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Rating Action:

Moody’s affirms A3 IFSR of FWD Life HK and Baa3 issuer rating of FWD Limited, changes outlook to stable from negative

16 July 2020

Hong Kong , July 16, 2020 – Moody's Investors Service has affirmed the A3 insurance financial strength rating (IFSR) of FWD Life Insurance Company (Bermuda) Limited (FWD Life HK).

Moody's has also affirmed the Baa3 issuer rating, senior unsecured debt rating, and Ba2(hyb) rating for the subordinated perpetual capital securities of FWD Limited, the holding company of FWD Life HK.

At the same time, Moody's has changed the outlook to stable from negative.

RATINGS RATIONALE

The change in outlook to stable from negative reflects the capital injections by shareholders into FWD Limited in H1 2020, as well as the management actions taken by FWD Life HK to improve and stabilize its solvency ratio.

FWD Limited set up a zero-coupon mandatory convertible program to issue up to $1.4 billion to its main shareholders, PCGI Limited and Swiss Re Investments Company Ltd in H1 2020, which will convert into common equity by the end of 2021 the latest. Around $1 billion of the mandatory convertible instruments has already been issued to fund a number of transactions announced since 2019, including the acquisition of MetLife Limited and Metropolitan Life Insurance Company of Hong Kong Limited (MetLife Hong Kong) and the exclusive bank partnership with Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank, long-term foreign currency bank deposits B1 negative, baseline credit assessment ba3).

The instrument will also be used to fund the recently announced distribution agreement with Bank Rakyat Indonesia (P.T.) (BRI, long-term foreign currency bank deposits Baa2 stable, baseline credit assessment baa2) and the investment of a significant minority stake of BRI's life insurance venture PT Asuransi BRI Life (BRI Life), which is expected to be acquired under FWD Limited. The transaction is still subject to regulatory approvals.

The new capital contributed by the shareholders reduces the strain on FWD Limited's liquidity position and financial flexibility that would otherwise arise from these recent transactions. In addition, we expect the program can be up-sized by the shareholders in case of further capital needs.

At the FWD Life HK level, the insurer has also received a combined capital injection of $289 million from FWD Limited in 2019, which has boosted its local solvency ratio to over 350% at the end of March 2020 from 267% at the end of 2018. Furthermore, the insurer has taken a number of management actions – such as the disposal of risky assets, entering into coinsurance arrangements and lengthening asset duration – to increase and stabilize its solvency ratio.

The affirmation of FWD Life HK's A3 IFSR reflects the insurer's stable market presence and differentiated branding. FWD Life HK offers diversified products with low guarantee rates. Along with its focus on improving agent productivity, the insurer has developed multiple channels, such as brokers, banking partners and direct-to-customer channels.

While the disruption on its distribution caused by coronavirus has resulted in a decline in new business sales in H1 2020, the direct financial impact on claims and persistency is manageable. The domestic segment would also help alleviate the slowdown in the cross-border sales. The insurer maintains good liquidity, with investment-grade bonds accounting for over 75% of its investment mix.

However, these strengths are offset by its volatile and modest profitability track record, which is mainly driven by business growth and expense overruns owing to its scale and the impact of interest rate fluctuations. Similar to market peers, the insurer continues to have a decent level of exposure to riskier asset classes, such as private equities and real estate, which would subject the insurer's profitability and capitalization to higher volatility than from traditional asset classes.

The affirmation of FWD Limited's Baa3 issuer and senior unsecured debt rating reflects the structural subordination of the holding company to the policyholders of FWD Life HK, MetLife Hong Kong and other subsidiaries. These ratings are three notches below FWD Life HK's IFSR, which is consistent with the typical notching practice we have for insurance holding companies operating mainly in jurisdictions where a solo-only regulation is in force.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

FWD Life HK

The rating could be upgraded if FWD Life HK significantly improves its (1) profitability, for example, with a return on capital consistently in excess of 8%; (2) earnings coverage to above 4x consistently; (3) capital position, such that its local solvency ratio is in excess of 300% and the ratio of shareholders' equity to total assets exceeds 8% consistently, respectively; and/or (4) scale and market position.

On the other hand, Moody's could downgrade FWD Life HK's rating if (1) its profitability erodes, with return on capital consistently below 2%; (2) FWD Limited's adjusted financial leverage rises above 30% on a consistent basis and earnings coverage further deteriorates, which could be a result of additional debt issuances or much weaker earnings; (3) the company's capital position deteriorates significantly — for example, due to volatile capital markets or changing interest rates — such that its local solvency margin ratio falls below 200% on a sustained basis; and/or (4) there is a significant disruption to its distribution channels.

FWD Limited

As FWD Limited's rating is linked to FWD Life HK's rating, Moody's could upgrade/downgrade FWD Limited's ratings if Moody's upgrades/downgrades FWD Life HK's rating.

The principal methodology used in these ratings was Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

FWD Life Insurance Company (Bermuda) Limited (FWD Life HK) is the ninth largest insurer in Hong Kong by in-force individual business in 2019, offering term life, whole life, endowment, universal life, accident, and health insurance products.

FWD Life HK's total assets and shareholders' equity — on a statutory basis — totaled USD14.6 billion and USD1.3 billion, respectively, at the end of December 2019.

The insurer's ultimate parent, FWD Limited, is a holding company that owns FWD Life HK and other subsidiaries, including a life insurance operation in Macau and a general insurance operation.

FWD Limited's assets and shareholders' equity — on an IFRS basis — totaled USD17.6 billion and USD2.8 billion, respectively, at the end of December 2019.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569 .

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Frank Yuen, CFA
VP-Senior Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS : 852 3758 1350
Client Service : 852 3551 3077

Sally Yim, CFA
MD-Financial Institutions
Financial Institutions Group
JOURNALISTS : 852 3758 1350
Client Service : 852 3551 3077

Releasing Office :
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS : 852 3758 1350
Client Service : 852 3551 3077

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