4.4 Legal risk - Scor
4.4 Legal risk - Scor
4.4 Legal risk - Scor
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4.1.9 FINANCIAL RATINGS PLAY AN IMPORTANT ROLE IN SCOR’S BUSINESS<br />
Financial ratings are very important to all reinsurance companies, including SCOR, as ceding companies wish to<br />
reinsure their <strong>risk</strong>s with companies having a satisfactory financial position. The Group’s Life reinsurance activities and<br />
the Business Solutions (large corporate accounts underwritten essentially on a facultative basis and occasionally as<br />
direct insurance) business area in Non-Life reinsurance are particularly sensitive to the way its existing and prospective<br />
clients perceive its financial strength notably through its ratings. This is also true for the reinsurance treaties business in<br />
Non-Life in the U.S. and U.K. markets. Some of reinsurance treaties, including the assumed retrocession treaties that<br />
were entered into with AEGON companies in the course of the acquisition of the mortality reinsurance business of<br />
Transamerica Re (see “Section 5.1.5 – Important events in the development of the issuer’s business” for details on this<br />
acquisition), contain termination clauses triggered by ratings. Refer to “Section 4.1.10 – A significant portion of SCOR’s<br />
contracts contain provisions relating to financial strength which could have an adverse effect on its portfolio of contracts<br />
and its financial position”.<br />
In addition, if SCOR’s rating deteriorates, certain stand-by letter of credit facilities would require a higher level of<br />
collateralization and would increase the cost of the letters of credit. The timing of any review of the Group’s financial<br />
ratings by the rating agencies is also very important to its business since the Non-Life contracts and treaties are<br />
renewed at various set times throughout the year.<br />
Regarding the subordinated notes issued by SCOR SE, an equity credit has been assigned to certain notes in line with<br />
S&P existing methodology. A change in this methodology could lead to (i) a disqualification for equity credit of the notes<br />
and (ii) force SCOR SE to exercise the option that is offered in such case to redeem the notes. More information about<br />
subordinated debt appears in “Section 20.1.6 - Notes to the financial statements, Note 14 - Financial Debt."<br />
Some of SCOR’s cedants’ credit models or reinsurance guidelines depend on their reinsurers’ financial rating. If SCOR’s<br />
rating deteriorates, cedants could be forced to increase their capital charge in respect of their counterparty <strong>risk</strong> on<br />
SCOR. This could lead to a loss of competitive advantage which, in turn, could significantly impact SCOR’s revenues,<br />
net income, cash flow, financial position, and potentially, the price of its securities.<br />
4.1.10 A SIGNIFICANT PORTION OF SCOR’S CONTRACTS CONTAIN PROVISIONS RELATING TO FINANCIAL<br />
STRENGTH WHICH COULD HAVE AN ADVERSE EFFECT ON ITS PORTFOLIO OF CONTRACTS AND ITS<br />
FINANCIAL POSITION<br />
Many of SCOR’s reinsurance treaties, notably in the U.S. and in Asia, and also increasingly in Europe, contain clauses<br />
concerning the financial strength of the Company and/or its operating subsidiaries having the contracts and beneficiating<br />
from the Group rating, and provide for the possibility of early termination for its cedants if the rating of such subsidiaries<br />
is downgraded, or when its net financial position falls below a certain threshold, or if it carries out a reduction in share<br />
capital. Accordingly, such events could allow some of SCOR’s cedants to terminate their contract commitments, which<br />
could have a material adverse effect on its revenues, net income, cash flow, financial position, and potentially, on the<br />
price of its securities.<br />
In the same way, many of the Group’s reinsurance treaties contain a requirement for it to put in place letters of credit<br />
(“LOC”) provisions, if the financial strength rating of the Company and/or its subsidiaries subsidiaries having the<br />
contracts and beneficiating from the Group rating deteriorates, the cedant has the right to draw down on a LOC issued<br />
by a bank in SCOR’s name.<br />
Banks providing such facilities usually ask SCOR to post collateral. Its value retained by the bank, which can be different<br />
from the market value since it includes haircuts, is at maximum equal to the amount of the LOC facility. In the case of a<br />
LOC being drawn by a cedant, the bank has the right to request a cash payment from this collateral, up to the amount<br />
drawn by the cedant. It enforces by offsetting the collateral the Group posted to such bank.<br />
In the case of a large number of LOCs being drawn simultaneously, SCOR could encounter difficulties in providing the<br />
total amount of required cash or fungible assets, i.e. exposing it to a liquidity <strong>risk</strong>.<br />
Moreover, some of SCOR’s facilities contain conditions about its financial situation which, if not met, constitute a default<br />
and might result in the suspension of the use of current credit facilities and/or a prohibition on obtaining new lines of<br />
credit or result in the need to negotiate new LOC facilities under adverse conditions, which could have an adverse effect<br />
on its revenues, net income, cash flow and financial position, and potentially, the price of its securities.<br />
For more details about the Group’s lines of credit, refer to “Section 10 - Capital resources.”<br />
4.1.11 OPERATIONAL RISKS, INCLUDING HUMAN ERRORS OR COMPUTER SYSTEM FAILURE, ARE INHERENT<br />
IN SCOR’S BUSINESS<br />
Operational <strong>risk</strong>s are inherent in all businesses including SCOR’s. Their causes are multiple and include, but are not<br />
limited to, poor management, employee fraud or errors, failure to document a transaction as required, failure to obtain<br />
required internal authorizations, non-compliance with regulatory or contractual obligations, information technology (“IT”)<br />
system flaws, poor commercial performance or external events.<br />
The failure to attract or retain the necessary personnel could have a material adverse effect on SCOR’s results and/or<br />
financial condition. As a global financial services organization with a multi-centric management structure, the Group<br />
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