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Rating Action:

Moody’s changes FWD Limited’s outlook to positive; affirms FWD Life HK’s IFSR and maintains stable outlook

29 March 2021


Hong Kong , March 29, 2021 – Moody's Investors Service ("Moody's") has 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 Insurance Company (Bermuda) Limited (FWD Life HK) and changed the outlook on FWD Limited to positive from stable.

At the same time, Moody's has also affirmed he A3 insurance financial strength rating (IFSR) of FWD Life HK and maintained the stable outlook.

RATINGS RATIONALE

The change in outlook to positive from stable for FWD Limited and the affirmation of the Baa3 issuer rating reflects the implementation of groupwide supervision (GWS) by Hong Kong Insurance Authority (IA) on 29 March. Moody's expects GWS will become effective for FWD Group (the Group) following the designation of an entity within FWD Group as the Designated Insurance Holding Company (DIHC) by the IA.

Moody's considers GWS will provide enhanced group supervision for FWD Limited, which includes key features such as (1) inclusion of the holding company within regulatory oversight, notably through regulatory capital requirements that apply to groups on a consolidated basis in addition to regulatory requirements at the operating company level, and (2) group-wide risk-assessment and risk-reporting requirements.

According to our cross sector methodology "Assigning Instrument Ratings for Insurers" (https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1093824 ), for insurance holding companies under enhanced group supervision, Moody's would apply narrower notching on insurance groups' issuer and senior unsecured ratings, which are two notches below the principal operating companies' IFSRs, compared with the current three notches between FWD Life HK's A3 IFSR and Baa3 issuer rating of FWD Limited under solo regulation.

The potential narrower notching reflects our view that the increased group-level regulatory oversight and increased deployment of excess capital at the holding company level are likely to reduce the probability of default at the holding company.

After the designation of DIHC under GWS, the IA will regulate FWD Group on a holistic basis and FWD Limited and FWD Group Limited will be required to take necessary steps to ensure the DIHC is compliant with the GWS requirements, including the capital requirements in relation to the whole group. In Moody's view, the capital position and financial flexibility of FWD Life HK and FWD Limited will become more correlated with other supervised members, including FWD Group Limited, which operates the Southeast Asia insurance business of the Group, and currently have the same shareholders with FWD Limited. This is also notwithstanding that there is no capital fungibility between FWD Limited and FWD Group Limited.

As a result, there will be negative impacts on FWD Life HK's and FWD Limited's credit profiles, owing to higher financial leverage and weaker earnings of the combined group. However, we expect such impacts will be offset by the forthcoming capital injections from the shareholders over the next 12 months.

We do not expect to upgrade FWD Limited's rating right after its designation, but rather would only upgrade its ratings once we observe a more strengthened capital position of the combined group and when all the requirements, such as risk-reporting requirements are met as per GWS.

The rating action also takes into account governance as part of our environmental, social and governance (ESG) considerations. We expect the governance structure across its group in terms of capital, risk management and disclosure will be further strengthened with the implementation of GWS.

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. The insurer has developed multiple channels with good agency productivity and offers diversified products with low guarantee rates.

The capital injections in 2020 by its shareholders to FWD Limited reduced the strain on its FWD Life HK's liquidity position and financial flexibility that would otherwise arise from several transactions announced since 2019. Along with other management actions, it has also strengthened and stabilized the solvency ratio of FWD Life HK.

However, these strengths are offset by the weaker earnings and higher financial leverage of the combined group. FWD Life HK also has a volatile and modest profitability track record as a result of business growth and the impact of interest rate fluctuations. Similar to its market peers, FWD Life HK has a decent level of exposure to riskier assets such as private equities and real estate.

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

FWD Life HK

FWD Life HK's rating could be upgraded if (1) FWD Life HK's profitability significantly improves with a return on capital consistently in excess of 8%; (2) its earnings coverage increases to above 4x consistently; and/or (3) FWD Life meaningfully expands its scale and market position.

FWD Life HK's rating could be downgraded if (1) its overall group's capital position and financial flexibility deteriorate; (2) its profitability erodes, with return on capital consistently below 2%; (3) FWD Limited's adjusted financial leverage rises above 30% on a consistent basis and earnings coverage further deteriorates; and/or (4) there is a significant disruption to its distribution channels.

FWD Limited

FWD Limited's issuer and debt ratings would be upgraded if (1) the capital position and financial flexibility of FWD Group materially improve, which could be because of receiving capital injections from its shareholders; and (2) the Group is designated as being subject to GWS.

Given the positive outlook, a downgrade on FWD Limited's issuer and debts ratings is unlikely.

The outlook could be changed to stable if (1) the Group is not designated or there is a prolonged delay in its group designation; and the requirements, such as groupwide risk assessment and risk-reporting requirements are not met as per GWS; (2) the overall group's capital position and financial flexibility deteriorate, which could be because that it does not receive capital injections from its shareholders; and/or (3) the IFSR of FWD Life HK is downgraded.

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 Limited is a holding company that owns FWD Life HK and other subsidiaries, including a life insurance operation in Macau. 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_1243406 .

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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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