SCOR SE (SCR) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the SCOR Global P&C January 2020 Renewals Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would now like to hand the call to Mr. Ian Kelly, Head of Investor Relations. Please go ahead, sir.

Good afternoon, everybody, and welcome to our SCOR Global P&C January Renewals Call. I'm joined on the call by Jean-Paul Conoscente, Chief Executive Officer of SCOR Global P&C; and Laurent Rousseau, Deputy Chief Executive Officer of SCOR Global P&C. Before I start, I'd just like to remind you that the SCOR Group full year 2019 results will be presented on 27th of February this year. So when it comes to the Q&A session, we will only be able to refer to the renewals information and to the Q4 information that was provided in the press release. And so with that, we can start, and I hand over to you, Jean-Paul.

Thank you, Ian, and good morning, everyone. On this call, I'd like to share with you the outcome of our 1/1/2020 renewals. You'll find more information in the slides distributed earlier. So bottom line, in a market environment which ended up being more challenging than was expected, we made some tough underwriting decisions to produce a more profitable portfolio, position us very well for the rest of the year. Indeed, looking back, we entered 2019 with an optimistic view based on improvements we were seeing in the primary insurance market, along with smaller improvements in reinsurance. As a result, we grew our global footprint, with gross written premium up almost 16% in 2019. However, by the end of 2019, we realized new developments, such as climate change, social inflation, a depressed financial environment and higher man-made losses, led to a deterioration of the underlying portfolio performance. So ahead of the January 1 renewals, we increased our pricing loss trends across most lines of business and geographies. In reinsurance, we took management actions to shed business that fell below our revised profitability targets and grow in areas where profitability was better. We shed almost EUR 400 million of premium and wrote about EUR 150 million of new premium. And the result is a 4.7% reduction of renewable premium, the book of reductions coming from a few large quota shares in China and the U.S. The results are a much better expected profitability, 2.8 points of price improvement year-over-year, and roughly 1 point of improvement in the underwriting ratio. The difference between these 2 metrics comes from the change of our view of loss trend. This means that on average, we saw business at constant perimeter as having 2 points less margin than in 2019 before price increases. This market environment also gave us the opportunity to fully benefit from our specialty insurance platform, where market conditions are improving at a much faster pace. This market hardening in insurance started in North America and is now expanding globally, going beyond pure pricing corrections with stricter terms and conditions and claim management practices being put in place. Overall, on large commercial risk, we managed to grow our book by 16%, with an average rate increase of 14%. As a reminder, our yearly premium is roughly 75% reinsurance and 25% specialty insurance. So these management actions, we expect these percentages to change, but only marginally. With these actions, we maintain our Quantum Leap targets of a net combined ratio between 95% and 96% and annual growth in gross written premium of 4% to 8% over the duration of the plan. Profitable growth is the objective of Quantum Leap. In addition to our premium growth in 2019, we're also preannouncing our expected cat load for the quarter and the year. The fourth quarter was heavily impacted by the Japanese typhoons, where we are a lead reinsurer. The net impact to SCOR of cats is estimated at EUR 343 million after retrocession and before tax for the fourth quarter and at EUR 665 million after retrocession and before tax for the full year. This of course has been the center of discussions that we have started to have with our Japanese clients around the April 1 renewals, and our focus is getting back to a profitable position quickly. This concludes our overview. And Laurent and I will now take questions -- any questions you might have.

Thank you very much, Jean-Paul. So with that, we can start the Q&A.

[Operator Instructions] Our first question is coming from Vikram Gandhi from Societe Generale Group.

I've got 2 questions. Firstly, can you remind us on how should we think about the headline 2.8% in price improvement. Is that fully comparable to the figure from last year, which was described as being risk adjusted? Because based on your comments I gather that the change in the loss costs trends is not being factored in that 2.8%, and hence we get only 1 percentage point underwriting profitability improvement. So that's question one. Secondly, on the dip in premiums, you've mentioned it very clearly that those were given up voluntarily. However, since most of these quota share contracts, I'm assuming, they weren't really onerous from a capital perspective. So it would be great if you can describe the motivation behind sacrificing those volumes?

Okay. On the first question, the 2.8% is comparable to the 1.6% of last year. The -- what we call risk -- and this is why we took out the term risk-adjusted, because it was creating confusion. The risk adjustments that we meant was not our increase in loss trend, but adjusting the programs to be able to compare on a like-for-like basis. So in terms of how you should interpret it, the 2.8% is basically the [ facial ] price. It's the increase in spending for same unit of exposure between 2019 and 2020. And the 1 point of increased profitability includes that price increases, but also includes our increased view of risk. So the 1 point is really what should translate into an improvement of the profitability.

Okay. Okay. And just coming back on that. So the 1 percentage point improvement is net of the retro effects? Or that is yet to filter through 1 percentage point?

No, it's gross of the retro effects, but our increase of retro between 2019 and 2020 is very limited and the increased budget we have spent represents 0.2 points of combined ratio. So the gross and the net is very similar. Regarding the quota share contracts, that was your second question, right?

Yes.

Regarding the quota share contracts, there's roughly 10 contracts that represent the bulk of reductions. The majority of these are in China and the U.S. China, it was focused around 3 lines of business: Property, Motor, and Credit and Surety. And there, we had been pushing for price increases for a number of years. And last year we received some price improvements, and this year we received some additional price improvements, but not sufficiently, and the trends were basically exceeding the price increases that we were able to get. That's why we decided to reduce. On the U.S., the book, I'd say 2/3 of the reduction in the U.S. are focused around Property as property quota shares. There, what we're seeing is the margin that's ceded to the reinsurer, in our view, doesn't pay for the cat, and that's why we decided to reduce. There's also a limited number of quota share Casualty treaties that we reduced, and there is more a function of the perimeter that the client wanted to cover, including some segments that did not perform well and where there was remediation actions taking place. And we thought that that changed the economics of the transaction and decided to reduce as well.

Thank you. Thank you very much, Vikram. Let's go to the next question.

The next question is coming from Jonny Urwin from UBS.

Just 2 for me, please. So firstly, I guess, it was a bit puzzling to see the pullback in reinsurance today, given you grew 16% into reinsurance through 2019 when your rates, perhaps, weren't as good. And then to pull back just as rates are getting better in places, it seems -- I guess, obviously, you've explained that by various underpriced risks, but the super bearish view on that would be that you've grown strongly in a year that perhaps you shouldn't have, had a big hit in Q4 that surprised us and then were [ retrenched ] just as things are improving. What would be your defense of that very bearish view? And then secondly, just on growth, I mean, how confident are you that you can get back within the target range for 2020? And what will be the levers to get there?

Okay. I think both questions are linked. So again, going back to these, call them, 8 to 10 treaties where we took action. If we had kept those treaties constant and then did not reduce our shares on these, the growth we would have seen on 1/1 would have been in line with the Quantum Leap. So those really limited number of treaties, 10 out of 8,000 that we renewed, are really a big driver of the premium volume. Why -- looking at your question on bearish, I think, again, in 2019, we were -- we saw a large price increases. As you said, in 2020, we see these price increases actually continuing and accelerating. I think the key question with price increases is always, are they keeping up with loss costs? And what we saw in 2019, our view is, it was actually exceeding loss cost, and then when we received additional information throughout the year, we realized that actually was not the case. And that's what led us to review our position and our view of risk entering 2020. And in some cases, in some lines of business, we saw loss costs being smaller than the price increases, for example, in Aviation, and especially, in general aviation. And then we saw other lines of business where we believe the price increases were not sufficient compared to the increase of loss costs. And another example of that is Engineering. So I think it's hard to say -- to paint the market with 1 broad brush. It's very segmented and fragmented by line of business and by geography, and that's the approach we took. It was really client-by-client, market-by-market. For the rest of the year, we believe that the portfolio renewing in Japan, in the U.S. and elsewhere, we expect to have stronger price movements than what we've seen at January 1. 80% of the European treaties renew at January 1. And so they're a big driver of the overall volume. In the U.S., if you look at the information we sent you, in the Americas, we saw price movements of almost 5% across our portfolio, and we expect this to be at least at the same level, if not more, for the remaining renewals. And so I think the outcome of the renewals really drive how strong our growth is for the rest of the year. And just to finish, the January 1 gives you a picture in a point of time. The improvement of the portfolio and the increase of premium will take time to flow through the financials. Similarly, the 16% growth that we've seen in '19 will continue to flow through the financials in 2020. So again, we believe that those 2 combined will keep us within the range of 4% to 8% for 2020.

Thanks very much, Jonny. Let's go the next question, please.

The next question is coming from Andrew Ritchie from Autonomous.

I wonder if you could give us a bit more thinking around your cat budget or cat assumption of 7 points. I mean, it's the third year now where you've materially missed the cat budget. And I appreciate some of that might be down to the quirks of high Japanese exposure. But given you talked about worrying more about loss costs and the impact of climate change, what are your thoughts on the defendability of your cat budget? And the second question, sorry, it's following up on the previous question. The way you're talking, you're giving us concern that the stuff you wrote in 2019 was just underpriced, because you're saying, throughout the year, we realized that loss costs were much higher. Is that really the message you're trying to give us? Or are you're just saying that it was lost possible higher on certain parts of the [ book ] -- but those are the parts of the [ book ] that we've now shed, but in aggregate, we still were happy with the profitability of the business we wrote and put on the books last year. There's a slightly confusing message coming out.

Okay. On the first question on cat budget, on the -- as you say, it's the third year that we've exceeded that budget. This year and last year was really driven by Japanese portfolio. We're taking significant action ahead of the April 1 renewals in 2020 to reconfigure our portfolios, and not just pushing for price increases, but also repositioning our portfolio, and that should lead to, I'd say, less exposure to frequency events. Globally, we're seeing an increase in frequency of cat events and that would be a driver to increase the cat budget. But there's also 2 phenomenas that would counteract that. The first would be price increases. So as we're seeing price increases in Property in general, and then cat, in particular, that would be a drive to reduce the cat budget. In addition, as I mentioned, we're taking underwriting actions to reduce the exposure of our portfolio to frequency events. And that's also a driver for a reduction in cat budget. So I think having these positive and negative effects, we believe that the cat budget of 7% remains a viable budget for 2020. On your second question about -- on the pricing, we'll give you at the Q4 result presentation our view of the normalized portfolio, and you'll see that it's on the upper range of what we expected, and this comes after the price increases we saw in '19. And this is where we did a review of certain segments and it's -- as you say, it's not generalized, but it's focused on a few areas and this is where we took action. One of them being Property, and cat, especially the frequencies of the cat. Does that answer your question?

Yes, kind of.

Okay. Thanks, Andrew. Let's go to the next question, please.

The next question is coming from Kamran Hossain from RBC.

Two questions. The first one is just what would the growth look like -- and apologies if I missed this -- if you strip out the impact of the large quota shares you didn't renew? And the second question related to that is how much capital do you think you've got to redeploy from not renewing those bits of business?

On the first question, if we did not reduce on those quota shares, our growth would be around 4% to 5% at January 1. On your second question, we've -- our action has resulted in some freeing up of capital. But again, when we -- when we put together our plan, the capital consumption is one of the factors we take into account. And so our premium growth of 4% to 8% per year already factored that into account. How much capital we freed up in the year is really -- it's not how we look at it for the rest of the year, it's basically as long as we fit within our plan, which we know should be fine. Here, we're starting a little bit below plan, and so we have some margin to -- for the rest of the year. And then how we use those -- that margin will really depend on the opportunity and how the market develops.

Thanks, Kamran. The next question, please.

The next question is coming from Sami Taipalus from Goldman Sachs.

Just my first question is, just coming back to this issue on the cat. I'm sort of struggling to -- just the clarity on this issue here a little bit. It sounds like the issues you're highlighting are particularly on underestimating claims inflation potentially in the past or particularly related to cat business. And obviously, the renewals later in this year are quite heavily weighted towards cat business. So my question, I guess, is how confident can you be that you can actually achieve growth with those renewals and that there's not [ deferred ] remedial action to be taken, I guess, particularly given that you've had quite a big loss in Japan during Q4. Then my second question is, how much of this revision was already in the plan for the Quantum Leap plan? And how much is new during Q4?

So on your first question, I think how much growth the risk for the rest of the year really depends on how the market reacts. In Japan, after 2 consequent years -- 2 consecutive years of large cat activity, we expect price increases to be high double digits. And so if our expectation is fulfilled, then there will be opportunity to grow there. In the U.S., you've seen that there's been programs exposed to Florida, where there's been Irma loss creep, even loss creep from the 2018 losses. And this has to be reflected, again, in pricing. So depending on how the market reacts will really drive our growth opportunities. We have the capacity to do so, then it would be just a matter of the market reaction. On your second question regarding how this January 1 reflects the plan. As I said, we had anticipated entering January 1 that there'd be more reinsurance reaction to losses in '18 and '19. It was more muted than we expected. The strong price increases on the primary side, more or less in line with our expectation. And so for the rest of the year, we have a view of the market improving better than what we saw at January 1, and our plan is based on that.

And then one thing, perhaps, on the insurance, I would say, is we had the symmetrical surprise on the upside, i.e. positively surprised by the rate acceleration we've been noticing throughout the year into Q4 and into 1/1. Now admittedly, 1/1 is not as important a season on the insurance and tax side. But nonetheless, here we have been doing better than the plan on the specialty insurance front, so partly compensating the reinsurance trend.

Can I just very -- when you talked about those rate increases for Japan and the U.S., are you saying basically that's what you need to be able to grow at those renewals? So if you don't get that sort of level, then it could potentially be difficult.

Yes. If there's no further -- if the reaction at January 1 is similar to what we see in April and June, July, I think we may have to take some remedial action. And again, keeping in mind that once we strip out some exceptional cases, the overall growth we had seen for the rest of the portfolio is between 4% and 5%. And in the U.S., for subsequent renewals, there aren't as many large quota shares as we saw at January 1.

Thanks, Sami. Let's go to the next question, please.

[Operator Instructions] Our next question is coming from Thomas Fossard HSBC.

Two questions on my side. The first one is taking into considerations the development we are seeing currently in the U.S. casualty market. Could you please update us on your view, and potentially if you're starting to see, I would say, maybe a better opportunity to build or accelerate the building up of your book there? What would be also here the necessary price increase that you would expect before having this acceleration? Doesn't seem that at 1/1 yet, we've got this significant shift in business so far. Second question would be, maybe for Laurent, on the specialty insurance side. Here also, in spite of a significant price increase, it doesn't seem that this is leading to significant pickup in volumes. So do we have a bit of the same picture that is in treaty reinsurance, where price is going up, but it's not sufficient yet in your view to write the business? Would be interesting to get that picture as well on this side.

I'll start with the first question about U.S. casualty. So we are seeing a pickup of loss trends in U.S. casualty, and in particular, some segments. As an example, medical malpractice. We see loss trends increasing double digits. Similarly on commercial auto. The price increases that we're seeing on the primary side are also significant. And it really depends whether the business is more E&S or more admitted. But there, our view is the price increases are trying to play catch up with the loss trends. And therefore, our view of those segments remains negative. There's others, like umbrella or excess liability, which we see also high-single-digit, low-double-digit loss trend increases. But there, price increases have been significant and are outpacing these loss trends. So there we remain more bullish in those segments. So again, the -- there are not very many U.S. casualty treaties renewing at January 1. Where we reduced on those was really more a question of perimeter than underlying performance of segments. And the bulk of those -- the remaining renewals come in between March and July. Sorry, just to finish it. We see on many of those treaties reinsurance improvements in addition to price increases. So I think the 2 combined is -- we feel good about the development in those areas, again, by segment.

Okay. So if we were to think a bit forward, so 1.6% and 1.7% in the U.S., should -- if the market were to stay like this today, should we expect to see more shift coming into your books towards casualty versus property at 1.7%?

I'd say gradually. It's not just a question of what we want to do. It's also a question of how the market reacts and how much growth we can accomplish in this marketplace. So I'd say it's a gradual shift. Laurent, do you want to take that specialty reinsurance question?

Yes, sure. Just to make sure I understand your question, Thomas. Are you comparing the rate change on Slide 9 of 14% with a premium change of 16%? Is your question on why are we not going to premium more than that?