SZCRF - SCOR SE (SZCRF) Q2 2023 Earnings Call Transcript
2023-07-28 15:00:10 ET
SCOR SE (SZCRF)
Q2 2023 Results Conference Call
July 27, 2023 08:00 AM ET
Company Participants
Yves Cormier - Head, Investor Relations
Thierry Leger - Chief Executive Officer
Francois de Varenne - Chief Financial Officer
Romain Launay - Deputy CEO of SCOR Global P&C and CEO of Specialty Insurance
Jean-Paul Conoscente-Jacopin - Chief Executive Officer of SCOR Property & Casualty
Conference Call Participants
Will Hardcastle - UBS
Freya Kong - Bank of America
Andrew Ritchie - Autonomous
James Shuck - Citi
Tryfonas Spyrou - Berenberg
Derald Goh - RBC
Kamran Hossain - JPMorgan
Ashik Mussadi - Morgan Stanley
Thomas Fossard - HSBC
Vinit Malhotra - Mediobanca
Darius Satkauskas - KBW
Presentation
Operator
Good afternoon, ladies and gentlemen, and welcome to the SCOR Group Q2 2023 Results Conference Call. Today's call is being recorded. [Operator Instructions].
At this time, I would now like to hand the call over to Mr. Yves Cormier. Please go ahead, sir.
Yves Cormier
Good afternoon, and welcome to the SCOR Q2 2023 results. My name is Yves Cormier, Head of Investor Relations, and I'm joined on the call today by Thierry Leger, CEO of SCOR as well as the entire Executive Committee.
And I please ask you to consider the disclaimer on Page 2 of the presentation. I would now like to hand over to Thierry Leger. Thierry, over to you.
Thierry Leger
Thank you, Yves. Good afternoon, and welcome, everyone. The first half year of 2023 has been marked by many climate events across the world, riots in France, heat waves, wildfires, rising interest rates and the continuation of the war in the Ukraine. In this environment, SCOR has been faring very well.
Actually, with a net profit of €500 million for the first half year, we have set a new record for the group. I view this as a significant step following the improvements on the underwriting side of our P&C business over the last 18 months. It is also a testimony to our well-diversified business model across Life & Health, E&C and Investments.
Looking at the half year 2023 results, I'm pleased with the outcome. The net profit of €500 million, the return on equity of 23.2%, and the growth in economic value are all very strong. Also the Solvency II ratio with 213% is at the upper end of our optimal solvency range. More in detail, first half 2023, results. Net income is supported by positive results across all the activities. The combined ratio, Life and Health service results and the regular income yields are in line with the targets and assumptions provided in April 2023.
I'm satisfied with our Q2 results, which translates into €192 million net income for the quarter. Performance across all 3 business lines is positive despite some challenges in P&C. For Life & Health, we see opportunities and the business continues to grow profitably and generates a strong insurance results. The P&C performance was impacted by higher man-made activity and more prudence in our reserves. There were several small to midsized events, and riots is the most obvious one, but there are also a couple of losses from industrial risks. After the repositioning achieved by the team in 2022 and early 2023, I continue to monitor closely the performance of our portfolios. For investments, the group continues to benefit from high reinvestment rates and report a strong increase of the regular income yield.
On the renewal side, we are determined to benefit from the supportive market to maximize value creation, net profit and return on capital deployed. We continue to build on our 4 major strengths: our global franchise, our skilled and committed employees, a resilient balance sheet and our [indiscernible] with sustainability at its core. The outcome of our June-July renewals testifies for it. After the remediation of our portfolio in January, we are starting off a better diversified portfolio. We can take full advantage now of the positive phase of the P&C reinsurance cycle. In this context, we are confident that we can grow our economic value further, and we will continue to work hard on delivering on our 2023 financial targets. Francois, over to you.
Francois de Varenne
Thank you very much, Thierry, and good afternoon, everyone. I'm pleased to present these Q2 results as the new CFO of the group. Unless mention, I will focus today on quarterly figures and not year-to-date figures. As in Q1, key highlights of the quarter are summarized in the first slide of the section. The net income of the group is satisfactory over the quarter at €192 million and contributing to a strong net income for the first half of the year of €502 million. This translates into a return on equity of 16.9% for the quarter and 23.2% for H1.
The group insurance revenue stands at €3.9 billion. The new business, CSM, at €367 million, benefits from the strong underwriting performance of the period, including April and June renewals. The performance of the second quarter is driven by positive results coming from our 3 business lines, and continues to demonstrate the complementarity of our core activities.
Let's now move to the details of the performance of the 3 business lines over the quarter. I will start with P&C. P&C continues to benefit from favorable market conditions, both in pricing and terms and conditions. As a result, the new business CSM stands at €271 million in Q2 benefiting from a strong pricing at the April and June 2023 renewals.
Looking at the P&C insurance revenue, it stands at €1.9 billion, which represents an increase of 7.9% compared to Q2 2022 at constant exchange rate. As noted in Q1, this growth is primarily reflecting prior year volumes as insurance revenue is on an earned basis.
We continue to allocate more capital to Specialty Insurance based on attractive returns of sales, which continued to grow, increasing by 18% at constant exchange rates, representing 33% of P&C over all insurance revenue today. The combined ratio stands at 88.5%. It benefits from a Cat ratio of 4.2% in the quarter. However, the P&C technical performance is impacted by a high attritional ratio of 85.6%. I would like to draw your attention on the fact that this quarter, we added some prudence to selected existing P&C reserves. This is a deliberate change in approach to build conservatism in our P&C reserves that Thierry and I want to signal today.
The P&C insurance service results stands at €186 million, driven by a CSM amortization of €322 million, partially offset by the negative experience variance mostly explained by the high attritional this quarter. We disclosed this quarter the discount effect on the combined ratio, it stands at minus 6.9 points in Q2, stable to Q1, as you can see in the appendix. Overall, we consider this attritional too high and we are not satisfied by our P&C performance, but we are confident that remediation action taken in 2022 and early 2023 and favorable market conditions will help us to continue to improve our technical profitability.
Let's now move to Life Finance. The business continued to grow profitably and generate a strong insurance results. We continue to build our Life & Health CSM through new business generation, mostly from protection. The new business CSM stands at €96 million in Q2. Life & Health Insurance Service results amounts to €140 million, supported by a strong CSM amortization of €117 million and risk adjustment release of €40 million. Experience variance stands at €13 million, including a technical reclassification from experience variance in Q1 to [indiscernible] contract. Overall, the performance of the Life & Health business is strong in Q2. After looking at P&C and Life & Health, let's turn to investments.
The key message here is the confirmation of the regular income yield improvement, thanks to higher reinvestment rates and a relatively short positioning of our high-quality fixed income portfolio, which has an average rating of A+ and the duration of 3.2 years. Total investment income on invested assets stands at €162 million, and the regular income yield at 3.1% versus 2.9% last quarter. As a reminder, total investment income is not included into the insurance service results and common top. The reinvestment rate stands at 5.1% at the end of June compared to 4.6% in Q1. The invested asset portfolio remains highly liquid and financial cash flows of €9 billion are expected over the next 24 months, enabling SCOR to benefit faster from higher investment rate. Our liquidity position is strong with €2 billion of cash and short-term investments.
Let's now move to our 2 financial and solvency targets. I will look at this on a year-to-date basis, as they are our targets for the full year 2023. In H1, the economic value is up 8.7% at constant economics. The economic value growth is notably driven by the strong shareholders' equity growth of 15.7%, which contributes to consolidating SCOR's group at capital. The economic value stands at €52 per share compared to €50 at the end of 2022. Please note that both the net income and economic value capture a €47 million pretax impact related to the option on own shares only to score over H1.
Moving now to the solvency target. The solvency ratio stands at 213% towards the upper end of the optimal range defined by the group. Three main drivers impact our solvency ratio during the first 6 months of the year. The increase in Solvency II own funds consistent with the increase in IFRS 17 economic value the SCR increase driven by new business in Life & Health and P&C, especially in Q1, and of course, the dividend accrual of €1.8 per share for the first 6 months of 2023. As usual, there are more details in the appendices, and we'll have a Q&A session to address your question.
With that, I will hand over to Thierry.
Thierry Leger
Thank you, Francois. Before we move to Q&A, let me summarize. The €500 million net profit for the first half is a testimony to both the strength of SCOR's business model and the complementarity of our core activities. Our efforts continue to pay off, and we will continue to work to deliver on our targets. I'm confident in the group's ability to take full advantage of the current market conditions. I look forward to presenting SCOR's strategic plan, 2326 on the seventh of September 2023 on the back of the first was a strong first half year. Our clear focus is to take full advantage of SCOR's strong franchise and technical expertise. The market environment is positive right now for all business units, P&C, Life & Health and Investments with some of the best conditions we have seen in decades. The teams, the Executive Committee and I are all looking in the same direction forward. And we are ready to seize the opportunities ahead.
Thanks for your attention. Let's now move to Q&A. Yves, over to you.
Yves Cormier
Thank you very much, Thierry. On Page 20, you will find the forthcoming scheduled events. With that, we can now move to the Q&A session. [Operator Instructions].
Question-and-Answer Session
Operator
[Operator Instructions] We do have our first question, comes from Will Hardcastle with UBS.
Will Hardcastle
First of all, I guess, the attritional noise, some of it is perhaps manmade excess and some of it is because of the added prudency in the reserves. If there's any way to disaggregate that, quantify those factors? That would be helpful. And I guess on those man-made excesses, Thierry, are you putting it down to -- that's just quarterly volatility and a bit of bad luck? Or would this be a signal that there's more remediation to do on those?
And the second one is, if I was to look at it more positively, it looks like effectively you've recycled that investment gain from the call option that would have created excess profits into reserves to help future profitability as such. Would you agree with that comment? And if so, where are you looking to build that excess reserve level up to? Obviously, I'm not expecting for numbers, but any sort of high-level overview to where you'd like to build it too.
Francois de Varenne
I will take the two questions. So maybe I will give you more flavor on our P&C combined ratio. And as you mentioned, the split of the contribution to this combined ratio. So as we mentioned in the introduction, the common ratio is benefiting this quarter from a strong Cat ratio of 4.2%. As I mentioned, so please note also that in Q1 -- compared to Q1, we published now the discounting effect within the combined ratio. You have it for Q2 on Slide 11 and on Slide 41 for Q1. So if you exclude the discounting effect and if you just compare the attritional between Q1 and the attritional of Q2, we have close to 9 points of difference in Q2. And we can explain this difference by 3 buckets. The first bucket, we were impacted by man-made developments and particularly claim reserves on the French riots. French riots, they started the 27th of June. So we took the estimate of market insured losses published 2 weeks ago by Francis [indiscernible]. On top of which, and Francis [indiscernible] the French federation of insurance companies. And on top of this market insured losses of €650 million, we added a material prudent buffer to insured losses. We took the full hit in Q2 on this event, and it amounts to a pretax amount of €40 million, which corresponds to 2.5 points of the combined ratio in Q2. So that's the first bucket.
The second bucket, we have a few large industrial losses as well as some claims in agriculture in Brazil. coming from the previous underwriting year, so which means before remediation action that we took on this particular portfolio. So the second bucket accounts for 3.5 points of the combined ratio this quarter. The rest include the prudence, I mentioned, added to our P&C reserves and other, I would say, some other technical or smaller items. So as I mentioned, as mentioned by Thierry, we are not satisfied by this attritional level. But we are really confident that the recent remediation action and favorable market condition will help us to improve the performance. On your second question, do we recycle the €45 million mark-to-market positive impact on the option on own shares that we've got. This is not my message. What we want to do this quarter with Thierry is to send a signal.
So this is a deliberate change in approach to build conservatism into our P&C reserves. We have indeed taken a prudent approach as we update our reserving position on particular exposures. There is, I would say, no particular deterioration in relation to prior events, except the 1 mentioned on agriculture. However, we have reviewed experience and made appropriate actual adjustments where necessary.
So to conclude on this point, I insist, this is not a catch-up on claims. This is not a catch-up on inflation. This has nothing to do with our normal annual review process, which will take place in Q4.
Yves Cormier
Thank you. Can we move to the next question, please?
Operator
Our next question comes from Freya Kong with Bank of America.
Freya Kong
Maybe just a follow-up on the increased prudence in P&C that you've taken. Is this a one-off for the quarter? Or should we extrapolate the sort of 3-point build for the rest of the year? And if so, what would your updated guidance be? Is it still 87% at a headline level for combined ratio? Secondly, could you help me understand the Solvency II walk from Q1 of 219% to 213% in Q2. You've had positive earnings contribution. And based on your sensitivities, you should have had positive contributions from markets in the quarter. I'm struggling to understand the difference here at around 10 points versus consensus.
Francois de Varenne
Thank you, Freya. I will take also the 2 questions. So the first 1 on the prudence and the combined ratio, so we maintain for the full year of 2023, all the April assumptions. So we maintain in particular a 97% combined ratio for the full year 2023. The signal that we sent this quarter, you should expect to see it regularly in the future. There is no specific budget predetermined in advance, but that's something that you should see more often in the future, I would say, compared to the past.
Your second question on the solvency ratio. I think to understand what is happening on the solvency ratio, it's important to look at the 2 components of the solvency ratio. So the SCR on 1 hand and the owned funds, on the other hand. The way we look at it, SCR and owned funds increased in Q1. So the ratio -- the solvency ratio was at 213% at the end of 2022. It increased in Q1 under the effect of both increase of SCR and owned funds to 219% at the end of Q1. Then in Q2, the SCR was flat, while the owned funds have decreased, leading to a decrease to the ratio back to the 213% level of 2022.
So how to explain this decrease of the owned funds, the owned funds, if you look at the slide, have decreased by €274 million in Q2. And the key movement to explain this variation that's basically coming from 3 items. The first one is that the accrual of the dividend that we see under Solvency II, and I mentioned that we accrued for €1.8 per share. The second one, we have a negative economic impact. It came mostly from the inversion of the yield curve, which is not covered by our ALM strategy, which is today based on duration matching, and that will be an area of improvement in the future to reinforce our ALM strategy on this specific point.
The level and the third item explaining the decrease of the owned funds, that's the level of capital generation, which was lower than expected for both Life & Health and P&C. In Life & Health, this is consistent with the low new business CSM and that we observed in Q2. And in P&C, this is really consistent and fully aligned with the negative expense variance that you see under IFRS 17.
We have also some changes in operating assumption, mostly for Life & Health are less impactful under Solvency II, but they are similar to the ones that you see under IFRS 17. Overall, what we can say is that you see there is a strong alignment or strong correlation between the movement in the owned funds and what we observed under IFRS 17 for the economic value.
Yves Cormier
Can we move to our next question please?
Operator
Our next question comes from Andrew Ritchie with Autonomous.
Andrew Ritchie
Just a quick question on Life. Obviously, the Life P&L has been strong. The service results has always been strong, including -- stronger than I expected CSM release. But the CSM went backwards in Q2, including quite a big assumption change. Was that assumption change to do with the items you mentioned? Or is there something else going on in the Life business? Maybe clarify that. And I don't know if it's linked also to the change of the treatment of some of the variances in Q1, which became onerous in Q2. So that's the first thing on Life assumptions.
And the second thing is just to clarify, the 87% combined target, which has been standing since April, I think you said in Q1, that target included a lower discount benefit than what you were seeing in Q1. In Q1, you didn't give us a discount benefit, but we now learn it was 6.9%. Is that still the case? In other words, as per, as the way we interpret it is just to be obviously clear on this, you're sticking with 87% and that does have a higher discount benefit, but we're trading a discount benefit off against the prudent factors you mentioned. But just ultimately, I guess, the main clarification point is the original 87% included a lower discount benefit than what you're now enjoying.
Francois de Varenne
Thank you, Andrew. So I will take the 3 questions. So the first one on the Life & Health assumption or operating assumption changes. So this relates to data and model updates, mostly on Life & Health, and that's mainly driven by updated data that we received from cedants with a smaller impact of model refinements. So they mostly relate to future volumes expected on proportional contract. So that's mostly a Q2 effect that was not reported in Q1. This relates to update over Q1 and Q2. The majority of the impact arise in Q2 following updated data again, I see from cedants.
On your second point, on onerous contracts this quarter on Life & Health, this is really a technical item and that's technical reclassification of the Q1 item under experience variance to onerous contract. So the amount of reclassification from Q1 to Q2 from experience variance to onerous contract, is €34 million. This is a technical correction arising as you can expect during a transition to a new accounting standard. The driver behind the change in Q1 was strengthening claims reserves on a block of runoff contract. So in April, we explained that we expect on onerous new business contract to be limited for Life & Health it remains the case. Again, this is a technical reclassification this quarter.
On P&C, so that's a good point. I will be very transparent. So that's true that the objective of the April presentation was to provide an overview of where IFRS 17 figures could land. I think we were the first 1 to do it. We help you build your models, and I don't think any other institution provided that level of detail at that time. So the assumption provided in April implied the level of net income, which was exceeded both in Q1 and Q2. And also what we observe in practice today is that over H1, the combined ratio is pretty close to the assumption of 87%, what I want to say is that our indication of April are relevant.
However, as you would expect, with a complex transition to a new financial reporting standard, there have been refinements to certain estimates as we build a clearer view. So for example, there were some adverse impact related to the treatment of retro that we discussed in Q1. So it is clear today that for this year, the impact of the discounting will be around [6.5, 6.7] points for the entire year. So with the objective of being transparent, we added in the appendix the detail of the Q1 combined ratio, including the discount effect and you see that stable in Q1 and that's stable in Q2. So we maintain the objective of 2023 for a combined ratio of 87%, and we will be disclosing our assumptions for '24 up to '26 early September. So take this as a clarification of all of our assumptions and the first year of transition to the new norm.
Yves Cormier
Can we move to the next question please?
Operator
Our next question comes from James Shuck with Citi.
James Shuck
Firstly, just a point of clarification. I think you said that the Q2 discounting rate benefit was in line with the plan that you had for the 87% for full year, for the 6 point -- whatever it was in Q2. Could you just confirm that was the case. I just wanted to check I got that down right. Secondly, on the IFIE, the P&C Re IFIE, so pretty stable Q1 to Q2, around €80 million, €85 million. How will that evolve over the course of this year? So are you able to give any guidance about that IFIE unwind for full year '23 and into '24, please? Because obviously, you're getting a big pick up on the investment yield, but I presume there will be some offsetting impact from this IFIE unwind. So there's a complex area. I appreciate that. But clearly, we can make some estimate based off what swap curves are doing at the moment?
My second question was really around the new business, CSM in P&C Re. So that's a very good number, certainly versus the target that you put out there for the full year. So you're already tracking well ahead of what you thought that number would be. I guess you're still, however, guiding to 2.5 to 3 points of improvement on the underwriting year loss ratio. So given you're blowing through that new business profit target already at H1, should we be thinking that -- however, we think about it on a true underlying basis, the improvement is more than 2.5 to 3 points?
Francois de Varenne
So maybe on your first clarification that is needed. Maybe I was not clear in the previous answer. We disclosed an impact of the discounts in the common ratio in April of 4 points. We confirm it will be [6.5%, 7%] for the full year, but we maintained the 87% assumption for the combined ratio. So again, that's a correction of an assumption on the discount, but we maintain the 87% for the full year. On IFIE, so that's what I can tell you on this. So this is what you see today in H1, that's an impact of minus €171 million. So which means it's a little bit more than half of the budget we announced in the April presentation of €300 million. How could you -- we can explain that it's above. You have to understand what IFIE represent -- I mean, it reflects the development of interest rates over the past years. And again, you have to come back to look in rates that have been recently increasing. So you should expect IFIE to increase in the future, and that's what we observed. So on a quarterly basis, we already exceed a little bit the €300 million budget in Q1 and Q2. So we will very likely exceed the €300 million during the year, and it should accelerate a little bit in the future as well with the increase of interest rates.
On the third question, it was on the -- so the new business, CSM on P&C. Here, again, we maintain what we said in April, so the assumption. This is the first year. So we learn what we observed in Q1 and Q2 is that there is a strong seasonality with the [1 1], the [1 4] and the [1 6] and the [1 7] renewal. So We don't change the assumptions for 2023 and again, wait for the publication of the strategic plan to see our updated assumptions on the next 3 years.
We do not provide the CSM amount for each renewal date, only the evolution. We want to avoid confusion by providing figures under different assumptions. So at renewables, what we do, we price and we compute the CSM with the most updated information, which differ from the 1 used for quarterly financial results. So the [1 6] new business, CSM, is included in the Q2 new business CSM and the [1 7] new business CSM, will be included in the Q3 new business CSM.
Yves Cormier
Can we move to the next question please?
Operator
Our next question comes from Tryfonas Spyrou with Berenberg.
Tryfonas Spyrou
I have 2. The first is on the management expense ratio came at 6.6% I think for year-to-date, well below the guidance. I guess I'm just wondering if you have any visibility as to where this could land in the full year. And perhaps you can give us an upgrade on the progress made on the efficiency sort of program year-to-date.
The second one is a slightly sort of a broader question. It's on the topic of PFAs and the pollution from these so-called forever chemicals. There has been a lot of noise around this recently, given the €10 billion lawsuit settlement by 3M in the U.S. So just wanted to ask whether you think you could potentially have any exposure to the so-called sort of PFAs and whether there have been any reserves that have already been set aside for this potentially emerging risk?
Francois de Varenne
So we'll [indiscernible] first one. And Romain Launay will take the second one. So on management expense, that's true that -- I mean we are below the assumption presented in April. So the management expense ratio on a year-to-date basis is at 6.6%. So that's slightly below the budget we've got. This is mostly explained by some specific variance cost reduction that we already took in 2023. And that's the beginning of the reduction of our cost base that starts to be visible. I mentioned that our management expenses, they do include the implementation cost, the one-off implementation costs that we mentioned -- at the end of June, we spent €7 million on one-off costs to implement our cost saving program. And you should not expect a catch-up effect in the second part of the year on management expenses.
Romain Launay
As regards to fiber chemicals, indeed, I mean, that's well identified concern for the entire industry. at SCOR, we've developed a framework to monitor this risk. And we have specific provisions in our underwriting guidelines to address this topic through various ways for the lines of business that are most concerned by this topic. This framework and these underwriting guidelines involve exclusions that we have implemented in the insurance contracts for chemical manufacturers. So we think that this is something that strongly mitigates the exposure to fiber chemicals going forward.
Yves Cormier
Can we move to the next question, please?
Operator
Our next question comes from Derald Goh with RBC.
Derald Goh
Two questions, please. The first one is on Solvency, I might have missed this in your remarks earlier, what's the impact from market moves for H1? And the second one is also on Solvency. You mentioned about this increase in SCR from new business in both Life & Health and P&C, but it's not that apparent from your growth rate, not a renewals outcome. So I'm just curious as to which lines of businesses that you've deployed the capital in? And also maybe one last 1 very quickly. How has your P&Ls trended after the midyear renewals, please?
Thierry Leger
Yes, on the SCR growth, I think that's, in particular, also an effect from the increased loss costs that we have in our pricing, which translates in SCR growth that is very similar to what you have seen in the last year. On the market movement, we don't disclose the exact amount, but the sensitivity were not a good proxy in Q2. in particular, with the inversion of the yield curve, which, as Francois has said, is not very well captured in our ALM strategy.
Jean-Paul Conoscente-Jacopin
Maybe -- this is Jean-Paul. I can take the question on the P&Ls. So we had slightly increased P&Ls compared to the end of last year for areas that we thought were attractive after the [1/1] renewal. Overall, though, our net P&L would be down probably double digit compared to last year because of the strong actions taken at January 1 -- and let's say, our remediation actions on proportional treaties and on [CanExel] at January 1.
Yves Cormier
Thank you. Can we move to the next question, please?
Operator
Our next question comes from Kamran Hossain with JPMorgan.
Kamran Hossain
First question is just around, I guess, the prudence in the approach that you've been taking. I think with the change that you're taking to the reserving approach or thinking about things more prudently. Are there any other areas that you think as a new management team, CEO, CFO, that you might want to kind of be a little bit more cautious on and in particular, is man made to 1 of these areas?
Second question is just on the dividend accrual. Clearly, as you said, you've had a fantastic kind of start to the year $500 million plus earnings in the first half. Why is the dividend accrued flat? Just intrigued about that.
Francois de Varenne
Maybe I'll take the question on the dividend. You remember, I mentioned during the call, the annual call that that €1.4 per share dividend that we paid in 2023 in relation to 2022 was not a reset. So by prudence, and that's what we did in the past. We usually accrue the last dividend and the last dividend that was paid before the cut of to 1.4% was 1.8%. So that this one by prudence. We accrue again, the decision on the dividend is taken by the Board and is taken after we closed the account, the full account. So it will be end of February, early March next year.
Thierry Leger
Okay. And on the prudence in other areas.
Francois de Varenne
Yes. cautious in other areas.
Thierry Leger
Yes, exactly. In other areas. So we are very carefully picking our loss picks in general. We are looking particularly at the areas that have been sensitive over the last times. I would mention basis in U.S. Casualty, for example, or also just generally loss picks in longer-term lines exposed to inflation as an example. So those are areas that we have particular prudence, but also generally, when we open claims, large claims, we are prudent. I could mention a list like that. But we -- there is more than just reserve areas where we apply prudence. Not sure Francois or Jean-Paul, whether you have some addition.
Francois de Varenne
And I would say that for, I would say, new orientation for the business and the exposure to various lines or geographies. You have to wait and see until the end of the summer and the publication of the strategic plan to understand the direction of the next 3 years.
Jean-Paul Conoscente-Jacopin
And maybe just to add. Yes, It's part based. I think what we did on the French riots is a good example. And I think that's the approach we're going to take going forward for the losses as they occur.
Yves Cormier
Can we move to the next question, please?
Operator
Our next question comes from Ashik Mussadi with Morgan Stanley.
Ashik Musaddi
Just a couple of questions I have is, first of all, I mean, is it possible for you to give some color about the activity in the renewals with respect to pricing with respect to what you are seeing from the alternative capital. I mean we keep hearing there's a lot of cat bonds coming in, but what about the collateralized reinsurance. So what are you seeing on those front with respect to alternative capital, traditional capital coming in and diluting the margins. So put it other way, I mean, is there still excess margins being made in the property gap business? Or are we at more or less a breakeven margin level now -- so any color, visibility, outlook on this would be very helpful. That's one.
And secondly, can you just give us some color about this onerous contracts in P&C, you had a bit of a release of 1.5%, whereas in life, you had a bit of addition of €40 million. So what are these related to? Any color on that would be very helpful.
Francois de Varenne
I'll take the first question on the REITS.
Jean-Paul Conoscente-Jacopin
So the growth in June, July was really focused on global lines property cat as well. We see the rates on property cat continuing to be producing [excess] margin I think you mentioned the influx of new capital cat bonds coming in the market. We could see cap 1 activity picking up. But I think there was just very focused on probably for renewals, which for us is not a big area of focus. We saw also a number of players coming in big on some of the cap [pool] renewals. And again, that's not a big focus for us. So on the business that we're focused on, we think the prices are very much in line with what we saw early in the year. And continue in our view to produce good excess margin and very good return on capital. So we see property cat as being attractive. And our expectation is that we'll remain so in 2024 as we start taking into account, inflation, even though it's reduced, but still it impacts the property lines of business, so we expect price increases to continue next year. And we expect the [excess] margin to continue as well.
Thierry Leger
And if I may add just a few high-level remarks to this one. at the beginning of 2022, we were guessing estimating that the gaps in available insurance capacity was around €50 billion to €80 billion. In the meantime, of course, a little -- a few drops of capital came in with companies that would increase their equity. There has been a little bit more on the ILS front, but ultimately, those movements were relatively small However, the incumbents have built their capital. So a little bit of that gap has been closing. But we estimate that the gap might still be around €40 billion as we speak. So it will require significantly more capital generation or new capital coming in to close this gap.
So in the meantime, programs start now slowly to be placed as Jean-Paul said, but that only happens at the right price. Discipline is still very, very high. And as Jean-Paul said, we, therefore, expect this trend to last for longer.
Jean-Paul Conoscente-Jacopin
Yes. I think the big difference in these renewals compared to January is that insurance companies have reset their expectations. And so there isn't as big as a disconnect as there were in January. But from a reinsurer's appetite, I'd say, it's very much in line with what we be received and requested at January 1. So the price increases have been very much in line, improvements of the retention terms and conditions have also been very similar.
Francois de Varenne
On your second question on onerous contracts, so I answer on Life & Health. So again, Life & Health that's the technical classification between Q1 and Q2. For P&C, we have this quarter a positive impact of onerous contract -- and it's coming from a reversal in loss component of prior periods, which is positive and also the effect of amortization of the loss component. And these 2 elements more than offset the impact of day 1 losses, which is limited this quarter.
Yves Cormier
Okay. Next question, please.
Operator
Our next question comes from Thomas Fossard with HSBC.
Thomas Fossard
I've got 2 questions and maybe 1 clarification on reserve prudency. The first question would be on the S&P capsule model changes. I think that all the industry had to give feedback to S&P by the end of June. What was your take of the change in the model? And what are the potential outcome of it? Is it overall a positive or negative for core?
Second question would be related to your cat load of 10 points in the combined ratio. I think that you never really clarified moving into IFRS 17. If this was still a quarterly 10% -- 10 points of combined ratio or if this was a bit seasonally driven by risk exposure. So maybe you could clarify if, for example, in Q2 stand-alone, which should benchmark the 4.6 point of upload to 10 points or there is maybe a bit of a a bit of a change compared to what you implemented in the past.
And maybe the clarification, Francois, is on the reserve prudency because it seems to be that actually the share price is taking a bit of a heat, I guess, on your comments. Is there a clear willingness to build an explicit buffer, as it's been implemented by some of your peers in Europe. So is there an implicit target where you want to build this buffer, maybe some clarification on why suddenly you believe that -- or you think that this is a needed approach compared to the past?
Francois de Varenne
Thomas, for your -- infact is, 3 questions. So the first 1 on the S&P rating and model. So you know that we all received in June the latest version of the new S&P model. It's too early to tell. So the RFC was received at the beginning of May. So -- we just submitted our feedback to S&P. At this stage, what we see on the latest model, we see a lot of moving parts, and it goes in both directions, we see a full credit at this stage given to the CSM and the risk adjustment, which is an excellent news for us, and that's something that we anticipated. We see that also that's not a big surprise, increased the charges across all types of risks. And we'll see also increased diversification benefits, which are positive for SCOR. We see also some new modules. More specifically, there is 1 on ALM and 1 on pandemic risk. So it's too early, wait now for the definitive feedback of S&P. As you know, we have a very good relationship with them, and we are discussing the implication of the new model with them.
On your second question, I will be very clear. There was never a seasonality applied on the cat ratio at SCOR under the IFRS 4. That's the same thing in 2023 under IFRS 17. So no seasonality on the 10%. Would you expect the seasonality on insurance revenue, especially in Q3? No.
And to clarify on your last question on reserve on the prudence that we add to the reserve. Do we want to do a little bit like our peers? Thierry and myself, the answer is yes. So don't see anything else than this big yes.
Yves Cormier
Thank you. Let’s move to the next question, please.
Operator
Our next question comes from Vinit Malhotra with Mediobanca.
Vinit Malhotra
Thierry. Francois. So my 2 questions. I mean, most of my topics have been addressed, but 2 questions, which I can maybe seek a bit more clarity. You mentioned Francois, that you were not happy you and Thierry were not happy with the attritional loss ratio. But obviously, I mean, when you look at it, it seems to be more -- you're loading it up with a bit more conservatism here and there on manmade reserves on reserves from the U.S. casualty was mentioned. So I mean, I'm not sure whether you should be saying that we are not happy with the attritional, you should be saying that we had a good attrition and we loaded it up with conservatism. Would you kind of agree with that view because the remediation has happened. So I'm just trying to gauge where are you going with this conservatism? I mean you just now said that you do want to build up buffers. And I don't know whether I missed it, but maybe did you quantify or indicate anything on that? I'm just curious on this attrition and conservatism?
And last one -- second one is probably a bit easier, but you have reiterated the 87% combined ratio for the year. But obviously, the P&C new business, which is a key component is significantly ahead already at one edge and even though there might be some seasonal factors. It might just be exceeding it I mean, is that the way to look at it that if this -- say there is a €100 million, €200 million beat on that number and that is what goes into reserve conservatism -- you still produce 87%?
And then the last 1 is clarification. You said the market environment you want to take advantage of. And then you mentioned that there is still a lot of discipline. So is that also your outlook for the next year, for example, that we think there's still more demand and even this new capital may not really offset it until prices could go up again next year?
Francois de Varenne
So many points mostly of clarification, Vinit. So you come back on also the question of Thomas. So we don't have a specific budget in line to build buffers. But I just want to clarify, if we don't do it semester where we earned €0.5 billion of net income, and we generated a return on equity of 23%. I don't know when we can do it. So see this as a strong signal for determination, Thierry and I to do it. So which means the second question on the IT 7 combined ratio we maintain -- we are not satisfied by this level. Don't see the discount effect or the resilience that we had or the prudence that we had in the reserve, we continue to monitor and to focus on the attritional as mentioned by Thierry in the introduction.
Jean-Paul Conoscente-Jacopin
And maybe on your last question, Yes, we do see the market dynamics still being in favor of reinsurer going forward. As Thierry mentioned, we believe there will still be an imbalance between demand and supply. We see the demand for reinsurance continuing to increase and will continue into '24, and we see reinsurers being very disciplined. And we don't believe there's any dynamic that will change that we can foresee right now. So we expect price increases to continue next year and the favorable reinsurance dynamic to continue as well.
Yves Cormier
Thank you. Can we move to the next question, please?
Operator
Our next question comes from Darius Satkauskas with KBW.
Darius Satkauskas
I'm sorry, I'm going to focus on prudence again. So the first question is, what are you trying to solve when you think about how much you can add to the reserves in terms of how you think going forward? Is it the 87% combined ratio? So if cats are benign or discounting effect is bigger than you expect, that's what goes into reserves? Is it ROE or net income? Any color here would be helpful. Is this a multiyear thing? Would you expect that you'd potentially build enough this year? Or is that something that we could expect in the medium term? Is this something that you -- what you've built in the second quarter in terms of prudence 3 percentage points or so. Is that pretty specific? Or is that bulk IBNR?
And then just lastly, just sort of philosophically. To what extent is this to do with IFRS 17, the fact claims are discounted? Would you have still strengthened it if we were on IFRS 4? Or is it really because at some point, if you will, would rise and it's a way to sort of manage that pressure?
Francois de Varenne
So I'll try to answer to all your points. So maybe the first one, I come back on the discount effect. If the question is -- we built a buffer to smooth the effect of the discounting? The answer is no. So I'm clear on this.
Then on prudence, again, I stick to what I say. That's a new approach that we disclosed this quarter. Again, there is no catch-up effect on nothing. We're just simply taking a more conservative stance on certain exposure. We are not flagging a specific line or underwriting here. We just had this quarter a prudent on a few lines, but not across the book. Should you expect this again in the future? Yes, especially when we have exceptional quarters.
Darius Satkauskas
Sorry, just to clarify. So this is not bulk, this is line specific?
Francois de Varenne
This is not across the book. So of course, that’s -- I mean, we did this on some specific line this quarter, but it could be other lines next quarter.
Operator
Ladies and gentlemen, this concludes today's question-and-answer session. At this time, I would like to hand the call back to the speakers for any additional or closing remarks.
Yves Cormier
Thank you very much for attending this conference call. The Investor Relations team remains available to discuss any additional questions you may have, so please don’t hesitate to give us a call. As a reminder, SCOR will hold its IR Day on the 7th of September and Q3 results presentation on the 10th of November. I wish you a very good afternoon.
Operator
This does conclude today's call. Thank you for your participation. Ladies and gentlemen, you may now disconnect
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SCOR SE (SZCRF) Q2 2023 Earnings Call Transcript