SCOR SE (SCR) Earnings Call Transcript & Summary

Hello. Good morning and good afternoon, everybody. Welcome to Deutsche Bank's tenth annual global financials conference, albeit in a somewhat different capacity this year. My name is Hadley Cohen. I'm part of DB's European insurance research team. I'm delighted to be able to present today 3 members of SCOR's management team. We're supposed to have Mark Kociancic, Group Chief Financial Officer. At the moment, he is having technical issues. So hopefully, he'll be able to join us shortly. But we're also joined by Jean-Paul Conoscente, the Chief Executive Officer of SCOR Global P&C; and John Jenkins, the CEO of P&C Re in the Americas. I was going to hand over to Mark to make some opening remarks. But given he's had some technical issues, I may jump straight into the Q&A. [Operator Instructions]

So in Mark's absence, Jean-Paul, I think I'll start with you, if that's all right. I guess one of the biggest areas of uncertainty at the moment with regards the potential future COVID losses relates to trade credit insurance. I think you've mentioned that this accounts for around about 7% of your premium base of around EUR 400 million, give or take. First of all, I guess, is there any update you can provide on claims experience so far in this business?

Yes. Thank you. We don't have any update in terms of claims experience. We probably don't expect to see much until -- in terms of claim activity until Q3, more probably Q4. Right now, as we said before, this is a line of business that's going to be, of course, affected by the economic activity. What's difficult to assess is the impact of government intervention. You've read in the press many European governments, German government, the French, the Dutch, the U.K. and then -- and the string continues, are putting in place massive programs to shore up trade credit in the fear that trade credit insurers will withdraw capacity and then make the economic situation worse because of the lack of exports and imports. So -- and like in the case of Germany or the Dutch scheme, these programs are unprecedented. And so in Germany, the government is basically taking all policies issued from January 1 onwards as the main reinsurer, with trade credit insurers keeping a very small portion of the risk. So -- and the Dutch is very similar. So that's the difficulty we have right now, is assessing the impact of these government schemes. In this uncertainty, we think using the financial crisis, it probably provides a good benchmark given the lack of clarity we have today. And I think the governments are also kind of scaling their intervention with that in mind and trying to make sure that the economic crisis today is worse than the financial crisis '08-'09, scaling their intervention to kind of get back to a similar situation.

So just picking up on a couple of the points that you just made there. I mean in terms of parallels to the financials crisis and what have you, I think some of your peers have sort of mentioned combined ratios around 100%, maybe slightly higher than that for this line of business, and that's probably not too dissimilar from the experience seen for some of the better underwriters back in global financial crisis. I mean do you think that's a reasonable proxy to think about? Or do you even think that looking at it from a combined ratio perspective is the right way to look at it given all these government interventions and what have you as you're talking about?

Yes. It's difficult. I think looking at a combined ratio point of view is a bit difficult as it really depends on which underwriting year is affected. As I said, the underwriting year 2020 is likely to be less affected because of these government interventions. 2019 is likely to be more affected, but that's from an underwriting year point of view. From an accounting year point of view, how the 2 mixed together will produce the combined ratio. And so I think it's difficult to tell. I think 100 or something slightly above 100 is probably a decent benchmark. But we think that using -- doing it like as it was from the financial crisis is probably a better approach than trying to pin -- to have a loss pick or a combined ratio for that line of business.

Okay. Cool. All right. If we think about more broadly, I mean, I know it's still early days and the vast majority of your portfolio renews in January. But can you talk about to what extent you're seeing increased demand for the product offering on the P&C side? And do you think that the -- are these opportunities and benefits enough to offset broader structural pressures that we're seeing in the market?

Yes. So we have seen opportunities from clients that have been affected in Q1 by the impairments, the investment impairments. A number of companies bought additional quota share, bought additional limit. I'd say the number of purchases made to date, additional purchases, remains fairly limited. In total, we probably see some 15, 20 opportunities. But I expect that this will significantly increase in Q3 and Q4 once insurers and reinsurers are having a better idea of the impact of COVID-19 to their P&L on the asset as well as on the liability side. And we expect to see more programs coming to the market Q3, Q4 and then 1/1. We remain optimistic that there's opportunities for growth through this increased demand.

I mean, I -- so I guess some of your competitors have talked about, a, the potential for seeing a sort of flight to quality within that increased demand for reinsurance. To what extent do you agree with that? And how does -- how can SCOR take advantage of that, I guess?

Yes. No, absolutely. It's something we started seeing in the April and May renewals. June is more focused on Florida, and it's more transactional. So not so much in June 1 but May, April. And then we're seeing similar trends in July as well. So for us, of course, being one of the remaining AA-rated reinsurer, we're always part of the conversation. So I think the first step to translate this into growth is to have the opportunity to see the program and to participate on the program. And given our standing, we have opportunity. Then the next step is whether the price meets our expectation, and that will vary on a case-by-case basis. But right now, I can tell you our renewing teams are very busy. They have a higher number of submissions than in the past and looking very carefully at all the opportunities.

What about on the pricing side? I mean we've already started to see some positive momentum in the recent renewal season. I mean is this crisis going to be big enough to drive a sort of genuine hard market, do you think?

We're seeing that already. I think it started with the April 1. The crisis really became crystallized, I'd say, in the last couple of weeks of the April 1 renewal. But then -- and already, April 1 was probably a harder market than we saw January 1. And then it's only accelerated since then on the reinsurance side. As well -- on the insurance side as well, you can see that in the first quarter, the insurance rate increases were starting to decelerate a little bit. And now you see a reacceleration of these price increases in March, April, and we expect that to continue throughout the rest of the year. So I think both on the insurance side, you see renewed price increases with significant increases across Property and Casualty on the reinsurance side from what we've seen, and this is primarily U.S.-driven renewals in May, June, July. But we see the market hardening right now, much more than just a few weeks ago. And it looks like every week that goes by, the market is getting harder and harder. And it's not just about pricing. It's also about terms and conditions, clearer wordings, removal of, I'd say, very broad wordings, event definitions and going back to a balance more in the reinsurance table right now.

So I guess the natural question then from that, given that the pricing is accelerating and what have you, I mean, I guess, do you think it's fair to say then that your -- should we now assume that your combined ratio ambitions for -- in Quantum Leap of 95% to 96% are too conservative in light of this environment?

Well, 2020 will definitely be affected by COVID-19, so we're still...

So I guess on an ex cap-type large loss basis or normalized?

Normalized -- then normalized for COVID-19, potentially it's a bit early to tell because what happens with the price increases on the short-tail lines like Property, you see that right away. But those price improvements may be somewhat muted by the COVID-19 losses coming through on the portfolio. On the Casualty, even though we believe the underlying performance of the portfolio is improving, I think we won't -- though not be reflected in the results probably until 2 years later because you want to make sure that from the reserving point of view, you maintain a conservative reserving approach. So the short-tail lines will be reflected, let's say, fairly quickly, and the combined ratio price improvements will be reflected in the combined ratio. But that will be probably negated by COVID-19. On the Casualty, those are improvements that may not be reflected in the combined ratio until -- we expect the price improvements from '19 to start showing up in the latter year of 2020. And then the price improvement we see in 2020 probably will not show until the end of 2021.

But do you think that it's fair to say that directionally, the underlying trends are moving better than you expected when you originally set the 95% to 96%?

Definitely, we didn't anticipate the -- of course, we didn't anticipate the COVID-19 at all. But what we did anticipate is a market as hard as what we're seeing today.

If I just come back to the April renewals. I mean I think you talked a lot about them moving up into the higher layers of the contracts. And to what extent are you already doing this with other cat exposures? Or is there more work to be done in that respect? And what does that mean for -- how should we think about that in the context of volatility of losses and what have you?

Yes. This was specific to our Japanese portfolio. The development of the Japanese portfolio was really impacted by our relationship with Sompo, who became a shareholder at SCOR and then exited our shareholding. And that affected our positioning on the -- our Japanese programs. And as a result, we had a, I'd say, heavier-than-average concentration on the bottom of those layers. And when we did this renewal, we basically redeployed capacity more across the rest of the programs. But in other countries, U.S. or Europe or elsewhere, we tend to be more across-the-board players. So that comment was really about Japan. If we look at the April 1 renewals, with the price increases we received, if we had not done this redeployment of capacity, we probably would have grown at April 1 probably in the 20% to 25%. Our growth was more muted because we moved the capacity from layers that were big premium generators but also higher-frequency loss layers to more remote loss layers with the lower premium. And that explains our lower, let's say, growth rate. Going forward, we're monitoring our portfolio across, let's say, all bands of loss types. And so in Japan in particular, which had been affected by typhoons in '18/'19, we think we'll be less exposed to small- to medium-sized typhoons than in the past. And elsewhere, our portfolio will have a similar profile to what it does today.

Cool. Thanks very much, Jean-Paul. John, whilst we've got you on the phone, if I -- may I ask you a question on social inflation? I mean I think SCOR has done a very good job so far in avoiding this issue given, I guess, relatively limited exposure to the Casualty lines affected. Can you talk about to what extent you think the price increases that we're seeing in those lines are now enough to reflect the risk associated? And at what point would you consider meaningfully increasing exposure to these lines of business, if ever?

Okay. Yes. No, I think that's fair. SCOR has been underweighted in Casualty and specifically in U.S. Casualty. We've seen social inflation coming as an issue happening already prior to the whole COVID situation. Frankly, we were a little disappointed at the January renewals with the ability to obtain the needed increases that we thought were appropriate given social inflation that we saw happening in the marketplace. Now I think with the -- probably in combination with the COVID, we're now seeing improved abilities for both our clients on the insurance side to get the needed rate increases as well as on the reinsurance side, where previously you had this kind of the U-shaped phenomena that everybody talked about, we've seen that phenomena disappear over the last month or so as far as the ability to obtain reasonable terms on the reinsurance side in addition to the primary insurance improvements. So we're feeling better about the ability to obtain the needed results given social inflation, but it continues to be a factor. We expect it to continue to be a factor going forward. But we feel much better about the ability to obtain the needed increases that we're seeing. And we're seeing that reflected in multiple ways of the -- you talked about the flight to quality. I think that insurers are looking to team up with reinsurers that will be better long-term partners with them. We'll probably see more in the way of being able to obtain differentiated terms to reflect what we think is the appropriate price for risk. So we're seeing that in multiple ways. But I think we're still being relatively prudent as far as the weight of the portfolio, of the Casualty versus Property, so we don't expect to see radical changes there. But we are feeling better about our ability to price properly for the liability exposures that we're taking on.

Okay. Excellent. Thank you. I think we hopefully have Mark on the line. Mark, you...

Hi, Hadley.

Hey. Great to have you. So if I turn my attention to you, if that's all right. I guess the first question I'd like to ask is around the dividend decision that came earlier in the week. I guess from the press release, it feels like the Board's decision to propose no dividend was solely driven by the regulator. I guess, first of all, do you think that's a fair comment? And secondly, if that is fair, why has it taken so long to make the decision?

Well, the Board obviously takes like every piece of information into account. It was heavily, heavily influenced by the AOP -- ACPR guidance that was provided recently. So the -- why has the decision taken so long? It's really trying to get more clarity from the regulator on how strong their conviction is and also to gain a better understanding of where we are in this crisis that remains ongoing. And then we had to work within the framework of the timetable of having a June 16 AGM, and then having this disclosure of the resolutions done kind of at the last moment so that we had maximum time to digest all of these factors. But we were prepared internally for any decision, where if the Board decided to pay the full dividend, that's something we were prepared for. We were prepared for this decision which they took, which was not to pay anything now and see where we are in the fall. So we'll just have to see how this develops moving forward.

So I guess linked to that, I mean, if we were to assume the virus losses develop as you currently expect them to and nat cats are within budgeted amounts, I mean, can you -- how can we think about your appetite to sort of either reconsider payment of the dividend or capital returns to shareholders more broadly before next year's full results?

Well, I mean, that's the whole point. I think the ACPR tactically chose the October 1 date because you're not allowed to pay a dividend based on the 2019 results after September 30. So what that means is that you basically have 2 options thereafter. You would have to convene another AGM or an extraordinary general meeting to put forward a resolution to have a special dividend. So that's one option. I think the other option that remains on the table is share buyback, which is provided within the annual resolutions of the AGM. So those will be, I'm sure, on the table for consideration later on this year for -- by the Board. And I think at that point in time, there will be a much better understanding of the crisis by the regulators not only from a P&C and Life pandemic point of view but also from financial markets, economic impact and any kind of legislative or government backstop-type policies that may have been developed to mitigate certain risks. So I think what the ACPR was doing was really trying to have an abundance of caution as this crisis unfolds until there's more clarity, to the extent you can get more clarity, by October 1.

Makes sense. Okay. I guess sticking on the capital side of things. I think you said on the 1Q call that you remain focused on the organic objectives currently. But can you just talk about under what circumstances you think it would make sense to consider M&A opportunities? I guess I'm thinking about added scale, improving pricing power, diversification and what have you. And can you -- do you feel that you can achieve your ambitions in this respect to the same extent organically?

Yes, definitely. And I think the organic plan is still very, very viable. And we will be entering a, if we're not in it already, I guess, a hard market for P&C. I'd say the only headwind is really more on the investment yield side, where you've got a lower -- structurally lower interest rate environment pretty much regardless of which currency you're looking at. Overall, I think M&A will be somewhat more muted. There's obviously been a lot of distress in share prices for the sector. And I think any kind of hostile approach will certainly not work in this environment. And boards that -- for companies that have a capital event and maybe some strategic issues, they could be more accepting of an M&A option to be bought out. But those boards will want to extract maximum value, and I suspect they will pause until there's more clarity in the market for the size of the exposure and the benefits of a hard market globally. So I suspect you would see limited M&A activity in general for the industry this year, probably more so next year once things begin to stabilize. And from our standpoint, it still remains a viable option if the opportunities arise. Obviously, our share price is not where we would like it to be to help facilitate any kind of possibility, but I think things will change as we move forward.

Okay. And then on the -- I guess in light of the ongoing backdrop, I think Jean-Paul has talked about and you talked about a potential hardening of pricing and what have you. I mean, how are you thinking about your Quantum Leap ambitions now? I mean presumably, some of these are perhaps more achievable than they would have been previously. More may be -- some may be more challenging to achieve perhaps on the cost side, for example. And can you talk about how you're thinking about the different moving parts within that?

Mark, do you want me to start on the business side, on the P&C side?

Yes. Go ahead.

So on the P&C side, the -- we had a number of initiatives, redeploying our capital where we thought the value creation was better. We've continued to do that throughout the year and think that's still achievable. The 95%, 96% combined, we've already discussed. We think that's reasonable over the remaining part of the plan. The growth, the 4% to 6%, again given the opportunities that we're seeing and the price increases we're seeing, we believe that's still very much achievable. And then we had a number of initiatives about the digitization of our business, more innovation, and I think this -- the COVID-19 crisis has put that more into focus and actually has accelerated those initiatives. So on the P&C side, we feel that we're pretty much on track to meet the majority of our objectives. Mark, do you want to talk about the rest of the group?

Yes. Overall, I still think it's -- the plan itself is very viable. I still see significant ability on the top line to generate the premium levels that are necessary to complete it. And I think that can be opportunistically applied where we're -- we may have some decreases in certain areas, for example, on the P&C side, and we may have a reduced level of premium here and there on the Life side. But I do think we can reallocate capital to facilitate growth elsewhere, and this is part of the benefit of our size. We have the ability, I think, to expand the -- our participation on panels where we like the business. So overall, I'd say structurally, we're set up for that internally in terms of having the underwriting, pricing, referral process like the basic nuts-and-bolts infrastructure to support significant expansion of growth in various lines. So that, to me, exists. It's really finding the opportunities and then managing the crisis in an ongoing manner. Part of the issue, there's been a bit of a conservative play in the industry in the opening stages, these opening months, where you're trying to maximize resources in the ultimate parent because you don't have certainty on the types of losses, size of losses. And if there's a need for liquidity or capital fungibility in a specific subsidiary, you need to be prepared for that. And that, I think, is continuing to diminish, become clearer in its scale as time goes on. And so we're also concurrently looking at opportunities on how to revise the operating plan of the group, the annual operating plan of the group, within the current environment. So overall, I think the strategic plan is still good to go. We're looking at this as more of an earnings event-type structure for 2020 but certainly with some opportunities on a moving-forwards basis.

Excellent. Thanks very much. I'm conscious that we have less than a minute left, so I think that's probably a great place to finish off. Gentlemen, thank you very much for joining us. Very much appreciated and very interesting. Thank you.

Thank you.

Thank you.

Have a good day and stay safe, everybody.