Coface SA

PAR:COFA

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Coface Results 3M 2023 Conference Call. [Operator Instructions].I would now like to turn the conference over to the CEO, Xavier Durand. Please go ahead.

[Xavier Durand, executive]

Thank you. Welcome, everybody, to this first quarter publication call. We're happy to report our net income at EUR61.2 million 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. We have provided in April a pro forma view of 2022 quarter-by-quarter. So we will be comparing this quarter, the first quarter 2023 to the pro forma 2022 that we had previously disclosed. So under those precisions, our turnover as you see, is up 11.4% at constant FX and perimeter. And if you look down the list of our products, you see that Trade Credit Insurance is growing almost 11%, the client retention is breaking yet another record at almost 96%, pricing is down 1.5%, but less than it did, I would say, last year. Business information continues to grow with a 15% growth at constant FX, and factoring is up 13.1%. So another good quarter, I would say, and we'll discuss the underlying trends in the following pages.You also see that the net loss ratio at 40.6% brings the net combined ratio to 66.3%. So the gross loss is up from last year by 9.2%, as we see a normalization of the risk environment. But last year, we had also the impact of the last, I would say, bit of the government programs, which we contributed to. So when we compare the net-net result, it's actually better this year. The net cost ratio is down by 2.1% to 25.7%, and that's both operating leverage and continued high reinsurance commissions. We'll explain how we're continuing to invest in the business during that time. So overall, we call this a strong quarter with EUR61.2 million, 17% growth versus last year and return on average tangible equity at 13.6%.We've added a page to the usual stack on Page 5, just to highlight 2 different points in what we're doing. The first one has to do with how we're growing our information business, and we wanted to give you a little bit more color on the -- on what's going on in that business. It's actually made of 2 parts. One is the, I would say, historical business information units that we had in Coface, mainly in Eastern Europe and in Israel. And that piece is growing single digits. And then we've introduced with our new strategy, new products, about 40% of our business, which is showing a 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.Just to highlight, this business is that we've reached 13,000 individual clients for this activity, both large and small companies, and that compares to this roughly 50,000 clients that we have in 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 forward in our Build to Lead plan bonding, single risk debt collections factoring the revenues of these specialties is up 20%. And then, insurance and debt collection fees are up 17%, that's a reversal of a trend from, I would say, the past where I think in the last couple of years, we had seen much less growth in those parts of the business than on the pure insurance premium. So, just to give you a little bit more color on 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 and thought I will show this. But also, we have a EUR200 million real estate book as a diversification of that investment. I wanted to give you a little bit more color because everybody knows this is an area of the investment portfolio that is under more stress. We do not hold buildings directly, so we hold them through investment funds. We have been careful in selecting funds that have low-to-moderate leverage, so we are not invested in the highest leverage parts of that space. We have been proactively managing that part of the book. Actually, it started in the second quarter of 2021, where we had about 9% of our book in real estate at the end of '21, we're targeting something like 5% by the end of this year, which means a EUR90 million of divestments, there are limitations 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 resilient, which would be housing and logistics types infrastructure.So as you know, the real estate portfolio will be run through the P&L in terms of mark-to-market under the new IFRS 9 accounting standards. So it has a negative impact on our -- the return of our asset portfolio for this quarter and then we'll explain this in the rest of the call.With that, I'm going to turn to Page 7, those are pages you're by now very familiar with. You can see the 11.4% growth in the total revenues for the business, 10.9%, as I said for the premiums driven, as it has been so far for quite a while now by past client activity and very strong retention. The other revenues as I mentioned, they're up 15%, a little bit more information that's at 15, third-party debt collections which is small, but it's starting to pick up some speed at 44%, factoring up 13%.And then as I said, the insurance fees after several years of stagnation is 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 and whereas I would say last year, we had fairly homogeneous growth across all the world. And you're starting to see some differentiation here and that's really driven by the -- what's going on in the economies in the 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 slightly down, that's driven by, obviously, the slowdown of the activity in the technology, ICT space, as well as commodities. If we exclude '22 positive one-off, we're kind of flattish for Asia.North America double-digit growth, Med & Africa doing really well, Central Europe negative because we are running off the book in Russia. Excluding this, we would be at a 1% growth. So that also highlights some form of slowdown in Eastern Europe. And then Northern Europe and Western Europe, you see the numbers being inflated in Western Europe by some accounting one-off on the alignment of the accounting methodology. But if you take that out, which is something like 10 points, you've got growth at 7 for Northern Europe and something like 11 and 12 for Western Europe. So continued growth in the activity of our clients in that part of the world.If you go to Page 9, you see that new business continues to be coming back to the levels of pre-COVID. We continue with our stance of being prudent in the way we underwrite business and this part of the cycle and really consistent with our strategy to value creation through the cycle. The retention rate, as I mentioned, broke yet another record. I think we've been breaking those records for five or six years in a row now. The price effect is minus 1.5%, which tends to be somewhat in line with -- more in line with, I would say, our 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 half -- less than half of the activity we saw last year. So we're clearly seeing a slowdown in the economic activity, which is reflected in the turnover declarations that we get from our clients. So clearly, the cycle that we have predicted is happening. So no real surprise when it comes to those numbers for the team here in Coface.I'll go to Page 10 and talk a little bit about the risk. So you see that we had another good quarter at 40.7%, which pretty much in line, by the way, with the quarters that we had before that. There is a slow normalization underway. I think it's probably happening a little bit slower than we would have thought, but we are seeing the number of claims increased since now almost two years. It will be two years in June, close to pre-crisis level. The large losses are increasing, even though they're still, I would say, below the average of the cycle.You can see on the bottom right of the graph here, we try to compare '22 and '23. 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 a slight blue line here on the top, which would -- which explains what the reserves would have looked like if we didn't have that discounting method. So the new vintage, we're reserving at 78.4%, actually very close from the 84.2% we had last year, as you recall last year, that 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, I would say the intense blue 35.6% are the bonus from the prior years. And you see that they are lower than they've been in 2022 and in 2021, getting back to the values historically that we had seen in the prior years. And that's really because of the two, I would say, extraordinary vintages that we've had following the COVID and the government policies, which have driven insolvencies to record lows. While these two vintages are now running off, so we're getting fewer bonus from the past and things here as well are normalizing.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 quarter-by-quarter for the different regions. And here, what you see is pretty much so that the four largest markets, more stable on the bottom are pretty benign, I would say the trends at 42% for Western Europe, 24% for Northern Europe, 26% in Central Europe, Med & Africa 29%. So really, the risk remains actually 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 rebounds from zero actually in Q4 to still a very good number at 32%. Latin America sees the second tranche of the large file that we had discussed in Q4. So the difference here is that -- so we've taken the second part and that will be the end of this file. But it is compensated this quarter in terms of the net loss by the charge that we will pass on to the reinsurers. So net-net, you won't see it, but on a gross basis, it still appears here on the Latin American curve.And then in Asia Pacific, it's rebounding from a, say, a very low of minus 50% to plus 29%. So the quarterly numbers, as you know, are more volatile, but we still see a pretty good level of losses here in Asia. We have the usual page on cost on Page 13. So you see that our total costs quarter-over-quarter and a year are up 10.9%, almost 11% and you see how that breaks down between the 8.8% for external commissions paid to third parties and the 11.5% that we have in internal costs.Amongst those numbers, I just wanted to highlight a few things. First of all, the insurance costs are growing 7.9%. So when you compare that to the growth of the insurance premiums, we are continuing to see operating leverage. The costs are growing less than the rhythm at which we are growing the premiums, which is exactly what we want and we've been doing for the last seven years, I guess.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. And 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 pushing off in the future. 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.So with that, I'm going to turn it over to Phalla to take us through the rest of the deck here.

[Phalla Gervais, executive]

Yeah, good evening. So let's look at the mentioned page and here we're on Page 14. I will start with premium cession rate at 27.3% that [Technical Difficulty] has been very stable compared to last year because we're going back to, I would say, the previous COVID period level where you only have the third-party reinsurers in place. Claims cession rate is moving up from 7.1% to 27.4% as Xavier mentioned, just to remind you that in Q1 2022, we have released reserve the last chunk of the reserve related to the public schemes, of course and we went back to the government that put these schemes in place. This explains the low claims cession rate last year, while this year, again, a level back to normal pre-COVID except that here within the 27.4%, we have that I think the first partial excess of loss related to these very large claims that we have in Latin America and for the first time in progress for the 20 years history, we reached the first tranche of excess of loss. Bottom line, reinsurance result moving from minus EUR52.5 million to minus EUR21 million.If we move to the next page, the net combined ratio stands at 66.3%, again, pretty good result. If we really want to compare to April to April again, I will compare the 56% of last year without the public schemes in place to the 66%. And here you can see that this increase is mainly showing the loss normalization where net loss ratio is moving from almost 30% to 40.6%.Let's move now to the financial portfolio, where we are on Page 16. So if you look at the chart on the left-hand side, we can see that the mark-to-market of our investment portfolio is now amounted EUR3 billion, slightly above EUR3 billion. In terms of asset allocation, so we have not moved much since end of 2022 with the bonds -- investment in bonds at 75%. We have de-risked our equity part last year, as we mentioned that, now down to 3%.Investment in Real Estate Fund at 7% as Xavier mentioned and here you can see that 60% is really liquid assets as we are here at end of March and we're holding cash to pay our dividend, which is what we made yesterday. If we move on the right-hand side, which is the net investment income, it's minus EUR2.6 million. I think three highlights here. The first one I would point it out to the underlying yield on our portfolio without mark-to-market, without realized gain. You can see that our yield -- the accounting yield is now at 0.5%. And this 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 have moved our portfolio to take this opportunity last year. On the other hand side, we have booked a negative impact related to the fair value of our investment in real estate. As Xavier mentioned, moving under IFRS 9, the mark-to-market, so the unrealized loss and gain, in this case it's unrealized loss goes to P&L, while on the other [indiscernible] needs to grow into our equity.Last, we booked this quarter an FX so accounting impact related to the application of IAS 29 hyperinflation on Turkey and Argentina and as the booking of minus EUR5 million pretax. So going into our net investment income, this leads us to a net income at EUR61.2 million, with an operating income up 11% compared to last year and the net income up 17% compared to last year, again a very satisfying quarter.Return on average tangible equity, I will start with the change in equity. We have on anyways side, the full year 2022, this is a pro forma under IFRS 17 at EUR2.18 billion. Net income of the quarter at EUR61 million and then I think differently from last year you can see that in terms of mark-to-market of our investment portfolio, it is now positive, excluding, of course, the liquid asset part and the investment in real estate that goes into P&L. This leads us to a final IFRS equity at the end of March of EUR2.1 billion.Return on average tangible equity starting with end of full year 2022, 12.7%. You add up the technical results, we have a negative impact related to the financial results we just commented it, lead us to return on average tangible equity of 13.6%. [Technical Difficulty].

[Xavier Durand, executive]

So as usual, I'm going to wrap this up on Page 20. Look, I think just to say a few words about the environment to start. So there's a lot of risk out there. I think we've -- over the past few quarters, we've highlighted the geopolitical tensions, the War in Ukraine that's showing no sign of abating anytime 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 last year in commodity prices, social tensions, economic risk around energy, I mean, all that stuff is out there. It did not materialize as we said on the prior calls, as badly as it could have, I would say, during the winter.But the risk is still out there and we're seeing some manifestations of that through, one, the number of insolvencies, which continues to rise and many economies is now at or higher than the 2019 levels. And then the tensions you've heard about over the last few months and in the U.S. around the banking liquidity, which adds additional uncertainty to the economy because it will, I think, create some kind of a credit crunch from the mid to small-size banks in the U.S. and there's thousands of them.So there's still risk out there, I think 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, which is on one hand, being thoughtful about where we invest our money and what kind of business we write.Number two, making sure we focus on the clients and deliver superior service. We have an NPS that remains above 40%. For us, it's a really good score. We measure that on a quarterly -- on actually on a monthly basis in a very detailed way. We're continuing to invest in our plan. I mean this is a time when the business is performing. So we think it's a good time to continue to invest. We're investing in our ancillary products. We're also investing in our technology. We're being disciplined about cost. And then we are managing the risk portfolio overall consistent with the trends, the long-term trends that we're seeing. And also, we manage the new risk 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 of the increase in interest rates would have on that book, even though it has an impact. So that's where we are, in a way, staying absolutely true to our culture and continuing to deliver and execute.With this, I'm happy to turn it over to you for questions.

[Operator]

[Operator Instructions] The first question from Michael Huttner from Berenberg.

[Michael Huttner, analyst]

This is [indiscernible] and three questions. One is the -- can you -- what is the amount of the business insurance fees? I was looking for it, I'm sure it's somewhere, but I couldn't find it, so that would be really useful. The second is on the reinsurance, so you're using the excess loss. Can you just help us out and say what the limits are on this to give a feel for the -- well, how well protected you are? And then the final question is, I'm really curious that insolvencies are up and you said in many places at or above 2019 levels, your loss ratio is definitely below '19 levels. So what's the difference? What's -- where is there -- what's the bits where you're so much different to back in 2019 that you can still produce these excellent operation?

[Xavier Durand, executive]

So let me start by that one and Phalla is going to look for the interim cession numbers while I speak. But, so the overall -- so usually what government measures, the overall number of insolvencies in the market, it doesn't tell you where these insolvencies are happening and what kind of companies are being hit, which sectors. So what we're seeing in a turn of a credit cycle like this is it usually starts with the smaller businesses. It starts in certain geographies and it starts in certain sectors.And so right now, I mean, 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. And so two things underneath this, one, we're not necessarily exposed to those sectors that are most impacted. And second, we manage this proactively by being a little bit ahead of the curve. So that would be my two sense on it.And when it comes to the reinsurance, I think our limit is EUR60 million or something like this, right?

[Phalla Gervais, executive]

Well, the first tranche of excess of loss is 52 I think previous.

[Xavier Durand, executive]

Okay. That's the prior year and yeah, that's right.

[Phalla Gervais, executive]

52.5 before quota share. So after quota share it's EUR40 billion.

[Xavier Durand, executive]

Yeah, so 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 business and information fee -- the insurance fees -- the limit fees, sorry?

[Phalla Gervais, executive]

The closure, the total -- okay, the total exposure increased, is that your question?

[Xavier Durand, executive]

Was that your question, Michael?

[Michael Huttner, analyst]

No, no. I was just asking for the fees from your business-to-business you're investing in the business information insurance, yeah.

[Phalla Gervais, executive]

Are you talking about the business information revenues?

[Michael Huttner, analyst]

Yes, so I should be clear with, sorry.

[Phalla Gervais, executive]

So the 15% year-over-year BI revenues growth?

[Michael Huttner, analyst]

Yes and what is the actual euro number?

[Phalla Gervais, executive]

The amount, you mean the new amount, okay.

[Xavier Durand, executive]

Sorry, we were struggling to understand what...

[Michael Huttner, analyst]

Thank you for being selfish with me. It's somewhere in the back know, we have that somewhere in the back of the deck? They're looking for the number, Michael, we'll give it to you, so it's in the back somewhere.

[Operator]

The next question from Benoit Petrarque from Kepler Cheuvreux.

[Benoit Petrarque, analyst]

Yeah, so a few questions on my side. So the first one will be on the claims frequency, which kind of normalized, which is quite normal. Do you see any acceleration of the normalization or is this normalization still very gentle and progressive? And I was also trying to understand if you already see any signs of credit crunch happening in the U.S. following the March event? Or is that too early? Basically, just wanted to get your view on the speed of normalization of the claims frequency. Second one is more on the large losses, which are still below average. Could you help us to understand how much points of combined ratio or claims ratio that could bring in case will be back to the kind of more longer-term average in terms of large claims? And then the last question is on the total credit insurance exposure. On your construction book, do you see any deterioration there, any signs of weakness and maybe higher claims or still a book doing well? I was just wondering on that book.

[Xavier Durand, executive]

The last question was relative to construction -- is that?

[Benoit Petrarque, analyst]

Yeah, construction, yeah, yeah, exactly.

[Xavier Durand, executive]

Yeah, that one I can answer because it is traditionally the sector that starts to pinch early in a credit cycle. I think you're well aware that in some parts of the world, the interest rates directly impact the end buyers because the mortgages are variable rates, right? And so as it impacts the home buyers, they quickly start feeling the pinch. Their ability to borrow is lower and that drives a much reduced construction business orders, right? So we're seeing that. It's not -- it's an area that we are absolutely well aware of and it's not everywhere, but it's mainly in the markets where you have variable interest rates and where the consumers tend to be impacted faster, I mean there's lots of literature in the press about this. So nothing really surprising here.In terms of the claims frequency, yes, there is normalization. It is happening, but it's happening, I'd think, probably slower than we could have feared. And so there's a definite trend of rising. You might wonder why that is, I think it's because it takes a while for the monetary policy to impact the real economy. It takes a while for the loan renegotiations to happen. And then also happened, I would say, on the back of incredibly generous monetary policies in the last two, three years.So it takes a while to soak up all that cash that's been spent, I would say, by the governments to prevent the effects of the COVID crisis. So I think that's really what's underlying this. In terms of large losses, I don't think we have a split between the two things. But as I said, a large loss for us is kept and its impact to, say, a couple of percent of our equity, right? So these are discrete events. They're not high frequency events, but what we call a large loss would be something that's much smaller than EUR40 million. So it will have an impact, but that's something that we look at closely.

[Phalla Gervais, executive]

Yeah and the very large that we have, just to remind you, the very large loss claims that we have in Latin America was related to fraud.

[Xavier Durand, executive]

Yes. So it's not an insolvency, it's a fraud, which is a kind of a one-off event. We don't see many of those, but when they buy, they can be significant.

[Operator]

We are now taking the next question. The next question is from Thomas Fossard from HSBC.

[Thomas Fossard, analyst]

Yes. Two questions. The first one would be, I guess that you would have to pay some reconstitution premiums for the excess of loss. If this is the case, has it already been booked in the revenues in Q1? Or is that something to reline for Q2? Not sure that this is meaningful, but just to understand the mechanism here.On the Q1 -- on the Q1 results, so a very strong start to the year. I'm really trying to get a sense of if there were any obvious one-offs and it looks to me that actually the one-offs were rather negative -- has been positive. So implicitly, is more hinting to more than 65% or maybe roughly EUR70 million net profit normalized. And the way you're describing the outlook is that yes, they are still on the horizon, but that actually you've got all the tools in place to reproduce the kind of operating performance. So maybe you can help us to understand what was potentially in your view, things were -- which were a bit abnormal and that we should keep in mind in thinking where you expect to land on a full-year basis?And maybe the last point is you're starting to indicate lower volume growth coming from your client. That's -- there is some normalization as well on that front and probably likely to increase further, we see a reduction in the inflationary environment. So should we expect a slowdown as well of your top line maybe more in 2024 than 2023 or second half of the year, maybe you can help us on that?

[Xavier Durand, executive]

Again, I'm going to start with the last one, because historically, our business grows, I don't know, more as a proportion of GDP -- of global GDP than anything else. And I think the last 2 years, if I count this first quarter, let's say, the last year or 1.5 years or something like this have been quite exceptional and that Coface has grown 14% last year and another almost 11% this quarter, right? So I would consider that to be something exceptional, especially if the central banks are keen on bringing down inflation. As you know, we are an inflation-friendly business in that -- the nominal rise in the turnover of our clients directly translates into growth in our premiums.So the answer to that question is, I think, yes, I think we should see -- we should -- and that's what we've indicated for a long time now that we should see that the situation won't reproduce itself forever to tell you how fast and it's very hard to -- for anybody to peg. I mean, I don't think even central bankers know. So I'm not going to make any forward-looking statement there, but I would think it's safe to assume that we're not going to see those kinds of activity levels forever.In terms of the Q1 results, I'll let Phalla take that one.

[Phalla Gervais, executive]

I'll take the first questions and the answer to it is, yes, we booked it, which is the [ reconciliation ].

[Xavier Durand, executive]

Oh, the reconciliation cost. So that one --

[Thomas Fossard, analyst]

And how much was it just to get a feel?

[Phalla Gervais, executive]

It's not -- it's really not significant.

[Thomas Fossard, analyst]

Okay. Understood.

[Xavier Durand, executive]

And then in terms of the Q1 results, I think Phalla highlighted some of the events in the -- so I said when it comes to the fraud in Latin America, that is compensated on a net basis. So that's really not a one-off. And then the other things are pertaining to the portfolios.

[Phalla Gervais, executive]

Yes, exactly, which is the mark-to-market and the accounting from that application.

[Xavier Durand, executive]

So on that one --

[Thomas Fossard, analyst]

So negative in Q1, which will be somewhat normalized or leading to higher underlying net income.

[Xavier Durand, executive]

I mean, these things tend to cycle, as you know. So again --

[Thomas Fossard, analyst]

Now but then maybe on the commission -- on the reinsurance commission, I think that you indicated that the reinsurance commission were high in Q1. I mean, I'm not sure I followed why this was the case in Q1 and is it specific to Q1 or --

[Xavier Durand, executive]

No, it's nothing Q1, it's because we -- I think we have pretty good reinsurance terms, and I was just referring to that as we did last year. I mean, there's really no change there, right?

[Thomas Fossard, analyst]

Okay. So nothing specific as well?

[Xavier Durand, executive]

Nothing specific here.

[Thomas Fossard, analyst]

So conclusion, that's very strong underlying performance basically.

[Operator]

We are now taking the next question. The next question is Hadley Cohen from Deutsche Bank.

[Hadley Cohen, analyst]

A few small questions, hopefully. Firstly, on reinvestment rate at just above 2%. It sounds very low given where bond yields are and what have you go. So can you just tell me what I'm missing there, please, and why the reinvestment rate isn't a little bit higher than that currently?And I guess linked to that, on Slide 10, I think you're suggesting that the discounting effect in the first quarter was around about 4.5 points on the loss ratio. Can you possibly tell us what the average discount rate you used was in the first quarter, please? And then how should we think about that 4.5 points all else equal for the rest of the year? Should we assume that, that should trend a little bit lower going into the rest of the year given the mix between paid claims and unpaid claims?And then my second question is around, I think, the first time approach benefit was around EUR90 million and I think EUR30 million of that give or take came out in the 2022 numbers applying around about EUR60 million left for -- and I think you guided to that being coming through in 2023 and 2024? Is it possible to get a sense of how much of that is left post the 1Q at all?And then my final question, slightly more conceptual, but I think when we talk about normalized claims activity and over-the-cycle combined ratio and what have you, everyone seems to have 80% number in mind. And I think that historically has been the right number, but you are seeing very, very positive operational leverage given expenses are growing less quickly than top line. So how should we think about that sort of normalized sort of over-the-cycle combined ratio now?

[Xavier Durand, executive]

That's the $10 million question, right? So a few things. I'll start with the last one, and I'll let Phalla handle the first 2 questions, right? So on this combined ratio question, a few points of reference. I think we have a competitor that stated in their plan, what their combined ratio is. So that's kind of an anchor in the marketplace that we can't just ignore because there's somebody that's willing to write that business at that level on average through the cycle. So that's -- and they've been public about it, and they happen to be quite a lot bigger than we are.The second thing I would say is our cost ratio is improving steadily over the last 7 years, as you've seen, I think, in -- back in 2016, we were at 36% or something like this or even higher, and we're down to 10 points better. So that's a huge improvement. I would just stress that part of that improvement is also driven by losses. So there's a couple of effects that are counter cyclical on this. On one hand, if losses are low, we get better reinsurance terms and that translates into better cost ratios on a net basis, not the growth part. On the other hand, when there's more losses, you have more fees coming from debt collections and stuff like that. So it's a hotch potch.But I think looking at it on a net basis, it's probably not necessarily the right way here because there is an impact on the losses on the cost ratio as well. So when you do well on losses, you tend to do well on both ratios at the same time. And Phalla, you want to talk --

[Phalla Gervais, executive]

I will take the other questions. So the first one in terms of reinvestment rates, I think we have doubled the rate compared to last year in Q1. You know that we have -- in terms of investment buffer, this is coming -- mainly coming from the bonds book that we have. And you know that we have a buy-and-hold strategy. It means that, of course, we will reinvest and take advantage of the interest rate increase over time. But we're not changing and we're not selling the stock that we have, the bond stock that we have to reinvest immediately. So we have -- we're wanting up -- it's a roll out given the maturity date of our investments that will be reinvesting in higher grade. So yes, it's increasing, and it will continue to increase over time. This is the first answer.The second one, in terms of discount. As you know, in -- under IFRS 17, we're using a EIOPA yield curve every quarter. So this is application of the EIOPA yield curve. So it's a swap yield curve that we're applying in terms of discount rate. So it's not something that we're choosing, it's something that is given that we're applying that our whole insurance market is applying.And for the third question, which is --

[Hadley Cohen, analyst]

Sorry, Phalla, just to come back on that. In terms of the -- so if we assume that interest rates stay stable for the rest of the year, should we expect that 4.5 point level to stay stable as well? Or will it naturally be seasonally higher in the first quarter given the sort of claims profile?

[Phalla Gervais, executive]

I would say all being equal, because, of course, we have the new vintage of claims coming through and you have the stock that given -- if we're not increasing significantly the total amount of reserve all being in cost, I would say, yes, in principle. But life, I think nothing is [indiscernible] right, so our book is moving and yield curve is moving.

[Hadley Cohen, analyst]

And then sorry, just last question on the FTA impact.

[Phalla Gervais, executive]

For the -- on the FTA impact, so basically, your question is what is that at the end of full-year 2022 and this is what we discussed on pro forma presentation, we still have -- well, we have EUR60 million coming from IFRS 4 that we have taken into our balance sheet. So if we didn't move on the IFRS 17, yes, I would say that part of the EUR50 million, but I don't know, we haven't done this [indiscernible] will be released or probably release during 2023. How much was --

[Xavier Durand, executive]

There's always an 18 month --

[Phalla Gervais, executive]

18 months period, so --

[Xavier Durand, executive]

So given that nothing is made out of the year, you would assume 18 months for somehow to this to be released, which we're not going to see you in.

[Operator]

We are now taking the next question. And the next question from Benoit Valleaux from ODDO BHF.

[Benoit Valleaux, analyst]

Most of my questions have been asked already, but maybe 2 remaining questions. First one regarding business information. You gave us a breakdown between historical business and new products. So in your view, would you say that new business could be more profitable in the end than historical business? Maybe it's difficult to think about it like this, but you think you might have more pricing power on this kind of business. I mean just to understand if after first investment phases, you expect also a positive impact from the shift in product mix -- so this is the first question.

[Xavier Durand, executive]

Yes. Sorry, go ahead.

[Benoit Valleaux, analyst]

No, no, sorry. And another question, everyone is talking a bit more around artificial intelligence at this point of time. We've seen that you've made some additional investment in technology. How do you see -- sorry, do you believe that artificial intelligence is an opportunity for you to improve your processes, efficiency and so on? Or do you believe that it could be maybe a risk with potential new competition?

[Xavier Durand, executive]

Well, yes. So on that one, I don't think I see all the hype around ChatGPT and all that good stuff. And yes, in theory, you would think it's possible that at some point of time, these systems become so great that they start replacing operators, right, or making -- I think what's more likely to happen is what we've seen actually for all these tools that have been introduced over the last 30 years. I mean, the latest being RPA, robotic process automation or is for these tools to progressively come and become integrated into our business and to help us become more accurate, more efficient, look at much more data than we used to do before. I think history is more likely to repeat itself than to have some kind of revolution where tomorrow, we're just going to get rid of hundreds of people that are going to do the business.It's only because we have to control these tools, we have to understand them, to build them into a regulated entity process requires a lot of back testing and a lot of proving to regulators that it actually works. And that if something shifts, this thing is not going to go crazy. So I don't think it's going to be the miracle solution, if you will, that people maybe think. It is impressive to see what these things can do. But nobody has tested them over the long haul on a business with changing circumstances and can demonstrate with 10 years of background that actually work and how they can keep it under control.So I think we're still -- you're going to see some stuff. Actually, if you look at our retention is helped by some actually AI work that we've done, where we've taken data that we couldn't really understand just by looking at it and having the machine help us define which clients are at risk and which are not. So we've done that work. It's taken actually years, but it's helping, as you can tell. It's not the only thing that's helping, but it's one tool that's helping us do. And I do think it's going to be the same going forward. We can only put in a business process that is that sensitive where you're actually starting to allocate hundreds of billions of risk by to a machine. You got to make sure the machine is going to do it right, right? So we're going to be both interested and reasonable about this, right?In terms of the business information margin, so I think we've said all along that the traditional information business is slower in terms of its growth and it's under more competitive pressure because it's been around for a long time. So in theory, we should be getting better margins. But the other thing is to develop the new business, we've got to invest. So we're spending actually money. We're hiring people. We're building things in terms of technology. We're learning. We've got to build a marketing presence.So when you add it all up, I don't really know how to answer your question. If it were mature and if it were -- if we were really ahead of the game with everybody else, it would be true. But in a growth environment like this one, which looks more like a, if you will, an internal start up of some sort of accretion of a new product, it's not really a start-up because it's built on the core knowledge of the business, but it's still -- it's still something new that we're developing. It's very hard to answer that question, quite frankly.

[Benoit Valleaux, analyst]

But do you expect an improvement in margin, for example, next year on this business? Or is it too early to --

[Xavier Durand, executive]

The timing is also a question. I mean, I think the way I've been discussing this with the market is to say the following: it's core to what we do, right? We are an information-based business. That's how we underwrite EUR700 billion of risk on millions of companies. And that's how we're able to onboard clients with new. We have 180 million companies in the database. So that's core to what we do. Now it happens that this data can also be used for other purposes, for other use cases that traditionally we weren't considering or we didn't even imagine sometimes that could be used for. To do this, we've got to invest. We're doing it in a way that's neutral on the P&L. So you're not seeing it. But basically, we're building a business for free, or we're expanding the franchise for free.I think rationality means I should push it for as far as I can to scale before I start milking it, right? So we've got a very small cal here. And if you start melting it too hard, you're not going to -- you're going to get some milk, but it's not going to be a lot of milk, it won't matter for Coface. So the question is, I think it's too early to answer. I think we will know when we get a better sense of how big this thing can be. And I think logically, we should keep pushing it as long as we can see some significant growth coming out of it.

[Operator]

We are now taking next question. And the next question is from Michael Huttner for Berenberg.

[Michael Huttner, analyst]

I just wanted -- I had 3. So the first one is if you do have that number of business information revenues would be lovely. The second is you spoke a lot on investments. So I just wondered whether you can give a feel for how much you are investing and whether in a way you're investing ahead of the curve, that's the feeling I have at the moment. And then the final thing is when you discussed IFRS 17, so there's a question which my competitor asked about the EUR60 million kind of drag, if you like, on non-profit or high time lines. But of course, you don't -- I think when you discuss IFRS 17, you said it has an impact of when you have a reserving where you set up the reserve now and you kind of collect the one-off profit kind of 2 years down the road. IFRS 17 kind of half forces you to front-load this a little bit. It's more evenly spread. And I just wondered if you can give a feel for the impact of that relative to where it was before.

[Xavier Durand, executive]

So IFRS 17 -- so we're a short-term business, right? So I would say after 2 years, we kind of know where the vintage is going to be, right? So after 2 years -- over a period of 2 years, I think IFRS 4 and 17 really doesn't make any difference, right, or minimal. So what changes is the dynamics. IFRS 17 forces you to recognize profits or losses faster than IFRS 4 because it's a different methodology and introduces more volatility because every time, I don't know, like an interest rate varies and the discounts are different, and then you have to combine with IFRS 9, you have to put through the P&L more things than before. So it just creates more volatility during that 2-year period. And that's pretty much all I can say quite frankly, because I don't know.

[Phalla Gervais, executive]

No, exactly. And as I said, EUR60 million is related to the prior year period on the IFRS 4 that I think if we have stayed under IFRS 4, this EUR60 million will be released on the IFRS 17. But IFRS 17 will recognize the prior year period earlier. This is what we have booked in our FTA.

[Xavier Durand, executive]

It's just a one-time event. I don't know if it's --

[Phalla Gervais, executive]

It's a one-time event, that's a [ valid ] point.

[Xavier Durand, executive]

I don't know if it's really worth over a 2-year period of time, EUR60 million is -- okay, it's one time -- I don't know -- don't know if it's that big of a deal. The -- in terms of the business information number --

[Phalla Gervais, executive]

Question is slightly below EUR30 million for the first quarter.

[Xavier Durand, executive]

Okay. And then in terms of how much we're investing, look, when I say we're investing, it's not like there's a -- the old business runs on one side and then we've got some kind of just an innovation shop where we would put all the money. It's -- the money is spread amongst many different things we need to continue to build in the business. That includes salespeople that include -- or new people in new geographies to do stuff that includes technology that we need to change or upgrade or improve on the core business. That includes new features and technology that we didn't have before.So maybe AI is a piece of this, maybe [ Extranets ] or APIs or a whole bunch of technical tools that we need to invest in. So it's a hotch potch of things. And I think we're staying the course to pick those things that matter the most for us for the long term and for the short term. And then they are consistent with, obviously, our capacity to drive them home. And that's not just the money actually, it's sometimes much more the user's ability to drive all these projects simultaneously. I think is one probably a significant limitation in terms of how much we can do in any point in time.So we're being thrifty because by spending too much, sometimes you overload the organization with too many things. And in that case, things get done slower and not as well. And you're not necessarily gaining time. So I think that's -- we're trying to balance out the execution risk with the speed, with the short term, trying to change the wheels and the blinkers on the car while you're still running the rates, right? That's pretty much the way I put it.

[Operator]

There are no further questions at the moment. I will hand back the conference over for closing remarks.

[Xavier Durand, executive]

Well, look, thank you very much. We're right at 7:00 p.m. So it's been an hour. I mean, I actually went so fast, I'm surprised. Look, it's a pleasure, quite frankly, to have those discussions. I think we're really talking about the heart of the business. And for me, it's all we do right all day long. So thank you for your interest for these conversations that I think are getting to the meat. We're in this environment where, yes, things are -- the long-term trend is exactly as we said before. So there's no news. The short-term events are whatever they are. We try to manage them as best we can. I think we're getting better at being agile and being on the ball, and we keep coming up with examples of how we're managing these things as they show up.I don't know what the next quarter will carry, but we will be happy to speak with you. It will be middle of August, actually, right? So that's not the most convenient date. It's IFRS 17 driven because it's -- we're learning that thing, and we're going to try to do the best we can to deliver smoothly and as quickly as we can, but it's a little bit more complex than the stuff we had before. So thank you for joining, and we'll talk to you. I think it's what is it August -- 10th of August. Okay. Thank you very much. Thanks, everyone.

[Phalla Gervais, executive]

Goodbye.

[Operator]

That concludes the conference for today. Thank you for participating. You may all disconnect.