France’s SCOR Group, the world’s 8th largest reinsurer, issued a profit warning today, stating that: “a net loss estimated at around EUR 250 million [$246 million] is expected for the full year 2002.” The group recorded a $20.65 million profit for the first six months.
The warning comes as something of a surprise, as all three rating agencies have recently reaffirmed the company’s ‘A’ ratings, albeit with negative outlooks. The company said that it had undertaken to compile a “detailed statement of its situation as at June 30 2002 and of its prospects for the current financial year” in order to “respond to the legitimate questions asked by the financial markets and the Company’s shareholders.”
The results were “presented to the General Management of the Group on October 26 and were the subject of a special meeting of the Audit Committee and of the Board of Directors on October 29 2002″, said the announcement.
SCOR listed the impact of a number of factors that have combined to significantly decrease its earnings. They are summarized as follows:
- A high level of claims in the third quarter as a result of flooding in Central Europe and Germany (EUR 70 million [$68.85 million] and the Group’s credit activities EUR 38 million [$37.37 million]
- The Company has had to mark to market its investment in Swiss Life through a provision for the financial year of a total of EUR 100 million (98.36 million], following a recently announced reorganisation of this company (planned Share Exchange offer). In total, in 2002, SCOR will make around EUR 230 million [$226 million] in provisions for depreciation and capital losses incurred on its equity portfolio. After these measures, SCOR’s investment portfolio presents net unrealised capital gains of EUR 254 million [$250 million] as at the end of September 2002, compared to EUR 87 million [$85.57 million] as at June 30 2002
- The aforementioned actuarial analysis carried out with respect to the June 30 financial statements confirmed that the technical reserves were sufficient to allow the Group to fulfil its commitments. On the recommendation of the General Management, the Board of Directors has nonetheless decided to make an additional provision of EUR 225 million [$221.31 million] for the Group, to bring the technical reserves concerned in line with the actuarial best estimates.
- The additional provisions stem, in part, from the situation of SCOR’s Bermudan subsidiary CRP for the 1999 and 2000 underwriting years, the impact of which was highlighted by the actuarial review whose results have just been made known. They concern a limited number of contracts covering Workers Compensation in the United States. These contracts have been subject to an unusually high level of accumulated claims during the year, leading to a net loss for this subsidiary, estimated at EUR 100 million [98.36 million] for the 2002 financial year. Immediate corrective measures have been taken:
- Future estimated losses, which make up part of the estimate of the Group’s results, will be provisioned as at September 30
- CRP will shift the orientation of its activities and drastically cut back on its underwriting activities, which will be subject to tougher checks
- The management of this subsidiary will be restructured
- For SCOR US, these additional provisions concern underwriting years prior to 2001, and mainly Program Business, which ceased to be underwritten at the end of 2001, but which continues to show unusual deteriorations.
- All of these factors will lead to the restructuring and reinforcement of the Risk Control Department and the Group Internal Audit Department.
The bulletin detailed several measures SCOR planned to implement in order to restore profitability, including a drastic cutback in ART and Credit & Surety reinsurance, more stringent profitability standards for its p/c business, and a “significant reduction in operating costs over the course of the next two years.”
It emphasized that the Group’s life reinsurance and large corporate accounts activities were producing “excellent results,” and would be expanded. It noted that “the Group’s underwriting results in 2002 in Property & Casualty and Large Corporate Accounts are, as at September 30 2002, in line with expectations, presenting a gross combined ratio of 92% and a net combined ratio of 98%.”