The French-based global reinsurer has had its FSR downgraded to A (Excellent) from A+ (Superior)

AM Best has downgraded the Financial Strength Rating (FSR) to A (Excellent) from A+ (Superior) and the Long-Term Issuer Credit Ratings (Long-Term ICR) to “a+” (Excellent) from “aa-” (Superior) of SCOR SE (SCOR) (France) and its main operating subsidiaries.

It follows similar rating action taken by Fitch, S&P and Moody’s Investor Services, after SCOR issued a series of disappointing results and disproportionately high natural catastrophe and drought losses.

Despite the downgrades, the reinsurer remains in the top tier of global reinsurers with its A-ratings intact albeit diminished.

In SCOR’s 2022 earnings announcement, chairman Denis Kessler said it had been a disappointing year, but that the reinsurer will seize opportunities as market conditions improve to cement its status within the top tier.

Risk management approach must improve

According to AM Best, the rating downgrades reflect the deterioration in SCOR’s operating performance, which is no longer considered supportive of AM Best’s previous strong assessment.

”The poor underwriting performance in recent periods has highlighted weaknesses in the group’s underwriting and risk management capabilities,” it said in a statement.

“As a result, the ERM assessment is no longer considered supportive of the previous very strong assessment and has been revised to appropriate. The group’s risk management capabilities are in line with its risk profile.”

In 2022, SCOR reported a sizable net loss of €301 million and a combined ratio of 113.2%, driven by above-budget natural catastrophe losses and reserve strengthening carried out in the third quarter of the year.

SCOR’s five-year average (2018-2022) non-life combined ratio and return-on-equity ratio are 102.5% and 3.5%, respectively, as calculated by AM Best.

The group’s earnings diversification between non-life and life segments somewhat moderates volatility in its overall technical results. Non-life technical losses, recorded in each of the past six years, have been offset by profits from SCOR’s life portfolio in five of the six years, despite elevated mortality driven by the COVID-19 pandemic.

Rescue remedy 

While the group’s management has implemented remedial actions to improve underwriting performance, such as reduction of its peak exposures (natural catastrophe risk and US mortality risk), nonrenewal of unprofitable accounts, and streamlining the organisation to increase operational efficiencies, it will take time to improve the non-life technical profitability track record, noted the rating agency.

AM Best expects SCOR’s risk-adjusted capitalisation to be maintained at the strongest level prospectively, as measured by Best’s Capital Adequacy Ratio (BCAR), supporting its very strong balance sheet strength assessment.

The group benefits from a conservative investment portfolio and a robust retrocession programme designed to shield its capital base. A partially offsetting factor is SCOR’s reliance on soft capital components, which includes hybrid debt, value of in-force life business and a contingent capital facility.

“SCOR continues to maintain its prominent position as one of the top five global reinsurers, with excellent product and geographic diversification,” it concluded. ”The group’s internationally recognised franchise, long-standing client relationships and technical expertise help SCOR manage local and global reinsurance market cycles.

”The group is expected to benefit from improved reinsurance market conditions, while executing on its stated objective to reduce earnings volatility.”