Lifted by Southeast Asia Growth, Insurer FWD Seeks IPO Safe Landing

Key Takeaways:

• FWD has switched its focus from opportunities in China to the growth potential in Southeast Asia as its main IPO selling point for investors
• The company’s listing was delayed in May this year due to bumpy market conditions, and it is still beset by uncertainty, with sluggish Hong Kong stocks and a likely swing from profit to loss this year

By Ken Lo

FWD Group Holdings Ltd., an Asian insurer backed by Hong Kong tycoon Richard Li,is making another attempt to land a share listing after earlier IPO bids were buffeted by market volatility and regulatory concerns.

Li,  the younger son of Hong Kong billionaire Li Ka-shing, is now circling for a touchdown on the Hong Kong Stock Exchange, with market sources saying FWD is looking to raise $1 billion with an IPO in the first quarter of next year.

FWD filed its second Hong Kong listing application last Tuesday. The company was originally rumored to be listing in Singapore or in the U.S. as a Special Purpose Acquisition Company (SPAC), but ultimately decided on Hong Kong as its IPO destination. US securities regulators had raised concerns that Chinese authorities might intervene in FWD’s business, and the insurer later acknowledged in its risk factors that it could be more affected by uncertainty over Chinese laws and regulations if it expanded its mainland China business.

The company also mentioned in the prospectus that any failure to comply with China’s new laws on data security and personal information introduced last year could have a material adverse effect on its business, financial condition and results of operations. Given the uneasy policy backdrop, FWD finally opted to list in a place where it has roots, to mitigate some of the risks.

FWD submitted its application to list on the Hong Kong Stock Exchange as early as February this year and was reported to have passed the exchange hearing in May. But the listing was eventually delayed due to market volatility. However, as Hong Kong stocks have fallen again since July and hit a new six-month low on Monday, the outcome of the latest listing attempt is unclear.

FWD has expanded its insurance empire to 10 Asian countries, spanning a relatively established market in Japan and emerging markets in Thailand, Cambodia, the Philippines, Indonesia, Singapore, Vietnam and Malaysia. The IPO’s main selling point is the growth potential of the insurance business in Southeast Asia, while its Hong Kong and Macau branches are growing relatively slowly, reflecting the weaker state of the Chinese business.

Hong Kong and Macau business less attractive

In addition to strengthening FWD’s capital, the IPO funds would be used to boost the company’s stake in Bank Indonesia’s life insurance business from around 35% to 44% over the next two years.

Companies that will remain in an investing phase for some time to come would have to boast a compelling growth story to persuade investors to sign big checks in a market downturn.

In pitching its IPO, FWD can point to its pan-Asia credentials and its growing business from the Southeast Asia region.

The value of its new business increased by just under 25% to $405 million in the first half of this year, compared to the same period last year at constant exchange rates, according to updated financial data in the FWD prospectus.

While new business in Hong Kong and Macau only grew by 4.9% year-on-year to $103 million, the figure for Thailand and Cambodia increased by 26% to $144 million, making them the largest sources of new business, overtaking Hong Kong and Macau. So far this year, the value of new business for the whole of Southeast Asia has amounted to $230 million, more than half of FWD’s new business growth, based on combined income from Thailand, Cambodia and five other Southeast Asian countries.

By contrast, the performance in Hong Kong and Macau deteriorated in the first half of the year, with their annualized premium equivalent, a common sales measure used by insurance companies, falling 25.5% from the year-earlier period to $188 million, as border controls to contain the spread of Covid 19 reduced insurance demand from residents of mainland China.

However, the picture was much brighter in the emerging markets of Southeast Asia. Here, FWD’s annualized premium equivalent rose 58.6% year-on-year to $190 million, driving a slight increase of 2.8% in overall premiums to $732 million.

FWD had enjoyed booming business in Hong Kong and Macau from sales to mainland Chinese visitors. But the Covid pandemic deflated that market. The value of new business from mainland Chinese visitor sales plummeted from $60 million in 2019 to just $6 million last year. As of the end of March this year, the number of mainland Chinese with valid FWD policies only accounted for about 1.2% of the total, rendering the Chinese market insignificant as a business driver. It is clear why FWD is no longer highlighting China in the sales pitch for its IPO.

Moreover, the earnings outlook is turning darker. FWD recorded a net profit of $249 million last year, which the company attributed to higher actual investment returns than expected long-term investment returns and a net profit contribution from discontinued operations. In the absence of similar boosters this year, and with business expansion raising costs, FWD is expected to post a net loss this year and in future periods, which may dampen investors’ appetite for its shares.

Richard Li as an active investor

FWD is held by Richard Li through PCGI Holdings and related entities. In recent years Li has turned low-key in his investment style, with a focus mainly on the traditional financial sector, but in his early days he was very active in the venture capital arena.

After dropping out of school in the U.S., Li returned to Hong Kong in 1987 and first joined his father’s conglomerate, Hutchison Whampoa Ltd. (now merged into CK Hutchison Holdings Ltd. (0001.HK)). He went on to found satellite TV company Star TV, before selling a controlling stake to media mogul Rupert Murdoch’s News Corporation for $525 million in 1993.

Armed with his first fortune, he set up Pacific Century Group in the same year. The young tycoon is best known for taking on $12 billion in debt from more than 30 banks in 2000 to buy Hong Kong Telecom, with a market value of more than HK$250 billion ($32 billion). After the dot-com bubble burst, the company’s market value plummeted, weighed down by the high debt.

Li returned to the international capital markets again in recent years, collaborating with Peter Thiel, founder of PayPal, to launch a series of SPACs under the Bridgetown brand. One of them, Bridgetown 2 Holdings, completed its acquisition of Singapore real estate website Property Guru in March this year, although its shares have nearly halved in value since its IPO.

FWD had two rounds of private placements prior to the IPO, raising $1.625 billion from institutional investors.  According to industry sources, the placements in question were valued at around $9 billion. The insurance industry uses a measure called embedded value, a calculation using net assets and projected profits, to assess business value. Taking an embedded value equity figure of $9.036 billion from independent actuaries, cited in the prospectus, FWD’s valuation would be slightly higher than $9 billion. However, embedded value is only the most common pointer to a life insurer’s value. Whether or not FWD can raise $1 billion will largely depend on market conditions.