FWD Life Insurance Co. (Bermuda) Ltd. Assigned 'A-' And 'cnaa' Ratings; Outlook Stable

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1 Research Update: FWD Life Insurance Co. (Bermuda) Ltd. Assigned 'A-' And 'cnaa' Ratings; Outlook Stable Primary Credit Analyst: Anna Kong, FSA, FRM, Hong Kong (852) ; Secondary Contact: Austin Oh, Hong Kong (852) ; Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria Ratings List FEBRUARY 24,

2 Research Update: FWD Life Insurance Co. (Bermuda) Ltd. Assigned 'A-' And 'cnaa' Ratings; Outlook Stable Overview We view the Hong Kong-based life insurer's business risk profile as satisfactory and its financial risk profile as very strong. We are assigning our 'A-' long-term local currency insurer financial strength and issuer credit ratings to FWD Life HK. At the same time, we are assigning our 'cnaa' long-term Greater China regional scale rating to the company. The stable outlook reflects our view that FWD Life HK will maintain its competitive position and capitalization at the current level over the next one to two years. Rating Action On Feb. 24, 2014, Standard & Poor's Ratings Services assigned its 'A-' long-term local currency insurer financial strength and issuer credit ratings to FWD Life Insurance Co. (Bermuda) Ltd. (FWD Life HK). The outlook is stable. At the same time, we assigned our 'cnaa' long-term Greater China regional scale rating to the Hong Kong-based life insurance company. Rationale The ratings reflect our view that FWD Life HK has a satisfactory business risk profile and a very strong financial risk profile. The insurer has an adequate competitive position and very strong capital and earnings. We derived our 'a-' anchor for FWD Life HK from the combination of these factors. FWD Life HK operates in Hong Kong, which we view as having a low industry and country risk. The country risk in Hong Kong is very low because of the territory's resilient and highly flexible economy, robust financial system, and strong payment culture and rule of law. In our view, the industry risk of the life insurance sector in Hong Kong is low and well supported by the market's strong profitability and growth prospects. We expect FWD Life HK's marketing campaign after its rebranding in mid-2013 to further enhance its brand awareness in the next one to two years. That should solidify its adequate competitive position. We also expect the company to maintain a fairly high customer retention, despite its change of ownership and rebranding. The insurer has gained market share in the past few years and is now one of the top 10 life insurers in Hong Kong. The company is owned by Mr. Richard Li and Swiss Re; Mr. Li acquired his stake from ING Group in FWD FEBRUARY 24,

3 Research Update: FWD Life Insurance Co. (Bermuda) Ltd. Assigned 'A-' And 'cnaa' Ratings; Outlook Stable Life HK adopts a diversified distribution strategy. The company distributes more than half of its new business through bancassurance. We believe FWD Life HK's sound and long-term relationships with its major partner banks support its business growth. However, the existing agreements with its major partner banks are non-exclusive and, hence, open to competition with other insurers. Similar to the industry norm, products distributed through bancassurance are also less profitable. FWD Life 'HK's nearly 1,500 agents generate less than 40% of the company's business. We expect FWD Life HK's agency force to grow and shift its product mix to higher-margin products. The company distributes less than 10% of its business through brokers. In our base-case scenario, we expect FWD Life HK's capital and earnings to be very strong over the next two years. Based on our premium growth projection for , the business growth implies the possibility of further increases in insurance and market-risk exposure. We believe its high profit retention and embedded value generation could support its capital strength. However, we believe the company's net profit could remain sensitive to investment markets and interest rate movements. In our assessment, about half of the company's capital base is made up of value of in-force, which in our view is not as strong as shareholders' equity. We assess FWD Life HK to have an intermediate risk position. The company allocates a high proportion of its investment portfolio to high-quality, fixed-income securities. The investment portfolio is also well-diversified among obligors. Exposure to foreign exchange risk is limited, as reflected in FWD Life HK's active hedging of currency risk and a credible currency peg of the Hong Kong dollar to the U.S. dollar. We view FWD Life HK's financial flexibility as adequate. We expect the company to obtain capital and funding from the shareholders when needed. We believe the shareholders have access to various channels of external capital and liquidity. The company does not have outstanding debt obligations and we do not expect it to rely on debt as a significant source of funding. FWD Life HK's enterprise risk management (ERM) and management and governance practices are neutral factors for the rating. The company's ERM is adequate with strong risk controls, in our view. The company has a well-defined ERM framework with three lines of defense. The insurer has two committees to manage its risks: an asset and liability management committee and its operation risk committee. The two committees regularly report to the board of directors. We view that the insurer has identified all material risks from all sources and defined comprehensive risk appetite and risk tolerances on most of its material risks. It monitors its risk dashboard and manages the exposures within limits at least every quarter. FWD Life HK's management and governance is satisfactory, in our opinion. The company has diligent strategic planning, comprehensive financial standards, and conservative risk tolerances. FWD Life HK's management team has good experience in the Hong Kong insurance business. FEBRUARY 24,

4 Research Update: FWD Life Insurance Co. (Bermuda) Ltd. Assigned 'A-' And 'cnaa' Ratings; Outlook Stable We regard FWD Life HK's liquidity as exceptional, given the strength of available liquidity sources, mainly premium income, and a pool of liquid assets. Refinancing risk is immaterial, and we believe the group can manage unexpectedly large claims or an increase in life insurance policy lapses. Outlook The stable outlook reflects our view that FWD Life HK is likely to maintain its satisfactory business profile and very strong financial risk profile over the next two years. We expect the insurer to maintain adequate financial flexibility while continuing to grow. We may downgrade FWD Life HK if the insurer's capital and earnings worsen to moderately strong as a result of rapid growth or a fall in business quality. We may upgrade FWD Life HK if its competitive position improves to strong and the company maintains its capital and earnings at the level of very strong. This may happen if we perceive that the insurer could enhance its brand and reputation, giving it a significant commercial advantage over its competitors, or significantly improve its operating performance to a level consistently stronger than its competitors. We currently consider this as unlikely in the next one to two years. Ratings Score Snapshot FWD Life Insurance Co. (Bermuda) Ltd. Financial Strength Rating A-/Stable SACP a- Anchor a- Business Risk Profile Satisfactory IICRA* Low Risk Competitive Position Adequate Financial Risk Profile Capital & Earnings Risk Position Financial Flexibility Very Strong Very Strong Intermediate Risk Adequate Modifiers 0 ERM and Management 0 Enterprise Risk Management Adequate, Strong Risk Controls Management & Governance Satisfactory FEBRUARY 24,

5 Research Update: FWD Life Insurance Co. (Bermuda) Ltd. Assigned 'A-' And 'cnaa' Ratings; Outlook Stable Holistic Analysis 0 Liquidity Exceptional Support 0 Group Support 0 Government Support 0 *Insurance Industry And Country Risk Assessment. Related Criteria Group Rating Methodology, Nov. 19, 2013 Insurers: Rating Methodology, May 7, 2013 Enterprise Risk Management, May 7, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 Ratings List New Rating FWD Life Insurance Co. (Bermuda) Ltd. Counterparty Credit Rating Local Currency Financial Strength Rating Local Currency Greater China Regional Scale A-/Stable/-- A-/Stable/-- cnaa/--/-- Complete ratings information is available to subscribers of RatingsDirect at and at All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. FEBRUARY 24,

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