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Edited Transcript of SCR.PA earnings conference call or presentation 24-Oct-19 7:30am GMT

Q3 2019 Scor SE Earnings Call

Paris La Défense Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Scor SE earnings conference call or presentation Thursday, October 24, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Denis Jean-Marie Kessler

SCOR SE - Chairman & CEO

* François de Varenne

SCOR SE - CEO of SCOR Global Investments

* Frieder Knüpling

SCOR SE - Group Chief Risk Officer

* Ian Kelly

SCOR SE - Head of IR

* Jean-Paul Conoscente

SCOR SE - CEO of SCOR Global P&C

* Laurent Rousseau

SCOR SE - Deputy CEO of SCOR Global P&C and CEO of the Specialty Insurance unit

* Mark Kociancic

SCOR SE - Group CFO

* Paolo De Martin

SCOR SE - CEO of SCOR Global Life

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Conference Call Participants

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* Andrew James Ritchie

Autonomous Research LLP - Partner, Insurance

* Avinash Prakash Goel

Societe Generale Cross Asset Research - Equity Analyst

* Jonathan Peter Phillip Urwin

UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst

* Kamran Hossain

RBC Capital Markets, LLC, Research Division - Analyst

* Michael Hermann Haid

Commerzbank AG, Research Division - Team Head of Financials

* Thomas Fossard

HSBC, Research Division - Co-Head of European Insurance and Analyst

* Vinit Malhotra

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the SCOR Group Q3 Results Conference Call. Today's call is being recorded. (Operator Instructions)

At this time, I would like to turn the call over to Mr. Ian Kelly, Head of Investor Relations. Please go ahead, sir.

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Ian Kelly, SCOR SE - Head of IR [2]

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Good morning, everybody, and welcome to the SCOR Group 2019 Third Quarter Results Call.

I please ask you to consider the disclaimer on Page 2 of the presentation which indicates that the financial results for the third quarter 2019 included in the presentation are unaudited.

With this, I would like to give the floor to Denis Kessler, CEO and Chairman of the SCOR Group, who is joined on our call today by the entire Comex team. Denis?

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Denis Jean-Marie Kessler, SCOR SE - Chairman & CEO [3]

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Thank you, Ian, and good morning, everyone. SCOR records a solid performance in the first 9 months of 2019. On a year-to-date basis at the end of Q3 2019, SCOR is achieving the solvency target and outperforming the profitability target of its new strategic plan of Quantum Leap despite the challenging conditions that the insurance and reinsurance industry faced in the third quarter, marked by 3 factors.

First, an elevated natural catastrophe activity with 2 major events, Hurricane Dorian in the U.S. and in the Bahamas and Typhoon Faxai or Faxai in Japan, I need to choose between the 2 way to pronounce it. Second, a series of significant manmade P&C claims throughout the world, including notably satellite losses, refinery fires, a major travel group failure and faulty construction claims. Finally, third factor, the low-yield environment as interest rates even fell further in the United States in particular.

SCOR has successfully navigated through these headwinds, once again demonstrating the resilience of its business model and its shock-absorbing capacity. The beauty of our mission as a reinsurer is to provide security and to safeguard the resilience of economies and societies impacted by those shocks. SCOR once again has completed its mission while managing to deliver a good set of results. The strong performance bears witness of the relevance of the recipe which the group has consistently applied over the years. Needless to remind you, the 4 cornerstones that allow SCOR to absorb shocks and to create value: First, our very active risk management policy; second, strictly controlled risk appetite; third, high diversification; and finally, a robust capital shield policy.

Let's move on to Slide 4. SCOR has consistently delivered strong P&C and Life technical profitability with low volatility over the years. You'll see on the left the evolution of SCOR's quarterly P&C combined ratio and Life technical margin from Q1 2006 to Q3 2019 included, representing 55 quarters. Over these 55 quarters, the combined ratio has been strictly below 100% in 9 cases out of 10. The third quarter of 2019 falls in this category with a quarterly combined ratio of 99.4% in spite of the large series of catastrophe and industrial events.

You see on the right the distribution of the reported quarterly return on equity on the same time period. As expected, the volatility of SCOR's profitability at the group level is even lower than that of the P&C combined ratio thanks to the additional diversification benefit with life underwriting risks and investment risk. The natural volatility in the P&C combined ratio is mitigated by the higher stability of the life technical result as well as return on invested assets. Thanks to this optimal diversification, SCOR consistently delivers results in line with its strategic objectives.

Over the last 55 quarters, the ROE has exceeded 4% in 93% of the cases. Again, the third quarter of 2019 falls into this category with a quarterly ROE of 7.5%. I repeat, quarterly ROE. These charts concretely illustrate how SCOR successfully manages to generate regularity from a raw material made of shocks and large risks.

Let's move to Slide 5. SCOR continues to expand and deepen its franchise in particular both on P&C in the U.S., the largest market in the world; and on Life in Asia Pacific, writing all together more than EUR 12 billion of gross written premiums in the first 9 months of 2019. This is an increase of 3.2% at constant exchange rates compared to last year, mainly driven by the strong growth of SCOR Global P&C of 11.5% resulting from successful renewals in an improving environment.

The SCOR Global Life coverable live growth of minus 2.5% at constant exchange rates reflects financial solution deals renewing as fees, as you know. If these renewed as premium on a like-for-like basis with last year, SCOR Global Life growth would stand at 3.8% as the group overall growth would reach 7%, at constant exchange rates, again. The group definitely expands this footprint.

The profitability is strong with a net income of EUR 401 million year-to-date at the end of Q3 2019, translating into a return on equity of 8.8% or 816 basis points over the 5-year risk-free rates, slightly above the Quantum Leap profitability targets. The technical profitability of the business engines through the first 9 months of 2019 is strong with a robust P&C net combined ratio of 95.7%, in line with the 95% to 96% assumption of Quantum Leap; a strong Life technical margin of 7.2%; and a return on invested assets of 3%. Meanwhile, the solvency ratio is in the optimal range, standing at 2-0-3, 203%, at the end of September.

The group's capital generation has been strong but unfortunately partially offset by the impact of market movements since the beginning of the year, particularly the decrease in interest rates, which is the main driver of the reduction in solvency. Hence, SCOR has successfully navigated the higher level of claims in the third quarter, combining disciplined growth, strong profitability and robust solvency.

I will now hand over to Mark for the detail of third quarter financials. Mark, the floor is yours.

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Mark Kociancic, SCOR SE - Group CFO [4]

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Thank you, Denis, and good morning, everyone.

So let's begin on Slide 5 and I will walk you through the main financial highlights of the quarter. In the first 9 months of 2019, SCOR underwrote just over EUR 12 billion of gross written premiums, representing a 6.3% increase over 2018 at current exchange rates or 3.2% at constant exchange rates.

SCOR Global P&C grew at 14.7% while SCOR Global Life by 0.7%, both at current exchange rates. SCOR Global P&C delivers a net combined ratio of 95.7% in spite of heavy loss activity in the third quarter. The combined ratio includes a cat ratio of 7.6%, just over the budget of 7%, and benefits from 1.4 percentage points of reserve release. The Life technical margin is strong at 7.2%, in line with the Quantum Leap assumption and benefits from the positive impact from Financial Solution deals being renewed since the beginning of the year as fee business. Finally, SCOR Global Investments delivered a strong return on invested assets of 3%, supported by a recurring yield of 2.6% and realized gains of EUR 43 million in the quarter, largely coming from the real estate portfolio.

Overall, SCOR's net income for the first 9 months of 2019 stands at EUR 401 million, up 17.3% compared to 2018. This translates into a return on equity of 8.8%, and this is above our Quantum Leap profitability target of 800 basis points above the 5-year risk-free rates. The solvency position stands at 203% at the end of the quarter and in the optimal range of our solvency scale. The positive capital generation for the year, which is in line with expectations, has been more than offset by significant market movement from the reduction in interest rates at an estimated 21 percentage points. Despite this, the solvency ratio remains in the upper part of the optimal range.

Moving on to Slide 8. SCOR has seen a strong growth in its book value over the first 9 months of 2019. After dividend payment, our shareholders' equity increased by 11.3% compared to fiscal year 2018 to reach EUR 6.5 billion. This is largely driven by net income of EUR 401 million recorded in the first 9 months of 2019; EUR 374 million of positive impact from revaluation reserves; and EUR 249 million of positive impact from currency translation adjustment, largely due to the strengthening U.S. dollar. Overall, this corresponds to a book value today of EUR 34.71 per share, up from EUR 31.53 at year end. The financial leverage has decreased by 2.4 percentage points since the beginning of the year and stands at just above 25%, in line with our Quantum Leap assumptions.

Let's move on to Page 9. SCOR generated EUR 572 million of operating cash flow in Q3 2019. SCOR Global P&C's cash flow is robust despite the claims payments from the 2017 and 2018 cat events. SCOR Global Life cash flow reflects volatility of claims payments and seasonality in client and tax settlements, as we noted last quarter. Overall, the total liquidity of the group is very strong and stood at EUR 2.1 billion at September 30.

Let me now hand over to Jean-Paul, who will present the result of SCOR Global P&C.

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Jean-Paul Conoscente, SCOR SE - CEO of SCOR Global P&C [5]

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Thank you, Mark. The third quarter of 2019 has been challenging for the market and for SCOR Global P&C. This quarter growth is still fueled by a strong second half 2018 renewals in the U.S. as well as from the successful first half of the year 2019 renewals.

On a year-to-date basis, our premium growth is 11.5% at constant rate of exchange. We expect the premium growth rate over the entire year 2019 to finish in around the same level. This reflects market opportunities we dynamically seized in the first half of 2019 with share increases both on programs where underlying metrics were improving as well as opportunities following merger and acquisitions and other market movements.

On profitability. The SCOR Global P&C 9-month results remain robust despite 3 concurrent but different phenomena affecting the global market in the third quarter. As Denis mentioned, a heavy cat burden resulting in a cat ratio of 7.6% for the year-to-date, slightly above over 7% cat budget, driven by net contribution from Typhoon Dorian and Faxai, respectively, EUR 92 million and EUR 89 million. We're the fifth-largest reinsurer in the Caribbean and the fourth-largest reinsurer in Japan, and these impacts are consistent with our market share. Both the Caribbean and the Japanese markets are known for their loyalty and short payback periods. We are therefore confident in our ability to recoup on these events.

Second phenomena is the heavy manmade losses with an above-average number of manmade losses, including credit and surety losses involving the insolvency of Thomas Cook; a number of space claims, including the Falcon Eye satellite launch loss; and a few unrelated number of sizable U.S. casualty claims on the SCOR Business Solutions portfolio. There is also the impact of the Ogden rate change for EUR 13 million pretax, going from an interest rate of 0% to minus 0.5%.

The last phenomena is an adverse attritional environment. We're closely monitoring attritional loss ratio trends. Recent data released by the American P&C Insurance Association for the first half of 2019 show a trend of deteriorating results for the U.S. market of about 1.3% of combined ratio despite the price increases seen at the first half renewals. We believe this is a result of 2 factors. The price increases seen in 2018 and 2019 have not been sufficient to bring profitability to a sustainable level across most lines of business and therefore more increases are required in 2020 and beyond. The second is the full impact of the price increases in '19 have not yet fully flown into the financial figures. These trends drive essentially the increase of the attritional combined ratio from 79.2% in 2018 to 81.3% in 2019, bearing in mind that reserve releases at the end of Q3 are similar to the ones at the end of Q3 2018.

To partially balance these higher-than-usual cat and manmade losses, we have made reserve releases of EUR 60 million net. These reserve releases amount represent less than 0.5% of Global P&C's net technical reserves which at the end of Q3 stand at EUR 13.5 billion. Year-to-date, our reported combined ratio stands at 95.7%, still within the Vision in Action and Quantum Leap assumptions. On a normalized basis, our year-to-date combined ratio stands at 96.2%, slightly above our 95% to 96% range. Another metric, so technical cash flow remains strong, as mentioned by Mark, at EUR 430 million this quarter and EUR 586 million year-to-date.

Overall, this claim-heavy quarter should remain a positive pressure on rating environment ahead of the January 1 renewals, during which we'll be focused on improvement of our margins. As our business is largely proportional, we'll benefit from the continuous hardening, primary insurance market, and we expect also improvements in the reinsurance pricing in terms for the same.

I now pass the floor on to Paolo for Life.

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Paolo De Martin, SCOR SE - CEO of SCOR Global Life [6]

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Thank you, Jean-Paul. SCOR Global Life delivers a strong start to our Quantum Leap plan. In particular, we're successfully combining franchise development in Asia and strong profitability. We're deepening our impact and accelerating value creation, particularly in Asia, where we're delivering on our strategy by addressing a large protection gap through innovation.

In the first 9 months of 2009 (sic) [2019] as you've already heard from Denis and Mark, SCOR Global Life has recorded gross written premiums of EUR 6.7 billion. This is an increase of 0.7% at current exchange rate and a slightly -- slight decline of 2.5% at constant exchange rates compared to the same period of last year. As in previous quarters, this variation is largely driven by certain Financial Solutions transactions which have been renewed as fee business rather than as premiums since the beginning of the year. As you may remember, on these deals, we're now recording similar amount of profits and no headline premiums. On Appendix Page 29 of the presentation, you will find detailed numbers.

Excluding these transactions, we have grown by 3.8% at constant exchange rates, driven by positive business development growth in Asia and North America. Overall, the premium growth is in line with our Quantum Leap assumptions of 3% to 6% over the cycle, and this translates for 2009 (sic) 2019 in an expected normalized growth rate of somewhere between 3% to 4%.

On the profitability side, the technical result is strong and stands at EUR 453 million for the first 9 months. The new business underwritten continues to be above the group ROE target. And the in-force performance is solid with U.S. mortality claims roughly EUR 110 million higher at constant exchange rate and pretax than in the same period in 2018, balanced by active portfolio management and strong reserve position. This has improved slightly from EUR 130 million we disclosed in the first half of 2019.

Our technical margin stands at 7.2% for the first 9 months of 2019. The renewal of Financial Solution deals as fee business adds about 40 basis point to this metric. As mentioned in the beginning of my presentation, on this deal, we're now recording similar level of profit on lower headline premiums.

I will now hand it over to François for detail on our investment performance.

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François de Varenne, SCOR SE - CEO of SCOR Global Investments [7]

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Thank you, Paolo. SCOR's total investment portfolio reaches EUR 28.5 billion at the end of September with an invested asset portfolio of EUR 20.3 billion compared to EUR 19.5 billion at the end of June. The portfolio positioning reflects the current level of uncertainty in financial market and asset allocation choices defined for the Quantum Leap plan. Liquidity stands temporarily at 9% of the invested assets above the 5% that we would target in less uncertain market conditions. The share of corporate bonds is stable compared to last quarter at 44%, but 4 points below our allocation at the end of 2018. And the fixed income portfolio remains of very high quality with a stable average rating of A+ and a duration of 3.6 years.

And highly liquid with financial cash flows of EUR 7.1 billion expected to emerge from the investment portfolio over the next 3 years. Since the beginning of the year, our income yield stands at 2.6%. Our theoretical reinvestment rate excluding future capital gains stands at 2% at the end of September in a lower interest rate environment.

As announced previously, SCOR Global Investment has initiated a disposal program of mature real estate assets. Two buildings were sold during the third quarter, generating capital gain of EUR 34 million. This brings our income on invested assets to EUR 434 million since the beginning of the year, corresponding to a return on invested assets of 3%. And the market -- under current market condition, we maintain our expectation of an annualized return on invested assets in the 2.7%, 3% range for the full year 2019.

With this, I will hand it over to Ian for the conclusion of this presentation.

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Ian Kelly, SCOR SE - Head of IR [8]

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Thank you very much, François. On Page 13, you will all find the forthcoming events scheduled for February next year, including the P&C January renewals call and the SCOR Group 2019 full year results presentation. Also, you can see the upcoming conferences which we are planning to attend during the remainder of this year and the start of next year.

So with that, we can start the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Jonny Urwin from UBS.

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Jonathan Peter Phillip Urwin, UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst [2]

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So one on the manmade, one on nat cats, please. So on the manmade losses, so the normalized combined ratio is a bit elevated in Q3, so 97.5%. Can you quantify how much of that is driven by manmade, please?

Then on the nat cats, so based on your loss estimates for both Faxai and Dorian, it looks like you're pointing to about EUR 6 billion sort of market share -- losses for each. Is that fair? Or has the retro already kicked in, which lowers your net loss? And is there any retro protection for Q4?

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Jean-Paul Conoscente, SCOR SE - CEO of SCOR Global P&C [3]

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On your first question. So the attritional loss ratio for this -- for year-to-date is about 2 points higher than last year. On a quarterly basis, we have a normalized combined ratio slightly higher than our 96%. This has happened 3 times in the past and we still managed to bring the combined ratio within the expected range. We think this will be a similar story for this year.

The -- relative to the cat ratio, this is an average over the last 10 years of cat. '17 and '18 have been heavy. '19 third quarter has been heavy, but the beginning of the year was relatively light. So again, we believe our 7% cat ratio is solid. And as a reminder, we increased it from 6% to 7% at the beginning of 2019. And on the attritional side, we don't expect this level of manmade losses to occur every quarter. So again, we believe our target normalized combined ratio of 95% to 96% still holds. The second question...

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Jonathan Peter Phillip Urwin, UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst [4]

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And that was -- so that was 2 points higher in the quarter, right, and not year to date.

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Jean-Paul Conoscente, SCOR SE - CEO of SCOR Global P&C [5]

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Two points higher in the quarter, yes, you're right.

Relative to the cat events. In terms of market loss, I -- we -- I think we pegged Dorian slightly lower than your number and same for Faxai. On both, we have some retro that is playing for us. We have some proportional retro in Japan which provides some relief and a limited amount of retro on the Caribbean loss.

And then for your question regarding the rest of the year, we haven't affected our excess of loss retrocession, which remains intact. And the proportional retro we have in place remains intact as well.

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Laurent Rousseau, SCOR SE - Deputy CEO of SCOR Global P&C and CEO of the Specialty Insurance unit [6]

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So just one word on -- it's Laurent on the manmade. What we've guided so far is that our manmade experience was pretty close to the cats budget. If you look at our 7%. If you look on the 9-month 2019, we're not far off. Q3 was a [negative here], but on 9 months, it's close.

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Operator [7]

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Our next question comes from Andrew Ritchie from Autonomous.

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Andrew James Ritchie, Autonomous Research LLP - Partner, Insurance [8]

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I wonder if you could just give us some color as to your exposures to some of the particularly pressured areas in U.S. casualty right now. I appreciate SCOR is a small player in the U.S. casualty market, but you have grown that book from a small base fairly significantly. And I think some of the claims issues you've seen have been on casualty-related areas. So maybe just give us some color on, is there a further rethink? I mean the impression you're giving is that you're not very happy with the attritional experience. And some of it's manmade, but some of it might be, I don't know, maybe you are seeing some of these casualty effects coming through.

And my only other question related to that, SCOR Business Solutions, there's been some commentary in the trade press. In fact, apparently SCOR has been communicating with trade press, indicating a change of strategy for channel, particularly purchasing of reinsurance for legacy book, closing down legacy books. Can you give us some color on what has been decided? It sounds like you've moved on in thinking from the Investor Day.

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Jean-Paul Conoscente, SCOR SE - CEO of SCOR Global P&C [9]

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Yes, I'll start with the question on U.S. casualty and I'll let Laurent reply on the SBS and channel.

On the -- on U.S. casualty, we have 2 portfolios. One is a treaty portfolio, the other one is SCOR Business Solution portfolio. The larger portfolio we have is on the treaty side. We write a large number of segments on casualty on a treaty basis, med mal, D&O, E&O, general liability. Two lines of business that we don't write at all, one is commercial auto, the second one is workers' compensation. These are the 2 lines of business that experienced most of the difficulties for our competitors and our clients over the past years, so these are 2 lines that we've avoided.

On the other lines, we're seeing similar trends than the rest of the reinsurers and our clients. But the big difference is we've been very cautious in growing our casualty book. We're still predominantly property-driven in the U.S. And so even though we see these effects on our portfolio, the effect from a reserve point of view has been negligible. And we feel we're still adequately reserved from the U.S. casualty point of view.

From a pricing point of view of the business going forward, we see that the price increases achieved in '18, '19 are just keeping up with the loss trends and this warrants additional price increases in 2020, both on an insurance side and a lowering of commissions on the reinsurance side.

Laurent, you want to take the insurance question?

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Laurent Rousseau, SCOR SE - Deputy CEO of SCOR Global P&C and CEO of the Specialty Insurance unit [10]

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Sure. There are actually a few questions, so let me take them one by one. On SBS. So the last commercial lines insurance and factbook. Here, there is an acceleration of the rate increases, led by property, led by onshore energy. And here, that growth is very satisfactory. We are taking advantage of that to prune the portfolio. So we as well reduced some buckets. But all in all, the SBS story is indeed in line with what we've presented in September.

I would say it is the same for channel. And here, there are a few points. The reinsurance to close a deal, which is not an announcement we've made but which was reported by trade press refers to things very consistent with our view on the profitability of the book and that we need to concentrate our resources, capital and management attention on the Life book and the future growth. So here, I think it's a focus on profitability which has always been the case for channel over the past 18 months with a number of actions that we took. That's point one.

The point two on channel is the SBS, so the business planning exercise. So here, we have a slight decrease for 2020, and this is a mix between the single risk insurance, political risk, environmental liability, which are similar trends than SBS. So pretty positive trends and we're doing very well there. We're leading in those lines. And we're -- clearly, we're taking a more prudent stance on the property lines at growth, whether it is single risk [D&F] or the binders. But all in all, I would say that the story is very similar to what we've presented at the Investor Day, where we refocused channel on profitability and on other business, our specialty and where we can lead.

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Jean-Paul Conoscente, SCOR SE - CEO of SCOR Global P&C [11]

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And just one final comment on the attritional is primarily driven by manmade losses and not by deterioration necessarily of the rest of the portfolio, especially on the U.S. casualty part.

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Operator [12]

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Our next question comes from Kamran Hossain from RBC.

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Kamran Hossain, RBC Capital Markets, LLC, Research Division - Analyst [13]

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One question probably with a couple of parts. When I look at I guess full year consensus of EUR 572 million and what you've achieved here to date with EUR 401 million, implies a pretty strong Q4. Could you maybe talk a little bit in that respect just around the outlook for realized gains in the fourth quarter?

And then secondly on I guess some thinking around Typhoon Hagibis and what impact this might have. If it's just that, does it look like a normal quarter or does it look a little bit worse? So just some thoughts on how we bridge the kind of EUR 401 million to EUR 572 million for the full year.

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Denis Jean-Marie Kessler, SCOR SE - Chairman & CEO [14]

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Mark?

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Mark Kociancic, SCOR SE - Group CFO [15]

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So our -- that might be a consensus figure in the market side. I mean, our goal is clearly the 800 basis points over the 5-year risk-free rates. In terms of the Q4 figures that we see right now, I think it's too early to comment on Hagibis. That's something that is still very much in its early stages.

I think we have a solid pipeline of potential gains in our investment portfolio, and the remainder of the business is solidly on track. I think what we experienced per Jean-Paul's comments, in Q3, was some volatility on the manmade in particular, and the nat cat side is something that evolves without any warning. So I think we're on track to achieve our profitability expectations for the year, and we'll see how we do relative to the market consensus.

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Kamran Hossain, RBC Capital Markets, LLC, Research Division - Analyst [16]

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And on the realized gains side, do you think we're done for the year?

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François de Varenne, SCOR SE - CEO of SCOR Global Investments [17]

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So on the -- so on the realized gain side, so as I told you, we have sold 2 buildings in Q3 on the real estate portfolio. Another building should be sold in Q4 with a positive contribution to the investment income, keep in mind that with EUR 164 million of unrealized gain on the real estate portfolio, we still have a strong capital gain generation potential, and we aim at selling mature assets, which mean when the value creation cycle has been completed, you should expect a positive contribution again in 2020 from the real estate portfolio. So both in Q4 and next year.

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Operator [18]

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Our next question comes from Vinit Malhotra from Mediobanca.

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Vinit Malhotra, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [19]

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So on my 2 questions. One is that the -- there were reserve released of EUR 60 million, I think very similar to last year 3Q. And then we obviously have another storm in Japan, and potentially there could be some more in 4Q. Could you just comment on how you view the reserve position or spend, also given 2 successive or even more years of some reserve movements, please?

And second question is I just noticed that the P&C expense ratio, so the management expense ratio, suddenly very low in 3Q, just about [6.2% or 3 points]. And you've [attributed] some of that to growth. Is there some exceptional to point out there? That -- and sorry, I do have a clarification that when you said that the 2.5 points -- sorry, 2 points of mission attrition was all manmade, that is the correct understanding or not?

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Denis Jean-Marie Kessler, SCOR SE - Chairman & CEO [20]

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Jean-Paul, the second question.

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Jean-Paul Conoscente, SCOR SE - CEO of SCOR Global P&C [21]

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Yes. On the attritional, the 2.1 points of additional attritional combined ratio is -- so it's the sum of the attritional loss ratio plus the commissions, and this includes the impact of manmade losses as well as Ogden as well as the overall attritional performance of the book.

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Denis Jean-Marie Kessler, SCOR SE - Chairman & CEO [22]

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Frieder?

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Frieder Knüpling, SCOR SE - Group Chief Risk Officer [23]

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The reserve release in Q3 haven't been in any way unusual. That's part of our long-term reserving strategy. You've seen similar reserve releases in situations like this in the past. We manage our reserve buffer on a long-term basis. So there's nothing particular about what we did in Q3. And when it comes to Q4. This -- our reserving policy is unchanged. And if there's significant claims activity, there's going to be the same type of consideration as in Q3.

When it comes to estimating the Q4 claims and the losses from the cats, as Jean-Paul said, this is a bit early to say so. I don't think we can speculate about the impact at this point.

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Jean-Paul Conoscente, SCOR SE - CEO of SCOR Global P&C [24]

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On the management expense question, if you look at Page 10, the management expense ratio went from 7.3% to 6.8%, and the majority of the decrease has been just a scaling up of the portfolio. We haven't necessarily grown the management expenses very much, but we're writing bigger shares of existing treaties and therefore lowering our management expenses.

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Vinit Malhotra, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [25]

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Okay. And Frieder, if I can quickly follow-up. The reserves trend, would you is about unchanged as well as the reserve policy is unchanged?

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Frieder Knüpling, SCOR SE - Group Chief Risk Officer [26]

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Sorry. Just to make sure I understood. You asked about the reserve trend...

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Vinit Malhotra, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [27]

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Not the strength, sorry. The adequacy or would -- however I could phrase it. Just because you've seen reserve releases...

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Frieder Knüpling, SCOR SE - Group Chief Risk Officer [28]

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Our policy is unchanged. We wouldn't have made the release if we didn't have the buffer. So there's no fundamental change to our reserve strength compared to previous quarters.

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Jean-Paul Conoscente, SCOR SE - CEO of SCOR Global P&C [29]

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And again and just as a reminder, this release is less than 0.5% of the total P&C reserves. So it's a very small percentage.

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Operator [30]

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Our next question comes from Michael Haid from Commerzbank.

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Michael Hermann Haid, Commerzbank AG, Research Division - Team Head of Financials [31]

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Two questions. First, pricing in Japan. Apparently, you and the industry faced some higher losses from Japan. From my perspective, it seems that the price increases that were achieved in the renewals in this year were not sufficient and possibly even by far not sufficient. What are your expectations for pricing in Asia for the 2020 renewals?

Second question on the Solvency II ratio, apparently it fell from 215% year-end 2018 to 203%, still within the optimal range. But is this current level, is this a concern for you at this stage? Are you considering any management action to protect this level? Or do you say just that it cannot fall any lower given the interest rate environment at the moment?

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Jean-Paul Conoscente, SCOR SE - CEO of SCOR Global P&C [32]

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So this is Jean-Paul, I'll start with the Japanese question. As you know, on the Japanese market, the mentality of the companies there is to pay back reinsurers over time. As a reminder, after the 2011 earthquake losses, we suffered in Japan. The payback for those losses was 4 years. So following the losses of last year and this year, we -- last year, the price increases on the CATEX oh were about 25% on average, some higher, some lower, and we expect price increases to continue in 2020. But again, the mentality of the Japanese clients is not just to give payback on the specific programs that were impacted but across the whole portfolio. This is what was achieved after the 2011 losses, and we expect a very similar trend to happen at this renewal.

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Denis Jean-Marie Kessler, SCOR SE - Chairman & CEO [33]

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Either Jean-Paul or Frieder on the solvency level.

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Frieder Knüpling, SCOR SE - Group Chief Risk Officer [34]

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So as Mark said, solvency is well in the optimal range, where we'd like it to be. We've managed it at the upper end of the solvency range in the past years to provide a buffer for market movements like what we've seen in the first half of the year. So this was well provided for. We have strong operating capital generation. We disclosed the first 6 months analysis of change of the solvency ratio just a month ago, showing that there's strong support from the operating business which has partially offset the effect of the interest rate decline.

The best course of action we believe is implementing Quantum Leap, accelerating the generation of value and solvency capital from our business activities. And that is going to provide continued support to our solvency position going forward. But there's still buffer for further adverse market movements. But as I said, the best protection we have is the strong operating capital generation which we've demonstrated over the past 6 months and which we planned also per Quantum Leap.

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Operator [35]

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(Operator Instructions) Our next question comes from Avinash Goel from Societe General.

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Avinash Prakash Goel, Societe Generale Cross Asset Research - Equity Analyst [36]

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This is Avinash from Soc Gen. I just have one question. What is the normalized capital generation for 9 months given low Solvency II at 203%?

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Denis Jean-Marie Kessler, SCOR SE - Chairman & CEO [37]

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Will you?

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Frieder Knüpling, SCOR SE - Group Chief Risk Officer [38]

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Sorry. Was the question what's the normalized Solvency II capital ratio?

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Avinash Prakash Goel, Societe Generale Cross Asset Research - Equity Analyst [39]

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Capital generation rate.

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Frieder Knüpling, SCOR SE - Group Chief Risk Officer [40]

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Yes. So we've been publishing a breakdown of our solvency ratio movements over the past few years. You will have seen that a typical operating capital generation in solvency ratio terms was maybe in the range of 10 to 12 percentage points. But nowadays, volatility caused by new business seasonality, claims experience and so on around this.

It's not a target and normalization is something which requires a good discussion, so we don't really look at it this way. But that's been the trend of operating capital generation. And this has then been overlaid by market movements, by of course capital management actions and a bit of model changes and things like that. But if you look at our past solvency disclosures and also the half year disclosure, which we added for the first time in September this year, I think that gives you a good picture of what we are currently producing.

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Operator [41]

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Our next question comes from Thomas Fossard from HSBC.

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Thomas Fossard, HSBC, Research Division - Co-Head of European Insurance and Analyst [42]

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Two questions. First one would be, just to come back on the manmade exposure. I think it's now a couple of quarters that you've been facing high, elevated level of manmade, probably running above your normalized level on a quarterly basis. So I will start -- I was wondering if you were starting to be concerned by anything, deteriorating trends across your book over year. We're still seeing the random combination and accumulation of different losses.

And also related to this question, can you be a bit more specific on the surety loss coming to your book on Thomas Cook? And potentially what has been the initial loss estimate you have provisioned for the Lubrizol explosion plant?

The second question would be related to your retrocession program. Usually, you're very early in renewing your program to market. I guess it's now, probably for a large extent, done. So could you tell us how you've been going through maybe a retrocession market which been a bit tighter over the past couple of months? And if there's been a change in terms of pricing for you?

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Jean-Paul Conoscente, SCOR SE - CEO of SCOR Global P&C [43]

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Okay. Going back to the first set of questions around manmade losses. So your statement is incorrect. We haven't seen an unusual level of manmade losses over the first half of the year. It's really been in the third quarter. And if you look at our normalized combined ratio in Q1 and Q2, you'll see that actually we're below our 95% to 96% target combined ratio. So -- and the level of manmade we've seen in this quarter is not unusual compared to prior years. Just very volatile. And on average, we see this year, year-to-date as being a bit heavy, but not unusual compared to the past.

On your second question, also on manmade, Thomas Cook. So the losses there come from the -- it's mainly a surety loss to the market. Again, this is affecting our treaty portfolio across about 15 clients, both for the European insurers and U.S. insurers, and the cost is the repatriation of stranded travelers. And by some accounts, this is the largest peace-time repatriation operation since World War 2. And as well as the cover of events payments of travelers that did not yet consume their trips.

So as I mentioned, the loss for us right now is estimated about EUR 23 million.

On Lubrizol, we're exposed mainly -- we only write the property of the risks. We have no exposure on the casualty side. And our exposure on the property is very limited. It's a single-digit loss we estimate currently.

Your second question related to -- on the retro. So we've started -- as we do every year, we start discussions over the summer. This year, that market is much more difficult than in the past years, there's been a retrenchment of some types of covers, especially around aggregate covers. But many of our expiring retrocession areas are continuing to provide us quotes and capacity. Because of our approach to retrocession which has been kind of a long-term mentality and not opportunistic, we feel we have strong support. And we're currently placing our retro and expect to be completed in the next couple of weeks on the main programs.

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Laurent Rousseau, SCOR SE - Deputy CEO of SCOR Global P&C and CEO of the Specialty Insurance unit [44]

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Thomas, a couple of points. It's Laurent. The Q3 on manmades is actually very close to the Q2 that we had last year, so it's not unheard of. It's on the -- it's a bit above the average that we have, but it's really not above so significantly. And as Jean-Paul said, the first half was lower. On casualty manmades that we saw, we've had 3 claims for SBS on casualty, completely unrelated. I mean this is -- one of them is product reliability, another one is PA. So we have some casualty manmades more than usual, but again, no pattern, no trend there. And there's a fourth claim manmades that is above EUR 10 million for SBS in the quarter, and that's the space one.

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Thomas Fossard, HSBC, Research Division - Co-Head of European Insurance and Analyst [45]

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Okay. Just to come back on the retro. So Jean-Paul, if I understand you well, actually no change to be expected either in terms of protection or cost of the plan overall?

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Jean-Paul Conoscente, SCOR SE - CEO of SCOR Global P&C [46]

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No, we've adopted our programs slightly because we're buying aggregate cover. And as I said, the supply in the marketplace has decreased from that product, so we did that with the structure slightly. But overall, be very similar to what we have today with more or less the same players.

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Ian Kelly, SCOR SE - Head of IR [47]

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Okay. And so that's the end of the questions. So thank you very much for attending this conference call. Please don't hesitate to give us a call should you require any further information.

And just a quick reminder that as usual, we have the sell-side analyst roundtable held in our Paris, London and Zurich offices this evening, as usual, at 5:00 p.m. U.K. time, 6:00 p.m. European time. So if you can attend that, we'll see you there.

Otherwise, thank you very much, and have a nice day.

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Denis Jean-Marie Kessler, SCOR SE - Chairman & CEO [48]

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Thank you all.