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Rating Action:

Moody's changes FWD Limited's and FWD Life HK's outlook to negative

03 July 2019


Hong Kong , July 3, 2019

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 negative from stable.

RATINGS RATIONALE

The rating action follows the announcement on 28 June 2019 that FWD Limited will acquire MetLife Limited and Metropolitan Life Insurance Company of Hong Kong Limited (collectively, MetLife Hong Kong) from MetLife, Inc. (A3 stable).

The change in outlook to negative reflects the uncertainty surrounding the funding plan of this transaction, and the potential negative pressure on the financial profile of FWD Limited and FWD Life, particularly on its liquidity and financial flexibility. This is because FWD Limited's earnings coverage is already weak, currently below 1x, following the issuance of two hybrid capital securities in the past few years. In addition, FWD Limited has had limited dividend upstream from FWD Life HK considering the latter's capital needs and low level of earnings. If the MetLife Hong Kong acquisition will be funded by additional debt issuances, FWD Limited's earnings coverage, and consequently the financial flexibility of FWD Life HK, will be under further negative pressure.

Nonetheless, Moody's notes that the acquisition will enhance FWD Life HK's scale, market share and distribution capabilities in Hong Kong which would be positive for its business profile.

AFFIRMATION OF FWD Life HK's and FWD Limited's ratings

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 agent productivity, the insurer has developed multiple channels, such as brokers, banking partners and direct-to-customer channels.

Moody's expects FWD Life HK's profitability to improve in the medium term, because of stronger investment performance and a gradual release of earnings from its in-force book. The insurer also maintains good liquidity and holds a significant portion of liquid assets.

However, these strengths are offset by the sensitivity of the insurer's solvency ratio to interest rate movements, partly mitigated by several management actions, such as coinsurance arrangements, and the reduction in crediting rates and dividends for certain products in 2016 and 2017. The insurer has also gradually been increasing its exposure to riskier asset classes, such as equities and real estate, for yield enhancement.

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. These ratings are three notches below FWD Life HK's IFSR, which is our standard notching between a holding company and the IFSR of its dominant insurance operating company domiciled in the location in which the regulatory supervision placed stronger emphasis on operating company level and thus capital might not flow freely to the group. FWD Life HK is the group's largest operation in terms of assets, revenue and net profit.

RATING DRIVERS

FWD Life HK

Given the negative rating outlook, upward pressure on FWD Life HK's rating is limited.

Nevertheless, FWD Life HK's rating outlook could return to stable if: (1) the acquisition of MetLife Hong Kong is largely funded by capital injections by shareholders; thereby alleviating pressures on its financial leverage and earnings coverage; and/or (2) the insurer significantly improves its profitability — with a return on capital in excess of 8% — and improves its earnings coverage significantly and on a sustained basis.

Moody's could downgrade FWD Life HK's rating if: (1) the group'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 to fund the acquisition of MetLife Hong Kong; (2) 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; (3) its profitability erodes, with return on capital consistently less than 2% ; and/or (4) there is a significant disruption to its distribution channels.

FWD Limited

Given the negative ratings outlook, upward pressure on FWD Limited's ratings is limited.

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

The principal methodology used in these ratings was Life Insurers published in May 2018. 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, 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 USD12.4 billion and USD823 million, respectively, at the end of 2018.

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 general insurance.

FWD Limited's assets and shareholders' equity — on an IFRS basis — totaled USD15.5 billion and USD2.3 billion, respectively, at the end of 2018.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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.

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
Associate Managing Director
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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