Moody’s Investors Service has downgraded the Insurance Financial Strength Rating (IFSR) of SCOR SE and its key operating entities to A1 from Aa3, citing a weakening of the firm’s profitability.
The rating agency writes that the downgrade also reflects Moody’s expectation that SCOR’s senior management will likely be faced with a high level of scrutiny from both external stakeholders, namely clients and investors, and internal stakeholders, which will increase execution risk in implementing a new strategic plan.
The outlook for the ratings has been changed to stable from negative, says Moody’s.
The new outlook reflects Moody’s expectation that SCOR will maintain its strong franchise both in the global P&C and Life reinsurance sectors.
The rating agency also anticipates SCOR to gradually improve its profitability, both in terms of earnings levels and volatility, and maintain capital adequacy within its target range.
Moody’s prior negative outlook on SCOR’s ratings was assigned back in October 2022, following a weakening in the firm’s performance in the first half of the year, which then continued in the third quarter.
At the beginning of this year, SCOR announced that former Swiss Re executive, Thierry Léger, had been appointed as its new CEO, effective May 1st.
In Moody’s view, the turnover in this role highlights challenges in the implementation of the firm’s succession plan, however, the rating agency notes that Léger has a strong track record and is highly experienced in the sector, which positions him well to run the firm going forward.
In terms of profitability, the results for the third quarter of 2022 showed a further weakening of SCOR’s earnings, reflected in a net loss of €509 million for the first nine months of the year.
Meanwhile, the firm’s Solvency remained on very strong levels, at 217% and thus at the upper end of what SCOR defines as its optimal range, but Moody’s notes that positive market movements strengthened the ratio by 43 percentage points over the first nine months.
Moody’s states that while positive rating pressure is unlikely, it could develop should there be a successful building of a strong earnings track record, reflected in a sustained return on capital (Moody’s definition) of 5% paired with lower volatility.
Other positive ratings drivers include evidence of maintaining a market-leading franchise in both the P&C and Life reinsurance sector; sustained positive underwriting results on an as reported and normalised basis and evidence of adequate reserving in P&C reinsurance; and cycle capitalisation close to the current levels, with the reported Solvency II ratio at the upper end of the target range of 185-220%.
Moody’s observers that negative rating pressure is unlikely given the strength of SCOR’s credit profile relative to other A1 rated peers, but could arise in case SCOR is not able to restore its profitability to levels commensurate with the A-rating level, i.e. a return on capital (Moody’s definition) moving towards at least 4%, paired with lower volatility, or it becoming apparent that SCOR’s franchise is weakening.
Additional pressure could result from a Solvency II ratio consistently below 180%, and/or financial leverage consistently above 30% and earnings coverage consistently below 5x, and/or additional meaningful adverse reserve development.
