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Edited Transcript of COFA.PA earnings conference call or presentation 5-Feb-20 5:00pm GMT

Full Year 2019 Coface SA Earnings Call

BOIS-COLOMBES Feb 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Coface SA earnings conference call or presentation Wednesday, February 5, 2020 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carine Pichon

COFACE SA - Chief Financial & Risk Officer

* Xavier Pascal Durand

COFACE SA - CEO & GM

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Conference Call Participants

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* David Barma

Exane BNP Paribas, Research Division - Research Analyst

* Hadley Cohen

Deutsche Bank AG, Research Division - Research Analyst

* Rahul A. Parekh

JP Morgan Chase & Co, Research Division - Analyst

* Thomas Fossard

HSBC, Research Division - Co-Head of European Insurance and Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the conference call for the presentation of Coface results for the period ending December 31. (Operator Instructions) As a reminder, the conference call is being recorded. Your host for today's conference will be Mr. Xavier Durand, CEO; and Carine Pichon, CFO. I would like to turn the call over to Mr. Xavier Durand. Sir, you may begin.

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Xavier Pascal Durand, COFACE SA - CEO & GM [2]

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Thank you very much, and good evening to everyone. Thank you for calling into this report. We're happy to report our full year 2019 numbers. As you know, it's an important milestone for Coface, as it is the last year of our Fit to Win plan. I'm even more happy since it's another strong quarter that we are recording and which caps, actually a record year. You see that we're reporting EUR 146.7 million of net income. That's up 20% from last year, and it is a record for Coface. Our turnover reached EUR 1,481 million year-to-date. At constant FX and perimeter, this is up 5.9%. Underlying that growth, and you see that Trade Credit Insurance is growing at 7%, again, at constant scope and FX for the year. You'll see later in the pitch at -- same trends we've seen over the last quarters remains true. Client retention is at a record, new business is growing again. All regions are contributing to growth. It's also been a strong quarter on the loss side. You see that our net loss ratio for the year improved by 0.1 point at 45%. Our net combined ratio stands at 77.7%. The losses for the fourth quarter come in at 44.8%. We continue to see good past claims, returns, and disciplined underwriting in a riskier environment has been maintained in the business. The cost ratio is down 1.8% at 37 -- 32.7%, sorry, versus 34.5%. And that's -- we haven't changed our strategy of continuing to drive strong cost controls and driving business growth and investments at the same time. And then that brings our combined ratio at 80.4% for the fourth quarter, which is 1 point below what it was for the same period last year. So EUR 146.7 million that means the EUR 29.4 million of net profit in the fourth quarter. If we exclude nonrecurring items, it brings us quite close to the EUR 150 million mark at, EUR 149.2 million. The earnings per share are at a record EUR 0.97. That's 23% up year-on-year. So we're really close to the EUR 1 per share mark. I'm also happy to report that we just signed an agreement to acquire a company in Norway. It's called GIEK Kredittforsikring. It's a EUR 9 million premium. So it's not a big acquisition. But it's another one that gives us an entry into the Norwegian market, where we were really not present other than by doing business from Sweden or from Denmark. So this is another way for us to acquire position in this significant market.

Going to the next page and continuing on the highlights here. Our solvency comes in at 190%, and we're proposing a EUR 1 per share dividend. The return on tangible -- on average tangible equity comes in at 8.9%. If we take out the exceptionals, we get over the symbolic benchmark of 9% to 9.1%. The solvency ratio includes, obviously, now the usage of the Partial Internal Model. As you know, it's been approved at the end of last year. We can now reflect that into our calculations. We've also introduced the new methodology for calculating solvency for our capital requirements for factoring again, no surprise here. We've translated the conference scale that we had in the standard formula, which, if you remember, was 140% to 160% and with the same risk framework, the new target range comes in at 145% to 175% and then consistent with what we told everybody over the last few quarters. We have increased our retention, i.e., decreased our recourse through reinsurance on the quota share to 23% from 26% for 2020, and that's also included in the solvency calculation. So we're continuing to return funds to shareholders, EUR 1 per share dividend. That's a little bit more than 100% payout. And just happy also to just give you a number for Fit to Win. We in totality returned EUR 390 million to the shareholders. I'm also happy personally that the Board has just renewed my mandate for another 4 years. Clearly, it's been a great journey, leading Coface through this deep turnaround, and I'm excited about all the things that are still lying in front of us. We actually will be talking about these on our next planned presentation that will be on the 25th of February, and I invite everybody, obviously, to join us in Paris for that event.

I'm going to Page 6 now. And I just wanted, like, we're not going to do this many times, I wanted to give everybody a perspective on what happened through the whole Fit to Win plan. So we're happy that we've met or exceeded all of our objectives for the period. I mean, I've listed some of the key metrics here that we'd set out for guidance. It's return on average tangible equity. It was obviously negative in 2016. And it's slight -- it's pretty much around the 9% range. Now, I mean, I'll remind everyone that includes 0.42% of capital optimization, we've set a target of 1%, which will be obviously achieved with the -- now the capabilities that the internal model gives us. In terms of savings, we had set a benchmark closer in time to save EUR 30 million in 2018. We've exceeded that. We keep counting because we're not changing our strategy, which is to save cost everywhere we can in infrastructure and purchasing and organization, simplifying the business, digitizing, lean and all these good things. And we reinvest the money where we see necessary. And as you are aware, we've reinvested most of that money actually into better risk management tools, better efficiency, better service, more technology and some growth initiatives in different parts of the business. Our solvency ratios improved by 40 points in 3 years, actually 45 points in 4 years, we don't show at the end of 2015, but we were about a 145 level. The combined ratio is below the target 83% that we had set for the business through the cycle. And then the revenues have grown about 9%. Now I'll remind everyone that in '16 and '17, we had a lot of portfolio cleaning to do which has led to actually some attrition in the book, resetting, I think the baseline for what our salespeople have to achieve. And we're happy that growth has come back now following the different turnaround actions that we've led. And then finally, you're all aware of the approval of the internal model. I think it was a key element for us in delivering on this plan because as you know, while we were doing this, the standard formula that has actually evolved in the opposite direction and the requirements there have been less favorable. S so it's been a good plan. We're happy with these numbers. I'm going to take you, before I wrap it up, through the usual pages with Carine.

So I'm turning over to Page 8. Talking a little bit about growth. You see the 5.9% at constant FX and perimeter I was talking about. Underlying this trade credit grew at 7%, as I said. Other revenues were up slightly at 0.6. This is -- this includes both services like information and debt collection, but also the factoring business revenues. As you know, we've been repositioning that book now for about a year. We've got a new team on it. And the good news is the information and services growth offset still negative growth on the factoring book. In terms of fees, they're growing, but they're growing less than the premiums. Obviously, as we are in the part of the cycle where the losses are actually pretty good. We have less collection fees. So nothing surprising here.

When I go to Page 9, I think the good news on this page is that every region in the world is growing. Our biggest challenge for Fit to Win, to turnaround the growth in Western Europe and Northern Europe, which are our most stable and most ancient and biggest markets for us. Western Europe is coming in at 3.4%. That's, I think, the record in the last 10 years for Coface, quite frankly, it's driven both by new business and strong retention in France and the U.K. Northern Europe shows a 1.5% headline. That includes a drag from the factoring business. So if you take that out, we're up 3%, again, another record for the last 10 years in Germany and Northern Europe. Central Europe has been growing less in prior years. We have undertaken restrictive actions on risk in Poland, in particular, I think we've been quite deliberate about this. We now also have the integrated PKZ business in these numbers. So less growth, but you'll see that the risk actually benefited from these measures. Med and Africa continues to be pretty steady in terms of growth, both new business and activity remain pretty good. North America growing again at 4%. We're seeing much better retention, actually, and new business is picking up towards the second part of the year. Asia Pacific. When you take out the one-offs that we had in 2018, the underlying growth for that region is about 10.8% so not quite as spectacular as the 17.8% that you see here. But the business is back on the growth track after we, as I said, cleaned up the book and reset the baseline. And then Latin America shows pretty impressive growth at 24%. I remind everyone, this is linked to some very large multinational contracts we've signed back in 2018, which are fully enforced in 2019 and where the proportion of Latin America was bigger than the average, but these are global contracts where we actually look at the profitability of that business throughout the global P&L.

On Page 10, the usual breakup of our growth numbers. You see -- I think it's there is a turnaround going on in terms of new production. The total number for the year is EUR 133 million. It's up EUR 17 million from where we were in 2018. It's also higher than '17. So I think it confirms that the actions we've taken in terms of turning around, particularly in our mid-market segments are working. The retention continues to improve at 91.6%. It is absolutely the record for Coface, showing that in terms of servicing our clients, I think the company is making progress. Price effects remains negative, which I think, given the loss ratios that we're seeing is quite natural, but it is better. And we are -- and we have been able to see some price gains and particularly in certain markets that were more volatile, and we'll talk a bit more about that. New volume -- sorry, volume effect, as you see, after reaching a peak, which was mid -- probably mid or beginning '18 has been constantly and consistently dropping. So the number for last year is 2.8%. You're all aware of the slowdown of the global economy since 2017, and I think that's what we're seeing here. So I'm not expecting miracles here on that line, given the current circumstances.

I'm going to Page 11, talking about the losses. So for the full year, the loss ratio before reinsurance and including claims handling expenses comes in at 43.4%, which is almost -- it's about 0.8% below where we were in '18. On the right-hand side of that, you can see the quarterly split, sorry. And basically, the numbers I think we need to look at is the one in white because it takes out the facultative reinsurance business. Basically contracts where we seek specific reinsurance for risks that we don't necessarily want to keep on our books. So the sequence continues to be pretty good, 46.3%, 42.2%, 41.9%, 45.1%. You see the fourth quarter at 44.4%. So continued good risk performance in what is a riskier economic environment, and I'll talk about this towards the end of this presentation. When you look at the sequence on the bottom right-hand side, you see that we opened the year at 73.1%, pretty much in the middle of the range of where we were in the prior years. We continue, though, to see high recovery rates for the year, they're at 32.2%. So I think it shows that the discipline we've put in place in terms of managing risk continues to pay off.

The next page really talks about, as we usually do, the split of the risk numbers by region. So the 4 large, more stable markets, are, as usual, on the bottom of the page. You see that the work we've put into controlling the risk in Central Europe is paying off. So they had a year at 42.5%, which is way lower than the 50% more or less range they were in for the prior 3 years. Western Europe is very stable at 34.6%, very much in line with the past. Northern Europe, including mainly Germany has actually made quite a bit of progress comes in at 40 -- just below 41%. And again, there's been a lot of work done on the risk side here. And then Med & Africa, very stable at 46.3%. The 3 more volatile markets that have created more headaches in the past are on the top. North America had a pretty good year overall at 45.8%, I would say, a strong year. We saw a little bit of a blip, as you remember, in the third quarter, but the fourth quarter was actually pretty good. Asia Pacific, after the trough in 2018, is coming back up and at a pretty good level. And then Latin America is by far the most challenging market. I think it's no surprise to everyone. You're all aware of what's happened in Argentina. Chile had a social movement, which also influenced the risk significantly. But I think the performance was pretty good. If you look at the numbers, excluding foreign exchange, which kind of introduces a bit of a noise in the numbers. You see that we came in at 51.8% in '18 and 53.4% in '19. So a very, very strong reaction, I would say, from our teams in Latin America to some pretty unpredictable events. So I think it kind of validates the strategy we've been trying to put in place over the last few years to contain risks in different parts of the world.

Page 13 talks about cost. So you see that in totality, the costs were up 2.3% for the year. Obviously, we get leverage since the growth for the top line is close to 6%. You see a bit of a surge in the fourth quarter. On the chart in the middle, and I just want to here, give you a little bit of a walk from the EUR 132 million we had in Q3 to the EUR 144 million that we had in Q4. You may remember that we had a EUR 2 million exceptional good guy in Q3. So that, obviously, did not repeat itself. We had a EUR 2 million profit share for employees, which is a bit of an exception here as we end the plan in the fourth quarter. EUR 1 million of additional costs on North America. Again, this is a transfer from the light blue line, which is external acquisition costs into the dark blue line. So the top line is growing, you would expect our intermediation cost to grow, but if you remember, we are buying our distribution out in the U.S. to regain control over our distribution, and that continues to drive more cost in the blue line. This is a EUR 1.6 million nonrecurring VAT item. And then we decided to accelerate some IT investments towards the end of the year for EUR 3.7 million that's in line with the plan, but this plan was back-end loaded. So it was bigger this quarter than it was usually. In totality, you see the cost ratio before reinsurance at 35.9% for the quarter, and there's a walk at the bottom right-hand of the page, which shows how we come from 35.9% in 2018 to 34.4%, so 1.5% improvement. The bulk of that is really driven by the difference between the growth in the top line and the growth in cost without, as I said before, compromising in any way the investments we need to make in the business. So I'm -- now I'm going to turn it over to Carine to take you through the other pages in the presentation.

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Carine Pichon, COFACE SA - Chief Financial & Risk Officer [3]

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So thank you, Xavier. Good evening, everyone. Before we comment 2019 reinsurance result just to know and to come back on the fact that we have decided to review the cession rate on the quota share for reinsurance, which have been decreased from 26% in up to '19 to 23% for 2020. So it will start on January 2020. And as before, it will be splitted into 2 quota shares on a 2-year period. Having said that, looking at '19 figures, which didn't include the change yet, we continue to have quite similar cession rate from a premium point of view. You see 28.6%, it was 28.7% in '18, so quite stable. And on cession rate, we also actually 26%, which corresponds to the actual '19 quota share. That's our reinsurance results. If now we continue Page 15 on our net combined ratio. So it turned at 77.7% meaning a decrease by 1.9% compared with 2018. Looking at each of the components, you may see that we have a stable loss ratio, 45% considering that the environment was more volatile in '19 than '18. It's a good result. And also positive operating leverage helped us to make decrease in net cost ratio by 1.8 points from 34.5% to 32.7%. So a global decrease on a yearly basis. Looking now on the second part of the slide. And on the bottom, you see that it's also positive on a quarterly basis. We went from 81.4% in Q4 '18 on combined ratio to 80.4% in Q4 '19. And so continue to have loss ratio stable and under control at 44.8% in a riskier environment. And globally, the Q4 combined ratio is also below through the cycle target, I remind you, is 83%.

Page 16 is to comment the financial portfolio and also its results. First of it, maybe starting on the EUR 2.8 billion of portfolio we are managing, on which we continue to target to have a stabilized yield as much as possible. You see that the accounting yield is quite stable, even better at 1.6%. It's clearly the reflect of the fact that we have decided and we have deployed during '19 an allocation with a little more real estate during the year. So that's the benefit we have for '19. We also have in our net investment income, not only results from the financial portfolio, but also impact of decision we have taken from a strategic point of view to disinvest in Peru and also to review the build infrastructure in some countries, particularly in Africa, which led to some impairments, you see in the net investment income, and that's the reason of the decline.

Page 17, it's now the net income you may see under the split coming from current operating income to the net income by sales. Maybe to comment some things, which are new in the Q4. You see that on the yearly basis, we have investment and restructuring expenses of EUR 7.5 million. And particularly, we are continuing to try to find some efficiency measures and reorganization and in Germany, we have decided to have some new plan, which has been announced in Q4. That's the reason why we have booked additional restructuring charges in Q4. Tax rate still at 28%, which is quite in line with what you have seen during the year and is better compared with 2018, where it was 34%. Page 18 is the view on our return on equity. So it's -- the average equity stands at 8.9%, up by 1.2 points compared with '18. Maybe just some comments on the equity because, you see that our equity has increased by EUR 1.8 billion to EUR 1.9 billion, knowing that we have distributed 100% of the results in '19, the main explanation is what you see in the revaluation reserve. It's the revaluation of our bond portfolio. And so following a decline in interest rates. We have a higher value of our bonds. That's what you see on the change in our equity. Return by itself, as I started to say, went from 7.7% that was for '18 results and thanks to improvements in technical results. So both cost and loss control, we have a positive impact of 1.2 points. Financial results mainly impairment, as I said, as some nonconsolidated entities lead to minus 0.7 points. And improvement in tax is contributing positive to 0.5 points. So 8.9% on established result and excluding some nonrecurring, it's 9.1% for 2019 of equity. You know that we are used every 6 months to comment also capital and balance sheet. So I will go with this part #3. So Page 20 is our balance sheet, which clearly continues to be solid. You know that we continue to have a very good rating from Fitch and Moody's, which is key for our industry because we need to have a good rating for clients. What is new is what you see, Page 21. So it's a new confort scale, which exactly is the new way of calculating capital requirement based under Partial Internal Model, which has been validated at the beginning of December. As you may see, this range now is from 145% to 175%. And the capital management principles remain completely unchanged. We are there to support the growth of Coface to keep a good rating from rating agencies, and that's the way it has been built.

Page 22 is the solvency evolution over time. In '16, we were at 150%, '19 we were at 190%, an improvement by around 40 points. What is interesting, and you may see in the middle of the page is that we have made a pro forma of the solvency ratio and the PIM in end of '18. So you see that it would have been 187%, and at end of '19 it's 190%. So it seems to be quite stable, which is the case. But if you look at the [growth] for the change in each variation, you [infer] that we have a decline of ratio, which is coming from 2 effects. The first 1 is that we need to support the growth, and I remind you that we have a growth around 7% on premium. We also need to finance the decision we have taken to decline the cession rates from 26% to 23% so it's already integrated in that valuation. But we also benefit of positive evolution, factoring evolution, the change of methodology led us to around 6 points of improvement. And also an improvement coming from own fund variation. I commented just before, the fact that we have benefited from a revaluation of our bonds portfolio.

So all in quite stable and quite a very robust and strong ratio at 190%. This ratio also, we present you for the first time, what would have been, in some cases, in some stress, the evolution of this ratio continue to be low sensitive to market shock on purpose. And the way we are managing our capital you see that either you have increased interest rate or spread evolution by 100 basis points or declined by 25% on the stock market. The impact of the solvency ratio is at a maximum 6 points. So it's clearly low sensitive. But -- and you won't be surprised that we are still sensitive to in crisis scenario, a scenario of 1/50 crisis equivalent will have meant that our ratio will then decline up to 169%, so a decline by a little more than 20 points.

Page 23 is a solvency capital detail. So looking at the right you see that the 190% represents eligible own funds of around EUR 2.2 billion. Same composition of capital, mainly in Tier 1 and also Tier 2 with [debt]. And we have a solvency required capital of EUR 1.1 billion along which, a little more of a EUR 200 million for factoring activity. So factoring required capital, we already have commented it, but I remind you, is now computed on standard methodology with [old basis] are also changed. So it means a 10.5% of risk-weighted assets.

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Xavier Pascal Durand, COFACE SA - CEO & GM [4]

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So I'm just going to wrap this up on Page 25, just with a few comments on where we are and the outlook. Clearly, I think, Fit to Win has met or exceeded all of its goals. We've really worked hard on the risk infrastructure. We've worked hard on service and efficiency, the cost base has been looked at in alignment with revenues, comforting to see that the business is back on a growth path with better retention, the commercial momentum that had to kind of kick in to offset the decrease in client activity happening. Profitability is that -- I mean, the net income is at clearly a record. Profitability is very close. Balance sheet has been strengthened, and you can see that 190% solvency is strong. So the next step will be presenting our plan on the 25th of February, and it will be a plan that is going to be based on the continuation of what we are. We already started 3 years ago, which is a deep cultural transformation of the business. And I'll come back to this. We are seeing this plan happen in a global economy, which is growing at a slower pace and basically, the way I would look at the economy now is, since 2017, where you had a peak of growth with synchronous growth between Europe, Asia and the U.S., things have been slowing down. I think we've been right and pretty clear actually about calling this out back in the middle of 2018. But we see this continuing this year. Actually, just a couple of underlying things. First of all, the debt levels around the world are at pretty much at a record level. But it's been made quite painless by the fact that the central banks have lowered interest rates. So despite all of this, you continue to see deep technology shifts impacting certain business areas. We can think of e-commerce, we can think of the energy transition. We can think of the advent of 5G, which is going to change a bunch of things around the world. So these deep transformations impact traditional players and continue to threaten their positions. And then what's happening is that since the global economy is growing slower while there's more fighting about who gets which piece of the cake. And that is actually taking place on a global scale. So we're all aware of the increased trade tensions between U.S. and China. But when you look at all the trade measures that have happened over the course of the last 2 years, it's over 1,000 a year. And it's not just U.S. and China. They account for about 1/4 of all these measures, but other countries have been very active, protecting their markets as well. The second phenomenon that we're seeing is more and more social movements within countries in terms of how to split the pie. And last year was pretty impressive with the movements, obviously, in France and Hong Kong, but also in Chile and Ecuador and Lebanon and Algeria. And so these events tend to have -- they're very hard to predict. And I think they reinforce the notion of agility that we've put forward. And when we thought about putting this plan together 3 years ago. I mean, the latest news about the health worries in China I think just compound that phenomenon. I mean, very hard to predict, but certainly something that we are watching very closely. And this notion of agility is important. It ties into our culture we've put this culture traits together being extremely customer-centric. And I think you can see that in the retention. Having expertise because our clients are here to buy our products and services. But they're here to access the knowledge of experts that are all over the world, our ability to monitor 70 million companies to have really good data management systems and the latest technology when it comes to analytics. But also the collaboration because when something happens like a movement in Chile, it's really the teams in Chile, who know what's going on there, reading the papers. They speak the language, they're on site, they understand the deep fabric of the economy, but it won't work if they can't collaborate around the world because our clients are global.

So collaboration is the other key value that we've put in place. And then finally, we have to react quickly sometimes with less than perfect information. But we do need to act so this whole notion of accountability and courage is also at the heart of what we do. So this cultural revolution that we started making really deep changes in Coface over the last 3 years is directly tied to our business model, and I think it is well underway. So just wanted to highlight a few things before opening it up to questions. We'll be presenting our plan, as I said, on the 25th of February in Paris. You're all welcome to join. With that, we'll be happy to answer questions as we usually do.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Thomas Fossard from HSBC.

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Thomas Fossard, HSBC, Research Division - Co-Head of European Insurance and Analyst [2]

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I've got a couple of questions. The first 1 will be related to the Solvency II ratio actually is based on the new model. And maybe related to the new confort scale you're providing on Slide 21. So there will be 2 sub questions. The first 1 is, can you help us to understand why the range between the minimum and the maximum has increased from the previous case? So I think that previously, you had 20 points, you have now 35 points or 50 points. And also, if you could help us to better understand to put some comments around the [130% to 145%], just to bit understand what would that mean if you were to reach this level? And the second question would be related on growth. Actually, we've seen year-on-year in growth accelerating. I think that you signal gradually that you were more comfortable in getting this growth onboard. Could you help us to understand if there were anything special in the 6% or 7% top line growth you achieved in '19? Or put it in a different way, why this 6%, 7% growth won't be a realistic assumption for 2020?

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Xavier Pascal Durand, COFACE SA - CEO & GM [3]

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Maybe I'll start with the confort scale. We -- as I said, we've translated the scale that you were familiar with the standard formula. We've just translated this in terms of the statistical meaning of the scale into the language, the mathematical language of the Partial Internal Model. So it means that the mean of the scale and the range of the scale represents the same range of variation in risk events -- of the probability of variation of risk events and their impact on the solvency ratio. So I think the best way to read this. It's just to say, it's the same scale, but the numbers have changed because the methodology of accounting has changed. So you would see the same triggers triggering the same events that we had before on the different scales. The -- in terms of the growth, I mean, as you know, we came from a time when the company had to readjust its growth -- its risk metrics back in '16 and '17. And when -- and then we -- so we basically rebased the products we had to sell and the risk appetite that we were comfortable with. And then we said about turning around our sales organization. So you're right to point out that this is something that we hope is going to continue. However, the client activity that we've enjoyed in 2017 and 2018 was exceptionally high, and there's no way, I think, in the current economic environment that this is going to continue to be the case. It's no surprise we're in a slowing economy and the clients that we serve around the world are not particularly seeing a lot of growth right now. So I think it just makes sense.

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Operator [4]

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The next question comes from David Barma from Exane BNP Paribas.

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David Barma, Exane BNP Paribas, Research Division - Research Analyst [5]

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My first question is on reinsurance. Is the drop to 22% a first step as you've negotiated one part of your biannual programs? So are you planning to do more there? Or are you comfortable with that level? And then the second one, just as a follow-up on the previous question on the solvency confort scale. You mentioned two sort of reasons in your slide pack. But from your answer, should we hence understand that the increased range does not reflect sort of a changed view on a buffer that you would want to have, given the macro conditions? And linked to that, you are at 190% after accounting for the change in reinsurance. You are still growing, but at -- your capital consumption will be lower going forward. And on the M&A front, you flagged many times in the past that the deals out there are quite similar to the one you've just announced today in terms of scale. So how should we read your current capital position versus your new confort scale?

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Xavier Pascal Durand, COFACE SA - CEO & GM [6]

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On the capital position, I think we really haven't changed our strategy or the way we think about the business. So our solvency has been strengthened. It's above the confort scale that we have just discussed. This is why we are actually, again, this year, distributing 100%, actually a little more than 100%, returning a dividend of EUR 1 per share to the shareholder. I mean, as we go forward, so a few things happen. We have, obviously, some growth in the underlying business, which pretty much translates directly into the growth of our capital solvency requirements. We will make, as you point out, if they are available, some let's say, bolt-on acquisitions in a number of areas where we think we can actually benefit from a market or from a scale standpoint or taking positions that we couldn't access on other markets. And so these things will basically be the way we see, we're going to employ the capital at this stage. I don't know, Carine, do you want to talk about the reinsurance piece.

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Carine Pichon, COFACE SA - Chief Financial & Risk Officer [7]

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Yes, maybe on reinsurance, so we have, let's say, a decrease from 26% to 23%, I mean, we will see what will be for 2021 and the year to come. Let's say, it seems to be a good basis for starting the new plan for the structure of the new plan. So that's what we have as a target as of today. Doing that, it's the way (inaudible). We have reinsurance to find the correct price for the capacity we buy. So it's also something we may adjust that globally seems to be a good base scenario.

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Operator [8]

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The next question comes from Hadley Cohen from Deutsche Bank.

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Hadley Cohen, Deutsche Bank AG, Research Division - Research Analyst [9]

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A few very quick questions, please. Xavier, I think you mentioned -- you talked about coronavirus. But I was just wondering, have you actually noticed any impact from coronavirus yet on the business? Secondly, I think within the investment result in the fourth quarter, there were some negative hedging effects. I was just wondering if you could quantify those, please. Next, I just want to -- I think I asked this question this time last year as well. But Carine, just to be clear, the -- just want to make sure there's 190% solvency ratio has already adjusted for the dividend for the EUR 1 dividend. So it's a net of dividend number. And then finally, Xavier, I think you mentioned on the last quarter's call that you had up to that point, you had achieved, I think, about 40 bps of the planned 100 bps capital optimization within the Fit to Win strategy post this euro proposed dividend. I was just wondering where you think you are after that.

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Xavier Pascal Durand, COFACE SA - CEO & GM [10]

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Okay. Well, the easy -- the quick easy 1 is the question on the 190%, because, yes, it does include the dividend, that's the methodology that we have to follow for calculating solvency. I'll let Carine answer the other 2. But let me talk about the virus because obviously, as you know, it's something that's pretty recent, something that's developing literally by the day. And it's -- I think the measures that China and other countries or some of the other countries are now taking are pretty much extraordinary to anything that we've seen in the past. So first thing I'll tell you is it's bigger, and it will have more impact than the crisis that happened in 2003 and 2004 with the SARS epidemic. It's bigger because of the measures that the governments have taken are stronger. The question, though, is this going to last? I think it's anybody's guess at this stage. It's very, very hard to make any forecast. We could be completely wrong. We were -- we had our country risk conference yesterday with 4 experts coming in debating the Chinese consumer and what's going to happen in 2020. And we pretty much had all sorts of forecast, all of them different including some saying such quarantine measures are actually going to have a huge effect, and this thing could go away pretty quickly to -- this is the biggest epidemic that we've seen in years, and the effects will be profound and last for a long time. So I think we don't know. What I can tell you, though, it's too early for anything to be seen in the numbers because, obviously, the payment delays are longer than the time this thing has been around and as you know, China has pretty much been put on vacation or at least parts of China have vacations so far. So very much too early to see anything in the numbers or to have a very a very definitive view of where this is going. But the things I've said before, remain true. People in the business are watching this very carefully. The teams are on it. We're going to manage this like we manage the other events that have happened over the course of the last year around the world. Carine, do you want to talk about the other.

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Carine Pichon, COFACE SA - Chief Financial & Risk Officer [11]

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So on your 2 questions, Hadley. So I'll start on capital. We say that we have reserved 42 basis points among the 100 basis points, which was targeted. I will say that after distributing 100%, a little more, of our result of '19, it will be more around 50 basis points. So that's what we are doing. And for the rest, we will discuss with you on the 25th of February. In terms of net investment income, you're right. You saw that we have a little increase of hedging costs. You know that we have a hedge on equity book aiming to avoid the big truck and also to reduce our capital requirement on that type of class of assets. So it has slightly increased in Q4.

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Operator [12]

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The next question comes from Thomas Fossard from HSBC.

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Thomas Fossard, HSBC, Research Division - Co-Head of European Insurance and Analyst [13]

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Yes, sorry. Two additional questions. The first 1 will be, again, related to coronavirus. I fully understand that it's pretty early to date, but it seems to be that this is already leading to a pretty significant commodity slump at the present time. I do remember that in previous years, you had some issues related to commodity brokers, if I'm right. So just if you could help us to understand how your exposure to these businesses have changed over time. And beyond that, yes. I mean, if you have already taken some precautionary measures in some geographies or industries, which you believe could be more significantly exposed to what is happening at the present time? The second question would be slightly technical is on the 23% cession ratio. Is that the -- I guess, this is the underwriting year session ratio. So that's not what you're expecting to be on the financial year basis in 2020? And also remind us, I think that you've got 2 quota share renewing 1 each, every single year. So how this -- how -- when are we going to reach the 23% effectively on the financial calendar year? And the third question would be on the cost, maybe we can have -- we will have on this on the 25th of Feb. But I mean, you've been cutting cost passively ahead of what you were expecting initially, how much you believe you can go beyond the current level? And are you reaching a point where, of course, things are going to be a bit more difficult and maybe additional investment will have a slightly bigger impact on your P&L going forward?

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Xavier Pascal Durand, COFACE SA - CEO & GM [14]

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Let me start with the virus here. You're right to point that there's been some impact on commodities, particularly oil. However, it's not nearly as brutal as what we have seen. If I recall, what happened in 2015. I mean, you had oil at $110 going down to $40, if I recall right. This time you're at $60 going to $50, I don't know, $55 or something like this. You lost 10%. So the magnitude is not the same. The other thing I would tell you is culling the commodity trading business was part of -- a big part of what we did in 2016 and 2017. So our exposure, I believe, is much lower than it was at the time. So that's what I'll tell you on -- in terms of other industries, other measures. It's very -- of course, we're watching, but it's very early days. The key here for us is to be selective in what we do. I'll just mention that overall in our exposures, China is about 2.6% in total -- of the total exposures of Coface, and that includes everything in China. The province that's being touched is a much smaller piece of that. So just to give you some perspective, I'll let Carine take on the -- let me say a few words about the cost. So you're right to point out that when you start out on the cost-cutting program, of course, you get the low-hanging fruits. And once you pick these -- it gets harder because you've got to climb up higher in the tree. And there's not an infinite supply of them. So that's true. It doesn't mean we're not going to keep trying. The other thing is we have been making disciplined, steady and continued investment in order to not just deliver short-term results here, but also investing in what we believe was key to drive this business forward. And I've mentioned consistently risk controls, some compliance stuff, service, technology, process and growth. And I think the mixture of what we -- of all these different ingredients has actually worked. We're walking a pretty fine line between all these different constraints here. We don't intend to change that way of thinking. The fruits are harder to get, but also I think the investments have to be commensurate, both of -- the other thing I'd tell you is some of the investments we have to make initially won't be -- we won't have to do them again. So I think it's true on both sides. I'll let Carine talk about the cession rate here.

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Carine Pichon, COFACE SA - Chief Financial & Risk Officer [15]

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So on reinsurance, so the 23%, Thomas you are right, it is related to underwriting year 2020. So that's clear. However, what we have done to keep an alignment between both treaty that we have also renewed by anticipation, the other reinsurance treaty. So it's 23% is specific to 2 quota share. One which will end, end of this year, and one, which will end, end of 2021. So that it's key. So that's mean that significant impact will be in financial year for the proportion of the premium, which will be underwritten in 2020, knowing that you know that we also have still 2019 premium, which will be written -- which will be kept at the 26%.

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Thomas Fossard, HSBC, Research Division - Co-Head of European Insurance and Analyst [16]

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So on the financial year, the 23% more to be expected by the end of 2021 was then...

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Carine Pichon, COFACE SA - Chief Financial & Risk Officer [17]

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I would say, full effect in 2021, but significant growth in 2020?

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Operator [18]

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We have no more questions. (Operator Instructions) The next question comes from Rahul Parekh from JPMorgan.

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Rahul A. Parekh, JP Morgan Chase & Co, Research Division - Analyst [19]

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I just have a couple of questions. One is on your Western Europe outlook. You -- I mean with Brexit now happening and in solvency, what's your view on rising insolvencies in your outlook on Western Europe for the next year or next couple of years there? My next question is on your impairments. There were some impairments due to Peru and some other consolidated entities now. I was just wondering, is there any goodwill or at risk or any impairment risk to come in the next year? And my last question is on -- just on reinsurance. Again, that with you, is the way you look at reinsurance, is it that you look at it as a factor to offset -- to offset the slowing economy? Or is it something that you would continue to look at even if the outlook of the economic changes?

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Xavier Pascal Durand, COFACE SA - CEO & GM [20]

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Okay. Well, let me talk about the reinsurance piece. You know there's 2 pieces to our reinsurance program. One is a quota share and the other 1 is an excessive loss, stop loss type of policy, which is there for risk mitigation standpoint. So we're not changing that second part. It's been very constant over time. We -- what we have -- what we are changing is the quota share, i.e., how much of this -- how much of this business we retain versus cede to reinsurers. And that is -- that is something we've adjusted up to the back in 2016. If you recall, the reason we did this was to start to get some capital optimization. Our cost of capital at the time was not as strong as our friends from the reinsurance industry. I think the things have changed a little bit since then. So that's why we're taking the reverse route here. In terms of Western Europe, look, Brexit started 4 years ago. Clearly, literally, weeks after that happened, we've seen the impact on the British economy. I would say the U.K. was lucky because they started on Brexit at the peak of the cycle. So they really didn't feel it all that much for the first few years. Even though construction slowed and retail slowed, and you had some pretty actually visible bankruptcies in the retail space or in the construction space or in the food and beverage space. And then it's been continuously slow. I mean, I think over the last 2 years, we've seen -- we've seen insolvencies in the U.K. rise by about 17%. If you contrast this with France, which dropped 4% last year. This is a pretty significant impact here. We expect insolvencies in the U.K. continue to rise. I mean, I think what happened with them getting out of the EU hasn't changed anything actually this year. We're in the same situation we were a year ago. What's in front of us, though, is that they now have to cut a deal somehow with Europe. And we don't know anything more about it than we did a year ago in terms of where it's going? Is it going to be a hard Brexit, or a soft Brexit? So -- I mean, for me, in terms of our business, there really hasn't been much change in terms of this milestone of leaving Europe. Except that we know now that they're going to have to cut a deal or find a way to go forward. In terms of Western Europe, I mean, the same trends we've seen at play last year, I think we're going to see play out this year again. So we have a slowing Europe economy. I mean, France has been actually doing pretty well. But you have Germany, which has been slow and probably the slowest it's been in a long time. And so it's kind of a 2-speed economy. I don't think we expect in the short term, any change in these trends. The industrial space has been hit, the automobile industry and things like this, and you're not going to see a turnaround of that any time in very short term. Carine, do you want to talk about that?

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Carine Pichon, COFACE SA - Chief Financial & Risk Officer [21]

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Yes. Maybe on impairment, so it's a slight impairment on goodwill and it's impairment on the shares we have in this entity. Let's say, we -- because on these entities, we see that the way we were operating were not positive and couldn't be profitable for the year to go. So that's why we decided to review the structure, in the case of Peru, we have decided to clearly liquidate the company and to continue to support our clients from Chile because it will be more profitable in the future. So difficult to say there will be any other decision like that in the future, but let's say, we don't anticipate at that stage because if it would in the case, we'll have put through it in the P&L.

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Operator [22]

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We have no more questions.

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Xavier Pascal Durand, COFACE SA - CEO & GM [23]

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Well, I think we're past the hour. We really keep these calls to about an hour. If there's no other questions. I think the interesting thing about this call is we're a couple of weeks away from our new plans. So I'll invite again, everybody to join us in Paris for the Investor Day that we're going to have. Obviously, this will be focused on talking about where we go from here. And so there will probably be more questions, we will address this. I want to thank everybody for joining this call and turn it back over to our operator here. Thank you, everyone.

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Operator [24]

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Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation, you may now disconnect.