Moody’s Assigns First-Time A3 Rating to Fosun-Backed Peak Re

June 16, 2020

Moody’s Investors Service has assigned an A3 insurance financial strength rating (IFSR) to Hong Kong-based Peak Reinsurance Co. Ltd. with a stable rating outlook.

Peak Re’s A3 IFSR reflects its good franchise in the Asian reinsurance market, solid capitalization, expanding product and geographic diversification and product mix with low reserving risks. These strengths are offset by its relatively lower profitability in comparison to more established global peers and the constraint on its financial flexibility from the weak credit profile of its major shareholder, Fosun International Ltd. (Moody’s has a Ba2 rating on Fosun, which is under review).

With almost eight years of operating history, Moody’s said, Peak Re has grown to become one of the top 40 global reinsurers by premiums. Peak Re’s franchise is particularly strong in Asia, with strong premium growth across China, India and Korea.

The reinsurer also has diversified its business outside of Asia with the Americas and EMEA contributing 32% of gross premiums in 2019.

Indeed, Moody’s said that Peak Re’s increasingly diversified geographic mix reduces earnings volatility. While Asia represented around 70% of Peak Re’s gross premiums in 2019, around half of that was generated across China and the rest in other Asian markets.

The reinsurer is keen to further grow its business in Americas and Europe to diversify its risk exposure.

Peak Re’s capitalization is solid relative to its risk underwritten, thanks to its strong share capital and earnings retained since its establishment, Moody’s added. The reinsurer’s local solvency ratio is standing at 367% at the end of 2019, well above the regulatory minimum.

Further, the reinsurer’s comprehensive retrocession programs also effectively reduce its net catastrophe losses to a manageable level, said the ratings agency, noting that the company’s access to alternative capital enhances its underwriting capacity.

Most of Peak Re’s business lines are of short-to medium-tail, and therefore entail low risk of significant adverse reserve development. In addition, the reinsurer’s focus on proportional treaties underpins more predictable loss experience, a positive consideration in assessing its reserve adequacy.

However, Peak Re’s profitability is relatively lower compared to the more established global peers as it continues to build scale. The reinsurer is still making underwriting losses after management expenses. Its combined ratio (including property, casualty and life & health segment) was 101% while its management expense ratio was at 3.4% in 2019.

Peak Re’s exposure to high-severity losses – via excess of losses treaties that cover catastrophe risks – also increases its earnings volatility, Moody’s explained.

The ratings agency said that Peak Re’s selective approach in underwriting has meaningfully reduced its underwriting losses since 2017, and the company is expected to gradually continue improving its underwriting profitability. On the other hand, the prolonged low interest rates will also put negative pressure on the reinsurer’s investment income in the next 12-18 months.

The stable outlook given to Peak Re reflects Moody’s expectation that the reinsurer will maintain its solid capitalization while gradually improving its profitability. In addition, it reflects the expectation that the weakening credit profile of Fosun would not have a material impact on Peak Re’s operations, business and financial profiles.

Peak Re’s CEO Franz Josef Hahn responded to the Moody’s rating with the following comment: “I am extremely delighted of this new rating for Peak Re. It is testimony to the years of hard work of our team. I appreciate the strong support by all of our stakeholders as from the humble beginning as a start-up company eight years ago.”

Moody’s said it could upgrade Peak Re’s rating if:

  • The reinsurer meaningfully improves its profitability, with its combined ratio falling below 100% and return on capital rising above 5% on a sustained basis;
  • It continues to enhance its market presence and franchise while maintaining its solid capital position, and/or
  • It further diversifies its product and geographic mix meaningfully without a deterioration in its underwriting profitability.

Founded in 2012, Peak Reinsurance Co. a reinsurer incorporated in Hong Kong and is majority-owned by Fosun International Ltd. The reinsurer provides property, casualty, life and health reinsurance. At the end of 2019, its total assets stood at $4.4 brillion and shareholders’ equity at $1.1 billion.

Source: Moody’s and Peak Re

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