SCOR restructures or cancels 15% of P&C reinsurance book

French reinsurance company SCOR continued its selective approach to property catastrophe underwriting during the second-quarter of the year, restructuring or cancelling 15% of the SCOR Global P&C book as it maintained its disciplined approach.

SCOR is the first of the global reinsurers to report its results for the second-quarter this year and it’s results show that a disciplined, selective approach and a willingness to forgo business which does not meet its return or risk management requirements is a solid strategy.

SCOR grew its premiums across the business, as it sought out choice opportunities in the difficult market environment, with gross written premiums for the first-half up 12.5% at constant exchange rates on a year earlier. Much of the growth was in the life reinsurance area, up 19.5% year on year, but the P&C business also saw growth, being up 4.7% on 2013.

The SCOR Global P&C business also benefited from a reduction in combined ratio on a year ago, as attritional loss ratio improved and large catastrophe losses remained low, dropping to 90.9%, which helped the firm to maintain its profitability. However SCOR noted that the expected profitability of the P&C book has declined.

The impact of the decline in reinsurance rates for large reinsurers will be a gradual decline in the expected profits that their portfolio will return. No matter how selective they are in their underwriting or how disciplined they are, there will be a profit impact to the book and SCOR is being transparent about this.

The key for global reinsurers is to maintain discipline while faced with a book of business returning declining profits. If discipline is maintained then profit comes down a few points but all is well and this can be sustained and compensated for elsewhere across the diversified reinsurance portfolio. If discipline wanes, the impact could be much greater than a few points off profit, particularly if losses occur and a reinsurer is caught out for having relaxed its terms a step too far.

SCOR said that while the expected profitability of its P&C book is certainly on the decline, in terms of return on risk adjusted capital and underwriting ratio, it remains above target. However, underwriting ratio is down around 1% on 2013 and risk adjusted return is down 2.5%.

As we said, if discipline is lost a decline in RoE on a property reinsurance book could translate into a much greater deficit if losses ramped up due to the looser terms and conditions that have been offered in the market. This is the danger that some reinsurers will face over the coming months, but SCOR says that it remains alert.

SCOR said that its Global P&C business resisted detrimental changes to terms and conditions and focused instead on portfolio management, which lead it to restructure or cancel 15% of its book of business.

SCOR continued to leverage alternative reinsurance capital and insurance-linked securities (ILS) in order to offset some of its own risk and use the cheaper cost of ILS capital to bring efficiencies to its book. During the first-half of 2014 SCOR launched its first sidecar, the Atlas X Reinsurance vehicle, which it said was in-line with its capital shield policy.

On the other side, the SCOR Global Investments ILS business continues to manage third-party reinsurance capital within a number of ILS funds, providing it with management fees and also another source of third-party capital which can be used to add efficiency across the business.

SCOR seems to be navigating the difficult market effectively at this time. The decline in expected profitability of its P&C book is more than offset by its life and diversified reinsurance business at this time. As long as it has stuck to its disciplined approach and there has been no acceptance of too relaxed terms, the firm looks like it could be one to watch for out-performance against the sector in quarters to come.