Coface SA

PAR:COFA

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Coface publication of Q1 2022 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded, Thursday, the 28th of April 2022. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Xavier Durand. Please go ahead.

[Xavier Durand, executive]

Thank you, and welcome to all of you on this first quarter report call. As you've seen from the headlines, it's been a really strong first quarter for Coface. I think we're pleased with the turnover line as well. You see EUR 431 million, up 12.8% at constant FX and perimeter. Within that, you see our trade credit insurance premiums growing almost 15% driven, first of all, by high client activity, but also our client retention is at a record close to 95%. Pricing continues to be down. I mean, that's a trend that we've seen now for the last 9 months. And also, we continue to see double-digit growth in our information business with strong momentum, and I'll make a few more comments along the way about what's going on there.

In terms of the loss ratio, it's coming in at 40.7%. There's a little thing here. We've actually taken a further EUR 33 million for the quarter in terms of the government schemes cost. That brings the total cumulative cost to EUR 199 million. And that, for us, means that we don't expect any further material impact for governments going forward. So that's going to be the last quarter where you're going to see our numbers kind of skewed by that. So without those government costs of this one-off, we would be at 30.4% in terms of the net loss ratio, bringing the net combined ratio to 67.3% and 55.3% if we exclude the public schemes.

Another, I think, important feature here is our net cost ratio, which is down 1.7 points to, I think, for Coface, a record low of 26.6%, which reflects both operating leverage in the business and also a better reinsurance commissions. So net-net, EUR 66.2 million, that's up 17.5% from the first quarter of 2021. It brings the return on average tangible equity to 13.2%, and we're happy, obviously, to confirm the dividend per share at EUR 1.5, which we'd already announced at the end of the year.

So before we go into the usual slides, I just want to take you through a little bit of the Ukraine-Russia risk story on Page 5. Obviously, that's on everybody's minds. We highlighted on the last call that our exposures were below 1% of our total. And you can see on the top right hand of the chart here, we went as of 28/02 from EUR 4.8 billion of total exposures to at the end of the quarter, which is 28/03. So a month later, EUR 2.6 billion, so a reduction of 46%. We've actually been very focused from the first day of the start of this war risk. Just as a matter of background, about 80% of what we do in Russia is for large international clients and most of them being actually Europeans. So we've been focused on trying to reduce our exposures, collect the money on behalf of these clients and we've -- in the meantime, suspended writing new business.

What we see right now is the Russian economy has actually been quite resilient. Payments have mostly continued to flow. There's been a flurry of sanctions and counter sanctions and we're addressing these real time. It's a pretty complex environment to manage. But I think we've been staying right on top of it. Our focus is really maintaining debt collection and key risk capabilities while we rightsize the operations. And then so far, the financial impact has been pretty limited. The main claims that we've seen have been related to sanctions as the Russian economy, as I've said, has proven pretty resilient. And just to illustrate the -- to reflect this into our accounting, you see the gross loss ratio in Central Europe coming in at 76.6% versus an average of 28.9% for the group. So that includes, obviously, some reserves that we put in there to take into account what's going on in this part of the world. So we're focusing on continuing to drive our risk and exposures down.

With that, I'm going to go through the usual slides that you're familiar with, Page 7. Turnover growth, 12.8%, premiums, 14.7%. You see other revenues up 5.2%, and that's really a mixture of both the business information sales up 11%, and collection fees, which are obviously still low because obviously, collections are low because claims are low. So just to say a few words about the information business. We're continuing to invest with the determination in this line of business, which we believe has actually gotten nice potential for us. Just in the course of this quarter, we've had some really nice commercial wins. I'll just tell you that we signed one of the key German auto manufacturers.

We've been able to sign one of the largest rating agencies in the world. We've been able to sign one of the largest credit card insurers in the world, and we've been able to sign one of the largest aircraft manufacturers in the world. So we see that the value proposition is actually taking hold, and you'll see some variation in the numbers quarter-to-quarter because this is still a young business, but we are continuing on this double-digit growth story here. The fees to earned premiums ratio is going down. But again, I mean, with this level of risk, it's not a surprise as the collection fees continue to be pretty low.

On the next page, Page 8. You see the breakdown we usually show on growth by region. And what you see here is a bit of the reverse situation you had seen about 1 year ago when Western Europe was growing faster than the rest of the world. This is due to accounting differences and the way the contracts work. And this time, it's kind of reversed, but it will normalize itself over the course of time. So Western Europe at 6%. The rest of the region is double-digit growth. Northern Europe, Germany, 13%; Central Europe, almost 22%; Med and Africa, pretty steady at 11%; North America, up double digits for the first time; Asia Pacific at 16%; and Latin America driven again by increased commodity prices and both hard and soft communities, I would say, at almost 35% growth.

On Page 9, you see the usual breakdown of our new business and different components of growth. New business is back to where we were in the first quarter of '19. It's in line with pre-COVID levels. We're taking a selective approach on growth given where the economy is. The retention rate is at, I would say, a record -- absolute record for us of almost 95%. So we've done really well there.

There is a drop in -- there is a drop in pricing, which is continuing in line with what we talked about over the course of the last few quarters, pretty much kind of offsets the growth in pricing that we've seen during COVID. And then the volume effect, which is the underlying trend of turnover of our clients driven in good proportion by inflation is up 4.4%, and that's really helping the top line for us. So as I said before, we're a pretty good resilient business when it comes to operating in an inflationary environment.

I'm, after this, moving on to Page 10, with the gross loss ratio, committing at 28.9%, that's still below the mid-cycle, despite the Ukraine-Russia crisis. What we see is continued normalization. Frequency has been increasing since the middle of last year. The large losses, the number of large losses is increasing, while it's still below, I would say, the average of the cycle. We've seen pretty limited amount of claims related to Ukraine at this stage.

We haven't seen any -- we haven't implemented any change in our reserving policy. We're opening the new vintage at 75.4% to reflect on an environment, which is -- continues to be complicated. But you see the [ bonus ] from the prior year is still at 49.1% just like last year. And just to mention, we do expect any potential risk linked to Russia and Ukraine to be more on a '21 vintage than any other. So continuing to see pretty strong releases from prior years at this stage in the cycle.

Going to the next, Page 11, which is the loss ratio by region. So you can see on the bottom, the 4 largest and quite usually more stable markets, performing pretty well, 31.7% in Western Europe, just below 30% in Northern Europe. What I mentioned in Central Europe, we chose to book a little bit more reserves here. Med and Africa at 22%, quite benign. And then the top markets usually volatile, but quite frankly, very, very benign in this time at 4% for North America, 1% for Latin America, and 20% for Asia Pacific.

The next page, Page 12, tells pretty much the same story, but quarter-by-quarter. So there's really not that much news here on this one from what I've just said. But you can see now for many quarters in a row, we've had actually a pretty good story, and that's pretty much across the board except for the Central Europe thing, which I just described. So I think we're continuing to perform on the risk side.

On Page 13, we go through the cost story. You see that our costs are up 10.6%. Part of this is external acquisition costs, which are growing as the turnover is growing. Internal costs are up as well. You can see our cost ratio before reinsurance lower than the prior quarters, but slightly higher actually than the first quarter of 2021, and we've got a walk on the bottom right-hand side, just to show that, yes, we are getting about 0.3% of operating leverage. So that's just the growth of the premiums, which is higher than the growth of the cost. But we are investing in the business information line, and you see that's costing us 0.4% of cost ratio.

And then debt collection, which is below the cycle and still from last year, still lower actually, is another 0.2%. So we end up the quarter at 31.6% before reinsurance. Just in terms of putting that in perspective, we come from the first quarter of 2019 before the COVID crisis, we come from 33.2%. So despite the fact that we're investing quite significantly in new things, we're still able to reduce the gross cost ratio. And I think that's the message I just wanted to convey to you guys.

With that, I'm going to turn it over as usual to Phalla to take you through the next few pages.

[Phalla Gervais, executive]

Thanks, Xavier. So on the reinsurance side, the results come down from minus EUR 47 million to minus EUR 56.7 million. The key drivers here is we start with the premium cession rate. Premium cession rate is down. Of course, I think we're sitting less premium than in Q1 last year as the public scheme and the backstop stopped at the end of June 2021. In terms of cession rate, you can see minus 2.5% that gets the eyes of everybody. This is really linked to the fact that we have a positive development, especially for year 2020 and 2021. And of course, all the reserve release part of that goes back to the external reinsurance and most of that -- part of that also goes back to the government that would place the public schemes.

That give us, I think the -- as a consequence of the net combined ratio at 67.3%, up from Q1 '21, to be noticed here the fact that, of course, we have book-up some reserve related to the Ukrainian prices. This is one thing. But more importantly, the 67.3% is pretty much distorted by the public schemes impact that we have taken this quarter and impact is 12 points. To be also notice is, of course, the net cost ratio at 26.6%, which is probably one of the lowest net cost ratio that we have seen in Coface. Thanks to the operating leverage, but not only this one, its also thanks to the higher reinsurance commission that we have been able to negotiate as a renewal in December '21.

Let's move to the Public schemes now. As I said, we took EUR 33 million this quarter. The total amount for us or the pretax impact is EUR 199 million since inception in 2020. We think that we have draw the lines here and we booked everything behind us.

With this, let's move to the financial portfolio. So the asset -- strategic asset allocation, as you can see has not changed much. The market value of the asset -- investment assets ends up at EUR 3 billion. A couple of things here to be highlighted, we still have a very high amount of cash coming from the operating performance, which is generating a lot of cash, and we're also holding a pretty high amount of cash, EUR 223 million to be paid as part of the dividend in a couple of weeks.

What has been -- to be highlighted as well is the equity hedges that we have put in place now to be quite efficient. As you can see, going starting contributed to EUR 4.4 million out of the EUR 12.2 million of net investment income. And as we are still holding a lot of cash, we redeploying it and we'll take advantage of the interest increase that is coming up. As a result, we are delivering, again, a very strong net income this quarter at 66.2% with an operating income up 20 -- a little bit less than 21%.

Tax rate at 27%, so net income up 17.5%. Most will be return on average tangible equity, and I will start with the change in equity, since December '21. Here, the net equity slightly decreased from EUR 2.131 billion to EUR 2.135 billion, drivers being the net income impact, offset by the mark-to-market on the investment portfolio as interest rates increased. Return on average tangible equity from 12.2% to 13.2%. And the only driver here is, of course, our technical and financial results net of tax.

With this, I'll turn it back.

[Xavier Durand, executive]

So just in terms of takeaway, I think we continue to be very focused on operating well. You see a few things here in this quarter, double-digit growth in TCI, mainly activity and retention, double-digit growth on the business information line, operating income up almost 21%, despite the fact that we've taken a further EUR 33 million on the public schemes, and that's going to be the end of it, and the Ukraine crisis reserves that I've just mentioned. We haven't changed our reserving policy.

We continue to very carefully monitor the risk environment. I'm sure you're all aware, first of all, the situation with Russia and Ukraine is quite volatile. That's creating shortages and potentially aggravating the energy and commodity prices that we've seen already go up. It's also probably going to create some inflation in the food area, food supply areas. The sanctions against Russia and are also going to continue to complexify, I would say, almost daily.

There's also, as you're aware, COVID outbreak in China, which is causing a series of lockdowns, which themselves will have repercussions in terms of the supply chain, which themselves will have, we believe, some repercussions on solvencies of a number of companies. So continuing to see risks out there, which supports our idea of normalization of risk. But we're pleased to confirm EUR 1.5 dividend per share. We continue to be focused on allocating capital efficiently. As I highlighted last time, our priorities are first quarter growth, and there's some core growth here going on acquisitions, if we can find some and then returning capital to shareholders, which we're doing with a EUR 1.5 dividend per share.

So that's kind of the wrap for the quarter. Very short presentation, I just have to say, because I think it's pretty straightforward. And we're happy to take questions from anybody at this stage.

[Operator]

Thank you. [Operator Instructions] Your first question comes from the line of David Barma from BNP Paribas.

[David Barma, analyst]

My first question would be more broadly on the risk environment. So it's pretty difficult to have a good view on the sector allocation and the changes there. But in this environment and given the inflationary risk, are you worried about some of your sector allocation? And have you started making sector changes within your risk budgets? That would be my first one.

Secondly, on capital. I know you typically don't disclose solvency and the interim publications, but given the strong market movements year-to-date and the last effects from the public schemes, maybe you can give us an indication on where solvency stands versus the end of the year?

And then lastly, on a single risk and sorry if I've missed that somewhere in your disclosure, but can you remind us how big your single risk business is nowadays? And what kind of actual risk you have in that bucket?

[Xavier Durand, executive]

Okay. Well, first of all, in terms of the risk environment, yes, we're not looking at it just by sector, but by company. So you understand the way we look at business is a mixture of sector/country/where companies are in the food chain or in the supply chains, if you will. And so it's all about the details. You will tend to see that our sector allocations over time when you look at the macro numbers, don't move that much. But what moves is the individual allocations that we make to this company or that company because in one sector, you have very, very different situation. So we are actively monitoring the risk. We're actively managing it. I think you're seeing it in the case of Russia, but that's not just the only case. We've been doing this now for years, and we had to do it for COVID. And so the story continues for us. The fact that there's a little bit more risk in the market is actually not necessarily negative for this industry because as you know, we've been operating at very low levels of risk for quite some time.

In terms of capital and solvency, so yes, we had announced -- we usually announce our solvency twice a year, and we do not provide figures at each quarter. But I think what I would say is, we still expect to see our solvency pretty strong at the end of this quarter because you see actually premiums going and so the reserve -- the premium component of that is actually pretty strong. So we feel pretty good about our solvency.

In terms of single risk...

[Phalla Gervais, executive]

A little bit above 1% of premiums. So it's...

[Xavier Durand, executive]

So it's about 1% of what we do. And for those who might wonder, we actually do not have any airplanes because I guess the question is going to come up. We have looked at these deals. I spent some time on them, and we've turned them down. So we have not -- we don't have any airplanes.

[Phalla Gervais, executive]

And we have almost no exposure on similar ways in Russia and Ukraine.

[Xavier Durand, executive]

Yes. So that's -- I think that kind of closes that discussion. I hope that answers your question.

[Operator]

Your next question comes from the line of Benoit Valleaux from Oddo BHF.

[Benoit Valleaux, analyst]

A few questions on my side. First of all, can you just tell us what has been the total group exposure at end March and what has been the evolution year-to-date, maybe I'm not seeing this information. Second question related to Russia. You gave us an update on your exposure at end March. What could be the figures? So what are the figures more or less in April. So just to understand, I mean, it has evolved over the last months.

And maybe one question related to business information. You enjoyed 11% growth in Q1, which is still a significant growth, but nevertheless, it's slowing down a little bit compared to what you've seen over the last few years. So what do you see as a potential growth rate over the next few years? I mean, you believe that, let's say, 15% to 20% CAGR is achievable? Or I mean, you see this 11% compared to your potential growth in the future?

[Xavier Durand, executive]

Yes. Let me start with this last question, then I'll turn it to Phalla for the other 2. So in terms of BI, we grew at 11% in Q1. I mean I'll just point you to last year when we had 9% into Q1. So it's a little bit better than last year. We ended last year at 18%, I think, in total. So I wouldn't read too much out of the -- out of one set of numbers for the quarter. We do not provide forward-looking statements, but this is an area that we continue to invest significantly in. With that, you want to talk about exposures...

[Phalla Gervais, executive]

Well, we're not disclosing much, but total exposure today is you can count on the kind of low single-digit growth on our total exposure. And on the Russia and of April, of course, obviously, the exposure is going down since the numbers that you will see will be probably something pretty much below EUR 2 billion -- that's what -- that was the question.

[Operator]

Your next question comes from the line of Thomas Fossard from HSBC.

[Thomas Fossard, analyst]

I've got a couple of questions. The first one would be related to the Russia provision. Can you please quantify how much it is in order to avoid you to see a debate on the numbers could be useful. The second question would be regarding your comment of a trend toward normalization. I think that this is your message today that the war so far is not creating too much of an issue, but potentially accelerating the return to a more normal claims environment. On this past world, more normalized claims environment, can you tell us a bit about the acceleration? So the second derivative that you've been mentioning regarding frequency and severity of the losses. I mean, how it changed since the start of the year? And also, could you remind us what is a kind of normalized combined ratio now for Coface, given that you explained the -- you had a lot of operating leverage accumulated over the past 2, 3 years. So can you refresh our mind on what this means in terms of overall number?

[Xavier Durand, executive]

Yes. So on the normalization, I've said that we had a surge in insolvencies at the first quarter -- second quarter of 2020, when COVID started, then the government poured money all over the economy, and we reached a trough in insolvencies, I would say, June last year, June '21. And since then, we've seen a -- what I call anticipate is going to create some return to normalcy for whatever that's worth. So that's what -- I think that's what I call normalization.

I mean, something we expected, something we're not really surprised of -- you never know where it's going to come from, but I think you -- there's nothing here that comes out of the scenario that we kind of have to find for ourselves or the things that we expect a target. I mean I have no reason to change that target today. What we're focused on doing, quite frankly, is just running the company as well as we can, quarter-by-quarter, month-by-month, day-by-day, literally, when it comes to some situations, and that's what we do. So I'll have to refer you to that plan.

You want to talk about the provision, Phalla?

[Phalla Gervais, executive]

Well, we haven't changed our reserving policy. So basically, the way that we look at things is, of course, and you can see that in the numbers that were presented on the loss ratio related to Central Europe, packing up at 76.6%. Obviously, this is providing for Russia cases, right? So what we can -- I think this will be the level of what loss ratio that we have booked up for Russia.

[Xavier Durand, executive]

But that's the best -- I mean, quite frankly, this is a situation that's quite still ongoing. So it will have to be updated on a quarterly basis. We don't know everything. I don't think anybody does, by the way. So yes, we took a view, which includes some IBNR. But at this stage, I think we'll have to play it by year.

[Operator]

There are no further questions. I hand the call back to the speaker for any closing remarks.

[Xavier Durand, executive]

No other questions. This may be the shortest call I've done in Coface. I'll take it as a good sign, I guess, or maybe there were fewer participants or maybe the story is clear or -- anyways, no need to torture everybody. We will obviously be here if you have further questions to answer them. And we will meet again, I guess, in July for the second quarter results. And on that call, we'll be updating everything else like solvency and exposures and all that good stuff. And thank you very much for attending tonight.