Retrocession helps shield SCOR from losses, ILS untouched

French reinsurance firm SCOR felt the benefit of its retrocession program in 2017, recording net positives to its balance-sheet as it shielded the reinsurer from higher impacts from losses, but SCOR’s insurance-linked securities (ILS) coverage was untouched, as its Atlas cat bond escaped from the 2017 catastrophes.

SCOR has reported its full-year 2017 results, a year in which its gross premiums written rose by 8.6% (at constant exchange rates) to almost EUR 14.8 billion, with growth seen across the business from life to property and casualty risks.

The company beat analyst consensus on net income, with the P&C reinsurance unit driving performance, while the life business was somewhat weaker in the fourth-quarter.

SCOR’s combined ratio in P&C reinsurance came in below expectations, helping to boost income at the unit despite the hits from catastrophe events including the California wildfires. Retrocession is one reason for the better than forecast performance of this unit, as SCOR made recoveries under its program during Q4 and for the full-year.

The retrocession SCOR benefited from was not from its catastrophe bonds though, despite the firms Atlas IX Capital 2015 transaction having been seen as one of the most at risk from losses due to the hurricanes.

SCOR said that its retrocession program worked as planned though, helping to shield it from losses. In fact its full-year P&C losses from catastrophes came in at EUR 591 million from the hurricanes and Mexican earthquakes, after retrocession, which is down from Q3 2017.

It’s likely the influence of retro recoveries as well as clarification over loss amounts that helped to bring this number down a little.

The reinsurer reported that the California wildfires in Q4 2017 added another EUR 91 million to its loss tally in P&C reinsurance.

Retrocession had a net positive effect to SCOR’s 2017 annual results of EUR 398 million, compared to a net negative in 2016 of minus EUR 388 million, which shows just how the retrocession responded to the year’s heavy loss experience. EUR 288 million of the positive effects of retro was for the P&C business in 2017.

In the fourth-quarter SCOR reported a net positive effect of retrocession at EUR 129 million, compared to minus EUR 64 million in 2016, EUR 87 million of which was for the P&C reinsurance segment.

SCOR notes its P&C reinsurance segments “optimal retrocession coverage.” Retro has been an area of the business at SCOR that has always had a significant focus, as the company leverages it to protect its balance-sheet and shareholders and in 2017 the company said that its retro program “worked as planned.”

Commenting on the reinsurers results, Denis Kessler, Chairman & Chief Executive Officer of SCOR, said, “2017 was marked by an exceptional series of major natural catastrophes. SCOR successfully passed this real-life stress test, once again demonstrating the resilience of its business model and its shock-absorbing capacity. This confirms the relevance of our strategy based on a controlled risk appetite, an optimized risk composition, a balanced business model between Life and P&C reinsurance, and a robust capital shield through retrocession and ILS.

“SCOR accomplished its mission in 2017, honoring all its commitments to its clients and contributing to the protection of hundreds of thousands of people severely affected by catastrophes, while managing to deliver a good set of results. SCOR is pursuing its active shareholder remuneration policy, with a dividend of EUR 1.65 per share, to be approved by the Annual General Meeting. The Group is fully mobilized to reach the strategic targets set out in “Vision in Action”.”

Leveraging retrocession and the capital markets or ILS as tools to absorb shocks to its business has been working for SCOR and had the losses of 2017 been more severe the company would have felt the benefits of a recovery on its Atlas catastrophe bond as well.

Additionally, the firms contingent capital arrangement could also have been another shock absorber for the balance-sheet, had the losses been more severe.

So as a result, SCOR has benefitted from the support of its retrocessionaires in 2017, some of which will have been sourced through collateralized, capital markets backed underwriters, we’d assume.

But the company maintains its capital markets protection through its catastrophe bonds, ILS and sidecar, totalling $630 million in protection against catastrophe losses and mortality events.

Additionally, SCOR goes into 2018 with its EUR 300 million contingent capital protection still intact as well, providing another buffer against future shocks.

Finally, SCOR grew its book at 1/1 2018, as we reported here, but also added more retrocessional coverage as well. So for the year ahead the company maintains a significant buffer against major loss experience, demonstrating the importance placed on these protections at the reinsurer.