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Good day, ladies and gentlemen, and welcome to the SCOR Group Q3 2018 Results Conference Call. Today's call is being recorded. [Operator Instructions]At this time, I would now like to hand the call over to Mr. Ian Kelly, Head of Investor Relations. Please go ahead, sir.
Good morning, everybody, and welcome to the SCOR Group 2018 Third Quarter Results Call. Can I please ask you to consider the disclaimer on Page 2 of the presentation, which indicates that the financial results for the third quarter 2018 included in the presentation are unaudited?With this, I would like to give the floor to Denis Kessler, CEO and Chairman of the SCOR Group, who is joined on this call by the entire ComEx. Thank you.
Thank you, Ian, and good morning, everyone. The first 9 months of 2018 fully demonstrates the relevance of SCOR's strategy and the resilience of the business model. When you look at the results we present this morning, we did have a; 1, sustained premium gross in the group's targeted geographical areas and business lines; 2, excellent technical results in both Life and P&C, and in both Treaty and Specialty; 3, continuing improvement in the income yield; 4, a stable cost ratios that bears witness to the efficiency of the group's operations; 5, excellent operating cash flow; and 6, a high solvency ratio marginally above the optimal range.SCOR's global footprint Tier 1 status and go-to-market approach allows the group to continuously expand and deepen its franchise globally. At present, SCOR operates in 38 offices worldwide and covers risk in 160 countries, serving more than 4,000 clients. We expect to close a EUR 15 billion mark of gross written premiums in 2018, mainly driven by a development in the U.S. on the P&C side and in Asia Pacific on the Life side. This translates into a 10% annual gross rate since 2009 at current exchange rates.Let's move to the next slide. SCOR records a very solid performance in the first 9 months of 2018. First, the group delivers strong [indigenous ] gross, gross written premium stand at more than EUR 11.3 billion in Q3, 2018 year-to-date, up 7.4% in constant exchange rates compared to the same period last year. Strong gross is driven by an expanded and deepened franchise of the group's 2 business engines: Life and P&C business is up 9.2% and 5% respectively at constant exchange rates, which is a right metric.Second, the group delivers a strong set of technical results. The P&C net combined ratio of 93.6%, robust Life technical margin of 7% and a return on invested assets of 2.5%, driven by a continuing increase in the investment income yield. It is worth highlighting that despite the high level of natural catastrophic events across various regions in the third quarter, the P&C combined ratio year-to-date is striking better than our strategic plan assumption.Last but not least, the group solvency ratio stands at 222% at the end of the third quarter, slightly above the optimal range of our solvency scale driven by robust capital generation. Excluding the impact of the U.S. tax reform, SCOR's net income for the first 9 months of 2018 would stand at EUR 405 million corresponding to a return on equity of 8.9%, higher than the profitability target set out in the Vision in Action plan. Even the high frequency of natural catastrophic events in the third quarter is performance based witness to the relevance of SCOR's strategy and with resilience value creation capability.The group is in very good shape and we are well on track to meet the targets of Vision in Action. Finally, SCOR continues to execute its EUR 200 million share buyback program as planned. Half of the program has been executed and completion remains on track for July 2019. In the meantime, for pursuing the optimization of our legal entities, the merger of the 3 SEs will be completed as planned in the first quarter of 2019.Let's go to Slide 5. SCOR is uniquely positioned to accelerate its franchise expansion and pursue its strong value creation. All 3 engines are powering ahead. SCOR Global P&C strengthens its position in the U.S. where we continue to enjoy a steady expansion with the ability to regain a market position that is commensurate with the global position and Tier 1 stages. At the moment, we're around number 10 in the U.S. versus being number 5 globally. Besides, SCOR's Q1 status and prime rating are major assets to capture profitable growth opportunities in a more favorable P&C market environment.Asia Pac, SCOR Global Life records exceptional growth close to 30%, 3-0, per annum, successfully delivering the Vision in Action and leverages the quality of franchise to outgrow the market. Finally, SCOR Global Investment expects to strongly improve its financial contribution to the group's bottom line from a higher recurring yield. Thanks to the positioning of our invested assets portfolio which remains highly liquid, the expected rise in interest rates would be very positive for SCOR. All of the 3 engines have additional room to contribute positively to improving the return on equity, is a continued focus on value creation.Let me now hand over to Mark for the financial details. Mark, the floor is yours.
Thank you, Deni, and good morning, everyone. So let's begin with Slide 6 and I'll walk you through the financial highlights of the third quarter results. SCOR underwrote EUR 11.3 billion of gross written premiums in the third quarter of 2018 representing a 7.4% increase over Q3 2017 at constant exchange rates or 1.9% at current exchange rates. This top line growth was generated by the strong contribution of both business engines. SCOR Global P&C grew by 5% and SCOR Global Life by 9.2% both at constant exchange rates. P&C net combined ratio for the first 9 months of the year stands at 93.6% including a 7% nat cat ratio due to heavy nat cat activity during the third quarter.Our Life technical margin reached 7.0%, also in line with the Vision in Action assumption. Finally SCOR Global Investments delivered a strong return on invested assets of 2.5%, driven by a recurring yield of 2.3% in the third quarter 2018 year-to-date. Overall, SCOR's net income for Q3 was EUR 80 million due to the elevated nat cat ratio of 16.5% within the quarter. Year-to-date, net income stands at EUR 342 million with an ROE of 7.6%.Excluding the impact of the U.S. tax reform charge booked in the second quarter, the net income would stand at EUR 405 million. And this translates into a normalized return on equity of a 0.9%, well in line with our Vision in Action profitability target of 800 basis points above the 5-year risk free rates. SCOR's solvency position remains very strong at 222% at the end of Q3, marginally above the optimal range of our solvency scale, and at 219% if we were to take into account the execution of the remaining part of our share buyback program.Now moving on to Slide 8. SCOR generated very strong cash flows of EUR 811 million. SCOR Global Life benefits from strong cash flow in particular due to positive impacts from financial solution deals in the United States, while SCOR Global P&C also provides robust cash flow. Overall, the total liquidity of the group is strong and stood at EUR 1.2 billion at the end of September 30, in line with our asset allocation assumptions.Let me now hand over to Victor, who will give you more details on the P&C results.
Thank you, Mark, and good morning. As an introductory remark, I'd like to say that the market we've been in for the last 7 years is now leading to the emergence of increasingly differentiated technical performances between insurers and reinsurers. It is, therefore, becoming increasingly relevant to assess each company's technical performance on its own merit without putting all of us in the same basket and without systematically trying to find common ground, trends and fortunes that may not actually exist.For us, whilst Q2 was characterized by abnormally high activity in terms of man-made losses, Q3 has seen first a return to normal for man-made loss activity which is reflected by the technical performance of business solution; and second, significantly higher than average nat cat loss activity. Q3 2018 events, Jebi, Florence, Mangkhut, and Trami, are assessed based on the latest claims information available. Considering the nature and the magnitude of these recent events, you will appreciate that at this point in time, there is a significant degree of uncertainty in these estimates.Again for us, all in all, the performance on a year-to-date basis continues to be excellent with a net combined ratio of 93.6% and a growth of 5% at constant exchange rates. This growth continues to be fueled mainly by Treaty reinsurance in the U.S., but also to a lesser extent by Treaty reinsurance in Asia and Business Solution, thanks to our leading positions on major projects mainly related to infrastructure.You will have noticed that we've processed EUR 60 million of reserve release in this quarter corresponding to 1.5 percentage points of net combined ratio on the year-to-date basis. We are currently conducting our annual analysis of where our book reserve stands versus the best estimate and we believe that net of these releases, our margin above best estimate at the end of this year will be at a similar level to the end of last year.These reserve releases are generated in long-tail lines namely facultative casualty, Inherent Defects insurance, and French and U.K. professional liability with a good spread over a number of underwriting years. You will also have noticed that on a normalized basis, the net combined ratio stands at 94.1% on a year-to-date basis, which confirms what we've been indicating about the net combined ratio range at which we operate across the entire portfolio.At this point, it is worth mentioning that the normalized net combined ratios of 94.1% on a year-to-date basis and 92.1% for Q3, both benefit from around EUR 30 million of positive development in Q3 in the same long-tail lines that generated the reserve releases. Just like the reserve releases, the positive developments are spread over a number of underwriting years which illustrates our disciplined underwriting and our prudent reserving.This means that our aim to maintain our net combined ratio at around 95% is realistic. It is also realistic because we expect 2 ongoing movements that we are currently observing to balance each other out. On one hand, we may have to slightly adjust our nat cat budget when planning for 2019 and the following years. That being said, our nat cat net ratio stands at 7% on a year-to-date basis at the end of Q3, which even with medical already factored in for Q4 does not call our 6% budget into question in a big way.On the other hand, we are seeing the positive effects of the pricing improvement that we have obtained across the board in recent years, gradually materializing in the technical performance for the improvement of the net attritional ratio. This in mind, we are entering the renewal season in a very sound situation which allows us to carry on with the same underwriting policies and to continue to offer the business consistency and continuity that are so essential in our relationships with our clients.I will now handover to Paolo for the presentation of the Life division results.
Thank you, Victor. Global Life delivers a very strong performance in Q3 2018, both in terms of growth and profitability. In the first 9 months of 2018, we recorded gross return premiums of EUR 6.7 billion, representing an increase of 9.2% at constant exchange rates or 3.7% at current exchange rate. This strong growth is driven by the expansion of our protection franchise business in Asia Pacific which has grown at 29% per annum since 2016, in particular in China, South Korea, Japan.Asia Pacific is now representing a material share of the Life division both on premiums and results. Growth in Life, as you know, also been supporting by new financial solution deals which reflect the strength of the teams that we've built in this line of business. Going forward, we expect the full year 2018 gross written premium to normalize down in line with the Vision in Action assumptions or potentially slightly above.On the profitability side, we see a strong increase in the net technical results standing at EUR 462 million, up 8.5% at constant exchange rates. The technical margin is solid at 7% for the first 9 months, in line with the Vision in Action assumption. Performance of the in-force portfolio is in line with expectation and a new business underwritten continues to exceed the group ROE target.I'll now handover to Francois for details in our investment strategy.
Thank you, Paolo. Moving on to Slide 11, SCOR's total investment portfolio reaches EUR 27.6 billion at the end of September, with an invested asset portfolio of EUR 19.4 billion compared to EUR 19 billion at the end of June, mainly driven by strong cash flows. The positioning of the investment portfolio is in line with the Vision in Action target asset allocation.Liquidity is stable at 5% of the invested assets in line with the target level defined for the strategic plan. The share of corporate bond in invested asset portfolio is stable compared to the previous quarter at 49%, close to the maximum of 50% defined for the plan. And the duration of the fixed income portfolio is at 4.5 years compared to 4.6 years at the end of June.Our fixed income portfolio remains of very high quality with an average rating of A plus and highly liquid. Indeed, at the end of September, expected financial cash flows from the fixed income portfolio over the next 24 months is stand at EUR 5.5 billion, allowing SCOR to benefit from increasing our investment rate.SCOR has new exposure to Italian government bonds. SCOR Global Investments deliver a 2.5% return on invested assets for the first 9 months of the year, which is supported by a continuing increase in the income yield; 2% in 2016, 2.1% in 2017, and now 2.3% during the first 9 months of 2018.During the last quarter, our income yield reaches 2.5%, highlighting the relevance of the portfolio rebalancing implemented since the launch of the strategic plan. We benefit from an improved investment yield at 3% at the end of September. Under current market condition, we expect the annualized return on invested assets to be in the upper part of the Vision in Action 2.5% to 3.2% range, both for full year 2018 and over the entire strategic plan. This level could be achieved, thanks to the disposal of a significant equity co-investment that might be completed by the end of the year.With this, I will hand it over to Ian Kelly for the conclusion of this presentation.
Thank you very much, Francois. On Page 12, you will find the forthcoming events scheduled for February next year, including the P&C January 2019 renewals call and the SCOR Group 2018 full year results presentation. So you can see the upcoming conferences which we are planning to attend during the remainder of this year.With this, we can start the Q&A session. Thank you.
[Operator Instructions] We will now take our first question from Kamran Hossain of RBC.
So firstly on the -- I guess on the Q3 cat losses, were any of them surprising and do you have an indication of what the return period for the losses during the quarter were because [indiscernible] 3.5 points growth fairly fetched? Just interested in that. And then I guess following on from that, any thoughts on pricing going into January given the losses? You've had plenty of them this quarter. As to year-to-date, you're still making a very decent margin. So any updated thoughts on that since Monte Carlo?
Victor?
On the return pay, no, we have not completed our studies on that. Well, it's obvious that you need to go -- except last year, you need to go back to 2011, 2012 to see the same sort of ratios in our portfolios. So it's certainly a heavy quarter. Regarding the pricing, well, I think first and I insist on that, the situation of each and every company is very specific and I think what we are enjoying at the moment is not the same situation for everyone. In addition, well, the number of lines of business that are in deficit from the worldwide basis has reached a level that is difficult to imagine that we can tolerate that on the longer basis. So I think the pricing improvement in my opinion will have to continue. They will have to continue on the very focused basis, line by line and market by market and more importantly client by client. I think there are currently Baden-Baden was -- conference is going on and there are lot of remarks that are made by different actors in there, which well, in my opinion describe pretty well the situation whereby, I mean, more and more with the pricing reinsurers, the leading markets, while discussions are becoming bilateral between the client and the reinsurers on the global basis, well, the entire business worldwide or in the region where they operate. So I think as I said, we are entering the renewal season in a pretty good position. We know where we are. We are -- as you say, we are good at the moment, but we know what it takes to be good at the moment. And we believe that in a number of areas and the latest areas to be highlighted is certainly the large corporate business in the downstream area, the petrochemical refining where the number of losses this year has piled up to a very, very high level. So those lines of business or those industry sectors will have to be continued to be rectified and corrected.
[Operator Instructions] We will now take our next question from James Shuck of Citi.
Two questions for me, please. Firstly, just in terms of the U.S. growth on the P&C side that you are targeting, I think you're kind of deemphasizing workers comp but re-looking to grow in general liability. I'm just interested to hear a bit more about some of the claims, inflation, patterns that we're seeing there, largely driven by whether it's wage inflation or whether it's due to other kind of liability and kind of talk, kind of issues. But are you still confident that you can still grow? Is this the right time to be growing in that particular line of business? Second question, could you update on where you are in terms of S&P surplus capital versus kind of a AA level? They've recently made some changes to their modules particularly around mortality and around ALM requirement. So just interested to hear what your surplus is over that level and how that has evolved over the year, please.
Well, our growth in the U.S. is a growth on the portfolio of about 250 clients with which we have established relationship. So it's not a growth across the board. Again it's a very focused growth deepening the relationships and increasing the alliance with selected clients. So we are very comfortable with the way we grow and the market segmentations that we've done. We continue to have, well, basically a no-go on workers' compensation. We do some of it within package of regional companies, but it's a very, very limited amount of workers' comp that we have. Regarding inflation, I think, we carry like other insurers I'm sure. We carry very thorough studies on an annual basis regarding the different parameters and the loss portfolios. So we have seen inflation. We have repeatedly said the last year and the year before that the price increases are barely covering this inflation and that we are not at the moment in a situation where the price increases are restoring margin -- well, the loss expectation, which is why we've grown much less than what we expected to grow. And we have passed on certain large contracts that have been offered to the market because we thought that basically the terms and conditions were not reflecting the situation of the market. But what is encouraging is that the primary insurers in the U.S. are totally cognizant of the situation and they are themselves with or without the pressure of our insurers, but sometimes without unfortunately they are themselves while going on with corrections of the market. So I think the problems are known and they are being dealt with, probably not at the depths or the speed we would like to see, but it's encouraging.
Thanks. Mark, on the solvency position of the group?
So for the S&P capital position, we've had pluses and minuses, as you point out, from changes in the S&P model, but we still remain firmly above, well above the AAA threshold in order to maintain our AA minus rating. So it's quite secure, not something that I'm particularly concerned about as we do our operating plan.
Would you guys be able to quantify that number? I mean, most of your peers do actually kind of give some kind of guidance about where you are on that? Because it's interesting just to think about that buffer relative to your Solvency II ratio. So is it more of a limiting factor to you and ideally if you could quantify, that would be great, please?
Yes, it's several -- it's an estimate obviously, but it's our estimate, not S&P's. It's several hundred million above the AAA threshold.
We will now take our next question from Jonny Urwin of UBS.
Just 2 for me. So just firstly, just to clarify the message that you're giving on the P&C combined ratio for next year. So is my interpretation correct that the stronger attritional performance we're seeing today might be offset a bit next year by a high cat budget? And then just to clarify again, did you -- you mentioned that the 92.1% normalized for Q3 was boosted by some positive reserve development or is that actually a normalized number? I didn't catch that, sorry. And then secondly, have your preparations for the 1st of January renewals been disrupted at all by the recent Covea bridge?
I think you read the message quite clearly. I think what we are saying in a nutshell is that we have been traveling at 94.5%, 95% combined ratio, net combined ratio. And we believe that next year considering the nat cat activity and also the penetration of nat cat business in certain areas of the world, the increased frequency of midsize severity, we will probably, well it all depends also on our retro program will renew. But I think basically it will renew as is. So we will be driven to probably slightly increase our Cat budget, which will be compensated by the continued improvement of attritional, thanks to the pricing corrections that we have already basically benefited from and will continue from benefit from. So overall, I think the 95%, well, as I said is for us a very realistic traveling sort of run rate for our combined ratio at the moment. Regarding the 94.1% year-to-date and the 92.1%, those are 2 normalized combined ratio. But they both benefit from positive development. Positive development has got nothing to do with the margin above best estimate or just positive development that we see as the years develop, and some of those positive development have been taken in the accounts of Q3. So if you -- and I am talking about EUR 30 million of positive development. So if you reintegrate those positive development in the normalized, well, your normalized would be again between the 94.5% and the 95%. So I think all of this to me is showing that there is a lot of consistency in our figures and a lot of stability in our net combined ratio. Regarding Covea, I think this has got absolutely no bearing whatsoever on the renewals. It's business as usual for us and for our teams. Everyone is from the client side and from our side, we are busy and discussing about next year and Covea doesn't at all come up in the conversations.
We will now take our next question from Thomas Fossard of HSBC.
Two question on my side on the -- for Victor on the P&C. First one would be regarding to [ HEM ] losses, just to better understand if you've seen any change to your early estimate made last year. How it has trended so far? And actually a few conventional, so how the -- maybe the buffer you had at the start of the year, you have changed positively or negatively? And the second question would be on the gross written premium, gross on the P&C re side. So year-to-date on constant FX basis, you had plus 5%. But I kept in mind from the September Investor Day and looking again this morning at Slide 123 of the Investor Day that you were more guiding towards something which was around 7% to 8% on a full year basis. So, I mean, should we expect a pretty significant pick up in Q4 based on the 9 months results?
Well, on the change, first of all we've paid about 50% of what we have booked in reserves. Secondly, well, for the moment, we see indications that are positive in the sense that, well, we still have a buffer or cushion of 10% to 15% between our reserved book and the sum of all the information that are providing to us by the clients and the insured. So this discussion we've kept it. We've decided to stay prudent and for the moment, we've not touched it. There will be a point in time where we will take a view on that. But for the moment, we leave it as it is. And we are pretty confident and more and more as time goes that, yes, there will be positive out of discussion. But for the moment, we've kept it and it is very stable. So we are pretty satisfied with what we did in the very first place. I think our reserving has been very solid, continues to be, and we'll see in the quarters to come whether we take a view or not on this, and/or when we take a view on discussion. Regarding the premium, we are at plus 5%. Well, difficult to say how much will the end of Q4 will be. But I would think that, well, what we gave an indication -- as an indication, but probably still stands maybe a bit softer than that, maybe 6% rather than 7% or 8%.
We'll now take our next question from Frank Kopfinger of Deutsche Bank.
I have also 2 questions. My first question is for Francois on the expected realized gains. You said that this disposals might be completed, so is there any risk that this could be postponed probably also due to the weak equity markets? But any color on this would be also helpful. And then secondly for Victor, on hurricane Michael as you mentioned, it's -- do you have already any view on the magnitude of potential losses here?
On the first question, on the expected realized gains, so again this is a co-investment within the equity portfolio. I have a strong confidence that the sponsor will execute the transaction before the end of the year.
Yes. [ Price ] is difficult. It's more a feeling that I'm going to give than really is something that is based on the information. I would think myself that Michael has got a potential even though we are not on cat specialist in Florida, but Michael has got the potential to be maybe slightly higher than Florence. Well, I think our take on Florence at the moment is pretty -- is probably a bit conservative. Florence seems to be trending downwards. So I can't give you a figure at the moment, but the feeling is -- but maybe slightly higher, but than Florence, but Florence maybe a bit too high at the moment in our reserves.
We will now take our next question from Vinit Malhotra of Mediobanca.
So Vinit here from Mediobanca. Two P&C questions please for me. First is on the -– for Victor, this traveling run rate of 95% going forward as well. Would it not benefit a bit from the price increases achieved or would you say that some of those price increases might be expected to go into the reserve buffers? That's the first question for next year, I mean. Second question is I just noticed that the feed-in premiums seem to have gone up quite a bit in the third quarter on the P&C re side. Is there something we should note if it -- because it doesn't just look like another cat bond or there seems to be some more thing there? If it's just an accounting thing, please, could you clarify?
Well, we have repeatedly said for the first 2 quarters that we had expanded our rate position, in particular our proportional rate position, which has got the effect on the seeded premium, on the earned net premium as well as on the on the expense ratio. So there is no secret about that. We have expanded the perimeter of our proportional rate position and we have been very open about that. Regarding the 95%, well as I said, I mean we are looking at our cat budget and we think that our cat budget may have to be slightly increased. Well, if we increase the cat budget, well, we believe also that our attritional will continue to improve, thanks to the translation of pricing improvements into the P&L. And for the moment, well, our indication is that we should have those 2 phenomenon balancing out. Hence the stability around 95%.
[Operator Instructions] We will now take our next question from Michael Haid.
Two questions also. You mentioned that every company, every reinsurance company is different. And when I look at this core combined ratio, I noticed you have a low attritional ratio in the third quarter. And also I noticed that you have a low commission ratio 23.4% only. Is that also driven because of your retro program? Or what is the reason for that? I'm not so sure about that. And the other thing is, you mentioned the EUR 30 million positive development and obviously the mix of releases of EUR 60 million. Can I just add up these 2 figures to arrive at a normalized combined ratio for the third quarter? How sustainable is a positive development of EUR 30 million? I think it's just third quarter event, right?
Positive development is outside of the normalized. Clearly, the normalized is reserve release and nat cat budget. So, I mean, the positive development I mentioned because you have seen that our normalized is slightly lower than our normalized of the previous quarters. But there is a quarter reason for that. So I think our normalize on the run rate is continues to be between 94% and 95%. But you've got a bit of positive development this quarter, positive development of the best estimate itself and not of the margin or over best estimate. So that's why we provided that information, so that well, we are clear on the fact that on our view, our normalized is 94.5% to 95%, not 94% to 94.5%. I know that Vinit is trying to drive us down worse by all means, but I prefer to be clear on where we are.
But should we expect the positive development, not in each and every quarter or...
We have a positive development every quarter, but what I'm saying is that this quarter, we had -- we have decided to take a view on certain positive development and we are having positive development this quarter that has above the, say, average sort of positive development we have on each and every quarter. Bit of a hike, that's all. But that explains why our normalized is a bit lower.
And the low commission ratio?
The commission ratio, yes, you're right. I mean you found the reason. We've seen more proportional, but the proportional is higher commission, so you seed something which is at -- acquired at a higher commission. So yes, the -- mathematically the effect is you lower a bit of your commission level. Yes.
And is the lower commission ratio then kind of a sustainable -- sustainably lower commission ratio for the next quarters?
I think at 25%, you have a good proxy of what the commission ratio going forward. You have it in one of the footnotes, by the way.
[Operator Instructions] It appears there are no further questions at this time. Mr. Kelly, I'd like to turn the conference back over to you for any additional or closing remarks.
Okay. Thank you very much for attending this conference call. Please do not hesitate to call us should you require any further information. And a short reminder that for the sell-side analysts we will hold our usual roundtable discussion at our office this evening starting at 6:00 p.m. European time. Thanks a lot and have a nice day.
This concludes today's call. Thank you for your participation. You may now disconnect.