SCOR searches for opportunities to deploy excess capital

SCOR has  said that its solvency ratio now stands at a high level, above the optimal range, meaning it has surplus capital available. It said the level of excess capital above the optimal range is approximately €200 million as at 31 December 2016.

The company’s solvency ratio was at 225 percent at the end of 2016 while its optimal target ranges between 180 and 220 percent.

“The principle use of potential capital will come from the property/casualty (P&C),” says CFO Mark Kociancic during the company’s 2016 results presentation.

SCOR Global P&C recorded gross written premium growth of 1.2 percent in 2016 at constant exchange rates, driven by a 5.4 percent growth in the fourth quarter. The last three months of 2016 benefited from the strengthening of SCOR’s position in the US, the company said.

The fourth quarter of 2016 and the January renewals have put SCOR back on a growth trend with increases slightly above 5 percent at constant exchange rates, which is at the mid-point of the 3 percent to 8 percent range indicated in the 2016-2019 plan, says Victor Peignet, CEO of SCOR Global P&C.

At the same time, technical profitability in P&C has deteriorated slightly. In 2016, SCOR recorded a net combined ratio of 93.1 percent, following two years of combined ratios close to 91 percent.

“The distribution of our growth is very much weighted towards the property and casualty treaty business and the US market,” Peignet notes. “Both the specialty lines and business solutions are impacted by the situation of the worldwide economy that mostly affects the engineering, and marine and energy lines of business,” he adds.

SCOR is, however, registering improvements in the construction market in the US which may be followed by Asian economies such as China, India or Japan, either locally or via investments abroad. Such a trend would be driven by infrastructure and power including renewable energies and water treatment and distribution.

Opportunities for capital deployment are less visible in the life side of SCOR’s business. “We’re fairly stable with the life plans. That’s coming along very nicely,” says Kociancic.

SCOR Global Life’s gross written premiums were up 8.3 percent compared in 2015 at constant exchange rates at €8.19 billion. Growth in the life business was driven by new business across all product lines in EMEA (Europe, Middle East and Africa) and the Americas. In addition, an expansion of the franchise in Asia Pacific was fuelled by new business flows in protection and financial solutions. SCOR also reported on the execution of new longevity deals. The expansion happened with a technical margin at 7 percent, benefitting from profitable new business, an increased share of longevity business in the product mix and a “healthy performance” of the in-force portfolio.

Pointing to the growth performance of the protection line of business in Asia Pacific, namely China, Japan and Korea, but also Canada and Latin America, as well as in longevity, the CEO of SCOR Global Life Paolo De Martin says that “we are going into 2017 with a strong level of comfort.”

“We keep deploying resource in Asia Pacific. The market has been very buoyant in the region for life protection business. We still see a good trend in the longevity market particularly in the UK and I think we’ll keep benefitting from the diversifying footprint that we have in smaller markets.”

De Martin is also satisfied with the profitability of the business as it is being written at margins “well above” the ROE (Return on equity) assumptions included in its pricing models.

“We are very comfortable where we see the margins coming in. And on top of that the in-force business has been very well in terms of results,” De Martin says.

SCOR is also likely to deploy some more capital on the asset side, according to Kociancic. “We still have some room to redeploy our resources to increase the capital intensity,” he notes. Acquisitions, however, are not in the cards. “That’s not something that we are actively pursuing at this time,” he says.

If these options do not offer sufficient opportunities to deploy the excess capital, SCOR might return capital to shareholders, either by increasing its dividend growth rate, by buying back shares, or a mixture of both.

But SCOR’s excess capital may grow further. The company is in the process of merging its units SCOR SE, SCOR Global P&C SE and SCOR Global Life SE. The combination of the businesses is expected to result in savings of up to €200 million in solvency capital.

“This project remains on track with work progressing well,” CEO Denis Kessler comments, and adds that it should provide the group with diversification benefits.

SCOR is currently negotiating with 48 jurisdictions to close legal entities and create branches to secure the continuity of the business.

“It’s definitely very complex,” Kociancic says. He points to the complexity of transferring portfolios and setting up branches in numerous jurisdictions, but notes that he is confident that the process can be finalized around early 2019.

SCOR is also increasingly confident that it won’t be qualified as a systemically important financial institution, which would have required an increase in capital reserves. “We have been arguing for years that the reinsurance industry is not systemic,” and “it seems that the regulatory pendulum is swinging in this direction right now,” Kessler says.