8 September 2013 Reinsurance

No news is good news in reinsurance: SCOR CEO

“No news is usually good news in reinsurance.” That was the message from Denis Kessler, the chairman and chief executive officer of the reinsurer SCOR, discussing details of the group’s new strategic plan which he presented to investors on September 4.

The plan, called Optimal Dynamics, follows its Strong Momentum plan, which covers the period 2010–2013, and which was updated in September 2011 following the acquisition of Transamerica Re’s mortality portfolio.

The most recent plan, which takes the firm to 2016 and comes just three months after the company bought the US life business of Generali, is the continuation of the same strategy. The four strategic pillars of the business remain unchanged, Kessler said, as does its target for achieving profitability of 1,000 basis points above the risk-free rate over the cycle.

The company will grow, but steadily, Kessler said. It doesn’t plan any acquisitions but any opportunities that do emerge would only be considered within very strict pre-set criteria.

“Many companies are forced to undergo massive restructuring and fundamental changes because their business model is not suited nor adaptable to market conditions or the way a particular sector has changed. Many years ago, SCOR went through the same thing,” Kessler said.

“Right now, we are in very different place. Our business model is robust and well adapted to the environment we are operating in. So why change things? If we had decided we were not suited to this environment, we would have factored it into business plan. But we are well diversified and well positioned for a transition in interest rates levels we believe will occur. No news is usually good news in reinsurance.”

Within this measured approach, Kessler has identified several good reasons he believes SCOR can outperform its competitors.

First, he believes the low interest rate environment, which has troubled the industry for so long now, will soon end and that SCOR is well positioned to take full advantage of this.

SCOR has, he says, invested a lot of effort in understanding how it can best manage this transition from very low interest rates to more normal levels. One of the things SCOR has done, for example, is rebalance its investment portfolio with an emphasis on shorter duration investments, something that is also reflective of the make-up of much of its liability portfolio. This will allow it to quickly realign its portfolio as interest rates improve to maximise the upside.

Kessler’s second area of focus—and reason for optimism—is the growth of the company’s property/casualty business. He expects this business to generate a very healthy combined ratio of 93 to 94 percent within the horizon of the new plan. He again backs up this expectation.

First, he believes, the influx of alternative capacity will stabilise and retreat slightly in line with rises in interest rates. He is convinced that the wider low yield environment is the primary driver for this money seeking alternative investments and, as this changes, so will the sentiment of these investors – something that would allow reinsurers to move back into this space.

But the bigger source of growth for SCOR’s property/casualty book will come through a simple gradual expansion of its lines with existing clients. He says a driver of this will be an increased sensitivity to counterparty risk among global insurers combined with the fact that, of the biggest reinsurers, many have the lowest exposure to SCOR.

“Many of the biggest insurers have expanded rapidly in recent years. As such, they increasingly want to work with reinsurers with a truly global presence and, ideally, they want to work with fewer reinsurers. On top of this, these companies are much more risk-aware when it comes to counterparty risk.

“Because of SCOR’s history, proportionally we will often be the player they have the least exposure to on the programme,” Kessler said. “Yet we can offer the global service and expertise they are looking for. That makes us a good option for them when they review their reinsurance arrangements or seek a new partner. Smaller players will have more difficulty accessing these risks.”

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