HONG KONG--(BUSINESS WIRE)--AM Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Ratings of “a-” (Excellent) of Peak Reinsurance Company Limited (Peak Re) (Hong Kong) and its subsidiary, Peak Reinsurance AG (Switzerland). The outlook of these Credit Ratings (ratings) is negative.
The ratings 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).
Peak Re’s standalone business fundamental remains stable. Despite the company’s capital and surplus having declined by 18.5% to USD 1.2 billion as of year-end 2022 due to a net loss and negative changes in the fair value of investments, AM Best expects the company’s risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), to remain at the strongest level over the short to intermediate term. Peak Re has published its unaudited financial results under IFRS 17 and IFRS 9 accounting basis. The company reported an improvement in its capital and surplus to USD 1.3 billion as of 30 June 2023, supported by profitable underwriting and investment earnings. Other supportive factors of the balance sheet strength include the good level of financial flexibility in accessing traditional and alternative capital markets, overall prudent investment risk profile, comprehensive retrocession programme and strong liquidity.
Peak Re reported its first net loss in 2022 since establishment, as the combined result of underwriting performance dragged by catastrophe losses, unfavourable investment returns and foreign exchange losses. AM Best views Peak Re’s retrocession program to be effective in mitigating negative impacts from event losses to a manageable level. In recent renewals, the company has put stronger focus on risk selection with an aim to lower catastrophe exposure and improve the expected technical margins of its non-life portfolio across different product lines and geographies. While the investments result was impacted negatively in 2022 amid the volatile market conditions, Peak Re has continued to de-risk its investment portfolio gradually and benefit from consistent interest and dividend income. Under IFRS 17 and IFRS 9 accounting basis, the company’s unaudited net profit reached a record level of USD 160 million in the first half of 2023. The company continues to maintain a lean and efficient operational model, as reflected in its stable management expense ratio.
Peak Re’s non-life portfolio is diversified by product lines and geography, with a focus on the Asia-Pacific region. The company aims to expand its U.S. casualty business selectively and continue growing its non-proportional treaty business. The company also plans to expand in traditional risk business in the life segment, with a focus on health products including medical and critical illness in China. Moreover, the company has been building its market presence in offering structured reinsurance solutions to clients for capital efficiency purposes.
The negative outlooks reflect AM Best’s expectation that Fosun remains exposed to a heightened risk level in adjusting its investment portfolio, replenishing its financial resources and controlling its financial leverage amid the current challenging macroeconomic and capital market environment. Over the short to intermediate term, if a potential adverse credit event were to occur at Fosun, AM Best views that Peak Re may still be subject to contagion risk to a certain extent. Notwithstanding, 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 mechanism includes board composition, stringent related-party transaction policies and regulatory oversight.
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 also may 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. While unlikely over the short to intermediate term under the current ownership structure, positive rating actions may occur if Peak Re demonstrates a sustained and robust level of risk-adjusted capitalisation with supportive operating profitability, while being exposed to more subdued level of negative parental contagion risk.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
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