SCOR SE (SCR) Earnings Call Transcript & Summary

Good morning, and welcome to SCOR P&C January 2025 Renewals Conference Call. My name is Thomas Fossard, Head of Investor Relations, and I'm joined today on the call by Jean-Paul Conoscente, CEO of SCOR P&C; and Claire McDonald, CEO of SCOR Business Solutions. Before we start, I would like to remind you that SCOR will publish its full year 2024 results on the 5th of March, and the conference call will take place at 2:00 p.m. CET. You will shortly receive the invite. So when it comes to the Q&A session, we will only be able to refer to the renewals presentation provided in the press release and the slide. I will ask you to have a look to the disclaimer on Page 2, and I will now hand over to Jean-Paul.

Thank you, Thomas, and hello, everyone. I'd like to share with you the outcome of the SCOR January 1, 2025, treaty renewals. These renewals account for around 2/3 of our reinsurance portfolio and about half of our projected annual P&C EGPI for 2025. Additional details can be found in the slides and the press release published earlier today. If we move to the key takeaways, the January 2025 renewals took place in a more competitive landscape where we have seen an increase in available capacity from traditional reinsurance players along with elevated demand for reinsurance. Prices remain attractive despite a slight decline compared to 2024 in some lines. Our strong franchise and strict underwriting discipline helped us to successfully conclude the renewals. We achieved a 9.6% EGPI growth by executing our strategic plan, growing mainly in our preferred specialty lines of business and in alternative solutions, while remaining cautious on U.S. casualty and climate change-sensitive business. We also maintained the same level of expected profitability as last year, benefiting from our dynamic portfolio management and retrocession buying in an improved retrocession market. I will now elaborate more on these two points. From an EGPI perspective, we executed the strategy of Forward 2026, namely, we increased the allocated capital to diversifying specialty lines, namely marine, engineering and IDI, reaching a growth rate of 17% across these lines of business. International casualty was impacted by the nonrenewal of one large transaction. Overall, we achieved 8% growth across the targeted diversifying lines, in line with the strategic plan growth assumptions of 8%. We continued the development of alternative solutions to address our clients' growing demand for customized reinsurance solutions, reaching a strong 30% year-on-year EGPI growth. We remain disciplined across all lines of business, pushing for further improvements where we felt it was necessary and walking away from business that we considered underpriced with respect to our profitability targets. These achievements translated into a total premium growth of 9.6%, which is fully in line with our Forward '26 assumptions. It's important to highlight that the 9.6% EGPI growth will not be translated 1 for 1 into IFRS 17 insurance revenue. First, under IFRS 17, insurance revenue is on an earned basis and hence, reflect the dynamics of the business renewal in the past 24 months. Secondly, as disclosed during the Investor Day in December, Alternative Solutions business, EGPI, translates into insurance revenue net of commissions and NDIC only. These contracts often feature significant fixed commissions and profit commissions, which are an essential part of what makes them structured. We indicated that an average of 60% of the Alternative Solutions EGPI is commissions and NDIC. With regards to profitability, we are pleased to have achieved stable prices in our renewal business through active portfolio management. We achieved a slight price decrease in nonproportional treaties, offset by a slight increase in proportional business, which represents around 75% of our book at 1/1. While we continue to grow our nonproportional business, it is slightly decreasing in relative size due to our strategic growth of solvency relief quota shares, part of our Alternative Solutions offering. The combination of disciplined underwriting, price changes and more effective retrocession protection enabled us to maintain a stable expected profitability of our portfolio. The drag on gross underwriting ratio, as you see on the right hand of Slide 5, comes from price changes and increasing commissions, a change in our view of risk, and a shift in portfolio mix. This was offset by dynamic management of our retrocession, benefiting from better terms and conditions and some changes to our structures. These actions led to a reduction in the overall retro cost for 2025, while allowing us to maintain the risk exposure within the risk limit defined in Forward 2026. This outcome gives us confidence in our ability to deliver a net combined ratio of below 87% in 2025, as articulated at the Investor Day in December. Let me now provide more details in 4 key areas. First, Alternative Solutions. We see continued strong demand for capital management solutions across all territories. Leveraging our client relationship and strong franchise, we grew our Alternative Solutions offering around capital solutions by 30% from an already strong base achieved in 2024. SCOR has a dedicated and experienced structured team with a global reach, which remains a competitive advantage. Second, on diversifying lines, which include IDI, engineering, marine and international casualty, we were able to reinforce our leadership in key markets, growing our lead positions and securing preferential terms in IDI to ensure adequate profitability. In engineering, our clients continue to maintain underwriting discipline after years of re-underwriting with stable rates. Our long-term support of strategic accounts allowed us to grow sometimes at differential terms. In marine, the reinsurance market was softer than expected due to ample reinsurance capacity, rather benign loss activity outside of the Baltimore bridge loss, and decreases in primary rates. This follows years of market hardening and marks a tipping point in rate movements. We succeeded in obtaining nonconcurrent terms in some programs, but had to let go of programs where terms and conditions were too soft. In international casualty, despite high competition in that market, we grew successfully on selected accounts but non-renewed one large account, leading to an overall decrease of the EGPI at 1/1. Third, property cat. In property cat, the EGPI is flat compared to last year, reflecting a cautious approach to climate exposed business. Prices were down on a risk-adjusted basis, 5% to 15% on loss-free programs, with 5% to 15% price increases on loss-affected programs, mainly in Eastern Europe and Canada. We maintain our discipline to limit our exposure on lower layers. We have also slightly reduced our exposures in the U.S. as well as in the U.K. and Scandinavia, where the rate reductions were the largest. Last, but not least, U.S. casualty. We continue to believe that primary rate increases and improved reinsurance commissions are insufficient to offset high loss trends. This leads us to reduce our position or exit a number of accounts, resulting in a drop of EGPI by 11% at 1/1. These actions show a disciplined execution of our Forward '26 strategy, pushing for diversification while focusing on profitability. Let's move now to the outlook for the rest of 2025. We anticipate continued growth of reinsurance during the remainder of 2025 as risk aversion remains generally high. We also anticipate continued balance between supply and demand as observed at January 1. In addition, we anticipate that the $35 billion or more market losses coming from the Los Angeles wildfires will have an effect on cat prices, which should be more stable than observed at 1/1. Overall, we remain confident that market discipline will continue throughout 2025 and that prices will remain at favorable rate adequacy. At 1/1, we also strengthened our relationship with existing risk partners and successfully secured new partnerships. We're on track to achieve our Forward '26 goal and plan to continue expanding in this area during the rest of the year. In conclusion, the January 1 treaty renewals are another illustration of successful execution of our Forward '26 strategy. We move confidently into the next renewals and continue to deliver on our Forward '26 ambitions, leveraging on the positive momentum of the January renewals. Before answering your questions, I would also like to give you an update of our Los Angeles wildfire estimated impact. With market losses varying from $30 billion to $45 billion, we believe this will be a large but manageable loss for SCOR. Based on the information currently available, we believe the impact should be around our quarterly cat budget for Q1. Further information will be provided as we start receiving more information from our cedents. And now I'll turn over to the operator for Q&A.

Thank you very much, Jean-Paul. So with that, we can start the Q&A. [Operator Instructions] Operator, the floor is yours.

[Operator Instructions] The first question is from Michael Huttner of Berenberg.

I had two questions. The first one, you talked about adequate pricing and I think firmer renewals on the nat cat. Can you give us a kind of a range of outcomes, which you're expecting now for the rest of the year on pricing? And my second question comes from a very useful call with your wonderful IR team this morning. From memory, SCOR is still in the process opportunistically of building buffers. And I wondered whether this current set of renewals, how much kind of buffer building you're kind of implying in your below 87% combined ratio?

Thank you, Michael. On the first question, as I mentioned, what we saw at January 1 on a risk-adjusted basis, our cat price decrease is between 5% and 15% with U.S. business probably on the higher side of that range and loss-affected countries where we had losses in Canada and Eastern Europe this year, more of the 5% to 15% rate increases. So for the rest of the renewals, we don't have many renewals in countries where there's been cat losses this year. But we think the wildfires will act as a floor to the drop of cat prices. So I would expect the cat price to be more flat on the U.S. renewals going through the rest of the year and probably between 0% and 5% in other territories. On your second question for the buffers, this is a question I prefer to leave for the quarterly results. So we can start addressing that at Q4 and Q1.

The next question is from Darius Satkauskas of KBW.

Could you please expand a bit on your views on the specialty market? I mean, you said your view in engineering, you said marine is a bit softer. Which lines where you have exposure are tipping below price adequacy in your view? And then the second question, do you think the opportunity to grow in specialty, engineering, et cetera, will continue into the rest of the year?

Thank you, Darius, for your question. So let me go through the lines where we start reducing. We reduced our portfolio on cyber and aviation. Aviation, we think the prices are still not reacting enough to some of the market losses. We also expect some of the impact to start flowing from the Russia-Ukraine conflict to the aviation market. And these have not been incorporated into the aviation pricing yet. So we prefer to remain prudent at this stage and reduce our portfolio by roughly 7%. On the cyber, we see challenges both on the primary side and the reinsurance side. We see rate decreases on the primary side and more favorable terms for cedents on the reinsurance side. And therefore, we carefully manage our portfolio and shrunk our book, which was already small, by roughly 6%. Then we have marine, as you mentioned, where there was a line that we've been targeting, but terms and conditions were starting to deteriorate both on the primary side and the reinsurance side. There, we think we still have adequate price. So we grew in some accounts and shrunk on others. There, I think to your question on rate adequacy will depend on what the subsequent renewals look like. I think if we still see aggressive price decreases, we'll probably start reducing our portfolio further. Engineering and IDI are markets where we still see on the primary side very good price increases and reinsurance terms are overall stable, in some cases, slightly down, but overall very good. And so I think price adequacy across specialty lines is still very good across more. The lines we're most concerned about right now would be aviation and cyber. And we keep monitoring those lines of business. On your question about the opportunity to keep growing those lines, it is becoming more attractive and more competitive because it's attractive for all reinsurers to diversify their book. I think we're able to leverage both the broad client relationships we have and the SCOR brand, and that's been a very powerful tool for us to grow in those lines where we had positions before, but not necessarily lead lines. And so I think there's still room for us to grow on those lines of business because I'd say the franchise we have with those clients is much bigger than the market share we have with them. So I think there's still room for us to grow.

The next question is from Vinit Malhotra of Mediobanca.

I hope you can hear me, sorry, Vinit here at Mediobanca. So first question I would have is on retrocession where you mentioned dynamic management. And just in the context of maybe a month ago or 2 months ago, we saw your major retrocession put in place. So do you think that what you've achieved was even better? And then would that help also that plan or that cover that was put in place? And if you could just talk a little bit more about retrocession, that would be helpful. My second question was just a clarification on cat. You did mention where you reduced exposure, like you mentioned, U.S., Scandinavia, U.K. But clearly, you've also increased somewhere the exposure because the minus 4.5% pricing are flat on EGPI. So I'm just curious to hear more where you found opportunities to increase and get exposure price.

All right. Thank you, Vinit. On your first question on retrocession, what we've done is we have actually bought more limit this year than last year, but shifted the way we buy it to buying more proportional because there was more availability of capacity on the proportional market. And as a consequence, we also reduced the amount of nonproportional that we purchased. So that's sort of the dynamic buying that we referred to, is buying more proportional and slightly less nonproportional. And on the proportional side, we were able to generally get an overrider, which helps us pay for our management cost and some profit on top of that. And on the nonproportional, prices were down compared to last year, but last year was probably the peak of the retro market in terms of pricing. On your second question on cat, we managed to grow basically in territories where we saw good price increases. So some of the loss-affected territories I mentioned before is where we grew. And then in some of the other countries where we saw the price decreases as more reasonable is where we're able to grow. So the U.S., it's slightly down, but basically, we kept our powder dry for the remaining renewals in the U.S. where we think prices will be better. And we grew slightly in Europe and in APAC and Latin America.

The next question is from Shanti Kang of Bank of America Merrill Lynch.

So I just had a question on the U.S. casualty side. So I'm just curious if you can tell us what actions you're taking to manage the existing book, and that's just off the back of the fact we've seen some U.S. insurers take some large adverse development loads this week, even on the younger years. So could you just help me understand how we get comfortable with SCOR's reserve position, particularly on the U.S. casualty side?

Okay. Thank you. As you will remember, we've been saying for the past few years that on U.S. casualty, we see the loss trend double digit. And we saw at the renewals, January 1 renewals last year, sort of a divide between the reinsurance markets where some reinsurers believing the loss trends was double digit and others believing the loss trends were probably on a lower basis. And the question we had was whether the price increases we see on the primary side and some of the improvements, both on the underwriting of the insurance companies and the slight reduction in commissions for reinsurers, were sufficient to offset the loss trends. Our analysis last year is that, that was not sufficient. Our analysis this year is, again, that's not sufficient, and we think that we would need much more rate increases to go through on the primary side and probably further commission reduction to get it to profitability to meet our targets. So this is what we've been using for our pricing. On the reserving side, we take the same view and apply it to all the underwriting years. When we look at some of the analysis, the results that were published by some of our peers, we did some benchmarking to see if the numbers in terms of loss trends or loss picks that they reported were in line with ours for the more recent underwriting years, and we see that's the case. So we think we were pretty well positioned with our U.S. casualty reserving right now.

The next question is from Will Hardcastle of UBS.

I guess the first one is, is it possible you can try and quantify what that inwards headwind impact is on the combined ratio? And the retro tailwind, is it more than a point or so in each direction? And would any of this have any lasting pressure beyond 2025? So just thinking about the mechanics, would it make the 2026 combined ratio better or worse mechanically at this point? I know there's a lot to play for still. And the second one is just on the retro spend. Is it anticipated to be up or down year-on-year in absolute terms? Or maybe you can express that as cession, that would be helpful.

So on your first question, we don't really provide quantification of the impact. All we say is it more or less offsets the reduction of gross underwriting margin on the inward side. On your second question, I think the effect should last beyond 2025. I think we'll have losses in the financial year 2026. That would still benefit from the reinsurance program of 2025. So I think the benefit will be '25, '26. How the retro market looks in 2026 is really difficult to tell right now. It really depends on loss activity throughout the year. I think what we see right now is the wildfires at $30 billion probably has little impact on the retro market, some impact but limited. As we get to $40 billion or higher market losses, then the impact becomes more severe. It impacts not only traditional retro, but also potentially some of the ILS and cat bonds. So if the market loss for the Los Angeles welfare ends up being on the upper side of the range, there probably will be an impact of retro, which will be reflected at the renewals of 1/1/2026.

The next question is from Chris Hartwell of Autonomous.

Just two quick questions from me. First of all, on terms and conditions. You say that they're mostly unchanged. I wonder if you can maybe elaborate on what changes have happened. As you mentioned, I think, engineering as an example, but I wondered if there's been sort of meaningful movement anywhere on deductibles, but also whether the appetite for multi-event frequency covers has improved. And second question is just trying to reconcile what appears to be strong top line growth with your existing guidance for new business CSM, which is, I think, as you updated in December, still at 1% to 3%. I was wondering if you can help me reconcile one to the other one. That's it for me.

Thank you, Chris. On your first question on terms and conditions; so if we start with cat, we saw sort of an initial push from cedents and brokers to buy lower down and float aggregate covers or second-event covers to reinsurers. I think overall, the market was quite disciplined and there was resistance to go lower down or to offer aggregate covers. So in our case, we were able to more or less keep attachment points stable and write very little aggregate covers or second-event covers. It's probably on the fingers of one hand of the programs that we wrote. So I think that will continue throughout the year. There still is a very high risk aversion, both on the insurance side and the reinsurance side for those type of covers. So I think for the rest of the year, especially in view of the Los Angeles wildfires, I think there's going to be continued discipline from the reinsurance on the remaining renewals. On your second question, I think the projections we have for the new business CSM are based on a number of assumptions. As I reminded in the opening speech, the big growth is coming from Alternative Solutions. The growth of EGPI translates into a smaller growth of IFRS 17 revenue, and that's also reflected in the CSM. So I think what we see is probably a much smaller growth of the CSM. I also mentioned that we bought more proportional retrocession, which also means that we're probably ceding CSM as well on the retro side. So those two effects make it such that our initial projections might be a bit conservative at this stage. We have to see how the rest of the renewals go. And as a reminder, the IFRS revenue is really a consequence of the 2 past underwriting years. So 2025 underwriting year will flow as IFRS 17 in '25, '26. The CSM is slightly different. But there, we have to take into account the Alternative Solutions and the retro as negatives compared to the gross portfolio growth.

[Operator Instructions] The next question is a follow-up from Michael Huttner of Berenberg.

Two. On the wildfires, so 1/4 of your budget, so my guess is just 10% would be about $150 million or something. Is that roughly the order of magnitude? And then following on from that, does it change your view of wildfires, your risk appetite for this portfolio? In other words, is this an unusual loss for you? And then the second question, with a similar theme, you mentioned with the retro and the change, you're still within your risk appetite. Can you maybe give us a feel for what it means in numbers? The guess I'm making is that your exposures have gone up a little bit, maybe a bit more than premiums. But I don't know how to quantify it, and I'm probably wrong anyway.

Thank you, Michael, for your questions. On the wildfires, if we look at the wildfires that took place in '17, '18, the market has changed dramatically since then. Insurance companies have been taking significant action to reduce their exposure to wildfires, restricting coverage and being more selective on where they provide this cover. And then reinsurers have also been more selective by raising retentions and trying to position capacity above, I'd say, the normal activity. Ourselves at SCOR, we try to position our capacity above roughly a 1-in-10 return period. And so for the wildfires, we take that into account and we try to position our capacity above what we consider a normal wildfire activity. Here, this event is really unusual in the fact that the area that was affected has a lot of high net worth individuals, very expensive real estate. And the fires were aggravated by the Santa Ana winds, which spread the losses and kept them going for a long period of time. So I think I'm not sure exactly what the return period of this event is, but it will be higher than the 1 in 10. So it doesn't really change our view of wildfire. We still are risk averse to it. But here, what we anticipate will be driving our losses will be [ cat xl ] of insurance companies that position their program above the normal frequency, but this is kind of a very unusual and severe loss. So this is the type of loss that reinsurance is here for. In terms of your question on the exposure, you're correct that our net exposures are going slightly up. We published last July our PMLs for 2024. We'll do something similar this year. We'll publish later in the year our projected PMLs for 2025. We said that we would grow our cat exposures in line with the expected growth of the economic own funds. And so that's where we sit right now. So on some perils, we're probably slightly down compared to last year. On some perils, we're slightly up. But on the overall portfolio, the growth of the net PML is at or below the growth of the economic own funds that we project for '25.

[Operator Instructions] There is one follow-up question from Michael Huttner, Berenberg.

I'm very sorry, but it's such a magic opportunity and you've been so helpful and kind. Just on the issue of how these wildfires affect the kind of sentiment for the rest of the year. Listening to your answer, it sounds as if it's broadly divided between some people saying, "It's a bit an unusual event, and so this is what we're here for," and others who would kind of say, "Well, no, it's a big part of our budget and it's maybe unacceptable." Is that roughly how you see the market thinking about this loss?

Since '17, '18, it's a risk that all companies are very much aware of. I think you have companies that try to limit their exposure to what I would call frequency type of perils, and we're part of that group. And therefore, we would expect for wildfire market loss of $10 billion, $15 billion, have an impact that's extremely limited. Here, if the losses were $25 billion, the reinsurance losses would be quite small. As we start getting into the $30 billion, $40 billion, $45 billion, then we believe that some of the, I'd say, [ cat xls ] of large companies will start to be affected for the first layers or second layers or potentially more. And that's where our losses are coming from. I think you have other reinsurers that are aware of the wildfire risk, but view the pricing as attractive and have decided to increase their exposure to the peril at those prices. So I think that, if it is a divide in the marketplace, that would be how it would be divided.

Thank you, Michael. I think that with this, we're going to close the Q&A session. Thanks, everyone, for attending this session this morning. Any follow-up questions, please give the IR call for everything which is related to the 1/1 renewals. As a reminder, SCOR will hold its full year results on the 5th of March at 2:00 p.m. CET. And with this, I wish you a nice day.