Fitch Affirms FWD Limited and Insurance Subsidiary; Removes Rating Watch Evolving; Outlook Stable
(The following statement was released by the rating agency)Fitch Ratings-Hong Kong-05 February 2021:
Fitch Ratings has affirmed the Insurer Financial Strength (IFS) Ratings of Hong Kong-based FWD Life Insurance Company (Bermuda) Limited (FWD Life HK) at 'A' (Strong) and the Long-Term Issuer Default Rating (IDR) of parent, FWD Limited, at 'BBB+'. The two entities' ratings have been removed from Rating Watch Evolving, on which they were placed on 3 July 2019. The Outlook is Stable.
Key Rating Drivers
The removal of FWD Limited's ratings from Rating Watch Evolving reflects Fitch's view that there will be no significant change in FWD Limited's credit profile following the company's acquisitions of MetLife Hong Kong and Vietcombank-Cardif Life Insurance (VCLI).
The ratings of FWD Limited and its insurance subsidiary reflect the group's 'Very Strong' capitalisation and leverage, 'Good' financial performance and 'Moderate' business profile.
Fitch's 'Very Strong' assessment of FWD Limited's capitalisation reflects a Fitch Prism Model score that was well into the 'Very Strong' category at end-1H20. The score was supported by significant amount of capital injections by shareholders to fund the company's two recent acquisitions and to add a capital buffer, as well as disposal of FWD General Insurance Company Limited (IFS: BBB+/Stable). FWD Limited's financial leverage ratio also improved from 20% at end-2019 to 13% by end-1H20.
FWD Limited's overall financial performance is 'Good'. Fitch estimates that there was a marginal improvement in financial performance in 2020. FWD Life HK continues to focus on the more profitable health and participating products, in line with its business strategy of value creation. However, high new business growth and market volatility have strained operating profitability.
Fitch ranks FWD Limited's business profile as 'Moderate' compared with all other Hong Kong insurance companies. FWD Life HK has an 'Adequate' business franchise within Hong Kong's life insurance sector, supported by its tied agent, broker and bancassurance channels. FWD Life HK's operations had about 3% market share by annualised premium equivalent in 9M20. The group also has a 'Favourable' business risk profile and 'Well Diversified' business portfolio. This results in Fitch scoring FWD Limited's business profile at 'a-' under its credit-factor scoring guidelines.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- A material adverse change in Fitch's ratings assumptions with respect to the coronavirus impact.
- Failure to maintain FWD Limited's capital score at a level well into the 'Strong' category, as measured by the Fitch Prism Model
- An increase in FWD Limited's financial leverage ratio to above 30% for a prolonged period.
- Dramatic weakening in the operating performance of FWD Limited's insurance subsidiaries in terms of pre-tax return on assets and the value of the new business margin of its life business.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- A material positive change in Fitch's ratings assumptions with respect to the coronavirus impact.
- A positive rating action that is prefaced by Fitch's ability to reliably forecast the impact of the pandemic on the financial profile of Hong Kong's insurance industry and FWD Limited's insurance subsidiary.
- An improvement in FWD Limited's operating profitability, with pre-tax return on assets higher than 0.7% consistently.
- An improvement in FWD Limited's Fitch Prism Model score to well into 'Very Strong' or above on a sustained basis.
- An improvement in business profile, including operating scale, broader distribution coverage and more diversified profitable business lines.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579]
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
FWD Life Insurance Company (Bermuda) Limited; Insurer Financial Strength; Affirmed; A; Rating Outlook Stable
FWD Limited; Long Term Issuer Default Rating; Affirmed; BBB+; Rating Outlook Stable
----senior unsecured; Long Term Rating; Affirmed; BBB; Rating Watch Off
----subordinated; Long Term Rating; Affirmed; BB+; Rating Watch Off
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