SCOR outlook lowered to negative as profit concerns grow

The uncertainty and heightened risk to earnings and financial performance due to “above-budget” claims emanating from natural catastrophes, life reinsurance and further losses arising from the war in Ukraine has prompted Fitch to lower global reinsurance giant  SCOR’s outlook to negative.

SCOR’s financial performance in the last four years (2017-2021) has been negatively affected by  large catastrophe losses, pandemic claims and lower investment income, which according to Fitch, leads to low performance metrics for the rating.

Furthermore, the Russia-Ukraine fallout has “weakened the reinsurer's financial prospects” in addition to existing performance challenges resulting in a  €80 million loss in the first quarter of 2022, which Fitch said was “weaker-than-anticipated”.

Fitch believes the reinsurer faces “heightened pressure on earnings that represents a medium-term risk to its ratings.” Financial performance and earnings represents as a high influence credit factor and the main vulnerability of  SCOR’s credit profile relative to peers' and Fitch's rating guidelines, Fitch said.

The ratings agency’s change in outlook reflects concerns that  SCOR may not deliver a financial performance that would be in line with its expectations for its current ratings over the next year to two years.

Fitch says its “base case” forecast shows a net profit return on equity (ROE) and combined ratio (CR) better than 6% and 100% at year-end 2022, but sees a risk to these expectations due to uncertainty of above-budget natural catastrophe losses, continued high levels of life reinsurance claims, and further losses arising from the war in Ukraine.

The Fitch-calculated ROE at end-2021 recovered to 7.3% (2020: 3.7%) was below the agency’s 8% expectation. Over five years, ROE averages 5.5%, which Fitch thinks is “weak for the rating” it currently has.

SCOR reported a net 2021 property and casualty (P&C) CR of 100.6% (2020: 100.2%). It had the lowest CR of the four leading European reinsurers in 2020 but was the only one who did not show an improved CR in 2021, Fitch noted. However, the CR, after adjusting for Covid-19-related claims and natural catastrophes, improved to 93.1% (2020: 95.7%), the best of the four leading European reinsurers.

Fitch views “favourably” that  SCOR’s ongoing portfolio optimisation will expand its most profitable business lines, while reducing natural catastrophe and US mortality risk exposures. The effectiveness and timeliness of these management actions will be key in its assessment of financial performance in the next 12 to 24 months.

SCOR currently enjoys the insurer financial strength (IFS) rating of 'AA-' and long-term issuer default rating (IDR) of 'A+'.

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