SCOR reinsurance goes ultra-prudent in Q3 loss to clear slate & protect ratings

Don't be dismayed by the scope of Q3 losses at global reinsurer  SCOR as the mass of new reserves and cost bookings likely represent a case of extraordinary prudence designed to clear a path for unencumbered 2023 earnings growth, equity market analysts are saying in near unison.

“Although headline numbers look weak, these actions being taken should allow the company to start from a clean slate into 2023,” analysts at Deutsche Bank said in a note to clients.  “We see this all providing some initial confidence that the company is moving in the right direction.”

“The Q3 2022 results were a masterclass in ‘kitchen-sinking,’ i.e., getting all the bad news out of the way at once,” analysts at Berenberg concurred.

SCOR claimed €517 million in Q3 nat cat, including €279 million on Hurricane Ian, and went on to add €485 million or 2.3% to its P&C reserves, attributing 2/3 of that move to the need to get ahead of inflation. The final blow: a €94 million write-down on deferred tax assets. By the bottom line: a €270 million Q3 net loss and a P&C combined ratio at 141%.

Analysts at Jeffries put the depth of the loss booking to the need to protect ratings. The credit rating looks “seemingly at risk of a downgrade in 2023,” making the mitigation of near-term earnings risk “essential,” analysts wrote.

To Jeffries ear, a ratings downgrade would put SCOR out of the competitive loop. Cedants face capital requirements based on reinsurer ratings and SCOR would enter the vicious circle of price slashing to stay in play. Jeffries went so far as to say “the moment of peak risk is passing” and upgraded SCOR to a ‘Buy.’

“From our perspective, management did not disappoint,” Jeffries analysts wrote. “This is a rare instance where a bigger provision is better, as it adds credibility to the market's forecasts.”

Jeffries was not put off by the left-pocket-to-right-pocket nature of the reserve move as SCOR funded the P&C reserves with reserve releases in life & health. That release rather “realises the hidden value that we believe has never been adequately reflected in the share price.”

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