SCOR on target despite higher than budget cat losses, as retro helps

Global reinsurance company SCOR has reported that it remains on target for the year after the third-quarter, despite suffering higher than budgeted catastrophe losses during the period, which is partly thanks to its retrocessionaires.

SCOR has reported positive group net income of EUR 401 million for the year-to-date, a 17.3% increase compared to the first nine months of 2018.

However, the firms P&C reinsurance business suffered as catastrophe losses including hurricane Dorian and typhoon Faxai dented the result, driving a higher combined ratio thanks to above budget catastrophe losses and leveraging its retrocession to share some of its losses and reduce their impact.

Overall SCOR continues to expand steadily, with gross premiums rising by 17.3% to EUR 12.055 billion for the year so far.

It’s the SCOR Global P&C (property and casualty) underwriting unit that is delivering most of this growth, with P&C premiums up 16.1% just in Q3 at constant exchange rates to over EUR 1.8 billion. For the year so far P&C premiums written are up 14.6% to over EUR 5.26 billion.

That’s impressive expansion which continues to be driven by the United States, where SCOR has made it its mission to grow profitably over the last few years.

Given the expanding P&C reinsurance book is coming at a time of improving rates as well, the underlying profitability of the portfolio will certainly be higher.

However, the impact of catastrophe losses continues to dent the performance and in the third-quarter of 2019 the P&C business would actually have fallen to a technical underwriting loss were it not for reserve releases that lowered the combined ratio.

SCOR’s P&C book suffered a 12% impact from natural catastrophes on the combined ratio, with the major losses also buffered to a degree by SCOR’s expanded retrocession program.

Hurricane Dorian resulted in a EUR 92 million loss after accounting for retrocession, SCOR said, while typhoon Faxai caused an EUR 89 million loss net of retrocession.

Year-to-date the catastrophe ratio now stands at 7.6%, above the budgeted 7% level. Given the impacts of typhoon Hagibis are expected to be as much as double Faxai’s, it’s safe to assume SCOR will also require support from its retrocessionaires for its losses from that event.

SCOR has been expanding its retrocessional reinsurance protection for a number of years now, with the capital markets assisting on a collateralized basis and also through any catastrophe bonds the reinsurer chooses to sponsor.

The strategy at SCOR has been to focus on optimising its retrocession, including the use of insurance-linked securities (ILS), while at the same time extending the perimeter of its retro protection to better buffer its results from volatility caused by losses.

While this does has resulted in additional retro cost, SCOR now finds its results regularly cushioned from the impacts of major catastrophe losses.

SCOR’s retro program has cost it more so far this year, but premiums ceded to it have also risen.

In P&C the amount of premiums ceded have more than doubled year-on-year, part of which may due to the fact SCOR is into its retrocession for typhoon Jebi loss creep now and so can continue to pass on any rise in losses to retrocessionaires from that 2018 catastrophe event.

In Q3 2019, SCOR has ceded slightly less in the way of premiums than it did in 2018 from the catastrophes that occurred, but still there is significant evidence of the retro program helping the reinsurer to moderate its losses.

Without the effects of the robust retro program, SCOR’s P&C business would without doubt have suffered a technical underwriting loss for the quarter even factoring in the benefit of the reserve release.

On top of the major catastrophe losses, SCOR’s P&C business was also hurt as its attritional loss and commission ratio rose to 81.3% for the first nine months, which is 2.1% above 2018’s.

This was due to a higher level of man-made loss activity, SCOR said, as well as the costs related to the Ogden rate decision in the United Kingdom.

But a release of prior year reserves amounting to EUR 60 million has helped SCOR to maintain technical underwriting profitability, as this took the equivalent of 4.1% off the Q3 P&C combined ratio, which came out at 99.4%.

For the year-to-date, SCOR Global P&C’s combined ratio was 95.7%, up 2.1% from 2018’s 93.6% at the end of Q3.

Normalised, the combined ratio stands at 96.2% after Q3, which is slightly above SCOR’s target range of 95% to 96%.

It’s very hard to identify the precise positive impact of retrocession during the quarter and year-to-date, but it’s certain that without it and had SCOR not made the changes to expand its retro program, the underwriting result in P&C could have been worse.

Part of the retrocession program involves the leveraging of third-party capital, meaning investors in some ILS structures and ILS funds that support SCOR will have supported the reinsurers results.

In a world where severe weather and catastrophe loss activity appears to be increasingly volatile and hard to forecast, robust retrocession and the use of third-party capital is increasingly key, even for the largest of global reinsurance firms.

Denis Kessler, Chairman & Chief Executive Officer of SCOR, commented on the results, “SCOR demonstrates once again its capacity to successfully combine profitability and solvency, in spite of challenging conditions that the industry faced in the third quarter of 2019, marked by a series of natural catastrophes and man-made P&C claims, combined with historically low levels of interest rates. The Group continues to expand and deepen its franchise both on U.S. P&C, the largest market in the world, and on Life reinsurance in Asia-Pacific.”

The steady expansion into the United States will of course bring SCOR face to face with a perhaps even more volatile loss environment, given the impacts of severe weather, hurricanes, social inflation costs and more, suggesting that its retrocession program will become increasingly key in helping the reinsurer realise the profitability of its growing portfolio.

Read more on SCOR’s results over at our sister publication Reinsurance News.