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Fitch Affirms FWD Limited's Insurance Subsidiaries' IFS at 'A'
February 15, 2017 / 7:26 AM / 6 months ago

Fitch Affirms FWD Limited's Insurance Subsidiaries' IFS at 'A'

(The following statement was released by the rating agency) HONG KONG, February 15 (Fitch) Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings of Hong Kong-based FWD Life Insurance Company (Bermuda) Ltd (FWD Life HK) and FWD General Insurance Company Limited (FWD GI) at 'A'. Fitch has also affirmed FWD Limited's Long-Term Issuer Default Rating (IDR) at 'BBB+'. The Outlook on these ratings is Stable. A full list of rating actions can be found at the end of this commentary. KEY RATING DRIVERS The rating affirmation reflects FWD Life HK's focus on value creation, manageable exposure to risky assets and its ongoing efforts in expanding its distribution coverage. The IFS rating of FWD GI benefits from a two-notch uplift above its standalone assessment because Fitch views FWD GI as a very important subsidiary within the group. The ratings also consider FWD Limited's prudent capital management strategies, and the moderate business profile and solid liquidity position of FWD Life HK and FWD GI. The ratings of FWD Limited and its insurance subsidiaries are constrained by its moderate operating scale and volatile operating results. Despite having been operating for about three decades in Hong Kong, FWD Life HK's market share in terms of new business annualised premiums equivalent (APE) was only about 1.9% in 9M16 while FWD GI captured a market share of about 1.1% in 2015 in terms of gross premiums. The agency believes FWD Limited will maintain adequate capital buffers within its operating subsidiaries to support their business expansion and as cushion against asset volatility. New business growth and interest rate volatility will weaken FWD Life HK's solvency position, although the risks are mitigated by coinsurance treaties and continued capital infusion from its parent, FWD Limited. The solvency ratio of FWD Life HK improved to 239% at end-1H16 (end-2015: 216%). FWD Limited's risk-based capital ratio on a consolidated basis, as measured by Fitch's Prism Factor Based Model (FBM), was at the 'Strong' category at end-1H16, with a financial leverage ratio at 25.6%. After factoring in the issuance of USD250m subordinated perpetual securities in January 2017, FWD Limited's FBM score improved to 'Very Strong' while its financial leverage increased to 28.8% on a pro-forma basis. FWD Limited's exposure to risky assets remained tolerable, although FWD Life HK raised its equities and funds allocation moderately in 2015. The total risky assets, which include listed and unlisted equities, investment funds, below-investment-grade and non-rated bonds, and investment properties, rose to about 29.2% of FWD Limited shareholders' equity on a consolidated basis at end-1H16 (end-2015: 27.3%, end-2014:15.7%). FWD Life HK reported strong growth in its value of new business (VNB) of 27% in 2015 and 46% in 1H16 from the preceding half. A wider VNB margin from the agency channel and a 16% increase in the agency force in 1H16 contributed to the overall VNB growth. Increasing sales in more profitable health and participating policies also reflect the company's focus on value creation. Higher costs associated with the expansion of distribution capabilities, such as the tied agency and digital commerce channels, together with the increase in insurance liabilities due to inforce coinsurance, lowered the group's overall operating result in 1H16. FWD Limited's annualised pre-tax operating return on asset stood at 0.2% in 1H16 (2015: 0.6%). FWD GI's underwriting profitability improved in 1H16 after the claims reserves adjustment implemented in 2H15. Its loss ratio reduced to 46.3% in 1H16 from 58.1% in 2015, leading to an improvement in combined ratio to 93.5% in 1H16 (2015: 102.5%). RATING SENSITIVITIES Downgrade rating triggers for FWD Limited and its insurance subsidiaries include: - Decline in FWD Limited's consolidated capital strength with its capital score persistently below the 'Strong' category as measured by Prism FBM and the solvency ratio of FWD Life HK, the main operating entity of the FWD group, consistently below 225%. - An increase in FWD Limited's financial leverage to above 30% for a prolonged period. - A significant deterioration in the operating result of its insurance subsidiaries in terms of lapse rates and mortality profits of its life business and underwriting result of its general insurance, with combined ratio persistently in excess of 105%. Upgrade of FWD Limited's IDR and its insurance subsidiaries' IFS ratings is unlikely in the near term. However, over the medium term, upgrade rating triggers for FWD Limited and its insurance subsidiaries include: - Broader distribution coverage. - Improvement in FWD Limited's operating profitability with pre-tax operating return on assets consistently higher than 1.2%. - Further strengthening in FWD Life HK's operating stability as measured by new business margin and growth of value of in-force business. FULL LIST OF RATING ACTIONS FWD Life HK - IFS Rating affirmed at 'A'; Outlook Stable FWD GI - IFS Rating affirmed at 'A'; Outlook Stable FWD Limited - IDR affirmed at 'BBB+'; Outlook Stable - USD325m 5.00% senior unsecured notes due 2024 affirmed at 'BBB' - USD100m 4.15% senior unsecured notes due 2023 affirmed at 'BBB' - USD250m 6.25% subordinated perpetual securities affirmed at 'BB+' Contacts: Primary Analyst Terrence Wong Director +852 2263 9920 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road, Central, Hong Kong Secondary Analyst Mia Yang Analyst +852 2263 9959 Committee Chairperson Jeffrey Liew Senior Director +852 2263 9939 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. 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