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-2021 Results

Conference Call Transcription

Paris, 28 October 2021

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 implied or projected by, forward-looking information and statements. The Coface Group is under no obligation and does not undertake to provide updates of these forward-looking statements and information toreflect events that occur or circumstances that arise after the date of the said meeting.

Readers should read the Interim financial report for the for the first half 2021 and complete this information with the Universal Registration Document for the year 2020, which was registered by the Autorité des marchés financiers ("AMF") on 31 March 2021 under the number No. D.21-0233. These documents all together present a detailed 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 to publish an update of these forecasts, orprovide 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 providean 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 any investment or other decisions made based upon theinformation 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 June 2021. As a reminder, this conference call is being recorded. Your hosts for today's call will be Xavier Durand, CEO, and Carine Pichon, CFO.

Xavier DURAND, CEO, COFACE

Thank you and good evening, everybody. Thank you for joining this third quarter earnings call. Just before we get into the meat, I just want to acknowledge that this is going to be the last call for Carine Pichon. She's been our CFO for a very long time. I think this is her thirtieth earnings call as a listed entity and probably her fortieth quarterly closing overall. She will be taking us as usual through the second part of the presentation. On the call we have Phalla Gervais who will be taking over from her and so going forward she will be the one presenting for us.

Let me now start with the results. We are happy to report a very strong quarter. Our total net income for the year comes in at EUR 190.9m at the end of September, including EUR 67.7m in the third quarter alone, which is a record for Coface. I think it's a strong quarter, not just because of the net income but also because of the other metrics. Our turnover is up 7.9% year-to-date at constant FX and perimeter and up 8.9% year-on-year in the third quarter. Trade credit insurance premiums, which is our core business, are up 9.3%. This is on the back of the rebound in the economy as well as the repricing that we did last year. The pricing impact is still positive year-to-date, up 1.6%, but as we highlighted the last quarter, competition has been increasing quite significantly and it has been negative for two quarters in a row now at - 1.3% cumulated. The other good news is our information services business that we have been focusing on continues to see momentum. We are up 13.4% year to date and 18% in the third quarter as we indicated previously.

On the loss side, it's more of the same with a net loss ratio which is down almost 30 points to 25.4% bringing the net combined ratio to 56.1% for the first nine months of the year. The Q3 net loss ratio is 31.4%, which is down almost 19 points from the third quarter of 2020. We continue to see a low level of loss activity although we probably bottomed out during Q3. The nine-month 2021 net cost ratio is up 0.6 points versus the first nine months of 2020 but it's better than the first nine months of 2019 as we continue to invest and our variable costs are back to more normal levels after an exceptionally low year due to Covid in 2020.

The net combined ratio is 62.4% for the third quarter. If we exclude the impact of government schemes, it's at 53.5%. The government schemes' costs are accelerating. What's happening is the years 2020 and 2021 are starting to mature and the phenomenon of accelerating government costs is going to continue for some time. We'll have more on that, but it's lowered our pre-tax profit by EUR 32m in the third quarter and EUR 57m year-to-date in 2021. I've already spoken about total net income. It brings our return on average tangible equity year-to-date to 13.9%.

Going into page 5, I just wanted to highlight some management changes. You've seen a few announcements come through. We continue to evolve and strengthen our leadership team as part of our normal activity. I've just mentioned the switch that is taking place between Carine Pichon and Phalla Gervais. Carine's moving on to head our Western Europe region, one of our largest regions, so she will now appear at the bottom of this chart.

Antonio Marchitelli who's been leading that region for the last 5 years will stay with us and will be leading our Global Specialities. He will drive Coface's growth strategy in three key specialty product lines, i.e. Single Risk, Bonding and Debt Collection. He will design and roll out a global roadmap to accelerate growth and build Coface's operational capability to develop these product lines.

Also confirmed in his role, Jaroslaw Jaworski who is now leading Central and Eastern Europe. He has been with us for a long time and until now has been leader of our business in Poland.

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In the same spirit, we have appointed Marcele Lemos to lead our South American business. She was previously the leader of our Brazil business and has more than 20 years' experience in the credit insurance space. For the record, out of our seven regions in Coface, four of them are now led by women, representing about 74% of the total turnover of the company. So, I think we're demonstrating that we're taking gender diversity very seriously, and not just in support functions but also in key operating roles for the company.

Moving on to the pages that you're more familiar with, on page 7, there are some growth story highlights. You can see total growth at 7.9%. Trade credit insurance is up 9.3% all other things being equal. We're seeing positive client activity. Business information sales are encouraging at 18% in the third quarter. Factoring, another one of our important adjacencies, is up almost 11% year-to-date and more than 10% in the third quarter. We're seeing finance volumes rebound in line with the economy. One of the corollaries of having a low level of losses is that third-party collection revenues are down, which is understandable. They're down 5.3% year to date. We're seeing the same phenomenon when it comes to fees collected from our insurer clients, as collection fees are also down, and that's driving our insurance related fees divided by earned premiums ratio down for the first nine months of the year.

Looking at the geographies on page 8, we actually have a very broad-based recovery in terms of our volumes with some really nice growth numbers across the key regions here. Western Europe is up 6%, Northern Europe is up 10.6%, Central Europe is above 7%, and Mediterranean & Africa is above 8%. North America, which has been one of the more volatile markets, is up 2% and I think we are seeing some recovery there. Asia-Pacific is up 5%, and Latin America is posting exceptionally high 18.8% growth on the back of prices. Agro-food, chemicals and raw materials mainly drive our business there, and there's been quite a lot of price appreciation in these spaces, which is helping our Latin American business see some pretty nice growth.

Page 9 contains the usual operating metrics. It is still a year of strong performance for Coface in terms of new business. We're having the second-best year in our history, not quite as good as 2020 but definitely continued growth. The retention rate is close to our highest. We are seeing a bit more competition as we speak, and I think I've already highlighted that. You're seeing it as well when it comes to pricing, which is still up 1.6% year to date, but it's been going down, which I already mentioned last quarter. During the third quarter, our prices went down about 0.7% but the impact is still positive year-to-date. We can see at the bottom of the chart the rebound in terms of the economy with the volume effect being the growth that we get from the growth of our clients' turnover, which is up 5% from last year, year-to-date. Again, that is in line with what we had indicated in the second quarter call.

Looking to the risk side on page 10, we're having another quite extraordinary quarter in terms of losses with a 16.9% loss ratio before reinsurance and including claims handling expenses. Operationally, we are seeing a low level of activity on large losses and low frequencies. We believe that we probably reached the low point in the cycle at the beginning of Q3. In this context, we've not changed our reserving policy. What you see on the bottom right-hand side is the opening of the 2021 new vintage, which is now lower at 70.5% and reflects what's happening as the year starts to develop. You also see some very large bonies coming from the prior vintages at 47.9%. At this point in the year, about two thirds of the bonies are from the 2019 underwriting year and one third from the 2020 underwriting year. That matters since for a good chunk of 2020 and the first half of 2021, about two thirds of our book has been protected by government schemes, mainly in France, Germany, Italy and the UK. These government schemes mean that we're immunised against losses but also against gains and recoveries when it comes to these vintages. That's why you will see that the cost of government programmes has increased, and we do expect this to continue temporarily for another few quarters. However, this doesn't mean we're not performing. It just means it's going to weigh on our upside for that period of time.

On page 11, looking at losses by region, I think the chart is pretty clear. It's quite an incredible picture if you look at the four largest and most stable regions at the bottom of the chart. They're all below 30% and Central Europe is at 16%. Then if you look at the more volatile markets, which we typically place at the top of the chart, clearly, they're very low, all in the teens with Asia back at 11% and Latin America at 8.9%.

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On page 12, we show the quarterly trend and the story is even more spectacular with Western Europe, Northern Europe and Med & Africa well below 30%. Central Europe, North America, Asia-Pacific and Latin America are all close to zero, with even a negative loss rate for Latin America as the year's rolling out much better than we had anticipated.

If we look at page 13 going to the cost side now, you'll see that our costs are up about 12% quarter-on-quarter from Q3 2020. Bear in mind that in 2020 we were right in the midst of the Covid crisis, so pretty much on lockdown. This was a tougher year of course for Coface, meaning T&L was down, and we had lower bonuses, lower volumes. This year we are growing again at a pretty fast rate. Variable costs are up, bonuses and compensation are going back up on the back of a very strong year. You can see that our cost ratio is marginally up from the first nine months of 2020 and there's a couple of things going on here. One, we are investing in our information business, and that's costing us about 0.5 points of cost ratio. We are seeing lower debt collection fees linked to low claims and that's costing us another 0.5% of cost ratio. At the same time, the business continues to drive operating leverage, meaning that the growth in our premiums is higher than the growth in our core operating costs to run our business. So, our first nine months' costs have gone up by 3% whereas revenues have increased by 5%. Combined, this means that, at 33%, our cost ratio is just barely higher than what it was in the first nine months of 2020, but it's lower than 2019, which is a more normal year as a reference.

With that, I'm going to turn it for the last time to Carine to take us through the rest of the pages.

Carine PICHON, Group CFO and Risk Director

Thank you, Xavier, and good evening, everyone. Happy for my last call to comment these figures.

So as usual, I will comment on the reinsurance result on page 14. As in previous quarters, this reflects very low loss activity and also public schemes. The cost of reinsurance, which you can see at the bottom, is around EUR 164m, EUR57m is linked to public schemes and I will provide more detail in the slide afterwards, but as the overall loss ratio is low, it's a higher cost for us. The premium cession rate at 43.4% is up by 0.7 points compared to last year, whereas we have a lower cession rate on the claims side mainly because we are releasing important results on the 2020 underwriting year.

The cost of reinsurance is higher because of low loss activity. Recognition of government schemes' impact is accelerating. We have two ways to look at this impact. The first one on the top left is the combined ratio. As a reminder, in blue, you have the published combined ratio and in green is the combined ratio without public schemes. What you can see is that up to and including Q2 2021, government schemes had a positive on the combined ratio, but the situation reversed in Q3 2021 because we have ceded virtually all premiums around that, but now we have reserve releases that we are giving back to the government. The impact is accelerating on pre-tax profit, what you have on the bottom left, where you see that we started to be negative in Q3 2020 and accelerated between EUR 10m and EUR 15m up to June and EUR 32m in Q3 2021 so clearly the costs to Coface, partly offsetting very strong profitability, are likely to increase in the coming quarters. This is because in countries where schemes are in place, the majority of potential future reserve releases are attached to underwriting years 2020 and up to mid-2021 when the government schemes ended. These potential future reserve releases will benefit governments.

Continuing now on the following slide, the net combined ratio is at 56.1% so a record low loss ratio on a cumulated basis for the first nine months of this year. You see that the cost ratio is up slightly by 0.6 points but clearly improved compared to a record year in 2019 by 1 point. The net loss ratio also improved at 25.4% which is around a 30% improvement compared to last year reflecting a low level of loss. On a quarterly basis which is the graph below, 62.4% is the combined ratio for Q3 2021. The loss ratio is at 31.4%, which is up compared to previous quarters. The fact that this is up is not because of the loss ratio before reinsurance - you have seen it was a contrary trend - but it's because the public schemes' weight on new business is more than offsetting improvement in past years. That's what you may see on net combined ratio.

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On the financial portfolio side, nothing specific that's new compared to previous quarters. We have a resilient income. The average yield on investment portfolio without realised gains is 0.86%. At the end of September 2020, it was 0.91% so quite similar and resilient investment income. We realised some gains this quarter on one specific real estate fund. It's a little more than EUR 4m. The investment portfolio is growing due to strong operating cash flows, and we continue to progressively deploy our excess liquidity. So, strong operating performance based clearly on the low combined ratio and resilient investment income.

Page 18 shows current operating income of EUR 266.1m. The tax rate stands at 23% this quarter, which is quite similar to before, so we have a cumulated tax rate at 24% and net profit at EUR 191m. This is 3.6 times higher than nine-month 2020 but what is clearly more relevant is to compare that net income to the pre-crisis level in nine-month 2019. On that basis, it's up +63% so a significant increase compared to 2019 too.

Page 19 is our return on average tangible equity, which stands at 13.9%, clearly on the back of a huge increase coming from technical profit with a strong underlying commercial and profitability level. The financial result is driving up the growth to a lesser extent. And our equity is up above EUR 2bn now on the back of this good net income. So that's it for my comments on that and now I will leave it to Xavier to discuss the key takeaways and the outlook.

Xavier DURAND

Thanks, Carine, and thanks for this contribution.

On page 21, when it comes to looking at this quarter, clearly, we've reached a record in terms of profitability and on the back of two key trends. One is that we're still seeing low claims across all regions, and then secondly, and I think more importantly, we continuing to see strong operational performance from the different areas of the business. In terms of the economy, it's been rebounding throughout the summer, as you're aware. We're facing some uncertainties, sporadic flare ups of Covid here and there so it's not completely over. We are seeing supply chains that have been disrupted during Covid having trouble getting reorganised and that's going to take some time. It's generating cost inflation, it's generating delays in production, it's disrupting the world as we knew it before Covid. I think the central banks and the states have now begun to remove the support that they provided during Covid. They're eager to get the economies off of the support line, so that's starting to happen. We do expect insolvencies because of this withdrawal of support and as some of these disruptions normalise, but we think the most likely scenario at this stage is that this will happen progressively. As I've already highlighted, in this context, potential reserve releases that would be attached to underwriting years 2020 and the first half of 2021, for the reasons that we've described, would mostly benefit the governments who've signed the schemes and therefore this would weigh on our numbers in terms of capturing some of that upside. We continue to implement our Build to Lead strategy. We really haven't changed what we're thinking about and what our priorities are. We're navigating what's in front of us tactically with resilience and with agility. I'm encouraged actually by the resilience of our core credit insurance business, and we've demonstrated another strong quarter of growth in our adjacencies. We're seeing some momentum here. So, to sum up, the company is doing well. Although I would say over the coming quarter, we will be immunised in terms of benefiting from upside from the contract that we signed with the government.

So that's basically the story. With that, I'm going to turn it over to the Q&A session.

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Coface SA published this content on 01 December 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 01 December 2021 10:20:12 UTC.