2023 02 16 Transcript Conference Call FY-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.

FY-2022 Results

Conference Call Transcription

Paris, 16 February 2023

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 31 December 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. Welcome everyone. Thank you for logging in. Good evening. This is our full report for 2022. We're happy to share with you our full-year results. As you can see from the headlines it's been a good year. We're reporting net profit of €283m, of which €54.7m in the fourth quarter. As I go through these slides, you'll see that a lot of the trends that I'll be describing will be similar to some of the things we discussed in the prior quarters. This has been a year of very high risk and volatility and at the same time strong performance by the company. Volume is up 13.4% all things equal. On a reported basis we're close to a 16% increase. Trade credit has had a very strong year by historical standards at 14.5%. This was driven by a client activity in an environment which has seen more inflation than we've had in the past. We broke a few records this year. One is client retention, which had remained really high for the last few years, rose again to 92.9%. We are seeing double-digit growth in our other lines. Business information is up close to 12% and 13% at full scope, and factoring is up 10%. The loss ratio is actually quite similar to last year. The combined ratio is up merely 0.3 points at 64.9%. What happened is in 2020 we had a significant cost from government programmes which created a cost for Coface. We don't have that in 2022 but we do have more claims, which brings us to a similar net loss ratio. The net cost ratio is down 2.5 points to a record 28.8% for the year, and this was due to both operating leverage and efficiency and higher reinsurance commissions. Our combined ratio for the fourth quarter was 68% so it continued to be really good. Total profit for the year was €283m. We acquired a company called Rel8ed in the first few weeks of the year, but this is a deal we signed at the end of last year. It's based in North America and it's an innovative open source data company. It brings us the ability to source data that's complementary to what we have, so it increases the depth and breadth of our data and it also helps us with tools to better manage and take advantage of that data, so I think it's a nice addition to the Coface's skill set on the data side.

If I go to the next page, you'll see that we ended the year with a strong balance sheet and a solvency ratio of 201%. Retuon average tangible equity stands at a record 15.6% for the year. Solvency is obviously above our target range. We have been able to maintain our reinsurance commissions versus last year and that's despite the fact that the market was generally much tighter than it was last year. This is happening generally in the private reinsurance market and around the world so we feel good about that. We are therefore proposing a pay-out of 80% corresponding to €1.52 per share, which is in line with our Build to Lead target and leaves some room to finance continued growth. I think the most important thing for me when you look at this year is we've continued to stay focused on operations, delivered on the things we had planned, and handled the things that showed up during the year. We've managed the risk situation in Russia well I think. We've taken advantage of a relatively benign claims environment to introduce a new global collection system spanning 40 plus countries and we'll be happy to have that as things normalise. We've increased our business information venture workforce by almost 200 people and that's both on the distribution side and also to make sure that we build a factory that's able to deliver the products that we're building. We've also completed a full assessment of our carbon footprint and we've committed some capital to green initiatives, which complements our offering. It's been another year where the Coface team has delivered.

On page 6, there are just two highlights. One on exposures on the left-hand side, which we talk about a couple of times a year. You can see that it's grown about 14% during the year to a record €667bn. When you look at it over a longer period of time, since 2017 it's grown about 6.6% per year. That's very much in line with our premium growth. And, as I've had the chance to explain in the past, we feel good about the quality of that book. The low DRA percentage is at a record low, and the average DRA which is the debtor risk assessment or the average score of the book is close to recent highs, so we feel like we're adequately positioned in the face of an economy which is obviously slowing and more volatile. A bit of an update on the right-hand side on Russia. When the war started in February, we had exposures of about €4.8bn. We brought this down to €0.6bn by the end of the year, which is an 87% reduction despite the appreciation of the rouble. We've seen moderate claims activity. We have booked reserves - I explained that before in Q3 - and we haven't added anything in Q4. It's just been redistributed amongst the regions to reflect the actual Russian exposures that we have in each one of the regions. But I think the team has done a good job here again with our clients, mitigating a significant amount of risk exposure while making sure we remain very sensitive to the needs of our clients as they were downscaling or dealing with their own situations as well.

On the next page is an update which we provide on a regular basis on the Build to Lead targets we set for ourselves with our four-year plan. I think it speaks for itself. Our combined ratios are well below the target, our solvency ratio remains way above, and our target pay-out ratio is consistent with what we promised and has actually been higher in the last couple of years. Retuon average tangible equity has reached a record over the last four-year period and is well above the 9.5% that we had targeted. So, we feel like we're delivering on plan. Things are happening as we were expecting.

Page 8 contains an update on ESG and CSR. The sections in green highlight what we've focused on and delivered in 2022. We spoke about doubling our exposure to ESG projects in a single risk area by 2025, so we've committed capital there. We have further decreased our investment portfolio's greenhouse gas emissions - about €3bn that we manage. We've also in the process of joining the NZAOA and the United Nations Principles for Responsible Investing so we are now within a framework that is recognised by the market and we can measure our progress in very specific terms like other players in the world. In terms of being a responsible enterprise, we completed a full carbon footprint assessment of the company. We've developed a plan to get to net zero by 2050 and so we've got the plan, we're rolling it out, and then we've seriously reinforced both our culture through training - digital training, face to face training - and our governance through the mechanisms we put in place to make sure we involve as many people as we can in this initiative in the company.

On page 10 I go to the more traditional pages here. So, you see the 13.4% growth at constant FX for the year. Trade credit insurance rose 14.4%. Other revenues, which includes both business information and debt collection, is up 8.3% so business info is up roughly 13% at total perimeter. Factoring is up 10% and debt collection fees are down because we've had less activity. I think the good news here on this page is that the fees that we derive from our trade credit insurance business are up 8.6%. It's been a couple years since we've seen some positive growth. We had negative activity here for a number of years, so there's a beginning of a change here.

On the next page you can see the growth by region, and I think the highlight is everybody's pretty much growing in the same ballpark anywhere from 10% to 13-14%, except Latin America for the same reasons we explained in the prior quarters which is the strong price increases we've seen in the commodity space - both hard and soft commodities where Latin America is the biggest producer. But pretty much every other region is growing for largely the same reasons which we'll talk about in a minute. Factoring is growing nicely particularly in Central Europe, a bit less in Germany as we have seen activity slow down there in line with the economy and the pressure that's being put on the energy sector.

If you go to page 12, this is consistent with everything we've said for the last four quarters. New business is a bit lower than in prior years and we've consciously stayed out of the transactions we believe were just not right from a profitability standpoint. The retention rate is at a record 92.9%, which for us is a very good number. The price effect is pretty much in line with prior quarters. We're down at about 3% and the volume effect is very high compared to other years but slower than it was in Q3. We're clearly seeing a slowdown in the economy in Q4 and that's not a surprise. I think you're all aware of the macro environment here which has been leading to a stagflationary environment.

On page 13, on the losses it's been another very good year at 34.2% in Q4 and 31.2% for the full year. We've been saying this for a year and a half so there's really no news. Normalisation is underway. The number of claims has been increasing since the middle of 2021. We're close to pre-crisis levels right now. We're also seeing an increase in the larger losses. Clearly the interest rate hikes, the rising energy prices, the slowdown in the economy following the Covid recovery, and some of the supply chain issues that we've seen with electronics, auto components and other items, are biting. Large losses are increasing but are still below average. We increased the reserves during the year in Q3 related to Russia, but then you see on the bottom here the new year comes in for 2022 at 80% reserves. There are two things in there. There are the Russian reserves and there's also a large Latin American claim that we are facing like the rest of the market, which is built in here and for which we've taken the large majority of the losses. Then there are significant recoveries from prior years. By historical standards, 51.6% is pretty high. That reflects the strong performance of the 2021 and 2020 layers in our book.

On page 14, you'll see a still pretty benign loss picture. The four largest markets at the bottom, which are also the most stable, all performed well during the year at anywhere from 14% to 35-36%. On the most volatile segments on the top, you see that the picture is actually pretty good. There was an increase in Latin America, which reflects this large loss that I was talking about.

If you go to the next page, we've got the quarterly picture. So, what you see immediately is that Latin America took a significant reserve on that claim in Q4. At the same time, Central Europe saw a big drop because we had booked some reserves in Q3, which were then reallocated to where we hold the exposures - WesteEurope and NortheEurope - which explains the increase in Q4. Med and Africa is pretty much on a normalisation curve so not much to say there.

If I go to page 16 on the cost side, our total costs are up 12.6% and that's made of two parts. One is the 18% increase in external acquisition costs. This is basically the commissions we pay to intermediaries. That also reflects the strong performance on the loss side because there are some profit-sharing agreements included in those commissions. Internal costs are up 10.9% and include about 1.7 points which are linked to our investments in the business information space, 2.6% which are linked to overall inflation, and then variable costs linked to premiums. These include taxes and things like this which are 3.6%. So overall, clearly internal costs are growing less despite our investments and despite the variable cost growing much less than the premiums, so we are getting operating leverage, which leads to a cost ratio for the year slightly above 2021 on the growth side. From a net standpoint, I think we are at our record at 28.8%.

With that I'm going to tuit over to Phalla to take us through some other pages.

Phalla GERVAIS, Group CFO and Risk Director

Good evening, everybody. So, if we look at the reinsurance page, page 17, the premium cession rate is at 27%. Of course, we don't have the public schemes anymore in 2022, so we're a little bit back to the pre- Covid period. If we look at the claims cession rates, it is at 15.5%. I just want to remind you that we have drawn a line with the public schemes reserve release and, for the following quarters, of course the fact

that we have positive developments is also benefiting the reinsurers in Q2, Q3 and Q4. As Xavier mentioned, we have higher reinsurance commissions to reflect the low loss ratio activity and all in the reinsurance result ends up at -€147m compared to -€314m last year. As regards the renewal of our reinsurance treaties, I would say that it has been very successful, especially if we look at the very hard market in the reinsurance space. Our share remains unchanged at 23% and the terms and conditions were broadly similar to what we got last year.

On the next page, the net combined ratio was slightly below 65%. The loss ratio remained low through the cycle as you can see. If you want to compare apples to apples, I would compare that with 2021, at 54.5% without the public schemes, so on this page you can see that the net loss ratio has increased from 23.2% to 36%. This reflects loss normalisation, the fact that we have booked reserves on Russia and also reserves on very large claims in Q4. On the other side you can see the net cost ratio dropped by 2.5 points thanks to cost discipline but also higher reinsurance commissions.

If we move to the next page on the financial portfolio side, the mark-to-market of our investment portfolio at year-end 2022 ended up slightly below €3 billion. In terms of asset allocation, you can see that we have continued to de-risk with equity now at 3%, bonds at 77% and we are still piling up some cash which is a liquid asset at 12% of the total investment portfolio. This comes from the cash generated by our business and of course we are keeping a high level of cash ahead of the dividend payment. In terms of investment deals, you can see that we have started to really pick up the yield as the accounting yield without the realised gain rose from 1.1% to 1.5% and all the new money that we're investing is above 2%. Something that we mentioned already in Q3 is the application of IAS 29, due to hyperinflation in Turkey and Argentina, which negatively impacted investment income by €13m pre tax.

This leads us to very strong net income for full year 2022 at €283m with operating income up 32% from €330m to €414m. The tax rate was almost unchanged at 26%, with net income up 26% compared to last year.

Retuon average tangible equity is on the next page, starting with the change in equity. We started with €2.1 billion of IFRS equity at the end of last year. Of course, we paid our dividend in May 2022. We are accounting for net income for the year and, as we said in previous quarters, equity has been impacted by the rising interest rate environment. This is the -€265m that you see on this chart. This results in total IFRS equity of €1.9 billion. Retuon average tangible equity rose from 12.2% to 15.6%, thanks to the very good technical result net of tax.

Now we're moving on to the Capital Management section. I will start with the balance sheet, totalling €8.4bn. Factoring assets and factoring liabilities that are totally matching slightly below €3 billion. We discussed the insurance investments of €3 billion. What is noticeable is the financing liabilities which is our hybrid debt. I think last year it was around slightly above €380m and you can see that here the €534m is in fact made of two tranches - the first one is related to the initial hybrid debt that we paid partially in September and also a new €300m, 10-year,fully-fledged, Solvency 2, Tier 2 that we issued in September.

We have a couple of pages on IFRS 17 later on. In terms of financial strength, the three rating agencies confirmed our ratings with AM Best and Fitch issuing a stable outlook and Moody's issuing a positive outlook in October 2022. Book value per share is €13.2 and tangible book value per share is €11.5.

Moving to the Solvency 2 page which is page 24, our Solvency 2 ratio ended up at 201%. Here, we should highlight the fact that our liability management in September temporarily boosted the Solvency ratio by 10% so, if you really want to compare apples to apples, I would compare 196% to 191%, which again is very strong given the fact that we are increasing our business, we're increasing exposure, but we have stayed very disciplined and rigorous in the underwriting process. On the right-hand side, you can see the usual