COFACE SA (COFA) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the 2021 Results Announcement Coface Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Xavier Durand. Please go ahead.

Thank you, and good evening, everyone. Thank you for joining this call. We're happy to report our full year 2021 results. I think you're aware, this has been quite an exceptional year for Coface. Nothing really happened in this plan, but it's still a year where we managed to reach all of our key objectives. We're reporting today a total net profit of EUR 223.8 million net income, of which EUR 32.9 million in the fourth quarter of 2021. The piece I think I'm pleased with is the turnover growth, which reached EUR 1.568 million (sic) [ EUR 1,568 billion ] year-to-date, which is up 8.3%; everything else similar for the year. And if you look at the underneath stories, Trade Credit Insurance is growing close to 10% at 9.7%. The pricing is still slightly positive, but as I have highlighted in the past quarters, it has now been negative for the last 3 quarters. We see information services growing 18% for the year and 30% in the fourth quarter. Factoring is up almost 11%. Debt collection is down 24%, but that's really not a surprise as the claims activity has been pretty low and there's a very strong correlation between the 2. Talking about claims, the loss ratio has improved by 14 points to 33% for the year. The net combined ratio comes in at 65%, 64.6%. And if you exclude the government schemes, we're at 54.5% for the year. That brings the net loss ratio at 50.4% and actually 10.9%, excluding government schemes for the fourth quarter. The net cost ratio has improved from last year by 0.8 points. And that brings the net combined ratio for the fourth quarter at 83%. I think the big news here is that what we've done on the government schemes, it's lowered our pretax profit by EUR 160 million in 2021, of which EUR 103 million in the fourth quarter, which means that we anticipate that a large majority of the expected cost of the government programs have now been taken into our accounts. So as I've said, that brings the total net income for the year at EUR 223.8 million, which means an earning per share at EUR 1.5, which compares to the EUR 0.55 that we had in 2020. From a balance sheet standpoint, you see on the next page that we are coming out strong at the end of 2021. The solvency ratio comes in at 196%. What's important about it is we don't expect further significant impact from government schemes in that ratio. The solvency target -- the solvency, sorry, is way above our target of 155% to 175%, as you know. We have renewed our reinsurance cession at 23% like prior years. The private reinsurance program has been renewed at better conditions despite the fact that the market is, generally speaking, tighter. So that brings the total return on average tangible equity for the year at 12.2%. This strong balance sheet and the profitability of the business allows for a record dividend of EUR 1.5 per share, which is 100% payout ratio, which is right in line with what we've done and what we've said we would do in our Build to Lead target. So we delivered, I think, a very strong financial year, but also, we are completely on track with our Build to Lead strategic objectives. And I would like to give you a periodic update on where we are on these plans, and that's why we put in a page, on Page 6, which gives you a bit of an update of what's happened during the year. You recognize here the 2 pillars. Number one, building leadership in the Trade Credit Insurance space, and we've got 3 points here. One is simplifying and digitizing the operating model. If you think of where we are here, about 75% of our products have been migrated to the new product suite, which is a condition to further digitization of our business, and that's in the mid-market space. We have been investing, and we are investing heavily, in digitization. I mean in total through the plan, we will invest about EUR 100 million in technology to make our business leaner, faster, better, and that's well underway. We're moving people into shared data centers, where we get more productivity, more standardization. And then one thing that's very important is client satisfaction. One way that we measure it is through NPS measurements, like many other companies do. And in the second half of 2021, our Net Promoter Score has been above 30%. I take that as a sign that we're moving in the right direction and this business is appreciated by its clients. In terms of information and risk capabilities, I think we've proven through the last 2 years that we can navigate a pretty volatile and uncertain environment. This is one of the things we had discussed initially when I joined Coface. We're now using the Partial Internal Model to -- for pricing. And then we are also investing in improving our trove of data. This is one of the assets in Coface, and we're continuing to build and enlarge our database. We've gone from 70 million corporates. We're going to 130 million. We've also multiplied the number of fields that we track on each one of the companies by something like 10x more. In terms of growth, we've completely realigned our organizations across regions, and you're very well-aware of what we've done there. We've been driving retention for several years in a row through both service and technology, and we've been expanding progressively into new risk segments like excess of loss in the U.S., bonding in Romania and other things. The second pillar is really about growing select specialties. Over the last 3 years, we've been turning around our factoring business. I think we've done a great job here driving better business through higher value segments, private equity, cross-border; improving the risk profile of the portfolio in terms of being self-liquidating; in terms of increasing efficiency and investing in our tools to manage this business; and then optimizing its capital consumption, which you'll see in the solvency calculations. Single risk and bonding is now led by a senior leader. We're reinforcing our business in the key markets. We're launching in new places. And we're starting to look at it from a reinsurance standpoint as well. Finally, information and services. That's certainly the biggest initiative we've had in terms of growth or adjacencies in this business. We're aggressively developing it as a new core activity, if you will, of Coface. I have a page which I'll take you through in a bit later. We're investing in the platform, and we're launching -- also, we're taking the opportunity of a relatively low claims environment to launch a new single tool in 45 countries for collections, which really updates our technology in the space. So a lot of stuff goes on, not just managing the crisis, not just managing the performance, but also continuing to change this business at its heart. If you go to the next page, 7. I just wanted to give you a bit more color on what we're doing in terms of information. And this whole thing started really with the realization that we had an underutilized asset in the company, which is the data we use for our own credit insurance business. We have assets in terms of companies' data. We have payment behavior data. We have underwriting expertise, hundreds of people around the world who are focused on managing the solvency and scoring companies. And then we have a global network and a global brand, which is recognized in the industry. So when we come with data, it's not just data that is being collected by us, it's data that's being utilized to manage EUR 600 billion of exposures, and I think that carries weight with our clients. We also realized there is a need for that kind of service in the market. People want to make informed decisions. They want better quality. They want better speed. They want a one-stop shop. They want insights, not just data. And I think we're well positioned to offer these kinds of products. So we've been investing in the platform over the last few years, whether it's in terms of sales, recruiting more people. We've actually almost tripled the [ EFTs ] on this business. We've multiplied by 2 the number of companies that we follow and then by 10, as I said, the number of fields that we track on each company. We are expanding the range of products that we're offering, and then we're investing in the technology to be able to not just manage this data, but to make it available in an easy format for our clients. And then I just wanted to show you some of the numbers here on the right-hand side. You see that our total services are up 27% over the last 3 years. And when you look at how that's made up, it's 48% growth in information and 29% decrease in debt collection. That will change at some point when the cycle reverses, but still pretty good performance on our information business. You see the reported number is EUR 42 million. That's what we consolidate. If you add the entities that are not consolidated, we're at EUR 48 million. The contribution margin, despite all these investments that we're making, is above 30%. And this platform is able to actually self-finance the investments we're putting in it. And I think that's what I wanted to highlight here on the information business. On Page 8, we see the key financial targets we set for Build to Lead. Combined ratio, below 80%. You can see we were actually below for the last 3 years. This year is particularly strong at 64.6%. Payout ratio, which is commensurate with our solvency ratio. So solvency has been way above our target range. You can see it again this year at 196%. The payout ratio has been 100% for the last 2 years. And the return on tangible equity, despite the fact that we have actually probably more equity than we really need, is at 12.2% for the year, so well above the 9.5% that we had set for target in Build to Lead. On Page 9, I also wanted to give you an update on our CSR strategy. We're at this point now where we're embedding the strategy into our daily operations, and we're setting specific targets. And I'll just take you through the key -- 3 key pillars here. One is becoming a responsible insurer. And a number of things we've done over the last couple of years. We've improved the ESG rating of our investment portfolio by one notch, so we went from C- to C. We've built and we've tested an internal tool to be able to assess the environmental impact of our debtor portfolio. So this is something new. And then we've integrated some ESG indicators into our risk appetite statement. So where we want to go is continue to work on the investment portfolio ESG rating. We set a clear target. You can see it at the bottom of this chart here, of 20% reduction of investment portfolio emissions by 2025. We want to integrate the environmental policy into our commercial policy. That is enabled by the tool that we have and also, as the taxonomy of what is green, what is brown and what is black is going to be developed, and then upgrade our procurement policy. The second pillar is really being a responsible employer. We've worked hard on diversity and inclusion. The standards that have been made mandatory for French companies is now being applied throughout the world. We've improved our diversity index by 3 points over the -- 2021. We've been very specific about LGBT+ inclusion. We've increased employee engagement by 24 points. And then we are developing employee development. We still need to formalize our diversity and inclusion policy. We continue to work on digital tools to be able to onboard people as we spend less time in the office and more digitally. We want all of these onboarding questions, training issues to be handled in an easier way for people. And we've committed to a specific target of 40% in senior management. What we're talking about here is not the executive committee, but the top 200 jobs globally in the company. So that goes well beyond, I think, the targets that companies usually track. In terms of being a responsible enterprise, which is actually how much we, ourselves, consume in terms of carbon, we've launched the full carbon footprint assessment with an outside firm. We've been working on our policies to reduce our carbon consumption, whether it's introduction of electric vehicles in our fleet, the travel policies, the -- and how much our buildings consume and how much we actually utilize buildings. There's 2 areas that we're still working on. One is to develop a reduction plan to achieve net zero. I think that's something we've got in front of us. And then two, as we move from more brick-and-mortar to more digital, to be able to define a responsible IT road map here because we're actually using more and more of the digital tools, and that transfers some of the burden on the IT. So we've set a short-term target of a 3-gram reduction in our car fleet. We've got to start somewhere, and we're continuing to work on this. And then the last pillar is really about driving the culture inside the company, making sure everybody is involved. We've got some ground -- some grassroots movements that have been initiated by our employees, which is called Green to Lead actually. We're supporting that. We want to make sure that we have all of our employees formally trained by the end of 2022. We're revamping our governance. The goal here is to make it an enterprise endeavor, not just something that's managed from the top or [ dedicated from -- to people in the company ]. With that, I'm going to take you now to the usual pages that we review during these calls. There's a lot of stability, as you know, in our presentations [ from hereon ]. So again, on Page 11, a very strong growth year, 8.3% total; as I said, 9.7% TCI; 18% business information, and actually 30% in the fourth quarter; factoring is up almost 11%; third-party collections is down. So nothing new here. The fees ratio to premiums is down, and that's really driven by our -- for our insured clients, the collection fees have been lower and that's correlated, as I said, to lower claims. On Page 12, we look at the geographies, and you see that actually growth has been pretty much spread out. And the reasons underneath this are pretty consistent across regions. So I'm not going to comment on them individually. Just to say, you look at Western Europe, Northern Europe, Central Europe, Med & Africa, we're all in the 8% to 9% range. North America is lower, but it's starting to pick up a little bit of momentum. Asia Pacific at 5%. Latin America, quite high at almost 15%, and that's driven by commodity, agrofood and prices. If we go to Page 13, you can see the usual way we look at growth. It's still a pretty good year for new business, with EUR 129 million, so not quite as good as 2019, but still pretty good. Retention is almost at a record, and it's been very stable actually for the last 3 years. The price is still positive. But as I said, I mean, the market has gotten very, very competitive and pricing has been down during Q4 as it has between Q2 and Q3 as well. And then the big driver here of our rebound is activity, which is up by 8.4%, which is a very strong performance after the drop in 2020. I'm now going to go to Page 14, talking about the loss ratio. You can see that it comes in at 21% for the full year '21. You look at the quarterly sequence here and you see that we reached a very low point at 10.5% for Q4. Some of the same trends that I've highlighted before are still pretty much in play here: continued limited large loss activity; low claims frequency across all the regions since Q3 2020; still a high level of reserves, which are being released. I think, as I said, we've kind of reached the trough in claims. I think it was probably middle of last year, at the end of the first half. And since then, we're seeing a normalization. There's been no change in our reserving policy. You can see on the bottom right-hand side that we're opening the new year at 66.3%, which really reflects our expectation that the normalization of claims is happening, but it's happening progressively. And then you're seeing the 47.7% boni on prior years, which is actually exceptionally high. So if I go to Page 15, you can see the loss numbers for the year by region. Quite a low number pretty much across the board, with Western Europe, Northern Europe, Central Europe, Med & Africa, all in the 20s or lower. And then the most volatile markets that we're usually more concerned with, North America, Latin America, Asia Pacific, all in the teens or below. So really, really a very strong year in terms of losses. And if you look at Page 16, which gives you the quarterly story, we're actually -- you can see that out of our 7 regions, you actually have 6 of them that are in the single-digit loss ratio for the quarter. And one, Med & Africa, is at 15%, which is quite benign for the business that we're in. So clearly, a very strong performance across the board. On the cost side, Page 17. You can see that our costs during the year have grown by 7.1%. So that means they're growing, and we know why. That's mainly employment costs as we had low bonuses in 2020 on the back of lower performance. That has been reversed, obviously, in 2021. However, the growth in the cost is lower than the growth in the premiums. So we get operating leverage during the year. You can see our cost ratio before reinsurance, dropping from 36% in Q4 '20, to 33% in Q4 '21. And you can see the net cost ratio at the bottom right-hand side of the chart going from 33.7% to 33.1%. And what we get is about 1.4 points of positive operating leverage. We got a negative, if I may say that way, from the investments that we've made in business information, [ for ] 0.2%. And then lower collection fees, I've already commented on that, and that's a negative 0.6%. So we continue -- I think the message here on cost is we're disciplined, we're thoughtful, we continue to invest. But every year, whether we're growing or not, you can see that we are actually improving the cost ratio of the business. With that, I'm going to turn it over to Phalla to take us through the next pages.

Thanks, Xavier. So when it comes down to reinsurance results, so it reflects the low loss activity and the impact of the public schemes. Let's start with the premium cession rate. So it goes down from 46.4% to 39%. As a reminder, the public schemes ended up on June 30 last year. The cession rates dropped, is, I think, it's a very sharp drop of 50.7% to 5%. Indeed, the reserve releases resulting from prior year's positive development and especially in the year 2020, as mentioned by Xavier, go back to the reinsures and in particular to the government that put in place the public schemes. We have a dedicated page on this later on. Bottom line, the reinsurance result, which is a cost for Coface, moved from minus EUR 44 million pretax to minus EUR 314 million. As regards to private reinsurance treaties, the renewal was done successfully and we keep the same quota share with improved terms and conditions while the market was getting harder. If we move to the next page, Page 20, let's focus on the government schemes and impact. Here, we think that we have recognized the large majority of the costs related to it. On the -- as in the chart on the top left-hand side, you can see -- I think you have 2 bars, the dark blue and the green, dark blue being the published combined ratio and the green being the result public schemes impact combined ratio. As we said last quarter, I think it was a turning point in Q3, where, of course, I think the public scheme started to benefit from the reserve releases that we made. And it started in Q3. We have announced -- we have said that it will be accelerated. Indeed, it has accelerated in Q4. As you can see, that in Q4, the combined ratio, I think without the public schemes, is really, really low at 10.5% -- yes, the loss ratio, sorry. It turns out, of course, that the pretax impact in Q3 was EUR 32 million. Remember that we had this discussion. And now, we have recognized EUR 103 million in Q4. We think that the vast majority will be behind us as we have the full year '21 taking into account EUR 160 million impact of costs related to the public schemes. We go to the next page. All this translated into a net combined ratio at 64.6%, which is a record low for Coface, moving from 79.8% on a year-to-date basis, to 64.6%, with a decrease in the cost ratio by 0.8% and a decrease of loss ratio by 14.4%, and all this related to the -- what we did with reserve release and going back to the public schemes. I would move to the financial income or investment income. A couple of things to be highlighted here. First of all, I think the total investment portfolio of Coface is now above EUR 3 billion. We maintained a well-diversified strategy in terms of asset allocation. We still continue to deploy the excess cash coming from the operating cash flows with, I think, the financial performance that we got and the low loss environment. In terms of yield, so the accounting yield results, realized gain and FX impact ended up at 1.1%, which is pretty stabilized now. And if we include the realized gain that we made on some real estate fund last year and benefiting also from the FX impact, the accounting yield of the investment portfolio ended up at 1.2%. All this, I think, lead us to a record earnings in full year '21, with an operating income that has more than doubled compared to previous years. The tax rate, which is pretty -- [ is right now ] at 23%. I think it was, what, 24% in Q3. And net income recorded again at EUR 224 million and EPS at EUR 1.5. I hope that you will enjoy it. And payout ratio at 100%. In terms of return of average tangible equity, it goes up from 4.8% to 12%. The drivers are only coming from the technical results and in a lesser extent, the financial results. The movement in terms of IFRS equity is pretty straightforward. It is only made of the dividend made in '21 at EUR 83 million and of course, accredited by the net earnings of '21 at EUR 224 million. Let's move now to the capital management and the capital page. And I will start with the balance sheet side. So it's a very solid balance sheet, ended up at EUR 8 billion. It has increased compared to last year. I think we are coming from EUR 7.5 billion last year, to EUR 8 billion this year. And here, it just reflects 2 things, the increase of the investment portfolio that we mentioned a little bit earlier and increase of the factoring assets as I think [ the way ] we are growing our factoring business. IFRS 17 project is going as planned. And of course, I think what really needed to be highlighted again is the fact that the 3 rating agencies have acknowledged the strength of our balance sheet, as Fitch, Moody's and AM Best have put Coface on the stable watch last year. We'll end up with a tangible NAV at EUR 12.8. I just want to highlight this one. Let's move to the solvency ratio. I think there's 2 pages there. I will start with the chart on the left-hand side, where you can see the solvency ratio semester-after-semester, which come way above our comfort zone and way above the upper range of a comfort zone than 175%. If you look at the middle chart, which is the work between year-end '20 to year-end '21, I want to -- if we compare apples to apples, which is without the impact of the public schemes, we are moving from 191% to 194%. And the published ratio is at 205%, moving from 205% to 196%. What are the drivers here? So of course, 3, I would say, key components. The first is, of course, the SCR. So the capital requirement has increased. On the insurance side, the increase of the capital requirements reflects, first, I think, the growth of exposure, the business growth, of course, and the low loss environment. On the factoring side, the capital requirement increase reflects, of course, the business growth above SCR has an impact -- or increase has an impact by approximately 30 points on the solvency ratio. But it -- all of them had been offset -- more than offset by the increase of the own funds that reflects, of course, our commercial performance, our business performance and our financial performance. So if you look at the own funds, the increase and the impact on solvency ratio is at 39 points. This, of course, allowed us to serve and propose a 100% payout ratio, still leading to a year-end solvency ratio at 196%. On the right-hand side, we just want to go through the sensitivity of the solvency ratio, whether through the financial market shocks and stress tests, either through the business shocks with the 1/20 and 1/50 events. Both cases, all cases, will be within our comfort zone or above our comfort zone. Move to the next -- moving to the next page, I think how the solvency is translated -- ratio is processed in terms of euro amount, so 2 components here. If you look at the insurance SCR, it ended up at EUR 1.055 billion. This is an increase by EUR 146 million compared to last year, reflecting, as you can see on the bottom left-hand side, the increase of the exposure. Same, factoring SCR has increased by EUR 40 million. And in total, I think our SCR ended up at EUR 1.264 billion, to be compared with own funds, eligible owned funds, of EUR 2.472 billion and a ratio at 196%. So again, a very, very strong solvency and robust balance sheet. [ I'm going to ] leave the floor back to Xavier.

Yes. So just a few words of -- to wrap this up, and then we'll move over to the Q&A session. I think it's been a great year. Clearly, from a financial standpoint, it's clear. I think that the salient point for me is that we've put the government schemes, a large majority of it, at least behind us. We have delivered strong growth and strong operating metrics, and that spans across our different product lines. You've seen the growth in factoring of 11%, the growth in premiums at close to 10%. We're continuing to invest in the business to make it better, whether it's digitization or the investments that we've made in the information line, which is starting to pick up some speed. And then we've taken advantage of a low claims environment to continue to upgrade our technology, with a claims system now that -- a collection system which is globally implemented in 45 different countries. So I think we are demonstrating our ability to grow through the cycle. We continue with an attractive capital management policy. We're going to pay out 100% of our earnings. That means EUR 1.5 per share. I'll let you compute the percentage of the share price that means. And so that's pretty much the story for 2021. With that, I'm going to open it up for questions.

[Operator Instructions] And the first question comes from the line of Michael Huttner from Berenberg.

Congratulations, these are amazing numbers. Everything is amazing. There are still questions. I have 3, please. The first one is the initial loss pick. And sorry, I sound as I'm [ splitting ], I'm not. The 66.3%, it used to be 72%, 73%, maybe, and you said it's still very conservative. So maybe you can give some color here. The other is the extraordinary growth of information services of 30% in Q4. I know you don't give guidance, but which number do I think about as kind of sustainable, the 18% for the year or that 30%, which is a real number? And then the last question is the government schemes. Can you give a bit of color or explain, or how do I compute how much is left?

Yes, hard questions. So on the loss rate, I don't think we've said what you said. But we -- what we said is that, normally, we open the years as a factor of what we see during that year. And you know it takes about 18 months after that for the year to completely roll off or mostly roll off. So what we're saying here is that given what we've seen in 2021, we opened the total year 2021 at 66%, which is typically lower than what we would on a normal year do, that's because of just what we observed in 2021. So that's this one. In terms of the information business, there's some seasonality. I mean it's still a small business, right? I mean there's -- so some of the deals are chunky. There's some seasonality. So you'll see that number -- quarterly number move a little bit from time to time. But I think the important thing for me is that you're seeing this business start to accelerate. We used to be a 3% growth business, and then we went to 5%, then we went to 11%. This year, we're delivering 18%. And so I think we're starting to see some growth, and that's encouraging for me in terms of the efforts that we've been putting into this and the response in the marketplace. In terms of the government schemes, I think what we're saying here is if you look at these schemes, they've been going on for '20 and '21. So about 9 months' worth of reinsurance in 2020 and about 6 months in 2021, with slightly improved conditions. So in 2020, I think we -- at this stage, we pretty much see where this is going, and we pretty much put that behind us. In 2021, we've taken a bite at it. And obviously, there's always going to be the question of how that shakes out. But I think that's what we mean by -- when we say the vast majority of the -- or a large majority. I'm going to be very specific, a large majority of the cost has been taken into account.

Next question comes from the line of David Barma from BNP P Exane.

I have 3 questions, please, 1 on capital and 2 on the top line. On capital, first, could you help us understand the difference, moving parts in the solvency ratio in the fourth quarter, please? I can see the negatives coming from the front-loading of the government schemes, the growth in the total exposure, the higher dividend. But maybe if you could help us bridge the gap in the second half. My second question is on pricing and trade credits. Do you think what we're seeing in the fourth quarter is a good indication of what you're seeing so far in 2022? And -- or do you think some of the growing tensions or worries in the credit markets could mean a bit more pricing power for the insurers? And my last question is on services. So thanks a lot for this additional disclosure. But could you talk a little bit about where that growth is coming from, maybe in terms of types of clients or geographies? And any color you could give us on what's been the key driver of that growth in information services?

Yes, thanks, David. I'm probably going to take it in reverse order and let Phalla take the question on capital. I guess you're referring to the walk that we provided.

Yes, I will.

So she will take you through this. But in terms of services, so you understand, we've launched a global initiative in services. We're at very, very different stages of maturity. We're seeing clients that are from the very small to the very large. So it's actually -- I would say, at this stage, it's too early to say -- to differentiate, I mean. But we're seeing a very nice response, both from small clients and from very, very large and very reputable clients. So -- and obviously, it's different channels, it's different products, it's different salespeople, it's different technology in terms of what we're doing. But we're seeing people that are interested in just data to -- for their -- to run their operations, to assess credit, to assess their supply chains or to validate their models or do -- there's a whole bunch of things that are going on here, and it's pretty broad-based. In terms of regions, I think it's too early to really see trends. But I think we're pretty much growing in every region in the world. In terms of pricing, this industry has seen diminishing pricing trends over the last 20 years. And that's something I highlighted before the crisis. Things changed at the beginning of the crisis because there was clearly a surge in risk levels. And I mean, I think the numbers are pretty clear. You've seen lower claims activity, which means there's more pressure. And I think that's just the natural level of competition you see in this market. I mean it is a competitive market. There's no question about it. So where it goes from here, that will depend, I think, on the scenario that plays out. We are -- we've seen a very strong recovery in the economy in 2021. We anticipate growth in '22, but less growth. And as I said, we expect a normalization of claims, which has started middle last year. But we expect that to be progressive. So I think it's pretty natural. I mean things are pretty clear in this business. So when there's low claims, there's more pressure. When there's a lot of claims and there's a lot of risk, there's less pressure. And that's just going to continue. In terms of capital...

Yes, I would take it. So in terms of the capital, we have 2 pages on this one. And as you can see, the work is really a year-end to year-end because this is [ not where we published ]. And so the drivers are pretty much what you described. I think on the insurance side, the driver is, of course, the growth that we are seeing, the increase of exposure and the low loss ratio that would cost us some SCR. And this is where you can see the SCR amounting and the impact of the SCR on the insurance side was an impact of 40 -- 24.8. On the factoring side, again, it's the growth, and you can see the growth that we are seeing in '21 is plus double-digit growth. Of course, this will drive, of course, capital consumption. But on the other hand, because we are really underwriting a profitable performance business, the own funds is more than compensating and we have an increase of the net results that you can see. You can -- and it goes from our risk management, it goes from our, I would say, cost discipline, and it goes, our commercial performance. And of course, we're also benefiting from the low loss environment. And these are the key drivers, and you have the own funds and performance more than offsetting the capital consumption, so we end up with a very strong, again, solvency ratio.

Next question comes from the line of Hadley Cohen from Deutsche Bank.

Just following on from David's question, perhaps I could ask it in another way to [ get you, Phalla ]. Just looking at the growth in owned funds in 2021, it's grown by over EUR 200 million. But very simplistically, you're paying out 100% of earnings. So I'm just wondering what's -- I can understand what's driving the SCR movements, but it would be useful to understand why the own funds has grown as much as it has given you're paying out 100% of earnings. My second question, hopefully, a very simple one. Tax rate is obviously lower than normal for this year. Are you still guiding to around the 30% level going forward? And then final question is can you talk a little bit about the geopolitical risks at the moment with regards Russia and Ukraine, how you're sort of adjusting your exposures to those markets and potentially energy industries and what have you?

Yes, I would take the first one. I think the own funds, you can see the work on the page that we have shown. The own funds increase, of course, is made of the earnings -- of the net earnings of the year, but it's obviously own funds, right? So you also have the impact on the best estimate and the premium best estimate, which is benefiting from the low loss ratio. And this one will normalize, but at the same time, the best estimate impact is also coming through on the SCR increase. So both are increasing. Of course, one is our numerator, one is the denominator. Then I think this is the first thing. On tax rate, I think it's 23%. The tax rate is really depending on various components. One is really the -- some deferred tax impacts. This year, I think we have been able to reduce it. I would not guide you anything anyway, of course. But we -- I think if you look at the past, the tax rate last year was at 37. So you can figure it out a little bit on where we go at 23. Yes, it's probably a low tax rate, and we'll be navigating something in between.

I mean talking about geopolitical risk, I mean, clearly, so if I think of '22, what's in front of us. It looks like COVID is kind of behind us, but it's not hit every part of the world equally. So there's still -- we're never completely sure that we're going to be out of the woods. There's clearly a timing of interest rates going on, and QE is kind of going away. There's clearly some inflation. There's supply chain constraints. And there is geopolitical and social risks. I mean so that -- these are the things that we're watching in general. When it comes to geopolitics, clearly, there are tensions around Ukraine. We're very well-aware of that. It concerns not just Ukraine, actually, but the countries around them and starting with Russia and then other countries that might be impacted. And what we do is we just look at what it means by sector. We look at the different scenarios that can play out. You could have a prolonged standoff, I would say, and some volatility linked to this. I mean the Ukrainian economy is going to take a hit if that happens. By the way, we have very limited exposures in Ukraine. Then you could have some kind of a military action that starts, whether it's limited or it's more important. I think we're looking at all these scenarios, and we're -- we are looking at what they mean for different countries and what they mean for different industries. Not everybody is going to be impacted the same. If there's conflict going on, oil prices are going to go up. Gas prices are going to go up. There's going to be recession in some places. There's going to be other areas that are much less impacted. So we're looking at all of this. And I think that the company is doing its job, where in terms of thinking through what it means and standing ready to handle whatever happens as we do usually.

Next question comes from the line of Benoit Valleaux from ODDO BHF.

A few questions on my side. First one, maybe regarding pricing. You mentioned [ 0.9% of your price decreased ] in Q4, and you enjoyed a very low level of claims frequency last year and even in H2. So can you please give us some color, I would say, on the trend you are enjoying year-to-date? I mean do you see some more significant price [ decrease, or you fear ] there could be some much more negative impact on the pricing going forward or not? Maybe second question is related to reserve releases. And just to come back maybe on the first question, or let's say, to, I would say, opening combined ratio and so on. When I look at what's happened with the government scheme for, let's say, from March 2020 to -- and June '21, as you say, a significant part of reserve releases from this period [ should belong ] to the government schemes, and you put a large part of the cost in Q4 last year. Nevertheless, I assume that you won't be able to book significant reserve releases on this underwriting quarter. And therefore, most of your reserve releases this year will come from H2 last year, maybe something, I don't know, before Q2 2020 and for the business, which hasn't been concerned by the governance schemes. So my question is to know, do you believe that you will be able to achieve roughly 30 percentage points of reserve releases in '22 as you've made in 2017, '18, '19? Or should we expect a much lower level of reserve releases? And maybe the third question, sorry, related to information. You are still investing in this [ growing ] business. When do you expect this business to generate some profit?

Well, I mean, let me start with the last one because I think we've disclosed the -- what we call the contributing margin of that business. So I don't think I need to say much more. It's a business that is in its infancy. We're going to have to continue to invest. And I think the trade-off is, for me, there is no question, we need to invest in this business. It is a multiform, multi-geography, multi-type of clients kind of endeavor. And so I think we are just getting started, if I may say. In terms of reserve releases, I think you described it perfectly. I mean there are a number of countries where we were reinsured quite heavily actually by the government for a period of 5 quarters. And in these countries, we're protected from the downside, we're also protected from the upside. So that's pretty clear. So the outcome is pretty well-known. So anything we do comes out of the other parts of the world or the periods of time when we were not reinsured. I think you're absolutely exact. I'm not going to give you forward guidance on these things. We never do. So I'm going to stick to my guns on this one, been doing for 6 years. In terms of pricing, I mean, I kind of said it all. I mean I don't have much to -- much more to add. You know that our contracts renew, a good chunk of them, towards the end of the year. There's more seasonality in renewals, I would say, at the end of the year, and then some others spread throughout the year. You've seen, in the past, we had a number of years where the price decrease was, I don't know, 1.5% or something like this, or at least in the past. So I think the numbers I'm mentioning here are not completely out of range. But it's hard to say. I mean I think it will depend on, as I said, what the future holds for us in terms of risk. But the one thing I would say is, if this crisis has any learning, is that I think we had a few things happen during this crisis, right? We had a lot of stress at the beginning, in March, April, May 2020 before the government started to intervene. Then we had a complete reversal of situation following this. And now, we're seeing a normalization. So we've gone through 3 different cycles in the course of 1.5 years. And I think we've proven, or we're proving, that so far, we've been able to handle these different situations. So I think, to me, it just validates, if you will, the agility of the business and the fact that the business model seems to be working.

Next question comes from the line of Thomas Fossard from HSBC.

A couple of questions from my side. Just to come back on the remaining cost of the public guarantees. Actually, if I were to run the math on the Solvency II basis, so running the 196% compared to 194%, it looks like I'm getting EUR 20 million, which doesn't seem to be the right calculation to do. Otherwise, I'm not sure that you would have, call it, the majority. We probably have -- word it as the full -- almost a full cost. So maybe you can help me to understand why -- what represents these 2 points of solvency in the 196%. The second question would be related to your credit exposure. So we are back to EUR 588 billion at the end of the year. I just wanted to understand what was your risk appetite at this stage of the cycle, if there is any, the stage of the macroeconomic environment? Should we expect you to stabilize? Or I mean, you -- and you believe that the environment is pretty good to grow from this basis. The third question would be related to the normalization of the loss ratios. I think that when we last met around Christmas season, I think that you indicated at that time that the trend in the normalization of the loss ratios were different by countries. And at that time, you highlighted that France and Germany were still running at a low level, while I think that you highlighted that, already in December, Italy and Spain notably were back to a more normal level. So can you just update on where we are for the main European countries? And the last question, sorry for that. But regarding growth coming from your clients, I think at 9 months, you were at 5%. Full year, you're 8%. You're implying a very strong growth coming from your clients in Q4 stand-alone. And does it mean that at the end of the day, your clear beneficiary for your top line of inflation pressure building everywhere in all industries, and so at the end of the day, we should expect a very strong top line growth for 2022?

So again, I'm not going to make forward-looking statements, but the fact that it's known that when our client's business grows, we grow because our premiums are expressed as a percentage of their turnover, which means that if there's inflation, their turnover tends to grow; if they can pass on their prices to their clients and our turnover grows. So I think that's a true statement. This business, when there's inflation, high rate tends to grow faster. And then we also get better returns on the investment portfolio. In terms of the normalization, I mean, I think, I don't have much more to say. I mean I think the -- as I said, we reached the trough. I think it was maybe June last year or something like this. And since then, things have been creeping up. I would say nothing has really changed. Italy and Spain are -- have been the countries that have normalized the quickest, with a few others. France and Germany have been low, and the governments are progressively taking out their support. So I think we are seeing a normalization. I'm not going to make any forward-looking statements again. In terms of credit exposures, you're right to say we have had a -- after a decrease in Q2 '20. We kind of changed course as the government programs were kicking in. And we have been supporting our clients with growth and our exposures of about 21% last year, which I think is probably the fastest that we've seen the growth. I mean what's driving this is really demand from our clients for legitimate business needs. So the commodities or trading has been growing. I think the -- our risk appetite, I can't comment on an overall risk appetite because that's not the way we look at it. We look at it country-by-country, segment-by-segment, industry-by-industry, company-by-company. So it's detailed work. What comes out of it is what comes out of it. And we are very attentive to, as I said, when we talked about the geopolitical risk, where we put our money, and that's the value of what we do, is a detailed one-by-one analysis of the value of the counterparts that we're insuring. And then a question on public guarantees...

Yes, I would take it. I think the way that you should look at it on the public guarantees was the impact on the capital. The public guarantees is basically a reinsurance, right? It's a reinsurance scheme. So when you're buying reinsurance, of course, it helps your capital position. And as you know, I think as at end of half year last year, so I think the impact in -- at year-end would be -- it's really minor. Not only due to the fact that, of course, we have put upon the large majority of this behind us, is also because this reinsurance has ended. And you should -- if we look at it as a reinsurance, it's the same way that we are doing now our private reinsurance, and it helps anyway the solvency.

Okay. So if I'm right, EUR 20 million is what you still expect as a cost in 2022?

No. It's not what we're saying. Here, I think you're mixing up the costs and the capital consumptions and the capital position.

Next question comes from the line of Michael Huttner from Berenberg.

And 2 follow-up questions. One is can you say what is the -- your reinsurance limits on the excess of loss? In other words, if you had a single large claim, what is the maximum that you would have as a net loss -- retained loss and with the rest going to the reinsurers? And the second is on Romania and bonding, I don't know much about -- I've never been there, but I used to follow Vienna Insurance and also UNIQA. I don't think they ever made money in Romania. It's roughly a wonderful country, but the claims always seem to be higher than expected. And I just wondered how much comfort do you have that the trends in credit insurance then or bonding in Romania would be better than the insurance on cars, which has been an issue for your peers.

Look, on this one, first of all, it's a venture. I mean we've been expanding our bonding business across market. Each market in bonding is different, right? And this is probably what you mean. But the range of what we insure varies and defers by market. It could be tax bonds. It could be performance bonds. It could be guarantees. I mean there's a number of things. I'm not describing in detail what we do in Romania here. But -- and in any case, it's not a huge venture, but we feel that this market is prone for what we typically do well and where we make money in the long term, which is kind of like retail-based small tickets instead of doing very large transactions, right? I'm going to turn it to Phalla for the insurance piece.

The reinsurance, the excess that we have, the limit is by -- excess for -- I think the highest limit is EUR 1.7 billion by claim, excess of loss.

How much?

EUR 1.7 billion.

But I'm not sure your question -- what was your question?

No -- so if you have -- it's a large -- if you have -- if an event happens, what would be your maximum single loss exposure?

Well, it's 2% of our capital base. It's about EUR 50-something million. Yes.

Yes. EUR 50-ish million.

Next question comes from the line of Benoit Valleaux from ODDO BHF.

Just a follow-up question regarding still reinsurance. As you have still an excess capital, why haven't you decided, I would say, to reduce your quota share, [ provided you have the ] part which came to renewals and the vote to increase your retention?

Well, I mean, that's -- it's a tricky question, in that you're happy you're not reinsured when things are great, and you're less happy when things are bad. And it's a long-term partnership here with reinsurers. We feel that when you -- we work both the quota share and the excess and the stop loss and all these things together. So it's a decision that involves multiyear long-term partnerships and the mix of the different products we buy from the reinsurers. I think that's the best I can tell you on this.

Next question comes from the line of Thomas Fossard from HSBC.

Yes, sorry. I just wanted to come back on the 94, 96 -- sorry, 194%, 196% Solvency II ratio. Because if I'm right, all the public schemes have gone now. So why there is still a difference in the number you're computing at your end? And the second question will be, okay, so you're sitting on excess capital. You're leaving your quota share or your cession unchanged. You have probably very limited ability to return capital through share buybacks because of the position of large capital. For the -- what the -- what are you going to do? What do you intend to do with such an excess capital, which you say is putting also pressure on the return on tangible equity?

Yes. Well, I mean, a few things, and I've said this for 5 years, so I'll just repeat it. Core growth is number one; external growth, if we can find opportunities; and last, we will return the money. So this has -- it really hasn't changed in terms of our capital allocation here. Phalla, you want to talk about the 194% and 196%?

Yes, I think that we will take it off-line with Thomas...

Yes. I mean Thomas, offering a call here, a more in-depth discussion on the 2%. I mean the government schemes are kind of behind us, but they're not completely because the...

We still have the end tail of what's going on.

We have the end tail of the roll-off of the advantages, right? And it takes about 18 months for these things...

And it has not fully developed yet on the 2021.

Okay. Okay. So you're on underwriting, okay. Okay. Understood.

Yes.

And the last question comes from the line of Michael Huttner from Berenberg.

And I'm really sorry, I have so many questions. But just one, so you mentioned external growth if you can find opportunities. Is there anything you can say here?

Really, there isn't. I mean sorry, Michael. I mean we look at deals. We like to make acquisitions if there are good ones. I've already said that there's 2 things that work for us. We either acquire some skills that we don't have or we get some scale in some business that we like, right? And the price has got to be right. So that's still -- nothing's changed. We've done a couple. I wish they have been bigger, but we've done a couple and they've been nice acquisitions. And we'll keep looking.

I hand over back to the speakers for final remarks.

Thank you. Well, actually, we've had more questions and more time than most other results calls. So thank you for joining us. The next call is going to be on the 28th of April for the Q1. So in the meantime, I just want to thank everybody for joining, and wish you a great first quarter.

That does conclude our conference for today. Thank you for participating. You may all disconnect.