KEY RATING DRIVERS
The affirmation reflects SCOR's very strong business profile within the global reinsurance sector, very strong capitalization and consistent operating results.
Fitch views SCOR as a diversified reinsurer able to offer a wide variety of reinsurance products around the globe. In the medium term, the agency views defense and development of SCOR's market position as dependent on the ability of the reinsurer to increase its share of key markets and reinsurance lines.
Fitch maintains a favorable view of SCOR's property & casualty (P&C) reinsurance business, which has steadily grown into a well-diversified portfolio, both geographically and by line of business. The segment was impacted by a series of large natural catastrophe events in 2H17. SCOR reported a combined ratio of 103.7% in 2017 (2016: 93.1%), with catastrophe losses contributing 14.9 percentage points (2016: 5.5 percentage points) to the combined ratio.
Life reinsurance is a significant part of SCOR's business, at least in premium terms. Successful management of the in-force book, coupled with continued organic growth, is viewed as key to diversifying group profitability. In 2017, SCOR's life reinsurance business continued to grow profitably. The technical margin at end-2017 stood at 7.1% (end-2016: 7%) and SCOR grew its gross written premium to EUR8.8 billion in 2017 (2016: EUR8.2 billion). Growth was driven by protection business in the Americas, financial solutions in Asia and longevity business in Europe.
SCOR scored 'Very Strong' on Fitch's Prism Factor-Based Model (FBM) at end-2017. A qualitative offset to the overall score achieved is the high proportion of softer forms of capital present. SCOR reported very strong Solvency II at end-2017, with coverage of 213% (end-2016: 225%). Investment gains and favorable operating experience were offset by catastrophe losses and changes in long-term US mortality assumptions.
SCOR issued USD625 million of Solvency 2 restricted Tier 1 securities in March 2018. SCOR will use the proceeds partly to redeem existing debt. The notes are a non-cumulative perpetual instrument with no step-ups on call dates, and therefore they are treated as 100% equity in both our financial leverage and Prism FBM calculations. However, they are treated as 100% debt in our calculation of the total financing and commitments ratio, in line with any other debt.
SCOR completed the first call of CHF315 million in June 2018 and expects to complete a further call of CHF250 million in November 2018. The combined effect of these actions will be to reduce leverage to around 20% on a pro-forma basis (end-2017: 26%).
Fitch recognizes that the current operating environment remains challenging for SCOR and the wider (re)insurance industry. Following the 2017 losses, risk-adjusted rates have improved in loss-affected markets, but to a more modest extent in other areas. SCOR reported that at January renewals risk-adjusted pricing was up 3% overall with a 7.8% improvement in non-proportional business and 1.7% on proportional treaties. The agency expects SCOR's diversified business profile and prudent underwriting policy to provide resilience against the challenging market conditions.
The ratings may be downgraded if financial leverage rises and remains over 25% or if Fitch's capitalization assessment, as measured by the FBM score, deteriorates to 'Strong'. A combined ratio consistently above 100%, or net income return on equity consistently below 6%, could also lead to a downgrade.
An upgrade could be possible if there is a significant improvement in business profile, combined with an improvement in the level and quality of capitalisation. However, Fitch views this as unlikely in the near term.