SCOR SE (SCR) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the SCOR P&C January 2023 Renewals Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would now like to hand the call over to Mr. Yves Cormier. Please go ahead, sir.

Good afternoon, everybody, and welcome to SCOR P&C January 2023 renewals. My name is Yves Cormier, Head of Investor Relations, and I'm joined on the call today by Jean-Paul Conoscente, Chief Executive Officer of SCOR P&C; and Romain Launay, Deputy Chief Executive Officer of SCOR P&C. Before we start, I would like to remind you that SCOR full year 2022 results will be presented on the second of March. So when it comes to the Q&A session, we will only be able to refer to the renewals information that is provided in the press release or in the slides, and I please ask you to consider the disclaimer on Page 2 of the presentation. And now I would like to hand over to you, Jean-Paul.

Thank you, Yves, and good afternoon, everyone. I'd like to share with you the outcome of the January 1, 2023 renewals. As a reminder, these renewals represent a little less than 70% of our reinsurance portfolio and almost 50% of our total annual P&C expected gross premium income for 2023. You'll find more information in the slides and press release distributed earlier today. I won't go through the slides. I wish to present you a brief overview of our achievements. We are very satisfied with the outcome of the reinsurance renewals in January 2023. These renewals marked a decisive shift in the reinsurance market dynamics. For the first time in almost 20 years, there was an imbalance in demand supply in the Cat market, which led to market resetting with bargaining power in favor of reinsurers. While the market roughly was limited to Cat, market hardening was generalized, driven by an increasingly volatile environment, continued unsatisfactory results for reinsurers and sustained high Cat loss activity. As announced during our Investor Day in November 2022, we tackled this round of renewals with a sole objective to improve the expected technical profitability and the risk return profile of our portfolio, leveraging the favorable market conditions. Our approach is underpinned by 2 key principles: optimizing capital allocation between lines of business and increasing portfolio diversification and technical results resilience. The favorable market environment helped us apply these principles while maintaining strong client relationships. Our underwriting actions led to a number of changes in both the profile and the profitability of our portfolio. Looking first at the portfolio profile, we pursue the rebalancing of our portfolio while optimizing the overall risk returns. We expanded our global lines footprint in what we view as segments yielding superior returns on capital. Our global lines EGPI grew by 11%, excluding agriculture. In that segment, we shifted the book towards nonproportional structures. On Cat programs, correlated charge in pushing for and obtaining increased cedants’ retentions, reduced frequency coverage, aggregates, proportional covers and better terms and conditions. Driven by the objective to reduce climate-sensitive volatility of the portfolio, we reduced our 1-in-250-year net Cat PML by 14%. At the same time, we also reduced our exposure to inflation sensitive lines. This led us to reduce our footprint in U.S. casualty and motor proportional business. In these lines of business, we view the market improvements as insufficient for the expected increase in loss cost driven by social and economic inflation. The impact of these actions on expected profitability has been significant. We achieved an average rate across the portfolio -- an average rate increase across the portfolio of 9%. Excluding the proportional portfolio, the rate increase achieved was 24%, including 35% for property Cat. This exceeded our revised forward-looking view of loss costs. The combination of these actions, reducing some business and increasing rates on others, led to a 2.5 to 3-point improvement in the expected net underwriting ratio with a 12% control reduction of our EGPI. I would now like to provide some additional details on 3 areas of note, the impact of our actions on the EGPI, how we led the property portfolio renewal and the impact on expected net profitability. Starting with the impact of our actions on the EGPI, we implemented the strategy outline in November of reviewing and remediating targeted underperforming client relationships and segments. Most importantly is the combination of our 2 actions. Firstly, reducing what we want to write less of and secondly, significantly increasing on business that we like. Taking a firm view of the need for improvement, we reduced our non-renewed 29% of the premium up for renewal, dominated by a small number of large premium volume relationships. The most significant segments impacted were proportional treaties across U.S. casualty, property, agriculture and motor. What is crucial to understand is that excluding these remediation actions, and the impact of higher cedants’ Cat retentions, we grew the rest of the portfolio by 23%. 70% of this growth came from rate increases and 30% came from increased shares and new business. Despite the strong underwriting actions, our client relationships remain strong, as we review it as a consistent market, we required changes communicated early in the renewal process. We maintained our strong franchise in Europe and Canada and continue to see attractive opportunities in the European region. We grew the proportion of this region by 6 points versus 2022. From a line of business perspective, we continue to see excess rate adequacy in Engineering, Cyber, Marine and Decennial and targeted these segments for growth. As a result, we increased the share of Global Lines in our renewal portfolio by 7 points versus 2022. Zooming in on the property renewals, we had roughly EUR 1.6 billion of property premium up for renewal at January 1. Following up plan announced as early as Monte Carlo in September, we significantly reduced proportional in aggregate covers, redeployed the capacity to Cat XL programs, increase the retentions on Property Cat XLs, pushed for high double-digit Rate on Line increases and negotiated terms and conditions that restrict the coverage, which has been extensively expanded during the past 20 years of submarket renewals. We pushed market retentions towards the 1- and 10-year return period across the portfolio globally, resulting in retention increases ranging from 60% to 150% in major markets outside the U.S. and over 30% increases in the U.S., which generally had higher attachment funds. Looking at Rate on Line, which represent the price increase per unit of exposure before adjusting for underlying exposure change, the increases achieved were the largest seen in over 20 years with an average increase exceeding 70% on our North American portfolio and reaching almost 45% on our European portfolio. While pushing for these significant changes, we also realized our forward-looking view of Cat risk, incorporating an average inflation of over 10% in Western Europe and the U.S. and increased frequency and severity trends due to expected climate change effects. These changes should allow us to keep up with a fast evolving environment while positioning the bulk of the portfolio away from the most frequent type of events. Through these actions, we reduced the overall Cat limits deployed by 9% year-over-year and increased our net 250-year PML by 14% after incorporating our revised view of risk. The combination of these actions, reducing business that we don't like and growing a business that we like allowed us to reinforce a forward-looking view of risk and obtained improvement exceeding our expected loss costs. The net impact in improvement of 2.5 to 3 points of our expected net profitability across all lines of business and geographies. We achieved this while also delivering a more resilient portfolio with less climate-sensitive volatility and a significant improvement of our net risk return profile. Through these successful renewals, SCOR is confident that the current P&C cycle will continue. We're actively preparing the upcoming 2023 renewals and remain well positioned to take full advantage of an expected positive market environment. I will now take any questions you might have.

Thank you very much, Jean-Paul. So with that, we can start the Q&A. Can I please remind you to limit yourself to 2 questions each.

[Operator Instructions] We do have our first question from Andrew Ritchie from Autonomous Capital Management.

I just wanted to explore Slide 9, particularly the -- which talks a little bit about the upcoming renewals. Maybe Jean-Paul, just give us a sense as to where you still feel there are -- you've written on the slide margin improvement opportunities. I'm not sure what areas would be incremental. But you're also saying that slight additional capital available for deployment. I'm not sure what you mean by additional capital. Is that because of capital that wasn't deployed at 1/1? Or are you anticipating raising or finding additional capital in some form or another? Maybe just clarify what you mean there? And the only other question was on -- could you just talk a bit through the outwards Retro experience at 1/1. I think your net margin improvement of 2.5 to 3 points is net of any increase in Retro. But just to clarify that and clarify the shape of the outlook Retro.

Thank you, Andrew. On your first question for the upcoming renewals, we do see opportunities to further improve the risk, let's say, the risk return profile of the portfolio. Compared to the January 1 ones, which are very heavily focused on Europe, the April and June, July are focused on regions which already have been gone through significant remediation actions last year. And so we think that the market cycle will continue as it has in January, and therefore, there will be interesting opportunities for us to continue to improve the portfolio. In terms of the capital available, what we meant to show there is that we still have the capital required for right business that we want to write. So we're not constrained by capital currently in terms of business opportunities. On your second question on Retro, we expected a very difficult Retro renewal season, which was the case, and it was actually made more difficult by Hurricane Ian but we have a very good diversification of virtual between traditional and ILS markets. And that allowed us to purchase the Retro that we needed. On the Cat side, having written less Cat business, we also purchased less Retro limits and yes, you're right, the 2.5 to 3-point improvement is net of Retro, including the Retro cost.

Is there any significant change in your non-nat cat retro. I mean, for example, it was discussed in the past that you've grown more into man-made risk away from nat cat risk. But in the past, you were very comfortable there was a lot of Retro capacity available for non-nat cat to lay that off. Is that still the case?

We bought all the capacity that we're looking for. It was a difficult market in all segments in terms of reinsurance or retro but capacity was there at an increased price, but as anticipated.

Next question, please. Our next question comes from Vinit Malhotra of Mediobanca.

Yes. Jean-Paul. So just 2 topics as promised. One is the -- so you mentioned about Europe and Canada and Europe being much more a focus area. But I'm also seeing dramatically strong reduction in European wind PML, even, I think, stronger than the U.S. from just the looks of it. And I'm just curious whether you could update us a bit about the European wind PML, but also any commentary you might have on the Cat approach. I understand that you reduced the new proportional in XL, but anything specifically that you would like to add would be welcome? Second thing I'm curious is the -- is obviously U.S. Casualty and Motor were kind of being talked about but Credit and Surety as well has been listed, and that's a line that I think I remember you got into quite involved way after the credit crisis. But I mean, it's just surprising that you're taking an excessive stands here. Can you just comment a bit about the reasoning behind that, please?

Thank you, Vinit. On the first question in European wind storm, it was really driven by actions on a few programs that were big drivers of European wind capacities. As you know, we support some of the large European companies that have not just European wind, but also global programs covering European wind and U.S. wind and other perils. And so some of the actions we took on those programs had a significant effect on the overall European wind capacity. Also the move of the retention, as you can see in Europe is where there was the most significant move. And so that put us at a more higher level in terms of PML consumption.

So it was just -- was it intentional, or it just happened along with the portfolio?

Yes. Yes, it was intentional, yes. On your second question, Credit and Surety, we -- from COVID, there was a lot of concern about the line of business, which has not materialized. At the same time, the credit insurance companies have done significant improvements to the portfolio. So we consider the underlying business is still attractive. However, as we have a forward-looking view on the economic situation and see heavy headwinds with regards to recession, we think that the -- this upcoming environment required some improvements on the underlying reinsurance terms that we were not able to achieve in many instances. And therefore, we took some actions to reduce our share. So here, it was more curtailing our shares on these programs. In terms of premium, the overall premium income for Credit and Surety remained stable compared to last year. And so the share decreases were compensated by premium increases on the primary side.

Can we go to the next question?

Our next question comes from Thomas Fossard of HSBC.

One question would be related to the guidance regarding the profitability of the current year to the 2.5% to 5% -- sorry, 3% profitability improvement. Can you help us to link this with your current guidance of 95% combined ratio. Obviously, there is no mention on any combined ratio guidance in your release this morning. So any -- any view on that will be helpful. The second question would be related to the EUR 358 million of additional SCR booked at 9 months in your Solvency II for operating capital deployment. It looks a very high number already at that time, but now looking at your minus 12% EGPI, it looks very, very -- too high number or maybe there is something that we missed in terms of understanding? Or would that mean that actually there will be a significant release of this potential growth that did not materialize fully at 1/1. So yes, also, any comment on that would be greatly appreciated.

Yes. Thank you, Thomas. On your first question regarding profitability. So what we're presenting here is the front book underwriting in 2023 at January 1. That should be compared to the assumptions we had for the front book underwriting at January 1, 2022. So the portfolio takes a couple of years to be earned through on a financial year basis. This should provide you some additional comfort that we can restore profitability and achieve a net combined ratio of 95% or below. Of course, these numbers will be different under IFRS 17. Regarding the second question that you had on the SCR, the volume decreased, but also, as you may have noted, the assumptions, such as view of risk have increased. So there's no direct translation into the SCR that is -- that we can derive from that. And this should not be taken as a signal of that capital will be released. As usual, we'll communicate a Solvency II metrics as part of the next quarterly results disclosure, and then we can discuss the topic further at that time.

And maybe one more, which might be related to the -- to my second question. Could you explain us what drove the decision to further shrink the Property Cat PMLs by 14%. What I think that at the Investor Day back in September after having achieved a 21% prediction, I think the message of the group was to say probably we've done what we needed to do. So maybe what we can say well on this.

Yes. I think with the increased view of risk, what we want to do is give better certainty of achieving our Cat budget of 8%, achieving our net combined ratio target of 95%. And so we increased the view of risk and through that, that forced us to take some tough decisions on a number of programs, and that's what led to the PML reduction. So I think the Cat market is as good as we've seen it in a long time in terms of the underlying metrics. Still, the portfolio is Cat, and so it has significant volatility as well. And so what we're trying to do is get the right return for that volatility and manage the volatility.

Can we go to the next question, please?

Our next question comes from Freya Kong of Bank of America.

First question, so you've undertaken significant portfolio rebalancing at January renewals. EGPI down 12%. Should we expect to see further rebalancing or restructuring over the coming renewals? Or would you say that the vast majority of this is now complete? And secondly, you've talked about conservative forward-looking claims inflation assumptions, which drove you to be more cautious in casualty and merger proportional. How comfortable are you with the claims inflation assumptions on your existing reserves? Did the Q3 reserve charge adequately cover this?

So on your first question of the rebalancing. As I mentioned before, there is the portfolios that come up for renewal for the rest of the year have already gone through significant remediation in the past. So the market remains hard in our view, for those renewals, but we'll have to see the extent to which terms continue to improve. So we believe that there's still opportunities for us to attract good opportunities and there may not be as much remediation needed as it was on January 1. With regards to your second question, related to inflation. So at January 1, the claims inflation ranges that we used range between 4% and 14%, depending on the geography and line of business with the highest inflation observed in the U.S. and Europe. There is no easy reconciliation with the reserve strengthening as this was assessed across all underwriting years on top of the inflation assumptions that were already included in the reserves. So I think the underlying assumptions are consistent but I think it's difficult to do a direct comparison.

Can we go to the next question, please?

Our next question comes from Kamran Hossain of JPMorgan.

A couple of questions. First one is just on the Retro spend. I know we've -- a couple of you have asked about this already. Maybe could you just give us the absolute change in Retro spend year-on-year just as a percentage of your absolute terms, just interested in that and how that might fare versus last year? The second question, coming back to the I guess, the change or the improvement in the underwriting. Obviously, it's very positive news. I don't think it's good for SCOR and good for the industry. I think I was interested in your comments around an increased view of risk, which again, I don't think is solely related to SCOR. But it probably suggests you're 95% -- towards 95% last year is probably the wrong starting point. But then again, the 103% that you're out of the 9 months, again, probably the one starting point. So I'm just trying to get an idea of where we should kick this off, where we should actually be thinking about for that 2.5 to 3 points to earn through over the next couple of years? Because I assume if you're running at 95% and then you had 2.5 to 3 points, you probably would have kept a bit more business. So just interested in that? And any color on that?

On the rental spend, we don't communicate the figures you're looking for, but to give you a rough idea of the price increases year-on-year -- for our peak perils on the Cat side, price increases were between 20% and 30% per current players and that's to be compared to the Rate on Line increases we got on the business we accepted, that was the figures I presented previously. So -- and of course, on the Retro side, it was less proportional and less aggregate available as we had signaled before and anticipated. On your second question, again, repeating what I said before, what we see here is the underwriting year 2023. And really, what we're focused on is achieving the net combined ratio of 95% that we indicated previously. So that's really our focus.

Can we go to the next question, please.