Thanks so much, Ito-san, and thank you to the T&D team and all of the participants. If I may ask that we briefly turn to slides two and three to read through a few important notices and disclaimers. This presentation may contain forward-looking statements within the meaning of applicable securities laws and other estimates and projections, which are not guarantees of future performance or outcomes and may differ materially from actual results. Fortitude assumes no obligation to update any such statements except as required by law. This presentation also includes certain non-GAAP financial measures, which may not be directly comparable to similar measures used by other companies in Fortitude's industry. A reconciliation of such non-GAAP measures may be found on Fortitude's website.
Finally, please note that unless otherwise indicated, the information in this presentation is as of September 30th, 2025, and that for the avoidance of doubt, when we use financial metrics such as adjusted net income, these metrics are defined by Fortitude Re and are different from the adjusted profit and other measures as defined by T&D Holdings. If we could kick off the presentation on slide six. Fortitude Re is one of the world's leading asset-intensive reinsurers. We provide tailored reinsurance solutions addressing our clients' most meaningful issues and opportunities. Our firm is supported by several of the world's largest and most sophisticated insurance investors, including T&D, Global Alternative Asset Manager Carlyle, and several sovereign wealth funds.
They have entrusted us with $6.9 billion of their capital to provide our capabilities and solution sets to the clients who see the value in how we can help them manage their strategic risk and capital positions. That value proposition has resonated strongly. From $37 billion in liabilities in 2020, we have grown to over a $100 billion balance sheet today, of which over $75 billion are general account reserves. As you can see on the bottom left of the page, we have built our business prudently and done so while maintaining a strong balance sheet, robust regulatory capital, and healthy earnings. This performance has not only earned us the recognition of clients and investors, but also the rating agencies, where we have an A- equivalent or better from Moody's, Fitch, and AM Best.
If we quickly flip to slide seven, our growth and our performance are all based upon our ability to deliver for our clients. As you can see on this page, we have done so with success in both Asia and North America. In Asia, which in our business is dominated by clients from Japan, we have achieved a little over 25% market share of reserves ceded to our market since 2020. Similarly, in North America, where the business is largely accounted for by U.S.-based clients, we've achieved approximately 10% market share. As Kai will expand upon later in the presentation, our success in delivering solutions that clients find valuable is the result of a deliberate and thoughtful business origination capability that is focused on deep partnership with clients who value our capabilities.
On slide eight, you can see that our core strategy is to be a reinsurer of choice across every liability origination channel where our capabilities can provide value to our clients and to our shareholders. In 2025, we executed on that strategy across multiple dimensions. As you can see on the left side of the page, we completed several block and flow reinsurance transactions that added nearly $10 billion in high-quality reserves to our balance sheet. We also established our presence in the capital markets with an issuance of senior notes that receive regulatory capital credit, as well as our inaugural issue of funding agreement-backed notes, or FABN, which Kai will expand upon later in this presentation. Finally, we launched our first sidecar, FCA Re, with over $700 million of capital dedicated to supporting clients in Japan and throughout Asia.
In Japan specifically, we have now completed eight transactions and continue our focus on supporting our clients here. We have already achieved approximately $14 billion in total reserves and $1.5 billion in flow premium. As you can see in the third column on this slide, one of the reasons our clients choose us is because of the strength of our balance sheet, as well as our robust approach to risk management, including our comprehensive and disciplined hedging of market risk. These efforts come together to generate significant earnings for our investors. We, of course, aspire to significantly grow both our client franchise and our earnings and are making significant investments to achieve our goals. Speaking of earnings, on slide nine, you can see that our financial results reflect the fact that our value proposition to both clients and investors continues to resonate.
On the left side of this page, you can see that we have made steady progress in responsibly growing our business, achieving $83 billion in general account reserves at September 30th, 2025. That growth has come thanks to the milestones I described earlier across reinsurance, FABN issuance, and the launch of our sidecar, FCA Re. Our earnings have also grown handsomely. In the nine months ended September 30th, 2025, our core operating earnings were $674 million, and our adjusted net income was $669 million. At a high level, core operating earnings can be thought of as our earnings power and adjusted net income as an operating earnings metric comparable to how U.S.-listed insurers report their operating income. As noted previously, for the avoidance of doubt, adjusted net income is defined by Fortitude Re and different from the adjusted profit defined by T&D Holdings.
Also, for investors who would like detail regarding the metrics on this page, detailed definitions are available on slide 39 of this presentation. These earnings figures are supported by our continued ability to generate an attractive spread on our assets relative to our expenses, which we refer to as core return on assets. You can see this metric remains generally consistent across time and varies only slightly as we receive assets from clients and then rotate them into optimized investment portfolios that deliver better risk-adjusted yields, as our Chief Investment Officer, Jeff Morrow, will expand upon later in this presentation. Turning to slide 10, capital and liquidity are managed dynamically through the use of defined targets based on our firm's risk appetite. Regulatory capital is managed to greater than 175% ECR at our Bermuda entities and greater than 500% CAL RBC at our U.S.-regulated entity.
As shown on the page, as of the third quarter of 2025, Fortitude is well above target at each. We enjoy 186% ECR in Bermuda and 645% RBC in the U.S. Based on these capital ratios, we know we have ample excess capital to support our clients. Financial leverage as of the third quarter of 2025 is just below 24%, well within our target. As shown on the right-hand side, we also maintain a strong liquidity profile with cash and cash equivalents of $2.3 billion, a committed credit and repo facility totaling just over $1 billion, and approximately $1.9 billion of liquid government bonds, providing our firm approximately $5.3 billion of total liquidity. Moving to slide 11, you can see that we have built our rating agency relationships through transparency, frequent dialogue with our lead analysts, periodic reporting, and detailed annual reviews.
Thanks to these efforts and our performance, we have achieved an A3 from Moody's and a minus from Fitch and are rated A at AM Best. Across agencies, the consistent themes you will see in the comments focus on our market presence, diversification, earnings, capital strength, and of course, the support of our investors. Moving to slide 12, Fortitude's risk management function is embedded in our operating platform, and it is a part of our DNA. The risk management culture is displayed in the collaborative analysis we do on in-force business and, importantly, evaluation of new business opportunities. Our pricing actuaries, reserving actuaries, investment team, finance, treasury, capital, trading, legal, compliance, operations, and IT are each involved in ensuring our risks are managed prudently and consistently with our risk appetite.
As you can see on the slide, key areas of focus include maintaining our diversification, liability valuation, asset liability management, investment management, and ensuring that we're providing the right transparency and analytics to support board oversight that is enhanced by our internal audit team. Continuing on this theme on slide 13, our approach to risk management is built on the foundation of our risk infrastructure and stress testing, all of which aligns with our risk appetite. We focus on an economic balance sheet view with added lenses for rating agencies, U.S. statutory CAL RBC, Bermuda regulatory, liquidity, and stress testing results. This framework is supported and monitored by robust governance by our executive committee, our board of directors, and of course, the Bermuda Monetary Authority, Fortitude's group regulatory supervisor.
We regularly test our balance sheet resilience against several standard and tail stress scenarios across multiple risk factors, both individually and in combination. These factors include interest rates, credit spreads, credit default and migration, and of course, alternative returns. We manage the balance sheet to remain above tolerable limits in each scenario and evaluate the results of our stress tests in detail, as well as management actions we take in each scenario to ensure our continued strength and resilience. Moving to slide 14, our $76 billion in net reserve liabilities are diversified, seasoned, and long-dated. They are also exceptionally stable. We expect an average runoff of approximately $2 billion per year over the next 10 years, which is more than offset by annual inflows from existing flow arrangements. This allows us to be both measured and selective with the blocks that we add to our portfolio.
Thanks to our robust underwriting and the seasoned nature of our liabilities, the actual experience we have seen from our reserves is closely tied to our expectations. When we compare our underwritten funding costs across our portfolio versus actual performance data, we see minimal deviation in that funding cost relative to our expectations. Our reserves are also sticky, with approximately two-thirds either contractually locked in through their maturity or not economic to surrender. We further manage the performance of our liabilities through tight asset liability matching, or ALM. Our average duration in the liability portfolio is approximately 10 years, and we hedge interest rates to stay within 0.25 years or one quarter of that duration target. Finally, diversification you see on this page is not just across the lines of business.
18% of our reserves are from outside the United States, and this geographic diversification further enhances the quality of our work. Moving quickly to 15 to support all of this, you can see that the attractive nature of our diversified, long-dated, and sticky liabilities extends over many years. Across our lines of business, the profile of our liabilities provides us the resilience to continue providing differentiated solutions for our clients for many decades to come. In turn, our clients and investors know that when they entrust Fortitude with their reserves and their capital, they're entrusting it to a firm that is built from the ground up to be a long-term leader in the asset-intensive reinsurance sector. I'd like to wrap up on slides 16 and 17 by talking about FLIAC. FLIAC is an Arizona-domiciled insurance company housing Fortitude's variable annuity portfolio. It is also Fortitude Re's core U.S.
platform for reinsurance transactions where clients prefer a U.S. counterparty. As a member of the Fortitude Group, FLIAC also enjoys the same ratings as our other insurance entities, as you can see on the top left of the page. FLIAC's $575 million in total adjusted capital supports strong regulatory capital of 645% RBC, as we mentioned previously. On a net basis, FLIAC's business includes $24 billion of statutory reserves, of which approximately 85% or $20 billion are separate account reserves, and 15% or nearly $4 billion are general account reserves. Like the rest of our business, FLIAC's investment portfolio is responsibly managed and consists largely of public credit and high-quality investment-grade private credit. Importantly, Fortitude and FLIAC, as a part of Fortitude, does not take directional market risk in equities or interest rates.
Consistent with our risk appetite, we target a 100% hedge of both equity and interest rate risk in FLIAC, which is more comprehensive than many VA writers. We hedge the equity risk in both the living benefit guarantees and the base contracts of FLIAC's policyholders. Since that position, our hedge effectiveness has consistently exceeded 95% and is often within one or two points of our 100% hedge target. As a management team, we recognize that even with that hedging discipline, GAAP results can show quarter-to-quarter volatility. When you see GAAP volatility in FLIAC's results, it usually stems from only a handful of drivers, and these do not impact the quality, durability, or ongoing economics of the business. For example, when policyholder experience differs from assumptions, reserves are updated through a formal review process, typically in the third quarter. That can sometimes drive that volatilities.
We also report FLIAC on what we call Fair Value Option, which reflects a quarterly mark-to-market of the entire business and is impacted by something called Fortitude's Own Credit Risk, or OCR. The OCR can sometimes create non-intuitive mark-to-market outcomes, such as FLIAC's earnings being lower when Fortitude Re's credit spreads are tighter because tighter spreads imply a lower discount rate for valuing our liabilities. A lower discount rate increases the value of liabilities on a mark-to-market basis and reduces earnings. We appreciate there is some complexity to that, but it is important to know that this GAAP volatility does not impact the intrinsic value of FLIAC. The true economic outcomes of FLIAC remain very robust. In fact, it bears noting that FLIAC consistently generates strong statutory capital results.
FLIAC paid $300 million of dividends to the parent company in 2024 and a more modest dividend to the parent in 2025. These dividends have been paid while maintaining strong capitalization that allows FLIAC to continue serving clients who prefer transacting through a U.S. entity. I'll wrap up on slide 17 to note that FLIAC also provides Fortitude an important presence in the United States and capabilities that help drive our broader business forward. Its scaled, seasoned portfolios of liabilities make FLIAC a robust entity to support several of our key strategic growth initiatives, including providing an attractive U.S. legal entity for clients who seek to reinsure via domestic insurance, providing an attractive issuer for our funding agreement-backed notes, or FABN program, of which we already issued $500 million in 2025 and expect to return to the market in 2026.
Of course, FLIAC is an advantaged reinsurance counterparty for lines of business with equity market risk exposure, such as registered index-linked annuities or RILA, which are growing very quickly in the United States and for which our clients are actively seeking trustworthy reinsurance partners, such as Fortitude Re. These capabilities are all supported by our approach to hedging, which, as I mentioned earlier, sets a 100% hedge target for both the living benefit guarantees and the contract writers and base contract, resulting in no equity market risk exposure for FLIAC. Because of these capabilities and our approach to hedging equity market risk and interest rate risk, we are excited about FLIAC's business outlook as a member of the Fortitude Re family. With that, I'd like to turn it over to our Chief Investment Officer, Jeff Morrow, to walk through our investment portfolio.
Thank you, Alon.
Turning to slide 19, we have a simple business model that plays through to how we generate returns. It starts with disciplined liability selection so that we can source funding at an attractive cost of funds with an insurance risk profile that we understand and can quantify. Through careful structuring and thoughtful underwriting, we develop tight asset portfolio construction. We keep the risks that we want at levels we want and hedge or ALM match away risks that we don't want. We have built sophisticated hedging capabilities and take stress monitoring seriously. Our in-house portfolio management team crafts the strategic asset allocation and sources assets through our strategic partnerships and through our diversified open architecture asset management model.
Turning to slide 20, our in-house investment team led by seasoned investment professionals constructs our asset allocation that is appropriate for the liabilities we're matching and optimizes the return on capital. Our partnership with Carlyle is a key competitive advantage. We have worked closely with Carlyle as they have built private credit businesses focused on the direct origination of assets with insurance-friendly risk profiles. These assets are the assets where we have the most specific expertise include asset-based lending, direct lending, and infrastructure debt. At the same time, we maintain an open architecture approach to asset management and hire best-in-class managers to diversify and scale our asset sourcing. This results in a highly scalable asset origination capability that we think is on par or better than any of our industry peers.
We have demonstrated the ability to quickly rotate and optimize a $25 billion block like we did in the reinsurance transaction with Lincoln Financial without maintaining the fixed cost and origination platform needed to do so every single year. On slide 21, we present an overview of our investment portfolio. The $82 billion investment portfolio is very high quality. 93% of it is fixed income, of which only 4% is rated below investment grade. The overall average rating is A-, and the duration is 7.3. As Alon mentioned, we have this duration of 7.3 plus the duration contribution from our interest rate derivatives matches that of our liabilities such that we don't have directional interest rate risk.
Our 47% allocation to public credit is high compared to the relative stability and predictability of our liability cash flows, but this facilitates ALM matching because we can hold long-duration assets to match the relatively long-duration liabilities. On slide 22, we go through our private credit portfolio. At $17.3 billion, it's about 21% of our assets. It's primarily investment grade with an average rating of BBB+. Our internal team maintains active engagement with our managers regarding the private credit pipeline and performance surveillance of the portfolio. Our credit performance has been very strong with no material losses or impairments. The largest asset class in here is asset-backed finance, which includes a diversified mix of consumer and commercial collateral types. We focus on understanding the risk and return profile of the underlying collateral before we invest. We then decide where in the capital structure to invest.
As evidenced by the average rating of A-, we are primarily investing in the senior part of the capital stack backed by high-quality collateral. The corporate exposure at about $8 billion is rated BBB+ overall and primarily consists of investment-grade private placements. The infrastructure portfolio at $1.1 billion primarily consists of project finance and investment-grade rated debt obligations. On slide 23, we describe our real estate exposure. It's $13.6 billion overall, or 16.5% of our assets. The largest category is residential mortgages, which we have originated over the past few years at an LTV of approximately 70%. At 3.9% of assets, our commercial mortgage loan exposure is well below industry averages. This has allowed us to be opportunistic and add exposure over the past few years while the industry has faced credit problems, which have been manageable for us given our relatively low allocation.
On slide 24, we describe our commercial mortgage loan portfolio in more detail. The average LTV is approximately 60%. The majority of the exposure is managed by Corebridge as part of the funds withheld accounts from our original reinsurance transaction with AIG. This means that the portfolio is highly seasoned and we are very familiar with it. Our internal team remains actively engaged with frequent and in-depth portfolio surveillance. We have also engaged a third party to independently value the portfolio. The watchlist has been stable over the past couple of years. We don't see new issues emerging and remained focused on optimizing our recoveries in a handful of workout situations. On slide 25, we summarize our exposure to structured products, which is about $18 billion, or 22% of the portfolio. They are primarily investment grade with a weighted average rating of single A.
The ABS portfolio at $9 billion primarily consists of the private asset-backed finance investments that I described earlier. We take exposures where we and our asset managers can underwrite and price the underlying collateral and diversify that exposure across collateral types that are exposed to different risk factors. Our CLO allocation is relatively high quality with an average rating of AA-. Only 4% of that portfolio is below investment grade. On slide 26, we summarize the recent returns of our alternative asset portfolio. Our alternative asset portfolio is diversified across asset classes, including private equity buyout, credit funds, real estate, infrastructure, real assets, and hedge funds. Our returns over the past few years have been below historical averages as private equity and real estate valuations have faced pressure due to the rise in U.S. interest rates and a slowdown in exit activity.
Importantly, our returns have remained at or above industry benchmarks and insurance peer averages. We have a more optimistic outlook going into 2026 given the strength in the global economy, improved financial conditions in the U.S. with the Fed cutting rates and credit spreads remaining near all-time lows, and increased deal activity in both the M&A and capital markets, leading to more active exit activity in the private equity portfolio. Now with that, I will turn it to Kai Talarek, our Chief Growth and Optimization Officer.
Thank you, Jeff. If you can turn to slide 28, Alon pointed out the slow runoff of our book. That slow runoff and sticky liabilities enables us to be selective in choosing the markets in which we operate and the specific transaction opportunities we pursue.
On this slide, you see an assessment prepared by an independent industry consultant, Oliver Wyman, of six key market segments. Fortitude today operates in three of the six segments shown. While the U.S. closed block market peaked in 2022, we continue to see opportunities for underwriting complex transactions with above-market returns in transactions that create a true win-win for our clients and our investors. The Unum Long-Term Care transaction in 2025 was a great example of that. We have continued to expand our flow footprint with three transactions in 2025 alone. U.S. retail annuity is the most competed over-market segment where even the largest player has seen stagnant volumes and where returns can be challenging. For now, we'll continue to access this market only through partnerships and flow reinsurance. U.S. pension risk transfer has faced some legal headwinds in recent years, and the market for U.S.
In-plan annuities has yet to materialize in a meaningful way. Japan and Asia, the market with, according to Oliver Wyman, the most significant growth is where we Fortitude have been the most successful with an impressive market share, the launch of a new sidecar in 2025, and three transactions last year alone. If we turn to slide 29, we can see how these transactions fit into the broader timeline of our evolution. We have a timeline of steady accomplishment in growing our book, further diversifying our business, building a deep roster of clients and partners, and earning the respect and recognition of regulators and rating agencies. If we turn to slide 30, having access to multiple liability origination channels, block, flow, institutional markets enables us to be selective and engaging on the right transactions. So we may opportunistically shift when where we originate more growth and where less.
What doesn't change, though, is what drives our success in each individual transaction, no matter the origination channel. Our clients value our disciplined economic underwriting, our first-class asset selections in our investments, and our creative structuring. The 2025 transactions, all five of them or including FABN, all six of them are a testament to the lasting resonance these capabilities find in the marketplace. Turning to slide 31 and assessing our competitive situation, Fortitude is competitive with leading players across all core dimensions. We have committed long-term investors. We have access to capital markets. We have multiple liability origination channels. We have leading asset access through an open architecture model and our partnership with Carlyle. We have a responsibly managed strong balance sheet, a focused business model, and low expenses and effective taxes
The resulting economics not only attract first-class clients, but also, very importantly, some of the best and brightest minds in the industry as our employees. Moving to slide 32, our underwriting approach and process rests on three major pillars. The first one is discipline pricing. Our discipline pricing is tied to capital markets price levels, consistent and comprehensive in considering all risks and based on realistic best estimate liability cash flows, as Alon touched upon earlier already. This pricing approach is complemented by multifunctional due diligence with stakeholder involvement across all functional areas, conducted in a culture of transparency and accountability, and lastly, we have active involvement and oversight from at every step of the way and a rigorous decision governance that escalates as we go from our first round proposal to signing and closing on a transaction. On slide 33, you can see what risk appetite guides our underwriting.
Our risk appetite is clearly defined and comprises risks whenever and wherever we believe our capabilities and insights allow us to create value. Generic market risks, as described earlier by Jeff and Alon, such as interest rates, public equity valuation levels, or foreign exchange rates, are rigorously and comprehensively hedged. But even in the areas where we do actively seek risks to create value, we do so selectively and on a case-by-case basis. As an example, in 2025, we underwrote the Unum transaction, which had significant amounts of long-term care biometric risk. We chose to work with a large, highly rated global biometric reinsurance specialist to retroceed this biometric risk completely for a zero net retained exposure so we could focus on what we do best, which is to create gainful ALM positions. Let me, on slide 34, review what we've done in 2025.
I've talked about the many successful transactions. The diverse composition, U.S. and Asia, block and flow, speaks to both the diverse balance sheet we are continuing to grow, as well as to the selectiveness and the bespoke transaction origination and structuring that gave rise to these transactions. Turning to slide 35, our FABN program was one of the six transactions of 2025. It is essentially an institutional accumulation product, similar in cash flow profile and risk to retail annuities, but with better persistence because it is non-callable, and having it adds further optionality to our liability origination. FABN allows us to deploy capital and fund investments on relatively short notice, and thus we can manage our capital more efficiently, and we can be a better strategic partner for our investment asset originators.
Moving to slide 36, our sidecar in Asia and its successful completion is important in a number of ways. First of all, our success strongly signals the quality of our business underwriting process. Why is that? Because the investors in the sidecar were won over by our track record of success of underwriting attractive returns in past transactions. Their decision to invest followed a detailed, thorough due diligence effort on the Asia business originated by Fortitude so far. The investment decision thus speaks to the quality of that business. Having a sidecar gives us access to fresh capital in a key growth market. Its explicit focus on Asia mirrors our commitment to and continued focus on that market. Moving to slide 37, we've spent the first five years building Fortitude Re into a respected, leading, top-five asset-intensive reinsurer with a broad capability spectrum and a global footprint.
As we look forward, we will continue to seek responsible growth by being selective in our underwriting in the markets in which we operate today, while expanding the roster of markets we will serve in the future as we further evolve our capabilities. We'll continue to expand and deepen client relationships to build out and build on our first-class reputation among clients. And we will maintain our pricing, investment, and risk management discipline at the heart of our strong balance sheet to preserve our compelling value proposition as we continue to grow the company responsibly. Thank you. May I now invite your questions?
Thank you very much. We would like to move on to Q&A session. If you have a question, please press the raise hand button at the bottom of the screen. We will send you a mute request in order, so please unmute and then ask your question.
I would like to introduce the first person from SMBC Nikko Muraki-san. Please unmute and ask your question.
I'm Muraki of SMBC Nikko Securities. I have two questions. First question is on relative competitive strength. This business, competitiveness, is the return of the investment and low insurance liability acquisition cost and operational efficiency. On page 26, you have shown four peers as a benchmark for your asset management. Can you tell us the names of these four companies? And similarly, the cost of acquiring insurance liability and operational efficiency from those perspectives versus your benchmark, are you superior or inferior? That is my first question.
Maybe I'll start, and I'll ask my colleagues to add that first and foremost, Muraki, it's great to hear from you. And thank you for the question. The first part of it, we deliberately anonymized the names on slide 26.
We're not at liberty to share the names specifically. In terms of the second parts of that question, we think that our client-centric approach allows us to originate liabilities at very competitive funding costs. And I think that's worth expanding upon across two dimensions. First, our focus within sticky liabilities and sometimes lines of business that have some complexity to them by definition means those are situations that don't have the same competitive features as, as you heard Kai say, retail and other more vanilla liabilities. And that does translate into a superior cost of funding for us. And then, as you saw on a prior slide, yes, we do have a competitive operating cost, and we think a market-leading tax rate.
On the operating cost, I think there's a little bit sometimes of apples and oranges between companies because certainly to operate certain types of portfolios requires a different cost base. But when we do apples-to-apples comparisons across companies that have our lines of business, we view ourselves as either competitive or better than competitive across those dimensions. I'd invite Kai and Jeff to perhaps add in any other comments.
On the asset yield competitiveness, we spend a lot of time with our industry partners benchmarking our fixed income private credit asset origination volumes and spreads relative to peers. And we do think that our expected asset returns are at the high end of the industry.
One of the benefits of our open architecture approach to asset management is that we can go talk to all different asset managers that are working with our various peers across the industry and get insight into what others in the industry are doing. And we think that the capabilities we've built with Carlyle, supplemented with the handful of external asset manager relationships we have, creates a very compelling asset origination capability that is at the high end of the industry.
And maybe just to expand a little bit on Alon's comments on your question on the cost of funds, I'd like to first of all observe that cost of funds in many cases are not directly observable.
In other cases, they are, such as in FABN, or if we're talking about simple single price parameter aligned insurance products like retail annuities, you can compare relatively accurately what others are underwriting to versus what you're underwriting to. In general, we are a price taker. So in order to be successful in the marketplace, we have to be competitive with others, which means we have to pay similar rates. Having a lower cost of fund on average then boils down to two things. It boils down to choosing in which markets to participate, and we measure our cost of fund very, very diligently and choose not to participate in markets that we feel offer only uneconomically high cost of funds.
And second, we focus on markets where our specific capabilities in terms of service levels, structuring of complex transactions, and design of involved ALM positions are of value to the clients and therefore mitigate some of the competitive pressures in terms of the cost of funds. Thank you.
Thank you very much. My second question on regulations. So recently, several concerns have been raised about this business. So ratings based on private letters, so liability surrender or refinance risk, regulation and supervision by NAIC, Bermuda, and Cayman Authorities. So please tell us about any anticipated regulatory changes and how they will affect Fortitude's competitive position. Thank you.
That's a great question, Muraki-san. I think for purposes of this conversation, the best answer we can give you is that what we see is a global convergence of regulatory regimes across the U.S., Europe, and in a certain region.
And so while it's probably outside of the scope of this conversation to speak to specific initiatives within each of the markets in which we operate, in general, I would say what we should expect is that while the terms may be different, the capital calculation ratios may be different. Reality is that in sum and substance, there will be convergence across regulatory regimes. And we think that plays actually to our advantage because our business model has never been about regulatory arbitrage. It's always been about we're bringing value to our clients through efficient capital, investment optimization, as you mentioned earlier, competitive operational cost.
Thank you very much.
Thank you.
So let's move on to the next question. Susan Osan from BFA. Please go ahead with your question.
Thank you for taking my question. I have two questions.
First, for LTV and having a low LTV, as mentioned in the presentation, recently at prices, are the numbers based off recent prices and valuations? My second question is a little bit complicated. For private debt, your exposure is relatively low, but last year, there was a lot of apprehension among investors. And with that as a backdrop, can you talk about areas that you are paying attention to increasingly? What kind of rating institutions are you working with? What ratings institutions are not as credible? Exposure per transaction or sectors that you're being mindful of or any other areas that you're paying attention to? And the first question was about if you're marking to market or not for the lower LTV. Thank you.
Thank you. Yeah. So the LTVs do reflect relatively recent appraisals. For the most part, they are within the past year.
And so the portfolio has been revalued since the commercial real estate stress and the rise in interest rates. So for private debt, that is a good question. And we are very focused on how we are underwriting and selecting assets within the private credit space. A lot of times when you read news articles about private credit, it's really referring to the direct lending market, which is lending to below investment-grade private borrowers. That is the segment of the private credit market that has seen the most growth and the most convergence with liquid markets and tightening of spreads and terms. We have relatively small exposure to that space. It's only about 1% of our assets. Where we are investing most of our money today is in investment-grade rated private credit debt, mostly in asset-backed finance, but also in lending to private corporate investment-grade issuers as well.
We are very careful about which rating agencies we use. We don't do rating agency shopping. We're not going out to the rating agencies that are going to give us the most attractive ratings. We do not use Egan-Jones at all in our capital. And we do use private letter ratings from places like Kroll and DBRS in addition to using ratings from the big three rating agencies, S&P, Moody's, and Fitch. Our use of private letter ratings is in line with the overall industry. And again, we're not rating shopping. We are going to the rating agencies that can understand the types of private credit asset classes in which we are investing and move at the speed of transactions so that we can offer compelling borrowing to compelling lending to our borrowers.
In terms of where we are being careful today, there's obviously a lot of investment in the AI build-out and the infrastructure associated with the AI build-out. We are taking a cautious stance there as a private credit investor, given the fact that there is obsolescence risk and downside if the technology does not play out as anticipated.
Thank you very much.
Moving on to the next person, Watanabe-san of Daiwa Securities. Please ask your question.
I'm Watanabe of Daiwa Securities. I have two questions. First is private credit-related SME direct lending exposure. How much do you have in actual amount? And more than 80% of your investment is non-Carlyle. And what is the competitive advantage in your investment area? That is my first question. The second question is the outlook for the future profit until 2030. Can you share the prospect of the profitability?
Sure.
About 1% of our assets are in direct lending. That's about $800 million-$900 million. Carlyle manages about 20% of our assets, but they are focused on the highest relative value, highest spread assets in private credit and alternative assets. A large part of our externally managed assets are in liquid fixed income where there is not a lot of excess value add. There we have outsourced to low-cost but high-quality providers.
Just if I may pick up on forward profitability, while we can't share specific forecasts on this call, we're certainly very optimistic about our pipeline. It is, I would say, as big as it has ever been from a size perspective, but I think perhaps more importantly, as high quality as it has ever been and as diversified across geographies and lines of business.
We certainly continue to provide to our investors within our core group that same optimism in a more specific way with forecasts that we share with them.
Thank you very much.
Let's move on to the next question from Morgan Stanley MUFG, Takemura-san. Over to you.
Thank you for taking my question. Takemura from Morgan Stanley MUFG. I have two quick questions. The first question is about. It's a follow-up on Mr. Watanabe's question. Going back to page nine in the presentation where you talk about growth rates, I'd like to ask you your view on the growth rates. For 13.1% of core operating earnings growth, do you think this is a level that's sustainable going forward? You said that you have a robust pipeline, but in Japan, as interest rates increase, there may be some hesitance around ceding, which is a concern of mine.
On top of that, for core operating earnings, for fair value changes, I think you said that you aren't reflecting it, but I do understand that does hit T&D's P&L, mainly around alternatives and fair value fluctuation. How will you be able to well control it? My second question is about page 12. For Bermuda ECR, 186%. How is it likely to change due to macro factors? Interest rates affect impact should be neutralized, and the alternative asset fluctuation should impact this number. That's my understanding, but is that right? Which means 186%, I believe, is as of end of September, but are there any big changes that you've been experiencing lately? So those are my two questions. Thank you.
Maybe I'll address the capital question first. Sure. Since that falls into my area of responsibility. Thank you for the question. You're exactly right.
Our Bermuda ECR solvency ratio, as well as our U.S. NAIC solvency ratio in our FLIAC entity, are numbers that reside on a balance sheet or express and measure a balance sheet that is extensively hedged against all generic market risk factors. While there is some basis differential between our hedging target and the items that are measured, for example, Bermuda has some non-cash liabilities that are also measured as part of their solvency framework. For the most part, our number is pretty impervious to moves in the major market factors, and indeed, we've actually seen and demonstrated that when you look at our ECR performance over the longer cycle of 2020 when we separated from AIG to today, five years, rates went from 2.5% on the 10-year in the U.S. to near zero, 50 basis points at the bottom, and then back up to 4.1%.
So we've seen very significant swings, but because our balance sheet is so closely matched and residual exposure is hedged, it has barely impacted our capital ratios. We are exposed to the valuation levels of alternatives, but we have a finite amount of alternatives in our portfolio. And we regularly, as alluded to it, stress test the sensitivity of our capital ratios to that to ensure that even in very severe scenarios, we remain comfortably above our minimum solvency levels. So I think you have it right. These numbers are pretty stable. Yes, they are sensitive to alts, but the sensitivity is limited and very tightly managed, as it is to credit risk and investment risk more generally.
Thank you, Kai. And Takemura-san, thank you for both questions. On the first one, looking at Slide nine, perhaps a few things.
Definitionally, you're right, core operating earnings includes our long-term assumption for alternatives returns, as well as our budgeted assumptions on liability performance. However, adjusted net income includes actual results of alternatives and actual results on liabilities. I shouldn't comment on how that flows through to T&D's metrics, but to your threshold question around how our pipeline translates into growth, while I can't provide specific numbers, I understand where you're going directionally, and I do expect that in 2026, we'll see healthy growth from both core operating earnings and adjusted net income perspective in our financial results.
Got it. I understand. Thank you. Thank you for the question.
Moving on to the next person, Sasaki-san of Nomura Securities, please ask your question.
I'm Sasaki of Nomura Securities. I have just one question to Alon.
This meeting, I think this is a third or fourth time, and every time the impression I get is that the asset and liabilities are diversified, risks are managed, and a stable business model is being created. That is the impression I get. So my question, the world is changing very rapidly. So in your mind, I'm sure you have upsides and downsides. So what are the big items for the upside and downside that you have in mind?
Sasaki-san, thank you so much for the question. If you don't mind, I'll answer with upsides. I'll invite my colleagues to add their thoughts, and then we'll give you our most direct responses on downsides as well. I think on upsides, frankly, I think our competitors also deserve a lot of credit. When we started this business, this entire industry was a niche industry within the broader global insurance ecosystem.
Today, there are over $1 trillion of liabilities in Bermuda, and the value proposition of what companies like ours provide into the broader ecosystem is not only well understood, but also well accepted, and going back to Muraki-san's earlier question on regulatory, I think regulators are more up to speed on why we're relevant, how we provide value, and frankly, how we provide capital to drive innovation and close protection gaps in many developed markets. I think the upside is the efficiency of our model continues to gain traction globally, and significantly more supply of reserves come to market and drives our profitable growth in a more accelerated fashion. I'll pause there. Kai, Jeff, you may have other views on other upsides.
I think you're right.
Yeah.
There's still market upside. Go ahead, Jeff.
I agree with your answer, Alon.
Thank you, guys.
By the way, Sasaki-san, this is a rare occasion. We don't usually, all three of us, agree quite this easily. I think the downside is the same one. And you might wonder, why in an equity investor presentation did these guys include two pages on risk management and stress testing? It's because we take it that seriously. And if I was to give you my best answer around what we all worry about, it's credit stress. Right? We have many geopolitical events that if you were witnessing these geopolitical events 20 years ago, 30 years ago, you would have predicted a more significant market consequence to spread tightening. Instead, spreads are at all-time tights. You might have thought it would have been disruptive to interest rates, certainly in the U.S., equally in Japan.
Yes, interest rates are up a little bit from where they have been, but by historical standards, you don't see the type of volatility you might have expected for these types of events, and so I think the most proximate near-term risk is we have something in financial markets that is globally disruptive to credit. I should note for our company, and frankly, I think for others like us who are responsibly managed, that's not necessarily a credit spread shock as much as it is true credit impairment that is the risk. Because thanks to our robust balance sheet, thanks to our hedging, thanks to our stress testing, we feel quite confident that in pointed market factor stress scenarios, we might have a bad day at the office, but our company's going to be fine. What we should all be worried about as people who deploy capital into the space is a proper credit stress that leads to defaults and losses on default that we haven't seen in a long time. I think that's a number one risk. But again, Jeff, Kai, might have other reasons.
I think I'll add to Alon's comments on risk management. One of the key instruments that we used earlier, somebody asked about our cost of funds and whether it's better or whether it's lower or higher than our peers. We try very hard to make it a little bit lower, despite the fact that we are a price taker. And the reason that we try to make it lower is because when we start off with lower-cost funding, Jeff's team can be more selective in choosing which risks to accept and which risks not to accept.
That's the principal basis, in addition to the selection care that we exhibit when we put together our SAAs, that drives our overall risk position and drives the fact that it is a contained risk position.
I'd also just add that because we are so careful in how we manage this risk and how we do take that into account when we are considering our growth and when we're pricing new reinsurance transactions, we're taking into account the current low spread environment and where we think we can construct portfolios that are adequately diversified and reflect our risk appetite. And we do lose out on some transactions because of that risk status.
And so there are risks to our growth in the near term because we are so focused on managing the credit risk of our balance sheet and doing what we think will create a portfolio that can generate stable profits over varied economic cycles.
Thank you for those comments, guys. I think it's very important to have perspective on not only what those risks are, but how we are managing through those potential risks. Thank you.
Thank you very much for the excellent. Thank you very much.
Let's move on to the next question. Sunil-san from BFA. Over to you.
Thank you for taking my question again. Regarding the credit market, your feedback would be valuable because you've been in the market for a long time. So it's a general question, but in the U.S., there's a lot of macro statistics available.
When you look at the current levels, it goes back to the pre-pandemic 2019 levels for interest rates, that is, and for the credit spreads in the bond market, for non-investment grades and investment grades, compared to pre-pandemic days, it's substantially lower. So you can call this a credit bubble, or the investment grade broader base globally, and that's why we're seeing the situation. So the credit spread shock is not likely to happen compared to the past, like you said earlier. So is that the way you look at the current circumstances?
Yeah, I think overall the economy is performing relatively strongly. We do have an outlook for pretty benign and stable growth, which is favorable for credit performance. I think that is a big driver behind why we see spreads at relatively tight levels.
But we are in an environment with increased geopolitical uncertainty, and we know that eventually, at some point, that there is going to be a recession. And so there is tail risk, and so we think it's important to maintain underwriting discipline when we are sourcing credit. We see the liquid credit markets are very tight, but we think we are able to find incremental spread for the risk we're taking in some of the structured credit and private credit markets.
But we have to do that very carefully, and we work, we hire in-house experts who really understand the markets in which we're investing, and then we work with best-in-class asset managers to underwrite that risk and construct a portfolio because we do think that we will start to see some performance dispersion when there is a market downturn eventually, and we construct our portfolio and stress test our overall balance sheet such that we think that we will be positioned to withstand that environment.
Thank you. And just to ask you maybe a follow-up or a relevant question, but for your private debt and the yields you're getting, in general, when you look at private debt funds, the dividend income you get from funds, for example, in the latter half of last year, had been declining.
For private debt funds, its yields used to be far over double-digit, but nowadays it's declining as a trend. But for your private debt fund portfolio, are you expecting similar yield decline? Or in your portfolio, are defaults not really happening in the first place? So can you give me an idea of that? Thank you.
So we have very low default activity. I think that low double-digit private debt yield is primarily, that's primarily below investment-grade private debt where we saw those yields, which is not the majority of our portfolio. We are more focused on an investment-grade private credit, about 200 basis points spread over risk-free. And we are more spread-based investors.
So if the private debt yield is coming down because risk-free rates are coming down or because liquid credit spreads are coming down, then we see offsetting impacts in our cost of funds, and the spread over our cost of funds is actually remaining constant as that's happening. So it's not impacting the overall profitability of our business in a material way.
Thank you so much.