Earnings Transcript for SCRYY - Q1 Fiscal Year 2024

Operator: Good morning, ladies and gentlemen and welcome to the SCOR Quarter 1 2024 Results Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would like to hand the call over to Mr. Thomas Fossard. Please go ahead, sir.

Thomas Fossard: Good morning and welcome to the SCOR Q1 2024 Results Conference Call. My name is Thomas Fossard, the Head of Investor Relation. And I'm joined on the call today by Francois de Varenne, Deputy CEO and Group CFO; Jean-Paul Conoscente, P&C CEO; as well as other Comex member. Can I please ask you to consider the disclaimer on Page 2 for the presentation? And now, I would like to hand over to Francois de Varenne. Francois, over to you.

Francois de Varenne: Thank you very much, Thomas. And good morning, everyone. I am very pleased to present these Q1 results today. As usual, I will focus on figures excluding the mark-to-market impacts of the option on SCOR's owned shares. I have 4 key messages for you today

Jean-Paul Conoscente: Thank you, Francois. And good morning, everyone. I'd like to briefly share with you the outcome of the SCOR April 1 renewals. As a reminder

Thomas Fossard: Thank you very much, Jean-Paul. On Page 19, you will find the forthcoming scheduled events. With that, we can now move to the Q&A session. [Operator Instructions] Operator, can we get the first question?

Operator: [Operator Instructions] We do have our first question from Freya Kong from Bank of America.

Freya Kong: On the CSM and risk adjustment releases in Life & Health, I think the run rate was a little lower than expected -- well, lower than last year. Can we get some color on what's driving this? And secondly, on U.S. mortality, your comments seem to suggest ongoing negative variances are possible. What are the trends that you're seeing on this book? And can you take action, like, on the CSM instead?

Francois de Varenne: Thank you, Freya, for your 2 questions. So the first one, on the amortization rate. So the annualized amortization rate for Q1 is 6.8. Are we comfortable with the 8% guidance? I would say yes. If you look at the release of CSM and the risk adjustment release, it's in line with our expectation. We see it at 120 million in Q1, so implying 480 million if annualized, and with no addition of financial contract. And as mentioned, we have a few of them in the pipeline. So this compared to a CSM release of 7.6% in 2023. So for 2024, I would say it's still early days. And we will monitoring -- we will monitor closely over the coming quarter, but I would say, at this stage, we are confident on the fact that we should be close to our guidance. The second question was on the experience variance on Life, so let's be clear of, and maybe I explain a little bit, what is happening this quarter. Again, we are under IFRS 17. So under IFRS 17, due to way we report, it is natural that we observe some volatility quarter after quarter. So we had positive experience variance in 2023, for a total amount over the year of 140 million. It could be also negative some quarters, so there is nothing surprising but the fact sometime it's positive. Sometime it's negative. It can happen, I would say, both ways. The experience variance is coming mostly from 2 elements. The first one is we have a negative claim experience in the U.S. mortality, and that's what we observed this quarter. On top of it, on top of this negative claim experience, we detect a element of conservatism in the way -- or in the claims development pattern. Indeed we have taken a cautious approach in the way we recognize claim. And during the COVID period, there was material distortions between claims reporting. As we have emerged from the COVID period and claims pattern again evolved, we have consciously taken a conservative approach on how we project this claim in the future. So this element of conservatism will be reviewed by year-end. Maybe, Frieder, you can maybe explain a little bit more what we observed on the claims reporting effect.

Frieder Knupling: Yes. Thank you, Francois. So what happened was that, during COVID, both claims reporting from clients and our own claims processing periods have lengthened. We have then, at the time, reflected this in the way we extrapolate from reported claims for the past quarters to the expected ultimate claims load by assuming that there will be more claims reported in later periods, for those previous quarters, of death. As Francois said, we have maintained this extrapolation method in our claims factors for the time being even though clients have recently reaccelerated the way they report claims. And our -- also our own processing has become faster again. So as Francois said, that is something which we will review it later this year and see whether there's a readjustment needed to something which is closer to how we estimated ultimate claims load before COVID. And maybe also just to touch on your other question, what type of trends we are seeing. First of all, this is experience in 1 quarter. We wouldn't look at this as indicating a trend that is something which would have to emerge over a longer period. We are very carefully monitoring claims experience at a granular level by client, by treaty. And we have options to remediate underperformance where that is sustained and action is necessary. And we have taken those actions quite decisively over the past years. And we continue to manage our in-force business very actively. We have options to increase premium rates. We can work with clients to adjust premium structures. We can agree on termination of treaties for in force of a new business, so there is a variety of actions which we can take. And we have a significant team which is very focused on managing our in force business very actively and making the adjustments which are necessary.

Freya Kong: Wait. So can I just clarify? Are you seeing, I guess, an acceleration of reporting, which has driven this negative variance, and no real underlying trends to be aware of?

Frieder Knupling: So as I said, we wouldn't look at this as a trend. This is 1 quarter's experience. There is an element of adverse claims experience, for 1 particular quarter, of dates of death, namely Q3 2023, which has come through in Q1 this year, but we believe that there is also an influence of the changes in claims reporting as we just described which is probably amplifying this effect somewhat. And that is something we'll look at later this year to see whether there's an adjustment needed.

Operator: Our next questions come from Will Hardcastle from UBS.

Will Hardcastle: First of all, on the P&C reserve buffer build in the quarter, you mentioned some is perhaps in there for the Baltimore loss, but is there any chance you can give us any sort of guide or range of what that's been outside of that as well just so it can help us to back out our attritionals for the quarter? And then just coming back to that Life experience variance, I guess, on the second part of claim settlement timing. You're expecting -- it sounds like you're expecting a reversal of this come year-end. Is that right? And then on that U.S. mortality, is it just 1 quarter's data that's come in and therefore that's made you make an adjustment? Or is this -- I guess what I'm trying to get to is what can make us feel that this is a 1x event and done? Or what is it that could make us be more concerned that this could extrapolate?

Francois de Varenne: Thank you, Will, for your two questions. So the first one, on the P&C buffer, I remind you on the strategy we put in place with [CRE] since July last year. So with determination, and we communicate each quarter on the strategy, we had buffer. So the way we had buffer

Operator: Our next questions come from James Shuck from Citi.

James Shuck: I wanted to ask about the multiyear retrocession contract that impacted last year on the P&C business value, please. That's the first I've heard of it. I'm just keen to understand what kind of risk transfer is happening because, like, kind of connected with that is also the commutation that you did in the period. So what kind of risk transfer actions are you undertaking here? What more, like, might we expect either this year or in future years, please? That's my first question. I'm reluctant to use up my other question on this, but I think I'm going to have to, the mortality charge on U.S. Life again. I'm sorry to go over it again, but I'm just getting a bit mixed messages, what you're saying, when it comes to the year-end review, please. Because on one hand, what you're saying now is that you are being conservative in terms of recognizing the claims patterns and the payment patterns. On the other hand, you're saying, well, we're going to have another look at this at year-end. Does that sort of suggest that you're being conservative at this point, and therefore, on balance, it's more likely that you reverse out some of that conservatism at year-end? Or does this suggest that -- when it comes to year-end, that you might extrapolate off that, and therefore, we might expect further charges?

Francois de Varenne: Thank you, James. I will start by the finance view. And then Jean-Paul will complement on description of what we did both on the multiyear retrocession contract and the commutation. So on the multiyear contract, it was booked in Q1 2023, with most of the costs booked in Q1. And you saw it, and that was a significant impact. And that's a 4-year contract. On the commutation

Jean-Paul Conoscente: Yes. On the retrocession contract, it's a structured retrocession program that we entered into last year, so as Francois explained, a lot of the costs was accounted for last year, in Q1, yes, but that's why you see the ceded premium between '23 and '24 being stable because, from an accounting point of view, it's just performing as normal. So it's the impact is really on the new business CSM in Q1 last year. In terms of the program that was commuted at year-end this year and then accounted for in Q1 2024, it was an alternative solution transaction that we underwrote a number of years ago which the client viewed as being too favorable to the reinsurer and had the option to commute and took that option.

Francois de Varenne: Thank you, Jean-Paul. On your second question, on the U.S. mortality, let's be clear. I mean, the point that we mention on the reporting effect or the level of conservatism we could have today, as mentioned, we see it. We need still a few quarter to confirm if this is a trend or not. And this will be confirmed by the end of the year, with the annual review, so please wait the annual review before we can confirm if this is a trend or just also just a lag for a given quarter. But again, we start to see it for 2 quarters in a row, so we are working on it. On top of this, expect as for P&C, and we do it also on the Life side, at the end of the year, we have the annual review of all the Life & Health reserves. And we will take action, again in both direction, if necessary, to maintain our reserve at the best estimate level [indiscernible].

James Shuck: Can I just ask quickly then? I just -- on the multiyear contract, but my question really was just about risk transfer in general. I didn't hear anything, in what you said, about what that multiyear -- what contracts it's actually entailed and whether you're looking at further risk transfer actions, please.

Jean-Paul Conoscente: So as you know, we buy our retrocession at January 1. So this was, again, a multiyear contract entered into last year that was across different lines of business. We -- when we bought our retrocession at January 1 this year, we bought slightly more retrocession overall than last year because of favorable market conditions. And we're not expecting to buy any more retrocession during the year, except for our cat one that renews in the -- in June this year.

Operator: Our next question comes from Tryfonas Spyrou from Berenberg.

Tryfonas Spyrou: I have a question on the P&C we -- combined ratio guidance, 87%. It looks like now you sort of assume an 8% discounting in that combined ratio guidance. How -- with the actual discounting was around 9.6%, so I guess, maybe, can you help us square the 1.5, 1.6 point difference between the two? Is this really sort of the kind of amount of buffer you expect to have in the visibility in that? Is that the right way you'd think about that? The second question is on Brazil. I know you made some large changes there in your exposure over the last couple of years. Maybe, can you remind us your position here and maybe comment on whether you have any sort of exposure to the flats and agricultural side of things?

Francois de Varenne: Thank you, Tryfonas, for the 2 question. I will take the first one. So both the normalization or guidance on the combined ratio and what is happening on the discount impact. So on the discount impact, you know that it's quite complex. And every quarter, we have question on this. It's a complex topic. The discount impact is depending on yield curve, currency mix in the portfolio, business mix on the cash flow pattern and also movement on reserve. And we see this impact every quarter, and it could be more pronounced here and there. The minus 6 points, I would say between minus 6 and minus 7, guidance was computed on the yield curve at the end of 2022. So when we prepared the plan in the first half of 2023. So here you have the latest update of what we think could be the discount impact in 2024. So that's updated with the most recent yield curve or most recent view on the cash flow pattern and the business mix, so it should be between minus 7 -- I would say, on an average, it should be minus 8% in 2024. We decided not to change the guidance or the expectation on the combined ratio, so we maintain a combined ratio guidance at 87% or below, including buffers. Why? Because -- you know that there will be a downward pressure on the discount impact. With the decrease of interest rates, we expect in '24 -- in '25 and '26 the discount impact to be a little bit lower. So we prefer to say we maintain the guidance over the plan. And probably it will help us of -- it will accelerate or facilitate the buffer strategy in 2024, so we should put more buffer. Let's say it more simply. We should put more buffer in 2024, than expected, due to discounts -- to the discount impact. Now I mean, again, the way we see it. So here, I mean, the way we pilot the combined ratio and the buffer strategy, that's really linked to what I said. So now we take us -- we take as reference point an average discount impact of minus 8 points, again normalized for cat, 10%, normalized for the discount impact; exclude the Life commutation. Again, on the expense ratio, we think there is a little bit of seasonality. Don't take Q1 2023 as the reference point. That was the initialization of the first quarter under IFRS 17, so take more the full year 2023. For the expense ratio, it's 6.6%. And here it's almost 1 point above, in Q1. We'll see some seasonality with front loaded -- front loading of some expenses in Q1. My expectation is an expense ratio around 7 points. So if you normalize for this and you include the buffer, we will maintain the guidance of 87%. And it works in Q1. On Brazil, I give the floor to Jean-Paul.

Jean-Paul Conoscente: Thank you, Francois. So as you know, the situation is still developing. And assessments on the ground are difficult, as loss adjustments cannot really reach certain negations. When we look at the event from -- there's potentially 2 areas that were exposed, our agro book and our SBS book. On the agro, we've taken significant remediation action, so our exposures have been much reduced. In addition, the floods happen in between harvesting seasons, so there should not be a major event for agro. It's not -- we don't expect that. On the SBS side, we're looking at large -- the -- Porto Alegre is a big industrial area of Brazil. We're looking at what facilities have been affected and any BI losses, but it's a bit too soon for us to know. But overall, the expectation would be to -- for this event to be a small to medium-sized cat event.

Operator: Our next questions come from Vinit Malhotra from Mediobanca.

Vinit Malhotra: So well, to be honest, my 2 queries have been addressed multiple times. I'll just try to ask 1 or 2 things just to clarify. And one is if you look at the positive in the P&C, this new business CSM growth. Could you just help to adjust for that 1Q multiyear effect, so material retrocession effects of 2023? So in other words, what would you say the underlying growth of, yes, new business CSM. And second thing, and again apologies again, but just so I get the sense

Francois de Varenne: Thank you, Vinit, for the 2 questions. So the first one, I will be quick. So on the P&C, the growth of the new business on the P&C side. So you see a quarter -- compared to last year, a 50% growth. Again -- so the explanation is linked, of course, to the significant growth of the new business and the renewal of 1/1. As we discussed, Q1 was negatively impacted by the initialization of this multiyear retrocession contract. If you adjust for this effect, the growth is 19%, Q1 '23 compared to Q1 '24, instead of 50%. And that's really realistic and in line with what we renewed in -- at 1/1. On your second question, on Life & Health. Again, we could have -- I mean it's too early. That's the first quarter we see this. We had positive experience variance. So Thierry and I, as soon as we detect something, we look. We understand, and we take action if and where necessary. There could be volatility, and we take it. There could be this reporting effect. We are checking if this is a trend. And if this is a trend, we will adjust. And it will be a good news for SCOR and for -- in the account at the end of the year. And there could be also a review of, I would say, underlying assumption. And we review the experience this quarter, again, to detect if this is something that is just normal mortality or not. So it's difficult to quantify. And I can't say 50%, 50%. Let's take a few quarters before we really understand what is in the account this quarter. We are investigating further the root causes of Q1.

Operator: Our next questions comes from Kamran Hossain from JPMorgan.

Kamran Hossain: Sorry. Definitely doing this topic to death on the Life & Health side, so apologies. The question I had is on -- I mean, I guess, given the kind of negative claims trends you've seen and then obviously what appeared like conservative assumptions on kind of claims reporting, can I just ask? How often, for most of the clients, do you get updated on these trends? Have you seen anything in management data since quarter end that would make you come to a slightly different conclusion from what you've seen in the first quarter? And the second question is on the same topic. I just want to confirm my understanding, but I think, in the IFRS 17 transition, you changed some Life & Health assumptions. Just looking back at 2022, the first IFRS 17 result that you reported, this time last year was pretty negative on the Life side, so I assume some of that was transition and kind of assumption changes. So I just wanted to make sure that my understanding was right.

Francois de Varenne: So the first question, maybe Frieder, on the reporting effect.

Frieder Knupling: So we get very frequent claims reporting from clients. These can be monthly or weekly claims reports. Sometimes large claims are reported individually, so this is not coming in bulks, but we have a steady flow of client -- of claims reporting from clients. And we settle claims also on an ongoing basis. So there is not any type of cliff effect in the reporting. This is something which emerges over several quarters and is monitored very closely by us.

Francois de Varenne: On your -- Kamran, on your second question. So that's true. I mean you saw it when we prepared the transition to IFRS 17. So we took some action to change. Keep in mind, that transition of IFRS 17, that was almost continuity in the P&C reserves. Under IFRS 17, we have to rebuild everything, so it was not a transition. It was a recomputation, with a different methodology, of all the reserves. So that's why you had this effect in Q4 2022 just before the official transition to IFRS 17. Again, at the end of this year, we will do the annual review like we did in Q3 -- in Q4 2023, so then that's the -- like in P&C, we have this annual review of the reserve on the Life & Health side. As discussed today, we will review if there is an element or not of conservatism in the claims development pattern that we see in Q1, and again, but we did this last year. And we will -- again, at the end of the year, we will review the experience and the assumption. And again we will take action when and if necessary.

Kamran Hossain: Yes. Can I just follow up? I think I -- the second part to my first question was just around any trends you've seen in the data since quarter end. I don't know if you've got that to hand, given that you kind of have weekly or monthly reporting.

Frieder Knupling: Yes, it's a bit early to say. We'll update you, at the next quarterly call, on this, yes.

Francois de Varenne: Again, to detect -- I come back on this. To detect a trend after 1 or 2 quarter, we need a little bit more time.

Kamran Hossain: Perfect. No, I got it.

Francois de Varenne: We start to see something -- what I'll say is that we start to see something, but before we could say it's a change of pattern, it's a trend, we need additional quarters. And we think, by the end of the year, we could have our conclusion on this.

Operator: Our next questions come from Derald Goh Go from RBC.

Derald Goh: I'm sorry. My 2 questions are still on the U.S. mortality stuff, but it's, I mean, hopefully, asking you something that someone else hasn't asked yet. So can you talk about maybe the levers that you have to help reach your sort of 500 million service result target for the full year? I'm thinking about sort of the reserve buffers that you have in Life & Health re. Is that still available? How much is that? And do you have -- can you remind us if you have any retro protections in place for the mortality book? Secondly, I'm assuming that the impact has not yet been reflected within the solvency. And if so, could you give a feel for what might the impact be, maybe a sense of what share of all reserves that is exposed here?

Francois de Varenne: So on the first question, Derald, on the 500 million target for full year, we have a miss. As I mentioned it, we have a miss, yes, in Q1, so we need more positive experience variance in Q2, Q3 and our Q4 to reach the target. As discussed, we have also the capacity to put in place management action with our clients in the U.S., which mean to increase prices. That's normal process. It's not new. We have been, over the last few years, doing this, and we will continue. And we will see also if we need to review again, based on the experience, the underlying assumption of the portfolio at year-end. Then we could have good guys, bad guys, but -- good guys and bad guys. I know it for a given quarter and not in advance because that would be in the accounts -- if I knew it. On the second point, on solvency, Fabian maybe.

Fabian Uffer: This has been fully reflected in our own funds, so it's in the solvency ratio that we published. It's included.

Derald Goh: And can you say how big was that?

Frieder Knupling: Maybe just on...

Fabian Uffer: I don't have this figure. And we wouldn't publish it, but since we kind of re-estimate and do -- although, for Q1, we do a solvency ratio calculation, I would say, or a bit of a rolled forward from year-end but taking into account all the claims movement that we observe, obviously. And that gives the solvency ratio that be publish.

Francois de Varenne: So to say differently. I mean everything is taken into account on the solvency ratio. The 6 points that you see, most of the growth is explained by the integration of the VNB of the 1/1 renewal on the P&C side. So there is a strong capital generation of P&C; a positive one, net of the claims that we see in Q1 but still a positive one, from Life. And we have a market variance that is limited to 1 or 2 points this quarter in line with the sensitivity we published...

Derald Goh: Yes. And very quickly [indiscernible] confirm. What is the size of the overall reserves of this U.S. mortality book that we are looking at here, please?

Francois de Varenne: I don't think that's something we communicate on, but no, I will check with the team.

Frieder Knupling: Just on the question on retro. Yes, we have a range of retro programs in place covering the U.S. book and other parts of our global Life & Health reinsurance book. This comprises per-life retrocession to limit the per-life retention. We hold on individual lives' quota share retrocessions and a cat program covering us against local events which could affect a larger number of lives.

Operator: Our next questions come from Freya Kong from Bank of America.

Freya Kong: Can I just ask on the net margin guidance for P&C from your renewals? I think, at 1/1, you said this was around 1 point improvement after considering business mix changes. Given that you've shifted more into alternative solutions and specialty, is it still the same? And in terms of the growth for later-year renewals, should we expect around the same sort of levels? Secondly, on the tax rate outlook for the year, what drove the better tax rate in Q1? And is the outlook still 30%?

Francois de Varenne: Thank you, Freya, for the 2 question. So on the first one, given the price change that we see in the April renewal -- keep in mind, April renewal, that's only 10% of the portfolio. We confirm what we said at the beginning of the year. After, I will say, the bulk of the renewal at 1/1, we expect -- and pricing terms and condition are there to maintain our expectation of an improvement of the underwriting ratio of 1.5 points, excluding the effect of alternative solution. If this is your question, that's excluding the alternative solution impact. On the tax rate, we have a good tax rate, 24% this quarter. We maintain at this stage the assumption of 30% for the full year and the rest of the plan. It's a little bit too early to see if all the merger that we take to protect and to utilize the French [DTA] that we've got will lead to a quicker revision of this guidance, so I prefer to maintain the 30% at this stage, but I would say we are on good track on the tax side.

Jean-Paul Conoscente: And in terms of expectations for the upcoming renewals, we still see good opportunities in the marketplace. So it's a bit early, but we remain bullish on the renewals remaining for the rest of 2024.

Freya Kong: Can I just ask on the underwriting ratio improvement? Including Alternative Solutions, what's the margin outlook?

Jean-Paul Conoscente: There the -- we maintain the guidance of 87%. So the 87% guidance includes the effect of Alternative Solutions as well as the buffers as Francois explained.

Francois de Varenne: And we mentioned during the presentation of the strategic plan the type of volume we would like to reach on alternative solution during the next few years.

Operator: Ladies and gentlemen, this does conclude today's Q&A. At this time, I would like to hand the call back to our speaker for any additional or closing remarks. Thank you.

Thomas Fossard: Thank you very much. Thank you very much, everyone, for attending this conference call. The IR team remains available for any follow-up questions you may have, so please do not hesitate to give us a call. As a remainder

Francois de Varenne: Good afternoon, everyone. And thank you very much for your presence today.

Operator: This does concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.