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Scor's US tax-reform charge could cut solvency ratio by 7 points, says CFO

Scor SE may have to take a charge of up to $350 million in 2018 as a result of U.S. tax reforms, which could knock between 6 percentage points and 7 percentage points off the French reinsurance group's solvency ratio, according to CFO Mark Kociancic.

But he told analysts during a fourth-quarter 2017 earnings call that the potential charge would be "very digestible" for the company and that the lower rate of tax would be positive for its nonlife reinsurance business, Scor Global P&C.

The U.S. tax reforms would affect Scor in several ways, Kociancic said. The cut in the corporate tax rate to 21% from 35% reduced the value of deferred tax assets on the reinsurer's balance sheet, for which it already took a €39 million charge in 2017. Then there is the base erosion anti-abuse tax, or BEAT, which aims to penalize companies for transferring premiums to non-U.S. group entities for the purpose of avoiding U.S. tax.

"We are exploring business restructuring options, which would also serve to mitigate the impact of the BEAT," the CFO said. "This will likely be clarified later in 2018. This restructuring may have a potential one-time tax charge of up to $350 million that affects the 2018 financial accounts."

He added that it was too early to give precise figures — if there is a charge at all — because "there is still a certain amount of ambiguity in the way the U.S. Treasury is trying to define the various aspects of the tax law."

When asked about the solvency-ratio impact, Kociancic said it would be "mid-single-digit," adding: "Regardless of the scenario, you are probably looking at six or seven [percentage] points. That is something we would have to refine, but it is not anything that would really be a fundamental driver of longer-term capital decisions."

Scor's solvency ratio based on Solvency II capital requirements stood at 213% at the end of 2017.

'Realistic' approach to Ogden rate

Scor reported a sharp drop in net income in 2017 to €286 million from €603 million, largely due to a heavy claims bill from the natural catastrophes that hit in the second half of the year. Scor's combined ratio — a key measure of nonlife underwriting performance — was above the 100% break-even point at a loss-indicating 103.7%, as €682 million worth of natural-catastrophe claims added 14.9 percentage points to the ratio.

A positive was that the reinsurer released €45 million of reserves it had set aside to cope with the cut in the U.K. personal-injury discount rate based on its assumption that the rate will be raised to 0% from September.

The discount rate, also known as the Ogden rate, was cut to negative 0.75% from positive 2.5% in March 2017, raising U.K. personal-injury-claims costs for insurers and their reinsurers. After pressure from insurers, the British government is considering revising the rate to between 0% and positive 1%, but it is not clear when the change will be made, if at all, and what the final rate would be.

To strengthen reserves for the discount-rate cut, Scor took a €116 million charge in the first quarter of 2017, so the €45 million release left a €71 million Ogden charge for the full year, accounting for 1.4 percentage points of Scor's combined ratio.

Scor Global P&C CEO Victor Peignet told analysts that while the ultimate fate of the discount rate is still unknown, "we think the position we have taken is realistic."