Coface : 2023 08 10 Transcript Conference Call H1-2023 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.

H1-2023 results

Conference Call Transcription

Paris, 10 August 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 2023 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 H1-2023 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 and welcome to all the people who've joined us today. It's a bit of an odd call in the middle of the summer. We appreciate your flexibility. We're delighted to present our first half 2023 results. You can see from the headline that the company continues to perform well. Net profit in the first half of €128.8m, solvency at 192%. When you go through the different items of the P&L, I think you see continued performance with the turnover up 11.1% all things equal, including 11.2% for TCI, which continues to be driven by client activity. These are largely the same trends you've seen in the prior quarters. Our client retention is still at a historic record for the business. Pricing is down as in the first quarter but it's obviously recovering from last year. We continue to see good momentum in our business information line of business, which is up almost 15% for the first half. Factoring is up 5%. You'll notice a slowdown there. It was double digits in the first quarter and clearly slowed down significantly in the second quarter. I think it reflects a clear slowdown in the economy in Germany and in Poland. Factoring is typically the line of business for us which is impacted soonest. So, it's an indication of a slowdown in the European economy. The net loss ratio for the first half stands at 40.3%, up almost four points from last year, which included the last part of the government pay-outs. That brings our net combined ratio to 65.5%, which is a very strong level, up two points from first half 2022. The gross loss ratio is slightly below 40%, up 7% from last year in a risk environment which is continuing to normalise. The net cost ratio stands at 25.2%, a very low level that reflects both our cost controls and high reinsurance commissions. It's also interesting to note that we have continued and we're continuing to invest in our business transformation and our growth, with good performance there as well.

That brings the annualised RoATE to 14.3%. As I said, the solvency at 192% is above our long-term target range of 155% to 175%. So, the company is strong. Also, we're reporting all those numbers now under the new accounting rules IFRS 17 and IFRS 9.

Going to the next page, we've added a page here on the environment because I think it's interesting for everybody to follow where we stand in the cycle. On the top left, you can see client activity for the last five years. There was clearly a dip during Covid in 2020 and a strong recovery buoyed by inflation in 2021 and 2022. Clearly in this first half of 2023, we're seeing slower client activity. There's a very significant slowdown here going on with client activity at 2.8%. You can see in the bottom left chart the change in corporate insolvencies, where the dark blue line represents the change versus last year. You can see that insolvencies are up in most countries. The UK is up 7%, France up 43%, Germany up 20% and the US up 33%. One exception is Italy at -5%. The green line shows where we stand versus the more normal pre-Covid period in 2019, and you can see insolvencies are already well up in the UK, back to 2019 levels in France, and still below in Germany, the US and Italy. But clearly the normalisation we've been talking about for the last two years is happening. It's continuing to happen. In that context, we're managing risk carefully. Our exposure growth is 3% in the first half of this year to €690bn. That compares to growth of about 13% last year. We've increased our prevention actions in close coordination with our clients, and you can see that versus 2019 which we consider to be a reference normal year, we're up 27% year-to-date and 66% in June. Our client activity is back to 2019 levels. Commodities, metals and energy are clearly offsetting continued price increases in the agro-food sector, and then I've already spoken about insolvencies. The bottom right chart just reflects what I've been talking about in terms of number of actions. So clearly there is a slowdown in the economy. Insolvencies are rising and we're managing the situation very carefully. That's the mission that we set for ourselves.

Page 6 on CSR is another important topic for Coface. We've been investing in the sector for a number of years now. I'll just go through the key changes here which are highlighted in dark green. On the responsible insurer side, we're continuing to expand our commercial exclusion policy. So far, we weren't covering sale, transport or dealings of thermal coal and oil. We've just added new exclusions which pertain to drilling, extraction and equipment, in relation to fossil energy, the sale of jet fuel and financing of these activities. So we're continuing to expand our exclusions to areas which we think are the most carbon intensive and most damaging to the environment. For the second year, we performed a climate stress scenario in our stress case for the regulators. We're continuing our work to decrease the emissions of our

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investment portfolio and we formally joined the NZAOA, which is the Net-Zero Asset Owner Alliance, together with about another 80 asset owners. This is different from the NZIA, the Net-Zero Insurance Alliance, which had multiple defections. We've set a goal of reducing the emissions of our portfolio by 30% in 2025 versus 2020. In terms of the way this is calculated - we outsource this to a third party named Amundi - there continues to be methodology changes that need accounting for, but there's nothing that leads us to believe that we're not going to reach that goal. I think we're well on track to do that and committed to those goals.

In terms of employees, we continue to survey very closely the morale of our employees and, for the first time, we're now above the benchmark of the industry for our employee Net Promoter Score. This is an area where Coface had been actually lagging the industry for a long time, so it shows that we continue to make progress and get more engagement from our employee base. We continue to drive our initiative to promote ESG projects in the area of single risk and that's going very well. We're well above our target in that area. In terms of fighting carbon, you can see in the responsible enterprise part that we are putting in place a series of measurements to reduce our consumption of carbon. We did a full assessment of our carbon consumption last year and we're now trying to reduce that footprint. This mainly comprises the buildings that we use, the transportation that we use, and the technology and IT consumption that we have as a business. And so we're putting in place the KPIs that are allowing us to really keep track of where we are, and I think we're making significant progress. In terms of communications and infrastructure, this is all based on a now well ingrained infrastructure. We have trained people. We have champions in every part of the world to follow these initiatives and align the whole company. As you know the regulations around the space are quickly getting more and more complex, and we're gearing up to be able to report based on the different sets of regulations being put in place. So that's where we are on CSR. We're absolutely committed to continuing to drive that part of the business.

On page 8, I'm going to go through the usual pages that you're now very familiar with. You see the growth components - 11.1% total, 11.2% for trade credit insurance, other revenues up 10.4%. I already mentioned the 15% for business information. In third party debt collection, we're doing more in that space now that we have launched a single global collection system. We're seeing 35% growth on the back of a renewed initiative in that area, and also a market which is more favourable. Factoring is up 5%, which I've already talked about. The good news here is on the insurance fees which are recovering with 11.3% growth in the first half at constant FX and that's really helping in terms of cost ratio.

When you go to page 9, you can look at the geography and the growth by region. It's a continuation of the story we had in the first quarter. Western Europe is up but there's an element of one off here so we're around 9%-10% growth without that one off in Western Europe. Northern Europe, which is Germany, is up 7%, Central Europe is up zero but if you take out the runoff that we're doing in Russia, we would be closer to 6%. Mediterranean and Africa continues to see good growth at 15% and North America at 7%. Asia Pacific is recovering from a lull we had in Q1, which was mainly tied to lower sales in the ICT technology sector. Latin America remains strong, driven by soft commodities and good client retention.

On the next page, the other way to look at our growth is the different components. I've already spoken about volume effect on the bottom, which is much lower than last year and getting back to the kind of numbers we were used to seeing in the past. I already mentioned a significant slowdown in some parts of the world. The price effect is better than last year but still negative. I think we're seeing better momentum on that front. The retention rate is at a record 94.4% so we're continuing to perform for our clients. We have great NPS scores and we're very focused on that. And finally, new production is rebounding from last year, so it's very consistent with the strategy we laid out to make sure we control risks when things are too good to be true, and remain ready to write business when the markets are a little bit more favourable.

If you go to the next page, on the loss ratio you see that it was another good quarter at 38.1% loss ratio before reinsurance and including claims handling expenses. As I've said now for the last two years, normalisation is slow, but it is happening. The number of claims has been increasing since the middle of 2021 so we're now two years into this. It's very near pre-Covid level. The large losses are increasing but they're still below the cycle average. Reserve releases you can see on the bottom right-hand side remain at a high level because we're coming out of a couple of years of very good performance. That's the 36.3% that you see in the more intense blue line which compares to the prior years which were exceptional but are still higher than what we would get in a normal year. And then you see that we've opened the new year at 73.4% under IFRS 17 rules. That would compare just for reference to about 77.5% in the IFRS 4 world that we used to know, within the range of what we would have done under IFRS 4, so we're still reserving at a pretty significant level.

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On the next page, we see the annual losses in the first half of 2023. I'd rather comment the next page which is the quarterly results because I think it's more telling at this point in the year. On the bottom, you have the four largest and more stable markets. You can see that there's really not that much to report here. Western Europe's losses continue to be very good at around 35%, Northern Europe at 29%, Central Europe at 33%, and Mediterranean and Africa at 46%. Not much movement here and continued strong performance. On the three smaller but more volatile markets historically - North America, Latin America and Asia - there's not much to report again on North America or Asia Pacific. There was a drop in Latin America following the big loss that we had at the end of last year in Brazil. Things are normalising but this is an area of the world where we see more losses and where we are actively working, so that's the story on risk.

Page 14 talks about costs and there again we're continuing our strategy to make steady productivity gains and at the same time continue to invest in our business. You see the costs are up 10.2%. That compares to the 11.2% growth that we've had in the business so we're still getting operating leverage. At the same time internal costs are up 10.4%, but within that you have 2.4% that are the costs of building the business information line, so without this we're closer to 8% compared to 11.2% growth in premiums. And then it's noteworthy to say that the cost ratios have improved by about a half point through the increased fee revenues that we've been enjoying through the beginning of the year. So that brings us to a 25% net cost ratio for the first half of 2023, which is a record for Coface and maybe for this industry. With that I'm going to pass it over to Phalla to take us through the next few pages.

Phalla GERVAIS, Group CFO and Risk Director

Thanks Xavier, so we are on page 15 on the reinsurance results. I will start with the premium cession rate at 27.1%, comparable to the first half of last year. We're moving back towards the pre-Covid premium cession rate. The claims cession rate has risen from 17.2% to 25.4%, however, in the first half of last year we drew the line under the reserve releases related to the public schemes so this explains the 17.2%. This year we're moving back towards the pre-Covid situation, although you may remember that the first half is slightly impacted by the excess loss on the very large claim that we had in Latin America. We are still benefiting from the higher reinsurance commissions and, as a result, our reinsurance result rose from -€83.2m last year to -€47.4m this year.

If we go to the next page, the net combined ratio stands at 65.5%. Again, I'd like to compare apples to apples, so if we look at the first half of 2022 without the public schemes, we were at 57.2% with a net cost ratio moving from 26.5% to 25.2%. As Xavier mentioned, this shows really very good cost discipline and high reinsurance commissions within an inflationary environment. The net cost ratio is very low. The net loss ratio on the other hand rose from 30.7% to 40.3% on a comparable basis, which really reflects the loss normalisation environment that we're going through.

Moving to the financial portfolio, I will start with the chart on the top left-hand side. The mark-to-market of our investment portfolio stands at €2.88bn. The asset allocation has not changed much for a couple of months now with the majority of our investments in bonds at 77%, a very small portion invested in equity at 3%, investments in real estate funds at 7%, and the remainder of the asset allocation is in liquid assets. In terms of key highlights, firstly the fact that the recurring income from our investment portfolio stands at almost €32m for the first half of the year, with the new money invested at 3.4%. Clearly, we are benefiting from the higher interest rate environment. The fair value to P&L line accounts for both realised and unrealised gains and losses. As already discussed in the first quarter, we booked a negative mark-to- market on our real estate investments. We booked -€12m in Q1 and an additional -€4m in Q2. The FX line also reflects the fact that we have to account for or apply IAS 29 related to the hyperinflation in Argentina and Turkey and this is accounted for -€6.4m. Another thing I want to highlight is the new Insurance Finance Expenses line introduced by IFRS 17. We discussed that a bit earlier on the gross loss ratio where you have the discount effect. With the discount effect that used to be under IFRS 4, the result was undiscounted and booked as a technical result. Now we have to isolate the discount effect in financial income and expenses in this specific IFE line.

This leads us to a strong half year net income of almost €129m, of which almost €68m was generated in the second quarter. Compared to last year's pro forma figures, net profit is down 4.4%, however, last year we didn't book anything related to hyperinflation.

If we move to page 19 which is the return on average tangible equity. IFRS equity at the beginning of the year was €2.018bn. We paid €227m in dividends in May. We accounted for the net income for the period, and then the €16.6m is the unrealised gain that we have on our investment portfolio, mainly bonds and

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equities. This leads to IFRS equity at the end of the period of €1.9bn, and the return on average tangible equity rose from 12.7% to 14.3%.

Let's move now to capital management on page 21. We have a very strong balance sheet. Total assets, total liabilities standing at €7.7bn. We discussed the insurance investments at €2.9bn, factoring assets at €3.1bn totally backed by factoring refinancing. We had no change in the hybrid debt and of course the net shareholders' equity that we discussed at €1.9bn. In terms of our financial strength, in May AM Best affirmed our Excellent A rating with a stable outlook. Book value per share is at €12.9 and tangible book value per share at €11.3. I think with the stock trading today at €13.4, we're above the book value per share so the market is giving us some credit.

Moving to the solvency page, page 22, the solvency ratio dropped from 201% at the end of last year to 192%. The 192% for the first half of 2023 should also be compared to the 192% in H1-22. You can see that the decrease is really coming from the SCR, so the capital consumption coming from our insurance and factoring businesses. We're basically financing our organic growth, and 192% is still comfortably above the upper range of our comfort zone. On the right-hand side, again we still have these two stress tests that you're used to seeing. The first one at the top is the stress test related to financial market shocks, in terms of interest rate spread and equity markets. You can see that applying all the shocks we'll still be way above the upper range of our comfort zone and this is mainly because we have de-risked our portfolio over the past 18 months. On the bottom right, you also have the crisis scenario shocks, the 1/20 events and 1/50 events. Again, 1/50 is the 2008 crisis with a combined ratio above 100%. Here we will be either above the upper range of our comfort zone or in the middle range of our comfort zone.

If we move to the next page, it just shows you the breakdown of the capital requirements between insurance and factoring so capital requirements stand at €1.278bn, compared to eligible own funds of €2.451bn. This gives us our solvency ratio of 192%. With this, Xavier, I'll give the floor back to you.

Xavier DURAND, CEO

OK just to conclude, another strong quarter. Very good results in line with the prior years in an environment that is changing. We're seeing double-digit growth in both the business information and the trade credit insurance lines. The combined ratio under IFRS 17 is at 65.5%. By all standards that's outstanding. Annual return on equity we've mentioned is 14.5%. The credit cycle is turning. After a very unusual inflationary outbreak, we're seeing lower economic growth and lower inflation which are driving lower client activity. The central banks around the world are dead set on taming inflation. It takes about a year for monetary policy to start affecting the real world. I think we're starting to see that but there's more to come so corporates are facing less availability of financing and they're facing higher payments and costs. We know the regulators are obviously watchful about not going too far, but I think it'll take a little bit more pain before they start easing off. In this context, we are continuing to consistently deploy our strategy. We're actively managing our risk in the areas, sectors and countries where it is less favourable. We're continuing to invest, building our services and investing to grow some of the new platforms that we've spoken about. We're really focusing on the clients. Our eNPS score and our NPS score with clients are both at a record level. And then we are making progress on our agenda for CSR, which is becoming more and more important for the business, so all on track. We're also happy to announce that we will present the new plan because we're coming to the end of Build to Lead and that's going to be March 5, 2024. So, we're still a while away but obviously working on it and we're excited about presenting the continuation of the Coface story for the next four years. With that I think that's all we have for you today and we are ready to take any questions.

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