SCOR Posts $400 Million Nine-month Loss; Rating Agencies React

France’s SCOR Group, the world’s seventh largest reinsurer, announced a nine-month loss of 349 million euros ($400 million), prompting both A.M. Best and Moody’s to place their ratings on the company and its subsidiaries under review.

Best said it had changed the under review status of SCOR and its subsidiaries’ financial strength rating of B++ (Very Good) to negative from developing. Moody’s said it had “placed SCOR’s ratings (insurance financial strength rating of Baa2; senior debt rating of Baa3; subordinated debt rating of Ba2) on review for possible downgrade.”

The company’s bulletin indicated that the loss was “essentially due to increased reserves on business written in the United States in 1997-2001.” It listed other highlights from the earnings report as follows:
— Profit on 2002-2003 writings in line with the targets set in the “Back on Track” plan, reflecting the Group’s improving fundamentals, forging a solid base for future development.
— Operating cash flow multiplied by 3, compared to the same period last year.
— Ongoing negotiations to commute a large portion of Commercial Risk Partners portfolio.
— Profitable life reinsurance operations to remain within the Group.
— Decision to increase capital by EUR 600 million [$687 million].

SCOR’s Chairman and CEO Denis Kessler stated at the end of the board meeting, held Nov. 5:”The Group’s results demonstrate the profitability of 2002-2003 underwriting worldwide. The Back on Track plan is bearing fruit. However, these good results are weighed down by the need for the Group to bolster its reserves in respect of business written in the United States in 1997-2001. As pledged, SCOR now books its reserves based on best estimates each year and has consequently decided to bolster these reserves in the wake of a detailed actuarial review carried out in October 2003.

“The Board of Directors has decided to pursue the transformation of its Life reinsurance business to form a subsidiary while retaining 100% control of this subsidiary, which generates satisfactory and recurring profits.

“The Board has approved the plan for a EUR 600 million capital increase in order to strengthen the Group’s solvency and allow it to pursue its existing underwriting policy, thereby profiting fully from buoyant reinsurance market conditions. The capital increase with allow SCOR Group to forge ahead with its strategy, which is to be a mid-sized reinsurer with global ambitions, operating selectively in all reinsurance classes, pursuing a profit-driven underwriting policy, providing value-added services, and having opted for a policy of conservative asset management, in order to offer its customers the) level of security they expect it to provide.”

SCOR’s announcement stressed that the new business it is writing is profitable. “For the first nine months of 2003, the net underwriting ratio for these underwriting years works out to 91% for P&C treaty business, equivalent to a net combined ratio of 96% while the net underwriting ratio for Large Corporate Accounts works out to 83%, equivalent to a net combined ratio of 91% for the same period, despite the impact of the May 2003 tornadoes in the United States.”

Best explained its action as being triggered by “SCOR’s decision not to divest its soon to be established new life subsidiary, the reported EUR 349 million (USD 398 million) loss in its consolidated third quarter results and the announcement that it plans to raise at least EUR 600 million (USD 684 million) through a rights issue.”

The rating agency said it “believes that the proposed rights issue is likely to restore SCOR’s prospective consolidated capital to a level commensurate with a B++ (Very Good) rating despite a substantial expected net loss in the region of EUR 300 (USD 342 million) for the full year (as a result of underwriting losses and reserve strengthening).”

Best warned, however, “that this prospective positive impact on capital will be somewhat offset by reduced financial flexibility. In addition, commutation negotiations at Commercial Risks Partners Limited (CRP), Bermuda have proven more protracted than anticipated, and negotiations remain open.”

Moody’s bulletin also noted these concerns, and added that its “review will focus, in particular, on the prospects for the successful completion and timing of the rights issue, as well as the potential for further adverse reserve development.”

Both rating agencies said they would continue to closely monitor the situation.