Earnings Call: Q2 2021

Jul 28, 2021

Good afternoon, ladies and gentlemen, welcome to the SCOR H1 2021 results call. Today's call is being recorded. There will be an opportunity to ask questions after the presentation. In order to give all participants a chance to ask questions, we kindly ask you to limit the number of your questions to 2. At this time, I would like to hand the call over to Mr. Olivier Armangaud. Please go ahead, sir. Good afternoon, welcome to SCOR H1 2021 results call. My name is Olivier Armangaud, Senior Manager in the Investor Relations team. I'm joined on the call today by Laurent Rousseau, CEO of SCOR, and the entire executive committee. Can I please ask you to consider the disclaimer on page 2 of the presentation, and the statement in respect of COVID-19. I would like now to hand over to Laurent Rousseau. Laurent, over to you. Thank you, Olivier. Welcome everyone. Today is my 1st quarterly results as CEO of SCOR, and I'm pleased to present strong headline numbers demonstrating our ability to create value as well as our resilience. There are quite a few moving parts as quite a few of you noted today, so I'm going to shed light on 3 important drivers that we see. The 1st one is on the underlying performance of the business. The business engines remain solid despite sustained activity. First of all, both of our businesses engines generate good growth. This growth is profitable. If you look in P&C, our attrition loss ratio is significantly better than our Consumly guidance. On the life side, we reiterate our life technical margin guidance for the year. On the asset side, we revise our return on invested asset guidance in the upper part of our initial range. We have already started reinvesting our liquidities from the Covéa transaction, and we'll continue to do so proactively till the end of the year. The second driver is if you look at the COVID impact. Of course, the pandemic is having quite an impact on both our life and P&C businesses. On the P&C side, we received further data from clients that led us to increase the provision for COVID-related business, and mostly business interruptions. On the life business, it continues to be impacted by COVID claims, although this is in line with what we've already communicated to you. Since March 2020, SCOR has reserved for around EUR 1 billion of COVID-related claims. This is meaningful and demonstrates our ability to absorb shocks, and we have been managing those exposures proactively. The third driver is the conclusion of the settlement agreement with Covéa. This settlement took place at the very end of the quarter on June 30th. It marks a very important milestone for the group. It crystallizes the value of SCOR Life reinsurance portfolio, which is a very important point as it demonstrates the often underappreciated value of our life business. It also enables SCOR to focus on its core business and rebuild the working relationship with a leading insurer. Finally, it provides SCOR additional degrees of freedom to manage its capital and pursue its growth. Overall, I would say these results show our strength in a volatile environment. They are on track with the strategic plan Quantum Leap. I will turn over to Ian. Once he walks you through the key financials of the quarter, I will then provide a perspective on what you can expect over the coming few months from me and from us, and we will conclude with a Q&A session. Thank you. Ian, over to you. Thanks, Laurent, and good afternoon, everybody. As Laurent said, it's a busy quarter. There are quite a few moving parts, and I would like to highlight upfront that the underlying performance of the business is very strong. Let's move to the settled agreement, reached with Covéa. To reinforce Laurent's comment, the key thing to note about this transaction is that it demonstrates the value in the life business and our ability to unlock that value. I think it's helpful if I walk through the mechanics of the transaction. The agreement provides for reinsurance of 30% of all of the in-force business carried by the SCOR Life Irish entities. The impact on our financials is very positive. Firstly, it is beneficial for the solvency ratio. We receive a cash commission for the best estimate of the future cash flows. The benefit comes from the associated risk margin with the business that is released. This is positive for eligible own funds, and combined with the reduced solvency capital requirement on the business ceded, leads to a solvency impact of approximately plus 27 percentage points. On the IFRS accounting side, against the commission received, we have movement in DAC and VOBA, and the support of a strong net reserving position on the portfolio. The resulting impact on the P&L is a positive EUR 311 million of income net of tax. This includes EUR 20 million pre-tax in respect of the indemnity settlement paid by Covéa, and EUR 30 million pre-tax in recognition of the value as at June the 30th of the call option granted to SCOR by Covéa on the shares it holds. Other impacts of the transaction are, of course, that the cash position is strengthened. The cash commission was received on July the 1st. SCOR now benefits from strong flexibility to fuel profitable growth. Those are the key features of the Covéa transaction. Let's look at the other key metrics of the quarter on the next slide. In H1 2021, SCOR continued to successfully develop its franchise. Gross written premiums stand at EUR 8.4 billion. This is up 9.1% at constant exchange rates compared to H1 2020, driven by P&C, up 14.3%, benefiting from the excellent renewals during the year, and steady life growth up 5.2% with continued franchise expansion in Asia. Following the execution of the life reinsurance treaties with Covéa and the robust performance of the underlying business, SCOR delivers a net income of EUR 380 million in H1 2021, translating into an ROE of 12.2%. Let's have a look at the business performance, starting with P&C first. We've published a combined ratio of 97.2% in H1. The underlying development of the attritional ratio is strong. Q2 was impacted by a charge of €109 million before tax for expected COVID-19 claims, as more information has been received from cedents regarding business interruption. The P&C business was also heavily impacted by CAT events related to the Q1 Texas winter storm and Q2 European storms. On a normalized basis for CAT and COVID-19, the P&C combined ratio stands at 91.2%, better than the Quantum Leap assumption. In this context, we confirm our guidance for 2021 with a normalized combined ratio trending towards 95% and below. On the life side, we had two significant impacts in the quarter. The continuous development of COVID-19, in line with expectations, as well as the benefit from the retrocession treaties concluded with Covéa. First, the impact from COVID-19 on the mortality block is reducing and is tracking in line with our epidemiological model. Excluding the Covéa transaction, the live technical margin stands at 3.1% for the first half, and we should return to Quantum Leap assumptions in Q4 2021 with an underlying full year technical margin of 5%. If we now account for the one-off gains on the treaties ceded to Covéa, the net technical result would increase by EUR 346 million and translates into a life technical margin of 13.1% for the half year. On the investment side, the return on invested assets stands at 2.5% in H1, driven by realized gains on the fixed income portfolio in Q1, offset by the continuous low yield environment. The normalization of the asset allocation should be visible by the end of the year. The return on invested assets expectation for full year 2021 is revised to the upper part of the previously communicated range and stands between 2.0% and 2.3%. In this context, the solvency of the group is very strong at the end of H1, estimated at 245%. This is above the group's optimal solvency range of 185%-220%. The increase in solvency was mainly driven by 27 percentage points positive impact as of January 1st, 2021 from the retrocession with Covéa. The sensitivity of solvency ratio to interest rates is reduced due to the retrocession agreement. The positive impact from the operating capital generation and market movement is partially offset by model changes and COVID-19 impacts. Briefly on a few other key financials. The shareholders equity of the group remains strong at EUR 6.3 billion after taking into account the dividend payment. This is an increase on the year-end position and results in a book value of almost €34 per share. Finally, I would like to highlight the strong cash flow of the group with net cash flow from operations exceeding half a billion euro. With that, I will hand back to Laurent. Thank you. Thank you, Ian. Before getting into the Q&A, I would like to, first of all, lay out what you, investors and analysts, can expect from me as CEO. Second, share with you how we have planned for the coming few months to prepare the ground for the next strategic plan and the future growth of the business. First of all, what can you expect from me as CEO? The first thing is engagement. You are one of the key stakeholders of the group and you are important to me. You can count on the fact that I will spend time with you, our investors, listen to what you have to say, and hear your candid feedback. Personally, I started my career 20 years ago in the market, and I intend to stay closely in touch with you. Secondly, you can expect me to be transparent and candid. I will share my views on where the group stands, as well as the opportunities and the challenges that we face. What to expect from us in the coming few months. We have decided to extend Quantum Leap plan for one more year. The key reason is that I want to use the time to properly review the performance of our business, our operational discipline, our invested asset mix, and the efficiency of our capital deployment. What can you expect at our upcoming September Investor Day? We will make it shorter than usual, and nonetheless provide important updates on the current business environment. The life and health as well as P&C reinsurance markets are going through volatile times. Yet we see clear and attractive opportunities to grow our franchise, in particular in P&C. On the asset side, there is also scope for a normalization of our investment strategy. We will lay out the broad directions of our future strategic plan, where do we see opportunities to improve our returns, our capital deployment strategy, and our strategic priorities as a management team. The results of today show clearly that we have some options to redeploy our capital and cash. I can tell you we will find the right balance between seizing growth opportunities in P&C, re-risking our assets, and keep some flexibility in an environment marked by high natural catastrophes and COVID. Finally, at the Investor Day, I will also communicate the timing and the discipline process through which we'll produce our next strategic plan. I already know that this plan will include more of your input and objectives than it has been the case in the past. To achieve this, I will ask you for your time after the Investor Day, to meet and discuss your individual input and objectives. I really want to be able to fully understand them and include them in our planning. With that, I will hand over back to Olivier for the Q&A session. Thank you. Thank you very much, Laurent. On page 14, you will find the forthcoming scheduled event. With that, we can move to the Q&A session. Can I remind you to please limit yourself to two questions each. Thank you. Thank you, sir. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using the speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We do have our first question from Vikram Gandhi from Société Générale. Hello. Hi, it's Vik from SocGen. Hope all of you are doing fine. I've got two questions. Firstly, I wondered if you can share what is the right way of thinking about the attrition in the Life & Health operating result, due to the agreement with QBE? Looking at slide 34, probably annualizing the EUR 621 million of premiums and applying a 7.3% margin is one way. This should reduce over time as the portfolio runs off, but would be great to get your thoughts. Secondly, can you please share what kind of COVID-19 impact are you assuming in the Solvency II ratio going forward? Related to that, what's the level of IBNR claims for the COVID reserves on the P&C side? Thank you. Yeah. Hi. Hi, Vikram. Firstly, on the impact on the technical margin on the Life business unit. Certainly, on the Life side, we do see ceded premiums. What we will do is, certainly, we confirm that for 2021, the technical margin guidance, excluding the one-off impacts of the retrocession agreement, the technical margin is confirmed at 5% for the full year. When it comes to Investor Day, we'll be confirming the impacts on the technical margin for 2022. To be clear, as Laurent has laid out, what we have done here is we've crystallized value that we would've done earlier than we would have done. That's at the heart of this transaction. We've done that. We maintain conservative margins within the portfolio, and we will come back at Investor Day, to describe how we're going to use the additional capital benefits that we get from this to enhance the earning power of the business. I think we've lost Ian. Maybe we can move to the second question on the COVID expectations and solvency ratio. Frieder, you want to take that? Yeah, I can take that. As far as incurred claims are concerned, the solvency treatment is completely in line with IFRS, and we have obviously particularly reflected the strengthening of our P&C reserves for COVID-related claims. For Solvency II, there is also an allowance for future claims. That's particularly relevant for the Life business, where, as we demonstrated in previous quarters, we are holding additional reserves for expected claims in the coming quarters. This hasn't changed a lot since the last quarter. There are slight movements. We are updating the models on a regular basis and also taking into account actual claims emergence for the past quarters, but the outlook is largely consistent with what we've presented in Q4 and Q1. Jean-Paul, do you want to take the question on, IBNR share and P&C? Yes. Hello, everyone. On the P&C side, you have in the presentation deck on page 9, a chart of the ultimate reserves we have for COVID and the amount of paid claims. As you can see, at the end of Q2, we've paid only $58 million of claims for COVID. Jean-Paul, if I can just come back on that. That's the paid claims to the ultimate, but that will not necessarily be reflective of the IBNR position, right? Yeah. The rest are our case reserves in IBNR. The majority of our claims, after this quarter, are property BI. Most of it would be case reserves. Okay. Thank you. Hi, it's Ian here, just reconnecting. I don't know whether I was still connected during my answer to the first question. Yeah, you were, Ian. Okay, thanks. We could just begin, yes. Ian. Okay. Thank you, Vikram. We will take the next question, please. Our next question comes from Kamran Hossain with RBC Capital Markets. Hi. Afternoon, everyone. Two questions. The first one is, I guess on the redeployment of capital. It sounds like, ahead of the IR day and ahead of the plan more fully, you're planning to deploy more of the capital into P&C versus life. Could you maybe talk about the relative returns that you see between those two businesses at the moment? I guess it's a little bit difficult to really back it out without the segmental balance sheet. The second question is, I guess on COVID losses, coming back to that. Whilst the BI piece has obviously got a little bit worse in the quarter, can you talk about the status of the credit and surety claims at the moment, and whether these have crystallized at all? Thank you. Thanks, Kamran. Firstly, on the capital deployment. Firstly, we're in a strong position on the capital side as a result of the transaction. That's clear. We really do benefit here. This brings us more degrees of freedom in how we view the position, how we deploy that capital. As we've said, and as you point out, once we get to IR day, we can talk about that a little bit more. We'll talk about how we allocate the capital, where we see the opportunities in the market, how we view the capital return policy. There are certainly key areas to highlight on, namely the P&C market, where we see good growth opportunities, and on the asset allocation, which remains extremely prudent at the moment. That could be normalized. Now, we will talk about the relative returns in answer to the question. We will always seek to deploy the capital where we see the best value for the shareholders. It's a little early now at this point, to talk to those relative returns and exactly how we're going to deploy this. We just concluded the transaction on the last day of the quarter. It's on our radar. We're working on this, and we'll speak more about it. Thanks, Ian. This is Jean-Paul. On the COVID P&C losses specific to credit and surety. Our view is based on information received from our cedents. The estimates are coming in much better than we had anticipated. This is mainly due to the government actions taken to shore up the trade credit environment and the different economies worldwide, as well as the underwriting actions taken by the credit and surety underwriters in pretty much every country. Not only price increases, but shrinking of limits, repositioning of the portfolio, and focusing on less risky sectors relative to the economic environment. What we see actually is the results for some of the large trade credit insurers are actually better than the results pre-COVID. We remain very bullish on the credit and surety market overall, and believe that the portfolio, even if the environment deteriorates in 2022, 2023, is in a very good position to withstand that deterioration if it happens. Thanks for the color. Kamran, can we take the next question, please? One thing that we can say on the returns on the P&C side, what we're seeing at the moment is about 2 points of improvement in the underwriting ratio. If you look back in time over the cycles, for sure in terms of return on allocated capital, we've been quite steadily improving, getting to fairly good levels over the cycle. Thanks so much. Kamran, next question, please. Our next question comes from Andrew Ritchie of Autonomous. Oh, hi there. I'm sorry to go back to this topic. This is addressed particularly for Laurent. I think investors need more reassurance that the deal you conducted with Covéa is, in the end, ROE accretive, and over a fairly short timeframe. From the information we have today, we will be taking down earnings expectations for the life business by 20% or something like that for the session. There's no clarity on where any capital's going to be deployed. You haven't referred to the fact that I would hope the hurdle rate for deployment is at least the ROI on your own shares, which looks very attractive. The fact that you possibly need to address your cost of equity inflated by the fact that you are one of the few financials to have not caught up on the unpaid dividend from 2019. I just want a clear message that you are seeking to enhance earnings power net rapidly, and that the transaction with Covéa will be ROE additive in the end, in a short timeframe. I'm not sure we've really got that message clearly yet so far. Sorry to be so blunt. Secondly, can I just have some clarity as to what belief you have in that normalized combined ratio? It's very low. It's very impressive. Obviously, the CAT loading looked quite high for a benign quarter. Maybe just give us your sense, is there any other normalization we should do for that underlying combined ratio? What your latest thoughts are on the right CAT budget? Thank you, Andrew. Let me take your first. I don't know if it's a question or a comment, but I'll answer. I'll let Jean-Paul talk about the normalized combined ratio. On the ROE accretive, the answer is, yes, your message is loud and clear. It is indeed what I meant when I talked of capital deployments earlier on. It is as well what I was alluding to on the P&C returns comments, that we're seeing today rates of returns, including on capital, on equity, that are very strong. Clearly, the earnings are going to be gone in the Covéa transaction, will be replaced, and we strongly believe that they will be accretive to the ROE. Do you think they can be? Go ahead, Andrew. Sorry. Are we talking replacement over many years, or what's the kind of trajectory we should think about? This is what we'll be taking you through on the IR day, Andrew. On the normalized net combined ratio, I think your question has 2 questions in it. 1 relates to the CAT ratio, the other 1 relates to the normalized combined ratio. If we look at the normalized net combined ratio, the CAT ratio of 7% is comparable to what we used last year. If you add the commissions and the attritional loss ratio, excluding COVID, you see a 5-point improvement overall compared to last year. That improvement comes from 2 parts. 1 is roughly 1-1.5 points of improvement because of the lower manmade losses in H1 2021 compared to 2020. That could be partially related to lower economic activity because of COVID. The second part is simply pricing improvement. We need to validate whether this continues for the rest of the year. There's no normalization needed there. On your question on the CAT ratio, it's something that we're looking at very closely, and that we'll come back to you at the IR day. The fact that we've only reached our CAT ratio budget in 1 year over the last 5 years is something that, of course, we've noted and are studying, and we'll come back to you with more information at the IR day on this. Okay, thanks. Andrew. We'll take the next question. Our next question comes from Will Hardcastle of UBS. Hey, afternoon, everyone. I'll try one more way on the capital allocation. I know we're going to get more color at the capital markets day. From this Q&A session, it feels like we're talking here about new opportunity of P&C, the return on capital is improving, and that's where we'll get most of the replacement on earnings. I guess to the point that you were currently operating above the top end of the target range before the settlement. What was constraining you before to grow P&C more at these return on capital levels? Am I missing something here? Perhaps just on the COVID claims in P&C. Is there any chance we can get some more color on these? When were the specific court cases, for example? When were the notifications coming in? I guess what's some new information that we're learning? Is there specific numbers you've just been informed about? Is it just these 2 cases that you reserved for, or is there an extrapolation within your increase. Sorry, there's a lot of very minor questions within that, Cody. Just some more color would be great. Thanks, Will. It's Ian here. Firstly, on the capital deployment, with the solvency now at extremely strong position. You questioned what was constraining the growth prior to the Covéa transaction. We operate under a variety of constraints. We lead the group by the group internal model under the solvency metric, but we have other constraints, including rating capital constraints. We do maintain an excess over AAA to have our AA- credit rating with S&P, for example. That's a constraint under which we operate. Now, the transaction that we have concluded at the end of the quarter is very positive from a rating capital context. That's good. That gives us more degrees of freedom and flexibility, when it comes to the growth opportunities that we have. This is Jean-Paul. I'll tackle the second question on the P&C business interruption claims. Again, this relates to affirmative coverage for business interruption. The main drivers, as we noted in the presentation, have been an increase of the gross losses estimated by our clients, primarily coming out of the U.K. and France. France doesn't have any centralized data I can refer you to, but the U.K. does. The FCA has published information showing both the number of claims accepted and paid by insurers, as well as the amount paid. What we see is the number of claims, as well as the amount paid by insurers in the U.K. between the middle of March and the middle of July, has more or less doubled in that timeframe. This has led our clients to review and revise upwards their own estimates. We apply those growth estimates with our own assumptions to the reinsurance treaties. This is the driver behind our increase of COVID reserves. Okay. Just to follow up, it is very specific to those specific cedents, and it is not something that we should consider the risk of extrapolation beyond those. Is that fair? Yeah, that's fair. I think the markets we see where the biggest amount of litigations, and I'd say the most negative development against insurers have been the U.K. and France. Other countries, I think, the development is going in line with expectation. Okay, thanks. Thank you, Will. We'll take the next question, please. Our next question comes from Vinit Malhotra of Mediobanca. Yes, good afternoon, sir. Thank you. Some of my questions have been addressed. Maybe if I could just ask again about the solvency. From Frieda's comment, I could understand that the future claims has not changed a lot since the last quarter, as I noted from Frieda's comment. I'm still struggling to see, were there any major model changes, high single digits that you would like to flag in some way, or versus the 1Q 232 and then the Covéa settlement. I'm still struggling to see why we got only to 245, with all that put in there. That's my first question on Solvency II. Second question is more about the COVID, which you have kindly addressed just now. Just on the P&C side, is the $58 million rather a low number as to what you would have expected? Does it suggest to you that there is actually some more buffers built in? Should we interpret that the fact that you had to strengthen reserves in 2Q means that last year the strength on the reserves wasn't very conservative? Just any comment additionally on this paid claim ratio being so low and the general reserving confidence level for COVID would be very helpful. Thank you. Okay. Hi, Vinit. On your question on the solvency movement in Q2 and what brought us to the estimated level of 245. There are a couple of one-offs which lead to the fact that the closing estimate is below just a simple sum of the Q1 estimate and the COVID impact. First one is model changes, as we indicated in the pack. We had a couple of model changes as we always We constantly improve the model, this leads to sometimes positive, sometimes negative solvency impact. As it happened in Q2, the aggregate impact of the model changes was negative, a little more significant than what we would have seen in previous periods. Still, a single-digit number in terms of solvency ratio impact, towards the higher end of what you would have seen in the past. There was not a massive single model change which caused this, it was really more a combination of different changes which have more coincidentally led to this impact this quarter. Secondly, the Covéa deal has been assessed as of the 1st of January, which is the effective date of the treaty. That leads to this solvency ratio impact estimate of plus 27 percentage points, which we mentioned. The retrocession does cede a significant portion of our most interest rate sensitive business to Covéa, and that includes interest rate sensitive risk capital, which we hold for this business, and also risk margin. As a consequence of that session, our interest rate sensitivity or the interest rate sensitivity of our solvency ratio has reduced due to the deal. That means that the impact of the interest rate increases, which we've seen in Q1, is then correspondingly lower. The impact of interest rate movements over the first six months is somewhat less than what you would get if you use the sensitivities, which we originally published in February, and then apply the interest rate movements, which we've experienced in the first six months. Finally, there is some impact of the COVID losses. We've, of course taken, as I said, the P&C losses. There have been small movements on the Life side, which have also reduced solvency a little bit. These three factors explain the big unusual movements, and everything else is really pretty much in line with what you would have seen in earlier periods. Sure. Thanks. This is Jean-Paul. I'll try to address your second question on P&C COVID claims. I think the $58 million paid at the end of Q2 really reflects the complexity of the claims settlement around COVID. I think when there's a clear presentation from our clients, and no questions asked about how these claims are aggregated, we pay them very quickly. As you see, it's a very small number. The large number of claims remaining are first complex for the cedents to get an assessment of their own exposures. Secondly, there's more complexity about how those claims are ceded to the reinsurance treaties. We see this ratio probably lasting until the end of the year and probably into 2022. The majority of our ultimate claims estimates are based on our own estimates, based on information we receive from our cedents, basically. It's a combination. Sure. Thank you. Thanks. 2 minutes. Let me take the next question. Next question comes from Ashik Musaddi of JP Morgan. Yeah. Thank you, and good afternoon, everyone. Just a couple of questions I have. First of all, going back to the topic around the normalized combined ratio. Clearly, what you are saying at the moment is 91.2%, and actually it is even better based on one comment, if I understood it correctly. That compares with 95%, what you've been guiding for Quantum Leap. There is a material difference between the two. Clearly, one of your comments suggested that we need to see what the pricing is going to do. If I look at some of your statement, pricing was still strong in July. You're expecting pricing to be in the hard market next year as well. What is the reason you're not improving this Quantum Leap 95% to, say, 93%, 92%, something like that? Some color on that would be good. Secondly, just going back to the Covéa thing. How should we think about annual impact on earnings at the moment? Shall we just do like EUR 300 million is the profit you have booked, so say EUR 30 million lower earnings until you redeploy the capital? Would you say that math is not right? There will be some lead time on the capital deployment. I agree that you will give more color at the investor day, but still there will be some delay. What should be the earnings impact going forward in the short term? Thank you. Thanks. This is Jean-Paul. I'll start with the question on the net combined ratio. Looking at different actions we've taken over the past 18 months. We took significant underwriting actions in 2020 to reposition the portfolio to be more profitable. In 2021, we really accelerated the growth because of what we saw as improving market conditions. As Laurent mentioned, in our own pricing, we see year-on-year pricing improvement between 2020, 2021, more or less resulting in at least 2 points of improvement of the loss ratio. We expected this to be earned over time. What we're seeing in the first 2 quarters of 2021 is both the benefits of the underwriting actions taken in 2020, as well as some of the earning of the better business in 2021. Again, for the time being, we haven't revised our guidance. We'll come back to you on this at the IR day, both for the rest of the year 2021 and in 2022. Just on the second question, I come back to what I said earlier, actually, in that the way to look at this is not about earnings dilution. What we've been able to do is crystallize value now, get cash now for cash flows that we would have had in the future. That's the key element here. That's at the heart of this transaction. We do get the capital benefit. The way I would look at this is not to start then to model downwards. We're confident that we can deploy the capital, and this is not going to be dilutive. We can deploy this to enhance the earnings of the group. We will come back with our plans there. Yeah, that's how we're looking at this is, we've received this benefit of crystallizing, and we shall deploy that. Okay, that's very clear. Thank you. Thank you, Ashik. We'll take the next question, please. As a reminder, to ask a question, press star one. Our next question comes from Thomas Fossard from HSBC. Yes, good afternoon. Two quick questions on my side. The first one would be on the P&C. If I'm looking at slide 32 of the pack, when I'm looking at net earned premium, I can still see net earned premium falling by 4%, 5% compared to last year, while we are now 18 or 24 months into much better markets. Can you comment on why this is the case? Actually, when we should expect net earned premium to turn to a more positive or stronger number at some point. The second question related again to the Covéa deal, and maybe to the origin of the structuration of this deal. Why 30%? Why 20% of the mortality book, of the U.S. mortality book? Were there any more appetite from Covéa and you refrain or? Just to better understand how the transaction has been sized up between both parties, what have been the driver to decide which was the right amount? Maybe connected to this, to be fair with you, I'm still struggling to understand why we've got a loss of 14 points of solvency if we are starting from the end of Q1, and I think the 27 points from the Covéa agreement. Let me put the question differently. If you would have potentially strengthened your balance sheet without showing too much of the number of the impact of the Covéa operation, would have been possible by model changes? At the end of the day, you're not showing too much, but ultimately the balance sheet has significantly improved, and this is also where you're getting more confidence regarding your freedom for the future. Thank you. Thomas, I'll start on the question on the net earned premium for P&C. The difference you see between the numbers we showed for the gross written premium and the net earned premium really relates to the earning of premium. If you look at 2020 earned premium, the earned premium at the first half of 2020 was driven by the very strong growth in 2019, and in some effect, but very little, of the repositioning of the portfolio and the underwriting actions taken during the renewals in 2020. I'd say the normal earning patterns we saw in 2020 were stronger than, let's say, usual. In 2021, what we have is a flattish renewal of the portfolio in underwriting year 2020, plus the effect of COVID, where there were some premium takedowns on some lines of business like political risk, construction, which is earned through now in 2021, and we haven't fully benefited of the underwriting increases we've achieved in underwriting year 2021. That explains the drop in net earned premium. We expect this to continue in Q3, because the same effect will continue. We won't really start earning significant amount of premium in Q3 from underwriting year 2021. I think from Q4 and then into the first quarter of 2022, you should really start seeing in the earned premium, the effect of the premium increase that we've achieved on a written basis in underwriting year 2021. On your second question, Thomas, Frieder speaking. The model changes which we've made in Q2 have nothing to do with the Covéa transaction, if that was part of your question. They were done completely independently, part of our regular maintenance of the model. It's complete coincidence that they happen in Q2. As I said, they are more significant than what you would have seen in previous periods. This explains a significant part of the difference between the simple sum of the Q1 ratio and the Covéa impact. The other somewhat minor, but not insignificant, movements are caused by the fact that the impact of interest rate movements and the increase in interest rates post-Covéa is smaller. We've reduced interest rate set and sensitivity of the solvency ratio by the session, and that has led to a correspondingly lower impact on the solvency ratio of the interest rate movement in Q1. Plus, there was the COVID deterioration, mostly from P&C, and these are the main one-offs which explain the difference between the simple sum and the ratio which we are publishing. Is that answering your question? Yeah. No, fully understood. Thanks for that. If you can say a word around the calibration of the deal on the appetite and why 30 and not 20 or not 40, or what was the appetite, what was the constraint? Anything on the calibration of that? I take this. This is Paolo. Hi, everybody. First of all, there was a strong willingness between the two parties to resume meaningful commercial relationships, and that was identified as one area that was beneficial to both parties. Negotiations per se are confidential, and so going too much into the details, I don't think is appropriate in this venue. From our side perspective, we felt that that level of session would bring a strong rebalancing to our life portfolio as we cede about 20% of our U.S. mortality business. That gives us a much more balanced portfolio between the U.S. and the remaining global franchise. Just to note on a few comments made before, I just want to underline this. This crystallizes EUR 1 billion of economic value of the franchise, effectively. I find surprising some of the comments on the dilution, reinforcing what Ian said, because effectively, this crystallizes future cash flows into today. We know risk margin effectively. We thought the deal on our side was, again, very beneficial economically, and also very strong rebalancing. We're going to show more data on the rebalancing as we get to the investor day in September. I don't know if that answers your question, Thomas. Copy, Paolo. Thank you. Thank you, Thomas. We will take the next question, please. Our next question comes from James Shuck of Citi. Oh, hi there. Good morning, good afternoon. More questions on the capital side of things, I'm afraid. Thank you for the commitment to greater transparency, Laurent. It would be helpful to get an update on where you stand in terms of rating agency capital over that AAA level pro forma for the Covéa deal, please. When I look at your Solvency II ratio, kind of rolling it forward, and think about how you manage that, it seems to me that you're going to have to periodically securitize the Life in-force book from time to time so that you can increase the rating agency surplus. If you just clarify your thinking around that. Again, when I think about the exposure growth that we've seen in the first half of this year. Really, all of it is rate driven rather than exposure. Yet you are alluding to the fact that you think you can grow quite strongly in P&C Re. Keen also to understand where that growth is going to come from, whether you are actually specifically referring to exposure growth, and whether that growth is going to be more than the retained earnings after the ordinary dividend. I would have thought that it would be self-funding, and therefore the stock of capital. Again, just thinking about how you manage that down with the levers you've got, appreciate that the capital market stage is coming up fairly soon in September, it's an important point to dwell on, I think. The second kind of question or area I think is a much shorter one. Laurent, you alluded to flexibility when you talked about the optimal capital position. Could you just update us with your thoughts around potential M&A? I don't think I heard the answer to Angie's question earlier on, but how do you think about the ROI when it comes to M&A versus, say, share buybacks? Thank you. Yeah. Hi, James. Just firstly on the S&P impact. We maintain, as I said, an excess over AAA. We don't disclose our margins over AAA. Certainly the transaction, as I said earlier, was very positive on a direct S&P capital model basis. You just need to remember that the transaction took place on the last day of the quarter. How we now think about balancing the capital that we've received under the various measures and what impact it has as we deploy this on our first earnings, on our solvency, on the S&P capital, on the cash profile of the group, as we deploy that. That just takes a little bit of time. It's a complex transaction. It's very beneficial across these metrics. We just need to think through how that's going to be applied, to ensure that it is accretive and that we are managing to the targets of the group, yet within the constraints that we have. As I said, we'll come back at IR day with more color around the approach there. Laurent, do you want to take on the exposure growth in P&C? Sure. I think your comments must relate to the June, July renewals, where indeed the growth is more or less in line with the price increases we've seen. The June, July renewals are dominated by the U.S. In the U.S., the question is not so much the price increases, but more the claim inflation, in our view, is that both across Property and Casualty, the price increases are barely keeping up with loss trend on both segments. Therefore, there's a lot of underwriting actions behind those numbers that took place in June, July, where the end result is more or less a growth in line with price increases. If we look across the year, we're growing our reinsurance book almost 11%, and 11% plus throughout the year, and we definitely did not achieve 11% rate increases. There is exposure growth there as well. On the specialty insurance, we've had significant growth this quarter in Financial Lines. Specialty insurance grows on a growth premium basis, almost 30%. Again, the average rate increases we see across the different lines of business is about 15%. I think there is both price movement as well as exposure movement in that growth. As we look to 2022 and review the market conditions that we expect there, I think you'll see similar projections that we anticipate in 2022. On your question, James. Actually, I think that's 2 questions. 1 is on the M&A environment, the other 1 is how do we decide to allocate capital, and how do we identify opportunities, inorganic ones versus organic ones. First of all, on M&A, look, our approach here is very much the same in the sense that we do not plan on M&A in our plans, and we take an opportunistic approach as and when. If you look back in history, the market is hard at the moment, and particularly on the P&C side. We do see a number of very attractive opportunities. We have the capital to grow. The addition of a franchise in such a market would be potentially more disruptive to our ability to really focus on underwriting the business. We don't change our approach to M&A. On the second point on the flexibility, how do we compare the various rates of returns? Clearly, we will keep all options in mind when we look at the flexibility of deploying our capital, whether it is to invest it. I think we've already alluded to the asset risk. I think this is something as well that Francois and his teams are looking at quite closely. There is a pretty interesting number of organic opportunities, I would say. In the way we look at capital return, this is something that we will be exploring at the IR day and going forward. Okay. Thank you very much. Thank you, James. We'll take the next question, please. Our next question comes from Will Hardcastle of UBS. Hi there. Thanks for taking a follow-up question. Just thinking, any early thoughts on the European flood loss really? Any comments, whether it be industry loss expectations, your comments on that, anything we should maybe extrapolate from the Q2 European storm loss for Q3 flood loss? Any high level comments here would be helpful. Secondly, I think on the solvency ratio, we know the ratio. I'm just checking Is there anywhere where you published the numerator or denominator in that ratio? I guess there's a lot of moving parts on the model changer, et cetera. Any guidance to what we can have as the denominator at this point? Thanks. I'll start with the European flood question. As you noted, the Q2 events that we booked are the European connected storms that took place in the Czech Republic and the adjacent countries. The market loss estimates for those events, they happened at the end of June, so the estimates are very rough, are between EUR 3 billion-EUR 5 billion. The European floods which took place in July will be part of the Q3 results. There we saw recently an estimate from the German Insurance Association of a range of EUR 5 billion-EUR 6 billion just for Germany, to which you probably have to add Belgium and other places. I'd say what you can see in Q2 is probably indicative of what we can expect for Q3, and probably the events that we have in Q3 are worse than the ones in Q2. On the second question, we'll publish this in all detail at the IR day, so you will see the breakdown and also the full movement analysis, in the usual level of detail, including the breakdown of the operating capital generation. You should all get this in early September. Okay. Thanks. It was worth a try. Cheers. Thank you. Ladies and gentlemen, this concludes today's question and answer session. At this time, I would like to hand the call back to speakers for any additional or closing remarks. Thank you. Thank you very much for attending this conference call. The investor relation team remains available to pick up on any further question you have, so please don't hesitate to give us a call. I wish you a good afternoon. Thank you. This concludes today's call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.