Good afternoon, ladies and gentlemen, and welcome to the SCOR Group Q2 2023 results conference 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 two. At this time, I would now like to hand the call over to Mr. Yves Cormier. Please go ahead, sir.
Good afternoon, and welcome to the SCOR Q2 2023 results. My name is Yves Cormier, Head of Investor Relations, and I'm joined on the call today by Thierry Léger, CEO of SCOR, as well as the entire executive committee. Can I please ask you to consider the disclaimer on page two of the presentation? I would now like to hand over to Thierry Léger. Thierry, over to you.
Thank you, Yves. Good afternoon, and welcome everyone. The first half year of 2023 has been marked by many climate events across the world: riots in France, heatwaves, wildfires, rising interest rates, and the continuation of the war in the Ukraine. In this environment, SCOR has been faring very well. Actually, with a net profit of EUR 500 million for the first half year, we have set a new record for the group. I view this as a significant step, following the improvements on the underwriting side of our P&C business over the last 18 months. It is also a testimony to our well-diversified business model across life and health, P&C, and investments. Looking at the half year 2023 results, I'm pleased with the outcome.
The net profit of EUR 500 million, the return on equity of 23.2%, and the growth in economic value are all very strong. The Solvency II ratio with 213% is at the upper end of our optimal solvency range. More in detail, the first half 2023 results, net income is supported by positive results across all the activities. The combined ratio, the life and health service results, and the regular income yield are in line with the targets and assumptions provided in April 2023. I'm satisfied with our Q2 results, which translates into EUR 192 million net income for the quarter. Performance across all three business lines is positive, despite some challenges in P&C.
For life and health, we see opportunities, and the business continues to grow profitably and generates a strong insurance result. The P&C performance was impacted by higher man-made activity and more prudence in our reserves. There were several small to mid-sized events. French riots is the most obvious one, but there are also a couple of losses from industrial risks. After the repositioning achieved by the team in 2022 and early 2023, I continue to monitor closely the performance of our portfolios. For investments, the group continues to benefit from high reinvestment rates and reports a strong increase of the regular income yield. On the renewal side, we are determined to benefit from the supportive market to maximize value creation, net profit, and return on capital deployed.
We continue to build on our four major strengths, our global franchise, our skilled and committed employees, a resilient balance sheet, and our raison d'être with sustainability at its core. The outcome of our June, July renewals testifies for it. After the remediation of our portfolio in January, we are starting off a better diversified portfolio. We can take full advantage now of the positive phase of the P&C reinsurance cycle. In this context, we are confident that we can grow our economic value further, and we will continue to work hard on delivering on our 2023 financial targets. François, over to you.
Thank you very much, Thierry, good afternoon, everyone. I'm pleased to present these Q2 results as the new CFO of the group. Let's mention, I will focus today on quarterly figures and not year-to-date figures. As in Q1, key highlights of the quarter are summarized in the first slide of the section. The net income of the group is satisfactory over the quarter at EUR 192 million, and contributing to a strong net income for the first half of the year of EUR 502 million. This translate into a return on equity of 16.9% for the quarter and 23.2% for H1. The group insurance revenue stands at EUR 3.9 billion. The new business CSM at EUR 367 million, benefits from the strong underwriting performance of the period, including April and June renewals.
The performance of the second quarter is driven by positive results coming from our three business lines, and continues to demonstrate the complementarity of our core activities. Let's now move to the details of the performance of the three business lines over the quarter. I will start with P&C. P&C continues to benefit from favorable market conditions, both in pricing and terms and conditions. As a result, the new business CSM stands at EUR 271 million in Q2, benefiting from a strong pricing at the April and June 2023 renewals. Looking at the P&C insurance revenue, it stand at EUR 1.9 billion, which represents an increase of 7.9% compared to Q2 2022 at constant exchange rate. As noted in Q1, this growth is primarily reflecting prior year volumes, as insurance revenue is on an earned basis.
We continue to allocate more capital to specialty insurance based on attractive Return on Sales, which continue to grow, increasing by 18% at constant exchange rate, representing 33% of P&C overall insurance revenue today. The combined ratio stands at 88.5%. It benefits from a cat ratio of 4.2% in the quarter. The P&C technical performance is impacted by a high attritional ratio of 85.6%. I would like to draw your attention on the fact that this quarter we added some prudence to selected existing P&C reserves. This is a deliberate change in approach to build conservatism in our P&C reserve that Thierry and I want to signal today.
The P&C Insurance service results stand at EUR 186 million, driven by a CSM amortization of EUR 322 million, partially offset by the negative experience variance, mostly explained by the high attritional this quarter. We disclosed this quarter the discount effect on the combined ratio. It stands at -6.9 points in Q2, stable to Q1, as you can see in the appendix. Overall, we consider this attritional as too high, and we are not satisfied by our P&C performance, but we are confident that remediation action taken in 2022 and early 2023, and favorable market condition, will help us to continue to improve our technical profitability. Let's now move to Life and Health. The business continue to grow profitably and generate a strong insurance result.
We continue to build our Life and Health CSM through new business generation, mostly from protection. The new business CSM stand at EUR 96 million in Q2. Life and Health insurance service result amounts to EUR 140 million, supported by a strong CSM amortization of EUR 117 million, and risk adjustment release of EUR 40 million. Experience variance stand at EUR 13 million, including a technical reclassification from experience variance in Q1 to an onerous contract in Q2. Overall, the performance of the Life and Health business is strong in Q2. After looking at P&C and Life and Health, let's turn to investments.
The key message here is the confirmation of the regular income yields improvement, thanks to high reinvestment rates and the relatively short positioning of a high quality fixed income portfolio, which has an average rating of A+ and a duration of 3.2 years. Total investment income on invested assets stands at EUR 162 million, and the regular income yield at 3.1% versus 2.9% last quarter. As a reminder, total investment income is not included into the insurance service result and come on top. The reinvestment rate stands at 5.1% at the end of June, compared to 4.6% in Q1. The invested asset portfolio remains highly liquid, financial cash flows of EUR 9 billion are expected over the next 24 months, enabling SCOR to benefit faster from higher investment rate.
Our liquidity position is strong, with EUR 2 billion of cash and short-term investments. Let's now move to our two financial and solvency targets. I will look at this on a year-to-date basis, as they are our targets for the full year of 2023. In H1, the economic value is up 8.7% at constant economics. The economic value growth is notably driven by the strong shareholder equity growth of 15.7%, which contributes to consolidating SCOR's group at capital. The economic value stands at EUR 52 per share, compared to EUR 50 at the end of 2022. Please note that both the net income and economic value capture a EUR 47 million pre-tax impact related to the option on own shares granted to SCOR over H1. Moving now to the solvency target.
The solvency ratio stand at 213%, towards the upper end of the optimal range defined by the group. Three main drivers impact our solvency ratio during the first six months of the year. The increase in solvency to own funds, consistent with the increase in IFRS event in economic value, the SCR increase driven by new business in Life and Health, and PNC, especially in Q1, and of course, the dividend accrual of EUR 1.8 per share for the first six months of 2023. As usual, there are more details in the appendices, and we'll have a Q&A session to address your question. With that, I will hand over to Thierry.
Thank you, François. Before we move to Q&A, let me summarize. The EUR 500 million net profit for the first half is a testimony to both the strength of SCOR's business model and the complementarity of our core activities. Our efforts continue to pay off, and we will continue to work to deliver on our targets. I'm confident in the group's ability to take full advantage of the current market conditions. I look forward to presenting SCOR's strategic plan 2023-2026 on September 7, 2023, on the back of a strong first half year. Our clear focus is to take full advantage of SCOR's strong franchise and technical expertise. The market environment is positive right now for all business units, P&C, life and health, and investments, with some of the best conditions we have seen in decades.
The teams, executive committee, and I are all looking in the same direction, forward, and we are ready to seize the opportunities ahead. Thanks for your attention. Let's now move to Q&A. Yves, over to you.
Thank you very much, Thierry. On page 20, you will find the forthcoming scheduled events. With that, we can now move to the Q&A session. Can I please remind you to limit yourself to two questions each? Thank you.
Thank you, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We do have our first question, comes from William Hardcastle with UBS. Your line is open. Please go ahead.
Hi, everyone. Thanks for the questions. First of all, I guess, you know, the attritional noise, some of it is perhaps man-made excess, and some of it is because of the added prudency in the reserves. If there's any way to disaggregate that, quantify those factors, that'd be helpful. I guess on those man-made excesses, Thierry, are you putting it down to, you know, that it's just quarterly volatility and a bit of bad luck, or would this be a signal that there's more remediation to do on those? The second one is, if I was to look at it more positively, it looks like effectively you've recycled that investment gain from the call option that would've created excess profits into reserves to help future profitability as such. Would you agree with that comment?
If so, where are you looking to build that excess reserve level up to? Obviously I'm not expecting full numbers, but any sort of high-level overview to where you'd like to build it to. Thank you.
I will take the two questions. Maybe I will give you more flavor on our P&C combined ratio, and as you mentioned, the split of the contribution to this combined ratio. As we mentioned in the introduction, the combined ratio is benefiting this quarter from a strong CAT ratio of 4.2%. As I mentioned, please note also that in Q1, compared to Q1, we publish now the discount effect within the combined ratio. You have it for Q2 on slide 11, and on slide 41 for Q1.
If you exclude the discounting effect, and if you just compare the attritional between Q1 and the attritional of Q2, we have close to nine points of difference in Q2. We can explain this difference by three buckets. The first bucket, we were impacted by man-made developments, and particularly claim reserves on the French riots. French riots, they started the 27th of June. We took the estimate of market insured losses published two weeks ago by France Assureurs, on top of which, and France Assureurs, the French Federation of Insurance Companies, and on top of this market, insured losses of EUR 660 million, we added a material prudence buffer to insured losses.
We took the full hit in Q2 on this event. It amounts to a pre-tax amount of EUR 40 million, which corresponds to 2.5 points of the combined ratio in Q2. That's the first bucket. The second bucket, we have a few large industrial losses, as well as some claims in agriculture in Brazil, coming from the previous underwriting year, which means before remediation action that we took on this particular portfolio. This second bucket accounts for 3.5 points of the combined ratio this quarter. The rest include the prudence I mentioned, added to our P&C reserves and other, I would say some other technical, or smaller item.
As I mentioned, and as mentioned by Thierry, we are not satisfied by this attritional level, we are really confident that recent remediation action and favorable market condition will help us to improve the performance. On your second question, do we recycle the EUR 45 million mark to market positive impact on the option on shares that we've got? This is not my message. What we want to do this quarter with Thierry, is to send a signal. This is a deliberate change in approach to build conservatism into our P&C reserve. We have indeed taken a prudent approach as we update our reserving position on particular exposures.
There is, I would say, no particular deterioration in relation to prior events, except the one mentioned on agriculture. However, we have reviewed experience and made appropriate actual adjustments where necessary. To conclude on this point, I insist this is not a catch up on claims, this is not a catch up on inflation, this has nothing to do with our normal and annual review process, which will take place in Q4.
Thank you. Can we move to the next question, please?
Our next question comes from Freya Kong with Bank of America. Your line is open. Please go ahead.
Hi, thank you for taking my questions. Maybe just a follow-up on the increased prudence in P&C that you've taken. Is this a one-off for the quarter, or should we extrapolate this sort of 3-point build for the rest of the year? If so, what would your updated guidance be? Is it still 87 at a headline level for combined ratio? Secondly, could you help me understand the Solvency II walk from Q1 of 219%- 213% in Q2? You've had positive earnings contribution, based on your sensitivities, you should have had positive contributions from markets in the quarter. I'm struggling to understand the difference here. It's around 10 points versus consensus. Thank you.
Thank you. Thank you for, yeah, I will take also the two questions. The first one on the prudence and the combined ratio. We maintain for the full year of 2023, all the April assumptions. We maintain in particular an 87% combined ratio for the full year, 2023. The signal that we send this quarter, you should expect to see it regularly in the future. There is no specific budget predetermined in advance, but that's something that you should see more often in the future, I would say, compared to the past. Your second question on the solvency, on the solvency ratio.
I think to understand what is happening on the solvency ratio, it's important to look at the two components of the solvency ratio. The SCR on one hand, and the own funds on the other hand. The way we look at it, SCR and own funds increased in Q1. The ratio, the solvency ratio, was at 213% at the end of 2022. It increased in Q1, under the effect of the both increase of SCR and own funds to 219 at the end of Q1. In Q2, the SCR was flat, while the own funds have decreased, leading to a decrease to the ratio back to the 213% level of 2022.
How to explain this decrease of the own funds? The own funds, if you look at the slide, has decreased by EUR 274 million in Q2. The key movement to explain this variation, that's basically coming from three items. The first one is, that's the accrual of the dividend that we see under Solvency II, and that mentioned that we accrued for EUR 1.8 per share. The second one, we have a negative economic impact. It come mostly from the inversion of the yield curve, which is not covered by our ALM strategy, which is today based on duration matching.
That will be an area of improvement in the future to reinforce our ALM strategy on this specific point. The level and the third item explaining the decrease of the own fund, that's the level of capital generation, which was lower than expected for both Life & Health and P&C. In Life & Health, this is consistent with the low new business CSM that we observe in Q2. In P&C, this is really consistent and fully aligned with the negative experience variance that you see under IFRS 17. We have also some changes in operating assumption, mostly for Life & Health, that are less impactful under Solvency II, but they are similar to the ones that you see under IFRS 17.
Overall, what we can say is that you see there is a strong alignment or strong correlation between the movement, in the own funds and, what we observe under IFRS 17, for the economic value.
Okay. Thank you.
Thank you. Can we move to the next question, please?
Our next question comes from Andrew Ritchie with Autonomous. Your line is open. Please go ahead.
Hi there. Just a quick question on Life. Obviously the Life P&L has been strong. The insurance service result, sorry, has been strong, including a stronger, certainly than I expected, CSM release. The CSM went backwards in Q2, including quite a big assumption change. Was that assumption change to do with the items you mentioned, or is there something else going on in the Life business? Maybe clarify that. I don't know if it's linked also to the change of the treatment of some of the variances in Q1, which became onerous in Q2. That's the first thing on Life assumptions.
The second thing is just to clarify, the 87 combined target, which has been standing since April, I think you said in Q1, that target included a lower discount benefit than what you were seeing in Q1. In Q1, you didn't give us the discount benefit, but we now learn it was 6.9. Is that still the case? In other words, I suppose the way we interpret it is, just to be absolutely clear on this, you're sticking with the 87. That does have a higher discount benefit, but, you know, we're trading a discount benefit off against the prudence and prudent factors you mentioned. Just ultimately, I guess the main clarification point is, the original 87 included a lower discount benefit than what you're now enjoying. Thanks.
Thank you. Thank you, Andrew. I will take the three questions. The first one on the life and health assumption or pricing assumption changes. This relates to data and model updates, mostly on life and health, and that's mainly driven by updated data that we receive from cedents, with a smaller impact of model refinements. They mostly relates to future volumes expected on proportional contract. That's mostly a Q2 effect that was not reported in Q1. This relates to update over Q1 and Q2. The majority of the impact arrive in Q2 following updated data, again, received from cedents.
On your second point, on onerous contracts this quarter, on Life and Health, this is really a technical item. That's technical reclassification of a Q1 item under experience variance to an onerous contract. The amount of reclassification from Q1 to Q2 from experience variance to an onerous contract is EUR 34 million. This is a technical correction arising as you can expect during a transition to a new accounting standard. The driver behind the change in Q1 was strengthening claims reserves on a block of runoff contract. In April, we explained that we expect on onerous new business contract to be limited for Life and Health. It remains the case. Again, this is a technical reclassification this quarter.
On PNC, that's a good point. I will be very transparent. That's true that the objective of the April presentation was to provide an overview of where IFRS web figures could land. I think we were the first one to do it. We help you build your models, and I don't think any other institution provided that level of details at that time. The assumption provided in April implied the level of net income, which was exceeded both in Q1 and Q2. Also, what we observe in practice today is that over H1, the combined ratio is pretty close to the assumption of 87. Which, what I want to say is that our indication of April are relevant.
However, as you would expect, with a complex transition to a new financial reporting standard, there have been refinements to certain estimates as we build a clearer view. For example, there were some adverse impacts related to the treatment of retro that we discussed in Q1. It is clear today that for this year, the impact of the discounting will be around 6.5, seven points for the entire year. With the objective of being transparent, we added in the appendix, the detail of the Q1 combined ratio, including the discount effect, and you see that's stable in Q1, and that's stable in Q2. We maintain the objective of 2023 for a combined ratio of 87, and we will be disclosing assumptions for 2024 up to 2026 early September.
Take this as a clarification of all our assumption and the first year of transition to the new norm.
Thank you. Can we move to the next question, please?
Our next question comes from James Shuck with Citigroup. Your line is open. Please go ahead.
Hi, thanks for taking my questions. Firstly, just a point of clarification. I think you said that the Q2 discounting rate benefit was in line with the plan that you had for the 87 for full year, so the 6 point whatever it was in Q2. Can you just confirm that was the case? I just wanted to check I got that down right. Secondly, on the IFIE, the PNC re IFIE, so pretty stable Q1 to Q2, around EUR 80 million-EUR 85 million. How will that evolve over the course of this year? Are you able to give any guidance about that IFIE unwind for full year 2023 and into 2024, please?
Obviously you're getting a big pickup on the investment yield, but I presume there'll be some offsetting impact from this IFIE unwind. It's a complex area. I appreciate that, but clearly, you know, we can make some estimate based off what swap curves are doing at the moment. My second question was really around the new business CSM in P&C Re. That's a very good number, you know, certainly versus the target that you put out there for the full year. You're already tracking well ahead of what you thought that number would be. I guess you're still, however, guiding to 2.5- 3 points of improvement on the underwriting year loss ratio.
Given you've blown through that new business profit target already at H1, should we be thinking that however we think about it on a true underlying basis, the improvement is more than 2.5-3 points? Thank you.
Maybe on your first clarification that is needed, maybe I was not clear on the previous answer. We disclose an impact of the discounts in the combined ratio in April of four points. We confirm it will be 6.57% for the full year, but we maintain the 87 assumption for the combined ratio. Again, that's a correction of an assumption on the discount, but we maintain the 87 for the full year. IFIE, that's what I can tell you on this. This is what you see today in H1, that's an impact of minus EUR 171 million, which mean it's what?
It's a little bit more than half of the budget we announced in the April presentation of EUR 300 million. How could you, we can explain that it's above? You have to understand what IFIE represents. I mean, it reflects the development of interest rates over the past years. Again, you have to come back to locked in rates that have been recently increasing, so you should expect IFIE to increase in the future, and that's what we observe.
On a quarterly basis, we already exceed EUR 300 million budget in Q1 and Q2. We will very likely exceed EUR 300 million during the year, and it should accelerate in the future as well with the increase of interest rate. On the third question, the new business CSM on PNC, here again, we maintain what we said in April. The assumption, this is the first year, we learn.
What we observe in Q1 and Q2 is that there is a strong seasonality with the 1/1, the 1/4, and the 1/6, and the 1/7 annual. We don't change the assumption for 2023, and again, wait for the publication of the strategic plan to see our updated assumptions on the next three years. We do not provide the CSM amounts for each annual date, only the evolution. We want to avoid confusion by providing figures under different assumptions. At renewals, what we do, we price and we compute the CSM with the most updated information, which differ from the one used for quite early financial results.
The 1.6 new business CSM is included in the Q2 new business CSM. The 1.7 new business CSM will be included in the Q3 new business CSM.
Thank you. Can we move to the next question, please?
Our next question comes from Michael Huttner with Berenberg. Your line is open, please go ahead.
Hi, guys. Thank you for taking my question. Two, the first is on the management expense ratio, came at 6.6, I think, for year to date, well below the guidance. I guess, I'm just wondering if you have any visibility as to where this could land in the full year, and perhaps you can give us an upgrade on the progress made on the efficiency sort of program year to date. The second one is slightly sort of broader question. It's on the topic of PFAS and the pollution from these so-called forever chemicals. There has been a lot of noise around this recently, given the $10 billion lawsuit settlement by 3M Company in the U.S.
I just wanted to ask whether you think you could potentially have any exposure to the so-called sort of PFAS, and whether there been any reserves that have already been set aside for this potentially emerging risk? Thank you.
We'll first one, and Jean-Paul Conoscente will take the second one. On management expense, that's true, that's, well, I mean, we are below the assumption presented in April. The management expense ratio on a year-to-date basis is at 6.6%, so that's slightly below the budget we've got. This is mostly explained by some specific variance cost reduction that we already took in 2023. That's the beginning of the reduction of our cost base that starts to be visible. I mentioned that our management expenses, they do include the implementation cost, the one-off implementation cost that we mentioned.
At the end of June, we spent EUR 7 million on one-off costs to implement our cost-saving program. You should not expect a catch-up effect in the second part of the year on management expense.
Hello. As regards the forever chemicals, indeed, I mean, that's a well-identified concern for the entire industry.
at SCOR, we've developed a framework to monitor this risk, and we have specific provisions in our underwriting guidelines to address this topic through various ways for the lines of business that are most concerned by this topic. This framework and these underwriting guidelines involve exclusions that we have implemented in the insurance contracts for chemical manufacturers. We think that this is something that strongly mitigates the exposure to forever chemicals going forward.
Thank you. Can we move to the next question, please?
Our next question comes from Gerald Go with RBC. Your line is open. Please go ahead.
Hi, afternoon, everyone. Two questions, please. The first one is on solvency. I might have missed this in your remark earlier. What was the impact from market moves for H1? The second one is also on solvency. You mentioned about this increase in SCR from new business in both life and health and P&C, but it's not that apparent from your growth rate, nor the renewals outcome. I'm just curious as to which lines of businesses that you've deployed the capital in. Also maybe one last one, very quickly. How has your PMLs trended after the mid-year renewals, please? Thank you.
Yeah, on the SCR growth, I think there's, in particular, also an effect, from the increased loss costs that we have in our pricing, which translates in a SCR growth that is very similar to what you have seen, in the last year. On the market movement, we don't disclose the exact amount, but the sensitivity were not a good proxy in Q2, in particular, with the inversion of the yield curve, which, as François has said, is not very well captured in our ALM, strategy.
Maybe Jean-Paul can take the question on the PMLs.
We had slightly increased PMLs compared to the end of last year for areas that we thought, you know, were attractive after the 1/1 renewal. Overall, though, our net PMLs would be down probably double-digit compared to last year because of the strong actions taken at January 1 and let's say our remediation actions on proportional treaties and on Cat XL at the January 1.
Thank you. Can we move to the next question, please?
Our next question comes from Kamran Hossain with JP Morgan. Your line is open. Please go ahead.
Hi, afternoon. First question is just around, I guess, prudence and the approach that you've been taking. I think it's, you know, with the change that you're taking to the reserving approach or thinking about things more prudently, are there any other areas that you think, you know, as a new management team, CEO, CFO, that you might want to kind of, you know, be a little bit more cautious on? In particular, is man-made one of these areas? Second question is just on the dividend accrual. Clearly, as you said, you've had a, you know, fantastic kind of start to the year, EUR 500 million plus earnings in the first half. Why is the dividend accrued flat? Just intrigued about that. Thank you.
Maybe I take the question on the dividend. You remember, I mentioned during the call, the annual call, that the 1.4 EUR per share dividend that we paid in 2023, in relation to 2022, was not a reset. By prudence, and that's what we did in the past, we usually accrue the last dividend, and the last dividend that was paid before the cut of to 1.4, was 1.8. This one, by prudence, we accrue.
Again, the decision on the dividend is taken by the board, and is taken after we close the full account, so it will be end of February, early March next year.
Okay. On the prudence in other areas?
Yeah. Cautious on other area.
Yeah, exactly. In, in other areas. We are very carefully taking our loss picks. In general, we are looking particularly at the areas that have been sensitive over the last times. I would mention spaces in U.S . casualty, for example, or also just generally loss picks in longer term lines exposed to inflation.
... as an example. Those are areas that we have particular prudence, but also generally, when we open claims, large claims, we are prudent. I could mention a list like that, but there is more than just reserve areas where we apply prudence. Not sure François or Jean-Paul, whether you have some additional?
I would say that for, I would say new orientation for the business and the exposure to various lines or geographies, you have to wait until the end of the summer and the publication of the strategic plan to understand the direction of the next three years.
Maybe just to add, yeah, it's part based. I think what we did on the French riots is a good example. I think that's the approach we're gonna take going forward for the losses as they occur.
Thank you. Can we move to the next question, please?
Our next question comes from Ashik Musaddi with Morgan Stanley. Your line is open, please go ahead.
Hello, thank you. Just a couple of questions I have is, first of all, I mean, is it possible for you to give some color about the activity in the renewals with respect to pricing, with respect to what you're seeing from the alternative capital? I mean, we keep hearing there's a lot of cat bonds coming in, but what about the collateralized reinsurance? What are you seeing on those front with respect to alternative capital, traditional capital coming in and diluting the margins? Or put it other way, I mean, is there still excess margins being made in the property cat business, or are we at more or less a break-even margin level now? Any, any color, visibility, outlook on this would be very helpful. That's one.
Secondly, can you just give us some color about this onerous contracts? In P&C, you had a bit of release of 1.5%, whereas in Life, you had a bit of addition of EUR 40 million. What are these related to? Any color on that would be very helpful. Thank you.
I'll take the first question on the. The growth in June, July was really focused on global lines of property cat as well. We see the rates on property cat continuing to be producing excess margin. I think you mentioned the influx of new capital, cat funds coming in the market. You know, we did see cat bond activity picking up, you know, I think it was very focused on property Florida renewals, which for us is not a big area of focus. You know, we saw also a number of players coming in big on some of the cat pool renewals, that's not a big focus for us.
On the business that we're focused on, we think the prices are very much in line with what we saw early in the year. Continue, in our view, to produce good excess margin and very good return on capital. We see property cat as being attractive. Our expectation is that will remain so in 2024, as we start taking into account the inflation, even though it's reduced. Still, you know, it impacts the property line of business. We expect price increases to continue next year. We expect the effect margin to continue as well.
If I may add just a few high-level remarks to this one. At the beginning of 2022, we were guessing, estimating that the gap in available reinsurance capacity was around EUR 50 billion-EUR 80 billion. In the meantime, of course, a little, a few drops of capital came in with companies that would, you know, increase their equity. There has been a little bit more on the ILS front, but ultimately, those movements were relatively small. However, the incumbents have built their capital, so a little bit of that gap has been closing, but we estimate that the gap might still be around EUR 40 billion as we speak. It will require significant, significantly more capital generation or new capital coming in to close this gap.
In the meantime, programs start now slowly to be placed, as Jean-Paul said, but that only happens at the right price. Discipline is still very high, and as Jean-Paul said, we therefore expect this trend to last for longer.
Yeah, I think the big difference in these renewals compared to January is that insurance companies have reset their expectations, and there isn't as big a disconnect as there were in January. From a reinsurer's appetite, I'd say it's very much in line with what we received and requested on January first. The price increases have been very much in line. Improvements of the retention terms and conditions have also been very similar.
On your second question, on onerous contracts, so I answer on life and health. Again, life and health, that's a technical classification between Q1 and Q2. For PNC, we have this quarter a positive impact of one-year contract, and it's coming from a reversal in loss component of prior periods, which is positive, and also the effect of amortization of the loss component. These two elements more than offset the impact of day one losses, which is limited this quarter.
Okay, next question, please.
Our next question comes from Thomas Huszar with HSBC. Your line is open. Please go ahead.
Oh, yes. Good afternoon, everyone. I've got two questions and maybe one clarification on reserve prudency. The first question will be on the S&P capital model changes. I think that all the industry had to give feedback to S&P by the end of June. What was your take of the change in the model, and what are the potential outcome of it overall, a positive or negative for SCOR? Second question would be related to your cat load of 10 points in the combined ratio. I think that you never really clarified moving into IFRS 17 if this was still a quarterly 10%, 10 points of combined ratio, or if this was a bit seasonally driven by risk exposure.
Maybe you could clarify if, for example, in Q2 standalone, we should benchmark the 4.6 point of upload to 10 points, or there is maybe a bit of a change compared to what you implemented in the past. Maybe the clarification, François, is on the reserve prudency, because it seems to me that actually the share price is taking a bit of a hit, I guess, on your comments. Is there a clear willingness to build an explicit buffer, as it's been implemented by some of your peers, in Europe? Is there an implicit target where you want to build this buffer?
Maybe some clarification on why suddenly, you believe that, or you think that, this is a needed approach, compared to the past. Thank you.
Thank you. Thank you, Thomas, for your in practice, three questions. The first one on the S&P rating and model. You know that we all receive in June the latest version of the new S&P model. It's too early to tell, the RFC was received at the beginning of May. We just submitted our feedback to S&P. At this stage, what we see on the latest model, we see a lot of moving parts, it goes in both direction. We see a full credit at this stage given to the CSM and the risk adjustment, which is an excellent news for us, that's something that we anticipated.
We see that also, that's not a big surprise, increase the charges across all type of risks. We see also increased diversification benefits, which are positive for SCOR. We see also some new modules. More specifically, there is one on ALM and one on pandemic risk. It's too early, wait now for the definitive feedback of S&P. As you know, we have a very good relationship with them, and we are discussing the implication of the new model with them. On your second question, I will be very clear. There was never a seasonality applied on the cat ratio at SCOR on the IFRS 4. That's the same thing in 2023 under IFRS 17. No seasonality on the 10%.
Would you expect a seasonality on insurance revenue, especially in Q3? No. To clarify, on the last question on reserve, on the prudence that we add to the reserve, do we want to do a little bit like our peers, Thierry and myself? The answer is yes. Don't see anything else than this big yes.
Thank you. Let's move to the next question, please.
Our next question comes from Vinit Malhotra with Mediobanca. Your line is open. Please go ahead.
Yes, good afternoon, Thierry. Good afternoon, François. My two questions, I mean, most of my topics have been addressed, so thank you. Two questions which I can maybe seek a bit more clarity. You mentioned, François, that you're not happy, you and Thierry were not happy with the attritional loss ratio. Obviously, I mean, when you look at it seems to be more, you're loading it up with, you know, a bit more conservatism here and there on man-made as well, on reserves from, you know, U.S. Casualty was mentioned. I mean, I'm not sure whether you should be saying that we are not happy with the attrition, or you should be saying that, "Hey, we had a good attrition, and we loaded it up with conservatism." Would you kind of agree with that view?
Because, you know, the remediation has happened. I'm just trying to gauge, you know, where are you going with this conservatism? You just now said that you do want to build up buffers. I don't know whether I missed it, but maybe did you quantify or indicate anything on that? I'm just curious on this attrition and conservatism. Last one is, second one is probably a bit easier, but, you know, you have reiterated the 87 combined ratio for the year, but obviously the PNC new business, which is a key component, is significantly ahead, already at one edge. Even though there might be some seasonal factors, you know, it might just be exceeding it.
I mean, is that the way to look at it, that if this, say, there's EUR 100 million-EUR 200 million beat on that number, and that is what goes into reserve conservatism, and you still produce 87? And then last one is clarification. You said the market environment you want to take advantage of, and then you mentioned that there is still a lot of, you know, discipline. Is that also your outlook for the next year, for example, that we think there's still more demand and even this new capital may not really offset it, prices could go up again next year? Thank you.
Many, many points, mostly of clarification, Vineet. You come back on also the question of Toma. We don't have a specific budget in mind to build buffers. I just want to clarify, if we don't do it a semester where we earn EUR half a billion of net income, and we generate a return on equity of 23%, I don't know when we can do it. See this as a strong signal of determination, Thierry Léger and I, to do it. Which means your second question on the 87 combined ratio, we maintain, we are not satisfied by this level.
Don't see the discount effect or the resilience that we had, or the prudence that we had in the reserve. We continue to monitor and to focus, on the attrition role, as mentioned by Thierry Léger, in the introduction.
Maybe on, in your last question, yes, we do see the market dynamics still being in favor of reinsurers going forward. As Terry mentioned, we believe there will still be an imbalance between demand and supply. We see the demand for reinsurance continuing to increase and will continue into 2024. We see reinsurers being very disciplined, and, you know, we don't believe there's any dynamic that will change that we can foresee right now. We expect price increases to continue next year and the favorable reinsurance dynamic to continue as well.
Thank you. Can we move to the next question, please?
Our next question comes from Daria Sitkova with KBW. Your line is open. Please go ahead.
Good afternoon. Thank you for taking my questions. I'm sorry. I'm gonna focus on prudence again. The first question is, what are you trying to solve when you think about how much you can add to the reserves, you know, in terms of how to think going forward? Is it the 87% combined ratio? If cats are benign or discounting effect is bigger than you expect, you know, that's what goes into reserves. Is it ROE or net income? You know, any color here would be helpful. Is this a multi-year thing? You know, would you expect that you'll, you'd potentially build enough this year, or is that something that, you know, we could expect in the medium term?
Is, is this something that you know, what you've built in the second quarter in terms of our prudence, you know, 3 percentage points or so, is that treated specific or is that both IBNR? Just lastly, just sort of philosophically, to what extent is this to do with IFRS 17, the fact that, you know, claims are discounted? You know, would you have still strengthened it, if we were on IFRS 4, or is it really because, you know, at some point, EC will rise, and it's a way to sort of manage that pressure? Thank you.
I try, I'll try to answer to all your points. Maybe the first one, I come back on the discount effect. If the question is, are we built a buffer to smooth the effect of the discounting? The answer is no. I'm clear, I'm clear on this. On prudence, again, I stick to what I say. That's a new approach that we disclose this quarter. Again, there is no catch-up effect on nothing. We're just simply taking a more conservative stance on certain exposure. We are not flagging a specific line or underwriting year.
We just add this quarter, a prudence on a few lines, but not across the book, not across the book. Should you expect this again in the future? Yes, especially when we have exceptional quarters.
Sorry, just to clarify.
Thank you.
This is not both IBNR, this is line-specific?
This is not across the book. Of course, that's... I mean, we did this on some specific line this quarter, but it could be other lines next quarter.
Ladies and gentlemen, this concludes today's question and answer session. At this time, I would like to hand the call back to the speakers for any additional or closing remarks.
Thank you very much for attending this conference call. The investor relations team remains available to discuss any additional questions you may have, please don't hesitate to give us a call. As a reminder, SCOR will hold its IR day on the seventh of September, and Q3 results presentation on the 10th of November. I wish you a very good afternoon.
This does conclude today's call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.