Peak Re has seen its insurance financial strength rating (IFSR) downgraded to Baa1 from A3 by Moody’s.
Moody’s said it has also downgraded the backed subordinated debt rating on the subordinated perpetual securities issued by Peak Re (BVI) Holding Limited to Baa3(hyb) from Baa2(hyb). These securities are irrevocably and unconditionally guaranteed by Peak Re. At the same time, Moody’s has changed the outlook to negative from ratings under review.
The firm wrote in a statement announcing the downgrade: “The downgrade on Peak Re’s IFSR to Baa1 from A3 with outlook changed to negative from ratings under review follows Moody’s rating action on 23 August 2022 to downgrade the corporate family rating (CFR) of Peak Re’s majority shareholder, Fosun International Limited (B1 negative), to B1 from Ba3 and change the outlook to negative from ratings under review.”
It added: “The downgrade of Fosun’s CFR reflects the company’s weak liquidity profile and elevated refinancing risk amid the challenging funding environment in onshore and offshore bond markets. The negative outlook on Fosun reflects the uncertainties surrounding the company’s execution of asset sales and fundraising against its sizable short-term debt maturity in the next 12 months, and its ongoing challenges in balancing its liquidity needs and maintaining the quality of its investment portfolio.”
Moody’s wrote that the rating action on Peak Re mainly considers the increasing contagion risks to Peak Re from Fosun’s weakened credit profile, in particular via reputational damage, which could increasingly strain Peak Re’s business growth and financial flexibility including its capital market access.
It wrote: “These contagion risks would linger despite the ringfencing measures in place that safeguard Peak Re’s financial resources, including an independent board without majority control by Fosun, stringent related-party transaction policies and strong regulatory oversight. Moody’s rating action on Peak Re reflects the positioning of the ratings to reflect such contagion risks, given that Fosun’s rating has been downgraded to deeper speculative grade levels. As a result, Moody’s considers governance risks under its environmental, social and governance (ESG) framework a key driver of today’s rating action, given Peak Re’s ownership by Fosun and Fosun’s governance practices.”
It added: “The Baa1 IFSR on Peak Re incorporates a one-notch downward adjustment from the reinsurer’s a3 standalone credit profile, reflecting Peak Re’s exposure to increasing contagion risk from Fosun, which has a significantly weaker credit profile.”
The firm said that Peak Re’s a3 standalone credit profile continues to reflect 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. In addition, Fosun’s high debt leverage and weak liquidity will continue to constrain the reinsurer’s financial flexibility.
Moody’s said that an upgrade was unlikely, given the negative outlook. However, it said this could change if the rating outlook on Fosun returns to stable, if Peak Re’s stake by Fosun was sold, or if contagion risks from Fosun do not increase materially.
These latest announcements follow that of Moody’s placing the firm’s IFSR rating under review for downgrade in June. The agency said at the time that it was concerned of contagion risks to Peak Re increasing as Fosun’s credit profile weakens.
The action followed 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.