SCOR SE (SCR) Earnings Call Transcript & Summary

Welcome to the SCOR P&C January 2024 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. Thomas Fossard. Please go ahead.

Good afternoon, everybody, and welcome to the SCOR P&C January 2024 Renewals. My name is Thomas Fossard, Head of Investor Relations. I'm joined on the call today by Jean-Paul Conoscente, CEO of SCOR P&C and Romain Launay, Deputy CEO of SCOR P&C. Before we start, I would like to remind you that SCOR full year 2023 results will be released on the 6th of March, and the conference call will take place at 2:00 p.m. CET. You will shortly receive an invite. So when it comes to the Q&A session, we'll only be able to refer to the renewals information that is provided in the press release and in the slides. On Slide 2, can I please ask you to consider the disclaimer related to the presentation. And now I would like to hand over to Jean-Paul.

Thank you, Thomas, and good afternoon, everyone. I'd like to share with you the outcome of the SCOR January 1, 2024, renewals. As a reminder, these represent a little more than 60% of our reinsurance portfolio and over 40% of our total annual P&C expected gross premium income for 2024. You'll find more information in the slides and the press release distributed earlier today. January '24 renewals took place in an attractive underwriting environment, leading us to grow the portfolio at adequate rates while improving the balance and the quality of the portfolio. After a very hard market in 2023, we see increased capacity deployment from traditional reinsurance players at 1/1/2024 as well as continued increased demand from insurers. These renewals were marked by what we can be called the cliff effect, reflecting the reinsurance market discipline. At the right terms and conditions, structure and price programs were often placed or over placed. At aggressive terms, low attachment points or inadequate pricing programs were not fully placed. In this favorable environment for reinsurers, we achieved the key objectives laid out in our strategic plan forward 2026. First, we increased our allocated capital into attractive diversifying lines namely Marine, Engineering, IDI and International Casualty. Second, we accelerated the development of alternative solutions to address a client's growing demand for customized reinsurance solutions. Third and last, we maintain a prudent approach to climate exposed business and to U.S. casualty through disciplined underwriting. These 3 objectives translated into a premium growth of 13.6% and to an improved expected net underlying ratio by 1.5 points, excluding alternative solutions. Before providing you more details on the renewals, there are 2 things I'd like to stress regarding the premium growth I just shared. This growth is the result of SCOR seizing opportunities in attractive market environment. It is therefore higher than what we anticipate throughout the rest of our forward 2026 plan. The 13.6% EGPI growth is not to be translated one-for-one into insurance revenue under IFRS 17, insurance revenue is an unearned basis and had reflect the dynamics of the business renewed in the past 24 months. I will now go into the details on how we executed these actions in line with the Forward 2026 ambitions. Starting with preferred lines, our ambition was to grow, to develop an attractive treaty lines to diversify our portfolio and improve our return on capital. We delivered on this ambition at the [indiscernible] renewals growing our EGPI by 13.3% year-on-year across Marine, Engineering, IDI and International Casualty. We significantly grew our Marine portfolio as market conditions remain attractive. Growth was driven by new business, meaning our expected profitability targets, including a few large opportunities. We leverage our global client approach and underwriting presence in key markets to capitalize on these new opportunities. In Engineering, organic growth was fueled by a considerable flow of new investments in many markets, continued rate improvements and new business. in IDI, we also benefited from strong organic growth on our existing portfolio, driven by France, U.K. and China. There was an improvement in expected profitability in a number of key EMEA markets. In International Casualty, we faced a decrease in reinsurance demand in the U.K. and Europe as primary insurers raised the retentions because of the increased cost of reinsurance. This effect outpaced new business rein in those territories and hence, contain our overall growth whilst improving our expected profitability. Moving to Alternative Solutions. Our growth was robust and supported by market demand. This offering is very valued by SCOR clients and allows us to secure broader diversification. Market dynamics led us to double the EGPI of Alternative Solutions renewed at 1/1 driven by new business from most markets globally. New solvency relief transactions, particularly quota shares were the primary growth drivers. We expect the continuation of strong activity during the year with an already existing strong pipeline with submissions. It is worth noting that the customized nature of these deals means that there is no seasonality for submissions, and we expect to see further opportunities to emerge throughout the rest of the year. Moving to Property Cat. Another key ambition of Forward 2026 is our prudent approach to climate exposed business and the U.S. Casualty business. Turning with the Nat Cat book, SCOR showed disciplined underwriting while remaining a major capacity provided to the market. Our growth was mainly driven by price changes in the U.S. and Europe. In Europe, Cat events, such as the Italian flood and Turkey earthquake, have not been led to market corrections. While globally maintaining our position in shares on [ Catacel ] treaties, we resisted attempts by brokers and clients to take shares on the working layers of the Cat Treatys hereby limiting our exposure to the most climate-sensitive part of the programs. We are also able to obtain additional limitations on SRCC coverage in a number of markets following the heightened political risk environment. This was a topic we highlighted before in the renewals. A discipline, combined with our clients' reunderwriting efforts on the primary side makes us very comfortable with our current Cat portfolio. We are confident that our renewal book should be more profitable and as volatile than in the past and we'll continue to see growth if market conditions remain favorable as remaining underweight. Moving to U.S. Casualty. One point of attention that this round of renewals was the U.S. Casualty line of business. Whilst we noted significant improvements in the primary underwriting of many of our clients and some improvements on reinsurance terms, we view these improvements as insufficient to offset the loss cost inflation, which we see running above 10% per year for most Casualty segments. As a result, we expect profitability to continue to deteriorate and maintain a prudent approach with regards to U.S. Casualty. But our renewed GPI was slightly down, focusing on capacity to our core existing clients. As announced in our strategic plan, we plan to keep a set capital allocation to U.S. Casualty, and you should, therefore, expect a continued reduction of the relative weight of U.S. Casualty in our overall portfolio. Moving to profitability. The underwriting discipline I just mentioned was not only applied on U.S. casualty, but on all segments. We capitalized on last year's improvements, stood firm in terms of conditions and push for further improvements when deemed necessary. We are pleased to have achieved a 3.1% price increase on our renewed book of which 6.6% on nonproportional treaties. As a reminder, our portfolio premium is 2/3 proportional, 1/3 nonproportional, relatively stable compared to last year. We achieved growth in our nonproportional book on traditional treaty business, but this was counterbalanced by the growth of solvency relief quota shares in Alternative Solutions, leading to a stable proportional and nonproportional profile. Confluence of disciplined underwriting price change and enhanced retrocession protections enable us to further improve the quality of our portfolio, resulting in a 1.5 point decrease of the net expected underwriting ratio meaning a 1.5 points of improvement in expected margin, excluding Alternative Solutions. Let's move now to the outlook to 2024. In a very uncertain world and with still a high risk aversion, we expect to see continued discipline in the market for the upcoming renewals. In spite of a more balance between supply and demand, at the start of the year compared to 2023, we expect sustained favorable reinsurance conditions for the rest of 2024. We believe that demand for reinsurance coverage will remain strong not only for our Traditional Treaty business, but also for Alternative Solutions business. On the retro side, we managed to increase our relationship with existing risk partners. We have also successfully raised additional third-party capital with new risk partners and plan to continue our expansion in this space throughout the year. As a reminder, we aim to double our fee income generation from risk partnerships over the duration of the Forward 2026 plan. In conclusion, I see the January 1st renewals as a successful execution of a Forward 2026 plan ambitions. First, we successfully allocated more capital in our preferred line and improved diversification of our portfolio. Second, we accelerated the development of Alternative Solutions. There we maintained a strong underwriting discipline on climate exposed business. Fourth, we maintain a prudent appetite with regards to U.S. Casualty. Fifth and last, we drove significant improvement in composition, quality and expected profitability of the portfolio averaging a strong client relationship. Generally, renewals enhance the quality of our portfolio putting us in a strong position from which they manage the rest of the year renewals. I will now take your questions.

So with that, we can start the Q&A. Can I remind you to please limit yourself to 2 questions each.

[Operator Instructions]. We do have our first question from Will Hardcastle with UBS.

Just firstly, some number clarifications. Is it possible you can quantify the alternative solutions growth impact on that combined ratio, essentially wondering what the 1.5 points that you give us is inclusive of alternative solutions? And then just also that any detail on that structured transaction that's not included in the GPI print would be helpful. And secondly, I know this isn't a solvency call as such. But I guess, the minimum -- I'd hope for maybe today is to get an understanding of how the renewal compared with the plans that you'd assume that the 9 months Solvency to reporting date? So any implication to that would be helpful.

On your first question, so with regards to Alternative Solutions, as mentioned, both at the IR Day and briefly in the speech before, the type of transactions we're focusing on are structured quota shares for solvency relief, capital relief for our clients. So these transactions tend to be low-margin business with the margin capital reinsurers and significant premium volumes. So the net combined ratio for those transactions tend to be, say, higher than the rest of the business. However, when you look at this on an economic basis, the amount of capital required to support those transactions is very small because of the low volatility. So in an economic framework like IFRS 17, this type of business is accretive to the overall business. So that's why we're trying to grow that segment. When you take into account the net combined ratio from the Alternative Solutions with the rest of the business, the net premium income that we project is less than 1 point, which we view as higher than the, let's say, the change of economic environment that we're anticipating. So we still see the margin improvement overall, including alternative solution. On your second question regarding the growth and the solvency question, we'll provide you more detail on the solvency with the Q4 results. But I can say that the growth we've had at the 1/1 was very much in line with expectations.

Our next question comes from Kamran Hossain with JPMorgan.

Two questions, just sticking more onto the Alternative Solutions side. The first one is what SCOR's pitch relative to peers on this? And I know a lot of your peers and maybe that your CEO came from what has been came from has been pretty big and structure the Alternative Solutions. So what SCOR's pitch on this relative to peers? The second question is that I think you alluded to kind of further growth within this area within 2024. So you've got a strong pipeline. This comes at a lower margin but probably higher kind of return on capital, return on equity. Should we expect that to be kind of [indiscernible].

With regards to your first question, I think we've been active in this space for a number of years. The type of transactions were focusing on previously were different, were more -- it's a more Cat exposed types of transactions. What we want to do now is really booked for [indiscernible] type of transactions. So, we're very clear with [indiscernible] retention protection programs, for example, where we saw a lot of opportunities at 1/1. We're really not in our appetite because we didn't want to [indiscernible] declining on a traditional basis. So as we communicate our appetite around solvency, then it's really a question of the relationship we have with [indiscernible] here we leverage the network that we have. Compared to our peers, I'd say our network is as strong as our peers from that prospective, and probably has diversified. [indiscernible] just a matter of making sure we have [indiscernible] not placed with only one reinsurer, but placed with several. On your second question regarding the potential pressure on the net combined ratio, again we don't believe this is going to have a significant effect. We remain very confident in our target of 87 and below, and we believe this business overall will be accretive.

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

Just a follow-up on the Alternative Solutions. You said there was not much seasonality in the deals, but as a proportion of your renewal portfolio at 1/1, it went from 5% to 13%. Is there any lumpiness in this? Or is this a fair view of how you see it as an overall view of your portfolio? And then secondly, just on U.S. Casualty, your claims inflation assumption is over 10% in the years to come. Is this something that your current reserving for historic years already assumes and allows for?

So regarding your first question, again, there is no seasonality, so there could be lumpiness. I think there was a fair amount of relief that was sought at 1/1. I think a number of clients as well, waited for the outcome of the 1/1 renewal to decide whether they would pursue other opportunities in the alternative solutions space. So I think the growth of this will be lumpy. One will be at April 1, June or July 1, but I think it will happen throughout the year. So there could be some lumpiness on to that, but we'll probably give you some outlook at the Investor Day towards the end of the year to give you the overall picture throughout the year. And on your second question regarding the U.S. Casualty, so our pricing assumptions and our reserving assumptions are very aligned. We'll provide more information on our overall reserve review for the year 2023 at the Q4 call. But all I can say is the pricing and the reserving assumptions are very aligned.

Our next question comes from Tryfonas Spyrou of Berenberg.

Maybe a question on your P&L and your exposures. I think last year, you gave us an update, but it looks like you don't have this in the slide this year. Maybe can you comment as to how have these evolved relative to last year. Appreciate you said nat cat appetite was kept relatively flat and sort of underweight and you see now for more enhanced retro protection, but can you maybe give us more color on the dynamics here in the shape of the book versus last year? The second one is on the appetite for deploying capital into April, in midyear renewals. How much appetite and how much capital flexibility do you have for growing volume ahead of rates and should we expect the similar dynamic as we saw at January renewals?

So on your first question, PMLs, we achieved a 1/1 or very much in line with the PMLs of last year. So I'd say overall, we're relatively flat in terms of Cat exposure. On your second question on the outlook for April. As you know, April is a market dominated by Japan plus a few other markets. The market -- there's been very low loss activity in Japan in 2023. So I think there'll be probably pressure on pricing that we expect for Cat programs. We're still expecting a positive price movement at this renewal. And I think in terms of growth, we're looking to grow the portfolio if terms of conditions are adequate. So I'd say I'm not sure it's going to be exactly the same order, but we would expect our portfolio to continue to grow at the April renewal.

Can I maybe come back to the first one. If you can maybe share any color on your retro purchase. You mentioned enhanced protection on your slides. Have you done anything differently? Has anything changed compared to last year? Have you got more protection?

So we found that the retro market this year to be more accommodating than last year. Overall, there was more capacity supply I think as well the retro cessionaries were more accommodating with regards to attachment points and more accommodating in terms of perils that were covered last year. It was really difficult to get cover outside its [indiscernible]. And this year, it was a little bit easier. So we were able to lower attachment points on the nonproportional program, we're able to grow the proportional session that we do, aggregate remains very difficult to secure. So overall, we bought slightly more capacity overall at roughly a constant budget.

Our next question comes from Andrew Ritchie of Autonomous.

I wonder -- I think I asked this every year, but could you just remind me what you mean when you talk about price change for proportional business. I think that is just reflecting any change in [ seed ]. I don't know if it's got any look through as to what's happening, the underlying rate adequacy, if you like, of the underlying primary business, but maybe if you could comment on both. Because I would have thought some of the underlying pricing was up quite a lot and some proportional business, especially things like motor. The only other question I had is, it looks like there was some -- you talked in your opening comments about some increase in demand from [indiscernible]. I'm just curious to what your outlook there is because, is there a sense that because prices have sort of stabilized, is there evidence that [indiscernible] is sort of coming back to the market to buy really what they want to buy whereas in the last 12 months, they've kind of not really been buying exactly what they wanted because they've been booking at the degree of rate change. So just curious on your outlook for specifically demand over the rest of the year.

Yes. Thank you, Andrew. So on price proportional, what we call price change is really the recorded primary rate change. So it doesn't include commission, this is just price. The impact of commissions and other effects is really translated into the indication we gave on the net technical ratio or the margin. To your second question on the increase in demand, we definitely see exactly what you're describing, where clients were typically holding back in 2023, buying the capacity they are looking for. We see a lot of clients throughout all markets and buying more capacity than last year given the, I'd say, the better visibility on the pricing environment. So we see demand in the single digits in most major markets.

Can I just ask back on the proportional. Would you not have expected proportional pricing at the underlying levels have gone up a bit more than that? I'm just thinking of the mix of your proportional book.

I think we -- it's the factor of the various lines of business. And here, what we do is we analyze the primary rates we receive from our clients. And so it's almost -- there's not a lot of extrapolation that goes into that. It's more an analysis of what they've achieved in 2023. And based on that, how credible we believe in 2024 projections are.

Our next question comes from Vinit Malhotra with Mediobanca.

So my 2 questions. One is just on the preferred lines. You mentioned Marine [indiscernible] and this is not new information, but also between IR Day and now we've had some focus on man-made activity. And I'm just curious that when you're growing in these kind of lines, probably also accompanying that has some increase in risk of man made. I'm just curious if you could share any thoughts on when you were growing these books? How are you managing that? And should we expect an improvement in the man-made trend. And that's what we hope, but I just wanted to hear your thoughts. Second question is just on the alternative solutions, again, apologies. I understand the dynamics of the call being higher than the rest of the business. But when we see the kind of net underwriting ratio, it seems to be that alternative solutions is a 1, 1.5, maybe 2 points, even a bit of a drag on the overall. So in other words, Alternative Solutions is worse than the Alternative Solutions of last year. Is that the way to interpret that? Or how should we really look at that profitability in Alternative Solutions versus last year versus the book you were writing before. That's my 2 questions.

On the first one, so this expansion of the preferred lines is that constant PMLs across those lines of business on a net basis. So we're not expanding the amount of, I'd say, maximum expected loss for those lines of business. We're just growing the diversification of it across the different markets. So I don't think it will lead to an increase of the man-made activity, man made loss activity. I think, actually, since it's calculated as a ratio of the overall premium income, I think as a percentage, should over time be decreasing. On your second question, again, the Alternative Solutions business that we write are not volatility covers, they are really capital relief transactions. So the volatility involved is very low. And therefore, the margin is very attractive in terms of return on capital. As I mentioned, we don't think this is going to lead to a deterioration of the net combined ratio, and we believe this is going to be actually an improvement of the overall return on capital or ROE that we will be able to generate.

Our next question comes from Derald Goh with RBC.

Two questions, please. The first one, I'm just trying to understand the difference between the nominal pricing that you have and the impact on the underwriting ratio because if I look at what you reported last January, you had nominal rate of plus 9 and a margin benefit of plus 2.5 to 3 points, so you look at a 6-point delta, whereas this year, it's 3% nominal and 1.5 point delta. So why is the delta so much smaller this year because it sounds like risk mix hasn't really changed. And I'm not sure what's driving that. Maybe you could clarify that, please. And the second one, it's on specialty insurance. I know it's not a focus of today, but if you could give a quick word on what you're seeing in terms of the market.

Sure. So let me try to explain on your first question. So the 3% price range has a mathematical impact of 2.3% improvement on an underwriting ratio of, say, 80%. The scope on which the price change is calculated is smaller than the renewed business because canceled business and new business are excluded, and so -- and the calculation of the price change does not account for a change in portfolio mix, does not account for commission change and does not account for change in SCOR's view of risk. So this is why when we give you both indicators, both the price change that we calculate in our portfolio as well as the impact -- expected impact on the overall underwriting ratio and margin. So hopefully, that provides you a better understanding of how this is done. Why is it different this year compared to last year? I think the view of risk last year was dramatically changed. This year, we have some of that taken into account. But also, we also wrote a lot of new business at January 1st, whereas last year, we didn't have that much in the business. On your second question on Specialty Insurance, maybe I can pass it over to Romain.

Thank you, Jean-Paul. On specialty insurance, I don't know if you recall the bubble chart that I showed at the IR Day. So actually, what we're seeing is that it's a very fragmented landscape in terms of rate movements where each line of business is driven by its own characteristics. So if you take, for instance, space, there has been a lot of claims in 2023. So rate increases that are in the high double-digit zone, terrorism and political violence to the line that is seeing very, very steep rate increases. Property is seeing strong rates, contraction too and then you have a number of lines of business that are more in soft mode. So that would be cyber, that would be D and O and professional indemnity. And even if you take property, for instance, the dynamics are very different, depending on the region. So in the United States, rates continue to increase at a marked speed whereas in Europe and in APAC, we see property rates plateau actually.

Our next question comes from James Shuck of Citi.

I just wanted to delve into the capital allocated this year, year-on-year. Obviously, the solvency objection you gave allowed for a big increase in the required capital. I heard what you said earlier on about it's in line with expectations, but it doesn't seem to me as if you've actually allocated any more capital in this renewal period. The P&C lines are flat. Global lines are up, diversified. Alternative solutions doesn't have much capital requirements based on what you're saying and you've also bought more retro cover. So just any comment around the increase in capital allocation year-on-year and then where that growth is potentially coming from that you alluded to back of 9 months? Second question, I may be completely wrong on this, but I've got some notes telling me that your price changes, so 3.1% you showed overall, but that's net of CPI inflation and therefore, a nominal price change is actually a bigger one. But judging by your answer that's not correct. But if you could just clarify that for me, that would be helpful.

James, on your first question, I will suggest to defer it to the results publication on the 6th of March. Jean-Paul, if you want to answer the second question?

Second question was regarding the price change calculation. So it's inclusive of inflation on the exposures but not inclusive of inflation on the losses. So again, this is why we provide you the price and the price calculation we do this year is comparable to the one of last year. This is where we provide you the 2 indications of the price change as well as the impact on net underlying ratio, which includes everything.

So the 3.1% is a nominal price change, right? Before any benefit -- before any allowance for inflation.

Right. Correct.

Our next question comes from Faizan Lakhani with HSBC.

My first question is on your unchanged combined ratio guidance of below 87%. Your underwriting margin improving 1.5 points this year. If I look back at last year's 2.5 to 3 points as well, which suggests a blended calendar year improvement of about 2 points, and that would get me to sort of sub-85. Now obviously, they're moving parts in the other way, so Alternative Solutions and discount. If you could just help sort of bridge why you haven't changed the combined ratio guidance and how I should be thinking about that? Second one, just coming back to James' question on nominal versus the normal rate that you talk about 3.1%. My understanding was that you've got some inflation assumptions in there. If you could just maybe help understand what your assumptions are ex U.S. casualty and how that's changed since the last year?

On your first question, so the guidance we're providing of a net combined ratio below 87% includes the growth on alternative solutions that we discussed -- that was achieved on January 1 and the growth that we expect for the rest of the year as well as the buffers that Francois spoke about during the last quarter calls. So when we provide this guidance, it includes all the different actions on the underwriting as well as the buffers we're including in our balance sheet as well as the business mix that we're projecting. On your second question -- sorry, go ahead.

So just to clarify that, but you are building buffers in H2 anyway and still getting below 87%. So that's not really a step change over the year, if I'm correct in thinking about it that way?

As I said, we're not changing our guidance. The margin improvement that we achieved on a price basis, the renewals will take time to earn through the balance sheet. And so every quarter, we'll provide more detail as to how that's developing. And your second question, so in the price change, we have -- the inflation on exposure is included in the price change. But as I said, the expected claims inflation or [indiscernible] view of risk if it changes, is not included. And to help you translate this price change into margin improvement is where we provide the net combined ratio expected improvement.

Okay. Sorry, just to clarify, has anything meaningfully changed over the past year in terms of your assumption on risk relative to last year?

No. No, it hasn't. And for inflation, the assumptions we have for inflation have been adjusted given the economic environment but remain -- again, the inflation we're looking at is loss inflation, not necessarily economic inflation, so it remains at a high level.

Our next question comes from Tryfonas Spyrou with Berenberg.

Sorry, just a follow-up on Alternative Solutions. Clearly, you've achieved really strong growth hanging your most exceeded your 206 assumption of doubling the growth there. I guess, is this more of a front-loading? Or how much more can you grow given that at some point, obviously, if it becomes too big a part of your proof that obviously dilute the combined ratio more. So I'm just trying to understand whether this is sailing to how much you can grow this line? And what's your appetite? How big can it become as part of overall P&C book.

I think the growth we achieved January was, I'd say, very much in line with our planned projections. As I mentioned, this type of growth is very lumpy. So I would expect the -- and the growth was a bit I'd say expect it to be stronger at the beginning of the year than throughout the rest of the year. So I should say that the growth for the rest of the renewals will probably what we're planning is something of a similar volume in terms of percentage of the overall renewal. I think it's really going to be dependent on how successful we are and transforming the opportunities. So it's a bit difficult to provide you clear guidance because there is no set renewals that we can point to. It's really going through transaction by transaction, and that really depends on how big the demand from client is.

Is there any...

Sorry, no. I was just trying to say that I think we can provide you a better view of what was achieved in '23 by the Investor Day and at different renewal dates. But there could be transactions that happened in between renewal dates.

In terms of the overall, how much it can become as overall part of portfolio? Is there a limit to sort of total premiums, how much it could go to in terms...

As I said, just to give you some indication, I don't want to be pin to any number. But to give you an indication, the growth we achieved at this January was more or less in line with the plan that we had.

At this time, we do not have any more questions. Ladies and gentlemen, this does conclude today's question-and-answer session. At this time, I'd like to hand the call back to our speakers for any additional or closing remarks. Thank you.

Thank you very much for attending this conference call. The Investor Relations team remains available to pick up any questions you may have. So please do not hesitate to give us a call. As a reminder, SCOR will hold its full year 2023 results presentation on 6th of March at 2:00 p.m. CET. And with this, we wish you all a good afternoon. Thank you.

This does conclude today's call. Thank you for your participation. You may now disconnect.