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Scor SE (SZCRF) CEO Laurent Rousseau on Q2 2022 Results – Earnings Call Transcript – Seeking Alpha


Scor SE (OTCPK:SZCRF) Q2 2022 Earnings Conference Call July 28, 2022 8:00 AM ET

Company Participants

Ian Kelly – Group CFO

Laurent Rousseau – CEO & Director

Yves Cormier – Head, IR

Fabian Uffer – Chief Risk Officer

Frieder Knupling – CEO, SCOR Life & Health

Jean-Paul Conoscente – CEO of SCOR Property & Casualty

Conference Call Participants

William Hardcastle – UBS

Kamran Hossain – JPMorgan Chase & Co.

Andrew Ritchie – Autonomous Research

Ashik Musaddi – Morgan Stanley

Darius Satkauskas – KBW

Freya Kong – Bank of America Merrill Lynch

James Shuck – Citigroup

Vikram Gandhi – Societe Generale

Vinit Malhotra – Mediobanca

Thomas Fossard – HSBC

Operator

Ladies and gentlemen, we seem to experience some technical issues. We kindly ask you to stay on the line. We will resume shortly. Thank you.

Ian Kelly

[Technical Difficulty]. You pay attention to the disclaimer on the second page of the presentation of our H1 2022 results. And I will hand over to Laurent, the Chief Executive Officer of the SCOR Group.

Laurent Rousseau

Thank you, Ian. Good afternoon, and welcome, everyone. If we move to the next — to the Page #3, please. Before taking you through our H1 results and our strategic update, I wanted to take a step back and share with you a few thoughts on the events of the first half of the year. I would like to address 3 points: increased uncertainty, accelerating our actions and keeping a sense of the long term.

Firstly, on the complexity of the environment that led to the postponement of the Investor Day, the uncertainties have only increased in the past 5 months. With hindsight, I do believe that it was the right decision to postpone our IR Day initially planned from the end of March. Since then, some of the structural uncertainties have not clarified or got any simpler. Our planning was prepared before the outbreak of the war in Ukraine, making all the references used for inflation, interest rates, economic growth and market cycles, susceptible to higher volatility.

In 2022, we are transitioning to new risk regimes, while making good use of this extra time to build a robust strategic plan framework suited to a highly uncertain environment. Our financial trajectory will account for the new macroeconomic environment, the refragmentation of the world and the changes in the reinsurance supply and demand dynamics. We are building this plan in a new accounting framework. IFRS 17 should better value — should better capture the economic value of SCOR and will more closely align the accounting framework and the other internal economic framework used by SCOR to drive performance. Our plan will focus on creating economic value over the long term.

Second, we have accelerated our actions to improve performance. There was a necessity to speed up our ongoing action and in parallel to build a strategic plan. The silver lining of the recent developments is that it confirms that we have set out the right priorities and are taking the necessary actions.

From a business perspective, we have finalized the first round of granular business and portfolio reviews that will lead to a reduction of our exposure to markets or segments where we felt the risk was not adequately rewarded and where the industry is at risk of not achieving payback after a major event. It led to a reduction in our growth ambition in markets that require locked-in capital locally, that could not sell financial growth. It will lead to a reduction of our footprint where we — where our setup is too large compared to the size and the potential of the market, and it will lead to a confirmation of our ongoing portfolio management actions and business plans when appropriate.

The underwriting strategy will take time to be implemented and its effects on our financials will emerge gradually over the course of the next strategic plan. Although we are accelerating our actions, the effects will take time. This will be an ongoing process to drive the business performance and the capital allocation of the group. From an organizational perspective, we are moving forward, and we have defined a new operating model that will accelerate the transformation and the simplification of the organization. Our priority is to run the business in an efficient manner without disruption to simplify processes and focus more on value-add tasks, thanks to automation. We want to reinforce operational excellence. Ultimately, our ambition is to absorb the inflationary pressure on management expenses that will increase in the coming years.

Thirdly, the long term. Once we acknowledge that we live in a sarcastic world and take short-term actions, it is critical to keep a sense of the long term. The world macroeconomic drivers are changing, and we are moving away from a world of perceived abundant capital resources. What do I mean by capital resources? First of all, the financial capital. Companies have enjoyed abundant and highly fungible capital available at a low cost, thanks to low interest rates and globalization. But the interest rate rises will create competition for capital, and we should anticipate less globalization and the refragmentation of the world around a few large countries and regional platforms.

The second form of capital is the natural capital. What do I mean by that? This is the health of the planet and the health of the people. There was a perceived abundance of natural resources and low environmental externalities, while life expectancy was rising. The pandemic and the climate crisis have shifted this paradigm and the value of health is becoming a central decision-making factor.

The third form of capital is the human capital. People and culture will remain critical in tangible assets that embody the [indiscernible] of SCOR with capabilities enhanced through training, personal growth and the development of technology. We are currently on a bumpy road, going through a great transformation. It will lead the risk carriers to a much better place with greater demand at an adequate price of risk.

During this great transformation, SCOR’s outperformance will be driven by its ability to be a disciplined capital allocator, a capital builder and holistic risk taker. Our life reinsurance leadership makes us strongly placed to respond to increased health demand. Our people and culture will successfully respond to and leverage the challenges of human capital.

If you turn to Page 7 of our presentation, I’ll comment just a few slides, but to be brief, and we can maximize Q&A time. 2022 will be a year of transition. And this, I think, on 3 accounts. First account is a pandemic, which has become endemic shaping a new normal with an increased demand for protection and increased digitalization of the value chain. Second, the concrete impacts of climate change are clearly visible in our industry. And the first half of the year was again marked by high frequency of severe nat cats. And finally, insurers and reinsurers will be evolving in the new macroeconomic environment.

Many countries are now experiencing levels of inflation that had not been observed indicates. This shift marked a new area for our industry and the transition brings its own challenges. For SCOR, this has translated into a net loss of €239 million for the first half of this year 2022. But despite the strong wins, SCOR is staying the course. The challenging developments confirm that the proactive actions we have been taking are justified and appropriate. Our teams are working intensely to reduce volatility, improve profitability and grow the franchise. You will remember, these 3 priorities were the ones I set out in September 2021 at our Investor Day. They remain our priority. SCOR is navigating the environment with a strong solvency ratio at 240%, and we’ll see the opportunities arising from these new parties.

If you shift to Page 8. Here we outline the key actions we take. First of all, we take actions to manage climate risk. Climate change has impacted our industry and will continue to do so, but we are not standing still. We constantly reassess and update our models and approach. As announced in September last year and implemented since, we aim at reaching a better balance by taking a more conservative view on cat. We should not assume that the past 5 years are exceptional, but instead, we should run our business, assuming these past 5 years are indicative of the new normal and manage our portfolio to deliver on our 8% cat budget.

June 1 and July 1 P&C reinsurance renewals led to a 21% reduction of our 1 in 250 years PML for the 2022 underwriting year, significantly ahead of our original 11% projection for 2022, which we had announced in January this year. Since we have reshaped our cat risk profile, reducing both earnings at risk and capital at risk. Other lines of business can also be impacted by climate risk and agriculture is one of them. It has been on a detailed review and will reduce volatility by cutting the net PML by 50% in agriculture. Additionally, we will rebalance the agriculture portfolios towards nonproportional business to improve the profitability.

Second, we take actions to manage pandemic risk. We are acting on 3 levers to manage our Life & Health portfolio to contain the pandemic exposure by delivering a controlled growth in U.S. mortality and exploring options to protect the in-force portfolio. We implement management actions. We leverage our continuous investment in actuarial analytics to engage proactively with clients and partners and improve the overall performance of our in-force portfolio. These efforts are completed by the internal capital management initiative to reduce our cost of financing and capital. We also diversified pandemic risk, and we will further expand in Asia Pacific and EMEA and continue to diversify outside of the U.S. market with a focus on global opportunities and transactional lines of business such as longevity and financial solutions.

Third, on this page, we take action to manage inflation and benefit from higher interest rates. We have prepared for inflation on investment side. Our relative low duration of 3.5 years of invested assets is a competitive advantage and the regular investment income will benefit from higher reinvestment rates more quickly. We have prepared for inflation on the business side, too, and we’ll continue to do so. Firstly, we’re implementing new guidance for underwriters ahead of the renewals. It’s going to be a new playing field for many of them with inflation having been benign for decades.

Secondly, we are calibrating our pricing assumptions by market and by line of business. As a price maker, we have a role to play to ensure the market reflects the right level of inflation in the prices.

Thirdly, we manage our results prudently. We benefit from a significant weight of the Life & Health and short-term lines of business in P&C. And as usual, we will launch our detailed annual results review in Q3. We have prepared our operations to manage our expenses despite the inflationary pressures. We have deployed a new operating model in June 2022 with a focus on simplification and execution and we’ll maintain a strong cost discipline.

Now let me move to Page 10 and look at the opportunities we see out there. Firstly, the market dynamics are improving for both Life & Health and P&C. In Life & Health, the pandemic has highlighted the still very large protection gap in many regions and market segments. The awareness of the need of Life & Health insurance coverage has triggered increased demand for protection products. This is particularly true in Asia Pacific and in the U.S. There is a demand shock that will drive future growth. In P&C, the growing uncertainty and volatility driven by climate and macroeconomic environment as strong capacity providers’ appetite for volatility. This is more of a supply shock and the increasing willingness to pay adequate cost of risk will drive the P&C cycle harder for longer.

Beyond the market dynamics, we keep investing to adapt to 2 secular long-term trends that will transform our industry, the disruption of new technologies and a transition to a sustainable economy. SCOR will become a technology-driven company, building on the foundation of the Quantum Leap plan. Quantum Leap had identified the right key strategic issues in technology. We have to deliver them over time.

And second, SCOR has outlined its long-term vision of a sustainable world. This was highlighted by recent commitments relating to underwriting, investments, culture and people and have been recognized by the nonfinancial rating agencies, MSCI and Moody’s more recently. Thirdly, we see the evolution of accounting and solvency regimes as an opportunity for SCOR.

So let me now hand over to Ian to take you through to the first half of the year financials and Ian will explain why we think IFRS 17 will be a net positive for the group.

Ian Kelly

Thank you, Laurent, and good afternoon, everybody. Let’s begin with Slide 24, where we show the key impacts affecting the results this quarter. As Laurent highlighted earlier, the impact of climate change continues to be felt. The first quarter had been impacted by the Brazil drought, but this developed in Q2 into one of the worst droughts experienced in Brazilian history. The damage exceeds $9.2 billion in crop production losses.

At SCOR, during the second quarter, we received additional information on the cost of claims, which now total €193 million, of which €158 million was incurred in the second quarter. Because of this major claim and aligned with our ambition to reduce the volatility from climate-sensitive events, we have fully reviewed our Agriculture portfolio to reach a better balance across our 4 core markets: India, the U.S.A., China and Brazil. We target a 50% reduction in PML for the underwriting year 2023.

On natural catastrophes, in Q1 related to the war in Ukraine, which remains unchanged at €85 million. The pandemic continues to impact the group’s profitability and particularly our Life & Health business. COVID-19 claims totaled €254 million for the first half of 2022. But that said, the bulk of this occurred in Q1 and claims are much reduced in Q2, and we continue to act through management of the in-force portfolio.

Finally, the group’s results are also impacted by 2 nonoperating items: a €45 million tax charge provisioned following negative taxable results in certain jurisdictions. And the negative pretax impact amounting to €30 million for the first half related to the option on our own shares granted to SCOR, which are measured at fair value through income.

Let’s go to Slide 25, presenting the key financial results of the semester. The impacts just described lead to a net loss of €239 million for the first half of 2022, of which €159 million is reported for Q2. Whilst this illustrates the volatile environment in which the group operates, the group remains well capitalized with a solvency ratio estimated at 240% at the end of H1, increasing from 226% reported at the end of 2021. Further, we have grown the franchise with gross written premiums increasing by 8.3% at constant exchange compared to H1 2021, amounting to €9.7 billion.

Looking more closely at the business units. SCOR P&C reports a strong growth at 20.9% at constant exchange, benefiting from both the continuing solid growth of Specialty Insurance by 31% and growth from recent underwriting years in Reinsurance Global Lines. On profitability, the net combined ratio stands at 107.7%. The nat cat activity was high in Q1, as I noted, with a nat cat ratio standing at 10.5%, above our budget of 8.5 — 8.0%.

The net attritional loss and commission ratio stands at 90.9%, up 9.5 points from last year. Claims related to the drought in Brazil account for 5.2 percentage points of the increase. The remainder of the increase is driven by the latent claims in the United States related to sexual molestation and the provision booked in respect of the Ukraine war.

Moving to the results of the June-July Reinsurance renewals. The results of the renewals reflect SCOR’s disciplined objective to reduce property exposure in the U.S. while taking advantage of the hardening market. Premiums decreased by 9.8%, principally driven by reduction in the North American portfolio, mostly in Florida and in the Property segment. North America now accounts for 47% of the renewed portfolio versus 56% at the same period last year. Excluding property, SCOR achieved premium growth of 3.5% driven by Reinsurance Global Lines. Overall price increases achieved were 6.7%, reflecting a hardening market in an inflationary environment.

Moving on to Life & Health. Life gross written premiums decreased 1.8% at constant exchange, reflecting the ongoing efforts to diversify the portfolio. SCOR continues to expand its franchise in Asia where underlying demographics fueled the demand for private health and life insurance coverage. In mature markets, SCOR Life & Health continues to build its franchise through innovative products and services. SCOR Life & Health delivers a strong technical result of 6.3% in H1 2022. And the technical result amounts to €245 million despite the impact of the COVID-19 pandemic previously mentioned of €259 million.

On the investment side, in Q1 2022, we successfully implemented IFRS 9, which importantly does not change valuation in the balance sheet, which is at market value, but it does change how movements in value are reflected in the P&L. In H1 2022, SCOR generates a return on invested assets of 1.6%, reflecting the negative impact of change in expected credit losses, which reduces the return on invested assets by 30 basis points year-to-date. Under the IAS 39 standard, the return would have reached 2.0%. Regular income yield is increasing at 2.0% and the reinvestment rate has effectively doubled since the year-end to reach 4.1% as at the end of June 2022, which is positive for the group in picking up on increasing yield relatively more quickly.

If we now look at other key financials, group shareholders’ equity remains strong at €5.6 billion, resulting in a book value of €31.21 per share. The net operating cash flows were negative in H1 at minus €368 million as a result of the payment of COVID-19 claims on the Life side. Nevertheless, liquidity remained strong at €2.5 billion.

That concludes the financial results. I did, as part of today’s update, also want to say a few words in respect to IFRS 17. And as Laurent noted, we clearly see the introduction of IFRS 17 as a positive development, not only because it better reflects the reality of the business and its true economic value, but also because it will help us better explain our business decisions. As a capital-driven company, our business decisions focus upon long-term economic value creation. As you can see on Slide 37, the value of SCOR is not fully recognized by the current accounting standards, and we believe that IFRS 17 will provide a clearer vision of the economic value of the group.

Having said this, IFRS 17 does not change the performance of the underlying business. Only the timing of the recognition of the income will change. IFRS 17 will help us align the accounting framework with the internal capital-driven framework currently used at SCOR to manage our business and to support the decision-making process to build long-term value. Key metric to track the value of the business will be the IFRS 17 economic value, which represents the shareholders’ equity plus the contractual service margin, or CSM. We expect the economic value of the 2022 opening balance sheet to exceed €9 billion under the new accounting standard.

Moving to Slide 39. At the opening balance sheet, the CSM will represent a stock of value in respect of anticipated future profits. This stock of CSM in the opening balance sheet will naturally be significantly larger for Life than P&C given the longer duration of the Life business. The stock of CSM from Life reinforces the value of SCOR’s long-term strategic commitment to Life business.

Each year, we will be reporting the new business CSM generated from the Life & Health and P&C business unit, which will represent the flow of value that has been created by the new business during the year. It’s also obviously a significant convergence between IFRS 17 and Solvency II, reflecting that both have an underlying economic basis. One difference to note, as you can see on Slide 40, is the use of a risk adjustment as opposed to a risk margin under Solvency II. The risk adjustment allows for full diversification benefits, which we consider to be sensible and appropriate.

When we publish our strategic plan in November, it will be on an IFRS 17 basis, giving an opportunity to start providing you with a better view on financial reporting outcomes within this new environment. We will also look forward to providing you with a clear view on the expected trajectory of our economic value over future years.

With that, I’ll hand back to Laurent. Thank you.

Laurent Rousseau

Thank you very much, Ian. I’ll go through very briefly on the concluding slide, Page 27. During this great transformation, SCOR’s outperformance will be driven by its ability to be a disciplined capital allocator, a capital builder and a holistic risk taker, progressively building our financial and capital long-term — sorry, progressively building our financial, capital and creating long-term value for our shareholders. We will protect natural capital. We want to lead by offering a differentiated value proposition, factoring in the sustainability imperative and will enrich our human capital and growing a nimble and innovative organization whose capabilities are enhanced by tech & data.

The current environment requires us managing a transition period. We build on our high diversification, one of our strategic cornerstones and achieved the right portfolio balances in both Life & Health and P&C. The current sources of volatility require adequate risk-adjusted remuneration. The underwriting decisions are driven by disciplined capital allocation and rooted in sound risk appreciation and our strong underwriting culture.

The capital is allocated based on a holistic view of the performance, the volatility-driven businesses need to rely on the right balance of premiums to absorb shocks. We built a simple and disciplined organization with the right alignment and controls in place. We’ll keep a sense of the long term and prepare the organization to seize opportunities from new projects. We will apply a few principles, be a price maker. We’ll deliver a differentiated value proposition to drive adequate returns for risk underwriting. We a risk taker, we share the fortune with our clients. We will leverage our medium size and show nimbleness and agility to better serve clients and navigate the market. We do not track the overall market, and we can deliver a unique financial performance, and we will allocate our capital to the most attractive segments and create economic value over the long term.

Despite strong wins, we have a clear course. We have accelerated our actions to improve performance, and at the same time, we keep a sense of the long term, and we are planning a resilient strategy to win in the new environment. This will be presented to you on the 9th of November.

I now very much look forward to answering your questions together with the entire connects around me. And I turn over to the Q&A moderator. Thank you.

Yves Cormier

Thanks very much, Laurent. On Page 46, you’ll see the forthcoming scheduled defense. And with that, we can move to the Q&A session. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions]. And we do have our first question from Will Hardcastle from UBS.

William Hardcastle

I’ll leave it at two for now. Big picture, if we take a step back and return — I mean, noble important factors like return on capital and just consider the combined ratio for the exercise, I guess, we usually expect cat business to have a better combined ratio in the lines that you’re growing in. And to the extent of the remedial changes are probably a bit sharper than we previously expected in both directions, does the business mix change like we think the consensus of around 95% for a combined rate? It’s harder to achieve or absolute except there’s a greater degree of confidence? But would you still feel comfortable with that sort of forward trajectory?

Second one, to be more specific, just relating to the reserve strengthening claim. Presumably, this is to the Board’s doubt for American settlement. I might be wrong, but I guess is this now a finalized reserve whether it’s paid or not? And so there’s no scope for further change. And was the development, I should know this, but because of the settlement itself or you extrapolated to other reserves beyond one individual case? And just so I’m clear on that, is it just a historical cover or a more recent sort of adverse development cover that’s being captured? I’m sorry, a couple of questions there.

Laurent Rousseau

Thank you, Will. Ian, do you want to take the first one and have Fabian take the second one?

Ian Kelly

I think Jean-Paul is on the combined ratio and the business mix.

Jean-Paul Conoscente

Yes. Well, on your question on the combined ratio going forward, actually we’re — although we’re reducing our PMLs, we’re not exiting property cat. We’re still providing significant cat capacity to our clients. What we’re doing is we’re — as we mentioned before, we’re moving away from proportional treaties and low cat layers. Those typically have actually combined ratios that are higher than, I’d say, typical cat program. So by reducing this, we don’t deteriorate the overall combined ratio, and we significantly reduced the volatility of the portfolio. So that’s why we expect to be able to still deliver the net combined ratio that we have targeted as well as reduce the volatility.

On the — on your second question related to the sexual molestation, the reserve we booked in Q2 relates to a specific program that is not Boy Scouts of America, that relates to sexual molestation claims affected by the viable statutes in a few states. And the booking in Q2 reflects some claims received this quarter, which were higher in terms of number of claims, the severity of claims that we had booked in our reserves. This new information will lead us to review our overall reserves for this segment and then put into the context of the overall reserve study that we do throughout the course of the year.

And maybe if Ian, I can pass it to you to give more details on that.

Ian Kelly

Thank you, Jean-Paul. Yes, this is something we have already reserved and taken into account as last year, where we built reserving models to capture these kind of claims. As explained by Jean-Paul, the latest 2 claims came relatively late in the quarter, and we will need to update as part of our Q3 and Q4 usual reserve analysis, the further development of this. We have in front of this claims still a bit of IBNR, but — and the best — we see it in a range of best estimate, but that’s definitely something we will look at, but also see how are the reserves development positively influences our overall reserve position.

William Hardcastle

That’s really clear. And sorry, just coming back to understand, I mean, this is my lack of knowledge. But is this sort of business that was written 20, 30 years ago or is this business has been captured somehow in more recent policies?

Ian Kelly

No, no. These are all on one year. The underwriting years affected our late ’70s, early ’80s.

Operator

And our next question comes from Kamran Hossain from JPMorgan.

Kamran Hossain

Three questions for me. The first one is just on — I guess, it’s coming back to the cat reductions that you’ve talked about. I’m just a little bit confused because I think you’ve — in the comments just now, you talked about exiting lower layers, which come at a higher margin. And I kind of understand that. But in your kind of cat reduction headlines, you’re talking about the 1 in 250 reduction of 21%. Could you — maybe help probably small for me, but just help me to understand what the reduction has been at the lower layers, so like kind of more kind of far tighter, closer return periods than 1 in 250 because clearly, 1 in 250 has not been the issue in the last few years. So that’s question one, kind of what’s a good number for me to kind of hang my hat on there.

The second question is on the S&P rating and being on a negative watch. Just noting in the beginning, the introductory comments, you talked about high levels of uncertainty that led to the delay of the Investor Day from March until we know this update now. Obviously, the rating review is still kind of ongoing. Could you maybe update us on that and what — whether that might influence your view of kind of dividends for this year, given that the first half of the year, given how tough it’s been suggested it might be an uncovered dividend for this year.

Laurent Rousseau

Jean-Paul, do you want to pick up on the first question?

Jean-Paul Conoscente

Sure. Thank you. So the cat reduction, as I mentioned before, is a result of both reducing on the low cat layers on the carry-fill book. We also have a significant proportional property book, which is cat exposed, both through treaty business and through MGA. As we mentioned at the beginning of the year, we basically exited MGA business that was cat exposed to the first dollar. On the property proportional, we also dramatically reduced and accelerated this reduction throughout the year.

The other big effect, why we’re actually landing at a higher reduction than initially forecast is our exit of the — for a specific company market where despite significant price increases, we had also significant concerns about the viability of the companies and the viability of the business model per se and, therefore, reduced completely our portfolio to those exposures and that reduction accelerated the PML reduction.

Kamran Hossain

Sorry, if I could just maybe just come back on that. I think I mean, I asked a similar question in Q1. But it’s — you’ve referred to the 21% at 1 in 250. If you’re thinking about 1 in 10, 1 in 25, 1 in 50, what would a similar number — what would a similar reduction be? Because I assume there has been quite a material reduction.

Jean-Paul Conoscente

It would also be double digit.

Kamran Hossain

Okay.

Ian Kelly

And then, Kamran, on the second question in respect of the rating, we placed strategic value on our credit rating. And so irrespective of the actions of rating agencies, we maintain and offer to our clients a AA level of security. We currently hold today a AAA level of capital to be able to do that. Were there to be any specific rate reactions that wouldn’t have any material impact on the business? Certainly, no impact on the Life side and limited impact on the P&C side, really the threshold is A+. But I’d come back to what we do, what’s in our hands, and that is the capital that we hold and the level of security that we provide, and we’ll continue to provide that AA level.

Kamran Hossain

And is there a timetable for, I guess, the next update?

Ian Kelly

That is a question for the rating agencies, and we don’t drive that timetable. And you referenced the dividend. In respect of the dividend, that is really premature in terms of process around the dividend. This is a Board decision. This would be undertaken in 2023. And the Board at that stage would take into account all the appropriate information, the financial information, the solvency, the result for the full year, the ratings capital that we hold and so on. And so that’s the process that will be followed. They will make that decision as a Board in 2023.

Operator

And our next question comes from Andrew Ritchie from Autonomous.

Andrew Ritchie

I wonder if you could just help us understand, is there any benefit in the year-to-date experience from what you’ve done on reducing the cat experience. I guess I’m trying to reconcile a significant miss of your cat budget versus actions that you started last year, and I think you even did quite a lot at 1/1 in respect of some of the European risk and again in April. So why — I guess, maybe can you give us any examples where the loss turned out to be less than otherwise would have been because of actions so far? Or is it just really a timing issue? I mean are we — I’m just trying to understand to what degree the 1H outcome is highly backward looking. And I suppose that relates to what — is there a significant material difference in your positioning in Q3 already, say, Q3 this year versus Q3 last year as we go through wind season. But I’m just looking for — just — I think you need to really explain a bit more why the first half was what it was in the context of the actions you’ve taken.

And I guess the only other question is I don’t understand the comment, Laurent, you wanted to flag a reserve review in Q3, and that was flagged again in relation to the molestation claims. So are you trying to flag something more material or a need to look more thoroughly inflation assumptions? It seems to be a bit of a change versus a degree of reassurance we were given by your 3 factory only, I guess, a month, 2 months ago. So I’m not quite sure what you’re trying to flag with that.

Laurent Rousseau

Okay. Thank you, Andrew. So let me pick up on both, and then I’ll hand over to Fabian and Jean-Paul. And let me start with the second one. No, there is — what I said is actually, I would say, a reiteration of what our 3 factories said on a recent analyst call. It’s the usual process that we do, which is quite a thorough one. And my simple answer is that we do what we did, nothing more, nothing less.

On the year-to-date benefit, I mean, Jean-Paul will pick it up more precisely. But simply put, we started taking actions on the portfolio on the cat exposures really starting in September last year 2021. So we haven’t gone around the clock, if you wish. So even those actions that we took on our U.S. MGAs in end of Q3 last year would not have the full benefits already. So you have your normal in-force, if you wish, that runs off over 1 year. And then you have the full benefit. So when it comes to U.S. winds, as of today, we would have 75% of the benefit of having canceled those U.S. MGAs book.

Now when it comes to the overall actions, the U.S. MGA was only the start. We took more going forward. So you should see the full benefit essentially 12 months after having taken the portfolio actions. This is quite mechanical.

Now my last point, and then I’ll hand over to Jean-Paul is on Page 14 of our presentation. It’s not exactly an answer to your question, but it still goes in the same direction is if we rerun our past 5 years’ portfolio, with the management actions, the portfolio actions we took so far as opposed to an 11.7% cat ratio, we would have had 8.5%. You might say this is still above 8% target admittedly. And so this is why we will keep pushing. But we — when you do an as-if analysis, this is the kind of results we’re getting to. So the question is how quickly is it the underwriting years feed into financial year? And here, you should expect the next 12 to 18 months or so to have 100% of it.

I’ll hand over to Jean-Paul and then Fabian.

Jean-Paul Conoscente

Yes. Thank you, Laurent. To your question, as Laurent explained, I think it’s both a question of timing and a question of where the losses occurred. Q1, it was really driven by Australia and some of the European windstorm losses. Q2 is driven again by an increase of the Australian losses going from $3 billion to $5 billion market loss as well as South Africa, which is driven by really one large risk that’s been flooded in South Africa. And the French Hill storms, which are not properly driven, are more agri-driven in terms of losses.

As Laurent said, I think we would expect in Q3 to benefit — see the benefit of our actions for any U.S. cat losses. If it was the small to medium-sized losses, it is what we’re trying to move away from. And I think we’ll see — we’ll take further actions at 1/1. We’ve taken some actions on our Australian portfolio July 1. We’ll take further actions throughout the year in 2023. And further actions on our European book and the U.S. book comes in January. So it’s a question of both where these losses have taken place and the timing for the actions to sort of emerge through the portfolio.

Fabian Uffer

Maybe about on inflation, I mean, while CPI is now moving up and we’re all looking at that for the first time in several decades, claims inflation has always been higher in certain lines of businesses, and it has been part of actuarial work since always, I would say. And we have reinforced this work beginning of almost a year ago, we’re starting on the pricing and reserving side. So the last year reserve cycle was already driven by looking closely at inflation. We will continue that in this year’s cycle.

We have also taken direct actions on our pricing. So we have increased inflation assumption at 1/1 at 1/4, and we are preparing now inflation assumption for the 1/1 renewal next year. So as Laurent said, I think that’s the normal course of our actuarial work at the moment, and we continue this as usual.

Operator

And our next question comes from Ashik Musaddi of Morgan Stanley.

Ashik Musaddi

Just a couple of questions I have is, first of all, I mean, if I look at all the portfolio management actions you are taking, such as reducing cat, reducing agro, taking actions on the legacy portfolio and also looking at the mortality, I mean, it just feels like it’s a bit more reactive than proactive. So I mean, how would you say that you’re not getting out of this business at probably the best time basically? I mean if cat pricing keeps on going higher, I mean, some of your competitors are saying this is the time to get into it. So what would you say on that? I mean if you can give some color on your thinking process around that? Is it just to reduce the volatility and change your portfolio overall for longer term? Or is it — or you believe that your exposure is just outright high at the moment that you need to reduce. So that’s one question.

And secondly is just under IFRS 17, I think there is a slide in the appendix which shows that the total economic value will be $9 billion, but the IFRS equity per se will be similar to IFRS 4. Could you just confirm, is it similar? Is it lower? Is it higher? In case you could give any color on that.

And just one more question, I mean, this legacy claims. I mean how do we know more about these kind of legacy claims? I mean do you have more in the blocks that you’re aware of and that could create some headline concerns at some point? Or would you say this is just a one-off its kind basically, and there should not be more.

Laurent Rousseau

I can take the — sorry. I can take the first one and handover to Ian on the second one. Look, are we reactive or proactive? And is today the right time to write cat? Look, as I said in my intro, I base — I think we have to base our current view of risk on the past 5 years. I don’t think there is any kind of scientific or anecdotal evidence that the cat frequency and severity is going to improve anytime soon. Admittedly, prices increase. Is it completely adequate where we think it’s not, we get out. And I think this is the most rational decision we need to make. So the first point is betting on the reversal of a 5-year trend, I think is a view that we don’t take. Point one.

Point two. However, attractive the rate adequacy is, the question is what should be the balance of the cat portfolio in the overall business. And this is the cat ratio by definition is what is the overall pot of non-cat business that we want to amortize the cat volatility with. And so here, what we’re essentially saying is we have very, too small ballast, too small base relative to the cat volatility. So our statement is not just a statement on the cat adequacies as well a question, a statement on what is the right balance of portfolio. And in order to deliver an 8% cat ratio, we need to amend that balance.

Ashik Musaddi

That’s clear.

Ian Kelly

Yes, sorry, go ahead, Ashik.

Ashik Musaddi

No, I’m just saying that’s clear.

Ian Kelly

Yes. On IFRS 17, we’re still calibrating and there are choices that we’re finalizing at present. But I would say we’re conscious of the balance between hard and soft capital within our balance sheet. And we would be targeting a similar level of equity at transition. And obviously, the shareholder equity will be impacted by [indiscernible] and then the — there will be impacts on to the new standard from that opening balance sheet transition from the shareholder equity that you see opening 2022. But yes, that’s the position. Okay?

And then maybe, Fabian, just to pick up again on the reserve comment.

Fabian Uffer

Sure. I can reiterate what I tried to explain. I mean we have built reserving models last year, different ones because by nature of these claims, it’s quite tricky to assess them. Kind of standard actuarial methodology doesn’t fully work. And at the time, and I think also now we are in a reasonable best estimate range where we can absorb some further claims. But there’s also clearly a slightly open uncertainty around this, and it’s an evolving theme.

Operator

And our next question comes from Vinit Malhotra of Mediobanca.

Vinit Malhotra

So first question is just on the Agriculture business dollar. I mean if the AgroBrasil was acquired or maybe acquired more in February 2020 and that was obviously based on the 15-year plus relationship with them. And then you yourself said this was the worst drought in history in Brazil. I mean and now you’re cutting back based on this year. Again, is this quite a sharp reaction to probably a one-off event? Or could you explain that when you bought the AgroBrasil book, what has really changed enough for you to now think of it like something you need to reduce the exposure to within a space of about 2 years now? So that is on AgroBrasil.

Second question is on the PML reduction, please. So yes, while the return periods you have discussed earlier. I’m just wondering if there is also another way to cut that pie into sort of the extreme peak risks like hurricanes, earthquakes and then sort of the second repair, which you could dominate at least the first half, whether you think of Australia or South Africa or even some of the agro losses in France. So I mean, have you thought of a number in terms of secondary versus peak perils in terms of the PML reduction?

And there’s one more clarification on the U.S. Casualty reserve review that is coming up or that is going on. Laurent, you said that you implied that it wasn’t anything out of the ordinary, but just the last answer as well suggested that there’s a full review going on. And so one would expect something more to happen in the rest of the year on the Casualty side?

Laurent Rousseau

Jean-Paul, do you want to pick up on the Agriculture?

Jean-Paul Conoscente

Yes. Regarding the Agriculture, you’re right, we acquired the MGA fully. I think it was 2019. And we also have an insurance company which carries the business. And given the level of profitability of the business, we decided to retain a large part of it. What happened is as the government — the Brazilian government decided to emphasize the program of subsidies, the portfolio grew substantially and the Brazilian portfolio became outsized compared to, I’d say, the rest of the portfolio. So the exit we’ve taken is to continue to write the business through the MGA, purchase more reinsurance so that our net is better under control. And we’re also looking at sort of adding some carriers in addition to the SCOR carrier for this business to help the MGA grow the business, but not necessarily affect our balance sheet.

You are right that the rates are increasing. We’ve seen this business very profitably. But as Laurent mentioned on the cat, what we want to make sure is that we don’t — it was an outsized exposure compared to the overall portfolio. We were trying — by cutting it in half in Brazil, we’re trying to bring it back in line with the portfolio size overall.

In terms of the PML reduction, we do track 2 metrics. We track the 1 in 250 PML, and this is part of our risk framework as we follow this. We also have a second parameter that we track is the earnings at risk where we look at the 1 in 10 PML and put that over the expected profit that we have in our plan. And so our target is to reduce both. So the PML that we mentioned has been reduced by 20% and then our earnings at risk is also a double-digit reduction compared to last year. As we move forward, this is going to be the focus of the rest of the remediation actions is to further reduce the earnings at risk.

Operator

And our next question comes from…

Laurent Rousseau

Sorry, there was a last question on the reserve development in Q3.

Fabian Uffer

Sure. I mean, I don’t think we can see the reserve development of this segment in isolation. It’s really — I reiterate the position that Eric convened or made 2 months ago. It’s really — we need to see that in an overall portfolio. And I think we are — there, we’re very comfortable in the best estimate range. Nothing has fundamentally changed. And that’s the way we look at this. Obviously, in an inflation environment and now with this, it’s also clear that reserving risk, not only for us, but I think for general, the industry has increased.

Operator

And we will take our next question from Freya Kong from Bank of America.

Freya Kong

I mean given the outsized exposure to Brazil that you had is triggering a pretty meaningful portfolio view of Agriculture on top of your nat cat book. Do you think that there are other areas of the book not necessarily climate-related that might be worth looking into to manage your overall exposures to single events or geographies?

And my second question is on the nat cat charges in Q2. Could you give us a relative split between the negative development in Australia or South African floods and French storms? And given we’ve had more French storm activity in Q3, what market share of losses should we be expecting?

Laurent Rousseau

Jean-Paul?

Jean-Paul Conoscente

Yes, we’ve done a thorough review of what other lines of business do we have significant exposures for and have performed review and plan — reduce PMLs for a number of lines of business. I think in our plans, we had the significant growth in cyber, for example, in terms of PML. We think that it’s a very attractive line of business. But from a volatility point of view, it’s also very volatile. So there, I think we will probably restrain some of the growth plan there. The other lines of business, I think are more modest in terms of the expected loss. And so I’d say cyber is really the only significant one.

In terms of the — your question on the losses, so if we look at the cat ratio for the first half of the year at 10.5%, 9.5% of it comes from 2022 events. And we have the remaining coming from negative development on some events in 2021, some positive developments. So what do we expect going forward? The storms in France, there’s been some storms and some fires in France. We don’t think that’s going to be a significant loss. We still need some further data on what exactly are the agricultural losses that would generate.

Again, the property should be mainly in the retention of insurance companies. With regards to the funds taking place in Australia right now, Again, we think it’s a much smaller event and should be probably more in the retention of the companies than the ones we experienced at the beginning of the year.

Operator

We’ll take our next question from Darius Satkauskas with KBW.

Darius Satkauskas

Two questions, please. So first of all, you have a target for normalized combined ratio of 95% and below. I don’t know whether you will deal with this probably for next year. But given that your reinvestment yield has increased materially, do you think it will have an impact on what commodity you’re going to achieve in 2023? I mean do you expect pressure on the underwriting margins, essentially?

My second question is, after you leased a lot of capital from the Covéa transaction, you’ve been deploying it into the market and guided to deploy it into the P&C market. Are you able to give some sort of color on the expected combined you’ve been deploying this capital at?

Another question is on COVID. You had losses roughly €59 million in the quarter. How should we think about the losses as we head into sort of winter months from COVID?

And lastly, on Solvency II, your ratio didn’t change since the first quarter, even though interest rates most materially. And there’s obviously been negative sort of experience variance, but there’s also a capital model adjustment that you’re flagging. Can you give more color on that, please?

Laurent Rousseau

I want to pick up Jean-Paul on the 95% and below and how — and if pressure will come on that from increasing interest rates.

Jean-Paul Conoscente

Yes. I think that is a question that I’m sure a lot of people in the industry are thinking about, will the rise of interest rates reduce the discipline of the reinsurance market? Frankly, I don’t believe so. I believe you have interest rates, but you have inflation, which today outpaces the interest rates. And we see it accelerating, not decelerating. I think the central banks have sort of missed it. They’re trying to correct it. How successful they will be is unclear. And this is economic inflation. You still have a lot of reconstruction cost inflation due to supply chain issues. You have social inflation, which drives casualty claims. So the claims inflation is not going away. And that requires disciplined underwriting, both on the insurance and the reinsurance side.

And again, the 2022 for the reinsurance industry overall will be another difficult year. Ukraine conflict is still unresolved into how it impacts the insurance and reinsurance industry. So there’s no reason for the market discipline to reduce. And therefore, I think actually what we expect to see at the upcoming renewals is increased pricing discipline with probably double-digit price increases on cat, whether there’s future losses or not and more pressure on casualty and other lines of business in terms of price increases.

Fabian Uffer

On the solvency ratio, we can look at Slide 27, where we highlighted the 4 main drivers of this quarter. We have a positive effect of the interest rates, roughly in line with our published sensitivities maybe slightly lower. That’s always a bit difficult because of the — it’s obviously just a kind of a parallel shift and the simplification in our sensitivities standard to the — when we run the real model.

The second effect is that we have the losses that we have seen under IFRS 4, also affect Solvency II. So this is kind of a mechanical translation. We have also accrued the dividend as usual in €1.8 that we do every quarter. And then we have a one-off effect on the — on how we model certain asymmetries on the Life side in our internal model.

Ian Kelly

Thanks, Fabian. I noted we had a series of questions in respect to the reserves. And we haven’t shown where all of the impacts of inflation can occur and some of the protections on the book. Fabian, I don’t know if you want to pick up on that and maybe talk briefly to Slide 18 and highlight how some of the impacts of inflation are managed and limited through the positioning of the liabilities.

Fabian Uffer

Sure. I didn’t talk to this because I thought it’s quite clear, but we have also Slide 19 in the appendix just to illustrate work that we do and have done how, in some times, our reserving position is affected from different kinds of inflation. The first thing I would like to highlight and that’s also on Slide #18, 41% of our Life & Health or our reserves of Life & Health reserves, they are not affected by inflation. And so this is kind of a stabilizing factor at all.

But then also when we look at the split of the P&C reserves, the 95 — 59% of our overall reserve position in the different lines of business. So we have a significant amount of short-term business that is, again, not as affected by inflation. We have also on the very long-term business, a lot of motor or European motor exposure where we have inflation risk mitigated by stabilization clause and so on. So you can see the split quite nicely. But I would also highlight that we are a market leader in this scenario, which is part of our long tail book, where we have a lot of intense pricing power and can influence rates reasonably directly and how we can manage the portfolio.

Laurent Rousseau

Thanks, Fabian. It’s next question.

Fabian Uffer

I think there was a question on COVID. Yes, just to pick this up, let us begin here. So maybe first to say that Q2 claims slowed for COVID with €59 million was significantly lower than in Q1, and that is just what we had expected. So where we landed is pretty close to our expectation at the end of Q1. Given infection numbers had dropped quite significantly at the end of Q1 and then early in Q2.

Going forward, I mean, there continues to be a fair amount of uncertainty. We don’t know what new variants will occur. The waning of immunity in the population, take-up of vaccination behavioral changes and so on are quite certain. So it’s hard to predict the next quarters precisely. But I think it’s fair to say that given the much higher level of immunity in the population due to both vaccinations and the very high number of infections, in particular during — due to the Omincron wave. We are not in the same situation anymore as a year ago. So yes, it’s quite likely that there will be some further waves in the coming quarters, maybe in the summer when in the southern states in the U.S., people tend to spend more time in doors or in autumn and winter in the northern — further in the Northern Hemisphere. But we do expect those waves to be less severe than what we’ve seen in the past 2 years.

Darius Satkauskas

And the capital that you sort of write some Covéa transaction, combined ratio?

Laurent Rousseau

Can you repeat the question, Darius?

Darius Satkauskas

So the question was, you released a lot of capital from the Covéa transaction. You guided to deploying that over 2 years. Since then, you’ve been writing quite a lot of business with that. I’m just curious if you can give some sort of color what combined ratio you sort of writing that business given that so much capital being used to write?

Laurent Rousseau

The new business we’re writing on the P&C side for underwriting year 2022 is significantly better than the 95% and below. We would estimate 1 point or 2 points below that target, but it’s for underwriting year 2022 only on an expected basis.

Operator

And our next question comes from Thomas Fossard from HSBC.

Thomas Fossard

Yes. Can you hear me?

Laurent Rousseau

Yes, Thomas.

Thomas Fossard

I have a couple of questions on my side. I just wanted to come back on the business mix shift and the expected reduction in the volatility. On the combined ratio side, I mean, can you be a bit more precise on the kind of combined ratio you’re expecting on the business where we — where you are growing the most at the present time? And maybe rehash a bit the view we should have on the combined ratio, especially property cat that you are exiting at the present time. I would have expected some negative effect on the 95% combined ratio to be fair because on volatile lines, if you’re not writing this business on significantly lower combined ratio, I’m not sure how you could meet your required cost of capital. So I’m not sure to get the math right. So maybe you can shed some light around this.

Second question also related to the business mix change is if you’re reducing so much the volatility of your business, how should we think about the optimal of Solvency II range, the 185% to 200%? Should we expect this to be lowered as a consequence of all the mergers that you are currently implementing?

The other question would be again related to U.S. legacy book. Just to better understand if we should be aware of other exposure to well-known U.S. cases such as opioid or, I mean, any significant claims or everything which is well known in the U.S. I know you commented in the past, but I’m taking the opportunity of what you’ve announced today in Q2, just to get an update on any material exposure that we should have in mind when it comes to well-known cases in the U.S.

The third and last question would be related to your change in the Board today with the Head of the Audit Committee leaving or resigning. I don’t know exactly what the right terms. Should we see any negative implication from this or any negative signs?

Laurent Rousseau

Jean-Paul, do you want to pick up on the combined ratio on the exiting and then rising?

Jean-Paul Conoscente

Yes. You’re right, Thomas, that for some of the cat business on an expected basis, the profitability tends to be better than some of the business. For example, some of the remediation, we’ve taken the cat derisking in June, July led to an increase of that expected net combined ratio of that book of roughly 0.5 point. But when we compare it to the overall portfolio, we had some significant improvements of the portfolio at the June — at the January and April renewals. And when you put it all together, we think the improvements outweigh sort of the small negatives that come from that.

In addition, we still see the Specialty insurance portfolio, where we have significant growth still being producing a better expected net combined ratio than the reinsurance today. Even though we think in 2023, reinsurance will likely catch up. But in today’s market, we still see Specialty insurance as producing a better overall net combined ratio.

On the solvency range, maybe Ian.

Ian Kelly

Just on the solvency ratio range, pick up on that. There’s no change to the target range of — or the optimal range of 185% to 220%. Were we to revisit, we would take the opportunity of the strategic plan to consider that. But at this point, there’s no change in that range, Thomas.

Thomas Fossard

I understood the answer. I mean should we expect this to be the logical consequence or direction of trouble given the change in business mix?

Laurent Rousseau

I was going to say, I think there is a case for the opposite, Thomas. In a sense, if you look back our solvency scale range, we’ve put it in place for the 2013 to nearest in that area. The interest rate environment at that time was radically different from today. So I think just that the mechanical interest rate impact means that at constant solvency ratio, it’s just — the situation is very different. So here, we have some kind of a wealth effect where the solvency gets boosted by a mark-to-market mechanism, but we haven’t got necessarily return in terms of cash since it’s a mark-to-market effect. So this is clearly an area where we are doing some work for the new strategic plan. But you could expect that actually across the board in the industry, the solvency ratios are going to be mechanically reviewed upwards at constant financial strength, otherwise.

Thomas Fossard

But Laurent, sorry to argue on that, but I mean should the better investment spend environment be positive for cash narration going forward? I mean, I guess it’s just really a bit more profitability to your business.

Laurent Rousseau

Absolutely. Absolutely, but in this interest rate rising environment, the mark-to-market effect is much faster than we take all of the credit as of today in terms of cash flows. But in reality, we — the current solvency ratio has this rise effect from interest rates. So you should adjust the solvency from the interest rates environment where you should kind of put it in comparison to it. I don’t see the solvency range having to come down as such.

Thomas Fossard

Okay.

Laurent Rousseau

In terms of your question on the U.S. legacy portfolio, we haven’t identified any exposures besides the portfolio that affected us in Q2. We continue to have very limited exposure to opioid to Boy Scouts of America and other known extra mall station or class action claims. That’s as of today. Again, a lot of this litigation came from changes in statute law, which made close claims reopen. But so for the time being, we don’t see anything. In the future, if there’s again reopening of closed claims, we’ll have to review.

Ian Kelly

Laurent, do you want to pick up on the change in Board?

Laurent Rousseau

Yes. On the last question, should we see negative signs? Look, no, I don’t think so. I mean Corinne has left for personal reasons. We have the new Chair of Audit Committee, Bruno Pfister, who is very experienced, very seasoned, first of all, Board member at SCOR. And before that, some of you might have come across him when he was CFO of Swiss Life and then CEO. So he’s extremely strong, extremely involved already, and he was the Chair of the Risk Committee. So he’s very family with the company, and that’s a very good news.

And Bruno is replaced in his position as Chair of Risk Committee by Adrien Couret, who as well he’s been on the Board for 2 years now, and we see that actually positively.

Operator

We will take our next question from James Shuck from Citi.

James Shuck

I just wanted to circle back on the capital position. So I think at the time when the 2019 dividend was canceled, there was talk about wanting to retain capital in order to be able to fund growth in the business. And I think you talked quite a lot about deploying capital. But if I look at the SFCRs and I look at the underwriting risk allocated to P&C, that number has actually come down or it’s actually been pretty stable, maybe up a little bit in ’21 and what you’re showing today at H1, just based on the group SFCR that’s not really gone up very much in H1. Obviously, you’re reducing PMLs and volatility and whatnot.

But I can’t actually see how you’re deploying capital into P&C on an overall net basis. And when I look at your optimal range, maybe your solvency rate, I hear what you’re saying about interest rates being higher, but it’s difficult for me to join up all the pieces and we can see how you’re deploying this capital into the hard market? That’s my first question.

The second one, really on the Life & Health re side of things, so the technical margin ex-COVID. It was well above your plan in Q1. What about planning in Q2? I think contain 12%, something like that. How — what are the drivers of that? What are the management actions? What are you seeing in terms of kind of positive effects, excluding COVID? And how should we think about that life technical margin for the remainder of this year? And I guess you’ll update on that at the Investor Day in November as to the outlook over the medium term.

Laurent Rousseau

Fabian, on the capital deployment?

Fabian Uffer

Sure. When you look at what we deployed on capital in the first half of the year, it’s almost — over €200 million has been deployed new capital. And that’s part of why also, in some sense, our solvency ratio didn’t increase a lot further. That’s the normal business where we bring the capital at work. So there’s over in a sense, €200 million in newly deployed capital for writing new business. This was obviously compensated by an amount of capital relief through the increase of interest rate, which has almost doubled so big. So that’s why you will not see it fully in the solvency ratio as of the H1.

Laurent Rousseau

Frieder on the…

James Shuck

Can I just go back on that before we delve back to the other question. So it’s just — hearing over the last 12, 18 months about how you are deploying capital into a hard market. And I hear what you’re saying in terms of H1. But in 2021, the underwriting capital allocators in the SCR has not really gone up. So I really still struggled to see why that dividend was canceled in 2019, but you can leave that as something in the past. But just are you actually intending to deploy capital from your optimal range level at this point in the cycle?

Fabian Uffer

I mean one thing, and I think I explained that in the past also on the analyst calls is the — how we calculate the SCR also contained in some sense, they expect the profit we make with this capital that we deploy. So in some sense, you have a dampened effect on — in some sense, the additional risk we take is compensated by the additional profits we will make. So that’s in some sense that’s why often, if you look at the reporting or if you look at the way our SCR evolves, people underestimate the amount of SCR reduction we get from additional expected profit in the year. And that’s kind of a mechanical definition of how the solvency capital requirement is calculated on Solvency II. You can take into account the expected profits that you make during and some sense, the modeling year.

Frieder Knupling

Right. On the other question on the Life & Health business. So the — first of all, the underlying performance of the business is strong, and we see good levels of profitability from different parts of the business in different parts of the world. And that’s been very, very favorable in the past 2 quarters. We do work a lot on managing our large in-force portfolio in different parts of the world. And that’s become an area of focus over the past couple of years, and that’s certainly something which we are intensifying and we are — we do have, on a number of treaties, contractual rights to increase premium rates where the performance of the business is not satisfactory. This is something which we exercise on a routine basis where that is appropriate.

We work with clients and with — also with regular partners on other solutions, which helped the business perform better and that can take a variety of forms. And more generally, we have a very strong reserving level and the development of the reserves is helping us generate the level of profitability, which we have seen in the past quarters, which, as you said, is somewhat in excess of the increased guidance, which we have given at the 2021 Investor Day.

James Shuck

Has there been any release of the margin or the best estimate in the Life & Health re business in advance of IFRS 17?

Frieder Knupling

There was nothing unusual we have on our in-force portfolio as we’ve done in the past. We continue to build up new reserves on new business, which we are writing. So there wasn’t a particular one-off, no..

Operator

And our next question comes from Vikram Gandhi with Societe Generale.

Vikram Gandhi

It’s Vikram, SocGen. I hope you can hear me all right. Just a couple of quick ones. Firstly, the floods in Australia. I’m aware it’s quite a significant event for the industry. But if I look at the past 10, 12 years of history, I really do not recollect any where SCOR has had any notable exposure to Australian nat cats. So just curious why are we seeing such a large impact from Australia this year? That’s one.

The second question is, what’s the group’s level of comfort with respect to BI losses related to COVID? What are you seeing in the market in terms of the latest developments? And if I can squeeze in another one, the pullback from cat and agro lines versus the growth in Specialty and Global Lines. Can I just request your comments on how do you think a recessionary environment can impact the Specialty lines?

And finally, I’m a bit confused on the messaging around Casualty. Slide 14 seems to suggest there will be growth in Casualty as one of the later actions. Whereas Slide 87 talks of scaling back from some of the U.S. Casualty treaties. So any color there would be helpful.

Jean-Paul Conoscente

Thank you, Vikram. So with regards to the floods in Australia, we — these floods occurred in Queensland. We have particular exposure, I’d say, on a lower cat level to these types of events in Queensland. And it comes from some of the low cat layers that we wrote there as well as some of the proportional treaties we wrote there. That’s why the floods that are taking place in New South Wales, we expect to have less exposure because we have less exposure to low cat layers and less exposure on a proportional basis. That’s where the — our gross exposures are coming from for this particular event.

In terms of your second question with regards to BI and COVID losses, we still have some uncertainty on a limited number of contracts and disagreements, I’d say, with our clients of how to view the claims and how to aggregate them, what is the cause, what is the payroll. And we’re continuing discussions with them. I think the insurance companies themselves are gathering additional information. The claims settled by insurers is still ongoing and far from finished. So I’d say right now, we had some small increase on a gross basis. But I believe on a net basis, no net impact. And so we continue to feel comfortable with our estimates to this date.

Your third question relates to Specialty lines. I do — we do believe that Specialty lines will be impacted by recession, especially in an inflationary environment. The key question is how much will price reacts? Right now, we think a lot of the Specialty lines of business are adequately priced. We’ve seen year-on-year price increases slow down in those areas because we’re at a good rate adequacy level. The key question mark is, will rate increases pick up again to account for a deteriorating environment or not? I think if the answer is not, we’ll probably have to review our growth plans in those areas.

And to your last question on Casualty, we do believe, again, the rate adequacy on the Insurance side, but for a number of markets on the Casualty side is good. We have grown our Casualty book of business on the Specialty insurance side. On the Reinsurance side, especially for U.S. Casualty, we believe the reinsurance terms are still inadequate in terms of the expected returns to the reinsurers compared to the volatility. We’ve seen submission increases at the beginning of the year. At the July 1 renewal, we saw less of that, more stabilization of commissions and the growth in that segment will be really driven by what happens to reinsurance terms comes 1/1.

Vikram Gandhi

Okay. That’s really helpful.

Operator

And our next question comes from Don Mahani [ph] from BNP Paribas.

Unidentified Analyst

Just two, if that’s okay. I wonder if you could just give us a little bit more granularity on the Specialty exposure, both with where you’ve been growing into and also the look — how you think about the prospects looking forward. I mean you’ve described on the slide in the appendix, the Property Energy liability pieces. But I wonder if you could go down another layer and talk about where you see sort of the best rating yourselves and best opportunity.

Secondly, just on the sort of the 95% combined ratio, when I sort of strip out the drought, the molestation claims and the cat, I think I still get to above 95%. Is that sort of on plan for yourselves? Are you seeing sort of other sort of challenges in the quarter that maybe mean that you are still feeling very comfortable with the progress there? Or are there sort of headwinds that are impacting your glide path through to the sub-95?

Laurent Rousseau

Thank you for your question. So the — if I look at the July renewal, the lines of business where we’ve grown the most are in terms of Specialty where Credit and Surety, Marine & Engineering and IDI. For example, on the credit side, the — we see that segment as being really reactive to forward-looking economic scenarios, and we saw price increases on the Credit and Surety side of roughly 7% at the July.

Marine Energy, IDI are at decent rate adequacy levels. So the price increases were more around the 2% level. So that’s what we see. We saw good opportunities at this renewal. If you look at — through year-to-date, Marine Energy is an area where we’ve grown significantly this year. And IDI is another one where we grow significantly. Looking forward, again, we expect the Credit and Surety to be affected in terms of loss ratio by a negative market environment. We believe a lot of the insurers are already baking some of that into the rate projections and the rates they’re pushing through.

There’s been a lot of portfolio cleanup done during COVID. And we can see that through the very stellar performance that most of these portfolios have experienced in 2020 and ’21. So then it’s a question of reinsurance terms, and we expect reinsurance terms to improve going forward. And again, that’s how we were basing our projections. If these do not materialize, we’ll have to review our plan.

Jean-Paul Conoscente

In terms of Specialty insurance, the insurance of large corporates. So looking at Slide 89, the property rate increase are actually holding a bit better than we were expecting. We’re seeing rate increases of 8% in Property. In Energy, we’re seeing quite a lot of competition in the market. And so here, the rate increases are barely flat. There has been some loss activity on the market for Energy. So we think that it could potentially lead to a reversal of this trend for Energy rates. And actually, beyond the rates themselves, our focus is very much on the sums insured and making sure that they really reflect the claims inflation that we are seeing.

And also bearing in mind that in the claims that we see typically, say, in Property, there’s a property damage component that is sensitive to inflation. But there is also a business interruption component, which is more driven by other things like your tensions on supply chains rather than inflation per se.

Operator

And our next question comes from Freya Kong from Bank of America.

Freya Kong

Just a follow-up on the Life & Health business. There was a comment in your press release about more volatility on excess non-COVID death in the U.S. Is there any color you can offer on this? And what increase are you seeing here? And just on the agro business, you said you’re moving into nonproportional. Does that mean you’re moving from more primary business into reinsurance?

Frieder Knupling

I can take the first question. What we have seen repeatedly over the past quarters is that in periods in which we received a significant number of claims, which are labeled COVID, we also tend to see a somewhat higher number of claims, which are not labeled as such, but for which there is a fair likelihood that at least some of them in one way or the other related to COVID, be it because the death certificates are not precisely because the persons who have deceased have not been tested or be it because they have died in the period in which the health system has been strained.

Our definition of COVID claims is quite narrow. So what we report as such, only captures claims, which have been officially labeled as COVID claims. But we do see that correlation and that has become part of how we plan and anticipate performance on a quarterly basis as that trend has manifested itself over the past quarters. But we have — as I said, we have anticipated this. We are reserving for this and have got used to that.

Laurent Rousseau

On the agro question, just to clarify, Brazil is the only country where we actually have the whole chain of owning the MGA, having insurance carrier and being a reinsurer. In all other geographies, we act only as a reinsurer. So when we talk about nonproportional, I described before how we plan to reduce our exposures in Brazil on a net PML basis in the other territories. What we want to do is shift our portfolio from predominantly proportional today to more balance between proportional and nonproportional.

Operator

We will take our next question from Thomas Fossard with HSBC.

Thomas Fossard

Yes. Maybe a question for Frieder. Frieder, in 2021, I think that you had a lot of benefits from portfolio actions. And actually, I think it was for 2020 like you indicated that we should expect a much lower level on a comparative basis. Now if I’m looking where you stand year-to-date, seems to come through still very in a positive way. And Yes, you indicated a couple of items like repricing and things like that. But I was wondering how much of the €600 million reserves benefits from the Covéa deal. You have already used up. And is there any incentive for you to use up this reserve before moving into IFRS 17? That’s the first question.

The second question would be for — maybe for François on the investment side. Actually hearing from the U.S., there is some people saying that they could accelerate the exit of some of the fixed income portfolio realizing losses in order to get more exposure to higher interest rates and picking up the yield for the — they are signaling kind of acceleration in the turnover of their investment portfolio. Is it something that you’re thinking or you’re planning to do? That would be my 2 questions.

Laurent Rousseau

Frieder, do you want to start?

Frieder Knupling

So on the first question, at the Investor Day in September, we announced that we are increasing our run rate ex COVID, technical margin expectation from 7.2% to 7.4% up to 8.2% to 8.4%. And that was, to a large extent, driven by the fact that we had a stronger reserving position after the in-force virtual transaction of about 1 year ago. Beyond this — and that continues to be the case and is unchanged compared to September.

What we’ve seen in the past 2 quarters is that management action and portfolio management have added significantly to the performance of our book. And that is — as I said, that’s an activity which we continue to strengthen and focus on given the large size of the in-force portfolio. So I wouldn’t expect this to trend down. This is a continued focus activity, and we will maximize the financial benefit we can generate out of this, working closely with our partners and clients to reach favorable outcomes for everybody.

Jean-Paul Conoscente

On the investment side, maybe we could go to Slide 20 of the presentation. I think we have a big advantage. At SCOR, you know it, that’s the relatively short duration of our investment portfolio that is linked to the relatively short duration of all our liabilities. You see the pickup in the regular income yield already in Q1 and in Q2 with a reinvestment rate that has been almost double, as mentioned by Laurent in introduction, between the end of Q — of last year and the end of June this year. So if you look at the positioning of our portfolio, almost 40% of our portfolio is going to mature and mostly through the fixed income portfolio is going to mature over the next 24 months.

So that’s a deep conviction. Our portfolio, our investment — or regular investment income will increase faster compared to peers in such an environment. And if you take — we did the simulation, if you take — with current asset allocation and we maintain this asset allocation up to the end of 2025. Our regular investment income will increase from 2% to 3%, 3.5%. So if you take the middle of the range, it’s an increase of €300 million pretax from the investment portfolio that is expected in 2025, which is a massive pickup. So we won’t accelerate.

I mean the acceleration of this investment is already in place, given the positioning of the portfolio today. And keep in mind also that the unrealized losses that we’ve got on the fixed income portfolio, which are sizable today, are just unrealized losses, so which means that given the positioning of the portfolio, which is shocked, we won’t have any liquidity issue. So we can hold anti-maturity, those securities. And through the time effect, this amount of unrealized losses will evaporate over the next few years.

Operator

Ladies and gentlemen, this concludes today’s question-and-answer session. At this time, I would like to hand the call back to speakers for any additional or closing remarks. Thank you.

Ian Kelly

Thanks very much for attending the call. I’ll just hand across to Laurent.

Laurent Rousseau

Thank you, Ian. Thank you for all of your questions. I think if I recap some of the key points that were — that came up in the call, I’ll start with the one actually the very last one from François on the benefits to be expected from investment return in the next few years and has already started. So just as another area of questions which we got today, how quickly do we see the benefits of the P&C reshaping into the PML? I think the benefits of the investment portfolio reshaping in the PML is going to be progressive, but it’s going to be meaningful, both of them.

My third point, so interest rates is going to be positive. P&C is going to be positive over time. The third point is indeed the current state, the current change in macroeconomic environment and assumptions clearly bring some questions. We’re addressing them very hands on. The reserving process that we’ve alluded to, I think, is a standard one. There’s nothing else to be seen in there. There’s going to be and we have been seeing some buffers and areas of conservativeness, which we’re going to use as we always have. And for sure, some areas of the portfolio will show some deterioration. I think this is a normal course of business, and this is a normal dynamics in our industry.

So we have showed you, I think, today, the actions we take. We have showed you very candidly the areas of pain and the areas of benefits that we’re seeing forward, and you can expect from us this continued transparency. On this, I’d like to thank you for all of the questions today and look forward to our next call. Thank you.

Ian Kelly

Thanks, Laurent. And the reminder that, that call for the Q3 results will be held on November 9, at which point we’ll also reveal the new strategic plan for the group. Thanks very much. Good afternoon.

Operator

This concludes today’s call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.



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