Coface SA

PAR:COFA

Earnings Call Transcript 2024-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the COFACE SA Q1 2024 Results Presentation. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Xavier Durand, CEO. Please go ahead, sir.

[Xavier Durand, executive]

Thank you very much, and welcome to all, and thank you for joining this first quarter 2024 earnings call. As you've seen from the headlines, we're happy to report a very good start to the year 2024 with first quarter net income up almost 12% at EUR 68.4 million. I think what you'll see during the presentation is that the results reflect 3 things. One, the environment and the economic environment in which we operate; two, the strategy we're applying, which is very much in line with what we've described during our Power of the Core Strategy Day and the very strong, I would say, execution from the business side. So, if I go through the headline here, turnover at EUR 464 million in the first quarter, it's down 1.6%, and that's comprised of two different things. One, trade credit insurance premiums, which are down 3.3%. And that's really the result of a flat client activity. To be noted, it's flat after 2 quarters of successive decrease. Client retention, which is still very high, although a little bit down from records. Pricing, which is still negative, but better from the last 2 years, in line with the historic trends. And then continued double-digit growth in our business information business with factoring it off down 6%. The loss ratio, as you can see, came in at a strong 35.8%, which is almost 5 points better than last year. The combined ratio stands at 63.1%. We'll go more into the details, but pretty much opening the year at a stable level from last year. We have continued strong reserve releases from prior years. The cost ratio is up 1.6 points, which is a clear consequence of lower revenues on the insurance side. But we continue to invest deliberately in the different elements, which constitute our power of the core plan. So, that brings, as I said, the net income to above EUR 68 million. Return on average tangible equity stands at almost 15%, 14.8% in. And again, this is really strong execution, I would say, in an environment -- economic environment which is slowing. And while we continue to make the investments we have committed to during the power of the core plan. On Page 5, we have given a little bit of a walk from the cost ratio Q1 2023 to the cost ratio in which we reached in Q1 2024. And you can see a few things here, a better business mix, continued investments, and obviously, the impact of inflation on our business. So, from the 29.4%, you can see that our premiums are down 3%, which drives 1.3 points of increase in the cost ratio. We embarked cost inflation from the prior year. So, what's happening here is really pretty much the reverse of what's happened in the last couple of years when inflation was higher on the top line than it was on the cost line. TCI investments, which we're making consistently with our plan, which are compensated by better fees and other revenues from the insurance business. Continued investment in the business information space, which is more than compensated actually by additional revenues from the business information, bringing our total cost ratio for the first quarter to 31.7%. So, I think the news here is a little bit of an inflation impact, and also the fact that the business information continues to deliver for us on the cost side and on the revenue side. On Page 7, we go into the usual slides. You can see turnover down minus 1.6%, as I've said. You can see that the other revenues are up 6.5%. I've already mentioned. The business information sales up almost 22%. Third-party debt collection, which is a much smaller business, it's still up 24% from a small base. We see more demand in the market, and we are putting more resources around this. As I mentioned, factoring is down by 6.3%. Just to remind you, factoring is a business we do in Germany and in Poland, which are parts of Europe, which are more affected by the, I would say, a slowdown in the economy. And then the other good news, I think, is the insurance fees confirm their recovery. They're up 7.3% at constant FX, which brings the ratio of insurance-related fees to the interest revenue ratio to 13%, up from 11.8% at the last quarter. On Page 8, you can see the split by region. Western Europe had a significant one-off last year from an accounting standpoint. So, it says minus 5.8 million. If you took that one-off out, we would be at minus 1.5%. Northern Europe, which is the Germany, and Northern Europe is down 4.2%. Again, this is the part of the world that's been slowing down the fastest, particularly the industrial side. Central Europe is down, again, being, I would say, squeeze in between the Germany and the Russian space. Med and Africa, I would say that's the good news from the southern countries in Europe, pretty much consistent with the economy of 7.3%. One of the areas where actually client activity continues to be positive. North America with a sharp slowdown in inflation reflected in the lower premiums by 6.7%. Asia, again, lower activity than prior, pretty much flat. Latin America, down as well due to very quickly slowing inflation on commodities, metals, but also, I would say, some of the risk actions we've taken over the course of the last few quarters. So, that's pretty much the geographic story. And then when we go into the next page, Page 9, you can see the split by area, with the new production actually rebounding from the last couple of years, actually higher than '22 and '23. As demand is increasing in the market, in the face of, I would say, a rising risk environment. Retention rates remained very high at the level of 2021, but slightly lower than '22 and '23. We are still operating in a very competitive environment, and we also see the impact here of some of our risk mitigation plans that we've acted on in the last couple of quarters. Pricing still negative, but better than it was in '22 and '23, and it's reverting to, I would say, the mean of the historic average for our industry. And then what we call volume effect, which is really the growth of our clients' turnover, which has been brought back down to 0 after 2 very good years in '22 and '23, which were much higher at 4.42%. So, that's really -- you can see how the things are evolving here in an environment where risk continues to grow, in an environment where demand is increasing, where pricing is getting a little bit better, but where activity -- economic activity is more subdued. If we go to the next page on the risk side, you can see it was a very strong quarter at a loss ratio of 33% for the first quarter. We can see the number of claims increasing since the middle of 2021. So, we're almost 3 years in what we've called the normalization. The first quarter now has 8% fewer claims than in 2019, but with the total amount now pretty much in line with 2019. We continue to see severity the low historic average, but continuing to increase. There's really been no change in our reserving policy. The opening year loss ratio stands at 78.6% if you take out the discounting factor. That accounts for the fact that we're operating in a continued volatile and uncertain environment. And then we had some significant reserve releases in the first quarter linked to Latin America, and that's how we get to the 33%. On Page 11, I'm actually going to skip that page because we are comparing here the last 3 years' loss ratios for each one of the regions, Through the first quarter of 2024. This is a year-to-date page, the first quarter, it's a little bit less relevant. And I'd like to more comment on Page 12, which is the last 5 quarters. So, we can see on this page that the 4 largest and more stable markets, Western Europe, Northern Europe, Central Europe, Med and Africa, are all pretty much continuing to be quite benign in terms of their loss ratios. Not a whole lot of movement there. On the 3 smaller but more volatile markets, North America, Latin America, and Asia Pacific. You can see again quite benign picture except the continued volatility in Latin America. Latin America had been hit last year with a significant losses. We actually, these turned out to be fully recovered. We had a spike in Q3 due to increased frequencies in parts of Latin America, and again, had to book some reserves at the end of the year, which actually have been thrown back at the beginning of this year. So, in the end, a pretty good story on the loss line. You see on Page 13, the story on costs, which I've really actually described in quite a lot of detail already on the second page of this presentation. So, pretty much, it's just another way to look at costs, which are increasing to the tune of about 6%. And I've described how the loss -- the cost ratio, sorry, has gone from up by 1.6 points. When you look at the cost ratio before reinsurance, the walk is from 29.4% to 31.7%. Again, here, we see the impact of our lower premium growth. The fact that we continue to invest, that's 1.1 points additional of cost ratio. And the fact that the inflation that we embarked from the past is weighing for 1.3 points. At the same time, we see the impact of a better product mix with fees and business information accounting for 1.4 points reduction of the cost ratio. So, that's pretty much the same story told in another way. And with this, I'm going to turn it over to Phalla to take us through the next part of this presentation.

[Phalla Gervais, executive]

Thanks, Xavier. So, let's go to Page 14 on the reinsurance side. As you can see, the premium cession rate is at 26.8%. This is pretty stable compared to prior year. Claims session rate at 21.1%, which is down from the 27.4% in Q1 '23. Just TWO effects here into Q1 '23, of course, we have this very large claim in Latin America, and part of that was passed to the reinsure through the excess of loss treaty. And in Q1 24, so, this year, we have, as Xavier said, some prior year positive developments that benefit to the ventures as well. As a consequence of this, I think the eventual result is at EUR 30.5 million. I believe that our external measures will really enjoy it. If we move to Page 15, the net combined ratio stands at 63.1%. I will start with the net cost ratio moving from 25.7% to 27.3%, which is up 1.6%. You know that the growth is, of course, the reinsurance commission is contributing 4.7% as the gross cost ratio has increased by 2.3 points. Net loss ratio moving down almost 5 points. Again, this is because in Q1 '23, we have these very large claims in Latin America. And in Q1 '24, reserve release from prior years. If we move to Page 16 on our financial portfolio. On the left-hand side, you can see that the mark-to-market of our investment portfolio stands at EUR 3.2 billion after the repayment of EUR 23 million of the first tranche of our Tier 2 debt at the end of March. The asset allocation has not changed much with a highly level of liquid assets, 20%. Of course, we will repay almost EUR 200 million of dividend by the end of May. If we move to the right-hand side, so the net investment income is moving up from minus EUR 2.6 million to almost EUR 80 million this quarter. A couple of highlights here. In terms of recurring income, it's been -- well, it's almost EUR 20 million this quarter with, of course, the accounting yield that continues to increase. We are investing the new money at 3.9%. So, we still have quite a significant operating cash coming from the good performance of the business. In terms of unrealized and realized gain and loss, so we have taken unrealized loss related to our real estate investment fund for minus EUR 6.5 million this quarter, and this is completely offset by realized loss and unrealized loss on other asset classes. FX, minus 2.7 million this quarter. This takes into account the hyperinflation that we have booked on Turkey for minus EUR 4.5 million. In terms of IFE, so insurance finance expenses, it stands at 11.4 million. This is pretty similar at the similar level that we have in Q4 '23. If the rate interest will not change much, probably more or less a run rate per quarter. Let's move to Page 17. So, our operating income is up almost 19% from EUR 9 million to EUR 107 million, and net income up 12% at 68.4. If we move to Page 18, we turn on average tangible equity. The IFRS has not changed much, except, of course, the net income of the quarter, and return on average tangible equity just the calculation, moving from 13.4% to 14.8%. Probably one of the highest under IFRS 17. That's pretty much for this quarter. We don't have the capital management. So, I give the floor back to Xavier.

[Xavier Durand, executive]

Thanks, Phalla. So, as you've seen, it's a quarter of strong execution in a slowing economy with our actions very much in line with our strategy, power of the core. I think it's quite an uneventful quarter in a way we continue to invest in our business. We have, I think, very strong financial results. The return on average tangible equity at almost 15%, I think, is very strong. We see the fact that our diversification is starting to pay off. We see robust growth in our services business, business information and fees. And that's starting to compensate a little bit the decline we had this quarter in TCI. The fact that BI, business information, sorry, is the growth of it, more than finances the investments we're making, I think, is encouraging. So, we consider that, that's a good start to the year. With that, actually a bit shorter presentation than usual. We're going to turn it over to the participants for questions.

[Operator]

Thank you. [Operator Instructions]. Your first question comes from the line of Michael Huttner from Berenberg.

[Michael Huttner, analyst]

Thanks so much for another set of lovely results. I had, well, four questions. Are they all numbers, and I'm really sorry, they're just fairly boring, because the results are so good. So, on the repayment of debt, I know you don't discuss capital management now. But this EUR 203 million, is it correct to think that the impact on solvency would be roughly 8 points negative? It's a question. The second is in the combined ratio, and you've probably shown it somewhere, but that I haven't tracked, what is the impact of the discounting? The third is on the reserve releases, that likely ratio of 43%. Within that, or can you give us a feel for the element, which might be a little bit exceptional, so that the recovery on Latin America? And then my final question, these are really boring, tangible equities. I work backwards from your roughly return on equity of 14.8%. Is the figure of EUR 1.84 billion?

[Xavier Durand, executive]

I think I'm going to let Phalla answer all.

[Phalla Gervais, executive]

Yes, I take some. So, the repayment of debt. Remember, Michael, in Q4, we already commented it. In Q4, we had the 3 tranches of Tier 2 debt. And the comment that we had is that there is a cap of allowance of year-to-date counting as Solvency II own funds, and we have already reached the cap. So, the repayment of the EUR 230 million this quarter would not change much in our solvency ratio because the haircut was already applied as of Q4 '23. The second question is related to the discounted effect. If you go to Page 10, actually, you have the 2 numbers, you have the undiscounted, which is at the opening at 78.6% and 74, which is discounted. You will do the math, I believe. The third question was related to the reserve release, right? On Latin America. Well, we booked some reserves on Argentina, if you will collect in Q4 '23, and we booked it in the region where the risk has been all written, mainly Latin America, some part of that in where, and part of that in MA. And actually, the customers, well, continues to pay. So, we have to release this reserve. Does it make sense?

[Michael Huttner, analyst]

Yes. But can you give me a feel -- if I think of it as a little bit one-off, a little bit, how big should I adjust for it?

[Xavier Durand, executive]

There's always something on -- there's always something going on, Michael, as you know, in our business.

[Michael Huttner, analyst]

Okay. Okay. But just to say the -- I worked out, and this is very, very back of the envelope and is with help the cane investor. It's about EUR 10 million is the amount, I would say. It's not to call it exceptional, as you say, is well that gives me feel. The numbers.

[Phalla Gervais, executive]

No, because that's a plus and minus. So, you have some relief then you have some book up elsewhere.

[Michael Huttner, analyst]

Okay. Cool. That's very helpful. And then in terms of equity?

[Phalla Gervais, executive]

Yes. It's just a matter of calculation. It just means that you -- we had the same question, don't worry. That the technical results in improvement is our increase is less than the increase of the equity. So, you have -- it's just a matter of calculation.

[Operator]

We will now go to our next question. And your next question comes from the line of Benoit Valleaux from ODDO BHF.

[Benoit Valleaux, analyst]

A few questions on my side. Maybe the first one is regarding client retention, which is decreasing a little bit versus a peak level last year, and still a very strong level. But nevertheless, you mentioned the fact that there is still a very competitive environment, but price increase are broadly similar to last year. And you mentioned also some risk mitigation action plan. So, I don't know if you can elaborate a little bit on this action plan. I mean, do it concern some countries, some specific sector? Does it also partly explains the fact that premiums are decreasing in the U.S.? You mentioned an increase in inflation, but is it also due to some arithmetic generation plan. And overall, will you say that you maintain your risk appetite at the same level than last year or you believe that you're opening or starting this year with maybe even a bit more conservative risk approach. And maybe linked to this second question regarding level premium. So, revenues are down a little bit versus Q1 last year, but Q1, Q2 was a very high comparison base. So, is it still fair to assume that your revenue should likely increase on a full year base for this year compared to last year? And maybe third question regarding reserves, but more opening reserves on my side. You have opened with still a very high opening loss ratio. You mentioned some political economic uncertainty. Is there anything to be mentioned in some countries, some emerging markets, or in some of the countries such as Israel or anything else maybe to be mentioned? And lastly, maybe regarding your investment portfolio, you still have 20% liquidity assets, as you mentioned, our cash in your portfolio, but regarding fixed income product. Did you increase a little bit the duration of your portfolio or not?

[Xavier Durand, executive]

Okay. I'm going to let Phalla take the last one. Let me address some of the first questions here. On client retention, I mean, clearly, we have been improving for 8 years in a row. And we reached the peak, I would say, last year, as you described, as I said, the market is competitive. So, we have to fight for every and each account that we have in the portfolio. I would say we have not changed our risk appetite. We remain very disciplined through the cycle and very consistent with the principles we've highlighted for now years or tens of quarters for those who've been on those calls. We want to create value for the long-term. We want to partner with long-term clients who understand the value of the service that we bring, et cetera, et cetera. So, there's really not that much of a change. I mean, it continues to be, we'd call it, street fight on an account-by-account basis, nevertheless. The risk mitigation plan that I'm talking about is our normal discipline of making sure that when we see risk increasing significantly in any part of the world, whether it's a sector, whether it's a country, whether it's an account for a whole wide variety of reasons. We're very clear, and deliberate, and very open on -- with our clients about how -- and we come up with ways to manage that risk. So, that's something that we do. In some cases, where the client's relationship cannot be profitable because we are just not in sync with the client or if somebody else is offering something that we are just incapable or we don't want to follow with, then we will see an impact on the clients. There's no particular focus on risk in the U.S. that I need to or can or have to talk about. So, the premium, I would say, change in the U.S. is mainly, as you highlight, we had strong quarters last year. The economy in the U.S. in real terms continue to do well, but in nominal terms, I would say we are off big time from the peak inflation that we've seen last year, particularly when even more, I would say, when it comes to some of the spaces where we are stronger and like commodities and stuff like this. So, that's really what you're seeing here. In terms of the revenues, yes, they are down. Yes, last year was a high point because we have a little bit of the reverse phenomenon that we've had the last couple of years when the top line revenue growth was fueled by, I would say, both the economy and the inflation numbers. So, I'm not going to make any comment as for the rest of the year. By the way, it's anybody's guess what inflation is going to look like and what the economy is going to look like, and we never make forward-looking statements on this. But you're right to say that last year was a high point, I guess, in terms of the growth of our revenues. In terms of the opening reserves, not much to say there. I mean, I think it's very consistent year-on-year. So, we don't think the environment has actually gotten any easier on the risk side. You can see that over the last 3 years, I've been talking about this for 3 years, and I still will. We have the, what I call, normalization going on. It's been slow. It's been progressive, but it's happening. I think in the key markets where we operate, the level of insolvencies is now at or higher than 2019 and continues to rise. So, really no reason for us to open on a significantly lower level. And then Phalla, you want to talk about the investment portfolio?

[Phalla Gervais, executive]

Yes, like the investment side. And you're right. I think you can see the level of liquid assets, which is 20%, of course, EUR 200 million will be repaid. In terms of duration, as you might know, the yield curve is still, I think, in the better where you have short-term yield higher than long-term. So, this is why we continue to have this level of liquid assets. Of course, we will position ourselves and probably extend a duration if the yield curve is going back normal, of course, normal having the long-term rate higher than the short-term one. So, for the time being, I think not yet, but we probably will depend on the interest rate curve evolution.

[Operator]

We will now go to the next question. And your next question comes from the line of Hadley Cohen from Deutsche Bank.

[Hadley Cohen, analyst]

Michael and Benoit have actually asked most of my questions, but just a couple of follow-ups, please. Firstly, on the LATAM release fall, just a point of clarification, and Michel posited that the sort of one-off elements was around EUR 10 million. But my inference from your comment was you seem to suggest that it should be less than that. So, I was just wondering if that was right? And then linked to that, is this case now closed? Or is there possible for further releases to potentially come through next quarter as well? And then my second question, and apologies if I missed your comments earlier, Xavier. I'm just wondering if there was anything particularly untoward to mention in the Northern Europe loss ratio in the first quarter at 42.4%. I'm just wondering if there was anything one-off in there, if it's just more, accelerate higher acceleration of normalization of claims activity or what have you?

[Phalla Gervais, executive]

I will take the first one. So, LATAM release, I think, yes, as I said, plus and minus should not be -- it's not a big one-off rule that you can see in Q1. So, it's across, I think, the board. Should we expect more release may be, but a very, I would say, lower level than it used to be, because I think the big change has been repaid already.

[Hadley Cohen, analyst]

And then on Northern Europe?

[Xavier Durand, executive]

Sorry, yes, on Northern Europe, I don't think there's anything specific. I mean, we are seeing a rise. I mean, this is the part of the world which is slowing, clearly and slowing probably faster than the rest of Europe and the rest of the world. The industrial base in Germany is more impacted, I would say. And also, in the variable rate, countries that are in the northern part of Europe, I think we've seen construction in other parts of the industry being a little bit more impacted. So, nothing, I would say, specific, but a continued slow rise of the risk levels, yes.

[Operator]

We'll now go to the next question. And your next question comes from Michael Huttner, Berenberg.

[Michael Huttner, analyst]

I have 3 questions, reinsurance, cost ratio and tax. On the reinsurance, if I understood correctly, but I may have misunderstood. You had a more positive contribution from commissions than before. Is that right? In other words, the reinsurers like you, does this imply they gave you a better deal at the renewals? So, that's one question. The other question is on the cost ratio. So, there's this lovely slide and you clearly -- it's clearly a topic which you look at carefully. Should I imply from the fact that you focus on it and you weigh up all the factors, et cetera, that we should get back to the previous level of around 26% quite soon. And then the last one is just on the tax rate. I couldn't figure it out, but I just wondered if we were at normal level, that's all.

[Xavier Durand, executive]

I'll take the first 2 because you're tempting me with your reinsurance question, Michael. I wish I had that way. I can imagine reinsurers out of their fondness just funneling more commissions, that's not the way business works. On the cost ratio, you're right to say that we are disciplined. The fact that the premiums are going down and the inflation -- the cost inflation that we've embarked over the last couple of years is now with us for the future, does not mean that we believe we should not continue to invest in the business. So, there's an element of this, which is the cycle playing through. There's an element of this, which is the, let's say, relentless productivity gains that we try to make every year, and there's part of this, which is the investments that we want to make in our business to make it better for the long-term. So, I think you're not going to see our efforts to diminish to try to become productive, but you're also going to see the impact of the environment. You're also going to see that we continue to invest because I think that's the right thing to do. There's always in our business to tradeoff between cost and loss for the reason that these 2 things -- the more resources you put on risk mitigation and on technology, and on knowledge and on data, the better. I think you can expect the outcome to be on the loss side. Also, as you know, the reinsurance plays a factor both on the cost and on the loss ratio. So, these 2 things are not two independent units. I've said that for 7 or 8 years now that I've been with this business, but it remains true, particularly now in this phase of the cycle. But I'll just leave it there. I hope that answers the question, and I'm going to turn it to Phalla for the tax rate.

[Phalla Gervais, executive]

Michael, the tax rate is evolving between, what, '24 to '28, and we're still in the same -- we're navigating within the same range. So, there's nothing in particular to be highlighted.

[Michael Huttner, analyst]

That's helpful. And just on the reinsurance. I'm sorry, I'm pressing a little bit. And my guess is from your answer is that it costs a little -- the reinsurance contracts, even though your results are outstanding and the reinsurance, obviously, not some profitable expenses for them. They didn't actually reduce the commissions they're paying?

[Phalla Gervais, executive]

No, it's negotiated every year. So, it's -- treaty has been renewed and we signed. So, there's nothing to be negotiated. And of course, they're enjoying our loss ratio. This is why we have these contributions in terms of commissions from our insurers.

[Xavier Durand, executive]

Yes, there's no interim negotiation in the year, Michael, these contracts are negotiated on an annual basis.

[Michael Huttner, analyst]

And I understand the reason. I'm sorry I'm going on, I'm being silly. The Q1 is the first time we see the kind of benefit or cost or whatever the negotiations you completed at the end of the year. That's why I was interested. That's all. But from your answer is, they're making up quite well on the loss ratios so the commission ratio is roughly stable. Is that how we see it?

[Xavier Durand, executive]

We mentioned last year that we renewed all the contracts at essentially the same conditions.

[Operator]

Thank you. [Operator Instructions]. There are currently no further questions. I will hand the call back.

[Xavier Durand, executive]

Thank you very much. I mean, let me just thank the participants. I mean, we realize this is a time -- a very busy time for announcements and companies announcing their first quarter. There's going to be a number of things on our agenda. For the 16th of May, we have the general assembly. The dividend will be detached on the 22nd of May, should be paid on the 24th. And then on the 5th of August, we will present our first half results for 2024. So, I'm going to pretty much leave it here. Thanks, everyone, and talk to you soon.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.