Past US failures make SCOR cautious as it grows US P&C book

In the January 2018 renewals, the reinsurer restrained itself, acting with caution and turning down business on which it deemed the pricing inadequate. It is a slow rebuilding process, Peignet admits.

SCOR has been clear for several years that it wants its P&C division, SCOR Global P&C, to further develop its US franchise and achieve clear Tier 1 reinsurer status. This is its stated goal in its “Vision in Action” plan 2016-2019. It wants to become a top-end reinsurer in the US by size—an achievement that would see its US unit match its position and market share globally.

The logic behind the strategy is clear: the US makes up just under half of the global P&C market. The P&C reinsurance industry total premium worldwide is worth around $160 billion; the US market alone is worth approximately $81 billion, according to a Sept. 26, 2017 SCOR presentation.

Rebuilding the US portfolio

There is still a way to go. In 2017, North America represented around 29 percent of SCOR Global P&C’s gross written premiums compared with, for example, 39 percent in Europe.

Peignet says progress has been made. “Over the last five years SCOR has re-established connections with clients that have profiles that reflect SCOR’s targets,” Victor Peignet, CEO of SCOR Global P&C, told Intelligent Insurer. “Overall, we have between 200 and 250 treaty clients in the US,” he said.

On the back of price increases following record-breaking 2017 catastrophe losses, SCOR has boosted its US property reinsurance premium volumes by 8 percent with rate increases of 7 percent. In the US, its casualty premiums grew by 7 percent as prices climbed by 0.3 percent.

Prices have improved particularly in the areas most affected by hurricanes Harvey, Irma and Maria (HIM), with Florida in the centre of hurricane paths. But this area is not a focus for SCOR, which is exercising caution. “The pure Florida domestic market is not for us,” Peignet said.  “Our approach has not changed after HIM.”

In addition to declining business in the more risky hurricane-prone areas, SCOR also remained disciplined on the pricing front, deliberately declining growth opportunities if the pricing was deemed inadequate

Overall, SCOR increased its property/casualty (P&C) reinsurance renewal premiums by 3.7 percent at constant exchange rates at the January 2018 renewals to €3.1 billion.

But this was modest compared with some of its rivals. Its German competitor Munich Re, for example increased the volume of business written at Jan. 1 by 19 percent to around €9.9 billion, due partly to new large volume treaties in the US and Australia.

But discarding less profitable business did allow SCOR to lift its achieved pricing levels at renewals. It reported risk-adjusted prices increasing by 3 percent overall. Munich Re achieved price increases of around 0.8 percent at the January renewals.

At the same time, SCOR’s strategy has meant a slower progress in its expansion and diversification plans in the US, where the portfolio continues to be focused on property. Much of this dynamic is a consequence of its experience around the turn of the millennium, when its US strategy backfired.

The past failure

SCOR had been expanding in North America since the early 1990s via its Bermuda subsidiary Commercial Risk Partners (CRP). The reinsurer developed long tail classes of business such as third-party liability and workers’ compensation. But the loss ratio for these classes deteriorated significantly a few years later, along with general reinsurance conditions.

“In 2000 we failed in the US,” Peignet said. “When we failed in the US it was basically because of casualty and professional liability. We walked away from that market,” he added.

In 2001, the group decided to exit totally from programme business in the US, a source of heavy losses in the past two years. The difficulties for SCOR were then exacerbated when the equity markets crashed after the terrorist attacks of September 11, 2001, impacting revenues generated from investments. This was compounded by a series of losses from those same terrorst attacks, natural catastrophes and asbestos. SCOR was also hit by losses on  some of the more esoteric elements of the portdolio it had developed which included credit derivatives, multi-layered debt instruments, political risk and alternative risk transfer (ART) deals.

As a result, SCOR skidded into a crisis. For 2002, it reported a net loss of €455 million reflecting the impact of the stock market crisis and additions to prior-year reserves. P&C reinsurance began to pick up in 2002, with a technical operating loss of €271 million, compared with a negative €440 million in 2001. SCOR had to increase reserves for its US business and it was downgraded by rating agencies. It required fresh capital injections to stabilise the company. In March 2003 it signed a letter of intent for the disposal of Commercial Risk Partners.

SCOR stopped writing casualty business in the US but this proved painful. “Unlike property, casualty is a long-term business,” Peignet said. “If you suddenly stop writing it, you enter into a cash flow squeeze. While you have invested the premiums of the past years, the losses are coming in and if you don’t get the new premium in you need to sell part of your investments,” he explained.

As part of the “Back on Track” plan 2002-2004, SCOR started to reduce the business volumes in the US and Bermuda including a sharp reduction in the underwriting of third party liability in the US. SCOR also committed to a reduction of its ART portfolio.

Work in progress

It took SCOR a while to recover.

“Since 2008 we are rebuilding the brand in the US,” Peignet said.

“We started to rebuild our portfolio via property and now we want to rebalance the portfolio and write more casualty and professional liability,” he added.

In order to do that, SCOR now wants to deepen the relationship with its existing clients.

“We have a lot of clients in the US where we are writing property, property cat, surety, construction. We write a bit of casualty and a bit of professional liability with some of the clients but the idea is to get to a better saturation of those clients by gradually penetrating all lines of business as long as we get the terms and conditions that fit with our targets,” Peignet explained.

But terms and conditions proved disappointing in the January 2018 renewals, despite record-breaking catastrophe losses in the previous year.

Although reinsurers sought to stem margin compression with more substantial rate rises at Jan. 1, 2018, many eventually ceded ground to clients as the date neared, particularly in non-loss affected areas, according to a JLT Re report.

Cautious on pricing

And it appears SCOR opted to take a tough, profit-first approach. It walked away from several large proportional deals which could have added an additional 10 percent premium growth.

Although some of the contracts were “interesting” negotiations did not lead to the terms and conditions SCOR was expecting, Peignet said.

But he is confident that the business will be shown to SCOR again next year.

SCOR did take advantage of improvements in non-proportional longer tail lines.

But Peignet said the pricing environment in the casualty business was disappointing. “This was a bit frustrating at the recent renewals. We thought that casualty would react and not only property,” Peignet said, noting that insurers had been saying that the casualty business in the US had deteriorated over the past years and needed strengthening.

Negotiations for casualty renewals were balanced by profitability pressures on original business and reinsurers’ desire for higher rates due to the build-up of claims, according to JLT Re. Loss-free casualty programmes therefore typically renewed close to expiring levels whilst accounts that experienced losses saw moderate increases. These outcomes were often accompanied by lower ceding commissions. Healthcare classes were mostly flat.

“We wrote some (casualty business), but not to the extent we were hoping to. What has been done this year is not been sufficient,” Peignet said.

Prices have not reacted enough because there is too much competition on the primary side and too much capacity on the reinsurance side and probably not enough deterioration of the loss ratios, he explained.

SCOR wants to expand in the casualty market because it offers the opportunity to build up reserves and, as a consequence, financial leverage.

“It’s good to mix and balance short-tail business where you releasing profits quickly, typically a year or two, with longer tail business, releasing profits over a longer period while building reserves,” Peignet explained.

“If you want to be a partner with clients that have property, casualty and specialty business you should be able to support them on all these lines of business. For the client relationship you should be able to write casualty.”

But, rebalancing the business in the US might take a while.

“Reinsurance is like a super tanker. You can’t change the business overnight,” Peignet said.