Swiss Re and SCOR outlooks changed to 'negative' due to COVID-19 impact

The rating outlooks of European reinsurance giants Swiss Re and  SCOR have been changed to 'negative' from 'stable' due to deterioration of underwriting performance, and vulnerability to higher mortality claims arising from the COVID-19 pandemic, respectively.

Analysts as S&P believe that Swiss Re's underwriting performance has deteriorated in recent years owing to the challenging pricing environment in its property/casualty (P/C) business and the underperformance of its primary business, Corporate Solutions (CorSo).

Following lower-than-expected earnings in recent years, the Zurich-headquartered global reinsurer reported a net loss of $225 million and a high combined ratio for first-quarter 2020, driven by the weak technical performance of its P/C business.

While much of this underperformance is attributed to COVID-19-related losses, S&P says the underwriting performance of Swiss Re's P/C business makes the group a negative outlier relative to close peers (with an average combined ratio of about 100 percent over 2017-2019), partly driven by higher natural catastrophe exposure than peers who have benefitted from prior-year reserve releases. Furthermore, the CorSo business, which is going through corrective underwriting actions to improve its performance, has constrained the group's weaker performance.

"We are lowering our earnings expectations for the group to reflect the pressure we see on its reported underwriting performance on the P/C side, partly due to potential further COVID-19-related claims, as well as the lower investment yield environment, which reflect current market conditions that the wider (re)insurance sector faces," it said.

According to the agency, the negative outlook indicates the possibility that it could lower the ratings by one notch if the underwriting performance of Swiss Re's P/C business does not perform broadly in line with its expectations.

At the same time, S&P has affirmed its 'AA-' issuer credit and insurer financial strength ratings on Swiss Re Group's core subsidiaries.

Meanwhile, Moody's Investors Service has changed SCOR's outlook to negative because it believes that the group is more vulnerable than other Aa3 peers in a stress scenario of higher mortality claims arising from the coronavirus pandemic.

SCOR's rating action is in response to Moody's assessment of the possible effects of the coronavirus on the group's credit profile. The COVID-19-related economic downturn is creating a severe and extensive credit shock across many sectors, regions and markets.

According to analysts, the reinsurance sector and SCOR has been one of the sectors affected by the shock resulting in a slowdown in business activity and an expected increase in insurance claims.

Moody's noted that France-based SCOR's profitability has deteriorated slightly as a result of the impact of above average large losses on its financial profile, leaving it with less flexibility to absorb higher losses in a potential stress scenario at its current rating level.

Moody's has affirmed SCOR SE's Aa3 insurance financial strength (IFS) rating as well as its debt ratings and the ratings of its subsidiaries as it expects SCOR to remain resilient, given the diversity of its business and management actions at the group's disposal.