Coface SA

PAR:COFA

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, welcome to the conference call for the presentation of Coface results for the period ending September 2018. [Operator Instructions] As a reminder, this conference call is being recorded. Your host for today's conference will be Mr. Xavier Durand, CEO of Coface; and Madame Carine Pichon, Group CFO and Risk Director.I would like now to turn the call over to Mr. Xavier Durand. Sir, please go ahead.

[Xavier Pascal Durand, CEO & GM]

Thank you, and good evening, everyone. Thank you, for calling in. As said, we're presenting tonight our results for the third quarter 2018. As you may have seen, I think Coface has delivered a very solid quarter at -- in what is a more volatile environment. In my mind, it fully confirms the validity of our strategy and our ability to execute. I'm going to go quickly, first of all, through Page 4 before we go into more details.Our turnover on the growth front reached EUR 1,035,700,000 year-to-date, which is up 4% at constant FX and perimeter. Q3 was strong with an 8% growth year-on-year and 4.7% excluding one-offs. This growth reflects both the growth of the insured turnover of our clients as well as the record levels of client retention and also a controlled new business commercial underwriting. On the loss side, the net loss ratio for first 9 months of the year is down 9.4 points versus last year at 45%, bringing the net combined ratio to 79%.In Q3, our net loss ratio stands at 48.5%, which actually represents 44.4%, excluding a onetime FX impact, which I'll explain a little bit later. This was driven by the strict monitoring we're making at the portfolio and continued strong recoveries from the past. Our 9 months' 2018 net cost ratio is down 1.4% from last year at 34%, which continues to reflect the tight cost controls we are implementing now for the last couple of years as well as the increase in the turnover of the business. Our net combined ratio comes in at 82.8% for the third quarter. It reflects a progressively normalizing risk environment, which, I think, we've been consistently highlighting through the last few quarters. As a result, our net income share of the group comes in at EUR 98.2 million, of which EUR 35.4 million in the third quarter. This includes a positive impact of FX net-net of EUR 5 million and continued favorable recoveries. It brings our total return on average tangible equity to 8.2% year-to-date. We feel confident in the strength of our balance sheet. We have, as you know, completed our EUR 30 million share buyback program so far. The shares will be canceled. And we have decided to launch an additional share buyback program for EUR 15 million before the end of February 2019, which is in line with the second pillar of our strategic plan, Fit to Win.And then finally, we're more than ever continuing to execute on our plan. You've might have seen through the last few weeks a number of announcements. We signed an agreement to acquire PKZ, the market leader for credit insurance in Slovenia. We've announced a partnership with Tradeshift to develop digital activities through their online trading platform. Our internal -- partial internal model effort is progressing as we expected. At the same time, we are continuing to monitor any potential change to the standard formula calculation. I have to say on this front, there's been absolutely no news lately, and the ball is still in the regulator's court.We have received a rating from AM Best for our business in North America. That's an important feature for us as a counterparty in this space. And the rating is A, which is excellent, confirming the strength of our balance sheet. And we've been putting quite a bit of effort in our ESG space and have been rewarded the Prime status by ISS-Oekom in terms of sustainability rating. That puts us in the top 10% of the 140 insurance companies that have been rated by this entity. So again, and it's fine I think of the strength and the commitments of Coface to these aspects which are important.Before we go into the usual numbers, I've put in a page here, on Page 5, that I just want to take everyone through. And this relates to the implementation of our Fit to Win. As I said, there's no question that after the trough of 2017, the risk environment is normalizing. I think we forecast that for about a year. In this context, being agile is more important than ever. This is the focus of our strategic plan. The 3 operating topics we had identified for our plan, risk, service and grow, are a key. And we're working them hard. And I've put on this page a few things that I want to take you through. On the left-hand side of the chart, you can see that we're continuing to actively monitor our risk portfolio throughout the last months. We've been working nonstop on implementing risk measures in the key countries, such as the U.K. with Brexit, Turkey, Argentina, that's pretty -- I think that's pretty obvious, Italy as well, taking actions on key sectors or large exposures and in spaces like commodities, metals or distribution pretty much around the world.And I have just 2 little charts here on the bottom of -- left of the page that I just want to point out to. The one on the left shows in the blue line the acceptance rates we have of the request that our clients make for new limits. And you can see that's been pretty stable through the last couple of years. The green line shows the weighted average quality of our -- of the lines in our book, in our exposure book. And you can see that's actually been increasing over time. So the book is increasing in quality. And then on the right-hand side, the little chart shows -- the green line shows the increases in exposure, the overall amount of exposure that we carry. It's been growing in line with the turnover of our clients. The blue line shows the difference between the risk exposure and the value of the contract we have in the portfolio. And you see that after a trough period of '17, where this has grown, it's actually stabilized and actually reducing in the last year, showing that we're actually getting better price for the amount of exposure that we're granting to our clients.On the service and efficiency side. You're aware of the efforts we have been driving to save costs. And I have to say that we will exceed our EUR 30 million target. I think year-to-date, we're at EUR 27 million. So clearly, I think, we will beat that target. We've launched over the last few months a group-wide sales force effectiveness program. Now this focus is on the mid-market, which is a very important segment for us. We really want to take the execution -- the sales execution in each one of the markets to the next level. And I think we're starting to see some benefits from this. We're continuing to drive client satisfaction. There's a lot to do in that space. We're monitoring key indicators of service throughout the business because, I think, it's very important that we continue to enhance our value prop to clients in the space. And then you're aware of some of the events that we've announced in terms of continuing to drive selective growth. We signed an agreement to acquire PKZ. This is the market leader in Slovenia. We will integrate the business in 2019 after we receive a regulatory approval to proceed with the acquisition. It's a positive impact, albeit small, on our 2019 EPS, and it will be neutral on our solvency ratio. So we think it fits right in with the bolt-on acquisition strategy I've described over the past few quarters. And then we've announced a strategic partnership with Tradeshift. This is an important online trading platform. We will be making available to their clients, in a very simple format, some of our products and capabilities in terms of evaluating the quality of their counterparties and at a later stage being able to buy and purchase our products, insurance products, through the web.So continuing to -- at the same time, we're saving money in the business, continuing to invest in things that are strategic for us going forward. With that, I'm going to take you through the next pages, starting with Page 7, describing our growth. And you're, by now, very familiar with these pages. So our total revenue was up 4% from last year. What's interesting is that the trade credit insurance business underlying this 4% is growing at 4.8% at constant FX. So we're seeing a good trend there. We'll see that it's driven by client activity, and prices are pretty much under control.The other revenues are down 3.9%. And as we've highlighted in the prior quarters, this is driven by Factoring, where we're adjusting our underwriting to new regulatory capital requirements and a more volatile environment. Our ratio of fees to growth -- gross earned premium is stable. So the fees are growing very much in line with the premiums in the business.If I go to Page 8. And we look at the geography of the growth. I think it actually -- we actually like the way it looks because it reflects the Fit to Win plan we've put together. You can see that all the mature regions on the top of the chart are now actually growing. Western Europe is up 1.5%. Northern Europe is slightly down, but if you strip out the Factoring business, actually it's growing close to 2% this quarter through the -- sorry, through the first 9 months. While Central Europe and Med and Africa are growing at above 8%.At the same time, you see North America is picking up a bit of steam with the -- in particular, some large policies and -- large single-risk policies. And while -- at the same time, Asia Pacific and Latin America are kind of flattish, reflecting, I think, our prudent and thoughtful underwriting in the region. At the same time, as you know, we've been cleaning the portfolio over the last couple of years in that part of the world.If I go to Page 9 and look at how the growth of the components work out. You see that through the first 9 months, our new production is down from last year, but actually, we started slow in the year. The first quarter was slower than expected. And it's been picking up since then. And actually, we're very much on par with the prior years in terms of the last 2 quarters. The retention rate is at a record level for the last 4, 5 years. And you can see that on the chart, it's true in most regions of the world. You can see that our pricing is getting better from the last 4 years and reflects, I think, our ability to control the price decreases in the mature markets and also to drive repricing in some of the riskier markets around the world. And the usual suspects you can think of are all part of this. And then finally, we are being carried by the growth in the underlying turnover of our clients here, which is at the 4.8%. From the beginning of the year, it's actually pretty high. And that supports us.Going to now Page 10 on the risk side. You can see that our loss ratio before reinsurance and including claims handling comes in at 43.8% through the first 9 months of the year. And then to the right of that is the quarterly sequence with the Q3 a little bit higher at 46.5%. Now there's a couple of things we need to explain when it comes to this loss ratio for the quarter. It's been impacted particularly strongly by FX. And this is linked to the very strong depreciation we've seen in a couple of markets, particularly Turkey and Argentina, which -- devaluation in the peso and [Technical Difficulty]

[Xavier Pascal Durand, CEO & GM]

Is there somebody online? No. It sounds like it. I don't know. So devaluation in the peso and in the Turkish lira, which basically causes us to revalue both the assets and the liabilities on the balance sheet. So it increases the loss reserves. At the same time, it increases the assets we have on the books, and we will see the corresponding gain in financial income.So when we restate the loss ratio for the quarter for that FX impact, it would actually come in at 43.6% in the third quarter of 2018. So good performance driven in a more volatile environment also driven by past recoveries. You can see at the bottom of the chart here that past recoveries are at 33%. Actually, part of this is a rewrite of old files, which -- into this new year, which are causing about 3 points of that recovery. There is a corresponding increase in new business reserves. So the 74.5%, you can see in terms of reserves for the new vintage would be about 70%, if we restated for that effect. So very much in line with the prior quarters and the prior year in Q3, and -- when we correct that for the rewrite of the business.When we look then on Page 11 at the split by geography. I think it's probably easier to comment on Page 23, which gives the quarterly split and not the cumulated performance for the first 9 months of the year. And when you look at that page, you can actually see that all of the regions, the key regions at the bottom, are actually performing pretty well with Central Europe at 47%; Western Europe at 27%; Northern Europe coming down at 41%; Med and Africa, below 50%, at 46%. So pretty good performance there. The regions that have been causing us a little bit of volatility. North America is at 65%, almost 66%. Now part of this, again, is driven by facultative reinsured business, which -- where the risk goes to third party on a deal-by-deal basis. So when you correct it for that number, the number comes in at 47%. Asia Pacific is climbing up, obviously, after a very strong recovery series here but still, say, below 40%. And then Latin America is the real hotspot here with a headline figure of 94%. If we correct that for the FX impact, I had talked about, we would be at about 70%. And obviously, this is driven by Argentina and the specific situation that we're facing there. So overall, that's the story on risk.And then if we go to Page 12, which is the cost topics. You can see here on the left-hand side that the costs are up 6.7% for the quarter. Now there's 2 pieces to this. One is internal costs are flat over the last 3 quarters. As you know, we're very -- being very disciplined about making savings. We have delivered, so far, EUR 27 million of savings through our Fit to Win efforts. So we'll exceed the EUR 30 million commitment we've made to everybody here. At the same time, our external costs are up significantly. And this is driven by 2 things: One is the growth of our turnover. You remember we had an 8% headline for the quarter; and the fact that this growth is happening in geographies where we have more intermediation, and therefore, the costs are going up. Net-net though, if you look at the cost ratio before reinsurance, it's down from the 37.4% we had last year to 37%. And if we look at the -- to the bottom-right hand of the chart, you see that the gross cost ratio comes in lower than last year by 1.4% at 35.8% versus the 36 -- sorry, by about 1% from 35.8% to -- from 36.7% last year.With that, I'm going to turn it over to Carine to talk about the rest of the slides here.

[Carine Pichon, Chief Financial & Risk Officer]

Okay, thank you, Xavier. Good evening, everybody. Reinsurance result is reflecting, as last quarter, a low loss ratio. As you may see in the bottom of this chart, reinsurance result is around EUR 47 million and also is reflecting growing accounting cession rate. You remember that we told you that we have increased our quota share cession for underwriting year of 2017 and 2018. And it is clearly reflecting in accounting numbers. We have ceded a little less than 29% of premium. And we have ceded around 27% of claims.Page 14. A view on our net combined ratio, which is at 79%, so down by a little less than 11 points of percentage compared with 9 months '17. Improving loss ratio, improving also cost ratio. Loss ratio, all of you can now see there, thanks to a strong underwriting policy. And cost ratio is down by 1.4 point as investments are fully financed by cost savings. We have already told you that we are searching cost saving so that we can finance our investments.On a quarterly basis, which is the second part of the graph, it's 82.8%, combined ratio, with a loss ratio which remains under control in a normalizing risk environment. And even despite negative FX impact, the Q3 2018 combined ratio is below through the cycle target, which is around 83%.A view now on our financial portfolio. We have been able to stabilize yield, as we stated here a very low rate environment, at least Europe, where the majority of our portfolio is located. You may see that accounting yield without any gains on sales is at 1.2%, which is exactly the same that first we have performed last year for 9 months '17. We also have reported EUR 9.5 million gain in financial results linked to FX effect, which is compensated by a similar decrease in technical result by EUR 8.8 million. So here you are. As described before by Xavier, there we have evaluation of process, which improved the financial income, whereas we have devaluation of liabilities, which is in technical result, and particular in loss ratio.Page 16 is a view on our net income. So net income EUR 98.2 million. Starting by commenting our current operating income, which is a very strong performance. It is more than 65% of increase compared with last year. Restructuring charges are at minus EUR 4.2 million. And it is expected that they should be a little lower compared with the previous plan, thanks to good execution. Tax rate is, for the 9 months, at 35%, although it was this quarter at 40%, mainly because of some tax reserves we have put in some geographies.All-in all, we have a net profit for the quarter, which is EUR 35.4 million, and which is benefiting from EUR 5 million of FX positive impact. You have here the rows and the charts explaining where it is put in each line of the financial statement. We have EUR 18 million in FX result, EUR 10 million in technical result, and after tax, it's around EUR 5 million of net-net impact on net result.That performance leads, Page 17, to a return on average tangible equity, which is above 8%, at 8.2% on a normalized basis, coming from last year at 5.3%. So clearly, the technical result and the improvement on combined ratio has driven this improvement. Financial result is lower, actually a positive impact and tax and others had a decline by 2.3%.

[Xavier Pascal Durand, CEO & GM]

So just to wrap this on Page 19 before we get into the Q&A. I think we qualify this as a very solid quarter. As we said, the environment is normalizing. I think -- it's pretty clear from the news that flow here that it's becoming more volatile. In this more volatile environment, I'm more than ever convinced that we have the right plan and the right strategy. Clearly, agility is the key here. And the business is executing on the plan. I mean, we have more top line growth as we've seen before. The cost control efforts we're driving are driving the cost ratio down by over 1 point from last year. The risk ratios, I think, have been pretty good at this stage. And the net income at EUR 98 million and the 8.2% return on tangible equity, I think, are numbers that reflect this execution. We -- as you know, we feel our partial internal model project is progressing as we expect. There's been no recent evolution on the standard formula. And we feel confident about the strength of our balance sheet. I'd just remind everyone here that our solvency ratio at the middle of the year is above 160%, 163% actually. And that's up more than 20 points over the last couple of years from where stood. As a result of this, we decided to launch an additional share buyback program for EUR 15 million, which will go from now up to the end of the February. And as I said before, I mean, our financial strength continues to be recognized, and latest was by AM Best, which is a key rating for us to have in the North American market with an A (Excellent) rating. So when we look forward, more than ever, we're continuing to focus on the execution of our plan. I think, continuing risk actions in key regions and sectors as things will develop. And the challenge here is being ready for whatever is going to present itself. Continuing with tight cost controls combined with disciplined investments, we're going to exceed our target of cost savings this year. We're reinvesting in the business deliberately and thoughtfully, and I've explained how we've been, for the last couple of years, making investments on the risk side, on efficiency, digital and on growth in selective ways. And I think also on, being able to innovate. And I've highlighted the PKZ acquisition, which for Coface is a first, I think, in the last 10 years. And so we'll consolidate our presence in this part of the world. And as well our ability to allocate resources to innovation and work on the digital front, on things that will matter for the future and help us bring our value proposition to new parts of the market as we've done with Tradeshift.So that's kind of the summary. I'm now going to turn it back to the operator, so we can open the call to the Q&A session.

[Operator]

[Operator Instructions] We have a first question from Guilhem Horvath of Exane BNP Paribas.

[Guilhem Horvath, Research Analyst]

Three questions on my side. The first one is on the balance sheet confidence that you mentioned and the fact that you launched a new EUR 15 million buyback program today. So if I'm looking at your balance sheet, on the one side, you benefit quite a lot from an improvement in best estimate earlier this year. And this seems to be quite policy control. So my first part of the question is: Is there a risk that actually you have decrease in solvency due to the fact that risks are normalizing around the world? And then you've got the standard formula risk, which you said, you have no update, but still is a risk. And you mentioned earlier that it was potentially 15 points of solvency. So my ultimate question is, would it mean that you're willing to continue buying back shares even if you are within the optimal range between 140% and 160%? Or is it something you don't want to do, and in which case you are well above the 160% ratio? My second question is: Can you update us, please, on the time frame for the partial internal model discussions because, I think, it's submitting to the regulator in the first half of 2019? But I can't remember if it's that. And do you have an update in terms of could it be possible that you actually decided earlier? And the third question is probably a bit detailed. But you mentioned that PKZ will have a positive impact on 2019 EPS, a small one. Can you please elaborate a little bit on the size of this impact in terms of growth and profitability for 2019 and onwards, please?

[Xavier Pascal Durand, CEO & GM]

Okay. Let me start with the partial internal model here. There's no change to what we said. We said, we would submit by middle of next year. I don't have any reason to believe it would be any different at this stage. That's all we can say. I mean -- so all I can say is that project is progressing. But there's no news on that front. In terms of PKZ, I mean, it's important for that part of the world. In this -- within the scale of Coface, it's 1% of our premium, right? So it's not going to rock the boat one way or another. So the increase in EPS is really marginal here. I'm just trying to say that it is accretive. So while it's a small acquisition, this is not a dilutive. It's actually a relutive purchase. There's no goodwill attached to this business, by the way. On the question of the balance sheet -- sorry, I'm trying to collect my thoughts here. So the -- yes, the solvency ratio, as you know, came in at 163% the end of year -- the middle of the year. So that was clearly much higher than our comfort zone, which is 140% to 160%. We think at this stage that the program we're proposing of EUR 15 million, it's about 1 point of solvency. So again, this is not something that's going to materially alter our ability to do this or that. But I think it's also a way for us to confirm the view that we have that our balance sheet is strong. And also, clearly, the stock price being pretty low. I think it's an opportunity for us to buy shares at a lower than par value.

[Guilhem Horvath, Research Analyst]

Sorry, if I can just follow up on my 2 elements, which were; first, the pro-cyclicality of the ratio and the fact that this estimate can actually be lower in this environment? And the second thing is, what would happen, if you have a solvency been 140% and 160%? Would you, in turn, to continue buying back shares?

[Carine Pichon, Chief Financial & Risk Officer]

Guilhem, we haven't changed at all our capital management policy. It's clear that the decision we have taken, of course, is quite material amount in terms in terms of point of cover. And it's taken into account for our prospect and forecast for various scores. So it's to make it clear. And we don't change at all our policy here that as long as we have between 140% and 160%. It follows the plan. We can grow as we expect. And we have kind of deliver 60% of the dividend payout ratio. And we not changed. And this particular, I would assume not too much material buyback, doesn't change at all our capital management policy.

[Operator]

The next question is from Thomas Fossard of HSBC.

[Thomas Fossard, Co]

Quick question. First would be on the monitoring of the risks. Clearly, this is something where market is probably having a bit of focus at the present time in the kind of pretty tricky economic environment, disconnection of different economies, the volatility in terms of fixed FX rates, which potentially have some significant disturbance effect on emerging economies. So would you be able to dig a bit more into your monitoring of the risk? And tell us, if so far, actually you have already taken some preventive measures? Or I mean, anything that you would like to highlight in this kind of environment? Second point would be, as growth is coming back, I guess at -- does it send a view you have regarding the structure of your insurance program next year? It may be too early, but I guess that we are already close to November, December. So you may have some thoughts on this. So what do we expect to tell us on this, please?

[Xavier Pascal Durand, CEO & GM]

Okay. Well, I was trying to address your question on risk monitoring on page -- let me see, I think, it was Page 5. And actually I think it was really intended to address your question, because the little charts, I showed on the bottom left, are historical looks at our book. And I think what it says is that we have been over the last 2 years taking actions on a variety of topics. All the usual suspects you can think of, whether it's Turkey or Argentina or Italy or metals or distribution, you name them. So these are topics that have been actively monitored and on which we've taken proactive measures. And the results, I think are shown on these 2 kind of summary graphs there. One is that the average quality of the portfolio have actually been increasing despite the fact that, as you say -- as we say, the environment is becoming more volatile. And then second that we are constantly watching the amount of exposure we have and the amount of premium we get for that exposure. So that the risk is aligned with the returns. The risk we're taking is aligned with the returns we can expect from the policy. So the answer to your question is, this is an ongoing activity. I mean there's some pretty significant movements actually in the risk management that we're making on different hotspots. It's not an across-the-board thing. It's, as we said, I think at the beginning of Fit to Win, we're being very clear here that we want to take targeted action. That's the value that we bring to the business. This is how we can help our clients and target the areas, which in our view, and this is a combined view from both our economic research on one hand. The indications we get from our on business indicators, which collects all the claims activity on a weekly basis. And any insight we could get from any of our clients or the people we talk to. We combine all of this to come up with views and come up with proactive action plans, which try to anticipate or at least be concurrent with the increases as close as we can to the wall of risk as was different ways of risk that we see spreading through the economy. So we're absolutely focused on this. This is what we do on a daily basis. The other question is on the reinsurance program. I mean, at this stage, I don't think we see a major change in our reinsurance programs. So I mean we're still going through obviously the discussion. We're just beginning a discussion of the reinsurance program. So it's a bit early in year to talk about it. But I don't anticipate a major change in the shape of the reinsurance program at least in its principle.

[Thomas Fossard, Co]

Okay. So if I link now the two questions. One on the risk monitoring side, the other one on the projection side. Actually what you're telling us today that we should not expect too much volatility on your loss ratio, net loss ratios in the coming quarters. Actually you believe that you've taken the necessary steps to prevent, I would say, any hiccup?

[Xavier Pascal Durand, CEO & GM]

I'll let you own that comment. I mean the -- clearly, I think -- nobody knows what the environment holds, right? I mean, we are, at the end, driven by the economy one way or the other. What I'm telling you is that we have -- we're watching it. We're constantly monitoring it. There will be events that we may be able to see develop gradually, where we will take actions. There will be other events, which are completely coming out of blue and which is very, very hard to predict. And these are obviously harder to preempt, right? So I think what we're saying here is that we are absolutely applying the principle that we have elaborated on in terms of putting the Fit to Win plan together, in terms of agility, in terms of focus on risk, resources, processes, quality of people and all that good stuff. Now the environment is the environment. And there's only -- we can't predict what the environment holds here.

[Operator]

The next question is from Michael Huttner of JPMorgan.

[Michael Igor Huttner, Senior Analyst]

I'm really sorry, I'm on a plane. I think they haven't closed the door yet, but I'd be really quick. And first question, if we haven't had the FX, would you have reported a combined ratio of around 78%? The second question is, the money given to reinsurers in the quarters, it's above or about the same as the normal run rate? And the third question is, on Argentina, this is the second quarter now you've mentioned it, is it something we should expect to continue? I'm really sorry about the noise. I'm going to mute now, sorry.

[Xavier Pascal Durand, CEO & GM]

Let me try to be -- on the first question, I think the answer is, yes. So you'd have to take out the FX impact and the combined ratio. The second question was that?

[Carine Pichon, Chief Financial & Risk Officer]

Argentina?

[Xavier Pascal Durand, CEO & GM]

Oh, Argentina was #3. So...

[Carine Pichon, Chief Financial & Risk Officer]

Money given to reinsurance.

[Xavier Pascal Durand, CEO & GM]

Oh, reinsurance? Was that his mind with the -- I guess, nobody gets that one. The money you transfer to the reinsurance?

[Carine Pichon, Chief Financial & Risk Officer]

That's correct. That's correct.

[Michael Igor Huttner, Senior Analyst]

If it's in line with what you expect through the cycle.

[Carine Pichon, Chief Financial & Risk Officer]

Yes. Ah, through the cycle. It's in line. I see it, with the loss we are reporting. Yes.

[Xavier Pascal Durand, CEO & GM]

I'm not sure I understand that question. The third question is on Argentina. Look, I mean, the developments there are -- as you know, there's 2 things. There's been a shock in the Argentinian market. Clearly, we've been impacted by them, it's -- given what we do, it's hard not to. And as you know, these -- when something like this happens in our book, it takes some time for us to go through the shock wave. There's, obviously, the actions we take. There's the contractual delays we have with our clients and grace periods and all that good stuff. And then there's the time for all of this to develop through the book. What we don't know is what's going to happen next in Argentina. And I think that's the element that probably the Argentinian government and the IMF would know more about than I do. So from that standpoint it's a bit hard to answer that question.

[Operator]

The next question is from Benoit Petrarque of Kepler Cheuvreux.

[Benoit Petrarque, Head of Benelux Equity Research]

So the first one was on this I think 78.7% combined ratio ex FX. I mean it is pretty low, actually includes quite some recoveries again, I think, this quarter. So could you maybe clarify a bit how much recoveries you seek and other exceptional recoveries you see this quarter? And I was a bit surprised to see so much recovery actually year-to-date. So as I was wondering just it where it comes from basically? And what we can expect in the coming quarters? Just one question also on the reinsurance. So I'm not sure if that's been asked already, but on the cession rate, do you have any plans to increase cession rate at this stage of the cycle? Another question was on the action plan. Let’s say, we have been talking about your Turkish exporter and Argentinian as well. Is there any new action plan you have been taken more recently, maybe around Brazil or Italy, or is there kind of new countries or maybe exposures you start to watch a little bit more carefully than you have done in the past? And then the last one was around just the outlook for 2019. We are almost in November. How do you see 2019? Will that be in line with the -- across the cycle average? Or could it be a bit worse than average or bit better? And what is your view on that?

[Xavier Pascal Durand, CEO & GM]

Okay, well, I'll start with the exposures, because I think, I've actually probably answered that one. But clearly, we're watching everything we can. I mean, and as I've said earlier, we have been working on Italy. We are watching every region in the world and ready to act. I mean the key in our business, as you know, we can't act before an event, because I don't think we are justified to do that. But we can't wait too long to act when an event develops. So that's the whole key. It's like when you go to the dance that you -- you do not start yelling before he touches your teeth, right? So we are -- I think to that extent, we've been working on Italy, we've been working on Turkey for probably the best part of the last 2 years. We've been working on Argentina, obviously, intensely this year. The sectors that I have mentioned, commodities that's been going on for a couple of years. Metals. I can talk about distribution. I think that's a major trend going all over the world. Actually it's touching every economy that I know about. So yes, we continue to be focused on all of these things at the same time. In terms of cession rate. As I said, I mean, I don't see any major change to our reinsurance programs. I think they are profitable for the reinsurance obviously. And I think we've increased it over the last couple of years. And I think we, at this stage have -- there's no major plan to change. But again, it's early days in the negotiations stage here. Carine, you want to talk about -- sorry, the first question on the combined ratio and...

[Carine Pichon, Chief Financial & Risk Officer]

So yes, I confirm you, yes, it is just to be sure that it's true that without FX, the combined ratio is at 78.8%, a fee that's what you calculate, which includes the loss ratio. We have already commented that 44.4% excluding the FX. And in that, you have a good deal of recovery. That's what we said. And also they reflect the treatment during -- of the new claims.

[Xavier Pascal Durand, CEO & GM]

Yes. And then it's too early to talk about '19. I think we'll talk about that in the next call. We -- all I'll tell you is that, I think at the end of '17, we were seeing the world as being particularly benign. And I think what we had forecast is actually pretty much happening, which is a normalization, if you will, of volatility. Very hard to call exactly where this goes. But if we're seeing risk come back and volatility come back to every sorts of markets, and you guys are very well aware about what that means, whether it's emerging market, whether it's a dollars or exchange rates, whether it's a trade discussions and trade wars between U.S. and other partners. So yes, it's happening. I would tell you just that medium-term, I think it's a good thing for us. I mean if there is no volatility, we really don't have a business. Enough volatility is good. Too much volatility, obviously, is not as good. But I think in the whole scheme of things, for us this is really what our business is all about, is managing this increasing volatility in the world.

[Operator]

We have a follow-up question of Thomas Fossard, HSBC.

[Thomas Fossard, Co]

I just wanted to come back on your growth rates. So the top line growth. And I would say, catching up on just what you said, Xavier. What I've expected actually in this kind of environment you to be a bit more supportive of your new business actually. More uncertainty should, I would say, trigger more buyer -- more buying from your existing clients, but also maybe you're finding new clients. Does not seem to be showing up yet on the new business. So could you share -- I mean, is there confidence in that? Is this coming with a lag, which is a usual thing in your business? Or does that mean that you are maybe suffering somewhere? I mean what can you tell us on that? And maybe talk a bit more about what we should expect next year, especially as the pressure on prices is somewhat easing in the coming quarters?

[Xavier Pascal Durand, CEO & GM]

Well, I'll say a few things about this. Clearly, I mean there's more demand usually when things -- I think you pointed that out rightly. When things get more risky, people are more willing to insure. The question is, are we seeing terms and conditions that match the risk that they're asking us to take? Realize that in today's environment, while there -- things are normalizing, the overall level of insolvency remains very much controlled around the world. And so most of our clients are actually still experiencing pretty good results on their policies, right? So take the U.K. and Brexit, for example. We see more U.K. companies willing to ensure. Now they -- the terms and conditions they want may not necessarily be those that we think will lead to great returns for us. So as I said from the beginning, we're being thoughtful about what we want to take on what we don't want to take. And the goal here is not to drive the top line for the sake of driving the top line. The goal here is to take good quality business that we think is appropriately priced. And we'll return good income from the -- through the cycle. So that -- I think that's what you're saying. And then the other thing, obviously, yes, it does take some time for things to turn around. And I don't think the market shifts its focus or changes its mind about pricing or about risk levels like that overnight. So these would be the 2 elements, I'd bring to your attention.

[Operator]

We currently have no further questions. [Operator Instructions]

[Xavier Pascal Durand, CEO & GM]

Okay. Well, look, we don't need to torture anyone. I thank you very much for logging in and spending the time with us. We will meet again and/or call again in February 2019. It will be February 11 for the total 2018 year report out. So thank you, everybody, and have a good evening.

[Operator]

Ladies and gentlemen, thank you, for you attendance. This call has been concluded. You may now disconnect.