Peak Re at risk of downgrade, faces credit contagion risks from parent

Hong Kong-based reinsurer  Peak Re has been placed on review for downgrade by ratings agency Moody’s due to concerns of “contagion risks” from the weakening credit profile of Fosun.

Peak Reinsurance Company is a reinsurer incorporated in Hong Kong SAR, China and is ultimately 87% owned by Fosun International. It provides property, casualty, life and health reinsurance. At the end of 2021, its total assets stood at $5.7 billion and shareholders' equity at $1.5 billion.

Moody’s Investors Service has placed “on review for downgrade” the A3 insurance financial strength rating (IFSR) of Peak Re, as well as the Baa2(hyb) backed subordinated debt rating of the subordinated perpetual securities issued by Peak Re (BVI) Holding. These securities are irrevocably and unconditionally guaranteed by  Peak Re.

The company’s outlook has been changed to ratings under review from stable.

The move follows Moody’s rating action to place on review for downgrade the Ba3 corporate family rating of  Peak Re's majority shareholder Fosun, reflecting its concern that public bond market investors’ increasing risk aversion will pressure Fosun’s liquidity while credit contagion risk from Fosun’s core property subsidiaries is also increasing.

The rating action on  Peak Re mainly reflects Moody’s concern that contagion risks to  Peak Re will increase as Fosun's credit profile weakens. It believes that the contagion risks, particularly via reputational damage, could increasingly strain  Peak Re's business growth and capital market access.

In addition, Moody’s considers the contagion risks that Fosun might influence  Peak Re's risk appetite.

“Given the weakening credit profile of Fosun, these contagion risks would linger despite the ringfencing measures in place that safeguard the financial resources at  Peak Re,” Moody’s said. “These measures include an independent board without majority control by Fosun, stringent related-party transaction policies and strong regulatory oversight.”

Given that Fosun's ratings could be downgraded to deeper speculative grade levels because of its tight liquidity and refinancing risk, Moody’s said its rating action on Peak Re “reflects the potential need of positioning the ratings to reflect such contagion risks.”

As a result, Moody’s considers governance factor under its environmental, social and governance (ESG) framework, a “key driver” of the rating action, given  Peak Re's ownership by Fosun and Fosun's governance practices.

That said,  Peak Re's standalone credit profile remains sound, Moody’s noted, reflecting the reinsurer’s “good franchise in the Asian reinsurance market, solid capitalisation, expanding product and geographic diversification, and product mix with low reserving risk.”

However, these strengths are offset by  Peak Re's relatively lower profitability than its more established global peers, despite a gradual improvement in recent years. Besides, Fosun’s high debt leverage and weak liquidity will continue to constrain the reinsurer's financial flexibility.

Moody’s noted that it could confirm Peak Re’s ratings if either Fosun’s Ba3 ratings are confirmed, or the ownership of  Peak Re by Fosun is “materially reduced” in which case the contagion risk would be materially reduced.

At the same time, the agency could downgrade Peak Re’s ratings if the contagion risks from Fosun increase materially in the form of a meaningful strain on  Peak Re's business growth or capital market access.

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