FWD Touts Growth As IPO Campaign Drags On. But Investors May Want More

Key Takeaways:

• The value of FWD’s new business increased 29% to $823 million in 2022, which the company described as ‘strong organic growth’
• But the Hong Kong-based regional insurer’s overall revenue fell last year, pushing it into the red again, as it reportedly may relaunch its stalled IPO bid later this year

By Warren Yang

FWD Group Holdings Ltd.’s ambition to go public is nothing new. The regional insurer backed by Richard Li, son of Hong Kong billionaire Li Ka-shing, has made multiple IPO efforts that have gone nowhere due to choppy markets. Conditions look better now, but that doesn’t mean that investors will bite if and when it re-launches the listing later this year.

Despite its status as a private company, FWD has been releasing financial data semiannually in connection with its outstanding bonds, including its latest disclosure of annual results last week. It’s also probably trying to keep investors interested in its story in the run-up to a potential new IPO bid in Hong Kong, after an initial U.S. bid collapsed and a two subsequent ones in Hong Kong last year also sputtered due to a weak market.

In its latest disclosure filed last Tuesday, the company touted “strong organic growth” in 2022, highlighting a 29% increase in the value of its new business to $823 million. The metric, widely used in the insurance industry, basically captures the present value of future net profit minus the cost of capital. So, any gain in the measure is certainly a good thing.

What also looks promising is FWD’s new business margin – the value of new business as a percentage of what’s known as annualized premium equivalent. That figure improved substantially to 58.5% last year from 47.4% in 2021. The denominator for the calculation is the sum of 10% of premiums collected from policies that are paid for in single lump sums, plus 100% of annualized first-year premiums from all new policies that are paid for in installments.

This is where it gets tricky to figure out how well FWD actually did last year just based on these figures. That’s because its annualized premium equivalent actually decreased, which seems to suggest its business slowed.

Indeed, in its more investor-friendly annual report for last year, FWD says its premium and fee income decreased 15% for the year, while its investment returns plunged more than 90%, resulting in a 29% fall in total revenue to $8.3 billion. And after all expenses are added, the insurer made a net loss again, just a year after posting its first profit in at least two years.

The company’s inability to make consistent profits can be a red flag for potential investors because, among other things, a constant cash burn can force it to issue new shares, diluting its stock. FWD has raised funds from institutional investors in its brief history so far. From late 2021 through 2022, it sold $1.8 billion worth of shares to the likes of Apollo Global Management, the Li Ka Shing Foundation, Siam Commercial Bank and Swiss RE. Yet its cash holdings decreased some 44% to $1.5 billion at the end of 2022 from a year earlier.

Regional Expansion

FWD could use some fresh funds from an IPO as it continues to expand across Southeast Asia. The company dropped its original plan to raise up to $3 billion in a New York listing amid unease among U.S. regulators about potential influence on the company from Beijing.

It’s now eyeing a market debut in its hometown of Hong Kong, though that alternative hasn’t gone so smoothly either. FWD first filed for an IPO in the city last February, but delayed it because of market volatility. It submitted a second application in September, but markets were even worse as the benchmark Hang Seng index hit a decade low in late October.

Now the company is reportedly trying to wrap up a Hong Kong IPO to raise about $1 billion that could theoretically come as early as this month, but would be more likely be later in the year. That’s a significant scale-back from what it originally sought in New York, but would still represent a significant cash injection.

Encouragingly for FWD, the overall mood in Hong Kong’s stock market is improving as China reopens after ending its “zero Covid” policies, fueling optimism about recovery in the world’s second-largest economy. The insurer’s key selling point is its focus on Southeast Asia, where insurance sales have ample room to rise due to current low penetration rates and growing middle classes of young people who are more receptive to such products. The region accounted for more than half of FWD’s new business value last year.

FWD started operating in Hong Kong, Macau and Thailand in 2013, and later expanded into seven more markets in Southeast Asia and Japan. Late last month, it was part of a group that agreed to buy a majority stake in Gibraltar BSN Life Berhad to expand into Malaysia’s life insurance sector. It currently only has an Islamic insurance business in the country.

FWD’s focus on Southeast Asia, instead of the vast Mainland China market, seems sensible, not only because of the region’s growth potential but also because regulatory risks are high in China, where large state-owned insurers dominate the industry. 

Still, FWD’s lackluster financial performance may make it difficult to excite investors about its story. Of course, these past few years have been difficult for insurers everywhere as the world coped with economic repercussions of the Covid-19 pandemic. But as economies move past the health crisis, FWD needs to convince investors that its growth will accelerate and that it can start making profits sustainably, sooner rather than later.

Even if it does, winning a high valuation could be tough, based on the recent performance by other insurers. In December, Beijing-based Sunshine Insurance (6963.HK) completed a Hong Kong IPO at the bottom of its indicative price range, and its stock has dropped by more than a quarter since then to trade at a price-to-sales (P/S) ratio of less than one. The figure is similarly depressed for the much larger peer Ping An Insurance (2318.HK). AIA Group (1299.HK), which has a more similar profile to FWD as a regional Asian insurer, is fetching a multiple of about 5, which is better but hardly grand.

These valuations show investor interest in insurers, even in industry leaders, is generally lukewarm. The market may be similarly unenthusiastic about FWD, unless it can start churning out some stronger growth and profits in the post-pandemic era.