AM Best has revised the credit ratings of Peak Reinsurance (Peak Re, Hong Kong) and its subsidiary, Peak Reinsurance AG (Switzerland).
It has assigned the outlooks to negative from stable and affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” (Excellent) of Peak Re and its subsidiary.
The Credit Rating reflect Peak Re’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management. In addition, the ratings factor in a neutral impact from the company’s ultimate parent, Fosun International Holdings Ltd. (Fosun).
The negative outlooks reflect AM Best’s expectation that macroeconomic headwinds and current unfavourable capital and investment market conditions may exacerbate financial stress on Fosun over the short to intermediate term.
However, AM Best notes that Peak Re has demonstrated a track record of effective mitigation of potential contagion risk stemming from Fosun’s weaker credit fundamentals, and can maintain its own financial strength. The ring-fencing measures include Fosun’s non-majority control over Peak Re’s board of directors, Peak Re’s rigorous related-party transaction policies and regulatory oversight from the Insurance Authority of Hong Kong, which AM Best expects to be collectively sufficient to protect Peak Re’s balance sheet from external influence by related parties.
Should a potential credit event were to occur at Fosun, AM Best views that Peak Re may still be subject to contagion risk to a certain extent, over the short to intermediate term.
Peak Re’s standalone business fundamental remains stable. The company’s risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), is projected to remain at the strongest level over the short to intermediate term. The company’s capital and surplus have achieved a compounded average growth rate of 11.8% during the five-year period from 2017 to 2021, mainly attributed to an issuance of perpetual subordinated guaranteed capital securities in 2020, a capital injection from shareholders in 2018 and the full retention of earnings. Other supportive factors of the balance sheet strength include the overall prudent investment risk profile, comprehensive retrocession programme and strong liquidity.
The company has consistently reported favourable operating results over the past five years, with an average return on equity of 4.4% during 2017 to 2021, supporting a strong interest coverage. Net losses arising from major events were controlled at manageable levels by the company’s effective retrocession protection. Interest income from debt investments and dividends from listed equities continue to support investment results. Notwithstanding, the decline in the fair value of available-for-sale investments during the first half of 2022 has dragged on the other comprehensive income, as well as capital and surplus.
Peak Re’s non-life portfolio is diversified both by product lines and geography, with a focus on the Asia-Pacific region. The company aims to selectively expand its U.S. casualty business and continue growing its non-proportional treaty business. The company also plans to expand in traditional risk business in the life segment.
Negative rating actions may occur if Fosun exhibits further financial distress, with this giving rise to heightened contagion risk for Peak Re. Negative rating actions may also occur if there is an adverse and deteriorating trend in operating results or if there is a material deterioration in Peak Re’s risk-adjusted capitalization.