2023 05 25 Transcription Résultats T1-2023 (Version Anglaise uniquement)

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.

Q1-2023 results

Conference Call Transcription

Paris, 25 May 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 Q1-2023 results. 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

Thank you. Welcome, everybody, to this first quarter publication call. We're happy to report our net income at €61.2m for the first quarter. As you know, this is the first time we will be reporting under the new format of IFRS 17 and IFRS 9 accounting standards. In April, we provided a pro forma view of 2022 quarter by quarter, so we will be comparing this first quarter 2023 to the pro forma 2022 that we had previously disclosed. So, on that basis our turnover is up 11.4% at constant FX and perimeter. If you look down the list of our products, you see that trade credit insurance is growing almost 11% and client retention is breaking yet another record at almost 96%. Pricing is down 1.5% but less than last year. Business information continues to grow and is up 15% at constant FX, and factoring is up 13.1%. It was another good quarter and we'll discuss the underlying trends in the following pages. You also see the net loss ratio at 40.6%, which brings the net combined ratio to 66.3%. The gross loss ratio is up from last year by 9.2% as we see a normalisation of the risk environment, but last year we also had the impact of the last bit of the government programs which we contributed to, so when we compare the net result it's actually better this year. The net cost ratio is down by 2.1% to 25.7% and that's both thanks to operating leverage and continued high reinsurance commissions. We'll explain how we're continuing to invest in the business during that time. Overall, this was a strong quarter with net income up 17% to €61.2m and retuon average tangible equity at 13.6%.

We've added a page to the usual stack on page 5 just to highlight two different points in what we're doing. The first one has to do with how we're growing our information business. We wanted to give you a little bit more colour on what's going on in that business. It's actually made up of two parts. One is the historical business information units that we had in Coface, mainly in EasteEurope and Israel, and that piece is growing in the single digit. Then we've introduced our new strategy and new products, which is about 40% of our business, and which is showing strong growth. We have the annual value of the new business that we're driving and the pipeline of new opportunities which are seeing strong double-digit growth from last year. I think another benchmark that's interesting for us to highlight with this business is that we've reached 13,000 individual clients for this activity, both large and small companies, and that compares to roughly 50,000 clients for Coface overall. So, it's starting to be material in terms of our ability to reach a large number of clients even though the unit value of these contracts obviously is much smaller than what we get in credit insurance. Also, some really nice growth in the other specialties that we've laid out in our Build to Lead plan. Revenue from our bonding, single risk, debt collection and factoring specialties is up 20% and then insurance and debt collection fees are up 17%. That's a reversal of the previous trend where over the last couple of years we had seen much less growth in those parts of the business than on the pure insurance premiums. This gives you a little bit more colour on what's continuing to drive service and fee revenues for Coface.

The other point we wanted to highlight is obviously the real estate portfolio. As you know, we mainly have bonds in the investment book and we've been modifying our other holdings, mainly stocks which have come down. But we also have a €200m real estate book as a diversification. I wanted to give you a little bit more colour because everybody knows this is an area of the investment portfolio that is under more stress. We do not hold buildings directly. We hold them through investment funds. We have been careful in selecting funds that have low to moderate leverage, so we're not invested in the highest leverage parts of that space. We have been proactively managing that part of the book. It started in the second quarter of 2021, where we had about 9% of our book in real estate at the end of 2021. We're targeting something like 5% by the end of this year which implies €90m of divestments. There are limitations due to the liquidity of these assets and, while we are managing that exposure, we're also actively rotating away from what we consider to be the most risky part of that book, which is offices and retail, into something that for us has got more resilience, which would be housing and logistics type infrastructure. So, as you know the real estate portfolio won't be run through the PNL in terms of mark-to-market under the new IFRS 9 accounting standards, so it has a negative impact on the retuof our asset portfolio for this quarter and we'll explain this in the rest of the call.

With that I'm going to tuto page 7. Those are pages that by now you're very familiar with. You can see the 11.4% growth in total revenues for the business and 10.9% for premiums, driven as it has been for quite a while now by past client activity and very strong retention. As I mentioned, other revenues are up just over 15% and information also up 15%. Third party debt collection is small but it has started pick up some speed at 44%. Factoring is up 13%. And then as I said, after several years of stagnation insurance fees are starting to see some momentum at 12.8% which for us is a nice non-capital-intensive source of revenues.

On page 8, we usually break up our growth story by region. Whereas last year we had fairly homogeneous growth across all the world, you start to see some differentiation here and that's really driven by what's going on in the economies and in different regions. So Latin America used to grow 30%. It's coming down as we're seeing a softening of commodity prices from last year. Asia Pacific is slightly down, that's driven obviously by the slowdown in activity in the Technology ICT space as well as commodities. If we exclude the positive one-off from 2022, Asia is fairly flat. North America posted double digit growth. Med and Africa is doing really well. Central Europe is negative because we are running off the book in Russia. Excluding this we would be at 1% growth, so that also highlights some form of slowdown in EasteEurope. And then in NortheEurope and WesteEurope, you see the numbers being inflated in WesteEurope by some accounting one-off due to the alignment of the accounting methodology, which accounts for about 10 points. If you take that out, growth stands at 7% for NortheEurope and 11% or 12% for WesteEurope, so continued growth in client activity in that part of the world.

If you go to page 9, you see that new business continues to retuto pre-COVID levels. We continue with our stance of being prudent in the way we underwrite business in this part of the cycle and very consistent with our strategy of value creation through the cycle. The retention rate broke yet another record, I think we've been breaking those records for 5-6 years in a row now. The price effect is -1.5%, which is fairly in line with those historic trends, but it is better than it was last year. So after Covid we had a good year in 2021, we had a rebound, a negative rebound in 2022 and things are starting to improve a little bit. And then on the volume effect it's still a good quarter but it is less than half of the activity we saw last year, so we're clearly seeing a slowdown in economic activity which is reflected in the turnover declarations that we get from our clients. Clearly, the cycle that we had predicted would continue is happening, so no real surprise when it comes to those numbers for the team here at Coface.

I'll go to page 10 and talk a little bit about risk. We had another good quarter at 40.7%, which is pretty much in line with the quarters that we had before that. There is a slow normalisation underway. I think it's probably happening a little bit slower than we would have thought, but we've seen the number of claims increase for almost two years now. It'll be two years in June, close to pre-crisis levels. The large losses are increasing even though they're still below the average of the cycle. You can see on the bottom right of the graph here we try to compare 2022 and 2023, so under the new IFRS 17 rules we have to discount the reserves that we put on the books, so that's why you have this light blue line here on the top which explains what the reserves would have looked like if we didn't have that discounting method. So, we're reserving the new vintage at 78.4%, which is actually very close to the 84.2% we had last year. As you recall last year was the first quarter in which we saw the invasion of Ukraine by Russia and we had taken some reserves, which explains why it was a little bit higher last year. On the other hand, the turquoise 35.6% are the releases from the prior years and you see that they are lower than they were in 2022 and 2021, and getting back to the values historically that we had seen in the prior years. That's really because the two extraordinary vintages that we had following COVID and the government policies which had driven insolvencies to record lows, these two vintages are now running off so we're getting fewer releases from the past and then things here as well are normalising.

On page 11, we show the quarterly loss numbers by region, and we compare that to the annual losses in the prior years. It's a little bit tough to compare one quarter with the full year so I suggest we move to page 12 where we have the quarterly sequence for the different regions. Here what you see is that the four largest and more stable markets on the bottom are pretty benign at 42% for WesteEurope, 24% for NortheEurope, 26% in Central Europe, and Med and Africa at 29%. So really, the risk remains pretty stable and really good on these four markets. You see more volatility as we have historically known in the three smaller more volatile markets on the top. North America rebounded from zero in Q4 to a still very good number at 32%. Latin America saw the second tranche of the large file that we had discussed in Q4, so the difference here is that we've taken the second part and then that'll be the end of this file. However, it is compensated this quarter in terms of the net loss by the charge that we will pass on to the reinsurers, so net you won't see it but on a gross basis it still appears here on the Latin America curve. And then in Asia Pacific it's rebounding from a low -50% to +29%, so the quarterly numbers are more volatile, but we still see a pretty good level of losses here in Asia.

We have the usual page on costs on page 13. Our total costs quarter over quarter and a year are up 10.9%, and that breaks down into 8.8% for external commissions paid to third parties and 11.5% in internal costs. Within those numbers, I just wanted to highlight a few things. First of all, insurance costs are up 7.9% so when you compare that to growth in insurance premiums, we are continuing to see operating leverage. Costs are growing more slowly than premiums, which is exactly what we want, and what we've been doing for the last seven years. We're continuing to invest in the business as per our Build to Lead plan, so you see that 2.2% of those 11.5% have been driven by investments that we deliberately make in this business. Then we're also adding to our technology investment budget, because I think this is a good time for us to do that. There are some things we can get done this year that it's just not worth postponing. And then when you look at our gross cost ratio, it's actually down 1.2 points from last year at 29.4% and that's really driven by the increased fee revenues that I mentioned earlier. With that, I'm going to tuit over to Phalla to take us through the rest of the deck.

Phalla GERVAIS, Group CFO and Risk Director

Good evening. So, let's look at the reinsurance page on page 14. I will start with the premium cession rate at 27.3%. That has been very stable compared to last year. We're going back to the pre-COVID period level where you only have the third-party reinsurers in place. The claims cession rate has moved up from 7.1% to 27.4%. Just to remind you that in Q1 2022 we released the last chunk of the reserves related to the public schemes and of course that went back to the government that put these schemes in place. This explains the low claims cession rate last year, while this year we're more back to normal pre-COVID levels, except that here within the 27.4% we have the first tranche of excess of loss related to this very large claim that we have in Latin America. For the first time in Coface's 20 years history we reached the first tranche of excess of loss. Bottom line, the reinsurance result moved from -€52.5m to -€21.3m.

If we move to the next page, the net combined ratio is at 56.3%, which again is a pretty good result. If we want to compare apples to apples, again I would compare last year's 56% without the public schemes in place to the 66%. Here, you can see that this increase is mainly due to the loss normalisation where the net loss ratio is moving from almost 30% to 40.6%.

Let's move now to the financial portfolio on page 16. So, if you look at the chart on the left-hand side, we can see the mark-to-market of our investment portfolio is now slightly above €3bn. In terms of asset allocation, we have not moved much since the end of 2022, with the investment in bonds at 75%. We de- risked our equity part last year down to 3%. Investments in real estate funds are at 7%, and here you can see that 16% is liquid assets as of the end of March and we are holding cash to pay out dividends which was done yesterday.

If we move on to the right-hand side which is the net investment income at -€2.6m. I think three highlights here. The first one is the underlying yield on our portfolio without mark-to-market and without realised gains. You can see that our accounting yield is now at 0.5%, which is twice as much as we had last year, so here you can see that we are starting to really benefit from the interest rate increase and the fact that we moved our portfolio to take advantage of this opportunity last year. On the other hand, we booked a negative impact related to the fair value of our investment in real estate. As Xavier mentioned, the mark- to-market, so the unrealised loss, under IFRS 9 goes to P&L while under IFRS 4 it used to go into our equity. Lastly this quarter, we booked an accounting impact related to the application of IAS 29, Hyperinflation, on Turkey and Argentina, booking -€5mpre-tax, which goes into our net investment income. This gives us net income of €61.2m with operating income up 11% compared to last year and net income up 17% compared to last year. Again, a very satisfying quarter.

On retuon average tangible equity, I will start with the change in equity. On the equity side, full-year 2022 pro forma under IFRS 17, we have €2.018bn. Net income for the quarter at €61m and then I think differently from last year you can see that the mark-to-market of our investment portfolio is now positive, excluding of course the liquid asset part and investment in real estate that goes into P&L. This leads us to a final IFRS equity at the end of March of €2.1bn. Retuon average tangible equity starting with the end of full-year 2022 stood at 12.7%. Adding up the technical results and the negative impacts related to the financial results gives us a retuon average tangible equity of 13.6%.

Xavier DURAND, CEO

So as usual I'm going to wrap this up on page 20. Just to say few words about the environment to start. There's a lot of risk out there. I think over the past few quarters we've highlighted the geopolitical tensions, the war in Ukraine that's showing no sign of abating any time soon, inflation that's out there, the increase in the rates from all the central banks and the pinch on liquidity that's simultaneously been driven all around the world, the incredible increases we've had over the last year in commodity prices, social tensions, and the economic risk around energy. All that is out there. It did not materialise as we said on the prior calls as badly as it could have during the winter. However, the risk is still out there. We were also seeing some manifestations of that through the number of insolvencies which continues to rise and in many economies is now at or higher than 2019 levels. Plus there are the tensions you've heard about over the last few months and in the US around banking liquidity, which adds additional uncertainty to the economy because I think it will create some kind of a credit crunch from the thousands of mid to small size banks in US. So there's still risk out there in this environment which remains hard to predict even though I would say the general trend is what we had forecast. The individual events are hard to predict. So we are staying absolutely true to our values and we're continuing to do what we said we would do. Number one, this means being thoughtful about where we invest our money and what kind of business we write. Number two means making sure we focus on clients and deliver superior service. We have an NPS that remains above 40, which for us is a really good score. We measure that on a monthly basis and in a very detailed way. We're continuing to invest in our plan. This is the time when the business is performing so we think it's a good time to invest. We're investing in our ancillary products and we're also investing in our technology. We're being disciplined about cost and we are managing the risk portfolio consistently with the long-term trends that we're seeing. We're also managing the new risks when they show up and I think the real estate portfolio is one that we had not discussed before but which we've been working on for almost two years now, and we've been taking a number of measures to try to limit the impact that the increase in interest rates would have on that book even though it has an impact. So that's where we are. Staying absolutely true to our culture and continuing to deliver and execute. With this I'm happy to tuit over to you for questions.

Q & A session

Michael HUTTNER(Berenberg) Fantastic, thank you, and congratulations again. Three questions. One is what is the amount of the business insurance fees? I'm sure it's there somewhere but I couldn't find it so that would be very useful. The second is on the reinsurance so using the excess of loss, can you help us out and say what the limits are on this to give a feel for how well protected you are? And then the final question is that insolvency is up and then you said in many places at or above 2019 levels. Your loss ratio is definitely below 2019 levels. So, what's the difference? Where are you so much different to back in 2019 that you can still produce these excellent ratios?

Xavier DURAND(CEO, Coface) So let me start with that one then Phalla's going to look for the insurance fees number while I speak. So, usually what government's measure is the overall number of insolvencies in the market, it doesn't tell you where these insolvencies are happening and what kind of companies or sectors are being hit. So, what we're saying in a tuof a credit cycle like this is it usually starts with the smaller businesses, it starts in certain geographies and it starts in certain sectors. So, you're all aware of some of the difficulties we're seeing in the retail space for example. I think construction is starting to feel some pinch. We've had obviously in the past certain industrial sectors that have been under close watch. So, two things underneath this - one, we're not necessarily exposed to those sectors that are most impacted, and second we managed this proactively by being a little bit ahead of the curve. When it comes to the reinsurance, I think our limit is €60m or something like this.

Phalla GERVAIS(CFO and Risk Director, Coface) Well the first tranche of excess of loss is €52m.

Xavier DURAND(CEO, Coface) Oh because that's a prior year. €52.5m before quota share so after the quota share it's €40m.

Xavier DURAND(CEO, Coface) We manage anything above 40 net. That was last year. We've increased those limits consistent with the growth of the business this year as well. And then the insurance fees? The limit fees…

Phalla GERVAIS(CFO and Risk Director, Coface) OK the total exposure increase, is that your question? Xavier DURAND(CEO, Coface) Was that your question?

Michael HUTTNER(Berenberg) No, I was asking for the fees from the business you're investing in, the business information.

Phalla GERVAIS(CFO and Risk Director, Coface) Are you talking about the business information revenues? Michael HUTTNER(Berenberg) Yes, sorry I should be clearer.