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Michèle Lacroix : “SCOR has strengthened its teams to invest more heavily in bank loans”

According to Michèle Lacroix, Head of Group Investment Office at SCOR, for several years, equity exposure has been strongly reduced in the group investment portfolio in contrast to its bank loan exposure...

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Next-Finance: What was the impact of Solvency II on your activity? Did you need to recruit?

Michèle Lacroix: SCOR has supported Solvency II from the start. This is a change we have been anticipating for more than ten years, notably by recruiting dedicated teams (for example for independent validation of the internal model).

Do you use an internal model or a standard model?

SCOR uses an internal model that was approved by its supervisory authorities in November 2015, i.e. before the new regime even came into force.
This model has been developed over the last ten years, drawing on the skills, expertise and experience of the Group’s teams.

The internal model accurately reflects SCOR’s risk profile and strategy. It is a stochastic model based on high-level scientific foundations, and uses sophisticated methodologies to model the dependencies between risks. It is comprehensive and holistic and covers all risks to which the Group is exposed, including Life and P&C reinsurance, investment portfolio and operational risks. SCOR uses its internal model to manage risks, allocate capital, manage its solvency, and make strategic decisions for the Group. It is also used in many other areas such as strategic planning, the capital protection policy, and the pricing and allocation of our assets.

SCOR uses its internal model to manage risks, allocate capital, manage its solvency, and make strategic decisions for the Group...
Michèle Lacroix, Head of Group Investment Office, SCOR

What is the impact of Solvency II on your allocation? What about the proportion of fixed income in your portfolio?

Under each of its strategic plans, SCOR allocates its capital to its differententities: Life, P&C and Investments. SCOR’s strategy is capital-driven. Regarding investments, SCOR’s objective is to remunerate the capital allocated by the Group to financial asset risks. When defining its investment strategy, SCOR takes into account the Group’srisk appetite, market conditions and the duration of its liabilities as part of its asset/liability management. SCOR also analyzes the impact of its investment decisions with regard to rating agencies and regulators.

As is the case for most (re)insurers, SCOR’s asset portfolio is predominantly composed of fixed income investments(78%). Of these, however, a larger share is allocated to corporate bonds, which account for 38% of the portfolio, compared to 27% for government bonds. Given the accounting treatment on the one hand, and the capital charge on the other, SCOR has been significantly reducingthe share of equities in its investment portfoliofor a number of years, bringing this down to2% as at30 September 2016.Conversely, the Group has focused on bank loans (4%), due to their more attractive risk/return profile.

Do you use hedging strategies for your portfolios via derivatives?

SCOR does not use derivative strategies or hedging strategies to optimize its solvency ratio. Its internal model is calibrated to reflect as closely as possible the risks linked to its portfolio positioning.

Debt funds, infrastructure debt and real estate are treated pretty well by Solvency II. Have you increased your outstanding assets for these asset classes?

Since 2010, SCOR has strengthened its teams to invest more heavily in bank loans, most of which are European. SCOR’s strategy is to invest in senior syndicated loans granted by a group of banks.

SCOR’s investment is divided between corporate loans (Libor/Euribor + 450-500 bps), real estate loans (Libor/Euribor + 200-300 bps) and infrastructure loans (Libor/Euribor + 180-200 bps).

Thanks to the guarantees and covenants attached to them, debt transactions benefit from a favorable capital charge in SCOR’s internal model. The risk-return ratio is therefore favorable for this asset class. SCOR has thus gradually increased its share of these loans to reach 4 % of the portfolio at the end of September 2016. SCOR plans to increase its exposure to this asset class over the course of the "Vision in Action" plan.

SCOR has gradually increased its share of bank loans to reach 4 % of the portfolio at the end of September 2016. SCOR plans to increase its exposure to this asset over the course of the "Vision in Action" plan...
Michèle Lacroix, Head of Group Investment Office, SCOR

Liquidity risk relatingto investment in debt products is managed through the Group’s ALM analysis, in accordance with the requirements and duration of the liabilities. SCOR maintains a high level of liquid assets to cover the technical reserves and the uncertainties of the business, without having to liquidate the less liquid assets held in the portfolio.

In addition SCOR Investment Partners, the asset management company of the Group, has opened a number of loan funds to third-party investors.

What needs to be developed with regard to Solvency II?

The Solvency II regime represents a real improvement over the previous supervisory regime as it is based on an economic approach that encourages better risk management. Thus, the level of regulatory capital requirements is commensurate with the risks to which insurers and reinsurers are exposed, depending on the activities in which they engage and their ability to reduce these risks, for example by diversifying their activities or by reinsuring themselves. In particular, it is possible to use internal models for the measurement of regulatory capital, subject of course to obtaining the approval of the supervisors after a very demanding process.

Of course, any regime can be improved, but the sector has already had to adapt to many regulatory changes in recent years…

Paul Monthe , RF , December 2016

Article also available in : English EN | français FR

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