Fitch Affirms FWD Limited's Insurance Subsidiaries' IFS at 'A'
At the same time, the rating agency has affirmed FWD Limited's USD325m 5% senior unsecured notes due 2024 and its USD100m 4.15% senior unsecured notes due 2023 at 'BBB'. A full list of rating actions can be found at the end of this commentary.
KEY RATING DRIVERS
The rating affirmation reflects FWD Life HK's ongoing growth in value of new business (VNB), its continued efforts in enhancing its distribution capability and manageable exposure to risky assets. The IFS rating of FWD GI benefits from a two-notch uplift above its standalone assessment because Fitch views FWD GI as a very important subsidiary within the group.
The ratings also consider FWD Limited's prudent capital management strategy, and the sound liquidity position of FWD Life HK and FWD GI. The group intends to keep the statutory solvency ratio of FWD Life HK in the range of 200% to 250%, well in excess of the minimum 100%.
The ratings of FWD Limited and its insurance subsidiaries are constrained by its moderate operating scale and volatile operating results. FWD Life HK's business profile remains moderate in terms of scale, despite having been in operation for about three decades in Hong Kong. The company's market share in new business in terms of annualised premiums equivalent (APE) was about 2.5% in 2014 while FWD GI only captured a market share of about 1.1% in 2014.
FWD Limited's risk-based capital ratio on a consolidated basis, as measured by Fitch's Prism Factor Based Model (FBM), remains in the 'Very Strong' category, although the ratio of FWD Limited's shareholders equity to total non-linked assets reduced to 22.6% at end-9M15 from 24.8% at end-2014. Ongoing premium growth and weaker operating profitability as a result of capital market volatility reduced FWD Limited's capital strength.
The agency believes FWD Limited will maintain adequate capital buffer within its operating subsidiaries to support their business expansion and asset volatility. New business growth and interest rate volatility weakened FWD Life HK's solvency position despite the infusion of USD55m in capital by FWD Limited in 4Q15 and the placement of reinsurance to mitigate the solvency strain. The solvency ratio of FWD Life HK was 216% at end-2015 (2014: 226%).
FWD Life HK reported strong growth in its VNB in 9M15. A wider VNB margin from bancassurance more than offset the decline in sales from this channel in 9M15. FWD Life HK became active in selling health and protection-type insurance policies with longer payment terms in line with its strategic focus on value creation.
Higher costs associated with the expansion of distribution capabilities, such as tied agency and digital commerce channels, lowered the group's overall operating result in 2015. FWD Limited's interest coverage (which includes realised and unrealised investment gains and losses) decreased to about 0.6x for 3Q15 from about 5.9x for 2014. FWD Limited's financial leverage on a consolidated basis amounted to 29.9% at end-3Q15 (2014: 23.8%).
FWD GI reported a decline in its underwriting profitability in 9M15. Following the implementation of its new claim-reserving guidelines, the company put aside additional provisions for the loss reserves of its employee compensation (EC) and motor insurance. As a result, FWD GI's loss ratio rose to 61% for 9M15 from 56% in 2014.
RATING SENSITIVITIES
Downgrade rating triggers for FWD Limited and its insurance subsidiaries include:
- Decline in FWD Limited's consolidated capital strength with its capital score persistently below the 'Strong' category as measured by Prism FBM and the solvency ratio of FWD Insurance Company (Bermuda) Limited, in Hong Kong, the main operating entity of the FWD group, consistently below 225%,
- An increase in FWD Limited's financial leverage to above 30% for a prolonged period, or
- A significant deterioration in operating result of its insurance subsidiaries in terms of lapse rates and mortality profits of its life business and underwriting result of its general insurance, with combined ratio persistently in excess of 105%.
Upgrade of FWD Limited's IDR and its insurance subsidiaries' IFS ratings is unlikely in the near term. However, over the medium term, upgrade rating triggers for FWD Limited and its insurance subsidiaries include broader distribution coverage, improvement in FWD Limited's operating profitability with pre-tax on assets consistently higher than 1.2%, and further strengthening in FWD Life HK's operating stability as measured by new business margin and growth of value of in-force business.
FULL LIST OF RATING ACTIONS
FWD Life HK
- IFS Rating affirmed at 'A'; Outlook Stable
FWD GI
- IFS Rating affirmed at 'A'; Outlook Stable
FWD Limited
- IDR affirmed at 'BBB+'; Outlook Stable
- USD325m 5.00% senior unsecured notes due 2024 affirmed at 'BBB'
- USD100m 4.15% senior unsecured notes due 2023 affirmed at 'BBB'
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