SCOR can “dampen” competition from ILS, but results “quasi-stable”

French reinsurance firm SCOR reported its January 2016 renewal results this morning, citing its ability to “dampen” the competitive pressures from ILS and alternative capital, enabling it to achieve “quasi-stable” profits in a difficult market.

SCOR uses the term “quasi-stable” repeatedly through its renewal statement this morning, by which you hope they mean the partly or almost stable, rather than the alternative definition of seemingly, or apparently but not really. It’s a little difficult to interpret given the challenging reinsurance market environment and could perhaps be taken either way.

“In a (re)insurance market that shows some signs of levelling out for certain types of contracts and exposures, but where competition regained some momentum at the very end of 2015, SCOR Global P&C achieves sustainable growth in spite of the pressures on prices worldwide,” the reinsurer explains.

SCOR Global P&C continued to be able to find “pockets of profitable new business” which it says counterblance the areas of its book where it is reducing premiums through becoming more selective and managing its portfolio.

As a result of this ability to steer the portfolio, SCOR says it has been able to “maintain quasi-stable expected technical profitability compared to January 2015, while recording gross premium growth of 2% at constant exchange rates, to EUR 3.0 billion.”

This ability to steer, to be selective while providing client value in terms of advisory and relationship management, helps SCOR to navigate the challenges posed by competition from efficient and alternative sources of reinsurance capital, while also enabling it to leverage its own Alternative Solutions unit.

The reinsurer said that its ability to lead programs and provide a full-service approach helps with “dampening the competition from ILS and alternative capital providers.”

At the January reinsurance renewals SCOR managed to contain the price declines across its book at just -1%, which is aligned with other major players, which it puts down to an ability to “benefit from a high level of exposure to more resilient primary insurance markets, through proportional business.”

While the reinsurer pulled back on premiums in regions such as Asia and Europe, it grew its underwriting in the U.S. market with growth of 24% reported to offset 2% declines across the rest of its book. This overall resulted in premium growth of 2.4% at constant exchange rates.

This has helped the firm to report that its “technical profitability remains quasi-stable” with its underwriting ratio only increasing slightly, expected return on capital continuing to meet return on equity expectations and an expectation of a 94% combined ratio for 2016 if losses remain normal. Unfortunately SCOR does not give return forecasts, so we cannot compare to other reinsurers that have disclosed that returns are declining.

SCOR also cites “improved efficiency of the retrocession cover achieved for 2016” which likely includes a reasonable proportion of ILS capital helping the reinsurer to balance its profitability by using efficient retro capital to offset pressure on its underwriting.

Another area that is helping SCOR to offset the competition is the continued development of its Alternative Solutions initiative, where it has combined its insurance-linked securities (ILS), structured risk transfer and alternative risk financing activities to centralise its ability to leverage new trends in underwriting capital and structures to support its client base.

SCOR specifically cites its ability to “provide clients with feasibility studies of specific capital management and capital optimization solutions” as something that provides a competitive advantage, particularly with new regulatory requirements such as Solvency II pushing cedents to better understand how capital management affects and can benefit them.

Like the other major reinsurers SCOR cites the importance of this ability to provide more than just capacity, which is the reason the reinsurer gives for being able to “dampen” the effects of competition from new sources of capital and ILS.

However it’s perhaps telling that one of the areas where SCOR leverages its ability to provide more than just capital is the one unit where it pulls together ILS, structured risk and alternative risk transfer.

One has to hope that “quasi” does mean almost, rather than seemingly, stable when it comes to profitability of its January 2016 book. Seemingly suggests that things may appear stable now, but there are no guarantees of them remaining so.

Victor Peignet, CEO of SCOR Global P&C, commented on the renewals and prospects for 2016; “In view of the difficult business environment in which we operate, this is yet another renewal season that can be considered a success. For the third year in a row under the “Optimal Dynamics” plan, our strategic initiatives are proving relevant, both in our core reinsurance business, where we continue to achieve notable progress in the US and with Global Clients, and in the field of Alternative Solutions, where SCOR Global P&C positions itself as an influential player. Despite the headwinds in front of us, this is a good start to the year and gives us confidence in our ability to maintain profitability on target for 2016.”

But overall SCOR, like the other large reinsurers, continues to be able to exert its scale, service and client relationships to build books of business that look set to help it maintain profitability in the current market.

The largest reinsurers remain leaders in the market place, but they are continuing to feel pressure from ILS, alternative capital and new business models. But at the same time they are leveraging these trends increasingly as well, as evidenced by the increasing use of efficient retrocession and the importance of units such as SCOR’s Alternative Solutions.

The importance of being able to not just navigate the competition from ILS and alternative capital but also to be able to leverage it within your own business is rising. That helps to expand the opportunity set for ILS investors, which will contribute to continued growth of this market.

Also read:

– Large European reinsurance firms still meeting cost-of-capital: JP Morgan.

– Big reinsurers: Some reinsurance lines no longer meeting cost-of-capital.

– Reasons to be cheerful, as cedents look to reinsurance capital support.