Hong Kong, November 16, 2016 -- Moody's Investors Service has affirmed the Baa2 issuer and senior
unsecured ratings of FWD Limited and changed the outlook to negative from
stable.
At the same time, Moody's has affirmed the A3 insurance financial
strength rating (IFSR) of FWD Life Insurance Company (Bermuda) Limited
(FWD Life HK) -- a subsidiary of FWD Limited -- with a stable
outlook.
RATINGS RATIONALE
Negative Outlook at FWD Limited (Baa2 issuer rating)
The change in FWD Limited's outlook to negative reflects Moody's
view that the benefits to holding company creditors gained from diversification
from ownership of FWD General Insurance Company Limited (FWD GI,
unrated), the non-life insurance subsidiary of FWD Limited,
through contributions of dividends, have become less evident,
relative to the Group's financial obligations.
FWD Limited's Baa2 issuer and senior unsecured ratings are currently
two notches below FWD Life HK's A3 IFSR, which is narrower
than the standard three-notch differential between a holding company
and the IFSR of its dominant insurance operating company. The two
notch-differential considers the diversification benefit from FWD
GI and the support from its principal shareholder, Mr. Richard
Li, who has substantial business interests outside of FWD Limited
in telecommunications, real estate and other sectors.
In order to strengthen FWD Life HK's solvency ratio and support
its business growth, the group has issued more debt in the past
two years. Its total interest expense has grown at a faster pace
when compared with the stable level of dividend remitted by FWD GI to
FWD Limited. Therefore, Moody's views the diversification
benefit provided by FWD GI as weakening, relative to the Group's
increased interest expense.
In addition, the company has become more debt reliant, with
adjusted financial leverage rising to 22.2% at end-2015
from 18.3% at end-2014. The company's
earnings coverage also dropped to 1.3x from 4.7x over the
same period, because its profitability was affected by investments
to expand distribution capacity in FWD Life HK, including its agency
force and development of its direct customer channel.
Affirmation of FWD Life HK's A3 IFSR, maintain stable outlook
The affirmation of FWD Life HK's A3 IFSR with a stable outlook reflects
Moody's expectation that FWD Limited has a strong commitment to
support FWD Life HK's capital adequacy. We expect the company
will secure adequate financial resources to provide such support in spite
of the increase in its parent's financial leverage.
FWD Life HK has continued to increase its embedded value via new business
growth and margin expansion. The insurer maintains an excellent
liquidity profile and holds a significant portion of liquid assets,
including investment-grade bonds. Its asset and liabilities
duration gap has also narrowed as a result of its proactive capital management.
Its capitalization is solid, with its local solvency ratio improved
to 239% in H1 2016 from 216% at end-2015, due
to the co-insurance arrangement of part of its in-force
business.
These strengths are offset by the sensitivity of its solvency ratio to
interest rate movements. Moody's expects the strong business growth
and still low interest rate environment will continue to pressure its
solvency ratio. The recent restriction on the use of UnionPay cards
by Mainland visitors to purchase investment-related policies in
Hong Kong may slow premium growth in the industry and potentially slow
the new business growth of FWD Life HK.
In addition, the insurer has been gradually increasing its exposure
to riskier asset classes, such as equities and private equity investments,
in an effort to achieve higher returns amid the low interest rate environment.
RATING DRIVERS
FWD Limited
Given the negative rating outlook, upward rating pressure is unlikely.
However, the rating outlook could return to stable if: (1)
the diversification benefit provided by FWD GI is significant, with
FWD GI's remitted dividends above 40% of the Group's
total interest expense; and/or (2) its financial leverage declines
as a result of shareholder capital injections.
FWD Limited's ratings could be downgraded if (1) the diversification benefit
provided by FWD GI weakens, with FWD GI's remitted dividends
falling below 40% of the Group's total interest expense;
(2) Mr. Richard Li significantly reduces his ownership stake;
(3) its earnings coverage remains below 2x; (4) its financial leverage
rises consistently above 30%; or (5) its liquidity position
further deteriorates, as a result of, for example, significant
capital injections into FWD Life HK or other subsidiaries.
FWD Limited's ratings could also be downgraded if FWD Life HK's rating
is downgraded.
FWD Life HK
FWD Life HK's rating could be upgraded if it: (1) significantly
improves its capital position, such that its local solvency ratio
rises above 300% or shareholders' equity-to-total
assets consistently exceeds 8%; (2) significantly improves
its profitability, with a return on capital in excess of 10%
on a sustained basis; and/or (3) substantially improves its market
position.
On the other hand, the rating could be downgraded if: (1)
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; (2) the group's adjusted financial
leverage rises above 30% on a consistent 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.
RATING METHODOLOGY
The principal methodology used in these ratings was Global Life Insurers
published in April 2016. Please see the Rating Methodologies page
on www.moodys.com for a copy of this methodology.
FWD Life Insurance Company (Bermuda) Limited is the ninth largest life
insurer by premium income in Hong Kong, offering term life,
whole life, endowment, universal life, accident,
and health insurance products. FWD Life HK held total assets and
shareholders' equity of USD7,380 million and USD450 million,
respectively, at end-2015, on a statutory basis.
Its ultimate parent, FWD Limited, is a holding company that
also owns other subsidiaries, such as a life insurance operation
in Macau, as well as general insurance, pension and financial
planning businesses. FWD Limited held total assets and shareholders'
equity of USD9,620 million and USD1,883 million, respectively,
at end-2015, on an IFRS basis.
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.
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.
Wing Kei Frank Yuen
Asst Vice President - 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
SUBSCRIBERS: (852) 3551-3077
Yat Man Sally Yim
Senior Vice President
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077
