COFACE SA (COFA) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Coface SA H1 2026 Results Presentation. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Xavier Durand, CEO. Please go ahead.

Thank you very much. Good evening. Welcome, everybody. Thank you for joining on the hot summer evening like this for our report on the midyear 2026. You will have seen from the numbers, we had a strong -- another strong quarter of execution in what I would qualify as a pretty tough environment at Coface. Just reminding everybody of the headlines. Net income at EUR 108 million or close. Solvency at 194%, so a very strong position. We had a quarter in Q2 where we saw a relative rebound of volumes versus the first quarter. So insurance premiums grew 1.4% versus a negative 1.3% in Q1, and I'll explain a little bit more in the next pages where that comes from. Most of the operating metrics, as you will see, have been strong. The retention is close to record at 93.6%. Pricing is negative, but above historic average at minus 1.3%. We continue to grow business information double digit, and including the total perimeter, the organic growth is 12% for the semester and 19.1% with the acquisition of Cedar Rose. Debt collection growing almost 32%, and also good news on factoring, which is up 3.5% after many quarters of subdued performance, I would say, in the current economy. I think the other good news for the quarter is the losses. The net loss ratio is better by 2.7 points versus last year at 37.4%. That brings a strong combined ratio, which is stable at 71.3% for the first half. The net cost ratio has increased by 2.7% (sic) [ 2.7 percentage points ] as we continue to deliberately invest in line with our strategic plan, and I'll go through more of that detail in the next pages. If we step back a little bit, we are now past mid-plan for Coface, 2.5 years into Power the Core. And we'll take a look at our main financial targets, but we are reconfirming these. And actually, over the last 2.5 years, we have beaten all of our metrics, combined ratio, return on average tangible equity, solvency and the payout ratio. We -- as you know, we evolve in an environment which is both slower growth and also an acceleration in digital and AI and connectivity. We know that at this point, what matters most for us is the long-term value creation with the BI business versus short-term profitability. So we think that the guidance we've given around the 50 basis points RoATE contribution in 2027 is now irrelevant. We are planning to, however, adjust the 2027 dividend, which will be paid out in 2028 upwards to compensate for the difference. As I said, net income at EUR 108 million, annualized RoATE at 10.9% with a strong solvency at 194%, which is almost 20 points above the upper range of our target. We've appointed 2 new Directors to the Board on the Arch representation, Hugh Sturgess, who is President and CEO of Arch Insurance International; and Christine Todd, who is the Chief Investment Officer at Arch Capital. So 2 strong appointments here of insurance professionals to the Coface Board and a lot of continuity on the Arch side. On Page 5, I just remind everybody of the financial targets that we had set for Power the Core. And again, I'll say it, this is -- these metrics, these goals were how we plan to position the company over the course of the plan to be able to deliver. And if you look at the actuals in blue versus the targets, you see that we've actually done better. The average combined ratio for the first 2.5 years is at 72.2%, which is way lower than the 78% we had targeted, undiscounted in the plan. As I mentioned, our solvency at -- is about 20 points above -- actually 21 points above the upper limit of the range that we targeted, 155% to 175%. We continue to pay out over 80% of our profits to shareholders on a regular basis and maintaining a high level of profitability through this cycle. And the RoATE to date is at 12.3%. And I'll just remind everybody that, obviously, this is influenced by the high level of equity that we retain in the business. So I would again qualify this as overperformance versus the plan that we had in place. On Page 6, I just wanted to give you some perspective on the market. On the left-hand side, this is not news, but putting it in a graph like this, I think, highlights where we stand are the Global Corporate Insolvencies Index that we've developed to represent what's going on in the world. And you see that where we are in the cycle is actually at a peak in the last 13 years. We thought things would stabilize a little bit this year, but actually, the events in the Gulf keep putting pressure on companies. So we see continued increases in insolvencies. You see the drop that happened after COVID when governments flooded the economies with, I would say, free money. So that had a dampening effect on insolvencies and then there's been normalization since, and we've gone back to, I would say, a much more normal behavior here. But the point is we are at a tough place in the cycle. And on the top right hand, I think I just want to illustrate also the slowdown in the economy is weighing on our core markets here. It is not often that we see negative growth in our core markets in Europe, like the U.K. is down 5.5%, Germany, 5%, France, 4.5%, Netherlands, almost 1% or 0.5%. And then the traditional growth engines in the TCI markets, which are Spain and Italy, are still growing, but at much lower rates. Italy has been a growth engine for this industry for many, many years and is now growing 3%. So my main comment here is global insolvencies at a decade high level. Premiums under pressure in our key markets. And that explains also why these low volumes drive intense competition and you still have pressure on prices. There's a lot of need for companies to invest and catch up in AI, make sure they stay up to the pace of what's going on in the market. So we see a tendency, and that's true across all of our businesses of large companies to delay large purchase decisions, whether it's in TCI or BI or others. And yet, I would say that Coface is outperforming on both volumes and margin. And I think that's just -- I wanted to put that in perspective of what the markets look like. On Page 7, we have a regular update on CSR. I think I've already highlighted in the last quarter one, the key achievements that we've had in 2025 versus the interim goals that we had set for ourselves. And then the message is we pretty much beat every single target that we had set for ourselves. And I also highlighted the 2030 goals, new goals that we set, further improving our performance on the key pillars. What I can say is on responsible insurer, we continue to weigh carefully how we invest the portfolio to continue to drive down the carbon emissions carried by that book. So the efforts continue. And in terms of being a responsible employer, our key goal here was to have 40% women in the top 200 jobs in the company. Now what's happened over the course of the last few years is we've added 1,000 jobs in the data, tech and digital space. And these are typically areas where -- which are male-dominated. So for us to maintain that ratio requires work, and we're really thoughtful and proactive in that area. And then as a responsible enterprise, we want to further reduce our own carbon emissions. And the focus right now is on responsible IT and procurement. So we're working our providers hard to make sure that they also do what's required to lower the emissions that are linked to them in our own accounting. And obviously, we are switching all of our fleet of vehicles and things like this to 100% electric and renewable energies. In terms of the culture, we have an EcoVadis rating, which puts us in the top 23% of companies that they rate. A few years ago, we had a really strong MSCI rating as well. I think there's space here, continuing to work on the way we report our business and the actual efforts that are ongoing in the business to continue to improve the way we meet the reporting needs of these agencies and continue to strengthen our rating. So not much to report, but the work continues. On -- let's go to Page 9. So these are -- this is my, I think, 42nd presentation to this group. So the format, as you see, it doesn't change quarter-on-quarter. I'll just comment on Page 9 that, as I said, total revenue is up 0.8% A better quarter in Q2 than we had in Q1 with insurance revenue for the first semester up 0.1%. Our other revenues continue to drive the growth of the business at almost 9%. We spoke about BI growing 12% organic and 19% with Cedar Rose. Confirms actually that we are able to grow these acquisitions when we make them, we see a clear uptick from being integrated into the Coface network. Third-party debt collection, up at 32%. Factoring having a good quarter, I mean, Q2 was almost 5%, which, as you know, we are mainly a factoring business in Germany and in Poland. And obviously, there's been a lot of work going on in that space and things seem to be rebounding a little bit. Good performance on fees, broadly stable, I would say, in terms of percentage of fees on premiums in a market which has a strong tendency to give away the fees in order to win the business. So I take it as a sign that our clients are willing to pay for the services that we provide alongside the insurance policy. On Page 10, we have the usual breakdown by region. I think what you see here as the headline is subdued growth around the world. I mean, clearly, that affects a lot of areas, but it affects more Europe, I would say, than the Rest of the World. You see almost 0% growth in Western Europe, almost the same in Central Europe, but slightly better news actually in Northern Europe, which is -- includes Germany. And I already mentioned that within Germany, factoring has been doing pretty well. Med & Africa has traditionally been a growth engine for us, and it is still growing, but at a much lower rate. We used to see more like 5%, 6% growth on a regular basis. So we're down to 2%. We see that the Gulf region is holding up remarkably well. I think the governments in the area are pouring money on the economy in an effort to sustain growth, and that's affecting us. Some FX in North America, but I think overall, outside of AI, a quite flat economy. I think the good news is more in the emerging markets. So you don't see it here in these numbers because we have tough comparisons for the first half of 2025. But underneath those numbers, there are good growth momentum in Asia. I think this is the place where I think a lot is happening today in the world. Latin America, still growing much less than before, but there's a disproportionate amount of that business, which is actually driven by European contracts with an expansion in Latin America. So -- but when you look at it, I think at this stage, a lot of the growth in the world, around the world is driven by emerging markets. On Page 11, we show the usual metrics of our performance. You see that new business is almost at a record. And I think they almost is because, as I said, we see large deals being slower. Companies are investing in AI, trying to save costs, trying to manage the situation in the Gulf and putting off where they can decisions that are not absolutely critical. In terms of retention, we're near a record, and that's been now for years quite stable. Prices are still negative, but they're a little bit better than they were last year and generally speaking, in the last few years. And then the activity that we get from our own clients' business growth is quite subdued at 1.5%. So that's really not exciting, but I think that reflects the world economy here. On Page 12, we have an update on risk. I think the good news is that you see the sequence on the top left of the quarterly loss ratio before reinsurance, including claims handling expenses and the story is really flat quarter-on-quarter. When you look into the details here, you see that the number of claims is back to 2019 levels, so pretty stable. The amounts have grown because there's been quite a bit of inflation since 2019, and that's reflected in an average amount, which is up by 4.6%. At the same time, we've seen still pretty good severity with a limited number of large cases that have come to hit us. So keeping our fingers crossed here, I think the business is executing. We haven't changed our reserving policy. We have opened the new vintage at a level of 81.2%, which you see as historically reflects, I would say, the political and economic uncertainty. So it's pretty conservative. And then we have enjoyed continued strong releases from the prior vintages here with almost 44% throwback from the prior vintages. So I would say, happy to not have much to report on the risk side actually. You can see that on Page 13, I'm not actually going to spend any time here because there's really not that much to talk about. And I -- so I will just skip that one and go to Page 14, where we have the quarterly numbers. It's an easier sequence to follow. And again, here, there's really not that much going on. A very slight uptick in Western Europe. That's because of the Coface geography. We have actually Senegal in the Coface Western Europe segment. And as you know, that's a country that's going through a little bit of a challenge right now. But outside of that, there's really nothing going on in the Rest of the World. Latin America has volatility. I think every quarter, every single quarter, I comment on that, and there's no news here. But frankly, on the risk side, there's not much to talk about. On Page 15, we talk about the cost. So -- as we've seen, the premiums are a bit better for the quarter. The cost is still growing 3.4% quarter-on-quarter. But for those of you who've been here for a long time, this is the second best quarter in 22 quarters in a row, so in 5 years. So we've highlighted how the cost increases are slowly coming down quarter-over-quarter, and that's true again this quarter. And if you look at what makes up the increase in the cost ratio on the top right-hand side, you see there's still 0.6 points that is driven by the difference in cost inflation versus premium inflation, but that's coming down, as I said. And the rest is really deliberate investments we're making. I mean the business is performing, and we are investing deliberately according to our plan in sales for trade credit insurance, in connectivity and data and technology and BI and debt collection. So that's 2 points, I think cost increase, and we get 0.8 percentage points back this quarter from the increase in sales that we have in the services area. I can say that these investments are really important. They position us differently. They make us better at managing the core business, insurance. And I think it's the right choice in an environment which otherwise is quite subdued and not easy. So that's what I have to say on cost, and I'm going to pass it over to Phalla to talk about the rest of the pitch.

Thank you, Xavier. Good evening, everybody. So let's go now to Page 16, from reinsurance side, we can see that the premium cession rate is stable compared to first half last year at 27.7%, while the claim sessions rate has increased from 23.3% to 26.5%. You know that our quota share, I think, is divided by -- well, there's 2 sections, right? On the TCI side, the quota share is 23%. But on our specialties, which is single risk and bonding, the quota share is at 50%. So it's really driven by the mix of our business, and we have been able to perform some of the reserves that we put naming -- I can name the Senegal one, for instance, 50% of reserves going back to the reinsurers that, that has increased. So as a result, I think we have the reinsurance income or loss for us, but income for them has moved from EUR 52 million last year to EUR 46 million this year. Lead us to the next page, the net combined ratio, you see is a very good one at 71.3%, very stable compared to half year last year with a decrease in the net cost ratio and a decrease -- similar increase -- decrease in the net loss ratio. From a Q2 perspective, from Q2 '29 (sic) [ Q2 '25 ] to Q2 '26 has a decrease from 74% to 72.4%. And remember that last year, the 41.1%, there are some noises in terms of accounting related to the FX where you have a little bit more in the loss -- net loss ratio and the -- I would say, the FX gain will sit in the financial income. This year, I think it's a little bit back to normal, but still, I think we have a very good net loss ratio. Let's move to next page, I think it's Page 18 now, financial portfolio. The mark-to-market stands at EUR 3.190 billion after the payment of our dividends of EUR 186 million at the end of May. Asset allocation-wise, no changes really with a high level of cash as usual, 14% of our assets held in cash or very liquid assets. In terms of return on investments, you can see that if you look at the first line, which is the recurrent income for our investment portfolio before gain on sales -- gain and loss on sales, moving from EUR 52 million to EUR 53 million with an accounting yield moving from 1.7% to 1.8%. This is half year, of course. As usual, I would comment on the FX impact, of course, less than last year because of the U.S. dollars and related money has not moved or a little bit less volatile this year than last year. The minus EUR 2.4 million, I think there's 2 elements here. The first one, of course, we have the usual hyperinflation accounting in Turkey stands for minus EUR 8 million at half year. And then you have the unrealized gain on FX of EUR 5.6 million, usually offset, you can see that in terms of geography of booking with the unrealized FX loss of EUR 9 million in the insurance finance expense line. Nothing more to be added, I think, on this page. So we can move to the next one. So the half year net income at EUR 107.8 million, down 13% compared to last year the same period. I think a little bit better than in Q1. So in Q1, the net income was down 13.7%. So we're improving on this front as well. Lead us to the next page, Page 20, return on average tangible equity. I'll start with the IFRS equity, where we're moving from EUR 2.213 billion to EUR 2.166 billion. We paid our dividend, and we accounted for the net income of the period and then the minor changes related to interest rate movement, but not very significant, lead us to a decrease of our return on average tangible equity from 11.4% at the end of full year '25 to almost 11% at half year '26, of course, with a decrease of our net income compared to last year. For this quarter, you know that half year, so we will comment on capital management, solid balance sheet. Total balance sheet at EUR 8.9 billion. We commented on investment portfolio at EUR 3.2 billion. The factoring assets, EUR 3.5 billion, reflecting the increase of our factoring activities backed by the factoring liabilities, which is for the refinancing that we have in front of this. Book value per share at EUR 14.5. I think we're trading at almost EUR 16. I think we're at EUR 15.80 something, which is above this level. And then we can move to the next page, which is the solvency ratio moving from 197% at the end of December last year to 194%. You can see that the capital requirement has decreased the solvency ratio by 11 points, offset by the own fund generation, which is a good performance of our business. This is just showing that we are financing our organic growth with the level of balance sheet that we have. On the right-hand side, as usual, you have the 2 types of stress test. The first one from the financial market shocks. We have already commented that previous quarters, the portfolio is pretty much derisked now, so we have -- we can cope with all the financial market shocks. And then the crisis scenarios, 1/50 and 1/20, again, we will be above the upper range of our comfort zone in the shock scenarios. If we move to the next page, Page 24, just laid out how the 194% of solvency ratio is made of. EUR 2.7 billion of Solvency II own funds to be compared to the EUR 1.4 billion of capital requirements. That's pretty much it. So very, very strong again in terms of balance sheet with 194% of solvency ratio. With this, give the floor back to Xavier.

Yes. Just to wrap it up, I think I mentioned this. So we're in a slow growth environment. We have a lot of uncertainty out there. I mean the story in the Strait of Hormuz continues to evolve almost by the hour. But we don't see at this stage what the outcome is going to look like. I think a lot of companies are dealing with this. It's going to create a longer, higher interest rates. It's going to create some inflation. It's going to create slower growth, and we see that at play. Obviously, for Europe, it's not easy. Emerging markets are doing a little bit better. There's the AI craze going on with a lot of investments, a huge amount of investments going into that space, which also creates a need for companies to invest correlatively. In that environment, I think we have a really strong performance with a 71% combined ratio, which is well below our through-the-cycle targets. We are seeing a little bit better quarter in terms of growth for insurance and continued growth in our services activities or noninsurance activities. I think we feel good about the strategy and the choices we've made. The economy is weaker than we anticipated. The data stuff is going faster than we anticipated, but at least we got the direction right. We are beating our financial targets that we had set for the business after the plan is completed. So we're doing that already. And we're reaffirming all these targets. We are, however, prioritizing, I would say, long-term value creation or midterm value creation in BI versus the short-term profitability because I think that business continues to see needs in terms of investment and building up its scale. We're going to compensate the difference, which is a few cents by share in the payout that will be made in '28 for the 2027 dividend. And that's pretty much it. I think we had discussed that a couple of times before in the prior call. So no big news here. And with that, I'm going to leave it open for questions.

[Operator Instructions] We'll now begin with the first question, which is from Michael Huttner from Berenberg.

Well done for better revenues and better margin. I have 3 questions. The first one is on the dividend. Can you compensate -- I don't quite understand what compensate means. If income isn't there, how do you compensate for the dividend? I don't understand. Does it mean I should add an extra bit to my dividend or assume it's growing? I'm puzzled. And the second is on the business information. So the growth was 12% in Q2. I was hoping for something around 15%. And I'm just wondering, is there any -- is this a structural slowdown? I know that with Cedar Rose acquisition, you have 19%, so the underlying is fine, but I was a bit puzzled by that. And then my last question, I didn't pick it up, what is in Western Europe, which is so bad? I couldn't make it up.

Okay. Well, maybe, Phalla, you want to take the dividend question. I mean it's fairly straightforward. The 0.5 percentage points RoATE means, I think, EUR 0.04 or EUR 0.05 per share.

Yes, per share.

Right. So we're just going to increase the dividend by EUR 0.04 or EUR 0.05 per share to make sure that the dividend payout to shareholders is the same as if we had reached the target. That's it.

Understood. Okay.

Okay.

But -- okay.

Yes. In terms of Western Europe, that one is -- so we -- do you want to take that one?

Yes, I can take that one. This is the country where Senegal is -- the country itself is under restructuring, and we have some exposure there. And the country...

But Senegal isn't Europe.

Yes, that's Coface geography. I'm sorry about it. We actually changed the name of that region to call it Western Europe, Africa.

West Africa.

West Africa, something like this or whatever. So there's a piece -- a low piece of stuff in there. It's not major. It just happens to be there. So we booked some reserves.

Some reserve there, I think less than EUR 10 million. It's -- the whole country is under restructuring. So it can go -- it can last a couple of years, but still it will be, I think, supported by the IMF. You have the [ Club de Paris ] restructuring team around this, and we just follow this.

Okay.

And as I said, it's a single risk, so it's highly -- in terms of quota share, it's highly reinsured.

Okay.

So on your second question, which was BI growth, yes, we've had -- we've been attuned to 15%, I don't know, for quite a bit of time. It is a bit slower at this time. I think what we see is, as I said, large companies delaying decisions that we thought they would make faster. So I think the environment plays a role into this. Whether that's structural or cyclical is for anybody's guess. I mean if you can read what's happening in the Gulf, let me know. What I see, though, is that it continues to grow. There's demand for what we do. I always said, because I think that's happened a couple of times in the past that I wouldn't take a quarter as a sign for long-term trends. But nevertheless, there is a slowdown. And at the same time, I think we need to continue to invest to put this business on a good footing in an environment in digital, which is moving quite fast. There's a lot going on. I mean I'm not going to tell you guys about AI because you probably hear it on every single pitch. It's being made by every single company around the world. So that's true as well for Coface. The good news, I think, is that we are doing quite a bit in that space. We have a Data Lab that's now 50 strong. We have 1,000 people in BI. So that's giving us capabilities that we didn't have before, and we feel good about that.

We'll now move to our next question. This is from Benoit Valleaux from ODDO BHF.

Yes. In fact, they are only related to business information. I'd just like to better understand, I mean, what has changed compared to what you had in mind when you have presented your strategic plan. At that time, I think that you expected organic growth, which is broadly in line with what you have achieved. I mean you are today at 12% Q1, Q2 this year. So maybe I'm wrong, but just to understand, I mean, do you believe that in the end, your organic growth is a bit faster than what you had in mind at that time, which can be what you need to invest a bit more than what you had in mind? Or it does mean that, I don't know, maybe this business is a bit more costly than what you had in mind? And linked to this, there is a point I don't really understand on this business. So you plan to be breakeven, if I understand next year. Maybe still a little bit too early, but does it mean that you plan also to be breakeven in '28, '29, I mean -- and we have to wait many years before reaching profitability on this business? Or do you believe that it's only maybe delayed by 1 or maybe 2 years? Also -- yes, sorry. I'd just like to understand also the benefit of scale, in fact, because it's all my question behind all of that. It means that to cap the EUR 1 million more revenues, you need to invest EUR 1 million more in cost. And honestly, I believe that there's a point of, we'll say, of size at which you might start to have some benefit of scale. And it seems that it's still not the case. So just to understand, I mean, do you believe that once again, it just delayed by 1 or 2 years or not really?

Yes. So a few things. So we have started this thing from scratch in tens of countries at the same time, right? So yes, we have some more size. Now we have EUR 100 million of turnover or something like this, whatever. But the scale that we have in each individual country is still very, very small. I mean we're talking about a market that is, I don't know, EUR 15 billion or EUR 16 billion, something like this. So we're barely making a scratch at this stage. So I think just to put things in perspective, I mean, when it comes to achievement of scale, we are still very, very, very small, right? The second thing we learned is that from the surveys we did with investors, everybody tells us we will not get any recognition for value until we reach a certain size, and that's not EUR 100 million. It's going to be bigger, right? So there's no question for us that value creation means, as you said, reaching scale, which means reaching scale market by market. And we see a lot of opportunities coming up for growth, but also a lot of changes in technology, which means the technology spend is probably going to be bigger than we thought. And that's not actually news for any business right now. I think everybody is spending more on technology than they thought they would, but that also impacts us, particularly in BI, which is a technology-driven business. So there's some of that going on as well. So AI is coming fast. We have to be there. We have to -- there's a lot of stuff going on. We're still planning to run that thing at a quasi-neutral impact on the P&L, plus or minus whatever. But I think it's more important for us to continue to grow and to keep on par with the market evolutions than it is to just try to make a buck. And I understand your point, yes, there is a place at which we need to prove that scale matters, but I don't think we're there yet.

Okay. So not before a few years. And yes, I understand this compensation in terms of dividend and payout ratio, so it's for 2027. Initially, I mean, once again, you target to breakeven this year and plus 50 bps on RoATE 2027. So we might have imagined that 50 bps could move to, I don't know, a few tens of bps higher in '28 and so on going forward.