In 2004, SCOR reported a return to profitability, but how long before the French reinsurer returns to the ranks of the "A" rated? asks Nigel Allen
There is one goal which is foremost in the mind of Dennis Kessler in 2005, to reclaim the "A" rating. Even though the 2004 results saw the SCOR Group returning to profitability, reporting net profit after tax of EUR68.7m (compared to a net loss of EUR314m in 2003), a profit achieved despite a EUR56.5m reserve increase relating to Typhoon Songda and the World Trade Center ruling, the rating agencies refused to move and maintained their top end of the "B" range ratings. Standard & Poor's stated that while the results were satisfactory, "they are in line with our expectations."
SCOR's inability so far to return to the ranks of the "A" rated reinsurers, a standard held by most of the group's principal competitors, has clearly had a detrimental effect on their competitive position. The group's life reinsurance sector and large facultative and direct underwriting business are areas particularly sensitive to financial strength and credit ratings, and the group has confirmed that 2004 rating levels have hindered the renewal of policies and treaties with existing clients and also limited opportunities to sign new clients. A brief examination of the group's 2004 results shows these concerns reflected in the overall decline in gross written premiums.
SCOR's battle plan for storming the "A" ranks was laid down in the group's "Moving Forward" plan. Implemented in August 2004, the three-year strategy (2005-2007) is founded upon two pillars, to return the group to sustainable levels of profitability of 6% above the risk-free interest rate and to achieve a level of solvency commensurate with the elusive "A" rating.
As Dennis Kessler made very clear following the announcement that the plan has received the full backing of the board, "The three-year 'Moving Forward' plan ... illustrates the SCOR Group's will to do everything that it can to provide to its clients the level of solvency which they expect and to its shareholders the level of profitability they want." To achieve this the business model is based on implementing an almost exocet-like focus on underwriting for profit coupled with a capital allocation strategy designed to carry the group through the cycle allowing it to more effectively manage its business according to the varying stages in the cycle.
SCOR by implementing this strategy has confirmed that it has now emerged from the "recovery" phase in its return to grace, which was characterised by the group's "Back on Track" plan. Launched in the latter part of 2002, by the end of 2004 the plan had imposed a revised underwriting strategy centred on short-tail, non proportional business plus large business underwriting on the non-life side, brought about a return of stability to reserves, restocked the capital base through a number of capital increases and instigated a major overhaul of the group's internal structures, both in terms of individuals and procedures.
This to a degree "rewrite" of the SCOR manual has been marked by a major decline in the group's gross written premiums, down 32% for the 2004 financial year, attributable mainly to the stricter underwriting parameters under which the company now operates which have seen reductions in US non-life underwriting and large corporate risks. This has continued into 2005, with the group reporting a further gross written premium decline of some 14%. This decline has also, as mentioned previously, been a side effect of the group's rating level.
While most would be happy with a single plan of action, it is clear that SCOR is keen to implement plans of action. In June, Kessler announced the planned implementation of a global restructure of the group's operations to better suit this revised business profile. Central to this "New Scor" restructure was the bringing together of all of the group's non-life reinsurance operations, particularly property/casualty treaty business, large corporate risks and credit & surety reinsurance, into a single unit similar to SCOR Vie, the group's life reinsurance subsidiary. Placed in the experienced hands of Victor Peignet - who has become virtually part of the SCOR furniture, having been with the company for over 20 years - the launch of the new 100%-owned subsidiary is designed to enhance overall operational performance, reduce costs, and ultimately put the group back on a more competitive footing. The restructure seeks to achieve cost savings of between EUR24m and EUR44m, split 50-50 between reductions in structural costs and staff costs. The staff cuts could see some 220 jobs go at the French reinsurer.
As can be seen from the graph on the right, the last three years have seen SCOR implement quite hefty reductions in the number of employees, and if the proposed 220 cull goes ahead, this would see the reinsurer's staff count fall to almost 800. With a client base reported in its 2004 annual report of 2,019 served by some 1,038 employees it raises a question as to the ability of the reinsurer to adequately service these clients, particularly if SCOR achieves its aim of securing an "A" rating, as the group has reported on a number of occasions that clients have confirmed that this return to an "acceptable" level of security will see the return of business.
Having been torpedoed by financial problems in recent years that would have scuttled most reinsurance vessels, SCOR has not only managed to shore up the holes in its hull and return the ship to an even keel, but has achieved this without the loss of too many passengers. Looking back at the 01/04 renewals, the group reported that in non-life property/casualty renewals, out of what it described as its "top" 352 clients, some 298 renewed their treaties, while a further 12 new clients came on board.
Looking at the retention levels reported for the 01/05 renewals, and once again at the property/casualty business (80% of which is renewed in January), SCOR announced that it had gained or regained some 40 clients, while loosing only 27 clients, 14 of which SCOR chose not to renew, seven abandoned ship for rating reasons, while the remainder were washed overboard by mergers between cedants.
However, the group is in little doubt that the longer it takes to achieve an "A" rating the weaker it will become. Speaking recently in London, Christian Mounis deputy CEO of SCOR VIE confirmed that despite the resilience of SCOR VIE's client base, the operation was suffering from the current rating position. "In the life market," he explained, "a 'BBB' rating is not great ... Due to the long term nature of the business, 'BBB' is below what is expected by clients." As new competitors such as Wilton Re enter the market, while fledgling entrants such as Scottish Re show clear signs of strengthening, this places SCOR VIE in a difficult position. As Mounis confirmed, in the life sector, size matters as it translates into an ability to provide a high degree of service in a global environment, adding that in relative terms if things continue as they are the operation runs the risk of being too small to effectively compete with it more buoyant competitors.
While SCOR VIE currently holds a top ten position, holding a 4% global market share, with a client base of some 521 worldwide, it is in a difficult position. This client base was 634 in 2003, with Mounis estimating that the group's downgrade accounted for approximately one third of this decline.
The remaining two thirds, according to Romain Durand, CEO and director of SCOR VIE were due to "cleaning" of treaties and books of business and the consolidation of companies. "As long as we have the current rating," explained Mounis, "the priority is on 'proximity clients'. With a better rating, we would be able to propose more sophisticated products to more complex clients." While so far the life operation has been able to maintain a firm anchorage in the European market, its weakened rating position has badly affected its standing in the US market, where it is unable to compete effectively for new business. "If we do not go back to an 'A' rating, there will be a slow decline," confirmed Durand, adding that all efforts and energies were currently being directed at getting an "A" rating.
- Nigel Allen is editor of Global Reinsurance.
SCOR IRP acquisition
On 21 June 2005, Dennis Kessler announced the launch of a capital increase through the issuance of 130 million new shares of SCOR - equivalent to 15.87% of the group's share capital - to acquire the remaining shares in IRP Holdings Ltd. Based on an indicative price of EUR1.55 per share, this equated to EUR201,500,000. On 23 June, BNP Paribas decided to exercise in full the overallotment option of 15%, bringing the overall share issuance to 149,500,000 (18.25% of the share capital), which amounted to EUR233,220,000.
IRP Holdings, set up in December 2001, manages a 100% interest in the share capital of Irish Reinsurance Partners Ltd. As of 1 January 2002, IRP Holdings, through Irish Reinsurance Partners, has primarily been used to reinsure part of SCOR's non-life business. However, the quota share agreement came to an end on 1 January 2005, placing IRP effectively in a run-off position, as SCOR no longer ceded any new business to the operation.
For the 2004 financial year, IRP Holdings recorded a net income of EUR50.1m after tax.
As calculated under US GAAP, the net asset value of IRP is EUR392.5m. SCOR holds 53.35% of the shares in IRP, with the remaining shares being held by Highfields Capital Management. Based on the US GAAP figure, this minority shareholding amounts to EUR183.1m. Highfields Funds has notified SCOR that they are willing to withdraw from IRP and the acquisition of the minority shareholding is expected to take place "as soon as practicable".
While the majority of the capital raised will go towards refinancing the share purchase, the remainder will help improve the group's financial strength, in particular "with a view of revising its financial rating".
However, since the announcement, AM Best has stated that for the time being SCOR's ratings remain unchanged.
SCOR Commutation continues
In its financial results for the first quarter of 2005, SCOR reported a group operating cash flow of EUR-348m compared to EUR-212m for the same quarter in 2004. This negative operating cash flow stems from the non-life operations, which saw a significant reduction in non-life underwriting in the US, the cessation of underwriting in Bermuda and commutations carried out in the first quarter in the US and Bermuda which totalled some EUR250m.
For 2004, the group reported a 7.5% drop in gross technical reserves net of retrocession to EUR9,030m, compared to EUR9,766m for the 2003 financial year. The decline is partly due to the on-going commutation strategy relating to Commercial Risk Partners, which saw its technical reserve fall to EUR216m in 2004, down from EUR317m in 2003 and EUR1,224m in 2002. The decline for 2004 was due to CRP's continuing commutation policy, plus claims payments through drawing down of reserves.
Technical reserves for the portion of SCOR's US portfolio in run-off fell to EUR1,171m for 2004, down 23% on the EUR1,584m reported for 2003.
SCOR Denis Kessler CEO
Denis Kesseler is a graduate of HEC business school (Ecole des Hautes Etudes Commerciales), with a PhD in Economics, a qualified professorship in Economics and a qualified professorship in Social Sciences. Chairman of the Federation Francaise des Societes d'Assurance (FFSA) (Federation of French Insurance Companies)and subsequently Senior Executive Vice President and member of the Executive Committee of AXA. He was First Executive Vice-Chairman fromm 1999 to 2002 of the Mouvement des Enterprises de France (MEDEF) (French Business Confederation) while continuing to serve as Chairman of the FFSA. He joined SCOR on 4 November 2002 as Chairman and Chief Executive.