SCOR's (SZCRF) CEO Denis Kessler on Q1 2016 Results - Earnings Call Transcript

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SCOR SE (OTCPK:SZCRF) Q1 2016 Earnings Conference Call April 27, 2016 8:30 AM ET

Executives

Bertrand Bougon - Head of IR

Denis Kessler - President and Chief Executive Officer

Mark Kociancic - Chief Financial Officer

Francois de Varenne - Chief Executive Officer of Global Investments

Frieder Knüpling - Chief Risk Officer

Victor Peignet - Chief Executive Officer Global P&C

Paolo De Martin - Chief Executive Officer Global Life

Analysts

Kamran Hossain - RBC

William Hawkins - KBW

Vinit Malhotra - Mediobanca

In-Yong Hwang - Goldman Sachs

Sami Taipalus - Berenberg

Andrew Ritchie - Autonomous

Olivia Brindle - Bank of America

Frank Kopfinger - Deutsche Bank

Vikram Ghandi - Societe Generale

Thomas Fossard - HSBC

Operator

Good day ladies and gentlemen. And welcome to the SCOR Group’s 2016 Q1 Results Conference Call. Today’s call is being recorded.

At this time, I would now like to hand the call over to Mr. Bertrand Bougon, Head of Investor Relations and rating agencies. Please go ahead, sir.

A - Bertrand Bougon

Good afternoon everyone. And thank you for joining the SCOR Group Q1 2016 results conference call. Before starting this presentation, please consider our disclaimer on page 2, which indicates that the presented Q1 2016 financial information is un-audited.

With this, I would like to give the floor to Mr. Denis Kessler, CEO and Chairman of SCOR Group, who is joined on this call by the entire ComEx team.

Denis Kessler

Thank you, Bertrand and good afternoon everyone. As you have certainly seen SCOR delivers from start of the year, absolutely in-line with the optimized dynamic strategy plan with quite a robust set of financial results.

The group indeed benefits from the momentum recorded in 2015. The planned optimal dynamics will reach its maturity in the quarter from now, at the end of June, the end of Q2. That means that we’re only one quarter to go before the successful end of the plan. Its excellent news as SCOR remains firmly on track to achieve the targets defined in optimal dynamics. We continue to combine profitability and solvency with ROE of 11.2% above the 1,000 bps above the risk-free rate.

And despite financial market situations in the beginning of the year, a strong solvency ratio at 2%. We are well within the optimal range of the solvency skill.

During the first quarter, SCOR was once again quite active in the reinsurance market and we did confirm tier 1 positioning. We did successfully sponsor our new catastrophe bond which contributes to optimization of the retrocession structure in the U.S. market with effect of January 2016.

SCOR Global P&C continues to perform in this long-lasting soft market by delivering good January and April renewals which we told we’ll discuss in more detail later on in the presentation.

With regards to the reserves themselves, they confirmed to combine growth, profitability and solvency, in an environment that is not only becoming increasingly competitive but also increasingly challenging for the traditional reinsurance industry. In this context, SCOR has been able to expand its franchise globally with gross written premiums of €3.3 billion or 5.1% at constant exchange rate compared to Q1 2015.

Frieder will also detail this and the MCEV reserves of €5.6 billion or €30 per share in 2015 validating the strengths of the biometric portfolio.

SCOR investments, delivers a very strong return on invested assets this quarter of 3.3% despite volatile markets, whilst continuing to adhere to the principles of [indiscernible].

Overall, SCOR records a net income of €170 million for the first quarter. In Q1 2016 SCOR successfully entered the Solvency II framework using its full intermeddle to manage the business and operations on a daily basis. I’m also quite pleased we pulled the Annual General Meeting off our shoulders. I did approve all of our resolutions this morning including a dividend increase of €1.5 per share that will be paid on Monday.

As you know, as a traditional reinsurance market is affected by both the evolution of the risk universe and the turmoil of the economy. It’s widely known that the reinsurance industry is currently in a situation of excess capacity due to a series of factors including the low Nat Cat activities in 2011 and the development of ILS.

Naturally we experience increasing price pressure in the recent January and April renewals fortunately resisting on terms and conditions.

I explained to you in the Q4 2015 results presentation that 2016 will be a difficult year in terms of the macroeconomic and financial environments. The context is the change and we’re affected by a number of exogenous factors. But I say we, the industry, the slowdown of the global economy and adverse developments in some sectors such as Robin & Garth [ph] are pushing down the demand for reinsurance.

As you will know we face increasing foreign exchange instability which affects almost all currencies. Looking at these struggles, and there are more and more questions about the duration of this economic cycle. And some people now really that means put as usual singular stagnation.

Reinsurance market is also suffering from the ultra-low interest rate environment in some cases negative interest rates. And we believe that the pain of persistent low if the negative interest rate is driven by chewy monetary policies will last for the foreseeable future.

This extremely low-yield environment is waiting on the return on invested assets. And our RoIA declines, it is also partially due to the combination of IFRS continued rules and the capital charges Solvency II and retention models.

On top of that you can add the regulatory overruled imposing blunt capital changes and even ever increasing reporting requirements.

The industry of - reinsurance industry is also facing an ever-growing number of production regulations notably in emerging countries which is affecting the frangibility of capital. These regulations include limitation of internal retrocession in Brazil and India and mandatory sessions to state owned or local ranches in Indonesia.

The environment is as changed represents some great opportunities for the group. Traditional risks remain in our growing surety notably natural catastrophes one is mean time risk of developing for example, nuclear, cyber, buzzards, cloning, connected cause, the impact of solo storms one greets and so on.

The protection gap is significant and needs to be closed. It concerned all business lines, Nat Cat, mortality, disability protection, enterprises coverage and so on.

And the fiscal stability in developed countries will drive reach from the public to the private sector creating opportunities in pension, sales care, Nat Cat infrastructure and so on.

In the end, I believe that the tailwinds will be stronger than the headwinds even if the road gets a little bit bumpy. SCOR has proven its resilience and we continue to prove its ability to anticipate and uphold shocks.

We are simply realistic with the changes of advised - the environment we operate in. The SCOR will pursue its development base on the cornerstones it has proved to be successful in the past, and which have enabled the group to become a recognized Tier 1 re-insurer.

Agility keys as the group’s DNA and thanks to seasoned teams, we will continue to find solutions to ensure boost the financial profitability and an optimal level of solvency.

We know how to deal with an uncertain environment, thus it is in that context that we’re meticulously preparing a new strategic plan which will be unveiled from the 7 September 2016 during IR Day and we all hope that you will attend this IR Day.

Let me now hand over to Mark, who will give you more details on the financial performance in Q1 2016. Mark, the floor is yours.

Mark Kociancic

Thank you, Denis. Moving on to slide 6, I will walk you through the key financial highlights of the first quarter of 2016. SCOR wrote approximately €3.3 billion of gross written premiums in the first quarter representing a 5.1% increase over Q1 2015 at current exchange rates or 5% at constant exchange rates. This top-line growth was driven by SCOR Global Life with a 10.5% rise at current exchange rates.

During Q1 SCOR Global P&C’s gross written premiums slightly decreased by 1.6% at current exchange rates. And this decline is specifically explained by Victor later on.

During the first quarter SCOR achieved high quality results for the net income of €170 million benefiting from a low Nat Cat environment generating 11.2% return on equity, thereby exceeding the group targets set at 1,000 basis points above the risk-free rate.

The P&C net combined ratio for Q1 stood in at excellent 89.7% and the life technical margin continued to outperform at 7.1%, also surpassing the optimal dynamics assumptions. SCOR Global Investments delivered a solid return on invested assets of 3.3% and their ability to generate this level of return on invested assets in the extremely low yield environment confirms the relevance of its prudent investment strategy, notably through the de-risking of the portfolio.

Going to page 8, shareholders’ equity was relatively stable over the first quarter at €6.4 billion corresponding to a book-value of €34.13 per share. This shareholders’ equity was supported by the strong net income recorded in Q1 while being negatively offset by the currency translation adjustment of minus €191 million largely due to the weakening of the U.S. dollar against the Euro.

Financial leverage stands at 27.6% temporarily above the range indicated in optimal dynamics. And as explained, during our fiscal 2015 results, the normalized financial leverage would be approximately 20.6%, assuming the intended cause of the Swiss Franc 650 million and €257 million subordinated debts callable in the third quarter of 2016.

Let’s move to page 9. SCOR generated a high level of cash flow. Thanks to the contribution of both business engines, we’ve been able to deliver a strong net operating cash flow of €317 million for the first quarter. That figure benefited from some timing differences leaving the normalized operational Q1 cash flow generation at approximately €250 million.

The total liquidity of the group reached €2.7 billion at March 31, representing a substantial increase year-on-year in-line with the temporary pause of the rebalancing of the investment portfolio and which Francois will discuss later on.

Approximately €6.8 billion of liquidity including cash and short-term investments is expected to be generated within the next 24 months from the maturity of fixed income securities and interest coupons.

I will now turn it over to Victor to comment on the P&C results.

Victor Peignet

Thank you, Mark, and good afternoon. We’re on slide 10, and it shows that Q1 is an excellent start of the year for us. This quarter is again characterized by a low level of Nat Cat loss activity. Besides this, the large man-made loss activity that we experienced at an unusually high level during two consecutive quarters of last year remains back at its normal level. This confirmed that what we saw last year was a spike as we commented at the time and illustrate the very nature of our business, which must be looked upon at over a sufficiently long period.

This brings us to an excellent net combined ratio of 89.7% which is in-line with our assumption of where it should be on a normalized basis. You will recall that for this year we have revised our annual Nat Cat budget downwards to the equivalent of 6 percentage points of net combined ratio instead of 7 previously.

The normalized net combined ratio stands at 94.3% for this quarter. It is worth mentioning that there is nothing to report on the reserving side.

On the subject of Nat Cat, and regarding the two first quarter closed events, the information is not complete and final yet. Of course, however, I can tell you that based on the information available to date, the total amount of losses for our shares on the Kyushu and Ecuador earthquake, should stay within one quarter of our annual Nat Cat business. This means that we believe that these two events can be absorbed in the second quarter.

Regarding the top-line, as Mark mentioned the comparison between the first two quarters of this year and last year is influenced by the fact that Q1 2015 was a very buoyant quarter with relatively stronger growth.

In addition to this, Q1 2016 top-line is impacted by two specific measures that we took. First is our decision to discontinue our capital provision to one of the syndicate in the portfolio of sense syndicate plus channel. The second is the consequence of the continued realignment of our activity and portfolio in aviation which led to the reduction of the premium income. This leads to a Q1 gross written premium decrease of 1.1% at constant exchange rate.

The impact of these two specific measures will get diluted over time during the year. And without them the two quarter comparison of the gross premium written would have shown a growth of 2.7% at constant exchange rate, so tentative growth of about 3% is in line with the indication that we gave previously regarding the trend of the top-line for the entire year.

Now moving on to slide 11 and the two following. Those three slides provide you with the same detailed information as for knowing any renewal season. They complement the press release of last Friday.

For us, there are two main reasons to be satisfied with the results of the April 1 renewals. The first is that they demonstrate our ability to continue to keep the expected performance in-line with the group target and the assumptions of optimal dynamics. This is achieved by actively managing the portfolios and simultaneously seizing opportunities to ensure profitable business from existing and new clients. The second reason is normalization of the relationship with the major Japanese insurance groups.

I will now hand over to Paolo for the presentation of the Life division results.

Paolo De Martin

Thank you, Victor. Moving on to page 14 of the presentation, I’m pleased to report that in Q1 2016 SCOR Global Life continues to deliver strong and profitable growth. Our gross written premiums reached €1.9 billion which represents a growth of 10.5% at current exchange rate or 9.9% at constant exchange rate.

Our new business pipeline continues to be healthy across all regions and all product lines with new business margins expected to meet the group profitability target.

When comparing our 2016 premiums to last year premiums, it’s to note that last year our premium growth was back-loaded in the second half of the year. Therefore, during 2016, we expect our year-over-year growth in premiums to normalize at around 4% to 5%. This will bring us in line with the optimal dynamics assumptions of 6% average growth between 2013 and ‘16 at constant exchange rate.

Overall, technical performance over the first quarter of 2016 stands at 7.1%, ahead of the 7% assumed in optimal dynamics. We’ve been able to deliver the strong technical margin thanks to both the profitability of our new business and the good performance of the in-force portfolio.

I will now hand over to Frieder Knüpling, SCOR’s Chief Risk Officer, to comment on the 2015 MCEV results.

Frieder Knüpling

Thank you, Paolo. Page 15 gives an overview of the development of SCOR Global Life’s embedded value of the past 8 years since 2007 that means during a period which spanned the entire financial crises it has grown almost three-fold.

Its development in 2015 mirrors that of our solvency to own funds as our MCEV evaluation basis is very close to Solvency II.

Page 16 shows that last year’s SCOR’s embedded value has grown by over €800 million reaching €5.6 billion even after repatriation of €236 million of capital from the Life division. The main contributor to the increase was solid operating earnings of €426 million which were mainly driven by a strong new business value of €354 million.

Economic variances led to a strong increase of MCEV of €245 million mainly resulting from market value gains from SCOR’s investment portfolio and modest calls of interest rates on U.S. dollar and GB Pound.

Foreign exchange gains of €395 million were mainly caused by the rise of the U.S. dollar against the Euro in 2015.

Moving on to page 17, the value of new business has grown by 9% year-on-year. MCEV earnings have more than doubled driven by the value of new business and economic gains. Embedded value is more suitable for capturing the economic value of Life business than IFRS. This can be seen in the increase in SCOR Global Life’s off balance sheet value at €574 million in 2015 to €2.4 billion. This increase in value not recognized under IFRS was mainly driven by the new business written in 2015 which is only partially reflected under IFRS and by foreign exchange movement.

During 2015, SGL has generated more than €520 million of free surplus from the development of its existing business. €470 million were used to finance the capital and reserve requirements of new business written in 2015. In addition, a very significant amount of €236 million was returned to the group consisting of €100 million in dividends together with interests on repayment of internal loans.

This demonstrates the ability of the Life business to fund new business growth whilst returning significant amounts of cash to the group and increasing the financial flexibility of the group.

As in the past, there are more details on the MCEV 2015 and the full presentation in the technical document, which are available on the website.

With this, I hand over to Francois de Varenne for the investment part.

Francois de Varenne

Thank you, Frieder. Moving on to slide 19, SCOR’s total investment portfolio which is €27.6 billion at the end of March 2016 with an invested asset portfolio of €18.2 billion compared to €18 billion at the end of December last year.

To face the increased level of economic and financial uncertainty, SCOR Global Investments has reinforced its prudent investment strategy since June 2015, temporarily and tactically in order to preserve our investment portfolio and wealth of SCOR shareholder.

In response to additional headwinds, which have materialized since the beginning of 2016, we have further increased our liquidity at 14% of invested assets up from 11% at the end of 2015.

The de-risking has been done at the extent of our corporate bond portfolio and more specifically the financial energy materials and mining sector. The duration of our fixed income portfolio has been maintained stable at €3.9 million.

The high quality of our fixed income portfolio has been maintained as well with a stable average rate change stability manner. Moreover SCOR Global Investments has maintained a very strict policy of avoiding any sovereign exposure to U.S. and other countries.

At the end of March, expected cash flows from the fixed income portfolio over the next 24 months stands at €6.8 billion which represents more than one third of the invested assets facilitating the dynamic management of our investment policy as soon as market condition return.

In spite of the adverse economic environment and the follow-on low-yield context, in all major currencies, SCOR Global Investment manages to deliver a very strong and high return on invested assets which stands at 3.3% for the first quarter of this year compared to 3.1% last year. This performance has been notably driven by capital gains realized on our real-estate portfolio.

Looking forward, I am confident in achieving objective of delivering a return on invested assets above 3% until the end of the optimal dynamics plan.

For the full year 2016, the estimated return on invested assets may be impacted by the temporary de-risking of our investment portfolio and the length of this de-risking strategy. Given the current investment rate of 2% and the cash position 10 percentage points higher than our long-term strategic level of 5%, the annual cost of current edging strategy can be estimated at around 20 basis points if it was maintained during the full-year impacting momentarily a return on invested assets.

With this, I will hand it over to Bertrand Bougon for the conclusion of this presentation.

Bertrand Bougon

Thank you Francois. On page 20, you will find the next scheduled event starting on today, 27 with the Q2 2016 results. And of course our Investor Day on September 7, as well as the conferences which we are planning to attend over the remainder of 2016.

With this, we can start the Q&A session. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions]. We’ll take the first question from Kamran Hossain from RBC. Please go ahead, your line is open. Kamran Hossain, your line is open. Please ensure the mute button is switched off.

Kamran Hossain

Hi, can you hear me?

Denis Kessler

Yes, we can.

Kamran Hossain

Hi, you can hear me? Great. First question is on the April renewals. Can you just give us a little bit of color around the Japanese renewals I know you lost some business last year due to the state had taken SCOR can you just talk us through whether you recaptured all of that?

And the second is just on how you categorize Nat Cat’s claims in your combined ratio calculation. Could you just maybe articulate what level of loss you need for something to be considered a Nat Cat claim rather than falling into traditional? Thank you.

Denis Kessler

Thanks for your two questions. Victor on the first one the renewals in Japan.

Victor Peignet

I think you will understand that we are not going to comment specifics on our Japanese claims I think that is not, that would not be correct. What we said last year is that we had lost the Mitsui business but we say this year is, whether the relationship has normalized which means that the relationship has been reestablished or have continued with this re-launch Japanese insurers, that’s what we can say.

Francois de Varenne

And regarding Nat Cat, the Nat Cat event is a Nat Cat event. There is no threshold or size of even, everything look into the Nat Cat ratio but for really events of below €3 million which, you can ignore.

Kamran Hossain

Thank you, Francois. Thanks very much.

Operator

We’ll now take the next question from William Hawkins from KBW. We’ll now see the next question from William Hawkins from KBW.

William Hawkins

Hi, thanks just for the operator, we get blanks out when you’re announcing us. Two quick questions, I expect you get a lot of questions on the investment return. I’ve just got a very simple one. Is there any seasonality in your investment income in the first quarter? It typically in the past year seems to have been below the run rate for the rest of the quarter. I know last year you had a CPI issue that depressed the figure but even allowing for the first quarter typically seems to be weak. So I just wanted to, is there anything seasonal going on in your investment income?

Secondly, the Solvency II ratio, could you tell us the numerator and the denominator? And you may think I’m splitting hairs on this but the 202% by my math against the 211% at the end of last year, maybe 7 percentage points comes from the declines in yields. But I can’t really find anything else that should be negative mark to essentially to otherwise quite low. I presume you should have had some capital generation in the first quarter.

So, for me, again, you may just say, it’s splitting hairs. But I would assume your Solvency II ratio it should have been around 205% or even slightly higher not 202%. So, either I’m underestimating the sensitivity to yields or are there some other negative that I’m not allowed for that makes some few percentage points? Could you maybe help me on that? Thanks.

Denis Kessler

Francois?

Francois de Varenne

On the seasonality of the investment income, there is no seasonality in Q1, usually that’s in Q2 and mainly due to the dividends we receive in the portfolio of some funds. So, no specific comments on this in Q1. Just as a reminder, if you look at slide 39 in the appendix, you should compare the income yield of 2% in Q1 this year to 1.8% last year, rate is increasing. It’s only for Q2.

William Hawkins

Thanks.

Frieder Knüpling

On the solvency ratio, so we estimate a decline by 9 percentage points. We’re not disclosing split between on-funds and for the capital requirement at this point. We may be doing this in the future. It is largely explained as it was said by the decline in interest rates. That has accounted for about 8 points given that interest rates have dropped by roughly 50 basis points. It is largely in-line with the sensitivities which we published two months ago.

And then there has, been a bit of impact from general market volatility and market value movements. Yes, we do allow for some capital generation during Q1 but we also reflect the perks in exposure of the portfolio and we accrue the expected dividends on a quarterly basis. So that in total doesn’t have a strong impact on the solvency ratio.

William Hawkins

Forgive me, if you’re not going to give me an exact number, just should I understand the decline mostly comes from available capital going down or required capital going up or it’s mutual?

Frieder Knüpling

It’s led between the two. The decline in interest rate leads to an increase in our capital requirement and a decrease in our owned funds. So you can pretty much relate it between the two.

William Hawkins

Thank you, Frieder. Thanks Francois.

Operator

We’ll now take the next question from Vinit Malhotra from Mediobanca.

Vinit Malhotra

Hi, there. Can you hear me?

Denis Kessler

Yes.

Vinit Malhotra

Okay, I’ll go ahead. First thing is on the P&C comments on aviation. It just feels like the, at least the renewal data wasn’t clearly lower, if I look at last two years, renewals in January for example, aviation book used to €125 million odd and last January and this January it’s around €160 million to €170 million. I’m just trying to square this comment that something has changed in aviation because I understood that so far you were fairly comfortable with that. And I mean that it’s enough to make an impact at the group level.

If you could just comment a bit about that and also, just to clarify the 2.7% you mentioned. Did you also say that going forward it should normalize, so I just want to understand that?

And second question is on the Life’s free growth. So the free surplus is significant €250 million odd lower this year than last year on that slide 18 I think. And that’s probably due to the very strong growth. Should we assume that if growth is sort of normalizing, then the new business trend should kind of normalize or and in the same context, dividends upstream were a little bit lower this year than last year despite such strong growth and this year was €100 million, last year was €125 million. Is there any intervening to that? Thanks.

Denis Kessler

Thanks a lot. Maybe on aviation maybe Victor.

Victor Peignet

On the aviation side, as you know most of the primary policies renew in November. And what we had is with one particular of our major participation, we had an over estimate of premium by the income, since we were at the same time asking them to re-underwrite both of their portfolio and revise their underwriting guidelines. They estimate that they had done before once they had to get them down.

And as you know, we work on estimates when we write quote share so we had to rectify the estimates hence the volume being down. So, it’s very one specific and you could even imagine which one probably.

Regarding the 2.7%, yes, what we are saying is that this is an impact that generally we have. And this will normalize during the year. So what I said is that about 3% increase of the premium that we applying for the entire year, we maintain it.

Vinit Malhotra

Yes, sorry, in the past at least we have 5% premium growth presented because you’re at €6 billion targeted for ‘16 which was sort of implied growth that’s why I’m curious? Hello. I think I’ve cut myself off.

Victor Peignet

I think you said €6 billion, we continue with that. I think €6 billion is not exactly right. Which is why it’s really, we don’t change.

Vinit Malhotra

Sorry, in this mic confusion. €6 billion is still maintained or should we expect it a bit lower?

Victor Peignet

Well, we maintain it, I think it may be a bit short of that but we will maintain that.

Vinit Malhotra

Okay, that’s nice. Thank you very much.

Operator

We’ll now take the next question from In-Yong Hwang from Goldman Sachs. Please go ahead.

In-Yong Hwang

Hello, this is In-Yong Hwang from Goldman I hope you can hear me. I’ve got two questions, from the P&C side. Firstly on the U.S. growth, again, as of January you seemed to have grown quite strongly there with this focus more for you guys. Could you just give us some confidence of the profitability of the growth that you’re getting here given that the pricing trends in that market seems to be over the most negative out of the two divisions that you show especially in the April renewals?

And secondly, I think and Denis you mentioned emerging with such fiber at the start of the call. Could you just remind us where you’re standing and where you see the opportunities from your side? Thank you.

Denis Kessler

Sorry, we’ll go to answer the previous question on Life, reinsure surplus since we try to answer all the questions. Frieder, could you please answer this question? Then to the previous question, I’ll come back afterwards.

Frieder Knüpling

So, the capital train was back to the group were slightly lower than last year but still far above what one would consider for example SCOR Global Life’s share and the group dividend. So it is still capital repatriation beyond those needs. So that’s an element of active capital management in this.

The new business train in 2015 was slightly higher than that of the year before because the business mix was slightly different. And the way the business was placed within the group. This is also to the fact that this is still measured on a Solvency I basis, which would still enforce at the end of 2015. Going forward, the main operating entities in the group, new entities will be subject to Solvency II instead.

The free surplus of the operating entities on a Solvency II basis will be significantly larger than on the Solvency I basis, so this, constraints if you like will be much, much softer and the group will place even more importance on its group solvency scale and solvency target to managing cash and capital within the group.

So, this is something which will really drive our capital managed much more in the future than the Solvency I base to free surplus metrics which are now no longer enforced.

In-Yong Hwang

And sorry, can I follow-up if I’m still in the call. Can I follow-up, will this change to Solvency II on the Life side, on new business train, will it start showing up in the group solvency as well? Should we factor for that or in the group S2 ratio?

Frieder Knüpling

It is already included in our Solvency II disclosures. So the movement in solvency between one year and the next, which we just closed, does reflect the impact of new business. On the Solvency II basis, this will, in many cases not be a new business train anymore before Solvency II allows the business on a close economic valuation.

So, at least for the business which sits within Europe is conservative new business train which you traditionally saw in the Solvency I will not exist anymore at least not in the same way. So, we will see situations where new business actually increases solvency and free surplus rather than consume capital.

In-Yong Hwang

Okay. Fair enough. Thank you.

Denis Kessler

Sorry, I didn’t catch the In-Yong questions, so sorry, could you repeat them I think there was one on the gross premium. Let’s stop by that and Victor, can you answer that question?

Victor Peignet

Well, the growth that we won for renewal is more in line with the gross that we have planned for the entire year. Well, that is quite explainable in a sense that while EMEA is for January was April and May, June, July is much more, easier in U.S. Our growth is much more focused on Asia and U.S. In actual facts, we even slightly reduced EMEA. So, I think the trend is there is to say that basically we’re aware where we thought we would be.

As far as the U.S. is concerned, well, first of all I don’t quite agree with the statement that this is where, the problem is, the one is the starting point and where we are I think I can assure you that the business we book into U.S. is clearly at the required profitability. And even the underwriting ratio, the loss ratio plus commission of our U.S. at the moment is below the average of the division.

So I think we have no worry on the business we book which is a mix actually. We are extremely careful to have the short-term, long-term mix by which well we can stick to the overall target. So definitely our long-term intake is limited by how much short-term we can find in the market including proportional by the way that fits in with the target.

In-Yong Hwang

Great, thank you. And if I could just repeat my second question, it was on emerging risks which Denis mentioned at the start of the call. I just wanted to get your stance on that especially on slide deck some of the competitor seems to be taking slightly different approaches regarding these emerging risks? Thank you.

Denis Kessler

Victor?

Victor Peignet

Slightly different in what sense?

In-Yong Hwang

In the sense of how aggressively that they want to be writing fiber contracts for example?

Victor Peignet

Okay, okay. Well, we ourselves are at the moment of the view that we do not have yet the level of technical knowledge and data by which we can be aggressive on the market. We are actively learning, acquiring knowledge. And I think we are progressing reasonably well. We’re also testing the water with a certain number of businesses that we accept to write. But this is very well contained in something that we feel is totally manageable. And it’s not going to impact the overall profitability target. So that’s where we are.

And we are building and there is an opportunity clearly there but it’s not yet reached the stage where we feel that, I was talking this morning about symmetry of information. Well, it’s even, while level of knowledge and information from both sides, the buyers of insurance and the providers. So, we are very active but in a cautious way.

In-Yong Hwang

Okay, great. Thank you very much.

Operator

We’ll now take the next question from Sami Taipalus from Berenberg.

Sami Taipalus

Hi, can you hear me? Hello. Yes, okay. Two questions please. First, on the Life business, the proportional longevity in premium seems to be going up. And I think you mentioned on the last call that the margin on this business is a bit lower than on the mortality business. And I understand that the ROEs are obviously similar.

I’m just wondering if you could just give us an indication of what the proportion of mortality was, sorry, longevity was in Q1 and how big the proportion would need to be before it started affecting your margin targets in the Life business where you’d have to start think about maybe bringing that down a little bit?

And then the second question is on your expense ratio where, it had ticked up a little bit in Q1. And I was just wondering whether this is sort of a new normal for that expense ratio, you kind of indicated in your comments that there was, some structural reasons behind the up-tick? And whether there are any items elsewhere in the combined ratio that offset that up-tick? Thank you.

Denis Kessler

Thanks, Paolo on longevity and the effect of margin.

Paolo De Martin

Yes, right now we are around 7% of the book being longevity. The longevity business by definition has a lower margin. It’s much more longer term, the risk in nature is very different. So we usually get something because of the margin means somewhere between 3% and 5% in that business. And it really does depend - it varies greatly deal by deal.

I think we’re in the process of looking at the next three years in terms of a strategic plan, so for this year with the growth on longevity will drive any changes or expectations on technical margin at least at this point.

I think the best place to have this conversation would be actually in September when we present the new strategic plan if as a group we decide that we still have the appetite to write as much longevity as we write more and those decisions are in the process of being made really at this point.

Sami Taipalus

Okay, fair enough.

Denis Kessler

Thanks Paolo. And Victor on the Tier 1 ratio and impact of course.

Sami Taipalus

I can’t actually hear anything, so I’m not sure.

Victor Peignet

Yes, yes. We said we would navigate between 6.5% and 7%, we are in due proposals of this round. What is important for me is that we stick with the combined ratio and I mean, it may happen in a given quarter that was a bit higher than the average. I think at the end of the day on a normalized basis, we’re still where we want to be.

Sami Taipalus

Okay.

Victor Peignet

No particular comment on this one.

Sami Taipalus

Okay. Would you say that there is a loss ratio offset to the higher expense ratio?

Victor Peignet

Well, what I say is that in this particular quarter, despite the fact that we are at the end of our range, well, our combined ratio on the normalize business is still relatively good. And that’s what we’re making sure will continue.

Sami Taipalus

Okay, thank you.

Operator

We’ll now take the next question from Andrew Ritchie from Autonomous. Please go ahead.

Andrew Ritchie

Hi there. Two quick questions. Firstly on U.S. mortality, I noted in the EV report that you strengthened assumptions for U.S. mortality for the old SCOR book. I mean, was there a big difference in assumptions between the old SCOR book and trans-America and Generali so that part of a wider review of assumptions in U.S. mortality and maybe just tell us experiences been on all of those books in U.S. mortality over the course of 2015 and what we might discern from the EV report?

Secondly, for Francois, you’re running high level of liquidity you increased it again in Q1. What has to happen for you to deploy that liquidity? You talked about wanting greater clarity on the outlook I think we’d all like that. But I’m not quite sure what you feel you’re going to get and what you feel you need to see to the points on liquidity? Thanks.

Denis Kessler

Paolo.

Paolo De Martin

So, the change in assumptions is the consequence of the regular review of our assumptions which we do every year or even during the years, so there is nothing in particular which triggered this. There is still a bit of assumption harmonization to be made between the different blocks of U.S. business which SCOR has acquired over the past years hence the comment. But this is a regular exercise which we conduct every year and which we’ve also been doing over the past.

And mortality experience of the U.S. portfolio was very close to our best estimate assumptions, no significant deviation.

Andrew Ritchie

So, I think there was a deviation in the old SCOR but hence the assumption change, but you never referred to a U.S. mortality assumption change before?

Paolo De Martin

No, there was no specific negative experience on this log. These are long-term assumptions over several decades. And we wanted to make sure that our assumptions also in 10 years and 20 years down the road are consistent and are valid. And because all of this is present value, you see the impact in the assumption changes but it was not triggered by specific experience variance in other books.

Andrew Ritchie

Okay.

Francois de Varenne

On the investment side, we had two questions, I think we have been moved quite, not to say very successful since 2007 to detect in advance potential shocks on the market. And we demonstrated our ability to invest strictly on cash and liquidity position as soon as the market conditions penny. That was exactly the case. You should be happy that we detected the mess of the beginning of this year and started to announce it after the summer last year. And we started the risk-free portfolio end of 2015 with the peak of volatility probably reach late January or February this year.

Today that’s put out in the market to deliver of risk-aversion of volatility is little bit lower compared to the peak up-sell a few months ago. I think this deliver of a certain ease to the AI in terms of interest rate policy, monetary policies, geopolitical risk attention, are the maximum today everywhere. Through the level uncertainty they have, again we prefer in those situation and to gain I think we have been quite successful since 2007 to do this.

We prefer to protect the value of the portfolio. We increase momentarily just for a few months at the cash position. And as soon as we have more visibility on the market we also demonstrated in the past that we have the ability to reinvest directly. We are waiting still a little bit to have more compost on the market today.

Andrew Ritchie

So, have you increased since the end of Q1 or is that still standing around that level?

Francois de Varenne

No, it’s relatively stable.

Andrew Ritchie

And the real-estate realizations you made during the quarter, is that part of raising liquidity or is that just a timing issue unrelated to that?

Francois de Varenne

Not at all, this capital gain has been achieved through the disposal of one of four office buildings in Paris within our real estate portfolio. And this production is a typical illustration of our value-added management style within the real-estate portfolio, which I presented if you remember during our last Investor Day in September.

So, we have completely restructured this building, let it to a new tenant and subsequently solid achieving a net return on this transaction and are both well sustained which is nice.

Well, to draw attention, to answer to your question on the fact that this transaction is not one-off for us since it was entirely structural in my expectation for the three assumptions in terms of return of invested assets presented during the last presentation.

And if you look at the slide 51 with the amount of unrelated gain on the real-estate portfolio, we still have a significant amount of unrealized gains within our real-estate portfolio. And those assets will be sold in the future as soon as the value creation will be at the maximum for each asset we own.

So, you should expect over the next quarter and year, will yield a significant contribution of the real-estate portfolio. Well, that’s the way we really manage this portfolio where we try to create value through the restructuring of assets.

Andrew Ritchie

Okay. And just to be clear, the 20 basis points you referred to in the opening statement, if you maintain the current level of liquidity, the annualized impact would be 20 basis points roughly?

Francois de Varenne

Yes, basically that’s it because the investment rate is 2%, it is on the slide and that was my previous point again, if this is on a full-year basis.

Andrew Ritchie

Okay. Thank you. Thanks.

We’ll now take the next question from Olivia Brindle from Bank of America.

Olivia Brindle

Hi there, [indiscernible]. Hello.

Denis Kessler

Yes.

Olivia Brindle

Okay. So, first question just I guess probing a bit on your Cat book. So, especially in light of the fact that you’ve gone from the 7% Cat load to 6%, just trying to understand what you’re doing around Cat at the moment. So, in the April book closure you sort of mentioned a bit more of U.S. Cat more of the specialty side, U.S. Cat rate is generally seemed to have stabilized a little bit.

So, I’m just wondering if you could talk about what you’re doing on your exposures there and how we should therefore think about the 7% to 6%, if I look at your earned to gross premium is on the dependency side that’s actually gone up. So, just wondering if any sort of comfort that we can get around that 7% to 6% would be helpful?

And then, the second point, also touching on something mentioned in the renewal disclosure. You said those improving pricing on the proportional side and then you had a 1% number on that. I was just wondering exactly what lines you were talking about and presumably that doesn’t include any offset from increased seeding commissions that would also be interesting to hear?

Denis Kessler

Thanks Olivia. On the Cat book, Victor.

Victor Peignet

On the Cat book the reduction from 7% to 6% is basically due to the improvement of our retrocession program and not to a change in our underwriting policy on Cat. As far as the U.S. Cat is concerned, well, this is a bit an exception of our underwriting. We do it with a combination of specialist Cat team in Zurich that dates back to the Euro, Acquisition of Conveyance and compliment team in Chicago.

But actually the feels of this is exactly the same as for the rest of the Cat business and we have a genuine management on our Cat portfolio well.

As far as the property, well, it’s basically specific property risk in the U.S. that we are talking about, on which what you are mentioning is not effective totally, I mean, really the commission. There is no increase of commission compensating for the improvement of the price or at least new compensation is not complete.

Olivia Brindle

And just sort of referring from that, if we were to look out overall across your P&C business, what the proportion of Cat has been and what it’s trending to, I mean, should we assume that there is a bit more of that given you’ve been growing in various places including the U.S. or would you say it’s more sort of stable in any business you pick up is rather opportunistic?

Victor Peignet

Well, I don’t think we are opportunistic writers in general, so not even in Cat. No, I think our Cat premium role is still a bit above 10% of the overall probably something like 12% maybe today, something like that. No big change from the year before. The Cat increases with the rest of the portfolio. I’m talking here of the pure Cat premium which is non-proportional Cat.

Olivia Brindle

So, yes.

Denis Kessler

Olivia, you’re answered so far, do you want to ask more?

Olivia Brindle

Yes, no, on that premium, just the second question on proportional business?

Denis Kessler

Which was, pardon.

Olivia Brindle

So, you talked about proportional lines benefiting from improved pricing and in certain areas and you had a 1% improvement I think on your book. So, I’m just wondering exactly to where that’s coming from and to what extent it’s offset by increases in seeding premiums, seeding commissions?

Victor Peignet

I told you that this is basically specific property in the U.S., Cat exposure on it.

Olivia Brindle

Okay, thank you.

Denis Kessler

Next question.

Operator

We’ll now take the next question from Frank Kopfinger from Deutsche Bank.

Frank Kopfinger

Good afternoon everybody. I have two questions. My first question, I would like to come back to William’s question regarding the seasonality as we see in the investment income. And Francois you pointed to slide 39 and last year at least we had the sort of pattern, and if you look back you also can see that Q1 was structurally regarding the regular income on a lower level than the other three quarters. I understand that there is some seasonality from dividend in Q2.

And now again in Q1, it looks the 2.0% and also if you take it in absolute numbers, they look rather on a lower level compared to where we have been in Q2 to Q4. And that extension is really whether the 2.0% is the run rate going forward or we should expect some ramp up going forward?

And the second question is on the Life free business, on the net technical result as you showed on page 34, the €86 million, the margin here looks stronger than last year in Q1 and could you elaborate a little bit on the drivers behind this margin improvement, your technical margin improvement? And then the drivers, whether this should be the run rate going forward also?

Denis Kessler

Thanks Frank. Francois if you could?

Francois de Varenne

Frank, on the seasonality, so again, we don’t see lot of seasonality in Q1, that’s usually in Q2 essentially on the equity portfolio. Just to understand the difference on slide 39, on the income yield in Q1 compared to the last quarter, if I expect Q2 or Q3 with the dividend last year, the income is good. It’s affected as I mentioned in the previous question or in my speech by the fact that we’re 14% of cash in the portfolio that returned Euro to date.

So, again, you see in this technical income yield the effect of the put-ons but again it’s rough to pay 20 basis points of return, to protect and to avoid volatility that’s in the market during Q1.

Denis Kessler

On the Life technical margin, Paolo?

Paolo De Martin

Yes, the increase is largely growth driven. So if you really focus on the margin rather than the absolute amount.

Frank Kopfinger

The margin increase refers to quarter-on-quarter. So, were there any business mix drivers?

Paolo De Martin

The margin is decreasing from 7.2% to 7%.

Frank Kopfinger

Yes, if I trip out the interest from Francois said, so if I look on this €86 million and take that?

Paolo De Martin

Yes, you cannot really split it out we have a lot of business that deposit moves in sync with the reserves. That’s why we put the deposit, the interest on deposit in the technical margin collection. So you cannot split that out.

Frank Kopfinger

Okay, fair point, thanks.

Denis Kessler

Next question please.

Operator

We’ll now take the next question from Vikram Ghandi from Societe Generale.

Vikram Ghandi

Hi, thank you. This is Vikram Ghandi from Soc Gen. I’ve got two questions. The first one; can you please share how much of the total BNC premiums emanated from China and related to that are you already experiencing season’s moving business from more to lines to with the lines of business with the GEOHAB Implementation?

And secondly, on slide 8, what is the main driver of the minus €81 million component in the development of shareholders’ equity. Does that largely offset the positive impact on key valuation results?

Denis Kessler

On your first question, [indiscernible].

Unidentified Company Representative

Well, in China, first of all we are not big writers of com share or motor equity share. So, we have not observed movements but as we’re not a player in that particular line and cannot really comment on that.

Vikram Ghandi

Okay.

Denis Kessler

The book value per share, Mark.

Mark Kociancic

On your second question with the cash flow, so the minus 81, the lion’s share of that movement is the purchase of treasury shares during the first quarter where the share price was struggling. It is for - primarily for the compensation of the share award plans that we have within the group.

Vikram Ghandi

Okay. Thank you.

Denis Kessler

Next question.

Operator

We’ll now take the next question from Thomas Fossard from HSBC.

Thomas Fossard

Yes, good afternoon. Two remaining question for François. The first question would be on the cash position of the group for the 14% to 15% you’re currently having. If nothing changed in terms of [indiscernible] market, with the cash flow generated by the group in the coming months and quarters and with the coupon and maturing securities coming in. Should we expect the level of cash by year-end to increase again from the 14% level to the end of the year if again nothing is changing in the market or you’re more likely to reinvest with the same type of split of assets?

And second question would be related to the unrealized gains on the realized book to €160 million. Can you just clarify if it’s purely invested assets and not taking into account unrealized gains on the real-estates for own use? Thank you.

Denis Kessler

So, Tom, on your first question, we have 14 points of liquidity in the portfolio today. And the amount of €6.8 billion including the liquidity we have today that we mentioned between today and the next couple of months.

Given the economic environment we don’t expect to increase the liquidity position unless there is on the valuation of the market condition in the next couple of months. So, if we see better condition in the near future, we should expect a decrease of this cash but at this stage the intention is not going to be changed today or in the future.

On the unrealized gain or the realized gain, I confirm that the realized gain we took on the real-estate portfolio is really a gain on one single building that is related in Paris that was describing largely last September in this presentation and most of the year. All the unrealized gain on the related portfolio that you see on slide 51 that’s the related portfolio, we own the investment. So which means it excludes the premises or the buildings we own as operating premises in the world, which are classified under IFRS and often geographic.

Thomas Fossard

Okay, that’s clear. Thank you.

Operator

We’ll now take the next question from In-Yong Hwang from Goldman Sachs.

In-Yong Hwang

Hello, thank you so much for letting me ask a follow-up question. I just have one very quick one on the portfolio management in your P&C book, obviously that helps you a lot in saving off the pricing pressure and the re-insurance market over the last few years. I was just wondering if there is a kind of a logical limit to how much can be on property management side just need to start the cancellation of your businesses for the April and the January dues have decreased in the last couple of years. So, I was just wondering if there is yet you can clear on that front or if there, if you still see opportunities where you can do that? Thank you.

Francois de Varenne

Well, I hope we never reach the limit. That must be one somewhere. If you look at slide 11, I think the, qualitatively what you see in the 1 April in renewal is what you are not seeing, what you stopped to see which is showing how we proceeded. In the past, couple of years ago you would have had cancels only to manage the portfolio we were cancelling business that was not producing and we were replacing by better business.

Today we are still doing that to a certain extent and also to another extent we are reducing shares on business where we think that strategically we should not do but practically while we cannot continue to support at the same level because of the competition on prices. So, we have added a second stage to the portfolio management.

In-Yong Hwang

Okay. That’s very clear. Thank you very much.

Francois de Varenne

And the second stage you can only add it in my opinion if your franchise is dipping up or the client tolerate you are doing it.

In-Yong Hwang

Understood.

Francois de Varenne

Okay.

Denis Kessler

Okay. Thank you very much for attending this conference call. We will talk to you again in the end of July for the half year results and of course IR Day in September. Thanks a lot. And don’t hesitate to call us if you need any more information. We will do our best to answer. Have a nice day.

Operator

Thank you. That will conclude today’s conference call. Thank you for your participation. You may now disconnect.

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