Coface SA - Q1-2016 results: A tough quarter in a polarized environment

Paris, 4^th May 2016
               
Coface Q1-2016 results:
A tough quarter in a polarized environment

• Turnover: €365m, -6.3% (-3.8% on a comparable basis^[1]) against a strong Q1-2015, stable vs. Q4-15
• Contrasted regional sales performance
  • Lasting soft conditions in mature markets, particularly Europe
  • Actions taken on portfolio in emerging markets impact growth
• New business production flat, client retention rate at record level of 92.5%
• Net combined ratio of 87.0% (84.3% excl. one-offs^[2]) stable vs. Q4-15
  • Net loss ratio at 55.0% mainly impacted by losses in Asia Pacific region, Commodities Trading sector, and two claims in North America
  • Net cost ratio of 29.3% (excl. 2.7 ppts one-offs¹) driven by disciplined cost execution
• Net income of €22m (group share), €27m ex. one-offs²
• Agreement on transfer of public guarantees activities signed with Bpifrance on April  18^th, effective transfer to take place before end 2016
• Operational efficiency review progressing well, outcome to be integrated into strategic plan, the main themes of which will be communicated at the time of H1-2016 results and presented in full at an Investor Day in London, September 22^nd, 2016

Xavier Durand, CEO of Coface, commented: "This has been a tough first quarter. Business turnover and profits were lower compared to the same period last year, against the backdrop of a polarized and volatile economic environment.

Our performance reflects a stark contrast between mature credit insurance markets - where risk is low and competitive pressures are driving down revenue - and emerging markets where risk is high, particularly in the commodities sector. Though the positive impacts of measures taken to reduce our risk exposure in Latin America over the last year are already materializing, it is too early to see the full effects of risk initiatives launched in Asia at the end of last year; these will translate progressively into our results. Given the volatile global economic environment, we remain cautious for 2016.

We are conducting a comprehensive strategic review of the business, which includes the work currently on-going on operational efficiency to improve our competitiveness. Its conclusions will be integrated into the new strategic plan, the main themes of which will be communicated at the time of our half-year results and presented in full on September 22^nd."

Key figures as at 31 March 2016

1. Turnover

Coface registered turnover of €365m in Q1-2016, down 6.3% against a strong Q1-2015 (-3.8% on a comparable basis^[4]), and stable compared to Q4-2015.

The Group's turnover was impacted by lasting soft conditions in mature markets: Western and Northern Europe are experiencing price pressure, particularly in France and Germany, given the low level of risk in these regions. In North America, business turnover increased again this quarter, although a long term growth trend is yet to be confirmed.

Emerging markets faced high risk volatility which led Coface to take action on its portfolio in some markets (Latin America and Asia Pacific), impacting revenue growth. The Group's Central Europe and Mediterranean (excluding Spain) & Africa regions reported slight increases in turnover.

In this context, Coface decided to reorganize its European regions: Spain and Portugal has moved to Mediterranean & Africa (from Western Europe) and Russia to Central Europe (from Northern Europe) allowing Western and Northern Europe to focus more on growth and operational efficiency.

New business production, supported by mid-size and local business growth, was in line with Q1-2015. Coface's client retention rate reached a record level of 92.5% thanks to a targeted, customer-focused approach. The start of pro-active re-pricing in emerging markets partially offset the overall price erosion driven by mature European markets (price effect -1.6%).

Client activity, which also drives premiums, is still contributing to growth but to a lesser extent than in the previous year.

*Published 2015 data has been restated to take into account the changes in scope.

2. Results

• Combined ratio

The Group's net combined ratio stood at 87.0% (84.3% excluding one-offs^[5]) and remained stable compared with Q4-2015.

The loss ratio net of reinsurance reached 55.0% as a consequence of losses in Asia, in the Commodities Trading sector, and two claims in North America. The positive impact of risk reduction measures taken in Latin America over the last year are already materializing. However, the full effects of actions taken in late 2015 to reduce our risk exposure in Asia will translate into our results progressively over time.

Excluding one-offs⁵ (which have a -2.7 ppts impact), the net cost ratio stood at 29.3% reflecting the Group's disciplined execution on internal expenses, which decreased to €136m^[6] compared with €143m in Q1-2015.

• Financial income

Financial income^[7] reached €10.8m (of which -€2.9m externalization of capital losses) at 31 March 2016 against €13.0m (of which €4.1m externalization of capital gains) in 2015. Thanks to its diversified portfolio and proactive investment strategy, Coface's accounting yield^[8], excluding capital gains and losses, remained stable at 0.4%, the same level as in the Q1-2015.

• Operating income and net income

Excluding restated items⁵, operating income stood at €38.2m and net income (group share) at €26.8m.

3. Transfer of public guarantees activity

Coface agreed terms with Bpifrance on April 18^th 2016 for the transfer of management of French state guarantees to Bpifrance, in line with the preliminary protocol agreed with the French State in July 2015. The recent agreement defines the terms of cooperation between Coface and Bpifrance to ensure maintenance of a seamless service for all insured parties.

The transfer of the public guarantees activity remains subject to modification of the applicable legislative and regulatory framework, which will come into effect by decree. Coface will continue to be remunerated by the French State until the effective transfer, which is scheduled to take place before the end of 2016.

As agreed with the French state and communicated last July, the amount due to the Group on the activity's transfer is €89.7 million before tax. The exceptional gain, after immediate depreciation charges (estimated at €16.3 million euros before tax as at 31 December 2015) will be recorded when the transfer becomes effective.

The reduction in costs linked to managing the public guarantees activity has led to a reduction in remuneration of €2.7 million for fiscal year 2015: this one-off adjustment has been accounted for in Q1-2016.

Coface and Bpifrance have also started discussions with the aim of establishing a solid and sustainable partnership to better serve French companies which will draw on Coface's 70 years of global risk coverage expertise.

4. Outlook and Calendar

In a global economy which remains volatile, where growth is sluggish and risks high in emerging markets and certain sectors (commodities, metals.), Coface remains cautious for 2016.

In mature markets, where risks are low, we expect commercial pressure to remain strong. While the positive impacts of the risk reduction measures taken last year in Latin America are beginning to materialize, we anticipate that the effects of risk actions taken end 2015 in Asia Pacific will translate progressively in our results over time.

We continue to focus on finely managing and adjusting our risk exposures as required by the current environment and on improving our operational and structural efficiency.

We will present our strategic plan, including the outcome of a comprehensive cost review, on September 22^nd 2016.

DISCLAIMER - Certain declarations featured in this press release may contain forecasts that notably relate to future events, trends, projects or targets. By nature, these forecasts include identified or unidentified risks and uncertainties, and may be affected by many factors likely to give rise to a significant discrepancy between the real results and those stated in these declarations. Please refer to the section 2.4 "Report from the Chairman of the Board of Directors on corporate governance, internal control and risk management procedures" as well as chapter 5 "Main risk factors and their management within the Group" of the Coface Group's 2015 Registration Document filed with AMF on 13 April 2016 under the number No. R.16-020 in order to obtain a description of certain major factors, risks and uncertainties likely to influence the Coface Group's businesses. The Coface Group disclaims any intention or obligation to publish an update of these forecasts, or provide new information on future events or any other circumstance.