2022 10 27 Transcript Conference Call 9M-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.

9M-2022 Results

Conference Call Transcription

Paris, 27 October 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 September 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, and welcome everyone to this earnings call.

We're happy today to report our results for the first nine months of 2022. As you will see from the publication, it's been another record quarter for Coface. This is a bit of a paradox at the same time given the risks out there in the economy.

Just going quickly through the key numbers, you see that for the first nine months we're reporting €228m in profit, which is more than all of 2021. €84m of this was generated in the third quarter, which is actually our best quarter ever. Turnover is up 15.2% at constant FX and perimeter and almost 18% on a reported basis. TCI continues to grow nicely at 16.6%. We still see some of the same trends in play that we've already discussed in the prior quarters. I'm not going to repeat these. Client retention is at a record high. Pricing is continuously down at -3% in line with the first half of the year. Business information continues to see nice revenue growth, almost 16% at constant FX. The loss ratio is up but still very good at a 36.9% net ratio. The net combined ratio is up close to 8% at 63.8%. Gross loss ratio at 30% is up 5%. We're seeing continuous normalisation of the environment and I'll speak more to this in the later pages. The cost ratio is still very strong at slightly below 27% and we'll talk about what's involved in this. For Q3 the net combined ratio is just below 60%. The retuon average tangible equity stands at 16.4%, and tangible equity per share is at €11.50.

There were a couple of notable events in the quarter. We managed to successfully refinance our Tier 2 debt which was due in 2024, so we've actually de-risked that 2024 deadline, and we replaced the old debt with Solvency 2 compatible debt which is going to help our solvency ratio. Second, Moody's has reaffirmed our rating but this time with a positive outlook, which is notable in the face of the upcoming slowdown and great recognition of where we stand as a company, the consistency of our underwriting procedures and the contribution of the information business to a more stable business model.

The next page really talks about Russia. We've looked at a page like this now for the last few quarters. You can see that our exposure and the trade credit insurance limit has gone down 75% including FX and, if you exclude the FX impact, we would be well over 81% at this stage. 80% of what's left is really domestic exposures which we are actually winding down as the contracts come up for renewal. The claims activity is still quite moderate. We further increased our reserve levels and I'll talk more about this when we get to the reserving pages. We're really adjusting the business as we go, retaining the key risk and debt collection capabilities while at the same time right sizing the front end of the business to reflect our stance on where this is going. So that's really the story on Russia.

Then I go to page 7 which starts the usual pages on growth. I've already mentioned the overall growth numbers. As I said, TCI continues to hold up nicely and is being driven by client activity and very strong retention. You're seeing some FX impact of the strong US dollar versus the euro in particular. Other revenues are up almost 10% and the information business grew close to 16% in the third quarter. We're still seeing lower debt collection fees, which at some point will tuaround. Factoring has been pretty good at

13% growth. And then another interesting feature is the nice reversal of growth for fees which has been decreasing now for a couple of years, and it is now up 6.7% at constant FX.

On page 8, you see the split by region and there's really not that much news here. WesteEurope, Med & Africa, Asia Pacific, North America and Central Europe are all growing in the 12% to 17% range. It's notable that Central Europe is growing as we are also winding down the Russian business. NortheEurope, which is Germany, is growing at close to 10%, and then Latin America, which is driven by commodities and commodity prices, is still the outlier at close to 30%. So, growth is broad-based and driven by some of the same trends, which you can see on page 9.

What you see on page 9 is a continuation of the story from the last couple of quarters. On one hand, our new business is the lowest that it's been in the last four years. I think we've been consistent with our philosophy, which is to create value through the cycle. So, we've been prudent and thoughtful in terms of underwriting new business in the face of a somewhat exuberant marketplace. We've been very focused on retaining our clients and our 93.5% retention rate is yet another record for the business. That's obviously coming at a price. The price effect is at -3.0%, which means we've given up the gains that we made during Covid in 2020 and 2021. Volume continues to be strong. The rebound from Covid plus inflation are driving 11% volume activity, which obviously benefits our activity as well.

When I go to the loss page on page 10, it's been another great quarter at 29.5% in Q3. We continue to see normalisation happening. The number of claims has been increasing since the middle of 2021 when we reached the trough, so we're nearing pre-crisis levels in terms of the number of claims. However, we're not seeing the large claims that we would normally see, so the large losses are still below the average. We've taken deliberate action to increase the reserves related to Russia, whatever exposures we still have there, in face of the escalation that's happening over there and the mobilisation, so I think there's an element of prudence here. You can see that in the bottom right-hand chart with the new vintage being written at a reserve level close to 81%. At the same time, you can see that the business continues to perform because we're seeing very strong recoveries on the prior vintages.

On page 11 we go into the regional view, and you can see that the four largest and traditionally more stable markets at the bottom have been fairly stable with relatively benign losses. WesteEurope is at 23%, NortheEurope at 30%, Med & Africa at just below 30%. One exception is Central Europe, where we booked some reserves on Russia. The three traditionally more volatile markets are also doing well. North America is below 30%, Latin America and Asia Pacific are at 10% or even lower.

If you go to page 12, you see the same story spelled out by quarter. What you see at the bottom is quite stable and good levels of losses in WesteEurope. In NortheEurope you see a peak and in Central Europe, corresponding to what I've mentioned in terms of booking some reserves on Russia. There had been a peak in Q1 already and then we booked these exposures in Central and EasteEurope, and then the next quarter we moved them to the regions where the losses were actually showing up or the exposures were actually allocated. That's why in Med & Africa you had a peak in Q2 but that did not happen in Q3. There was one file in North America which we booked in Q2 and that did not repeat itself in Q3. Latin America has been pretty benign and in Asia Pacific it's pretty much the reverse. We had a large old claim on which we found a recovery or settlement and that drove the loss for the quarter negative.

On the next page we talk about costs. Overall costs are growing quarter-on-quarter at a similar pace to our premiums, at 16% and there are two components to that. The first one has to do with the external acquisition costs, and you can see they're up 25 points. This is because there are some profit-sharing clauses in our contracts with clients, which when the losses are low means we pay more commissions and that's really playing out. So, part of this of this line is driven by the low losses that we're experiencing in the

book. Secondly, in dark blue here are the internal costs which are up 13.4%, and again within that you have a few different things at play. One is the investments that we're making in the business information line. The second one is that given the performance of the business, we anticipate that we're going to have higher costs in terms of incentives and profit shares with employees, so when you take that stuff out, you're down to 9.8% internal cost growth, and that's how I think we're continuing to drive positive operating leverage because our internal core costs are growing less than our premiums. So that has driven the net cost ratio for the first nine months of the year. The gross cost ratio is at 32.2% versus the 33.8% that we had in 2019 and 33% in 2021. Just to note again that given that the claims environment continues to be relatively low, debt collection revenues are also low.

That's the story for the costs, and I'm going to pass it on to Phalla to take us through the next pages as we usually do.

Phalla GERVAIS, Group CFO and Risk Director

Let's go to the reinsurance page, "record low past losses and commissions drive reinsurance result". If you look at the premium cession rate, it is at 27.1%, which is similar to the pre-Covid cession rate, prior to the backed-up period. This is back to a much more normal level. Then, if you look at the cession rate at 11%, I think there are two highlights here. First, if you remember in Q1 we put behind us the impact of the back stop when we released reserves that went back to the government that put in place the public schemes. And then, if you look at Q2 and Q3, the claim cession rate is pretty low as well, which is really linked to the low claims environment. Consequently, the insurance result ended up at €128m and that makes our reinsurers pretty happy.

On the next page, the net combined ratio has increased from 56.1% to 63.8%. Two components here - the net cost ratio is down almost four points. Of course, cost discipline is our DNA, but this is also due to higher commissions from reinsurance thanks to the renewal terms and conditions that we got at the end of 2021. The net loss ratio is up from 25.4% to 36.9%. This is driven by the fact that losses are normalising a little bit and of course all the additional results that were booked to Russia.

If we move to the next page, which is a view of our financial portfolio, the mark-to-market value is about €2.8bn. There are a couple of things to be noted here. First, you can see that we continue to de-risk our investment portfolio, reducing our equity exposure down to 3% in favour of bonds. The second thing is that we are still maintaining a very high level of liquidity. We're at 18% and this is really coming from the very strong cash generation resulting from the very strong business performance. This is helping us to reinvest at a much higher yield than we used to do in the past. Then, our hedging position is still in place, which also had a P&L impact this quarter. Net investment income has risen from almost €31m last year to €39m this year, with an accounting yield without realised gains up from 0.9% to 1.0%. I just want to highlight the fact that all the new money that we are reinvesting now is above 2%, so over time we're of course seeing investment income going up.

If we move to the next page, I also want to highlight that the €2.8bn doesn't take into account the additional cash that we have received from liability management. This cash totals almost €150m and is sitting in the current account as we speak, and it will be redeployed of course and reinvested at a much higher yield than we see today. We successfully managed our liabilities in September, de-risking the refinancing deadline that we have in 2024. There was a €380m Tier 2 loan that we have maturing in March 2024, so we bought back 40% of it and, at the same time, we issued Solvency 2 fully-fledged Tier 2 debt, a 10-year bullet of €300m at 6% which will mature in September 2032. As a consequence of this transaction,

there is a temporary impact on additional Tier 2 debt, with an additional 10 basis point impact on the Solvency 2 ratio until March 2024.

If we move to the next page, we've generated stellar profits in the first nine months of the year. €228m of which €84m was generated in Q3, with operating income up 24% and net income up 20%.

If we move to the next page, the retuon average tangible equity stands at 16.4%. If we look at the change in equity, it stood at €2.1bn at the end of December 2021, but of course we paid out dividends. Year-to-date net income is extremely strong, and you can see that we have a still healthy mark-to-market unrealised loss from our investment portfolio even with the increased interest rate, which is mostly impacting the fixed-income portion of our assets. As I already mentioned earlier in the Q2 and Q1 calls, we are in a buy and hold mode, which means that this is really temporary. We have no intention of realising this loss.

Retuon average tangible equity has increased from 12.2% to 16.4% due to the technical and financial result net of tax. With this, I'll hand back over to Xavier.

Xavier DURAND

So just to wrap this up, it's been the best quarter in our history in many ways, including double digit revenue growth in TCI and in the business information space at 16.4%, as well as a low loss ratio despite the fact that we've actually increased our reserves on Russia. We're all aware of the risks out there. There are many signs the economy is slowing down, and many clouds on the horizon. We've gone through the list many times - finding policies, political and geopolitical risks, obviously the energy crisis in Europe, and Covid. In the face of this risky environment, we've remained true to our strategy which is to apply continued underwriting discipline, to be consistent in our reserving policy and I think that's being recognised given the positive outlook by Moody's. I think that's one of their arguments. I think we're very focused on our clients. Ultimately, we create long-term value through this real partnership with clients. We have very high retention, actually the best we've ever had, and then when we look at our NPS score, which is something we spend a lot of time on, it's also the best that we've had and it's rising consistently. So, I think the takeaway is that we've got clear operating principles - creating value through the cycle, being disciplined. We're not going to change the stance that you guys have now been accustomed to for the last six and a half years, and we're going to remain true to the values that have supported us so far. I think in this more uncertain environment that this is going to be key in order to continue to perform.

So, with that I'm going to leave it to everyone for questions.