Revitalising Scor: Rousseau’s strategic challenges
The fourth-largest reinsurance company in the world is at a pivotal moment in its history.
Scor’s major challenge is its low share price, with the firm trading at roughly the same level today as it did in 2013, and its price-to-book consistently and markedly below that of peers.
That low valuation acts as a block to a variety of strategic options from which the company could benefit as it looks to cement its place in the top tier of global reinsurance companies, including but not limited to big-ticket acquisitions.
To fix this problem and improve investor and trading partner conviction in Scor, we believe there are a variety of actions that the company could take – and it has begun work in several of these areas already. No course of action ahead of Scor, however, is without its own element of risk.
Scor currently stands at a crossroads, partly because of its recent change of leadership.
For 20 years, it has been synonymous with larger-than-life former CEO and now-chairman Denis Kessler, who is credited with the remarkable feat of rescuing the company from near collapse in 2002 and propelling it into the big leagues.
However, Kessler’s succession was not a smooth process, with plans to appoint Benoît Ribadeau-Dumas scrapped in a volte face and Scor insider Laurent Rousseau installed in his place.
Kessler is now chairman of Scor for a two-year term. Rousseau, while well respected in the sector, is faced with the equally demanding tasks of convincing the market of his leadership outside of Kessler’s long shadow and shaping the next era for Scor.
Rousseau is set to outline a high-level vision for Scor’s future alongside the carrier’s Q2 results on 28 July. The full 2023-2025 strategic plan is due to be published at Scor’s next investor day on 9 November.
Ahead of these key dates, Insurance Insider has conducted a wide canvass of Scor’s observers and analysed the hurdles facing the French carrier, as well as what work is currently underway to overcome them.
The balance of life and P&C business within Scor’s portfolio and the disadvantage this can bring
The need to de-risk cat business and the potential pitfalls of such an exercise
The pros and cons of Scor’s pivot to primary business
The potential capital and cost benefits of improving Scor’s operational efficiency
Whether Scor can achieve the scale it needs to evolve – and if an M&A deal is inevitable
Approached for comment, Scor CEO Rousseau told this publication: “We already took significant actions to rebalance our portfolio, reduce volatility and restore profitability.
“2022 will definitely be a year of transition for the reinsurance industry and Scor is well positioned to navigate the transitioning macro-economic environment and seize the opportunities ahead.”
Part of the problem with the perception of Scor’s value stems from Covea’s unsolicited takeover attempt of EUR43.00 per share in August 2018, and the target’s rejection of that deal.
Kessler claimed that the deal would have given rise to a cultural mismatch between the merged businesses, diminished the Scor franchise and damaged its ability to access funding.
But although Kessler – with typical flair – described Covea ownership of Scor as being akin to a savings and loan association owning Morgan Stanley, some sources disagreed.
As one source put it, selling Covea could have “maximised shareholder value” and provided an “elegant exit” for Kessler, who was nearing the point of stepping down as CEO and was at the time facing investor pressure from activists to produce a clear succession plan.
Putting aside the rights and wrongs of Scor’s rejection of the deal though, one impact is clear: rebuffing the EUR43.00 bid “drew a line in the sand” when it comes to Scor’s value.
By refusing Covea’s overture, Scor sent the message that it believes its stock is worth more than EUR43.00 per share – but the price has lagged far behind that for some time, currently trading at around EUR22.00.
Shareholders are understood to be disappointed by the stock’s continued underperformance.
It would be unfair to judge today’s Scor by the Scor of four years ago. Since autumn 2018, it has been through the disruption of the legal battle with Covea, a CEO succession which did not run as smoothly as it could have, and the pandemic. Reinsurance has also, of course, fallen sharply out of favour.
It is also important to note that, as a French company, Scor has a duty to consider a variety of stakeholders including customers and staff when making strategic decisions, rather than slavishly pursuing an ever-higher share price.
Investor sentiment towards French companies, versus German or Swiss businesses for instance, can also be said to be slightly less enthusiastic, given the perception that the country is less shareholder-friendly.
The performance of Scor’s investment portfolio, generally believed to be over-cautious, is another element of concern for investors, with analysts regularly asking when the company might tweak its holdings to deliver higher returns.
Scor has already made progress on addressing its underwriting challenges and mortality exposure, as will be explored later. It is also making governance changes that could help to counter the ‘French discount’ applied to the stock.
But even taking these disadvantages into account, there are strategic issues that concern investors about the company, and this is borne out in Scor’s price-to-book multiple. For some time, Scor has traded at a discount to its peers, with a trading multiple of between 0.6x and 0.8x.
The major issue presented by Scor’s low trading value is that it prevents any sensible consolidation moves – either as an acquirer or as a partner in a merger. If the company wishes to grow, joining the ranks of its larger peers and achieving greater economies of scale, this logically must be an option for it to consider.
The relatively low share price, as well as the low price-to-book multiple, also makes Scor vulnerable to takeover.
The company has already begun remedial efforts to improve its trading multiple – and investors hope for more detail on plans at the investor day.
Below, we analyse the actions we believe could help lift Scor’s performance and in turn open up more strategic options for the company.
1. The life/P&C balance
Overexposure to mortality risk is part of the reason for recent volatility at Scor, given its large US life business and the impact of Covid-19.
The company at present writes more life than non-life business, singling it out among its three larger peers.
Putting Covid-19 losses aside, there is a view that investors are more enthusiastic about P&C than life reinsurance. This is because the former, as a shorter-tail class, has greater ability to react to market dynamics and change pricing than in life, even accounting for the constraints of the soft market on re-rating treaty business.
While the life business, absent major events such as pandemics, provides a steady stream of income and a significant benefit in terms of capital efficiency, it is easy to see why Scor has already announced plans to shift the ratio of its life and non-life business from 60:40 to the reverse.
Scor’s $1bn life retrocession deal with Covea a year ago also immediately shifted some exposure from its balance sheet and freed up capital to be redeployed elsewhere.
2. Tackling the cat question
This move to weight the business more heavily to P&C, however, also comes with challenges.
Sources repeatedly expressed the view that Scor had consistently mistimed the market cycle and was reactive rather than proactive when it came to expansion and pricing, particularly in cat.
It would be reasonable to expect some degree of distraction for the company during the battle with Covea, at which point a great deal of effort was expended on defending the company from an unwelcome takeover and perhaps less on underwriting strategy.
However, Scor’s annual cat ratio has exceeded its budget in four out of the six years from 2016, suggesting the company’s cat challenge pre-dated the Covea takeover. During those six years its average cat ratio was 10.7%, against an average target of 6.5%.
Over the past decade, Scor’s P&C gross written premium (GWP) has nearly doubled, while over the same period its expenditure on large loss events as a proportion of the combined ratio has leapt from single digits in the early part of the decade to double digits in the latter.
“Too many underwriters [including but not limited to Scor] are going for high rate on line, which generates premium income but also significant exposure,” one source said of this period.
Sources criticised Scor for a degree of neglect on its non-life underwriting, including realising later than peers the dangers of swelling secondary perils losses and an overexposure to mid-sized cat events.
One particular criticism is that, during a period of US growth in the middle of the past decade, Scor had written business among too few large US cedants, introducing a high degree of concentration into its portfolio.
“[Scor has been] tying a fortune to the underwriting capability of a narrow group of clients [in the US],” one source said.
There have been heavy losses outside of the US as well though.
While reinsurers globally have suffered the recent run of heavy cat loss years, however, sources were concerned that Scor had taken until mid-2021 to begin cross-portfolio work to de-risk on cat business.
As announced alongside its Q3 results last year, Scor has begun the process of cutting its cat exposure and shift towards non-cat property and specialty primary and reinsurance within the P&C book.
By the end of 2022, Scor expects to have reduced cat exposure by 15% from December last year. During Q1 it expanded premium in global lines, comprising marine, energy, credit and surety and inherent defects insurance, by 21% and in specialty insurance by almost 30%.
At the April renewals, Scor increased US premium by only 0.4% as it cut back on cat where it deemed pricing inadequate. In Japan at 1 April, it expanded premium by 14% as it continued to diversify away from cat and towards casualty, cyber and marine, while marine and energy drove its almost 60% European premium growth.
It is also important to note, as Scor’s next few quarterly results come through, that changes to the carrier’s P&C portfolio are not yet complete, as it looks to alter the balance of its book over a number of renewal seasons.
Scor’s drawback from property reinsurance, and cat in particular, is at once necessary to contain volatility but, if executed in the wrong way, can damage trust with cedants.
Cat business is considered core to any reinsurer-cedant relationship – Axis Re’s recently announced exit from all property business, and the shock it caused in the market, is a case that highlights the importance of cat to trading relationships.
In many cases, reinsurers can use the offer of cat coverage as leverage to access more profitable or less volatile areas of a cedant’s book.
On the other side of the equation, cedants might refuse to show a reinsurer more profitable business without a promise to take on some cat exposure.
Sources have accused Scor of being “inconsistent” in recent years when it comes to cat in particular, leveraging its size to access business, only to exit those programmes in a few short years.
For cedants, the comfort that reinsurance partners will support them through the pricing cycle is of the utmost importance, particularly in markets such as Japan for instance, where long-term relationships are highly prized.
A key challenge for Scor – and one in which it is not alone among reinsurers - is to balance its need for underwriting discipline through carefully targeted risk selection with the necessity to be a consistent partner to cedants.
3. Pivoting to primary: Potential pitfalls
On the surface, Scor’s push into primary business, where rate adequacy is far more evident after several years of compounding increases, makes sense.
The improving fortunes of Scor’s Syndicate 2015, a primary insurance platform, are largely the result of the syndicate’s efforts to remediate its book. These efforts included class exits as well as a £150mn ($184mn) reinsurance-to-close (RITC) deal completed in November 2019.
A further tailwind has come from rerating in the wider market.
After several years of underperformance with a plus-100% combined ratio, the syndicate, formerly known as Channel, has turned a corner in the past two years, booking a 96.3% and then 92.5% ratio for 2020 and 2021.
The syndicate in fact progressed into the top-performing quartile at Lloyd’s in 2020 and sat in the second quartile in 2021.
This improvement runs largely parallel to widespread remedial work across Lloyd’s to return syndicates to profitability after four years of aggregate underwriting losses, and positions Scor to benefit from Lloyd’s as a key distribution platform.
A central issue raised by critics of driving into insurance, however, is that this may present competition to Scor’s primary carrier customers.
There is the potential for clash with cedants more in Scor’s portfolio of MGA business, which includes a meaningful amount of personal lines, in which its reinsurance cedants are also concentrated – although it also provides capacity for specialty MGAs. It is important to note though that Scor is overall a fairly small player in a large MGA market, and it could be argued there is room enough for all without significant competition.
Given the tendency of Scor’s cedants towards personal lines, the carrier’s portfolio of primary large industrial risks poses less of a risk of competition with clients.
The drive into primary business could also lead to Scor concentrating too much similar risk within the group as a whole, spread across primary and reinsurance. There is a greater risk of this when it comes to Scor’s large manmade primary portfolio and this will require careful exposure management.
There is also the risk of mismanagement when a reinsurer grows into insurance, given that the two types of businesses require different platforms and different skillsets among their staff. Making a success of both broad lines of business is not impossible – but it is challenging and has been rare.
4. Improving operational efficiency
A number of sources pointed to Scor’s corporate structure as another drag on performance.
Scor was created in 1970 and grew through a series of acquisitions. This, along with the creation of several subsidiaries around the globe, have left it with a reasonably complex structure.
Although Scor’s larger peers also have complicated corporate structures, as a smaller company Scor would arguably benefit from a simplified company structure that could bring about both cost and capital efficiencies.
This again is an issue that the company has recently recognised. During 2022, Scor is to merge two of its Irish subsidiaries as well as merging Scor Switzerland into Scor SE, the ultimate parent company.
These two actions come as part of a simplification starting with the merger of Scor Global Life SE and Scor Global P&C SE into the single Societas Europea, Scor SE, in 2019.
The impact of the actions to be taken this year will improve the group solvency ratio by around 4 percentage points, Scor said in its Q1 presentation, as well as shifting the risk-based capital score of its US reinsurance entities from around 250% to around 550%.
They will also improve the circulation of liquidity at local entity level, Scor said.
One future option for Scor could be to replace some of its international subsidiaries with branches, which are less demanding in terms of the regulatory burden, although there are no disclosed plans to tackle this yet.
5. The scale question
One of the key challenges that lies ahead of Scor is its scale.
As previously mentioned, Scor’s current low trading multiple makes it vulnerable to takeover and prevents it from acquiring or merging with peers.
While Scor is the fourth-largest reinsurer in the world in terms of its overall size by group premium, in P&C reinsurance it is further down the leaderboard than that.
While pure size itself does not guarantee economies of scale or better profitability, in reinsurance, greater heft allows a reinsurer easier access to more attractive business and could also help to influence placements in terms of pricing.
Scaling up inorganically to a P&C reinsurance GWP more in line with Swiss, Munich and Hannover, then, would be highly beneficial to Scor.
There are two challenges here. The first is Scor’s valuation and size. The company’s relatively small size would mean it would have to buy a target for a combination of cash and paper.
If it were to buy a business for, say, 1.2x book, but Scor itself continues to trade at, for instance, 0.8x, it would risk shareholder fury via the sizeable dilution.
The seller would also have to accept becoming a meaningful shareholder in Scor – and with its lagging share price performance, that seems unlikely.
Scor’s journey from the brink of collapse in 2002 to the upper echelons of the global reinsurance market has been a remarkable one, but on a number of issues, it has work to do to maintain and then further cement its position in the big leagues.
The work begun on portfolio remediation, rebalancing life and P&C and corporate restructuring is a promising start to tackling those issues. But the market will be waiting with intense anticipation for the unveiling of Scor’s full new strategy later in the year.