EUR 850.00 For Business Accounts Only

Morningstar | Scor 3Q: Mundane Property and Casualty; Brighter Lights at Life

Scor reported net income of EUR 342 million for third-quarter 2018, slightly below what we think the business should have and is capable of achieving. While it’s not a particularly interesting set of quarterly results, we think there are a couple of items for investors to take note of. We maintain our EUR 38 fair value estimate, along with our narrow moat and stable moat trend ratings.

From a technical results perspective, property and casualty performed broadly in line. There were some high natural catastrophe claims during the period, such as Typhoon Jebi, Hurricane Florence, and Typhoon Mangkhut, which affected the business by EUR 105 million, EUR 50 million, and EUR 22 million, respectively. This led to natural catastrophe activity of 16.5% on the quarter and a 7.0% ratio for the year to date. And while management has spoken of this being an elevated quarter, we tend to disagree. Claims are still low relative to historical averages, and this 20-basis-point elevation above the prior year still stands in stark contrast to larger years, such as the 10.9% average the business endured during 2005-07.

The net attritional loss ratio came in at 79.2%; this includes EUR 60 million of reserves releases, affecting this by a rough positive of 1.5 percentage points, from longer-tailed inherent defects insurance and medical malpractice in the United Kingdom. One thing we think is worth noting within this division is the higher expense ratio at 7.3%, versus our perception that it should be something more like 6.8%, 50 basis points lower. We have yet to get to the bottom of management’s rationale for this being "increasing weight of insurance business and extended perimeter of retrocession".

Overall, this has resulted in a combined ratio of 94.1% year to date, well below the Vision in Action 95%-96% targeted range. This is clearly a stellar number for a reinsurance business.

While less has been (and is generally) said of the life business, we think this business unit has posted a decent number. The 9.2% increase in gross written premiums to EUR 6,743 million at constant-currency rates mainly comes from a higher volume of business in Pacific Asia, as well as higher sales for the financial solutions business in the U.S., Japan, and China. The technical margin is stable at around 7.0%, and on the back of this higher premium volume, the business unit has reported a EUR 462 million technical result. This is quite a bit above our expectations, though we would recommend caution on incorporating this into forecasts for the future, and we believe some reversion is likely.

On the investments side, the business is now managing EUR 27.6 billion in investments, split between EUR 19.4 billion of invested assets and EUR 8.2 billion of funds withheld. The quality of the fixed-income portfolio remains high with an average A+ rating and 4.5-year duration. The investment yield balance is starting to tip. While we still see some compression--for example, return on investments, which is annualised to include interest on deposits (or more specifically interest on funds withheld) came in at 2.1% versus 2.3% for the first nine months of the prior year, and return on invested assets, which is an annualised figure that excludes the interest on funds withheld, came in at 2.5%, versus 2.6% for the comparable period--the reinvestment yield continues to shift. A 20-basis-point uptick in this to 3.0% just between the most recent quarters leaves management to outline EUR 5.5 billion of expected cash flows being thrown off this portfolio in yield, equivalent to around 6 months of claims and benefits.

Overall, this is in our opinion a mediocre set of results. We think management has made too much of the property and casualty headwinds in the period, but that life is performing better than we have expected. Maintenance of this growth in the fourth quarter and beyond will be an interesting indicator.