SCOR SE’s Board of Directors met on November 8, 2022, under the chairmanship of Denis Kessler, to approve the Group’s first nine months 2022 financial statements(2).
In the third quarter of 2022, the reinsurance industry continues to face a challenging environment. The large and numerous natural catastrophes such as Hurricane Ian in Florida, Typhoon Nanmadol in Japan and Hurricane Fiona in Canada are further fueling an already hardening reinsurance market where capacity is scarce. The macro-economic environment is also volatile, with central banks hiking interest rates to fight against inflation.
SCOR’s challenging P&L performance reflects the highly volatile environment:
- SCOR P&C’s results reflect heavy Nat Cat claims (EUR 517 million in Q3 2022 contributing to a total of EUR 907 million for the first nine months of the year). Most notably, in Q3 2022, SCOR incurred EUR 279 million claims on Hurricane Ian. The cost of convective storms and hailstorms in France in June increases to EUR 166 million (EUR 113 million on top of the cost booked in Q2 2022). Man-made claims activity has been increasing as well in Q3 2022.
- SCOR L&H’s results benefit from positive underlying trends (including decreasing Covid-19 deaths in Q3 2022).
- Investment return benefits from the increase in interest rates with a 1.9% Return on Invested Assets for the first nine months of 2022 (2.3% Return on Invested Assets in Q3 2022) and will continue to see an uplift as interest rates continue to increase: reinvestment yield stands at 5.1% as of 30th September 2022, versus 2.1% as of 31st December 2021.
SCOR has also taken meaningful actions on its balance sheet:
- SCOR strengthens its P&C reserves by EUR 485 million (representing 2.3% of the EUR 21.5bn net P&C reserves) to take a prudent stance in a claims environment marked by high economic and social inflation.
- The release of IFRS 4 excess L&H reserves margin results in a technical profit EUR 460 million higher than the 8.3% normalized technical margin level in Q3 2022.
- SCOR takes a prudent stance on the tax assumptions on its balance sheet, through provision and non-recognition of Deferred Tax Assets (“DTAs”) leading to an additional EUR 94 million charge in Q3 2022, resulting in a EUR 139 million charge YTD. The losses not recognized for DTA purposes can be fully activated at a future date if appropriate. Going forward, SCOR expects to be able to absorb the DTA utilization and reduction in recoverability period.
SCOR’s solvency position remains very strong, at 217%, in the upper part of its optimal solvency range. This strong capital base will enable SCOR to take advantage of the acceleration of the hardening of the P&C market.
The combined effect of these developments results in a net loss of EUR -509 million for the first nine months of 2022 (EUR -270 million in Q3). The Group is currently focused on short-term remediation actions. Longer term commitments and targets will be unveiled to the market in 2023, under the new IFRS 17 accounting framework taking into account both the new macroeconomic context and the 2022 financial year results.
- Gross written premiums stand at EUR 14,827 million in the first nine months of 2022, up 6.2% at constant exchange rates compared with the first nine months of 2021 (up 13.6% at current exchange rates).
- SCOR P&C (Property and Casualty) gross written premiums are up 15.8% at constant exchange rates compared with the first nine months of 2021 (up 24.1% at current exchange rates). SCOR is adopting a more selective approach in Treaty P&C Lines(3), and continues to grow its Treaty Global Lines(4) and its Specialty insurance portfolios where market conditions are seen as attractive. The net combined ratio stands at 111.0%, including a 15.9% Nat Cat ratio. On top of this, SCOR P&C strengthens its reserves by EUR 485 million, equivalent to 8.5% of the net earned premium for the first nine months of 2022, implying a total combined ratio of 119.5% for the first nine months 2022.
- SCOR L&H (Life and Health) gross written premiums decline by 2.0% at constant exchange rates, compared with the first nine months of 2021 (up 4.7% at current exchange rates) as the Group rebalances the portfolio towards more health and longevity products and services in a post-Covid world. Over the period, SCOR L&H delivers a technical result of EUR 863 million, benefitting from a release of excess prudent margin in L&H reserves (delivering most notably EUR 460m above an 8.3% normalized level of technical margin for the sole third quarter). Following the release of excess margin, L&H reserves are adequate.
- SCOR Investments delivers a return on invested assets of 1.9% for the first nine months of 2022(5) and an investment income of EUR 305 million, with the regular income yield at 2.2% for the first nine months of 2022.
- The Group cost ratio accounts for 4.5% of gross written premiums in the first nine months of 2022.
- The Group net loss stands at EUR -509 million for the first nine months of 2022, reflecting mainly the impacts of Nat Cat claims (EUR -907 million) and the non-recognition of DTAs (EUR -139 million), while the impact of the P&C reserves strengthening is broadly offset by the release of L&H excess margin in the third quarter.
- The Group generates positive operating cash flows of EUR 54 million for the first nine months of 2022, driven by a positive EUR 867 million operating cash flow from SCOR P&C, while SCOR L&H operating cash flows are negative at EUR -813 million, notably impacted by the payment of Covid-19 claims (including from prior years), even though Covid-19 deaths are now declining. The Group’s total liquidity is strong, standing at EUR 2.3 billion as at September 30, 2022.
- The Group shareholders’ equity stands at EUR 5,430 million as of September 30, 2022, down from EUR 6,402 million at the end of 2021, resulting in a book value per share of EUR 30.39, compared to EUR 35.26 as of December 31, 2021. The largest driver for the change is the revaluation (assets measured at fair value through OCI) of EUR -1,117 million over the first nine months of 2022.
The current unrealized losses on the fixed income portfolio (EUR 1,595 million as of 30th September 2022) will not materialize and will quickly and significantly decrease as the securities that are part of it reach maturity (expected recapture of EUR 1,128 million in shareholders’ equity over the next 3 years).
- The Group financial leverage stands at 31.0% as at September 30, 2022, up 3.2 points compared to December 31, 2021 (27.8%), as a consequence of the decrease in shareholders’ equity. Adjusted for the negative impact of revaluation (assets measured at fair value through OCI) on the fixed income portfolio, the leverage ratio stands at 27.0% as of September 30, 2022.
- The Group solvency ratio is estimated at 217% on September 30, 2022, at the high end of the optimal solvency range of 185% - 220% as defined in the “Quantum Leap” strategic plan.
Update on SCOR’s strategy: focusing on a 1-year plan
SCOR is currently operating in a fast-changing environment driven by a number of paradigm shifts: the combination of higher interest rates and a return of inflation, together with heavy natural catastrophes activity and the pandemic have profound impacts on the reinsurance industry. SCOR has therefore been adapting its strategy to this new environment by building its resilience, focusing on a 1-year action plan to best position the Group in the new regime, and deliver a sustainable performance.
SCOR remains focused on restoring profitability and reducing volatility
The Group has already taken meaningful remediation actions in 2022:
- In the course of 2022, SCOR reduced its peak exposures (Nat Cat and US mortality). These actions have already started showing benefits.
- SCOR tightened P&C underwriting discipline and exposures. The Group reviewed its pricing assumptions ahead of 2023 renewals to reflect notably the new inflationary environment.
- SCOR took a prudent approach to its balance sheet resilience, by reviewing thoroughly its P&C reserves and building prudence in a highly inflationary environment.
The Group will stay the course in 2023 and has identified three strategic priorities:
- Restore profitability: the Group manages proactively its underwriting portfolios to increase profitability and reduce volatility. In parallel to ongoing underwriting and pricing actions, the Group acts to contain the impact of inflation on its cost base, building a nimble and lean organization will enable to deliver EUR 125 million yearly efficiency gains by 2025.
- Maximize the benefits of market tailwinds: thanks to its strong balance sheet, SCOR is poised to benefit from the favorable market trends both in P&C, through the positive development of the reinsurance cycle, and in L&H, by capturing post-pandemic market opportunities. SCOR’s investment portfolio will benefit quickly from the higher reinvestment rates thanks to a short invested assets’ duration.
- Build on a resilient balance sheet: SCOR will maintain a resilient balance sheet to deliver the right level of security to its clients and stakeholders. SCOR offers a AA-level of capital security to its clients.
SCOR sees appealing strategic orientations for both its businesses.
In L&H, SCOR will build on strategic continuity to reveal the full value of its leading franchise. The Group will leverage further its US mortality leadership position, while diversifying its portfolio
- geographically in APAC and Europe
- by deepening its longevity franchise
In P&C, SCOR will strengthen its reinsurance franchise. To deliver a sustainable performance across the cycle, SCOR will make the most of the hardening reinsurance market, after the successful build-up of its Specialty Insurance platform. To absorb shocks in an increasingly volatile environment, SCOR will build a resilient portfolio by leveraging its Tier 1 position in Europe and in Treaty Global lines.
One strategic imperative for reinsurers will be to offer a differentiated value proposition across both L&H and P&C businesses. SCOR will prepare for the future by accelerating the development of data and knowledge-driven solutions with clients and by fostering technological partnerships and investments to access chosen risks and clients of tomorrow.
SCOR will complete its IFRS 17-based economic performance framework in 2023.
SCOR is on track for the implementation of IFRS 17. SCOR strongly believes it will be a net beneficiary of IFRS 17, as the value of its L&H portfolio will be better reflected in the future accounting framework. Q1 2023 results will be presented under IFRS 17. Key performance indicators under IFRS 17 have been identified and need to be further calibrated and stabilized considering the current market volatility. The translation of SCOR’s strategy into IFRS17 targets will therefore be presented in 2023.
This proactive stance to business management will help SCOR deliver a sustainable performance for the benefit of all stakeholders, creating long-term economic value for its shareholders, bringing value to clients by offering a differentiated and sustainable value proposition.
Denis Kessler, Chairman of SCOR, comments: “In light of the Group's disappointing results, the Board of Directors asked the management team to accelerate the implementation of strong measures to strengthen SCOR's technical profitability and improve its operational performance. The Board will ensure that these measures are implemented with determination. This will enable the Group to take full advantage of the positive development in the P&C reinsurance market in terms of rate increases and tightening of terms and conditions.”
Laurent Rousseau, Chief Executive Officer of SCOR, comments: “The quarter has been difficult, and the results are significantly below the Group’s expectations. Our short-term priority is the restoration of our financial performance. The Group has already taken meaningful actions to improve its performance, reduce its exposure to Natural Catastrophes, and prudently reserve the combined effects of social and economic inflation. But these Q3 results demonstrate the need to go further and continue taking strong actions to remediate the Group’s underwriting performance and restore its profitability.
The hardening of the P&C market, the increasing demand for life reinsurance products and the increase in interest rates are drivers that should favor positive developments for reinsurers. I am confident that we are building from a sound base to navigate in the new environment and take advantage of market tailwinds.
We will communicate in 2023 the KPIs under the upcoming IFRS 17 norm, which will reveal SCOR’s economic value”.
(1) At constant exchange rates.
(2) The first nine months of 2022 financial information is not audited by the Company’s statutory auditors.
(3) Treaty P&C Lines include: Property, Property Cat, Casualty, Motor, and other related lines (Personal Insurance, Nuclear, Terrorism, Special Risks, Motor Extended Warranty, and Inwards Retrocession).
(4) Treaty Global Lines include: Agriculture, Aviation, Credit & Surety, Inherent Defects Insurance, Engineering, Marine and Offshore, Space, and Cyber.
(5) In 9M 2022, fair value through income on invested assets excludes EUR (38) million related to the option on own shares granted to SCOR. The 9M 2022 RoIA at 1.9% is calculated based on IFRS 9 and includes the impact of expected credit losses (ECL) and change in fair value of invested assets measured at fair value through profit and loss. Excluding those impacts (which would not have been recorded under IAS39), the RoIA would have been at 2.1%.