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
