RPT-Fitch Rates FWD Life Hong Kong at IFS 'A'; Outlook Stable

Mon Feb 24, 2014 2:45am EST

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Feb 24 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned Hong Kong-based FWD Life Insurance Company (Bermuda) Limited (FWD Life HK) an Insurer Financial Strength (IFS) rating of 'A'. The Outlook is Stable. FWD Life HK is the new name for ING Groep's insurance business in Hong Kong, which Pacific Century Group acquired in February 2013. FWD Life HK is owned by Mr. Richard Li and Swiss Re Group.

KEY RATING DRIVERS

The rating reflects FWD Life HK's solid capital strength, good liquidity position and sound asset liability management. The rating also recognizes the company's wide distribution coverage and consistent premium growth. The Stable Outlook reflects Fitch's expectation that the insurer's dividend payout policy is likely to remain unchanged in the future.

Fitch expects the company to maintain adequate capitalization to support its new business growth and to provide a buffer against investment volatility despite the change of ownership. The company's solvency ratio stood at 243% as at end-2013, well in excess of the 150% regulatory preferred benchmark. In view of the way the company manages the duration gap of its assets and liabilities, Fitch believes that the company has a strong solvency buffer to withstand shocks from potential interest rate volatility.

FWD Life HK has been able to disseminate its life insurance policies through multiple distribution networks. A stable agency force and the formation of distribution partnerships with several banking groups have enabled the company to sustain growth of its life portfolio. While the company's gross premiums rose by about 7% to about USD937m in 2013, its embedded value increased by 11%. The company's new initiative to strengthen the scale and productivity of its agency force is likely to accelerate the growth of new business in the coming two years.

FWD Life HK's life portfolio grew rapidly over the last three years driven by a significant increase in new business. Potential operating and pricing risks associated with such material growth could affect the stability of the company's operating results.

Positive investment results and mortality gains continue to contribute favourably to the company's operating margin. In the future, the company will emphasise the sales of health and protection products in order to further enhance its new business margin, although the margin has been satisfactory. Investment risk is prudently managed, with cash, bank deposits and good-quality bonds accounting for about 87% of its investments, excluding linked assets, as at end-2013. The company's exposure to risky assets remained manageable, notwithstanding a higher allocation to equities in 2013. Equities exposure accounted for about 6.7% of its invested assets as at end-2013 (end-2012: 3.6%).

The rating of FWD Life HK is partly constrained by its moderate market presence in Hong Kong's highly competitive life insurance market. The company's market share of new business in terms of annualised premium equivalent in 1H13 was about 3.1%, making it the ninth largest life insurer by this measure. Fitch expects insurers that are either bank-owned or subsidiaries of large insurance conglomerates with extensive distribution networks to constantly challenge FWD Life HK's new business acquisition capability.

RATING SENSITIVITIES

Downgrade triggers include deterioration in FWD Life HK's regulatory solvency ratio to below 225% on a sustained basis. Alternatively, a material increase in lapse rates, a significant reduction in mortality profits or a considerable change in its asset liability management strategy could negatively affect the company's rating stability.

Fitch might upgrade FWD Life HK in the mid- to long-term if it is able to expand its distribution coverage or further strengthen its financial fundamentals in terms of new business margin and growth of value of in-force business. FWD Life HK has an operating history of about three decades in Hong Kong.

Pacific Century Group acquired ING Groep's insurance operations in Hong Kong, Macau and Thailand in February 2013. In October 2013, Swiss Re Group became a strategic partner to FWD Group by acquiring a 12.3% stake.

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