SCOR claims size allows it to better manage pricing pressure

“The hypothesis first expressed four or five years ago seems to be confirmed,” SCOR CEO Denis Kessler said during the company’s first half 2018 earnings call.

Kessler was referring to the notion that so-called Tier 1 reinsurers, which includes giants like Munich Re or Swiss Re, have a competitive advantage. Their size allows them to manage a diversified portfolio, operate in five continents and maintain a top rating.

The Tier 1 status enables access to large volume business which requires significant capacity, Kessler explained. The number of business lines that a reinsurer can offer its clients, as well as scale and scope play a role when you are competing for business, he notes. A large player also is better positioned to absorb rising fixed costs from regulation and compliance, he added.

“All these factors still play a role and are unlikely to disappear. Critical size matters,” Kessler said.

He noted that in the Tier 2 and Tier 3 space, merger and acquisition (M&A) activity remains common, giving further evidence that the assumption that size matters is correct. “I would say it will remain valid in the years to come,” Kessler said.

Chief financial officer Mark Kociancic, agreed: “I would emphasize the benefits of scale with respect to pricing power and economies of scale for absorbing costs whether it’s regulatory burden or technological burden that we have to face as an industry.

“Clearly there will be larger moves forward from a productivity point of view amongst the larger players putting even more pressure on the tier 2 and tier 3 to have this strategic question of consolidation in their future.”

SCOR Global P&C grew gross written premiums by 4.9 percent year on year to reach €3.03 billion in the first six months of 2018 at constant exchange rates.

SCOR P&C CEO Victor Peignet noted that there is a general increase in available reinsurance premium in the market driven by large companies. “There is an advantage for larger sized reinsurers with the diversification, with the ability to trade with large clients,” Peignet said.

“Our goal is to maximise topline under constraints. We are pricing the business in a very disciplined way. We are managing the portfolio, but if we can get more topline within the target which is both a technical ratio and return on capital we definitely will do it,” Peignet explained.

SCOR’s P&C net combined ratio improved in the first six months of 2018 to 91.4 percent from 93.5 percent. The return on equity (ROE) deteriorated slightly to 8.8 percent from 9.1 percent over the period.

“We are delivering. A lot of people can only dream about a net combined ratio of 91 percent for a global, diversified reinsurer,” Peignet said.

Peignet also believes that prices will continue improving “moderately,” independently of the outcome of the upcoming hurricane season.

The US cat business is not driving the P&C market and not even the US market, Peignet explained.

What happened in the past years is an erosion of the superior profitability of the US cat business, he said.

“That business used to be priced higher with better returns. People who have been relying on the US cat business for their earnings are seeing a bucket of superior market business that is shrinking, and that is creating an issue for them,” he noted.

But SCOR claims that it is not affected by this trend. “We are in a different position. We never really enjoyed those periods of superior margins because we were not heavily involved in US cat at that time,” Peignet said.

SCOR has been clear for several years that it wants its P&C division, SCOR Global P&C, to further develop its US franchise, a goal it included 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.

“We are building an overall diversified book,” Peignet said. As it works towards its goal, SCOR believes that it can manage the pricing pressure. “If you are negotiating on a US cat only basis, that is a different story. Our relationships with clients are global relationships across all their lines of business. The discussions are different in essence and I would hope that this difference in essence is going to continue to benefit companies like SCOR.”

SCOR is restructuring part of the P&C business, but Peignet notes that this is not driven by the need to address problems, but because it will allow it to better fulfil the company’s ambitions.

“We are reorganising our operations in order to maximise synergies and get more efficiency in the business to produce more at today’s profit levels or above,” Peignet said.

SCOR has reorganised the structure of its large corporate risks insurance unit, SCOR Business Solutions.

The unit is now built around three regions (EMEA, APAC, Americas), six global lines of business (construction, property, energy, casualty, financial lines and marine & transportation), a newly created portfolio underwriting unit, and a chief technical officer.

“This business has been performing pretty well with a strong underwriting performance,” said Laurent Rousseau, deputy CEO of SCOR Global P&C. “Our ambition here is twofold: For one we want to broaden our product range. In addition, we want to have a regional approach to growth in APAC, EMEA and Americas,” Rousseau adds.

SCOR Global P&C is also consolidating its specialty insurance operations in the London Market to create a single business platform.

SCOR’s London market operation is a combination of its Lloyd’s syndicate Channel, and SCOR business solutions (SBS) in London.

The new platform will offer either company (SCOR) or Lloyd’s paper to its customers or a combination of both.

“The idea is a growth plan,” Rousseau said.