Analysts suggest SCOR might buy more retro to protect itself from further downside

French reinsurer SCOR is considering to buy more retrocession reinsurance to protect solvency, but dividends remain at risk, as interest rates and an active hurricane season add pressure to its balance sheet, according to Berenberg analysts.

SCOR’s Q2 2024 results revealed further risks that are causing analysts to turn even more cautious on the stock than previously.

Analysts at Berenberg stated: “We now envisage more downside to consensus FY24-26E EPS estimates while pressure on solvency will remain.

“We reduce our FY24E EPS estimates by 58% due to lower net reinsurance revenue growth due to higher retro spend (which we think the market overlooked) and higher management expenses. We reduce our FY25-26E EPS estimates by c11-12% mainly as a result of the lower stock of life and health reinsurance (L&H Re), contractual service margin (CSM) and – in the absence of firm guidance – a lower amortisation rate, we estimate c6.8-7% versus 8% guided previously and 6.8% at H124.”

Limited flexibility in its balance sheet was one of the key reasons for the reinsurer’s downgrade to Hold back in July, analysts noted.

SCOR’s solvency sensitivity to a 50bp reduction in the risk-free rate is 7ppt. The two-year US treasury yield is already down by c80bp since Q2 2024. Berenberg believes that this, combined with the expectation of interest rates falling further, will present additional pressure.

At Q2, US wind exposure remains underweight, SCOR’s management highlighted, and based on the new disclosure Berenberg would expect a 1-in-100-year US hurricane to cost around €320m, net of tax, equivalent to 7ppt on solvency.

Moreover, analysts estimate a c4.5ppt hit assuming the worst-case impact from the finalisation of the L&H Re reserve review in Q3 2024, noting that capital deployment for the upcoming renewals also takes place during the third quarter.

As Berenberg estimates pro-forma solvency of 182% at end-Q4 2024, below the 185% minimum level required to pay the dividend, it believes that SCOR is looking to purchase additional retrocession coverage.

This move “will come at the expense of earnings,” analysts warn, “but could provide 5-10ppt uplift and protect its solvency (185-192% pro-forma). In the event of this, the shares might get some relief; however, the risk of a big US hurricane and thus further pressure remains.”

With the probability of solvency dropping below the 185% threshold – the level required to maintain the dividend according to management – being high, Berenberg analysts believe SCOR is already looking into taking action that will boost solvency.

The firm stated: “During the Q2 2024 call, management said that one action could be to purchase retrocession reinsurance. We believe that SCOR could boost capital by 5-10ppt which could therefore allow SCOR to pay the dividend. We believe such news would be welcomed by the market and would be positive for the share price.”

Analysts concluded: “However, even with retro protection, SCOR will not be completely out of the woods, given the expected very active hurricane season. Even though it remains underweight in US wind, a 1-in-100-year US hurricane event could, we estimate, cause up to 7ppt in solvency, which would make it very unlikely that a dividend would be paid for FY24.”

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