FWD maintains rapid growth while delivering its first accounting profits

FWD Group Holdings Limited (FWD) is a leading Asian insurance group operating in 10 markets across the continent. While it is a private (unlisted) company, it still provides regular financial updates about twice a year (with financial statements).

We previously covered FWD last year where we looked through its FY23 results. In this article, we provide an update on its FY24 results and maintain our recommendations for its bonds, especially its 2029 junior subordinated bonds (FWDGHD 8.400% 05Apr2029 Corp (USD)).

Related article: Idea of the Week: Bonds yielding over 7% from a fast-growing Asian insurance provider

Sustained business growth momentum

FWD continued to see strong growth in its businesses. Annualised premium equivalents (APE), a measure of new business revenues, grew by +14% on a like-for-like basis in FY24. Value of new business (VNB), a measure of new business profitability, also climbed by a decent +19% on a like-for-like basis.

Growth was primarily driven by the ‘Hong Kong & Macau’ segment, similar to the case in FY23 (Chart 1). This segment saw a +57% increase in APE and a +33% increase in VNB (FY24), much higher than FWD’s other geographies. Meanwhile, the Japan and Emerging Market segments benefited from cost management measures, resulting in positive VNB growth for each segment in FY24. Finally, the Thailand & Cambodia segment was perhaps the weakest-performing geography in FY24, though this only represented a slight single-digit percentage decline in APE and VNB.

(Note: Figures in Chart 1 show the actual numbers which may differ from like-for-like figures referenced in the first paragraph above.)

Overall, FWD appears to have maintained its momentum in growing its business. The +19% like-for-like increase in VNB is fairly close to FY23’s +20% growth. The Hong Kong & Macau segment continues to be one of the larger drivers of new business growth for FWD, similar to the case in FWD.

Chart 1: Business growth remained decent in FY24, especially for the HK & Macau segment

Financial highlights – operating performance

(Note: Dollar amounts refer to USD, and growth rates are YoY unless otherwise stated. Results are for FY24 unless otherwise stated.)

We first look at FWD’s operating results. Net insurance results (revenue less expenses) fell by -2% to $574m in FY24, with the increase in expenses (+7%) slightly offsetting a smaller increase in revenues (+3%). FWD’s net (operating) investment result increased just +4% in FY24 to $319m, similarly with investment returns (+10%) mitigated by the increase in net finance expenses (+11%). This meant that the net combined result was little changed at $893m in FY24 (FY23: $892m).

However, FWD notably reduced ‘general and other expenses’ (-11%) to $348m. This is a notable change from FY23 to FY24, with management appearing to put a much greater focus on cost management (including expense overruns), as observed through its repeated mentions in its FY24 presentation slides. The reduction in these expenses ultimately drove operating profits higher by double-digit percentages, while improving its expense ratio to 15.3% (Table 1).

Geographically, we highlight that all four geographies saw positive operating profit after tax (OPAT) in FY24, with three of the four delivering positive growth (Chart 2). Management attributed the improvements in Hong Kong & Macau, as well as Emerging Markets, primarily to reductions in expense overrun (with Emerging Markets seeing a ‘significant’ reduction); meanwhile, the improvement in Japan OPAT was driven by its growing business and improving margins.

Table 1: Breakdown of operating profits

Chart 2: All four geographies delivered positive OPAT

Financial highlights – as reported in income statement

We also look at FWD’s reported results from its income statement – most notably, this will include non-operating and one-time items (Table 2).

FWD’s net insurance result here was little changed, similar to the case for operating figures seen previously. However, its net investment result improved massively from -$632m in FY23 to $241m in FY24, unlike what we saw in operational figures previously where operational investment results only grew +4%. The discrepancy can be attributed to non-operating items which accounted for -$1,364m in FY23 and just -$627m in FY24; while management did not provide specific breakdowns, we think there were likely effects of (i) FY23’s Athene reinsurance transaction loss of -$505m no longer recurring in FY24; and (ii) fair value gains on FWD’s financial investments, with a notable increase in its interests in investment funds. Net insurance and investment result hence improved massively from $47m to $911m in FY24.

Similar to the previous section, FWD managed to cut its general expenses by a sizeable -25%. The combination of an improved net investment result, and a reduction in expenses, resulted in both profits climbing significantly. Notably, PAT turned positive for the first time since they adopted the new IFRS 17 standards, increasing from -$717m in FY23 to $10m in FY24.

Table 2: Breakdown of FWD’s reported profits

Outlook for FWD

Business outlook remains decent

We think that FWD’s FY24 results were a step in the right direction, considering the uptick in both operating and accounting profits (and with accounting profits turning positive). The increased focus on cost management (seen through the cost reductions in the prior sections, and implied through FWD’s FY24 earnings report) is also a good thing in our opinion, given FWD’s history (e.g. FY22 and FY23) of delivering negative accounting profits despite strong operational growth.

(Note: ‘Accounting profits’ above refer to those reported in its income statement. ‘Operating profits’ above refer to a metric used by management for monitoring and decision-making. The purpose of operating profits is to help enhance the overall understanding of FWD’s performance, and primarily excludes one-off and non-operating items.)

Looking ahead, we think FWD appears to have maintained its growth momentum, based on the new business metrics (e.g. APE and VNB) referenced in the first section. We think the next step for FWD will likely be to sustain this momentum while managing costs prudently as the recent drop in general expenses was a good sign. However, we think FWD’s outlook remains decent over the next few years. Its business continues to see decent growth, and if it continues to make progress on cost management, we think it is well on track to deliver more consistent profitability (on both operational and accounting bases).

How FWD may be affected by geopolitics

Li Ka-Shing’s proposed sale of Panama Canal ports to Blackrock has prompted a sharp reaction by Chinese policymakers; while the sale has been halted for now, we do not rule out the re-emergence of similar uncertainties in future.

While FWD is not directly involved with the Panama Canal ports deal, this may be relevant since FWD’s owner (Richard Li’s Pacific Century Group) has family ties to Li Ka-Shing himself. The Hong Kong & Macau segment has been a key growth driver for the company, and it is driven by a mix of onshore and offshore demand (approximately 50/50). If authorities ever decide to interfere with FWD’s Greater China business, we think there could be a sizeable effect on FWD’s revenues and profitability.

That said, we think that a heavy crackdown on FWD remains unlikely for now as it may potentially break the trust of the private sector (again). Chinese policymakers have recently shown greater signs of greater government support toward the private sector. In February, at a symposium held by President Xi, Alibaba founder Jack Ma was seen after many years out of the spotlight, since the crackdown in 2020. Richard Li himself was also spotted in a group photo with Premier Li Qiang, even after the initial displeasure over the Panama Canal ports deal. Overall, we think that geopolitical risks may remain over the longer term but it is likely too early to conclude that such risks will have a definitive, notable negative impact on FWD.

Credit highlights

FWD’s credit profile remained stable and we do not think there is a material change from our last FY23 update. We remain positive on FWD’s broader credit profile. Its main solvency ratio – using the Local Capital Summation Method (LCSM) – came in at 260% (FY23: 292%), suggesting a still-sizeable buffer over regulatory requirements (100%). Its leverage ratio (reported by FWD, roughly representative of debt-to-assets) was little-changed at 25.5% (FY23: 25.5%).

(Note: The decrease in solvency ratio was due to a change in its calculation methodology, which changed its solvency base from Bermuda regulations to HK regulations, rather than a material change in its free surplus.)

A large proportion of FWD’s broader investment portfolio remains in fixed income or debt securities, which comprises government, government agency, and corporate bonds (among others). The remaining minority of its portfolio is in a mix of equities, funds, and loans & deposits. The investment-grade portion of its debt securities holdings already accounts for 73% of its entire portfolio; we also expect its funds and/or ‘loans and deposits’ holdings to be majority investment-grade, which altogether point toward a fairly high-quality investment portfolio for FWD (Chart 3).

FWD also holds about $1,687m in cash and equivalents as of FY24, with another $1,385m in undrawn credit facilities. The company has proactively refinanced a large amount of borrowings over the past two years, and its maturity profile is now healthy, with its next maturities coming in 2028 ($500m in loans), and following that in 2029 ($900m in its April 2029 bonds) (Chart 4). With its ability to generate positive operating cash flows, we think that it should be able to leverage its business growth to generate even stronger cash flows, helping it to eventually repay or refinance its debts when they mature.

Chart 3: FWD’s investment portfolio broadly remains high-quality

Chart 4: Healthy debt maturity profile

About the bonds

FWD has several bonds outstanding, including perpetuals and non-perpetuals (Table 3). We primarily recommend their non-perpetuals, particularly their April 2029 bonds.

Among the non-perpetuals, we like FWDGHD 8.400% 05Apr2029 Corp (USD) for its significantly higher yields compared to its other bonds (2031s and 2033s). This is a rare case of bonds having higher yields despite being closer to maturity, which we attribute to the junior nature of the 2029 bonds. Specifically, the April 2029 bonds are junior subordinated, ranked pari passu with FWD’s perpetuals, and ranked below its 2031 subordinated bonds and 2033 senior bonds, resulting in its sub-investment-grade Moody’s rating. We acknowledge that such junior bonds come with heightened risks (due to the lower priority of repayment on default) but think that the shorter maturity profile of these bonds (versus the 2031s and 2033s) partly mitigates such risks.

(Note: The 2029 bonds also come with a call option for the issuer if it eventually IPOs; this call option is not present for the 2031 and 2033 bonds. Nonetheless, despite occasional rumours of IPOs, we do not see concrete signs of any in the near horizon, especially considering the recent Panama Ports saga.)

Consequently, FWD’s 2031 and 2033 bonds are our secondary recommendations, for those who are uncomfortable with the junior nature of its 2029 bonds. These come with higher maturities and durations than the 2029 bonds. Nonetheless, they still provide a decent level of yield – over 6% - for a pure investment-grade bond. 

We do not recommend their perpetuals because of the sizeable non-call risks, which are especially important considering FWD’s perpetuals all have histories of non-calls on the first reset date. We included their next reset dates in Table 3 below, but caution that issuers will not necessarily call their perpetuals on reset. The history of non-calls further amplifies this risk, meaning that investors will have an uncertain time horizon when purchasing these bonds. Nonetheless, within these perpetuals, investors may note that FWDGHD 8.045% Perpetual Corp (USD) has the highest reset spread (5y UST + 4.865%), while FWDGHD 8.492% Perpetual Corp (USD) now has the highest current yield (8.8%).

Compared with other Asian insurance peers, we find that FWD bonds (especially our non-perpetual recommendations) provide a sizeable yield pickup. Some better-established and higher or equally-rated peers in this space include AIA, Ping An Insurance, and Prudential. . In all three cases, credit spreads are relatively tight, closer to the 100bps level. FWD bonds offer wider spreads (and consequently higher yields) of closer to 490bps for their 2029s.

Table 3: Bond comparison (recommendation bolded)

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in FWDGHD 8.400% 05Apr2029 Corp (USD). The analyst who produced this report holds an NIL position in the abovementioned securities.