Good morning, and welcome to the briefing for the FWD Group 2025 annual results announcement. My name is Evan Esterhuizen, Group Treasurer for FWD Group. We're about to begin our Q&A session. If you have a question, simply click the raise hand button at the bottom of your screen. Please be advised that should there be a higher volume of inquiries, there may be a delay before your request is placed into the queue. Over to you, operator.
Thank you, Evan. We will now commence the Q&A session. Our lines are open now, and we are standing by for your questions. Please be reminded that if you wish to raise a question, you may click the raise hand button on the screen. We will first begin with two submitted questions before the meeting from Mr. Joseph Fenn at Autonomous Research. Due to the time difference, as he is based in the U.K., he is unable to dial in. His first question is: What is the trajectory of expense overruns from here? And the second question is: Is the 40% margin in the Hong Kong business sustainable given the build-out of the UHNW business?
Well, great. I'll take those if that's okay, and thank you, Joe, for submitting the questions. First on the expense overrun, I think if you look at the financials, you see over the past couple of years an excellent track record in terms of making progress against the overrun, and we fully expect that to continue going forward.
More broadly, providing a little bit more color on that, you know, three big countries for us, Thailand, Japan, and of course Hong Kong, when you look at them in aggregate, have closed the expense gap and frankly are in an underrun position, which really leaves emerging markets, which, as you can see, is our fastest growing, you know, structurally top-line market when we think of the countries that make it up, as the remaining pocket of the company that still has an expense gap. I think the team led by Binayak has done a fantastic job in that segment, and it continues to grow and scale. I think the trajectory on the expense overrun is extremely well-positioned as we sit here today. The second question is around, you know, margins.
Look, I think structurally, short answer is we think the margins in kind of Hong Kong and Macau are extremely sustainable, and as we look forward, we don't really see, you know, any material margin pressures. We're gonna continue to benefit from growth, scale, and the underrun we think in Hong Kong, and of course, the outstanding performance of FWD Private. Again, we think we're well-positioned here.
The second question comes from MW Kim from J.P. Morgan. Your line is open. Please go ahead.
Thank you so much for this opportunity, and congratulations on strong numbers. I have two questions on investment book and also the free surplus generation. Firstly, the free surplus generation. The company appears to have achieved the economies of scale, and its cost control initiative are on track. My question is that what is the outlook for the underlying free surplus generation? Do we expect acceleration from current level alongside the business growth? The second one is about the investment book. The company is de-risking the balance sheet leverage, as suggested in the leverage ratio decline. However, the private credit risk is emerging globally. Could you comment on the company's exposure on the private credit investment and provide your broader view on the Level 3 other risk, please? Thank you.
Great. I think, MW, maybe I'll take those. You know, the first question is about net UFSG. I think again, if you look at, you know, the financials, you see, you know, we have, as a company, had a serious focus on both free cash flow and optimizing UFSG. I think in 2025, you see roughly 20% net UFSG growth. I think with respect to UFSG, with changes in capital rules as well as one-time items like reinsurance, I think you're always gonna have ups and downs probably year on year at our scale, but I think you're exactly right. The company has developed real operating leverage, a strong earnings profile, and the expense discipline has clearly contributed to that.
I think as you go forward, my broad rule is that I think net UFSG ex the one-times will really grow with earnings. I think in 2026, you know, we have highlighted that the change to an ESR regime in Japan will likely impact net UFSG in the range of $50-$100 million. You know, we think again, we're extremely well-positioned here for net UFSG growth over time. I think your investment question, I'm gonna try and make sure I recall these. There are two parts to it. You know, one is around private credit. Look, I think, you know, it's clear you're seeing some late-cycle behavior and underwriting in the private credit markets.
That said, you know, we work with a range of established asset managers and have had a real risk management focus in this space. You know, more broadly for us, while that private credit definition can be pretty broad, you know, the most material of our exposures is in the structured securities portfolio space, and this portfolio is made up largely of CLOs and mortgage-backed securities. That portfolio is roughly 95% investment grade, AAA down to A. We've looked at all of our exposures, and we remain pretty comfortable in that we've been conservative on the risk management side. I think the final comment was around Level 3 assets. You know, look, with respect to Level 3 assets, the largest component for us and frankly every other insurer is, you know, private equity funds and investment in funds.
You know, we have a disciplined accounting process around that and, you know, we go through that process at year-end, so of course very comfortable with that exposure in private equity, and pretty common relative to many of our peers and competitors. Hopefully that helps with your questions.
Next in line we have Mr. Rick Zhao from Morgan Stanley. Mr. Zhao, you may proceed.
Thanks, morning management. Thanks for sharing and taking my question, and congratulations on the solid and the strong full year results. I'm Rick Zhao from Morgan Stanley. Two questions from my side focus on the growth perspective. The first is here, we have a very strong 2025 and wondering our growth outlook into 2026 across markets, especially our biggest exposure in Hong Kong. I remember some previous consensus was around 10% or double-digit, and Sid just mentioned marginal growth in first quarter. Can we continue to outperform the market? Considering the regulatory changes in Hong Kong the past few quarters, will this bring any impact to our distribution channel deployment? The second is on our other region business.
In Thailand, are we more confident on our turnaround story in this market? Also maybe help us go through broad-based acceleration trends in EM and Japan. This is what we saw in the second half. Can this momentum sustain into 2026? Thank you.
Yeah. Why don't I open, Phong, and then maybe I'll pass over to you. You know, first I would point you to many of the comments I made in our earlier prepared remarks. You know, obviously in terms of the near-term outlook, we do expect continued growth in 2026. You know, different stories by different markets. I think Hong Kong, first with respect to, I think the initial part of your question. Obviously first quarter 2025 last year was an extremely strong quarter. We've seen moderate growth in the first couple of months of 2026, and we feel again, we're very well positioned here in Hong Kong. Of course, there are a wide range of regulatory changes and, I think we've spoken to this before.
You know, this has a meaningful impact in particular the retail space and kind of MCV broker channel. We've historically been a little bit underweight in that segment. Obviously for us, you know, the lever that has, you know, proven to be balanced and not materially impacted by this because of the nature of this channel and business is the high net worth segment where obviously we've continued to deliver and execute. You know, the second segment, you know, Japan, again, we've started the year really well in 2026 with respect to new business sales. We feel very confident in the trajectory of Japan.
Obviously in particular, given the demographic changes and the focus on retirement in that market, you know, the launch of our new savings product we think is very exciting, and there'll likely be future product rollouts. There's gonna continue to be incremental growth from that market and in particular that product segment. Maybe the, I think third part of your question is really around Thailand, so maybe with that I'll turn it over, Phong, to you and you can cover Thailand and EM.
Sure. Yeah. Thanks, Sid and thanks, Rick for the question. I think when it come to Thailand, I think we share with you earlier that we expect the moderate new business sales growth to continue into the early part of 2026. But we also share with you the impact of the lower interest rates continue to weigh on the early part of the year. We also share with you that the focus that we put in terms of pruning the less profitable business segment, such as the corporate care or some of the segment of the agency that in parts of the country that's not profitable. That effort certainly bear fruit for us.
We also double up when it come to the investment in technology to enhance the productivity. If you look across the group, that enhancement, for example in digital enablement, deliver 40% growth in terms of productivity for our agency force. That including market like Thailand that improvement. We will continue to do that. This we will build on that momentum that we see in Thailand for this year. For emerging markets, that definitely is the important engine of growth for us in the future. We continue to see very good momentum that carry from 2025. You see we grow 27%, and that carry into 2026.
We're feeling pretty good about the emerging market segment.
Moving on, we have Mr. Thomas Wang from Goldman Sachs. Mr. Wang, please kindly go ahead.
Thank you. Thank you for the opportunity to ask questions. Couple one from me. Maybe just really follow up. I think the first one on the economic assumption. That one I'm seeing a negative impact on the EV side, but a positive impact on the CSM side. Just wanna get a sense of what's driving, so firstly, what's driving that assumption change. Secondly, what's driving that difference between the two reporting metrics? Secondly is on the operating side, operating assumption variances.
The first half was a positive if you back out the second half, the answer closer to $100 million negative. I think Sid talked about this positive expense overrun in three of the four key markets. Just want to try to understand, what's driving that negative variance or what assumption change impact in the second half on the EV movement? Thank you.
Great. Thank you, Thomas. Why don't I take those? You know, first, on the economic variances, most important element is, you know, broadly our investment performance has been very much in line with the pricing assumption. That's obviously, you know, function of disciplined asset liability and risk management. You know, with respect to the difference between the IFRS and the EV, you know, look, IFRS is a much more economic and real-time view of what's happening in markets, and the EV and VNB have a lag. In particular, the negative variance on the EV and VNB side is mostly related to interest rate and credit spreads being updated as of year-end, which is a one-time, versus for IFRS, we're constantly updating that each quarter and each half year, and so it's probably more reflective economic view of risk management.
Thomas, I think your second question is around operating variances. The short answer, and I think we even commented on this in the first half results, if my memory is correct, is, you know, there's just some seasonality vis-a-vis the variances in terms of certain markets. There's nothing really that gives us any pause. I think we view, you know, the operating variances as very confident in terms of how our actuarial assumptions are set and largely and broadly across markets. Although you always have some pluses, good guys and bad guys, you know, in general, everything's falling in line with the pricing assumption that we see as we look at it today.
Our fourth caller is Michael Li from Bank of America. Mr. Li, you may proceed.
Hi. Thanks, Benjamin. This is Michael Li from Bank of America, and congratulations on the strong numbers. Thank you, Sid, for the past communication with clients and analysts, and best wishes. My questions are two. The first question is about the mix in Hong Kong. Can you give us some breakdown in 2025 about MCV and the local clients, in terms of value of new business in Hong Kong? And what kind of outlook do you have for MCV? The second thing is, Phong talking about the general, generative AI in the future, adoption.
Can you talk about, like, in the next two to three years, what kind of impact could be from, like, the adoption of AI and any kind of, like, cost cut on or distribution channel changes due to AI adoption? Because in the past few months, I think market worried a lot. In the U.S., in Europe, market worried a lot about AI's, like, disruption on the insurance distribution sectors. Thank you.
Thanks, Michael. You know, I've enjoyed working with you as well, and so really appreciative of the comment. Why don't I take the first part of the question, Phong, and then you can take the second part. You know, more broadly, you know, with respect to the specifics, we don't get into a deep disclosure of that, Michael, at the more granular kind of segment level. I think we've talked a little bit about in my prepared remarks on, you know, the onshore versus offshore split and how we think about the business.
You know, more broadly, I would say we're not seeing huge changes in the portfolio from the MCV dynamic outside of what I alluded to in the earlier question, which is obviously the MC-MCV kind of retail broker kind of segment has probably been most impacted out of the overall portfolio. With that, Phong, why don't I hand over the second part of the question?
Sure. Thank you, Michael, for the question. Definitely, I was waiting to see how many minutes into the session before the word AI come up. That's really important that we have been making AI and digital transformation as our key strategy, and recently doubling up, in term of that focus within the group. The impact on AI, as you ask, is across the value chain for insurance company, including ours. You can look that from distribution to customer service to the back office, efficiency of things.
So some of the data points that we shared with you earlier, for example, in the back office, we now implement quite a number of AI tools and models in our underwriting across the group, and that's enhanced productivity significantly. I think we cut down something like 40% of the manual effort that goes into underwriting in a number of countries, for example. In terms of customer service, we certainly cut down the headcount requirement to handle customer calls because of our AI chatbot and capability now improved significantly and can do an excellent job in taking care of our customer requirements.
On the distribution side, you can see that, as I shared with you earlier, I think by giving our distributors the right digitally enabled tools, and make their life easier and more efficient and more effective with the, in the conversation with potential customers, you can see that, across channels, such as agency, productivity improve by 40%. That's a result of a number of factors, but digital and digitally enabled tool is certainly a big factors, amongst them. You can certainly see the impact. The other example I can share with you is, for example, like Omne platform customer service.
We now able to embed that within the platform of our bank partner, the SCB EASY. This is the digital platform that SCB taking care of their 15 million customer across Thailand. Those are the thing that you can see that come to the forefront in a more scale fashion.
That's some of the thing I can share with you on AI.
We will now address one final question. We have Mr. Michael Chang from CGS International. Mr. Chang, your line is open. Please kindly proceed.
Hi. Thanks for giving me the chance to ask questions. Congrats on the strong results and all the best for Sid going forward. Just two questions. Firstly, on the Hong Kong business, understand that the first quarter growth could be a bit more moderate, but I suspect that would be largely due to the high base from the broker channel. Could management maybe just opine on the agent channel which saw quite strong growth, especially in terms of productivity, 40% year-on-year. How should we think about the non-MCV agent business? Is that quite solid? Are there any particular initiatives to actually see the strong momentum continue? Second question is probably more of a technical question for Sid.
I'm just comparing slide 40 and 42 of the slide pack. One of it is the risk discount rate for the EV in Hong Kong, which is going up, and the other one is the IFRS 17 risk-free rate with the liquidity premiums. I know that, you know, they're basically moving in different directions. In Hong Kong, the IFRS 17 risk-free rates with the liquidity premiums are falling, whilst the EV risk discount rates are actually rising. Could Sid just elaborate a bit more on what's driving these differences? Thanks a lot.
Yeah, sure. I'll take the first two questions. I think you know, on the first question, a couple of quick comments. I think you're spot on in terms of growth. Yes, we expect kind of moderate growth over in the early part of the year because in the first quarter you had high base, and then you had seasonality. As you saw, as we closed the year, fourth quarter growth in Hong Kong is more muted. I think you'll definitely see some very solid back-end growth effects in our view. You know, with respect to the agency channel, I think our team in Hong Kong, you know, Ken Lau, Jeff Wong, they've done a great job.
I think what I think is really the opportunity here is we've made some meaningful investments and we expect that, you know, to kind of bear fruit in the new year. Yeah, we're well-positioned in the agency space and Ken and Jeff, I think, have done a fantastic job. With respect to, you know, the technical question, look, IFRS is very much an economic-based view. You know, we update that every kind of quarter based on what real rates and spreads are. Obviously, the risk discount rate and the EV/VNB, that rate setting is more annualized, so there's always some disconnect between the two is what I would say.
On that topic, on slides 40 and 42, obviously I don't have them in front of me right here, but I'm sure Evan and team will be happy to follow up with you on anything you need with respect to that.
Ladies and gentlemen, that is all the time we have for questions today. If we were unable to get to your query, the FWD Group Investor Relations team will be pleased to follow up with you directly after the event.
This concludes our FWD Group 2025 annual results announcement. On behalf of FWD, thank you again for your participation. As a reminder, presentation materials, recordings, and transcripts from today's briefing can be downloaded from the Investor Relations section of our corporate website. Thank you again for joining.