Buried deep within SCOR SE's Q1 2024 earnings call lies a curious and potentially alarming anomaly that seems to have slipped past the radar of most analysts: a significant negative experience variance in their U.S. mortality portfolio. While market watchers have understandably focused on SCOR's strong P&C performance and impressive solvency ratio, this ominous whisper of trouble in the Life & Health segment deserves a closer look.

On the surface, SCOR's Life & Health division delivered satisfactory results, generating €112 million in new business CSM and a seemingly in-line CSM amortization rate of 6.8%. However, the devil is in the details. A closer examination reveals a troubling €71 million negative experience variance, largely attributed to higher-than-expected mortality claims in the U.S.

SCOR's management team, quick to reassure concerned analysts, downplayed the significance of this variance, attributing it primarily to two factors: 1) natural quarterly volatility inherent in IFRS 17 reporting and 2) a "conservative" approach to claims recognition due to lingering distortions in claims reporting patterns stemming from the COVID-19 pandemic. They insist that these distortions will be reviewed by year-end, potentially leading to a positive adjustment.

However, a sense of unease lingers. While acknowledging the volatility inherent in quarterly reporting, the magnitude of the negative variance – wiping out almost all of the positive experience variance generated in 2023 (€140 million) – raises red flags. Furthermore, SCOR's management, while confident about their ability to reach the €500 million full-year Life & Health service result target, now admits to being "more dependent on positive business developments" in the remaining quarters.

The question arises: Is SCOR's U.S. mortality experience a one-off blip, an accounting mirage destined to dissipate, or a harbinger of deeper, systemic issues? To answer this, we need to delve into the numbers and consider a few potential hypotheses.

Hypotheses and Evidence

Hypothesis 1: Accounting Conservatism

SCOR maintains that their claims recognition methodology is intentionally conservative, factoring in longer reporting and processing times experienced during the pandemic. They expect this to reverse by year-end, potentially leading to a significant positive adjustment.

Hypothesis 2: Underlying Mortality Deterioration

The negative variance could signal a genuine deterioration in U.S. mortality experience, driven by factors like long COVID effects, delayed healthcare access, or other emerging health trends.

Hypothesis 3: Combination of Factors

The most likely scenario is a combination of both conservative accounting and some degree of underlying mortality deterioration. The conservative accounting might be amplifying the impact of a genuine increase in claims.

Potential Impact and Key Questions

The implications of this U.S. mortality puzzle on SCOR's future performance are significant. If the negative variance persists, it could erode profitability and impact future dividend growth.

Key Questions for Investors:

Visualizing SCOR's Performance

The following chart compares SCOR's reported combined ratio with a normalized combined ratio that excludes the impact of the large commutation and adjusts the discount impact to the expected average for 2024. This normalization helps to provide a clearer picture of the underlying performance of SCOR's P&C business.

Conclusion

SCOR's U.S. mortality experience presents a critical unknown that warrants close monitoring. While management seems determined to tackle any emerging issues, the potential for a more protracted impact on profitability cannot be discounted. The coming quarters will be crucial in determining whether this mystery is a fleeting accounting phantom or a more substantial threat to SCOR's long-term success.

"Fun Fact: SCOR SE is a global reinsurance company with roots dating back to 1970. The name "SCOR" stands for Société Commerciale de Réassurance."