SCOR Is Downgraded

By Lisa S. Howard

NU Online News Service, Nov. 7, 4:30 p.m.?Thefour principal ratings agencies have either downgraded or put thetroubled SCOR Group on review as a consequence of its resultsannouncement where it reported a 349 million euro ($398 million)loss for the nine-month period, a plan to increase reserves by 241million ($275 million) and embark on a 600 million euro ($684million) rights issue.

The group reported the loss of 349 million euros for the firstnine months of the year essentially due to increased reserves onbusiness written in the United States in 1997-2001, resulting in areserve strengthening of 241 million euros.

On a more positive note, SCOR said that before the reservingaction its global business in 2002-2003 is profitable. For thefirst nine months of 2003, for these two underwriting years, thecompany reported a net combined ratio of 96.

SCOR said the additional reserves are mainly non-core classes,where activity has been halted or sharply reduced, such as "bufferlayers," program business and workers' compensation. "The factorsbehind these runaway costs are primarily due to medical costinflation, particular in some states like California."

An early plan to divest the company of its life reinsurancesubsidiary has been scrapped, SCOR said, explaining that bidsreceived "for the sale of this subsidiary do not fully reflect thevalue of this business, which represents a source of stable andrecurring revenues for the Group."

SCOR said it nevertheless plans to proceed with the transfer ofits life reinsurance activities to this newly formed subsidiary inorder to bolster its development.

As for the plans for the loss-making Commercial Risk Partnerssubsidiary, SCOR said negotiations are currently under way tocommute a large portion of CRP's book.

"A first commutation, concerning approximately 20 percent of theBermuda-based subsidiary was completed in July 2003, underwritinghaving been halted with effect from January 2003," SCOR said. "Inlight of the actuarial reviews carried out, the Group has increasedCRP's reserves at Sept. 30 2003 by 49 million euros to meet bestestimates reserving."

In response to these revelations, the ratings agencies promptlyresponded negatively.

A.M. Best said it changed the under-review status of theParis-based SCOR's financial strength rating of "B-double-plus" tonegative from developing. This also applies to the company's coresubsidiaries.

A.M. Best said the proposed rights issue will likely to restoreSCOR's prospective consolidated capital to a level commensuratewith a "B-double-plus" rating, despite a substantial expected netloss in the region of 300 million euros ($342 million) for the fullyear (as a result of underwriting losses and reservestrengthening).

This prospective positive impact on capital "will be somewhatoffset by reduced financial flexibility," A.M. Best said.

In addition, commutation negotiations at CRP have proven moreprotracted than anticipated, while negotiations remain open, A.M.Best said.

The rating agency is also reviewing the potential for furtherreserve deterioration. A significant delay or unsuccessfulcompletion of the rights issue will most likely trigger adowngrade, A.M. Best said.

Standard & Poor's Ratings Services lowered its long-termratings (including counterparty credit and insurer financialstrength) on SCOR and its subsidiaries to "triple-B-minus" from"triple-B-plus."

SCOR's losses, which stem almost exclusively from the group'sNorth American operations for underwriting years 1997-2001, "aresignificantly higher" than those expected by S&P, said creditanalyst Marcus Rivaldi.

S&P said the rights issue has the "explicit and strongsupport of major shareholders," which are pledging more than 50percent of the amount to be raised. Further support has come fromtwo banks, which provided "a conditional commitment in principle tounderwrite the balance of any rights above the amount committed byshareholders," S&P said.

"Should the rights issue be fully and unconditionallyunderwritten and the group retain the support of its key cedentsand brokers, Standard & Poor's may promptly raise its long-termratings on SCOR and related entities, although not higher than?triple-B-plus'," said Mr. Rivaldi.

In the event that this improvement to the balance sheet does notmaterialize, S&P said it may lower the ratings from the"triple-B" range.

In other ratings actions, Moody's Investors Service announced itplaced SCOR's ratings of Baa2 on review for possible downgrade,while Fitch Ratings placed SCOR Group's "triple-B" insurerfinancial strength on rating watch negative.