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Rating Action:

Moody's downgrades FWD Limited's issuer rating to Baa3, and affirms FWD Life HK's IFSR at A3

27 Jun 2017

Hong Kong, June 27, 2017 -- Moody's Investors Service has downgraded FWD Limited's issuer and senior unsecured debt ratings to Baa3 from Baa2. We also downgraded its junior subordinate debt rating on its subordinated perpetual capital securities to Ba2(hyb) from Ba1(hyb). The outlook for FWD Limited is now stable following the downgrade.

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

DOWNGRADE OF FWD LIMITED'S RATINGS

The downgrade of FWD Limited's ratings reflects Moody's view that the diversification benefits to holding company creditors gained from ownership of FWD General Insurance Company Limited (FWD GI, unrated), the non-life insurance subsidiary of FWD Limited, through the contributions of dividends, have become and will remain less evident, relative to the Group's interest expenses.

As a result, the narrower notching between FWD Limited's issuer rating and FWD Life HK's IFSR we ascribed before is no longer warranted. Therefore, the notching has widened to three notches, which is in line with our standard notching to reflect the structural subordination of the holding company.

FWD Limited's total interest expenses in 2016 have doubled that of 2014, when compared with the stable level of dividends remitted by FWD GI to FWD Limited. Therefore, Moody's considers that the diversification benefits provided by FWD GI have reduced, relative to the Group's increased interest expenses.

FWD Limited has issued additional debt and hybrid capital since 2014 to strengthen FWD Life HK's solvency ratio and support its business growth. FWD Limited's adjusted financial leverage has risen from 18.3% at end-2014 to 22.7% at end-2016. Following the issuance of USD250 million in subordinated perpetual capital securities in January 2017, the company's pro-forma adjusted financial leverage has further increased to 25.3%.

FWD Limited's earnings coverage also dropped to 1.0x 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 to customer channel.

The stable outlook for FWD Limited reflects the stable outlook of FWD Life HK's IFSR.

AFFIRMATION OF FWD LIFE HK'S A3 IFSR, STABLE OUTLOOK

The affirmation of FWD Life HK's A3 IFSR with a stable outlook reflects its improving market position and 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.

The insurer also maintains an excellent liquidity profile and holds a significant portion of liquid assets, such as investment grade bonds. Its asset/liability duration gap has also narrowed as a result of its proactive approach to capital management.

These strengths are offset by the sensitivity of its solvency ratio to interest rate movements, which was partly mitigated by multiple management actions, such as coinsurance arrangements and reduction of crediting rates and dividends for certain products. In addition, the insurer has been gradually increasing its exposure to riskier asset classes, such as equities and real estate, in an effort to achieve a higher return in the current low interest rate environment.

Nevertheless, FWD Life HK's 2016 financial performance has shown an improving trend on underlying earnings and solvency, which benefited from the rising interest rate environment. We expect this development to support a gradually improving credit profile, although it is still subject to multiple factors, such as sales prospects in regard to Mainland Chinese visitors, interest rate levels, its profitability and high-risk asset exposure in the medium term.

RATING DRIVERS

FWD Limited

FWD Limited's ratings could be upgraded if FWD Life HK's rating is upgraded.

On the other hand, FWD Limited's ratings could 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 8% 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 eighth 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 USD9,894 million and USD596 million, respectively, at end-2016, 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 USD12,383 million and USD1,860 million, respectively, at end-2016, 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
Client Service: 852 3551 3077

Yat Man Sally Yim
Senior Vice President
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

No Related Data.
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