FWD Group Holdings Limited's (FWDGHL) earnings and fixed-charge coverage ratio are expected improve steadily in the next year or two once non-recurrent costs ease, according to Fitch Ratings.
FWDGHL has a good operating performance, based on the group's ongoing value of new business (VNB) growth and stable VNB margin, says Fitch.
The VNB rose by 21.9% in 2023 on a constant exchange-rate basis, reaching $991m, while the VNB margin stood at 60.2% (2022: 58.5%). Nonetheless, net losses under the new accounting standards widened to $717m on non-recurring expenses, investment volatility and the accounting treatment of the Athene reinsurance transaction.
While FWDGHL recorded an accounting loss of $505m from the Athene reinsurance arrangement in 2023, the deal also enabled the group to produce $440m in new business contractual services margin, which will be amortised to the income statement.
Ratings
Fitch has affirmed FWDGHL’s Issuer Default Rating (IDR) at 'BBB+' and the Insurer Financial Strength (IFS) Ratings of its operating subsidiaries at 'A' (Strong)'. These include FWD Life Insurance Company (Bermuda) (FWD Life HK) and FWD Life Insurance Company (FWD Japan). The outlook is ‘Stable’.
Fitch has also affirmed the ratings of FWDGHL's US dollar-denominated senior unsecured notes and the global medium-term note programme at 'BBB' and the dated and perpetual subordinated perpetual securities at 'BBB-'.
Aside from operating performance, major factors driving the group’s ratings include:
Solid Capital Buffer: Fitch believes FWDGHL's capital buffer is sufficient to support the ongoing expansion of its operating insurance subsidiaries and to withstand near-term asset volatility. Its consolidated capital score, as measured by the Fitch Prism model, stood at 'Extremely Strong' at end-2023, based on IFRS 17 and the new IFRS 9 accounting standards and when including the contractual service margin as equity capital.
FWDGHL's local capital summation method cover ratio (on a prescribed capital requirement basis) improved to 292% in 2023, from 288% at end-2022, remaining well above the 100% regulatory minimum. This was mainly due to ongoing surplus generation and a capital benefit from an Athene reinsurance transaction. FWD Japan reinsured an in-force block of whole life insurance policies in Japan with Athene Annuity Re. in November 2023. Fitch expects the group's financial leverage to normalise at around 25% on a pro forma basis after the completion of its refinancing activities in 2024.
Diversified Revenue Sources: Fitch ranks FWDGHL's company profile as 'Favourable', based on a 'Favourable' business profile and 'Neutral' corporate governance compared with that of other life insurers in Hong Kong. Fitch's company profile assessment reflects FWDGHL's large operating scale and customer base, sound business franchise and broad geographical distribution coverage. The company has diversified premium sources, with a business presence in 10 markets across the region. It acquired additional stakes in FWD Takaful and Asuransi BRI Life in 2024.
Risky Asset Ratio Commensurate With Rating: FWDGHL's risky asset ratio was about 99% at end-2023, within the guideline for IFS 'A' rated life insurers. Although the company increased its investments in equity and equity-related funds in 2023, large portions of its equity-related investments were allocated to insurance funds with participating features. Fitch believes FWDGHL could reduce policyholder dividend rates upon a major capital market shock, given the sharing nature of participating-type policies. The group's exposure to below-investment grade investments was low relative to its equity capital.
'Core' Subsidiaries of FWDGHL: Fitch assesses FWD Life HK and FWD Japan as the group's 'Core' operating subsidiaries, based on the rating agency’s group rating criteria, and base the subsidiaries' ratings on FWDGHL's financial strength on a consolidated basis. FWD Life HK and FWD Japan contributed about 27% and 25%, respectively, to the group's total weight premium income in 2023.