S&P Global Ratings has affirmed its ‘A+’ long-term insurer financial strength and issuer credit ratings on SCOR SE and related core subsidiaries despite the company reporting a €301m net loss for the full-year 2022 and a drop in capitalization.
The outlook of these credit ratings remains stable, the agency added.
SCOR’s negative earnings, S&P noted, were affected by a major drought in Brazil, high natural catastrophe losses, and reserve strengthening in the property/casualty (P/C) segment, reflecting high economic and social inflation.
“This included negative underwriting earnings from(P/C), with its 113.2% combined ratio (loss and expense) worse than those of close peers,” said the agency. “P/C performance was hit by higher natural catastrophe claims (12.4% of the overall combined ratio) and reserve strengthening in the P/C segment (6.2%).”
It added: “On the life and health side, the €1,116m result was affected by COVID-19-related mortality claims of about €325m. Despite this, we expect that management’s actions, which started in fourth-quarter 2021, will lead to a turnaround of the business this year.”
S&P noted that the SCOR’s management has taken steps to improve the company’s weak earnings. On the P/C side, it has reduced its exposure to natural catastrophe by 14% in January renewals, after a 21% reduction in 2022.
It has also reduced exposure to US property and climate-sensitive businesses, and it has desensitised itself to the inflationary environment by strengthening its P/C reserves by €485m.
On the life side, SCOR expects improved earnings because its COVID-19-related losses are abating, the rating agency added, which was the main reason for increased mortality claims in the US. Also, rising interest rates help life reinsurers to gradually improve investment income.
S&P believes that SCOR’s relatively shorter duration investment portfolio will help improve its investment yield. At December 31, 2022, the company’s reinvestment yield improved to 4.9% from 2.1% in 2021.
“The group proposed a dividend of about €250 million for 2022 and we believe this will lead to a reduction in capital adequacy to ‘AA’ from the ‘AAA’ range during the forecast period through 2024,” the rating agency noted.
It added: “In our view, SCOR’s underwriting results will improve in 2023-2024, benefiting from hardening reinsurance pricing, with a combined ratio of 95%-98% including a natural catastrophe load of 8 percentage points.
“We believe that the group’s leverage ratio will remain below 40% and its fixed-charge coverage will be temporarily below 4x for 2022, before recovering to above 5x over 2023-2024.”
Finally, S&P noted that SCOR’s stable outlook reflects the agency’s belief that management actions will likely return the group to underwriting and overall profitability in 2023 while maintaining its market positions in life and P/C reinsurance.
It also noted that S&P is unlikely to upgrade SCOR in the next two years. However, it could consider a positive rating action if, in addition to the group’s capital adequacy improving to ‘AAA’, its underwriting performance sustainably strengthens with a combined ratio below 95%, which would translate into a return on equity above that of ‘A+’ rated peers.
This, according to S&P, would demonstrate that SCOR can translate its very strong competitive position into earnings in line with those of ‘AA-‘ rated peers.
