Settling the Scor

Settling the Scor

Four years ago, France's only remaining non-state reinsurer was in deep trouble. In an industry where rating agencies' opinions have become all powerful, Scor was out of favour and out of luck. Losses from the company's US division led to a net loss of E455m ($668m) for 2002, and its Standard and Poor's (S&P) rating was slashed to BBB+ from A– in July 2003.

But the vulnerable company that Denis Kessler took control of in late-2002 is hardly recognisable in the company that completed its second large acquisition in as many years in August 2007 and proudly launched its new expanded look with a flamboyant publicity campaign at the Monte Carlo Rendez-Vous.

Scor has had a remarkable year, providing drama to an industry enjoying record profits by launching an aggressive bid for fellow downgrade survivor Converium in February.

The acquisition is the crowning achievement for Kessler, who replaced ousted CEO Jacques Blondeau in November 2002, and has pursued a vigorous campaign to get the company back on track.

A man with a plan

In his unfussy office in Paris's La Defense business district, Kessler stresses time and again the importance of planning and consistency in his approach. Fifteen days after Kessler took over at Scor the company issued its first recovery plan, Back on Track, and two years later it issued a second plan, Moving Forward. Kessler says issuing and then delivering on those plans as promised was essential to the company's recovery.

"We've done everything we said we would do in the past five years," he says. This includes recapitalising the group, restructuring, and creating two subsidiaries to improve clarity – Scor Global P&C and Scor Global Life, "When you look back and say: what did we do? We followed our plans," says Kessler.

Scor's recovery is evident in its results. In 2002 the company reported a net loss of E455m. For the first nine months of 2007 Scor reported net income of Eu299m, a 93% increase on the E155m reported in the first nine months of 2006.

Thanks partly to Scor's acquisition strategy – including the acquisition of German life reinsurer Revios in 2006 and mainly non-life reinsurer Converium in 2007 – gross written premiums have risen steadily too. Gross written premiums for the group totalled E5bn in 2002, but had fallen to a low of E2.4bn by 2005. By the end of 2006 they were back up to almost E3bn. And in the first nine months of 2007 gross written premiums already totalled E3.38bn, a 62% increase on the same period in 2006. Scor expects to have annual turnover in 2007 of about E6bn proforma.

Kessler says Scor kept more than 90% of its clients through the crisis – proof of the strength of the Scor brand. "We have demonstrated the importance of the franchise of the group," says Kessler. "To survive with a triple-B rating means that the clients trusted Scor, because they would have had plenty of opportunities to shift the business to groups that are better rated. People trusted us, and as soon as we were upgraded the premium income has been going up."

Michael Zboron, senior analyst at rating agency AM Best, says Kessler appears to have the support and trust of shareholders, and has been instrumental in the group's recovery. "He was obviously one of the drivers changing the organisation. He was very successful in raising money when it was needed – he went to shareholders twice for more money. And the support from the French market was there as well," he says.

Neil Manser, equity analyst at Fox-Pitt Kelton, adds that Scor's Asian clients were also loyal. "A lot of the groups' business has proved to be quite sticky following the group's credit rating downgrade. This has not just been the case in France, but with the Asian business as well," he says.

For Kessler, the reason clients stuck with Scor is clear. "We are in for the long term. We strive to be a long-term partner our clients. We are committed, so our clients are willing to share our developments," he says. "Another very important aspect of a franchise is to be rooted in the markets that you operate in. If you have an intimate knowledge of the markets where you operate, it helps the franchise because your clients know you are heavily dedicated to the market. And we are dedicated to all our markets."

Getting a balance

Part of the recovery plan for Kessler was to balance Scor's life and non-life operations. In July 2006 it bought life reinsurer Revios. The consensus among analysts was that the acquisition was a masterstroke. Revios, the former life reinsurance business of German reinsurer Gerling Global Re, was snapped up for a bargain price of E605m.

"To this day I'm perplexed as to how Scor managed to get Revios so cheap," says Tim Dawson, equity analyst for Swiss investment bank Helvea. "Perhaps it was to stop the company falling into less welcoming hands, but it was a good deal. And it suddenly turned Scor from an also-ran to a serious player in life reinsurance."

Kessler says the acquisition meant the group reached what he refers to as the critical size in life reinsurance. Now Scor's non-life business needed to be addressed.

In February, Scor made an offer for Converium, shortly before the Swiss reinsurer won a hard-fought upgrade to the A-range from AM Best and S&P. After bitter and protracted negotiations Converium shareholders accepted Scor's offer of 0.5 Scor shares and SFr5.5 ($4.9) in cash for each Converium share in May. By September Scor owned more than 97% of the Swiss company.

Kessler says there are four basic reasons for the acquisition. "Critical size is a key term for me, because if you don't have the critical size you are not likely to have the optimal risk diversification and market power and expertise necessary. We want to be a global company and to do this you need the critical size. Two years ago we did not have it either in life or in non-life."

The two acquisitions have changed that, with Converium bulking up the non-life portfolio.

"The main rationale was to reach the critical size given the importance of the worldwide market today, but also, given that the primary market is consolidating and large corporations are consolidating, the relative size of clients and their reinsurers was unbalanced. So it's a necessary readjustment."

A second reason Converium appealed is that Scor would have been hard pressed to buy a stronger company. "We are an A- company, and it is difficult to merge with much-better rated companies," says Kessler. "The rating plays such an important role for capital adequacy, for the client and for the financial market. Revios was A- and Scor was A-, and Converium was BBB+ at the time we launched the offer, but it was A- two weeks afterwards."

The third reason Kessler cites is the companies' shared struggle for survival. Converium was also downgraded as a result of bad underwriting results from its US business in 2004, and with then-CEO Inga Beale at the helm, fought to regain its A-range rating, which it did early in 2007.

"Converium and Scor had to fight to get their ratings back, they had to keep their clients, they had to readjust their premium income, they had to solve various issues – so we had a common history," says Kessler.

Lastly, Kessler says Converium's business was complementary to Scor's aims. "We have complementary clients and expertise, they have business lines that we don't practice, they have clients in markets where we don't operate, and so we considered that there were lots of complementarities," he says.

He adds: "Those are four strong reasons. And shareholders have perceived the rationale for the merger, because at the end of the offer we had 96.4%, and we are now above 98%. The shareholders will have massively supported the offer – Scor's shareholders by approving the rights issue, and Converium shareholders by tendering their shares."



In particular Scor was looking to expand its agricultural lines, in which Converium has an excellent reputation. It is likely the company was also attracted by the Swiss reinsurer's relationships with large UK-based clients Global Aerospace Underwriting Managers and the Medical Defence Union (MDU). On top of that, the two companies are, according to analysts, surprisingly geographically complementary in Europe.

Optimism or good planning?

Buying and integrating a company like Converium is not without its risks. But in an industry where big acquisitions have often caused more harm then good, the Scor/Converium tie-up appears, so far, on track.

"It was a relatively big acquisition so the integration always takes a while before everything is finalised, but it appears to have gone relatively smoothly so far," says Zboron at AM Best.

In its Dynamic Lift: Version 2 plan, published to coincide with the launch of the new-look Scor at Monte Carlo, Scor announced that it expected real attrition to be about E200m and expected to book premium income for the combined property/casualty of about E3.3bn for 2007. "Taking into account all the effects, this means a stable premium income for this year," said Kessler at a press conference in Monte Carlo.

The company reiterated in its third-quarter results release that underwriting teams are in place and underwriting plans for 2008 firmly established.

Kessler is less boisterous than he was then, conceding that market conditions are not great – but he still sounds confident.

"What we say today, compared with what we said earlier, is that we are rather optimistic about the renewals, because the feedback from clients is positive after discussions and negotiations," he says. "Having said that, it's true there are some pressures on prices and rates. The only question that I consider relevant is: under today's conditions, are you able to renew the size of business that you would like in order to satisfy your profitability criteria? In this regard we are positive because we consider that we can book profitable business under today's market conditions with a satisfying volume of activity."

Kessler gives the example of the French terrorism pool Gareat. "Converium had a share of Gareat and Scor had a share of Gareat, and there was an open bid on the Converium share. We are going to have the same share as last year. There are declining rates because we have had almost no terrorist events, very fortunately. But it's a positive sign of trust and confidence in Scor – we are considered a strong security," he says.

Scor has been tight-lipped about the important Converium contracts with Global Underwriters and MDU, but Fabian Dupree, analyst at AM Best, says the sign are positive there too. "Regarding MDU they are at the final stage of negotiations and they seem pretty optimistic about signing a 10-year contract, so that is going quite smoothly," he says. "On Global Underwriters they are also aiming to secure a multi-year contract. This is an important part of Converium's business."

One reason the combined entity will not leak too much business, says Kessler, is that the combined share rarely exceeds the psychological barrier for buyers reluctant to place too much risk with one carrier. But he is also careful to stress that market conditions, and in particular the dramatic slide in the strength of the dollar, could mean results differ from the forecasts at renewals.

"We say 3% attrition on a combined book, but we must take into consideration that the dollar has slipped again by seven to eight percent since September 2007. The Scor group books around 50% of its premium income in dollars and that has a very big direct effect," he says.



And many analysts are still sceptical that the merger is going quite as well as Scor insists. But Manser says Scor seems relaxed about the intergrations. He says the firm has made detailed calculations on the pro-forma portfolio. "It does feel like they've gone through both portfolios and highlighted where there is overlap or attrition due to pricing – this adds up to around E200m. The group is saying that once it has got through the year it should have a relatively unchanged pro-forma premium base," he says.

A global approach

Since August, when the offer was finalised, Kessler has taken steps that may have helped to minimise bad feeling at Converium and ease the integration. In particular, Kessler appointed Converium people to key positions at Scor. Paulo de Martin, Converium's CFO, was appointed CFO of Scor in September. Marcus Circelli, head of investor relations at Converium, was appointed head of investor relations, rating agencies and capital management for Scor a month later. And Benjamin Gentsch, previously CEO of Converium Zurich, was made CEO of Scor Switzerland and appointed to the Scor executive committee.

"I think that was a very smart move, especially to get De Martin and Circelli on board, who were both pretty vocal beforehand in defending Converium," says Zboron.

Kessler says his aim is to make Scor a top global reinsurer, and he is taking no prisoners along the way.

"In today's world, if you want to be global, you cannot be French, or Bermudian, or US – it's not possible," he says. "It's a contradiction to say: 'It's a global company, but I only trust people of my nationality.' It doesn't work anymore, so with both Revios and Converium it was clear we had to mix the team. So it's consistent with my view – I try to follow the John Kennedy principle of picking out The Best and Brightest."

Kessler stresses time and again that Scor is no longer a French company. Although Scor might have been saved by the French market, Kessler is aware that for the company to continue to perform in the future, it must look beyond France's borders.

"We are not primarily a French company, we are a Societas Europaea and this is a move we made for consistency. We decided to adopt, for all companies in the group, not only the holding, but also the operating companies, Scor Global P&C and Scor Global Life, the status of Societas Europaea, which is proof of what we want to achieve," he says.

He adds: "We also implemented what we call a hub company, with people working in different places but having worldwide responsibilities. So it's not a centre with subsidiaries all around the world, it's a new design where we have excellent teams in Cologne, Zurich, Paris, London, Singapore and New York and so on, but they have both regional and worldwide responsibilities. They don't need to work in the same place, speaking the same language, with the same nationality and background. We are diverse and multicultural – the team in Spain is Spanish, the team in Italy is Italian, the team in Singapore is Singaporean or Chinese and in Canada is Canadian. We have almost nowhere expatriates. My board is international. It's proof of a vision – we have to create a global company and prove it in every decision.



"We want to be a multi-line, multi-market company, with a balance between life and non-life, and also a very strong European base – what we call European roots, global reach," says Kessler.

About two-thirds of the group's income comes from Europe, about 22% from the Americas, and the remainder from the rest of the world. There are no plans to materially increase the amount of business written in the US, even though some analysts are concerned that Scor has a lot of European property-catastrophe liabilities.

The third plan issued since Kessler became CEO, Dynamic Lift, is a central part of his vision. It sets ambitious targets for the company up to 2010. The targets include delivering a return on equity (ROE) of 9 percentage points above the risk-free rate over the cycle, an upgrade to A+ financial strength rating by 2010, and an active dividend policy and double-digit earnings per share (EPS).

Central to achieving those targets are assumptions about the company's performance, including gross written premium growth of 6.6% a year between 2007 and 2010. Some analysts are concerned that those predictions for growth are unrealistic, given rising retentions, and worrying given softening rates.

"They are helped by the fact that both Scor and Converium still have a bit of positive momentum from their respective rating changes, but it will be a challenge for them to keep expanding the business," says Dawson at Helvea. "They still have a programme to grow the business and at this stage in the cycle that's a bit risky."

Manser adds: "On the surface the growth figures look optimistic. The group does have some interesting areas to focus on, but it is one of the few reinsurers actively growing given the current pricing pressures."

Kessler rules out more acquisitions as a source of growth. "We have reached the critical size now, so there is no question now of being forced or led to acquire another company. But we will of course seize the opportunity to consolidate our position in certain specialty lines, for certain areas of the world. But those are minor and specific operations – like ReMark . But today we are not pursuing a large acquisition."

Instead Scor sees many areas for potential growth worldwide. "We believe there is still room for positive development in life and non-life. I don't share the view that the reinsurance market is just going to decrease. I see in the world lots of pockets of growth, and we have to be there. There are mature markets that are slowly increasing and we know that, but there are lots of markets that are booming."

He singles out Asia, where Scor already has a strong franchise, as having particular potential. "What we want to do now is consolidate a position in Asia. That's very important for us because we have been a long-term player in Asia. We have the chance to have a license in China, so we have strong ambitions there. We are also very active in India and have a team that is very successful there. We want to reinforce our presence in Thailand and south-east Asia, and we are also going to reactivate Scor in Australia and South Africa," he says.

Kessler adds ex-Soviet Union countries and the Middle East are two other areas where Scor plans to pick up business. "Scor is very well positioned in Russia, Georgia, Ukraine, Kazakhstan, Armenia – and no one knows that. That's small volumes, but it's growing. Those markets are booming," he says.

He adds: "The rate of growth in the Gulf States is also very impressive, and Scor has a historically very strong position in the Middle East."

Scor also plans to expand in selected specialist lines such as agriculture and takaful, and predicts good growth for the life side of its business.

Thinking positive

However, one thing Kessler feels passionately about is that the industry is strong, and needs to project a positive message. He feels there are plenty of opportunities for reinsurers.

"I'm surprised by the fact that too many people in the reinsurance world have a pessimistic view of the industry. We have opportunities to develop new products, to innovate, to tap new pockets of growth either geographically or by business lines. We have pressures on rates and prices. OK, it's our job to react and do our best. I see the future as challenging, but I'm not pessimistic. The problem is that part of the pessimism that observers of the reinsurance market express is reflected in the share prices," he says.

"I read financial analysts say reinsurance is out of favour and that explains the pressures on the share price. But we bear part of the responsibility for that. We have to repeat and explain to the markets and shareholders that we can make money, that we can book profitable business, that we can handle the new challenges and that we can help growing insurance markets. We might be temporarily out of favour, but we have to show that it is a great industry, and that we can do all these things."

Kessler has a strong vision for Scor. But some ask how the company will cope with the competition in Europe. Bermudian firms are flocking into the continent to see if they can squeeze in for a slice of business.

Says Dawson at Helvea: "My question would be: given the number of A-range reinsurers about, what is their particular proposition to reinsurance buyers to mark them out from the Bermuda capital and others?"

But Kessler believes his company stands out as a long-term player in a market where buyers value commitment and many doubt the stamina of Bermudian capital. "They don't do what I do. They come to Europe and open branches and, fine, it's competition. But my proposition is this: I've been around for years, so we have a vision that is a long-lasting commitment to the market. And there are still many clients that wonder if the companies that just start to operate in Europe will be there in 10 or 15 years from now. One example is life reinsurance. Look at the life market today, the five leading life reinsurance companies are the oldest," he says.

"We have a specific model. We believe in reinsurance, we have no banks in the group, we have no financial subsidiaries in the group, we have no direct insurance companies. We are a classical reinsurer, we believe in franchise – that's why we are heavily invested in Europe and Asia – and we believe in medium-to-long-term partnerships with our clients. Those are our specificities."

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