SCOR downgraded on ‘persistent underperformance’ – but remains bullish on P&C hardening

French reinsurance giant SCOR’s financial strength ratings have been lowered by S&P Global on “persistent underperformance” in the past five years, compared to close peers such as Munich Re and Hannover Re, which analysts believe have a better track record of meeting their earnings expectations.

SCOR losses ballooned in the third quarter with 29-point increase in its property/casualty net combined ratio, due to heavy natural catastrophe plus significant reserve building amid high economic and social inflation.

In the past five years, including the first nine month of 2022, SCOR's results have been “below our expectations and have not remained in line with those of 'AA-' rated peers,” S&P Global Ratings said in a statement announcing the downgraded of SCOR SE and its core subsidiaries and guaranteed entities to 'A+' from 'AA-'. The outlook remains stable.

S&P’s decision is based on SCOR’s performance in terms of profitability. “SCOR’s operating performance has not met our expectations or kept in line with that of 'AA-' rated peers, with the trend accelerating in the first nine months of 2022,” the agency said.

“SCOR reported a net loss of €509 million in the first nine months of 2022. This makes it a negative outlier relative to close peers such as Munich Re and Hannover Re, which have a better track record of meeting our earnings expectations,” it noted.

The reinsurer has promised to take “all possible steps to improve its profitability”, but defended its persistent underperformance blaming the tough market environment post-pandemic. “SCOR has gone through a challenging period, marked by a historic pandemic, successive natural catastrophes and very low interest rates. These various factors have weighed heavily on the Group’s profitability, which has nonetheless maintained a high level of solvency,” management said in a statement.

“SCOR is actively implementing a whole series of strong measures to remediate its technical profitability,” management noted. “The environment in the year ahead looks positive, with the hardening of the P&C market, the increase in interest rates and an improved situation in terms of the pandemic. SCOR is actively preparing the January 2023 renewals, fully focused on technical profitability.”

S&P expects SCOR to improve its earnings performance by 2023 but believe it will take time for the group to return to sustainable profitability levels in line with 'AA-' rated peers'.

On the P&C side, SCOR is reducing its exposure to natural catastrophe, which will come down about 20% by year-end 2022 versus 2021. It has also reduced exposure to US property, and climate-sensitive businesses. Furthermore, SCOR has desensitised itself to inflation by strengthening its P&C reserves by €485 million. On the life side, SCOR expects improved earnings because COVID-19-related losses are abating. In addition, rising interest rates help life reinsurers gradually improve investment income.

“We believe SCOR's relatively shorter duration investment portfolio will boost its investment yield. At Sept. 30, 2022, the group's reinvestment yield improved to 5.1% from 2.1% posted in full-year 2021,” S&P said.

“We maintain our base-case assumption that the group's risk-based capital will reach the 'AAA' level by 2024 after a dip to 'AA' in 2022 and 2023. From a regulatory perspective, we expect the group's solvency ratio to remain comfortably within its target range (185%-220%) over 2022-2024.”

“We expect SCOR's underwriting results will improve in 2023-2024 due to benefits from hardening reinsurance pricing, with a combined ratio (loss and expense) of 95%-98% including a natural catastrophe load of eight percentage points. We forecast that the group's leverage will remain below 40% and its fixed-charge coverage temporarily below 4x for 2022 before recovering to above 5x over 2023-2024.”

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