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Good afternoon, ladies and gentlemen, and welcome to the SCOR Group Q1 2021 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. Olivier Armengaud. Please go ahead, sir.
Good afternoon, and welcome to SCOR Q1 2021 Results Call. My name is Olivier Armengaud, Senior Manager, Investor Relations team. And I'm joined in the call today by Denis Kessler, Chairman and CEO of SCOR; and the entire Executive Committee. Can I please ask you to consider our disclaimer on Page 2 of the presentation, which indicates that the financial results for Q1 2021, including in the presentation, are unaudited. I would also ask you to note the statement in respect of COVID-19. And before starting our Q&A session, I would like to hand over to Ian Kelly, CFO of SCOR.
Thank you, Olivier, and welcome, everybody, to the call today. Let's start on Slide 4. In a quarter marked by the continued expected development of COVID-19 and an extreme and severe winter storm in the U.S., SCOR clearly demonstrates once again its resilience and shock-absorbing capacity. COVID-19 continues to develop as we anticipated. It is manageable and tracks closely in line with what we communicated within our full year 2020 results. On the Life side, the COVID-19 impact stands at EUR 162 million, of which EUR 145 million comes from the U.S. mortality portfolio, while on the P&C side, the impact is stable compared with the end of 2020. Our solvency ratio at the end of Q1 is very high and stands at 232%, above the optimal range and reflects all currently expected future COVID-19 impacts. In addition, the industry had to face the large natural catastrophe event of winter storm Uri in Texas, which had an impact of EUR 98 million for SCOR, net of retrocession and before tax. Whilst the combination of such events is extreme, it remains within the group's risk appetite, and it is the duty of the group to anticipate these risks and to absorb them. Moving on to Slide 5. In the first quarter of 2021, SCOR continued to successfully develop its franchise. You can see on the slide that at constant exchange rates, gross written premiums stand at EUR 4.4 billion, up 5.6% compared to Q1 2020, driven by P&C up 10.3%, benefiting from the excellent renewals during the year, and steady Life growth up 2.1% with continued franchise expansion in Asia. Moving on to Slide 6. In the context of the pandemic and the natural catastrophes, SCOR delivers a net income of EUR 45 million in Q1 2021, with strong underlying profitability. On the P&C side, the combined ratio stands at 97.1%, with 12.6 percentage points from natural catastrophe. On a normalized basis, the combined ratio is extremely strong at 91.4%, better than the Quantum Leap assumption. On the Life side, in line with what we had anticipated, the technical margin was impacted by COVID-19 claims in the U.S., in line with the communicated guidance, and stands at 1.6%. Finally, SCOR Global Investments seized opportunities presented by the bond market on the back of the reflation dynamic and delivered a solid return on invested assets of 3.0%, driven by EUR 77 million of realized gains. Moving on to Slide 7. The solvency is very high at the end of Q1 2021, standing at 232%. This, as I said, is above the group's optimal solvency range of 185% to 220%. The increase in solvency was mainly driven by the significant impact from market movements on the back of the sharp increase in U.S. interest rates but also from the positive contribution from the operating performance of the portfolio. The solvency ratio at the end of Q1 continues to reflect all currently expected future COVID-19 impacts. Let's move on to Slide 8. SCOR continues the digitization program we laid out in Quantum Leap and continues to deploy new technologies across the organization to improve our operational efficiency and productivity but also to broaden our product and service offering to create long-term value. In the first quarter of 2021, we have been able to deliver several ambitious digital projects, notably on the P&C side, a new satellite-based pasture insurance tool in Brazil, a rating tool dedicated to inherent defect insurance, an enhanced business-to-business pricing engine in trade credit insurance and an in-house pricing and risk scoring mobile app. On the Life side, we launched VITAE, a cutting-edge artificial intelligence biometric risk calculator. And finally, on the group side, we moved our internal reinsurance software, Omega, into the cloud. Let's move on to Slide 9. We have many reasons to be confident about the industry's prospects. On the Life side, the acceleration of the vaccination rollout confirms the COVID-19 deaths track in line with our epidemiological modeling. Whilst some uncertainty, of course, remains around the magnitude and the duration of the pandemic, at this stage, we expect to be able to return to the Quantum Leap technical margin assumption range of 7.2% to 7.4% by Q4 2021, translating into a full year technical margin of around 5%. On the P&C side, we believe that COVID-19 is one of the factors helping to create the conditions for stronger reinsurance growth, combined with a positive pricing dynamic. We expect these positive trends to drive continued pricing and terms and conditions improvements in future renewals. For 2021, this translates into a P&C normalized combined ratio trending towards 95% and below. Finally, on the investments side, we continue to seize opportunities presented by the bond market on the back of the reflation dynamic, particularly in the U.S., through realizing gains. The liquidity from this divestment is to be reinvested across the course of the year as the market stabilizes. We confirm our return on invested assets assumption for the year in the range of 1.8% to 2.3%. Briefly on a few other key financials. On Slide 12, the shareholders' equity of the group remains strong at EUR 6.3 billion, an increase on the year-end position. And this results in a book value of EUR 33.61 per share. And finally, on Slide 13, I would like to highlight the strong cash flow of the group, with net cash flow from operations exceeding EUR 0.5 billion during the quarter, resulting in a strong liquidity position of EUR 3.3 billion. With that, I will hand back to Olivier, and we can go to the Q&A session. Thank you.
Thank you very much, Ian. On Page 21, you will find the forthcoming scheduled events. And with that, we can move to the Q&A session. [Operator Instructions] Thank you.
[Operator Instructions] Our first question is coming from Vikram Gandhi from Societe Generale.
It's Vik from Soc Gen. Hope all of you are doing fine. I've got a couple of questions. The first one is on the Solvency II ratio. I acknowledge that 232% is quite strong. However, when I use the latest sensitivities and then overlay the fact that the group has higher liquidity and lower corporate credit exposure, it appears a bit too low compared to what I would have expected. Perhaps you can elaborate on some of the underlying movements there. And secondly, on the ordinary investment income, where there is a drop of about EUR 20 million quarter-over-quarter. I appreciate the group is sitting on more liquidity, about EUR 1.3 billion. But even considering that, the drop seems to be a bit too high. Can you shed some light on what is driving this?
Frieder, on the first question?
Yes. Thank you. As Ian said, most significant driver of the increase in solvency ratio was the increase in yields, particularly U.S. yields. So this accounted for the bulk of the upwards movement. There was also positive capital generation, broadly in line with average quarters in the past, so there was nothing unusual. We do allocate capital deployed to the growing business. So that, of course, needs to be funded. And we have also accrued for a quarter of regular dividend in line with previous practice. But there were no other significant movements beyond this and only very marginal impact from COVID during the quarter.
Thank you, Frieder. François?
So maybe, I think, there is 2 questions in your question. So the first one is linked to the liquidity and the exposure to corporate bond and the second one is the impact on the income yield. So first of all, let me explain the tactical positioning that took place at the beginning of the year. At the end of last year, we identified an increasing probability for U.S. interest rates to rise on the back of inflationary pressures, which, even transitory, create a new dynamic for the reflation trade in the interest rate market. So we took advantage early January of this positive environment. And we managed to sell more than EUR 1 billion equivalent of U.S. corporate bonds just before the rise of the 10-year U.S. interest rates. So the timing was good. We do believe that there is a further room of maneuver for steepening of the U.S. yield curve and still on the theme of the reflation dynamism in the market in the months to come. So that's why you see liquidity temporarily at 15%, which means the proceeds of the sale program are still in cash and the exposure to corporate bond has significantly reduced to 36%. We intend to reinvest in the next few months this amount of liquidity and to come back to a normal asset allocation as soon as we will consider the interest rate market will stabilize. So the impact on the income yield, as you saw previous quarter, our reinvestment yield has rebounded after having reached a low point in H2 2020. So that's explained the decrease of the income yield and also the fact that we have 15% of liquidity and only 30% of corporate bond today. As soon as we will reinvest -- and you see the good news is the significant increase during the quarter of the reinvestment yield to 1.6% compared to 1.2% in December. So you should expect in the second part of the year a rebound and an increase of the income yield again.
Our next question is coming from Kamran Hossain from Royal Bank of Canada.
Two questions. First one is just on the, I guess, underlying combined ratio. It looks like it was surprisingly strong, I guess, relative to your guidance for the year. How much of that 91.4% should we bank? And how much is simply kind of good luck on manmade, which has been light in the quarter? And the second question is, I guess, all the focus has been on COVID in Q1, especially in the U.S. where it's been a horrible quarter for, I guess, everyone in the U.S. everywhere. What's ex-COVID mortality look like? So if you could give any examples or kind of ideas around that, that would be exceptionally helpful.
Jean-Paul, on the combined ratio?
Yes. Thank you, Olivier. Kamran, on your question on the normalized net combined ratio, so as you saw, this quarter is the -- some of the net attritional loss ratio and commission is overall 5 points lower than Q1 2020. So of those 5 points, roughly 3 come from low activity -- a lower activity of manmade losses than in Q1 2020, and the rest is really the improvement of the portfolio. I think going forward, we'll still have to wait a few quarters to confirm this, but we think that we're starting to see some of the pricing improvements flow through the portfolio. And then we also benefited, as I said, from a very low level of manmade losses this quarter.
Thank you, Jean-Paul. Paolo?
Yes, Kamran. In terms of what we're seeing ex COVID globally, I would say, outside the U.S., the business has experienced a relatively buoyant performance in Q1. So we're very happy with what we're seeing. In terms of the U.S. portfolio, which is our largest mortality book, we are seeing some increasing claims across the overall U.S. portfolio after we exclude the deaths clearly reported as being due to COVID-19. And the volatility is similar in scale to volatility we have observed in other periods in the past, like Q1 2020 experience, for example. So it is too early to conclude whether this is connected to COVID-19 or just regular volatility. We have seen the usual annual flu impact broadly eliminated as a result of the COVID-19 containment measures. And we have to say that any long-term impact from COVID-19 will take some time to be determined and to emerge. We want to confirm that our reserves continue to be very strong with a significant margin of prudence, and we have a best-in-class experienced study team based in the U.S. focused on constantly monitoring and further improving our understanding of the driving factors of the U.S. mortality. So I believe, as we do regularly, I think when we come to the Investor Day later in the year, that that's a good time for us to give you more information on the overall evolution of mortality that we are observing in 2021.
Our next question is coming from Andrew Ritchie from Autonomous.
First question just on top line premium for the non-life business. I can see the effect of FX. And I guess the effect of FX does seem a bit stronger than I would have judged just from observed market movements in FX. I don't know if there's something unusual about the FX mix of your premiums in Q1. And the second sort of related question, when I look at the effect of deduction of unearned and deduction of reinsurance retro, it is bigger -- quite a lot bigger than Q1 last year. So it implies there's some mix shift or something different also about your Q1 non-life premiums, whether it's, I don't know, longer-dated business, there's a different earning pattern in it. Maybe could you just give us some color around that topic, the top line P&C and how we -- is there something odd about Q1 in particular? My only other question was I think the cat load seems quite high. I can see the Texas effect, and the Texas number looks about what I would have expected relative to the industry loss. But I'm surprised that you've picked up quite a lot of other cat losses in a relatively benign quarter. Were you surprised by that? And presumably, these levels of losses are such that there are kind of low-level frequency type stuff where you're not getting any benefit from retro.
Thank you, Andrew. Jean-Paul, for the 2?
Yes. Thank you, Andrew. So on your first question, the, let's say, constant FX growth, as you saw, reinsurance is increasing roughly slightly more than 6%. It's growing at 6.7%. Most of the growth is following the 1/1 renewals. So the current underwriting year is growing at 10%, in line with renewals, while the prior year is pretty flat. So that's where you see a difference in premium earnings. In addition, the growth in specialty insurance is very strong at 22%, and that tends to earn more quickly as well. The impact of FX really comes from 2 -- I'd say, 2 phenomena. One is the weakening of the dollar, which has an effect when translated to euros, but also the strengthening of the euro compared to all currencies. And so that affects not only premium in dollars but premium in all other currencies. So that's why we have a big effect this quarter. On your second question on the cat loss ratio, yes, we were affected by other cat losses in addition to storm Uri. The European storm phenomena affected Spain and Southern France, and that's roughly a EUR 15 million impact to SCOR, which is in line with our share of the treaties in France and Spain. And relative to the other cat losses, the more significant ones is additional deterioration on Sally and Laura. And this comes from the fact that the losses we had booked in Q3 and Q4 did not have complete information from our cedents, and the Q1 results incorporate additional information we received from a number of cedents which shows these losses deteriorating further. So we were surprised a little bit by this deterioration on prior losses but feel that the level reserved right now makes us comfortable that we should be stable for the remaining quarters.
Sorry, can I just follow up? The growth of specialty insurance earns more quickly, then I should -- what I was surprised with is the degree to which the amount -- the transition from net written to earned seemed lower this year, quite a lot lower than Q1 last year, which is, if specialty insurance is growing faster, wouldn't be the case.
Yes. But it's only 25% of the overall premium. The bulk of the premium is reinsurance. And the larger amount of premium earning is from prior underwriting years, which is flat more or less.
Okay. I guess the point being then the earned pace will pick up significantly as the year goes on, as we transition from -- as the prior year runs off as it were and the current year growth on the prior year.
Yes, that's right.
The next question is coming from Will Hardcastle from UBS.
Two quick ones from me. Can you just give us a bit of color on how the 1.6% reinvestment returns has been achieved? There doesn't look to have been much re-risking within the quarter if I look at duration or asset classes you've touched on. I guess just perhaps an outlook. If things stay from here, is that the sort of level you would be expecting, albeit you mentioned the expectation of U.S. pickup? And perhaps with re-risking, how much year-on-year income yield compression should we expect for next year, looking beyond, I guess? And second one is on premium. You've kind of touched on the rationale and the drivers behind the FX. It doesn't sound like there was anything abnormal then. I guess just so we're clear, if I look at those, should we expect a further headwind for Q2 before it stabilizes for the remainder of the year? Is that logic correct?
Thank you, Will. François?
On the first question, so that's true that our current reinvestment yield stands at 1.6%. Again, I remind you the definition of the reinvestment yield. That's the market yield of the fixed income and loan portfolio at the last day of the quarter. And we see an increase of 40 basis points compared to 31st of December last year, and that's mainly due to the increase of U.S. interest rate. So you should expect that increase of the reinvestment yield to continue with the steepening of the curve, and we should see a higher investment yield in the quarters to come. And as a consequence, as soon as we rebalance the 15% of liquidity into mostly U.S. corporate bonds, we will lock a new level of interest rate that will translate into higher income contribution compared to this quarter. So we confirm the range for the return on invested assets for 2021, so between 1.8% and 2.3%. At this stage, it's impossible to give you guidance or an expectation or an objective for 2022. It's too early and it's too difficult to predict such in advance of what central bankers are going to do and what could be the level of inflation in the next quarter. But my strong conviction is that you should see an increase of the income yield again as soon as we rebalance the portfolio, and that will mostly be done on U.S. corporate bonds. So you should expect, by the end of the year, to come back to an allocation between 43% and 45% to corporate bond within our portfolio and liquidity between 5% and 7%.
Jean-Paul, on the second question?
Yes. Thank you. On the second question relative to FX, the comparison to Q1 is comparing Q1 2020 with Q1 2021. I think as we progress throughout the year and compare Q2 versus Q2 or the half year of 2021 versus the half year of 2020, the effect should be more stabilized, everything else being equal. The big change in the currency happened with COVID, so -- probably more in Q2 2020, so that effect should be much less going forward. In addition, we have a large amount of premium that was -- and growth at 1/1/2021, which would be earning through in Q2 and the remaining quarters, and that should dampen the effect of the rate of exchange. So we expect it to be more stable throughout the year.
The next question is coming from Vinit Malhotra from Mediobanca.
So my 2 questions, first is for Paolo on the Life technical margin. So Paolo, I've been working with some interest how the modeling or the projections of mortality in the U.S have -- I think for the first time in at least a few attempts made in the last year. This time, they have been kind of trending to the charts that we have been seeing, so below 1,000 deaths by March end. I mean maybe 750 now, moving -- the average, and then moving towards something 600, 700 by the end of June. So what I'm trying to understand is that -- because obviously, in the past, these models had an error. So in this time now, they are tracking nicely. Would you say that there is some upside potential for the 5% for the 2021 technical margin? So that's my first question on Life. Second question is for François on the ROI target, given this liquidity rebalancing and also potentially some gains in the year. I mean if you look at even the top end, the 2.3%, and already being achieved 3% in the first quarter, it implies like we're looking for a rather low 2%-odd in the remaining 3 quarters. How should we -- I mean are you just being conservative or you think there could be some upside to that 2.3% but you don't want to quantify it at this stage? So I just want to hear any thoughts on these 2 topics.
Thank you, Vinit. Paolo, for the first question?
Yes, Vinit. Yes, as you mentioned, for us, the -- what we're seeing in Q1 is pretty much what we had projected at the Q4 disclosures in February. So we stay by the 5%. Our projections have not materially changed from what we presented to all of you in February. I think the only change we are observing is our weighted scenario, we show a narrowing of potential outcomes with probably a shift of casualties from COVID-19 being brought into Q2 and a lesser amount in Q3. That's kind of the change that our models would indicate. That said, that error you were talking about, Vinit, that has always been the challenge that any modeling has had to capture human behaviors effectively, first of all, human behaviors in terms of respecting certain restrictions, while -- whether distancing or masking. And I think the next big challenge is vaccine hesitancy overall, that is also human behavior. So that is what we're tracking very closely. We're also tracking very closely the emergence of -- potential emergence of new variants and the behavior of current variants, particularly in terms of vaccine resistance. So overall, I think we feel -- we reiterate the 5% assumption we have for the overall year. We still think that's a good number right now in terms of where we're seeing our results ending for the year.
Thank you, Paolo. François?
So on your question, Vinit, so first of all on the capital gain, what you should expect for this year. So we took EUR 74 million of capital gain on the fixed income portfolio. I cannot benchmark Q1. But if I benchmark what our peers at least in Europe did in 2020, we are in the low band of the contribution of fixed income capital gain to the return on invested assets. We are at 0.7% of contribution compared to our peers that stand between 0.6% to 0.9%. So I would say we are quite conservative on this side. You should not expect additional material contribution from the fixed income portfolio to capital gain this year. We are awaiting now the steepening of the various yield curves, especially the U.S. one. We have, let's say, kind of target or expectation of an entry point at 1.9%, and we are at 1.6% today on the 10-year U.S. rate. On the real estate side, that's true that also a contribution that you see each year -- given still the lockdown measures in France today, it's a little bit too early at this stage to have a firm view on our ability to disclose real estate assets this year. The current environment is too uncertain. Having said this, we hold several real estate assets which are mature and that we could sell if the market is there. And again, if the market is there, you could expect one sale before the end of the year. But I don't have yet the full visibility given the lockdown to confirm this. I remind you that we have EUR 122 million of annualized gain on the real estate portfolio that will flow into the P&L in the next few quarters and year. So now to your final question, am I conservative by maintaining the range 1.8% to 2.3%? It's -- maybe. It's a little bit too early. It will really depend on the speed of the steepening of the U.S. interest rates and the timing of the redeployment of the massive amount of liquidity that we have. So I think we will have more visibility in July or during the Investor Day after the summer to confirm or to revise upward the range.
The next question is coming from Ashik Musaddi from JPMorgan London.
Just a couple of questions, if you can help me. Sorry, going back to the ROI topic. I mean clearly, you are saying that the entry point that you will have on the reinvesting that cash or temporary liquidity into corporate bond is 1.9% versus we are at 1.6% at the moment. So how long will you wait for that entry point of 1.9% to be achieved? I mean let's say rates don't move for next 3 to 6 months, so how long will you wait for that? And as long as you don't reinvest at a higher yield, I mean, is it fair to say that you will be hitting this year's recurring ROI more at the lower end of the range, which is 1.8% rather than 2.3%? So some color on that would be helpful. The reason why I'm asking is I agree that interest rates should be trending higher. This is what all the pundits are saying as well. But never say never with interest rates, it just goes down forever. So that's one thing I have noticed for the past 25 years. So that's the first question. The second question is in terms of combined ratio improvement. Thanks a lot for giving some additional color about 5% lower attritional as of now. You mentioned that it is partly because of lower activity and partly because of portfolio improvement. Is it possible for you to give a bit more light on how much is that lower activity and how much is that portfolio improvement? I'm just trying to think a bit more for next 3 quarters how it might pan out from a lower activity perspective.
François, on the first question?
So on the first question, maybe let me give you our economic scenario. What we think today is that with central banks committed to stay behind the curve and governments to spend more money through budget of fiscal deficit, we think that steepening pressure should continue to affect the different interest rates curve and notably in the U.S. To come back to full economic activity and record low employment rate seems, I think, to be a prerequisite to any action by central banks against the potential spike in inflation. And acceleration of the pace of vaccination, easing of lockdown measures, coupled with tension on supply chains that we see, makes me believe that there is still potential for further inflation dynamism in the months to come, and my conviction is that it should happen by the end of the summer or beginning of the fall. So that's the central scenario we are playing today. So that's why I said, and that's my conviction, you should see a full rebalancing of the portfolio by the end of the year. The opportunity cost -- of course, there is a cost to any strategy. So the opportunity cost to maintain EUR 1 billion of corporate bond -- U.S. corporate bonds in cash, which means remunerated almost at 0 today is -- on a full year basis, it's a cost of 20 basis points on the income yield. Again, 20 basis points if we maintain EUR 1 billion in cash for 12 months.
Thank you, François. Jean-Paul, on the combined ratio?
Yes. On the combined ratio, so again comparing Q1 2021 with Q1 2020, there's a 5-point improvement. Of those 5 points, 3 are coming from a lower manmade loss activity. It's -- we're not really sure whether -- why it's such a benign quarter this quarter. Part of it could be explained by lower industrial activity because of COVID. And part of it could be explained just improvement in terms of conditions on the insurance side. So we'll have to wait a few more quarters to confirm whether this is an anomaly or a new trend. And the 2 remaining points is really improvement in profitability that we're seeing in this quarter. So if there was a normal level of manmade activity this quarter, to normalize, it would be -- instead of the 91-point-something it is this quarter, it would be more like a 94.
Okay. But just to be clear on this one. Basically, it feels like, so far, what you're seeing in terms of net pricing feeding into the combined ratio is 2%, which could be a function of your portfolio change or say, pricing improvement. So that's a fair comment, yes? It's not 1% that you were guiding at the beginning of the year, it's 2% at the moment.
Yes, right. This quarter, it's 2%, that's right.
The next question is coming from Thomas Fossard from HSBC.
First question would be for Paolo regarding management actions taken in -- or portfolio management actions taken in Q1. I think that adjusted for the COVID-19 claim in Q1, actually, we can compute a pretty high -- or higher technical margin at 9.4%, implying the delta to your long-term assumptions of EUR 44 million. So maybe, Paolo, you could explain to us where this EUR 44 million are coming from. And if at the end of the day, you are expecting portfolio actions to be a bit higher than what you were potentially guiding to at the end of the year. Second question would be related to P&C. Actually, we are seeing very, very strong results coming from the credit insurers. It looks like expected bankruptcy plans are far to pick up at this point in time. Could you quantify how much COVID-19 trade credit losses you've taken at the end of the year and what's the prospect for this COVID-19 losses on trade credit? I mean should we expect some form of release in the coming quarters? And very last one to squeeze also on the P&C. Can you say the Swiss -- the Suez Canal blockage for you was a Q1 claim or a Q2 claim?
Thank you, Thomas. Paolo, on the Life side?
Yes, Thomas. I think as I just mentioned before, for Q1, we saw very good underlying performance in the business. And ex COVID, we have seen the business performing definitely above our Quantum Leap assumption of 7.2, 7.4. I'd just like to remind you we're constantly working with our clients and our retro partners on treaties that are not performing as expected to optimize structures. And as part of our in-force management, we're regularly reviewing globally the portfolio and take actions where appropriate. I will say that in Q1, consistent with prior quarters, we have taken steps to increase premium rates in certain underperforming contracts. And these actions are similar to what we have done in the past. As we mentioned in February when we did the 2020 full year result presentation, the P&L impact and solvency ratio impact of each action, it really depends on contract terms and the mixture of businesses covered in each contract and the claim experience in the contract and other factors. So it's very difficult for us to forecast exactly how much is happening in one quarter or the other. And in 2021, we are continuing our strategy of optimizing overall our in-force portfolio. So overall, we -- again, as I said, we feel comfortable with the 5%. We think it gives us -- yes, it gives us good comfort as we go through 2021. I would also like to note that our overall research continue to have a very significant margin of prudence, and that makes us feeling comfortable as we move into the rest of 2021. Thank you.
Thank you, Paolo. Jean-Paul, on the 2 P&C questions?
Yes. So on the first one, on the Credit and Surety, what you're saying, Thomas. So we see the same thing that I think the fears of additional losses coming from COVID to the Credit and Surety portfolio is not -- has not been happening. We've seen reassuring results from our cedents in Q4. And from what we hear, Q1 is a similar trend. Actually, I think a lot of the underwriting actions that have been taken have actually improved the portfolio compared to maybe where it was before. So there's been a lot of underwriting actions taken by those companies and the performance has been very good. So we have some IBNRs that were taken for surety and we keep holding in Q1, and we'll review those as we receive additional information throughout the year. I think going forward, it's going to be very difficult for us on proportional business to really separate what is COVID and what is not COVID from those broad rows, so we would just look at the overall loss ratio. But the overall loss ratio right now seems to hold steady compared to pre-COVID conditions. On the Suez Canal, we did take some charge in Q1, a very small charge of 1.5 million. That's really related to the whole and some -- whole loss. What's uncertain is the sort of the contingent BI both from the canal itself and then from suppliers. As you know, the company managing the Suez Canal has filed a significant claim in the order of $1 billion, but the justification for the claim remains very unclear. And so I think those -- that information will take time to make its way through the marketplace. So right now, Q1, we've taken all the effect that we know for sure on the whole, and the rest, we're waiting to see how this develops.
[Operator Instructions] Our next question is coming from Michael Haid from Commerzbank.
Two questions. First, on the Texas winter storm and freeze, the EUR 98 million net loss on that claim -- you incurred from that. Obviously, it's quite a complex loss. First of all, can you give us a gross figure and how much the reinsurance recoverable is? And easily, one could think it comes from one treaty, but that is definitely not the case. It comes from many treaties and also many lines of business. Can you shed more light on the composition of this loss? How many treaties? How many lines of business? Second question, the obvious question. Capital position is very strong. What do you think about capital repatriation? Do you feel you need a buffer against your optimal solvency range? These are my 2 questions.
Thank you, Michael. Jean-Paul, on Texas?
Yes. On Texas, so the market loss estimated for the storm is about USD 15 billion. The -- our estimates are really coming from property treaties primarily, and this is primarily per risk and proportional treaties. There's some cat XL contribution but very little. Most of these losses would be in the retention of the larger programs. It's on the cat XL with some small companies that were affected. And we have a few claims from specialty insurance, but it's very limited. So the bulk of it is coming from a relatively large number of per risk and proportional property treaties.
And can you say the gross amount of what you expect for yourself?
Yes. The amount of recoveries is very limited. Let's say it's more or less gross equal net because of the composition of the loss and the fact that it also happened early in the year.
Thank you, Jean-Paul. Ian, on the capital questions.
Yes, sure. And Michael, yes, obviously, we're very happy that the solvency of the group is in a very strong position. But let's be clear that that's partly due to the movement in the interest rates in the quarter. On top of that, I would add we are still in the pandemic. It really is too early to be thinking about capital management actions such as additional capital return at this stage. And I would say on top of that, we remain in a positive market environment, in particular on the P&C side. So you've seen strong renewals from the group and given the market opportunities that we have with that hardening market environment, which we think will be sustained, that will carry on into 2022. That represents good value for shareholders in terms of accretive growth. So given all of those factors, it's a bit early to be thinking about capital return with the solvency ratio where it stands.
Our next question is coming from James Shuck from Citi.
So a couple of things. The reduction in corporate exposure -- corporate bond exposure Q4 to now, 43% down to 36%, obviously, you're rebasing that up by year-end and staying close to 45%. What's the drag on solvency that we should expect from that? There's clearly been a benefit in Q1 from moving the other way, but just keen to know what the drag will be as the year goes on.Second question on the combined ratio in P&C. So 91% is your normalized number, but you're normalizing for 7 points of nat cats and Q1 is normally a very light period for nat cat. So I'd be normalizing more at 3% or 4% based on history, which you kind of showed in the appendix. So that implies the kind of number of sub 94%, which is the number that you indicated, normalized for manmade. So maybe running about 91%. So perhaps you could just shed a little bit more light on that absolute number and what's driving that strong absolute number in Q1, please.
Thank you, James. Frieder, on the first question?
Yes. Thanks, Olivier. You should expect a relatively small impact of the reduction in recurring income. This is going to be much smaller than the effect of the interest rate movements themselves, which affect the overall bond portfolio and the whole balance sheet and our SCR. So compared to the dynamics of interest rate movements on our solvency position, the impact of holding this share of the portfolio momentarily in cash is quite small, and it can actually be favorable. If interest rates continue to increase, it will dampen the loss in market value of our existing fixed income portfolio and thus, be overall favorable for our solvency position.
If I may add to what Frieder said. And we may benefit also internal model from significant diversification benefit on the investment portfolio. So in any case, any re-risking of the portfolio, especially on, I would say, investment-grade corporate bonds would have, let's say, not material impact on the solvency ratio.
Thank you. Jean-Paul, on the second question?
Yes. I'm not sure I understand your question, but if I go back to the cat activity. So normalized using a 7% cat ratio, our net combined ratio would stand at 91.4%. As I described, compared to Q1 2020, that's 5 points lower, with 2 of those 5 points coming from -- yes, please, James.
Yes. So it's just like 7 points nat cat across the whole year makes sense, but Q1 is normally very light for nat cat. So I wouldn't use 7 points to normalize in Q1. So if I take your 94%, which is a normalized number for manmade, and then using 3 or 4 points of nat cat in Q1, I'm getting a number more like 91%. And my question is what's the driver of that being so good.
You mean the normalized or the cat -- I don't understand your question. On the normalized, what we do is we take 7% cat ratio regardless of the quarter. Whether it's Q1, Q2, Q3, we take 7%. So the rest is really an indication of the performance of the portfolio ex cat. And here, what we see is it's improving compared to last year.
Maybe we can take it off-line, but the question is more that 7% nat cat makes sense across the full year, but Q1 is not a normal -- Q1 is normally a lower number for natural catastrophes. So I wouldn't be normalizing at 7. I'll be normalizing at a lower number, which means your underlying combined ratio much better.
Okay. Yes. I understand your point, yes. So we -- that's not the way we've been doing it. So we don't have a normalization for cat that's relative to the -- let's say, the cat activity throughout the year. We just apply the same number across the same quarters. But you're right that Q1 has typically been a very low cat activity quarter. For the U.S. we see for the industry overall that Q1 this year is 4x higher than the 10-year average. So it's a reflection of the unusual nature of the storm Uri. But throughout the year, Q2 is typically also a relatively low cat activity quarter. So we'll have to see what the rest of the year has in store for us. But in the meantime, that 7% is a normalization we use across the entire year in every quarter. I can take this off-line with you.
The next question is coming from Paris Hadjiantonis from Exane BNP Paribas.
A couple of remaining questions from me. Firstly, on renewals. Now we've seen the results of your April renewals. There is some market commentary about a slowdown in pricing momentum as we go into June, July and given June, July is a bit more U.S. focused. I mean if I look at your April renewals, you have been quite disciplined and you have been stating that in certain cases, prices were not very compelling. So if you can give us some kind of commentary of expectations going into June, July, that would be helpful. Now secondly, again, on the P&C side, and it relates more to the development of the COVID loss. I'm wondering how IBNR reserves essentially have been developing over the quarter as you have been getting more claims notifications and whether now you have additional data points that make you confident that the current level of the reserves is adequate. I remember, last time we had you on the phone, saying something along the lines that up to EUR 20 million of losses on the P&C side for 2021 relating to COVID. Is that still the case? Or has anything changed there?
Thank you, Paris. Jean-Paul, on the 2 questions?
Yes. Thank you. On the first question, so going into the reinsurance renewals, we did see at April 1, especially in the U.S., sort of a more difficult market for reinsurers. But it's also a reflection of the fact that it's a relatively small renewal in terms of number of clients and treaties renewing. And as well, the treaties renewing were mostly not loss affected. So on the property side, you saw in our disclosures 4% rate increases on the U.S. cat, which is smaller than we achieved in 1/1 and smaller than we anticipate going forward. But I think it's just a reflection of the programs renewing, particularly in that date. For the case of going into June, July, we expect to go back to rate increases year-over-year of high single digit to low double digit on the cat side. On the casualty side, we also saw in the U.S. a different dynamic than expected, where a number of markets have been satisfied with the level of rate increases achieved on the insurance and therefore, happy to keep commissions -- reinsurance commissions either stable or actually increasing them in favor of the insurance companies. In those cases, we've reduced or come off those programs. So going into the renewals in June, July, we expect more of the dynamic to take place. It's a question mark of -- say, the casualty renewals were affected by some of the new markets with either new companies or companies that were not active in casualty becoming active in casualty reinsurance again, and those markets affected the outcomes. The question is whether they will remain to the same level of activity in June, July or will that sort of level off. So we remain cautious on the U.S., more optimistic on the cat going into June, July and on the rest of the regions renewing, still very bullish in terms of market trends and price increases achieved. Relative to your question on -- and maybe before we go to COVID, maybe Laurent, you can give an overview of what we're seeing on the specialty insurance side.
Sure. I mean on specialty insurance, so what I mean here is largely the large commercial lines insurance inside the business, rate increases still remained extremely strong, in particular on the casualty side where the momentum remains the same. On the property lines, in energy, occupancies and heavy industries, we have been seeing rate-on-rate increases of 2 digits for almost 3 years now. And we are seeing a deceleration, I would say, of the increases. So still positive increases but clearly, there has been a deceleration. In terms of rate adequacy, we are in very positive territory on property lines and clearly, casualty given social inflation. Given interest rates, we still have some way to go before getting good rate adequacy. But by and large, we are currently in a hard market for insurance that we haven't been in for several years. So it's -- the profitability has been pretty strong.
On your second question regarding COVID, at the end of Q4 and again in Q1, we had booked EUR 284 million for COVID. At the end of Q1, we have paid EUR 39 million for COVID claims. So even though we're starting to receive some information from cedents, it has been still very slow coming in, especially on the property BI. I think insurance companies are also trying to get a hold of the information themselves, whether it's 1 way, 2 way or 3 ways or is it one event or several events. And so I think this information is still ongoing, and we'll probably take another quarter or 2 to get better clarity.
The next question is coming from Vikram Gandhi from Societe Generale.
I've got 2 more left. One is on the ForEx impact on top line, which I'm aware we discussed early in the call, where, François, I think you suggested that it was dollar depreciating against the euro and euro also appreciating against most other currencies. Now when I see how the shareholders' equity has developed in Q1, there is a decent positive impact from ForEx translation. Now I know it isn't impossible to have this sort of divergence, but I would have thought it's pretty rare. So perhaps you can explain what is driving this difference, a positive impact on balance sheet and a negative on P&L. And the second question was really trying to understand the movement in unrealized gains on real estate, and this is on Slide 45. I see there is a small drop in unrealized gains from EUR 125 million to EUR 111 million, whereas there hasn't been any realized gains from real estate over the course of the quarter. So I'm just trying to understand what's the right way to look at these figures. So any explanation there would be helpful.
Thank you, Vikram. Ian, on the first question?
Yes. Yes, sure. So the dynamic -- the FX dynamic that you're seeing there, Vik, is that Q1 -- sorry, the top line premium, that's an average rate comparison, Q1 2021 against Q1 2020. And what we see there is Q1 '20, the dollar-euro rate was about 0.9. In Q1 2021, it's about 0.8. And that's driving the impacts there, those average rates across those periods. And to give you some sense on premium, we've got about 44% is U.S. dollar-denominated, 19% euro, 10% GBP and then we're into other currencies. And then on the CTA that you see in the balance sheet, that is a -- that's a closing rate impact. So that's closing rate Q1 against closing rate Q4 2020. And there, you do see a slight reverse, in fact. So I think Q4 '20, the dollar-euro rate was 0.82; now, 0.85 broadly. So that gives you the dynamics -- the reason you see the top line coming down, but the -- a positive impact in the CTA. Okay.
François?
So on the real estate portfolio, that's just a mechanical effect due to the fact that we have invested on some assets, so it increases the book value of some assets. And we have an external valuation of our real estate portfolio by independent expert that is done at the end of June and at the end of December. So market value have not been reviewed. It will be done in Q2 as previous years. But we have increased the book value due to investments on some assets. So that's just a technical effect that should disappear as soon.
Our final question is coming from Thomas Fossard from HSBC.
A very quick modeling question. You reported a 36% tax rate in Q1. Can you shed some light on what we should expect on a normalized basis for -- not a normalized basis, but on a reported basis for 2021? Should we work with a normalized 20%? Or should we factor in the 36% reported in Q1?
Yes. It's Ian here, Thomas. Yes, on the tax, this is distorted a little by a couple of effects. Firstly, we were experiencing a geographic rate mix that had losses in the low tax rate jurisdictions, principally COVID losses. So that was appearing in Ireland and then coming -- sorry, appearing in the U.S. and then coming through into Ireland. And then we had the profits coming through more in the higher rate tax jurisdictions, particularly in France. So the losses on the P&C side, they were principally retained in the U.S. Some did come through to France. But the very strong underlying profitability that we've been talking about in the call on the P&C side, that more than offset that. So that's distorted the group ETR in a quarter where the overall net income is low. So we would expect to normalize back towards the 24% Quantum Leap numbers by the end of the year as we progress through the following quarters.
We have no further questions over the phone, sir. So that does conclude the question-and-answer session. And at this time, I would like to hand the call back to the speakers for any additional or closing remarks.
Thank you very much for attending this conference call. The Investor Relations team remains available to pick up on any further questions you may have. So please don't hesitate to give us a call. I wish you good afternoon. Thank you.
This does conclude today's call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.