Coface (OTC: COFAF) is an insurance and reinsurance company that focuses on an undervalued and hidden segment of the insurance market: trade credit insurance. Approximately 90% of the company’s business consists of these types of credit insurance, and the principle is very simple. A company can protect itself against a default or a customer’s default by paying an insurance premium to Coface, which will in turn cover any potential default (and then go after the defaulting party).
Trade credit insurance is well-known and well-integrated in today’s international trading environment, and Coface is one of the few public companies that focuses specifically on this sub-sector of the insurance industry.
Coface is a French company and its listing on Euronext Paris is undoubtedly the most liquid listing to trade the shares of the company. of average daily volume in Paris is close to 200,000 shares, which represents a monetary value of about 2.2 million euros. There are currently 149 million shares outstanding, resulting in a market capitalization of approximately 1.65 billion euros. The company’s largest shareholder is Arch Capital Group (ACGL), which has a market capitalization of nearly $30 billion. Arch Capital has a stake of approximately 30%.
Unfortunately, the company’s website contains mostly ‘download only’ links, but you can find all the relevant information and documentation I’ll refer to at this page of the Coface website.
Strong results so far indicate that FY 2023 will be a good year
Although many French companies publish detailed financial statements only every six months, Coface publishes a detailed income statement and balance sheet on a quarterly basis.
Looking at the performance of the insurance company in the first nine months of the year, we see that Coface reported a total amount of 1.33 billion euros in gross written premiums, while total insurance income reached 1.19 billion euros.
Interestingly, the total cost structure remains under control and as you can see, even though the total amount of claims expenses has increased by a double-digit percentage, 462 million euros in total claims expenses is actually a fairly low percentage of total insurance income.
Of course, ‘attributed costs’ are also relatively high, and these are mainly G&A expenses related to claims handling and investment portfolio management.
After taking into consideration all these elements, the company reported total income from the insurance service of almost 244 million euros, a slight decrease compared to the result of the first nine months of last year. Fortunately, other income net of other expenses was very strong thanks to tight cost control (operating expenses increased by just over 2% while other income increased by almost 10% at just under EUR 230 million) and that was a big deal. help to increase income after reinsurance and other income to 290 million euros. Operating income was 273.4 million euros after deducting net financial expenses (related to investment income and insurance financing expenses). Coface also faced a tax bill of €59.4 million and a financial cost of €24.4 million at corporate level, resulting in a net income of €189.7 million. An increase of just over 2% compared to the first nine months of last year.
Since there are currently 149 million shares outstanding, the EPS in the first nine months of the year was approximately EUR 1.27 per share, and this indicates that the company is likely to be on its way to a full year EPS of at least EUR 1.60 per share. And since Coface has a payout ratio of ‘at least 80% of its earnings’, the dividend per share could very well be EUR 1.28 per share for a dividend yield of approximately 11% based on the current share price. Dividends paid in recent years were even higher than the EUR 1.28 I just mentioned for a high dividend should not come as a surprise. The dividend payable during FY 2022 was EUR 1.52 per share.
So what is the catch? Why is the stock trading at around 7.5 times earnings with an 11% dividend yield? First of all, it is a smaller insurance company focused on a particular market segment. Secondly, insurance companies across Europe have been hit very hard this year and while some have seen their share prices recover, others have not, and I think Coface belongs to that group. And finally, since the world economy and politics are very volatile, it is not unreasonable for the market to place a higher risk premium on an insurance company that focuses specifically on commercial insurance. Of course, it may increase premiums to account for increased uncertainty and volatility, but this may not fully cover the increased risks.
That said, Coface’s solvency ratio currently far exceeds the company’s own targets. At the end of June, Coface’s solvency ratio was 192%, as you can see below.
Since Coface has a target solvency ratio of 155-175%, the current solvency ratio still exceeds the company’s own targets, so there should be no problem maintaining a generous dividend policy.
At the end of September, the total equity value on the balance sheet was 1.98 billion euros resulting in a book value of 13.29 euros per share and even after deducting all intangible assets (155.5 million euros in goodwill and 77.8 million euro in other intangible assets), tangible book value per share remains stable at EUR 11.7-11.75 per share which means that Coface is currently trading at a mid-single digit discount to its tangible book value.
At the end of September, its investment portfolio of 2.94 billion euros consisted mainly of bonds, but Coface also invested close to 200 million euros in real estate.
While the quarterly update did not reveal many details on this investment portfolio, 63% of the bonds had a credit rating of A and higher. Only 5% of the bonds had a BB credit rating and below.
While I admit that the trade credit market is not easy to fully understand, let’s not forget that Coface has a long history in this sector and is currently the third largest player in the world (after Allianz Trade and a subsidiary of Grupo Catalana Occidente). Coface also recently dealt with a future maturity of a debt note after it issued €300 million of Tier 2 notes with a coupon of 5.75% and a maturity in 2034 to finance the maturity of the €227 million loan at 4.125% due in March 2024. This removes another major risk.
Given that the stock currently trades at less than 8x earnings, and given that we’re likely looking at a dividend yield of 11% (subject to the 12.8% dividend withholding tax in France), I think that a long-term position at Coface is guaranteed. I currently do not have any positions in Coface, but will likely initiate a long position in the next few days. First on the dividend, but I wouldn’t be surprised to see the stock move towards a 9-10x earnings multiple over the next 12 months.
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