French reinsurer SCOR has set reasonably ambitious but achievable targets under its new 2024-2026 strategic plan to build a more balanced and resilient earnings profile while enhancing its diversified global franchise and balance-sheet strength, Fitch Ratings says.
Fitch believes the plan could return SCOR (Insurer Financial Strength rating: ‘A+’/Stable) to profitability levels in the medium term, consistent with higher-rated peers, while consolidating its very strong business profile and capitalisation. The strategy leverages favourable market conditions and does not involve material execution risk that could worsen the group’s credit profile.
Fitch says that the new plan does not have immediate rating implications as the 2024-2026 guidance is consistent with its prior expectations underpinning a stable credit profile over the next 12 to 24 months.
A successful implementation of the plan, allowing the reinsurer to generate stronger, less volatile earnings while maintaining capitalisation strength, could lead to a positive rating action. A failure to turn around performance, deterioration in capitalisation and leverage, and a franchise erosion would put the rating under pressure.
The plan is built around two equally weighted over-arching financial targets of a 9% economic value (EV), defined as the sum of shareholders equity and net of tax contractual service margin (CSM) growth per year over the plan period and a Solvency 2 ratio within an unchanged optimal range of 185%-220%. Management indicated that it expects shareholder equity (net of capital repatriation) to contribute more to EV growth than CSM. These objectives support our assessment of a very strong capitalisation. Management also indicated that it intends to reduce financial leverage.
Profitability over growth
The plan favours profitability over growth while leveraging on favourable market conditions. SCOR assumes a return of equity (ROE) above 12%, supported by a net property and casualty (P&C) combined ratio below 87%, life and health (L&H) insurance service result of EUR500m ($537m) to EUR600m a year and an investment income yield of 3.4%-3.8% by 2026. New business CSM is assumed to grow by a modest 1%-3% a year while revenue is expected to grow more in P&C (4%-6%) than in L&H (1%-3%).
Fitch takes a positive view on planned management actions to build less volatile, more resilient earnings while building conservatism in reserves through an enhanced reserving framework. Overall, the global rating agency views the target technical performance objectives as achievable and supportive of its assessment of a strong performance.
The plan builds on SCOR’s remedial initiatives taken over the past two years. These included a rebalancing of the business mix towards P&C, and a reduction in exposure to natural catastrophes and US mortality risk, which have now largely been completed.
The combination of management actions, reinsurance rate increases and higher reinvestment rates started to earn through this year. This supports Fitch’s expectations for a return to a profitability level commensurate with the rating in 2023. SCOR posted a net profit of EUR502m in 1H2023 (1H2022: loss of EUR275m). The reported P&C net combined ratio was 86.9% (105.7%).
Fitch downgraded SCOR’s Insurer Financial Strength rating to ‘A+’ with a ‘Stable’ outlook on 6 December 2022 to reflect a continued weak financial performance, which deteriorated further in 2022. SCOR’s rating strengths remain its very strong company profile within the global reinsurance sector and very strong capitalisation.
