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Rating Action:

Moody's changes Fortis Insurance Co (Asia)'s outlook to positive

29 Nov 2007
Moody's changes Fortis Insurance Co (Asia)'s outlook to positive

Hong Kong, November 29, 2007 -- Moody's Investors Service has affirmed the A3 insurance financial strength rating (IFSR) of Fortis Insurance Company (Asia) Limited (FICA), and the Baa1 backed senior unsecured debt rating of Fortis Capital (Asia) Ltd, a wholly-owned subsidiary of FICA. The outlook for both ratings has been changed to positive from stable.

FICA and Fortis Capital (Asia) Ltd are indirectly wholly-owned subsidiaries of Fortis Insurance International NV (FII), following the completion of the two entities recent acquisition by the latter in August 2007. The ultimate parents are Fortis SA/NV and Fortis N.V. (issuer ratings at Aa3/stable).

"The outlook change reflects Moody's expectation that FICA's business and financial profile will improve over the medium term due to changes made to its operations following its ownership and involvement of Fortis Group," says Sally Yim, Moody's lead analyst for both entities.

"Historically, FICA's profitability has been volatile due to its aggressive investment strategy and heavy investments in equities. Going forward, asset-liability management will be one of the key areas of focus at FICA, given Fortis Group's expertise as well as its intention to align FICA's practice with its global standards. As such, we expect equity holdings to be reduced, and hence profitability will become more stabilized," says Yim.

In addition, as part of Fortis Group, FICA could diversify its distribution channels into bancassurance and engage in cross-selling activities. For example, it could cross-sell to Fortis' private banking clients in Asia and could form additional bancassurance relationships. Because of Fortis' expertise in investment-linked products -- which are increasingly popular in Hong Kong -- FICA will also expand its product offerings and sales effort in this area. If successful, such a shift in product mix would improve the company's underlying risk profile.

The affirmation of FICA's A3 rating reflects the company's good underlying financial strength. FICA shows sound capitalisation -- relative to the business risk written -- and has improved operations, both in terms of profitability and agent productivity, over the past few years.

However, these strengths are offset by a number of factors, including: (1) its operation in Hong Kong's intensely competitive market, which could pressure its growth plans; (2) its vulnerability to distribution channel disruption due to its current reliance on tied insurance agents; and (3) its exposure to income volatility, resulting from its equities and real estate investments. In addition, FICA's financial leverage, at 37.2% as of June 30, 2007, is high compared to its peers due to its materially debt-funded acquisition of a real estate investment in the first half of 2007.

The rating also reflects the implicit support FICA receives from Fortis Group, given the importance that FICA and the Hong Kong market play in Fortis Group's Asian growth aspirations.

FICA's rating could be upgraded if it: (1) achieves sustainable core profitability as a result of initiatives by its new management, with return-on-equity (ROE) consistently above 10%; (2) reduces its high-risk assets to below 30% of total invested assets, e.g. through reducing its investment in equities; (3) expands its distribution channels and product offerings, which could lead to growth in its business volume and market share; and/or (4) reduces its financial leverage to less than 30% on a stand-alone basis.

On the other hand, the outlook could revert to stable if: (1) its profitability deteriorates with ROE falling below 5% (possibly due to a significant loss in its investment portfolio or market share); (2) there is a decline in agent productivity and an increase in agency turnover which de-stabilizes operations; (3) its support from or strategic importance to its parent weakens; and/or (4) its financial leverage significantly increases to above 40% on a stand-alone basis.

The following ratings have been affirmed with a positive outlook:

Fortis Insurance Company (Asia) Limited -- insurance financial strength rating of A3;

Fortis Capital (Asia) Limited -- backed senior unsecured debt rating of Baa1.

Moody's last rating action on FICA and Fortis Capital (Asia) Ltd occurred on June 20, 2007, when it upgraded the ratings to A3 and Baa1, respectively, following the acquisition of its majority shares by FII.

Fortis Insurance Company (Asia) Ltd provides life insurance, group insurance and asset management services in Hong Kong. As of June 30, 2007, total assets and shareholders' equity were HK$13.7 billion and HK$2.9 billion, respectively.

Hong Kong
Sally Yim
Analyst
Financial Institutions Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121

Hong Kong
Jerry Chien
Managing Director
Financial Institutions Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121

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