2022 07 28 Transcript Conference Call H1-2022 Results (English version only)

Please note that the conference call was accompanied by a complementary presentation in PDF format available on the Group's website:http://www.coface.com/Investors, under the "Financial results and reports" section.

H1-2022 Results

Conference Call Transcription

Paris, 28 July 2022

IMPORTANT INFORMATION- In the conference call meeting upon which this transcript is based, Coface made certain forward-looking statements. Such forward looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Forward-looking information and statements are not guarantees of future performance and are subject to various risks and uncertainties. Actual results could differ materially from those expressed in, or impliedor projected by,forward-lookinginformation and statements. The Coface Group is under no obligation and does not undertake to provide updates of these forward-looking statements and information to reflect events thatoccur or circumstances that arise after the date of the said meeting.

Readers should read the Interim financial report for the for the first half 2022 and complete this information with the Universal Registration Document for the year 2021, which was registered by the Autorité des marchés financiers ("AMF") on 6 April 2022 under the number No. D.22-0244. These documents all together present adetailed description of the Coface Group, its business, financial condition, results of operations and risk factors.

Please refer to chapter 5 "Main risk factors and their management within the Group" of the Coface Group's 2020 Universal Registration Document in order to obtain a description of certain major factors, risks and uncertainties likely to influence the Coface Group's businesses. The Coface Group disclaims any intention or obligation topublish an update of these forecasts, or provide new information on future events or any other circumstance.

The information contained in the transcript is a textual representation of the conference call and while efforts are made to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference calls. In no way does Coface assume any responsibility for anyinvestment or other decisions made based upon the information provided on this transcript.

Presentation

Moderator

Ladies and gentlemen, welcome to the conference call for the presentation of Coface's results for the period ending 30 June 2022. As a reminder, this conference call is being recorded. Your hosts for today's call will be Xavier Durand, CEO, and Phalla Gervais, CFO.

Xavier DURAND, CEO, COFACE

Thank you. Good evening, everyone and thank you for joining this call. We're happy to report our first-half profit for 2022. As you probably saw in the headline Q2 has been another very strong operating quarter for Coface with €144.4m in net profit for the first half and solvency at 192%. I think if you look through the publication - I'll highlight some of the numbers without making necessarily comments on each one of them - but you see a number of items that are actually quite strong and in quite a few instances are records for Coface. Our turnover is up 14.6% and up 16.5% on a reported basis. Underneath that you find trade credits at 16.1%. Retention of clients is at our best ever 93.9%. Pricing continues to be under pressure as we've experienced over the course of the last almost a year. In business information, remember we had an 11% quarter in Q1. In Q2, we saw good momentum with growth slightly above 20% and high double- digit growth in new business from last year. Losses remain really good at 39.4%, so that brings our combined ratio to 66% and, actually, if you exclude the impact of the public schemes that we booked in Q1 which was €33m, it's actually better in Q2 than in Q1. The net cost ratio is down almost four points at 26.6%. I think that's clearly the best performance ever for Coface and we'll talk more about this. When you look at the publication, I think it's a strong quarter no question. €78.2m in Q2. Retuon average tangible equity at 15.4%. Solvency well above the target range. I'll talk a little bit more in the presentation about the board changes. One more piece of good news is that we were upgraded in terms of our ESG rating from

1. to AAA by MSCI. Finally, just for the record, our NPS which we really measure on a quarterly basis through thousands of clients across the entire globe is up 10 points from last year at 37%. I think that's a pretty good number in this industry if not the best.

We added one page on page 5 to just show some of the changes that have happened from the time we started this transformation of Coface in the first half of 2016 to where we are today. I thought it would be interesting to just reflect a little bit. You can see quite a lot of changes and a very significant deep transformation that's driving related metrics. Premiums are up 33% but if you recall we started off by reducing premiums because we had to clean the book back in 2016. Client retention is up almost four points, solvency is up 37 points, shareholders' equity is up 11% even though we paid out 100% of our net profit last year in terms of the dividend. The net cost ratio is down by almost 8 points. The net loss ratio, obviously supported by a good environment, is down 20% and then our "new-born" information business which we really started to drive back in 2019 is up almost 50%. That translates into a retuon average tangible equity story which you can see on the right-hand side of the chart showing steady improvement to 15.4%, obviously with the blip that we had in 2020 as we were going through the COVID crisis and the government discussions that you're all familiar with. So, this is a deep transformation - Coface executes, Coface has got a plan, Coface is focused on that plan while managing whatever the environment's got to offer. So, the story really doesn't change. The operating principles underlying the business don't change, but we are focused on execution and consistency through the different periods.

Moving now to page 6, I wanted to give you two updates. One is on underwriting. You're seeing some significant growth in our total exposures. We're up 9% from the end of last year to our highest ever at €642bn. But what's interesting is if you look back five years you will see that actually the premiums have grown right in line with the with the exposures. Actually, premiums have grown slightly more than the

exposures over time and if you look at what's underneath, you'll see that what we call lower quality exposures are actually close to record lows and the average exposure rating is actually close to its record high. So, we are playing the game and supporting our clients through this recovery phase, but we are also attentive to what's going on in the environment and making sure that we remain consistent with our long-term strategy of creating value through the cycle. Another update on Russia. You may recall that we started this whole war with €4.8bn in exposures on Russia. As of today, it stands at €1.4bn. If we used constant FX, because as you know the rouble has appreciated paradoxically through that period, we would be at €1bn. So, it means we reduced our exposure by about 80% excluding FX since the beginning of this event. The bulk of what we do now is related to domestic Russian exposure support for the benefit of large international clients that we work with. We took some reserves as you're aware for what might happen in Russia initially when this started and generally we're seeing claims so far being quite reasonable. Then we are focused on maintaining our capabilities to service our clients and also collect the money that they and we are owed in the country as we are also right sizing operations. We are not writing any new business in Russia. So far so good I would say but we are continuing to actively monitor the situation.

The next page really talks about our CSR strategy. I put it as a background in light grey this slide that we showed you at the end of Q1. You will see overlaid in green the items that are moving. I thought it would be a practical way to just highlight the fact that we're not losing the plot here, we're continuing to move ahead. A few things have changed - we are integrating climate in our risk monitoring. Amongst all the scenarios we look at, we look at the stress that the climate events would create on the company. We have now a formal Diversity and Inclusion policy approved by the board. We have completed a full carbon footprint assessment of the company which will be the basis from which we will build a plan to reduce it and eventually, if we can, become net carbon zero. And then I also already mentioned the upgrade in MSCI rating to AAA. We have put in place a full CSR governance organisation and structure within Coface so we continue to move ahead on that important topic.

And then, finally, one last update on page 8 about the Board. You're aware that we have had quite a few changes over the last year. Bernardo Sanchez is now our Chairman. We have five independent directors, two of which just joined. Laetitia Leonard-Reuter is the CFO for Generali France so really understands in- depth the insurance sector and finance. Laurent Musy leads a global business with Terreal and brings a wealth of international experience. And then some of the metrics are interesting now. We have the three committees led by female independent directors. If you look at our pool of directors, 60% are independent, 50% are female and 50% are non-French, so I think we really have a good mix and the level of expertise and experience here that positions us well.

With that I am going to go to the usual presentations. Starting with page 10, turnover growth is at 14.6%, which is quite a high figure and historically for Coface probably the best I've seen and probably the highest we've had in the business. Trade credit insurance is growing at 16.1% and on a reported basis it's up 18.1%. Other revenues are picking up some speed with 8.5% in the first half. Business information as I mentioned had a good quarter at over 20.2% in the second quarter. We still do not see the kind of collection fees that we would normally see through the cycle because the losses and the claims remain relatively moderate. Factoring is up almost 12% for the first half. Fees are up 5.6%, so I think there's quite a good momentum in the metrics here.

When you look on page 11 across the regions. Actually, I'm not going to comment every one of them because the trends underneath here are pretty much the same which is good retention and good client activity, leading to double-digit growth in every single part of the world. We see some of the metrics that are actually a bit more dynamic here with Central Europe at 18%, North America at 14%, Asia at almost 23%,

Latin America almost 24%, and then some of our factoring businesses with almost 50% growth in EasteEurope as we see opportunities here for us to position ourselves.

On the next page, the makeup of our growth really hasn't changed that much from the prior quarters. You're seeing a little bit less new production. I think we remain committed to disciplined underwriting in an environment that we consider to be skewed towards the downside, and also in a market where competition remains in my view a bit exuberant. The retention rate is the highest we've had. We are obviously seeing some price effect with nothing different from what we've highlighted so far. Then in terms of the volume effect, which is a combination of buoyant client activity plus inflation, you're seeing 8% which is a very strong number.

Moving onto page 13, losses, we had another really good quarter here with a 32.2% loss ratio for the second quarter, with the first half coming in at 30.6% so almost the same as we had in 2021. As I have already said many times, we do see normalisation underway. The frequency has been increasing since the middle of last year. There have been more large losses even though they're still below the average we expect in a cycle. Then there are a relatively contained number of claims related to the crisis in Ukraine which as I said we're monitoring very closely. So, we haven't changed the reserving policy. You see that we opened the new year at a higher level to account for the fact that the environment is riskier in our view. We still get really good releases from the prior years including from the year 2021 which includes some Russian risk and so it has been a very strong quarter on the loss side.

You can see that story split out on page 14 across the different regions with the four large more stable markets that I usually highlight first at the bottom of the page. They are very stable and below historical levels. Central Europe, a little blip here with the reserves we had booked in Russia but that's not new. On the more volatile markets, on the top side it's still a very benign picture. A bit of a pickup in North America and if you look on page 15 you'll see quarterly splits. In North America, what's happening is you have the combination of one larger claim with progressive normalisation which is taking place like in many other places around the world, so there's not much more to add on the losses side.

In terms of the costs on page 16, so you see that our total costs are up 8.7%. That includes obviously double-digit growth in external acquisition costs, which are driven by broker fees essentially. And then continued but lower growth in internal costs. We are getting operating leverage, so we continue to be disciplined on cost execution. Our premiums are growing faster than our internal costs. We are seeing the cost ratio before reinsurance obviously down by three points from last year. You can see the net cost ratio is also being driven by reinsurance benefit. I have to say this cost management does not prevent us from investing in the business, so we are spending money on technology and systems. We haven't lost any of these things in our sight. We also continue to invest in our information business in a very dynamic way. We still don't see much revenue from collections and I think that's tied to the environment. So this is another good scorecard on the cost side. With that, I'm going to tuit over as I usually do to Phalla to take us through the next few pages.

Phalla GERVAIS, Group CFO and Risk Director

Thanks Xavier. So, we are now on page 17 and we're talking about the reinsurance result. I just want to remind you that in H1-2021 all the public schemes were still in force until the end of June 2021. That explains the premium cession rate that was at 48.5%, and then on the claims cession rate side at 62.7%, again which was probably at the top of the reserving period related to COVID last year. Going back to this year, H1 2022 is a completely different story. If you look at the cession rate at 27.4%, we're much closer to a usual cession rate related to the third party reinsurance treaty that we usually have, and then on the claim

cession rate side 6.5%. A couple of things here. Remember that in Q1 we took €33m in costs related to the tail end of the public schemes that went back to the government that put in place such schemes. Of course, 6.5% is low and it just illustrates and reflects the low loss environment that we have. On the bottom line, the reinsurance result really reflects these low past losses and the result has decreased from -84.3 to -102.2.

The net combined ratio is at 66%, up from 51.9% in the first half of last year. If we want to compare apples to apples, I would look at the chart of the combined ratio without the impact of the public schemes. Here we're moving from 61.5% to 60.0% with a net cost ratio down almost 4 points as Xavier mentioned. This is really thanks to the cost discipline that was put in place despite the inflationary environment and the higher commissions that we negotiated at renewal. The net loss ratio is up from 31.0% to 33.7%, in which we have embedded the reserve booked on the Russia Ukraine crisis.

Moving onto page 19 on the financial portfolio. The mark-to-market value of our investment portfolio ends up at €2.8bn. There are a couple of things to be highlighted here. On one side, we have been negatively impacted by the turbulent financial markets, higher interest rates, wider spreads and the drop in the equity market. We also paid out almost €225m in dividends at the end of May. On the other hand, our operating and business performance has contributed a lot of cash and we have good cash generation here, which explains why our strategic asset allocation has not changed much. If you look at the fixed income, the bonds would be closer to 70%. We can also see that the liquidity level is still very high thanks to the cash generation from the business. We'll keep it at 18% waiting for progressive deployment to pick up the interest rate that the increasing interest rate environment will benefit in the yield and investment income. Tactically, what we've done as well to make our portfolio even more resilient is shorten the duration gap that we have. We have reduced the duration of our investment portfolio by almost one year and we have equity hedges in place that turned out to be very efficient. As you can see, our net investment income rose from €15.9m to €24.4m.

As a result, net income for the first half was very strong at €144.4m, €78.2m of which came from the second quarter. This is up 17.2% compared to last year with the tax rate almost stable at 25%.

In terms of retuon average tangible equity, I will start with the change in equity so let's look at the walk through from full year 2021 at €2.1bn. Of course, we paid out dividends to the shareholders. We accounted for the Q2 net income, and then you have this mark-to-market movement impact of -163 and +29 and this has driven down the mark-to-market investment portfolio. Retuon average tangible equity has increased from 12.2% to 15.4%, and is explained by the technical result and the financial result net of tax.

Let's move onto capital management on page 23. Total balance sheet at €8.5bn. Nothing has changed in terms of the structure of our balance sheet. You can see that the hybrid debt remains the same, we just paid the coupons, and the factoring assets are fully backed by factoring liabilities. IFRS 17 - the project is going on as planned and nothing to be added here. In terms of financial strength, something to be highlighted is the fact that AM Best confirmed that our rating is A which is an excellent rating in April 2022. Book value per share is €12.9 just to give you your own appreciation of where we are today. Tangible book value per share is €11.3.

If we move to page 24, the solvency ratio is down 4% from 196% to an estimate of 192%. Here, something to be highlighted is that, given the resilience of our investment portfolio, the Solvency II ratio has not moved much compared to last year. I just want to refer you to the stress test that we did in Q4 that was shown to you guys. At the end of June, we were already at this level of stress, and we have proven to be very resilient.

On the next page 25, you can see how the 192% is made up. Not much change since last year.