Moody’s has placed the A3 insurance financial strength (IFSR) rating of Peak Reinsurance Company Limited (Peak Re) under review for downgrade.
The rating agency is concerned of contagion risks to Peak Re increasing as Fosun’s credit profile weakens.
This action follows the rating action placed to review for downgrading the Ba3 corporate family rating of Fosun International Limited – who owns 87% of Peak Re shares – on June 14, 2022.
Fosun’s rating was placed under review because of concerns that public bond market investors’ increasing risk aversion would pressure Fosun’s liquidity. While, credit contagion risk from Fosun’s core property subsidiaries is also increasing.
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, noted Moody’s. These measures include an independent board without majority control by Fosun, stringent related-party transaction policies and strong regulatory oversight.
“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,” said the agency.
Given that Fosun’s ratings could be downgraded to deeper speculative grade levels because of its tight liquidity and refinancing risk, Moody’s rating action on Peak Re reflects the potential need of positioning the ratings to reflect such contagion risks.
Moody’s considers the governance factor under its environmental, social and governance (ESG) framework, a key driver of this rating action, given Peak Re’s ownership by Fosun and Fosun’s governance practices.
Moody’s, added: “Peak Re’s standalone credit profile remains sound. 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.”
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.
Finally, the agency explained, Moody’s could confirm Peak Re’s ratings if 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.
Moody’s could downgrade Peak Re’s ratings if Fosun’s Ba3 ratings are downgraded; or contagion risks from Fosun increase materially in the form of a meaningful strain on Peak Re’s business growth or capital market access, the agency noted.
Moody’s has also placed on review for downgrade the Baa2(hyb) backed subordinated debt rating of the subordinated perpetual securities issued by Peak Re (BVI) Holding Limited. These securities are irrevocably and unconditionally guaranteed by Peak Re.