In an interview with a leading French finance portal www.capital.fr, Paolo de Martin, Chief Financial Officer of SCOR, outlines the Group’s strategy and long-term ambitions.

Back on its feet and in a strong position after the acquisition of Revios and Converium, SCOR has emerged amongst the world’s leaders in reinsurance. Paolo de Martin, Chief Financial Officer of the French company, explains the group’s vision in terms of management and details its long-term ambitions.

Capital.fr: The July renewals gave rise to a further increase in rates (+5.9%). You have just come back from the Monte-Carlo meeting (the profession's annual meeting since 1957). Is this trend continuing?

Paolo de Martin, CFO: Monte-Carlo is essentially the opportunity to hold discussions with insurers and brokers, but also rating agencies and the other stakeholders, to lay out our proposals in preparation for the reinsurance treaty renewals, the majority of which mature at 1st January. In terms of signatures, most renewals thus take place at the beginning of the year, with some in April (for Asia and certain specialties), then in July (for treaties related to natural catastrophes). In the autumn it is only the renewals in the aeronautics sector which are signed. Otherwise, we tend to talk more about the principle of guarantees: are we going to renew such-and-such a coverage, will we propose new ones, what amounts are we going to devote to it, etc. This recent meeting in Monte-Carlo reassured us in our conviction that we have entered a phase of durably sustained demand, combined with lesser, or at best stable, capacities. Consequently we are banking on the continued rise in rates, at a pace similar to that observed during the last renewals. Furthermore, the reinsurance cycle provides much greater stability than in the past. The trend is thus very favourable for the coming years.

Capital.fr: What have been the effects of the financial crisis on the reinsurance sector?

Paolo de Martin: The financial crisis has definitively ended the discussions which had emerged regarding the raison d’être of reinsurance: do insurers really need this intermediary? Would it not be more advantageous for them to cover themselves directly on the markets through securitizations (ILS)? The crisis has proven the extent to which reinsurance is quite simply an essential activity for the insurance value chain and for the economy as a whole. Reinsurance has demonstrated its reliability and its capacity to weather the crisis; the majority of reinsurers are even managing to strengthen their financial balance sheet without external aid... No reinsurer has collapsed as a result of the crisis, none has even needed external financial support. Our business model, which aims to be independent of the financial markets, is now recognised as an essential support to the insurance sector.

Capital.fr: What are the other growth factors in reinsurance?

Paolo de Martin: The implementation of the regulatory reform in the insurance sector, Solvency II, is another important factor in terms of expansion for reinsurance. This reform aims, generally speaking, to do to the insurance sector what the banking authorities established with Basel and Basel II: progressing from a relatively simple method of calculating solvency to risk-based modelling. Now approved by the European Parliament, Solvency II should be adopted by the member states by 2012. This reform implies greater sophistication in the way in which insurers manage risks and determine their solvency margins, which will create real opportunities for reinsurance. A number of small or medium-sized insurers will indeed find their risk profile insufficiently diversified (particularly in health and traditional life) to insure their guarantees, they will therefore increasingly need to turn to reinsurance. In terms of the reinsurers, diversification has always been an important requirement and we are already advancing in the spirit of this reform. So at SCOR, we have, for several years now, already been determining our capital requirements according to specific risk modelling.

Capital.fr: How is SCOR positioning itself compared to the other reinsurers?

Paolo de Martin: The sector is dominated by two giants, Munich Re and Swiss Re. These are followed by Hannover Re, Berkshire and ourselves. Sensing an increase in risks with regard to the two leaders, due to a number of their investments, some of their clients have sought to diversify. And SCOR is ideally placed to capture their attention: we now have a sufficient size, a longstanding presence, a very solid balance sheet and we have shown that we do not take risks at any point in the cycle which we cannot cover later on... This has brought us new contracts over the last two years, enabling us to reposition our portfolio in a more profitable manner. Furthermore, the fact that we rank amongst the 4 or 5 leading players positions us favourably in a syndicated business environment (syndicated contracts are preponderant in Non Life insurance to guarantee risks which could not be absorbed by a single reinsurer). Increasingly, SCOR takes the position of a lead insurer of such syndicates: in other words, a client asks us to structure an insurance programme where we are seconded by other reinsurers. Being lead insurer enables us to influence the final conditions of the contracts and then their management.

Capital.fr: Is the company envisaging any acquisitions in this context?

Paolo de Martin: We are concentrating on endogenous growth. As I mentioned earlier, the reinsurance market currently offers excellent opportunities for organic growth, so why look for acquisitions? We are restricting ourselves to one-off operations, so-called “gardening deals": in other words simply adding to our portfolio here or there. We are not seeking growth for growth's sake. Becoming global number one or number two is not our intrinsic objective: we are essentially aiming for profitable, sustainable growth.

Capital.fr: Your approach is also reflected in a very cautious investment policy…

Paolo de Martin: Indeed, we are currently very conservative and hold a great deal of liquidity (3.8 billion euros) even though it is remunerated at only 0.3%. We think that the governments’ considerable efforts to kick-start the economy, although necessary and welcome, will result in inflation in a two or three year horizon. We believe that it will be difficult to entirely purge the excess liquidity and that public deficits will persist. In this context, the best coverage is to hold short maturities (our portfolio has an average maturity of three years, excluding cash), even though we know that we are missing out on opportunities on the equity market.

Capital.fr: In September, SCOR announced the acquisition of a mortality swap. Could you explain what this product consists in, and how it fits in to your strategy?

Paolo de Martin: SCOR Global Life held an initial swap, allocating us a maximum coverage of 100 million dollars in the event of an increase in mortality of over 15% (due in particular to major pandemics) and up to a ceiling of 25%. We have further improved our coverage with the purchase of a second swap, whose threshold is set at an increase of 5% in mortality. It provides coverage of up to 75 million dollars if the ceiling (an increase of 10% in mortality) is reached. This demonstrates the rigour of our risk management policy. At the same time, we are not especially worried about the extent of the influenza A(H1NI) pandemic. We could call the virus intelligent: it has a high level of penetration but luckily its mortality rate is fairly low. For a virus, eliminating its carriers on a massive scale boils down to disappearing over a short period. Nevertheless, a global pandemic with a high mortality rate, such as a virus similar to the Spanish flu in today’s context, with a high concentration and mobility of the population, is a possibility which we cannot rule out. Our research centres estimate that an event of this type occurs once every 250 years and that it would cost us 600 million euros. We therefore bought this swap to reduce our exposure in the event of such a catastrophe. In fact, our aim is that no extreme scenario (catastrophes, attacks etc.) costs more than 15% of the company’s capital.

Capital.fr: So is the science of risk SCOR’s raison d'être?

Paolo de Martin: During seminars with investors, we are often asked why we don’t take more risks to earn more money. Because we believe that the risk is generally greater than estimated. If we try to double our return on capital, the probability of bankrupty would be multiplied by 14, an unacceptable level. Conversely, if we were to strongly increase our capital buffer, we would not find sufficient resources to deploy it with a sufficient return. The essence of our sector resides in the capacity to allocate our capital in an optimum manner, rather than in the actual size of the volumes. This cautious approach provides us with extremely stable results.

Capital.fr: Could you resume SCOR’s profile in just a few words, and explain its interest for an individual investor?

Paolo de Martin: We are very well positioned to become one of the reference reinsurers of the sector, through our size, our solidity and our skills. We aim to optimise the risk ratio of the Group’s capital. We provide our shareholders with a realistic return objective, namely 900 basis points above the risk-free rate. We also provide stable dividends (on average we distribute 35% of earnings) as well as total visibility of risks incurred. If an investor is seeking exposure to the usual asset management risks, he would be better off considering a financial company other than SCOR. However, if he wishes to take exposure (and receive the resulting remuneration) to usually non-economic risks (natural catastrophe risks, mortality risk etc.), reinsurance is, in my opinion, an ideal method of diversifying his portfolio.