Peak Re’s Baa1 insurance financial strength rating (IFSR) has been placed on review for downgrade by Moody’s.
The rating agency has also placed on review for downgrade the Baa3(hyb) backed subordinated debt rating on the subordinated perpetual securities issued by Peak Re (BVI) Holding Limited. It had been previously downgraded from Baa2(hyb) to Baa3(hyb).
These securities are irrevocably and unconditionally guaranteed by Peak Re. Moody’s noted that the negative outlook from the ratings under review is not changing.
This action follows the agency’s rating action placed to review for downgrading the B1 corporate family rating of Fosun International Limited – who owns 87% of Peak Re shares – on 30 September, 2022.
According to Moody’s, the rating action on Fosun mainly reflects the company’s elevated refinancing risk due to the fast and significant decline of the market value of its listed assets, which further reduces the company’s funding headroom.
In addition, the company faces heightened execution risk related to its different fundraising plans amid capital market volatility and investors’ increased risk averse sentiment.
Moody’s is concerned that contagion risks could increase for the Hong Kong-based reinsurer as Fosun’s credit profile weakens, being one of the main reasons why it has taken these rating actions.
The rating agency said: “Contagion risks, in particular reputational damage, could increasingly strain Peak Re’s business growth and financial flexibility, including its capital market access. Such contagion risks would linger despite the ringfencing measures to safeguard Peak Re’s financial resources, including its independent board without majority control by Fosun, stringent related-party transaction policies and strong regulatory oversight.
It added: “Given that Fosun’s ratings could be downgraded further to deeper speculative grade levels, today’s rating action to place Peak Re’s ratings on review reflects the potential need of positioning the ratings to reflect these risks.
“Moody’s also considers governance risk under its environmental, social and governance (ESG) framework a key driver of today’s rating action on Fosun’s ownership in Peak Re specifically. “
Peak Re’s a3 standalone credit profile remains sound. According to Moody’s, this reflects the reinsurer’s good franchise in the Asian reinsurance market, solid capitalization, expanding product and geographic diversification, and product mix with low reserving risk.
Yet these strengths, are offset by Peak Re’s relatively lower profitability than its more established global peers, despite a gradual improvement in recent years. Additionally, Fosun’s high debt leverage and weak liquidity will continue to constrain the reinsurer’s financial flexibility, Moody’s noted.
There are three factors that Moody’s could consider to confirm Peak Re’s ratings, according to the agency. The first one would depend on Fosun;s ratings being confirmed or not downgraded into deeper speculative grade.
The second would be that meaningful portion of Fosun’s stake in Peak Re is sold to a buyer with a much stronger credit profile than Fosun, and the third one would be that contagion risks from Fosun do not increase materially and strain Peak Re’s business growth or financial flexibility.
On the other hand, Moody’s could downgrade Peak Re’s ratings if Fosun’s ratings are downgraded to deep speculative grade while contagion risks from Fosun increase materially, affecting Peak Re’s business growth or financial flexibility, the agency stated.