2023 04 27 Transcript Conference Call Pro Forma IFRS 17 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.

Pro forma IFRS 17results

Conference Call Transcription

Paris, 27 April 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 2022, which was registered by the Autorité des marchés financiers ("AMF") on 6 April 2023 under the number No. D.23-0244. 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 Pro forma IFRS 17 results. As a reminder, this conference call is being recorded. Your hosts for today's call will be Phalla Gervais, CFO.

Phalla GERVAIS, Group CFO and Risk Director

Good afternoon, everybody. Today, we're going to provide you with an overview of our pro forma IFRS 17 full-year 2022 results.

Before we start, I just want to highlight a couple of things. The first one is of course as everybody knows IFRS 17 went live on 1 January 2023, which means that the next time we talk to discuss our Q1 2023 results, they will be presented under this new accounting standard. The numbers that are presented today are the so-called pro forma numbers, which is the full-year 2022 results with the retroactive application of this new standard.

I hope that it will provide you with some useful reference for your modelling and that's one of the purposes of the call. We have already presented the first-time application with our year-end results in February, which is the opening balance sheet under IFRS 17 as of 1 January 2022. Please note that this has been reviewed by our external auditors now with no changes. The pro forma data that we will go through today, which is some quarterly numbers and more importantly the full year 2022 P&L as well as the closing balance sheet as of 31 December 2022 under IFRS 17, are as we speak under review by our external auditors. I also want to highlight the fact that we have moved since 1 January 2023 from IAS 39 to IFRS 9, which is related to the investment portfolio accounting classification. However, IFRS 9 doesn't require us to have a pro forma set of accounts for the previous year and Coface has chosen not to do so.

What you will see during this presentation is a couple of comments that will be developed during the course of today's presentation. The 2022 pro forma numbers need to be analysed in conjunction with the first-time application. 2022 obviously was a transition year and during this transition year you will have some short-term differences from one norm to the other.

You will see that the profit recognition pace is different under IFRS 4 and IFRS 17, however, given the short-term nature of our business, in the mid-term shareholders equity, earnings and cash flow will converge under the two norms.

More importantly, under IFRS 17, Coface will continue to report and to rely on the same KPIs but with very limited definition changes that we will go through.

If we move to the next page which is page 5, I think this page has already been presented in February but it's good also to be reminded. Our strategy remains unchanged and non-impacted by the implementation of IFRS 17. So, what was our state of mind when implementing IFRS 17? In terms of principle, I would remind you that the short-term nature of our business allows us to apply a simplified approach which is the Premium Allocation Approach. We have no Contractual Service Margin (no CSM). This is a principle. We have ensured or tried to ensure the same KPIs, the continuity of KPIs in terms of premium, combined ratio and retuon average tangible equity. We're not adding any new KPIs and we're not replacing any of the existing ones. We stayed very coherent in terms of reserving principle, and we'll see that later on. The first-time application on 1 January 2022 has been presented. And last but not least we have leveraged our existing Solvency II processes, which means that the best estimate that we are using under IFRS 17 is exactly the same one as we're using for our Solvency II calculation.

The first thing that comes out of this implementation is that the reserving philosophy remains broadly unchanged. This is apparent when we talk to you about the level of reserves on the new vintage for the opening year and the positive or negative prior year developments. We're applying the same philosophy. Coface's strategy is unchanged. The Build to Lead assumptions and the through the cycle targets remain unchanged - a combined ratio around 80%, retuon average tangible equity above 9.5% and pay-out ratio above 80%.

Cash flows over the lifetime of the policy are unchanged. However, the new rules tend to accelerate profit recognition and there will be some volatility especially from one quarter to the next. Financial leverage is unchanged from what we saw in the first-time application as of 1 January 2022. Shareholders' equity has

slightly increased compared to IFRS 4 by €91m net of tax, net of reinsurance which represents €0.60 per share.

So, let's go to the heart of the presentation. Going forward, you will see all the pages where there is an impact due to IFRS 17. On page 7, turnover, if you look at the chart, on the left hand side you have IFRS 4 and on the right hand side you have IFRS 17. Of course we are only looking at the full year 2022. Turnover changes slightly. The difference is less than 1% and this impacts only the earned premiums which is the insurance business, whereas fees and other revenue stay unchanged. Gross earned premiums changed from €1,527m to €1,516m. This change is close to €11m, which is nothing, however, you have two components. The first one is a reclassification from the OpEx line and this is related to the inward commissions, which are the commissions that we are paying on our fronting reinsurance business. Under IFRS 17, this is deducted from our gross earned premiums so it's just a reclassification from OpEx to premiums. Then, because of the duration of a policy, which in terms of premiums is approximately 17 months and is obviously longer than 12 months, under IFRS 17 we have to recognise a coverage period extension, which is a timing difference, and we have introduced this mechanism in our premium recognition. This goes on top of the gross earned premiums as of full-year 2022. The bottom line here is that gross earned premiums have slightly decreased compared to IFRS 4. Less than 1%.

On the next page you will see the same changes in terms of turnover across the regions. You can see that the only region where we have a more significant impact is Asia Pacific and this is because of the nature of our business in Asia, where we have the most insurance fronting business, and of course we're moving from €151m to €131m. We have deducted the inward commissions of this fronting business. Just showing you on a geographical point of view where the inward commissions have an impact.

Now let's move to page 9, which is probably the most interesting page for us in terms of changes. I will start with the chart on the top left-hand side, where you have the gross loss ratio before reinsurance and after claims handling costs by quarter and for the full year. On the right-hand side, you have the same gross loss ratio under IFRS 17 pro forma. So, on a full-year basis under IFRS 4, the gross loss ratio last year was at 31.2% while it would have been 35.5% under IFRS 17. To see what drives these differences, let's look at the chart on the bottom right-hand side. Again, you have the two views with IFRS 4 and IFRS 17 and of course here we're looking at the 12-month 2022 figures only. You are already familiar with this chart which has the opening year and the prior year development. I will start with the opening year - that's the dark blue bar. Under IFRS 4 you can see that at the end of last year, we opened the new vintage at 80.2%. Under IFRS 17, we would have opened a new vintage at 80.5%, but the difference between 80.5% and 77.3% is due to the fact that under IFRS 17 we have a discount. We have to discount the reserves. So, to compare apples to apples, you can see that the new vintage would be very similar in terms of reserving philosophy with the opening new vintage around 80%. So, on the other side which is the prior year development, you can see that the prior year development - the releases that we recognised in 2022 under IFRS 4 - represent a 51.6% reserve release, while under IFRS 17 it was 44.2%. When we said that we have a different pace in terms of profit recognition, this is what you see here. Under IFRS 17 the prior year developments are recognised faster than under IFRS 4, and the way that we have recognised it faster was through the first- time application, which is the opening balance sheet. You may recall that we have a first-time application impact of €91m net of tax, net of reinsurance. And then we go back to the chart above where you can clearly see the change. So the IFRS 4 full-year 2022 loss ratio was at 31.2%, then if we add the first-time application, which is the faster recognition of the prior year developments under IFRS 17, you are adding 5.5%. Then you have -1.9%, which is the discounting effect under IFRS 17, the methodology differences and timing. And then of course you have the impact of the inward commissions on the ratio, and we have a lower gross earned premium under IFRS 17. This is why you really need to look at this transition year for the P&L in conjunction with what we did in the opening balance sheet during the first-time application, so you have a complete view of the transition between the two norms in 2022.

Going back to the first graph, you can see the difference between the quarters. More specifically, it tells you that under IFRS 4, of the reserve release related to the prior years, a big chunk happened in Q3 2022, while this has been recognised under IFRS 17 mainly in the first-time application and opening balance sheet.

Moving to page 10, you can see these full-year 2022 variances by region. Again, if you look at the regions, there are some slight differences from one region to another, but it also gives you an idea of where the first-time application - so the prior year development recognition under IFRS 17 in the opening balance sheet - has been recognised.

If we move to the next page which is only IFRS 17 per quarter, what we want to highlight here is the fact that between the two norms the reserving philosophy or principle was exactly the same. You'll recognise

that in Q4 2022 in Latin America under IFRS 4 and IFRS 17, we booked these very large claims, specifically in Brazil. It's the same story in Central Europe where in Q1 because of the Ukrainian war we booked reserves. It's the same story under IFRS 4 and IFRS 17. In Q2, we reallocated these reserves to the region where the risk was underwritten. In Q3, we booked reserves when Russia announced the mobilisation. And in Q4, it's the same story. We reallocated those reserves to the region where the risk was underwritten. The bottom line here is that between the two norms the messaging in terms of reserving principle and philosophy remains exactly the same.

Moving to the Costs page, external and internal costs combined fall from €851m to €819m. Internal costs stay unchanged and you can see this reclassification related to the inward commissions. €31m from OpEx to gross earned premiums that has been netted off this inward commission. Mechanically the gross cost ratio decreased between the two norms.

If we move to the reinsurance page, again pretty much the same story on the reinsurance side. Premium cession rates remain almost the same as this is just the adjustment on the gross earned premium. The claims cession rate is higher under IFRS 17. This is due to the fact that we released more reserves under IFRS 4 during the full year 2022 P&L and of course this benefits reinsurance as well.

The net combined ratio stands at 67.6%. Same story and same explanation here as we provided for the gross loss ratio. Under IFRS 4, for full-year 2022, the net combined ratio was 64.9%. Under this first-time application, positive prior year developments are recognised faster in the IFRS 17 opening balance sheet and this time it's net of reinsurance. The impact is 3.8%, and we also have the impact of the inward commissions, not only on the loss ratio but also on the cost ratio.

Moving to page 15, net income of €240.4m, and in the first time application net equity increased by €91m net of tax, net of reinsurance.

The next page provides you with the change in equity under IFRS 17. The opening position was €2,229m. This is the opening balance sheet which is €91m higher than under IFRS 4. In terms of cash flow, I think the €224m in dividends is the one that has been approved. We are adding on -€264.9m in pro forma full- year 2022 net income. This is the mark to market so the unrealised loss related to the interest rate increase is mainly on our investment portfolio. This number is exactly the same as we have recognised under IFRS 4. Then you have the Others column. Part of that is exactly the same numbers that we recognised under IFRS 4, leading to a closing equity position of €2,018m.

If we look at the change in retuon average tangible equity under the two norms, it was 15.6% under IFRS 4 at year-end 2022. There is an equity impact, as equity under IFRS 17 is higher than under IFRS 4, and we have the net income impact. This leads to a pro forma retuon average tangible equity under IFRS 17 of 12.7%.

Moving now to the balance sheet on page 18. The balance sheet variances between the two accounting standards at year-end 2022, so here we're talking about 31 December. Couple of things here. We have already presented that, in the opening balance sheet, the principle is the same. So total assets and total liabilities under IFRS 4 were at €8.451 billion and have dropped to €7.586 billion under IFRS 17. You might recall that under IFRS 17 there is a lot of netting between reserves, other assets and other liabilities. Of course, goodwill, insurance investments, factoring assets, factoring liabilities and hybrid debt don't change, as they are not impacted by the IFRS 17 changes. What needs to be noticed is the difference in shareholders' equity. In the closing balance sheet, it's the difference between €1,960m and €2,019m, i.e., €59m compared to the €91m in the opening balance sheet.

So, what would it look like if we had Build to Lead targets through a cycle with an IFRS 17 lens, pro forma for sure. Well with what we said, the combined ratio would have been 67.6%, which is still below the Build to Lead target of 80%, the pay-out ratio would have been 94% which is above the 80% target. Retuon average tangible equity at 12.7% is above the 9.5% target, and there's no reason the solvency ratio would have changed. As I said we're leveraging the same best estimate under IFRS 17 as for my Solvency II calculation.

So, the key takeaways of this overview are that Coface's strategy remains unaffected by IFRS 17. You can see that the reserving philosophy remains broadly unchanged. We have an almost identical opening year if we disregard the discount effect for the new vintage. The Build to Lead assumptions and through the cycle targets remain valid and, more importantly, I think we just have faster prior year development recognition under IFRS 17 than under IFRS 4. However, given that our business cycle is two years, I think that in two years' time our figures under the two norms will converge. Coface will continue to report and rely on the same KPIs with very limited definition changes. You can see that on the gross earned

premium. I hope that you have seen that the pro forma 2022 P&L needs to be analysed in conjunction with the first-time application. It just illustrates the faster recognition of the prior year development under IFRS 17. We started to converge during 2022 and, more importantly, I think the Build to Lead and through the cycle objectives remain completely valid under IFRS 17.

Q & A session

Michael HUTTNER(Berenberg) Hi there, thank you so much. Really clear and you're the first of my companies to report. I'm really delighted with this and also you provided the Excel spreadsheet. Two questions. So, €91m is the net of tax, net of reinsurance impact on the opening balance sheet and I think €59m, a portion has already been used. I don't know how much exactly but a portion and there's still a portion left so I'm just wondering when will that portion affect earnings? Is it all in 2023? So really my question is does that mean that consensus should come down and by how much? I think it's €32m or something. And the second question is very simple. Is there any change in the asset allocation? I noticed you said the unrealised gains impact on the balance sheet is the same, but I think under IFRS 9 that there are some changes in profit recognition for assets, so I just wondered whether that would affect your philosophy.

Phalla GERVAIS(CFO and Risk Director, Coface) So, on the first question, indeed we started to converge in 2022 as you've seen, and of course what has been taken will not be taken again. It will depend on the development. We still have policies that are under development, so this would be taken into account in 2023 I believe for the vintage related to 2021 and 2022. It really depends on how our claims develop.

On the second one which is related to IFRS 9, so a couple of things, and you're totally right to highlight this and we presented it in February. As I said, we have no pro forma related to IFRS 9 in 2022, however, if you go back to the full- year 2022 presentation, we have shown that we know that IFRS 9 will lead to some volatility in the P&L. This is a matter of fact that we already reduced our equity exposure for instance at the end of last year, equity represents 3%, and this will go into equity in terms of mark to market. What remains volatile in our P&L would be investment funds in real estate and we have approximately 7% only. That might drive some volatility in our P&L. Real estate funds need to be looked at based on a mid-term or long-term view. So this might create some volatility in the P&L in 2023. This is why you don't see it in the end balance sheet because at the end of 2022 we were still applying as IAS 39. Does that make sense?

Michael HUTTNER(Berenberg) Yes, and how much would it be?

Phalla GERVAIS(CFO and Risk Director, Coface) What do you mean how much will it be? Michael HUTTNER(Berenberg) The difference between IAS 39 and IFRS 9.

Phalla GERVAIS(CFO and Risk Director, Coface) Well we haven't calculated the P&L impact. We only have the opening balance sheet view.

Benoit VALLEAUX(ODDO BHF) Yes, good evening, thank you for this presentation. One question on my side is regarding your reserving policy. I understand that the reserve releases in 2022 were mostly related to the first-time application, but I just wonder if going forward you think that you will still be able to manage or smooth the volatility of earnings. And when I look at slide 18 on your balance sheet. Do you have in your €1,433m in reserves, do you still have some buffer that is a best estimate, just to understand the gap between what you had under the previous accounting norms. I'm not sure if under IFRS 17 you are reducing your amount of reserves by roughly €600m so I just wanted to understand if you had some buffer within that or not. And related to this, you mentioned that your strategy is unchanged of course but can it lead you to change your reinsurance programme a little bit going forward or not?

Phalla GERVAIS(CFO and Risk Director, Coface) In terms of the difference between the two norms, you're right, under IFRS 17 we are now calculating our reserves based on a best estimate and risk adjustment. The total amount that you're seeing is the total of the two items. Did I answer your question? Within the €1.4 billion, or a little bit more, we have premium reserves and claims reserves. It's a little bit misleading. And the claims reserves are made up of the best estimate and risk adjustment.

Benoit VALLEAUX(ODDO BHF) And you don't disclose the amount of the risk adjustment?

Phalla GERVAIS(CFO and Risk Director, Coface) Well it will be disclosed when we present our Q1 results but what we can tell you is the percentage that we have retained for risk adjustments is about 85%.

Benoit VALLEAUX (ODDO BHF)Thank you.

Phalla GERVAIS(CFO and Risk Director, Coface) Going back to your second question related to the reinsurance, I would say that so far there's no reason to change any structure in our reinsurance.

Benoit VALLEAUX(ODDO BHF) On the reserving policy, do you still believe that you'll have some buffer when needed and maybe release some reserves also as you have in the past.