitions. So that's my answer to your first question.

And on the second point regarding the untraceable shareholders. As you said, we have 2.4 million shares calculating at a stock price of JPY 2,500, it's about JPY 6 billion. So we are still waiting until the deadline for the untraceable shareholders to notify the objections, so we will wait until that date.

And depending on the situation, we would consider selling or buying at the market or doing a share buyback. And after that, after buying back those shares or selling those shares, the shareholders are untraceable. So we will have them temporarily for 10 years on our books. And if the shareholders do not show up in 10 years, it will be booked as miscellaneous income after withholding tax.

So for the first 10 years, it will be booked as liability on our books.

[Kazuki Watanabe, analyst]

So that means that JPY 6 billion is a potential profit contributor in the future. Would that be correct?

[Unknown Executive]

Well, it depends on how we can trace the untraceable shareholders. But as a possibility, yes, it could contribute to profit.

[Operator]

Next question comes from JPMorgan Securities. Sato-san, please.

[Koki Sato, analyst]

This is Sato from JPMorgan. My first question relates to how the business is progressing and how should we see the final number?

[Unknown Executive]

So in Slide 28, we have the progress rate for each of the companies by different line items. So Taiyo Life's capital gains and losses. This number stands out. So according to the explanation in terms of shares equity, we shall see additional sales by JPY 50 billion. So you should be able to catch up.

However, suppose Taiyo, we will see a downturn, and I'm not quite sure about Daido. Apologies. I would like to pose this in a different way. So Daido Life, suppose that we shall see an upside. So in the past, we have conducted some additional loss processing so we will offset this upside factor on the company basis.

[Koki Sato, analyst]

But this time, so the Taiyo, if we expect to see a downside, will we see an upside by Daido Life. So I'd just like to confirm how do you intend to address these upsides and downsides by different companies?

[Unknown Executive]

Thank you, Sato-san, for that question. As you know, for Taiyo Life, the first half capital gains and losses have been stagnated because of the front loading of the sales of the foreign bonds in the first half.

Now going forward, as of this moment, Taiyo and Daido Life, we shall be able to achieve the budget number. Did I answer your question?

[Koki Sato, analyst]

I would like to post this differently. So Taiyo, let's just say it would achieve the budget. And Daido, if we see an upside, do we expect to see this as an overall upside on a consolidated basis? So because, for instance, Daido expect to see an upside, perhaps Taiyo will not stretch themselves, that sort of incentive would not work then?

[Unknown Executive]

No, that is not the case. So we do believe that there's a high possibility we shall see an upside on a consolidated basis.

[Koki Sato, analyst]

I just wanted to confirm that. The second question, this is somewhat apart from the results on the 27th of November, at the IR briefing, which is slated to be held. So I do believe the institutional investors are aware of this back in September, the President Moriyama have already showed his intent to revisit some of the initiatives and numbers. So as of 27th of November, will there be any additional update? Could we expect to see that? Of course, as of this moment, there are some areas you cannot fully comment. But as far as you can, if you can share with us, that would be helpful.

[Unknown Executive]

That is a really tough question to answer. But again, on the 27th of November, we'll talk about the -- some of the initiatives to enhance the share price valuation. So we would like to explain about the initiatives.

And of course, as part of that, we would share about the progress of the risk reduction and also about the core business. But I'm pretty sure, Mr. Sato, you're referring to the shareholders' return. Again, we should be able to explain how we think about shareholders' return as of this moment. Did I answer your question?

[Koki Sato, analyst]

Understood.

[Operator]

Next question is from Mr. Sakamaki from Mizuho Securities.

[Naruhiko Sakamaki, analyst]

Yes. This is Sakamaki from Mizuho Securities. I have 2 questions. The first 1 is on Page 10 regarding TDC and Fortitude. Year-to-date, as of Q3, you're overachieving the business plan, but the quarterly fluctuation is quite big. So looking at TDC or Fortitude, how would you assess the underlying earnings capability? It's not exactly about the financial results, but can you share your thoughts on the underlying earnings capability of TDC and Fortitude?

[Unknown Executive]

Sakamaki-san, thank you for your question. looking at the forecast for this fiscal year. In Q4, a potential downside will be the impairment on the CRE loans. But having said that, at this point, it will be well within our budget or projection. Also, it will be within the range of the loss we took in the first half of last fiscal year.

So if everything goes monthly for the full year guidance for TDAC, we may be able to enjoy some upside. And it's difficult to answer the underlying earnings capability of the churn. But at the fortitude, they bought the new book from Lincoln last year, and they are reshuffling the portfolio shifting from the high liquidity of sovereign bonds to low liquidity credit over Fortitude can exert their investment strength.

Also depending on the progress of there reshuffle, the result will be different. But for this year, if the business plan was 100, the action will be much higher than that. So we were targeting 200 and the actual will be closer to that targeted number.

And if I may add that for this fiscal year, Fortitude private equity return is expected to be lower compared to the long-term average. And also for the CRE loans, we are incorporating a certain level of impairment, which is higher than normal. So it's not been incurred in Q3, but it is reflected in the business plan. So vis-a-vis, the underlying earnings capability, the business plan is slightly lower or weaker.

[Naruhiko Sakamaki, analyst]

I see. And lastly, on the CRE loans. If I may confirm, you say that it's within the business plan. Does that mean that you are going to incur the impairment loss in Q4?

[Unknown Executive]

No, it has not been decided. Also we will see how the situation will trend. But even if we have to incur the impairment loss, it will be within the business plan and the budget.

[Naruhiko Sakamaki, analyst]

My second question is a little bit detailed. But looking at the surrender right of Taiyo Life, the sales rep channel seems to be stabilizing, but it's still high at the Asian channel. Do you expect this level to continue for some time? Or do you expect some improvement?

[Unknown Executive]

Yes, for the surrenders at the OTC, the Asian channel, it will continue to stay high because for the first 5 years, the [indiscernible] of the surrender is loaded. But so given the design of the product, we expect the highest surrender starting from year 6. Also, it will remain high for some time.

[Naruhiko Sakamaki, analyst]

I see. So from Q1, Q2, it declined, but it's not a declining trend. So you expect the Q2 level to continue?

[Unknown Executive]

Yes, that is correct.

[Operator]

Next question comes from Nomura Securities. Sasaki-san, please.

[Futoshi Sasaki, analyst]

3 so this is Sasaki from Nomura Securities. I'd like to pose 2 questions. The first question is quite simple. So at the very start of the materials, you have mentioned clearly that you're progressing above the plan, but you have not changed the guidance for the full year. Why is that the case?

[Unknown Executive]

Thank you very much, Sasaki-san, for that question. Given the current financial environment, as of this moment, it is challenging to come up with the 6-month forecast under high conviction. But this time around, we have postponed the change revision.

But in February, after the Q3 results, the Fortitude results will have been confirmed, and it's only 2 months to go. So at the same -- that particular moment, we would like to look into the full year number. And if necessary, we would like to make a decision for revision.

[Futoshi Sasaki, analyst]

So this is just a time issue then. So provided that all terms and conditions stay aside, this is just at the time issue then?

[Unknown Executive]

Of course, the current and the financial -- the fiscal standing, it has been quite uncertain. But recently, it is turning for the better. So chances are it will turn for the better as well.

[Futoshi Sasaki, analyst]

For the second question relates to the business. The policies results, sales results and also the basic profit and the capital profit and loss in Fortitude. So based on all these elements, if you can share with us your thoughts on the trend for next year's adjusted profit, if you can share with us as much as you can. So you have a JPY 130 billion target for the midterm plan or the long-term vision. So what is the certainty that you would achieve those numbers?

[Unknown Executive]

Sasaki-san, thanks for that question. So the next year's outlook is within the 5-year vision, JPY 130 billion was the number. So we do believe that certainty of achieving that number is getting higher.

[Futoshi Sasaki, analyst]

So this one around them. So this year, this level is somewhat better than you initially anticipated. Are you expecting a better level than this year? Or are you just referring to the fact that we are getting close to reaching that JPY 130 billion? Which are you talking about here?

[Unknown Executive]

Actually, it's both. We are seeing higher probability of achieving JPY 130 billion. And also, we are seeing improving in the portfolio. So the profitability has been on the rise as well. So the answer to you is both.

[Operator]

Next question is from Majima from Tokai Tokyo Intelligence Lab.

[Tatsuo Majima, analyst]

Yes. This is Majima. Thank you for this opportunity. I want to ask about the surrender rate of Daido Life. Looking at the breakdown, you explained earlier that the employers, the funding situation has deteriorated. So that's led to surrender. And so there is a policy replacement, which led to the surrender. Also in Q2, how much of a surrender is accounted through by policy replacement? And if a policy replacement-based surrender goes up for the calculation of EV, compared to the companies adopting the covering approach, I think the surrender impact will be bigger. And also the value of new business would also look higher. That's my assumption. Also from a long-term perspective for yourselves, who do not adopt the conversion approach. How does the EV calculation differ? How would you assess your position?

[Unknown Executive]

Majima-san, thank you for the question. As for the breakdown of the reasons for surrender, apologies, but we do not disclose that detail. And also for the value of new business and EV calculation, not adopting a conversion approach would not have a big impact. That's the answer to your question.

[Tatsuo Majima, analyst]

May I confirm, compared to other companies, I believe the surrender weight will look higher, and that would have some negative implications in the EV. Is that not correct?

[Unknown Executive]

Majima-san, yes. Not having that conversion approach will have that implication, but that impact is not material.

We will now finish the Q&A session.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]