Mandatum Oyj (MANTA) Earnings Call Transcript & Summary

Good afternoon, and welcome to Mandatum's Full Year 2023 Results Audiocast. My name is Lotta Borgström. I head Investor Relations here at Mandatum, and I am pleased to be joined by our CEO, Petri Niemisvirta, Chair Board, Patrick Lapetelinan as well as CFO, Jukka Kurki. During this audio cast, Petri Niemisvirta will initially walk you through the highlights and key developments of today's report, after which Jukka Kurki will make a deep dive into the key figures and the reasoning behind them. Finally, we'll have a Q&A session during which you have the possibility to dial in for any questions. The audiocast results presentation is presented by today's speakers. In addition, you can find the even more detailed investor presentation on our website, www.mandatum.fi. With these remarks, I'd like to hand over to Petri. Please go ahead.

Thank you, Lotta, and welcome, everyone, to Mandatum's full year results presentation. Let me start with our Q4 numbers, after which I will touch on the full year numbers, and then I will go deeper to our business. Jukka will dive more deeply into our results in his presentation. The Q4 result was solid despite the decrease in interest rates. A really good sales activity together with the consistently high level of customer satisfaction contributed to a strong net flow during the last quarter. Our product offering was well suited to the market environment during the year and Q4 was not an exception. So there are no signs of weakening demand for our products or services. The cornerstones of our business during the last quarter were our own highly active and competent distribution, a strong product offering with a good market fit and very high customer satisfaction. They all gave us a good momentum during the Q4. Mandatum's result for the full year 2023 was excellent. When we look at the numbers, I'm really pleased with the fact that all the result components contributed to the growth. So not only the net finance result but also the fee result and the risk result were at a very good level. As we have stated earlier, one of our most important target is the net flow. In 2023, we reached the all-time high number in net flow over EUR 750 million which is 7.3% of our assets under management. That is well above our 5% annual target. Also, our growth in our Client assets under management year-on-year was 15%, reaching EUR 11.9 billion. That is a record high number as well, which gives us a good starting point for growth in 2024. The Board's dividend proposal is EUR 0.33 per share, which is in line with the company targets. It is important for us to be a good dividend payer also in the future. If we look at how our assets under management developed last year, we can see that we started from EUR 10.3 billion at the beginning of the year. Our total inflow was EUR 1.7 billion, most of which was new sales. Our capability to gather money and new customers was extremely good last year. The outflow was EUR 1 billion and positive market movements, EUR 0.9 billion. Assets under management in total, ending up to EUR 11.9 billion. The highest growth in assets under management as well as in the net flow came from the institutional wealth management business, while all client segments contributed to the growth. The 21% growth in assets under management within the institutional and wealth management segment is something that I'm really pleased with. The corporate segment's growth in net flow was steady, 4.6%. I want to underline that even though the corporate segment's growth is not at the same level as for institutional wealth management, its role as a feeder is really important. Last year, 75% of the Wealth Management division's new sales came through the corporate clients. The net flow in the retail segment remained negative. The good news is, of course, that the assets under management in this segment increased by EUR 200 million, even if the growth was driven by market movements. As I mentioned earlier, the growth engine in our strategy is the institutional wealth management business. Inside that business area, all client segments grew with double-digit numbers. The biggest growth came from our newest subsegment, Ultra high net worths, both in purchases and in the euros. Then over to different product areas. Our main focus last year was on credit products, where the growth was extremely strong, 67%. I'm also happy that our allocation products has positive net flows in every quarter during the year 2023. When it comes to the fee income, we can clearly see that the growth area last year was once again institutional wealth management segment that grew by EUR 4 million, whereas corporates and retail segments were more stable. Despite the fact that most of our sales force related to credit and fixed income type of products, our fee income margin came down only by 3 basis points, meaning that we have had good discipline in our pricing. That is also one of our financial targets. And now over to you, Jukka.

Thank you, Petri. So let's dive a bit deeper into our results and other financial figures for last year. Q4 result was EUR 46 million, which I call solid, especially when taking into account significant movement in discount rates, which increased the cost of liabilities. Full year result was excellent EUR 210 million, which comes mainly from the net finance result, but all other result components were also higher than in previous year. Q4 fee result was EUR 13 million and full year result EUR 53 million, both clearly higher than in the year before. This is partially explained by higher AUM, but also from higher CSM release and recovering of previous year loss component. Good to notice that in addition to this unit-linked pension policy with CSM increased by EUR 60 million. This, together with EUR 1.9 billion higher AUM means that we could, in the normal financial conditions, we expect few result to increase. Q4 risk result, which is not presented in this slide, was EUR 8 million and full year result, EUR 18 million, both higher than previous year results. Good to notice that full year risk result is clearly above normalized expected results, and this is mainly because of higher CSM and risk adjustment release, which is partially explained by the sale of if-portfolio. Year-end CSM related to risk policies is EUR 129 million, and we expect around 10% of this to be released annually through profit and loss. When it comes to net finance result, interest rates have gone up and down between quarters, but the investment return has been positive in each quarter and also net finance result has been clearly positive in each quarter. With-profit segment's asset return in Q4 was 4.1% and cost of liabilities were EUR 144 million, including EUR 116 million cost related to increased discount rate. Q4 result was below previous year, excellent Q4, but cost notice that year 2022 result was much more volatile between quarters compared to last year. Full year result, EUR 149 million is clearly above our previous year result. No surprises when it comes to with-profit liabilities and no material changes in runoff profile. Discount rate movement caused some volatility here, but portfolio behind these liabilities is decreasing as we have expected. On the right-hand side, you see material movement in discount rate during last quarter. One year rate rate is now 3.4%, which is also the unwinding cost for current year. This means totally a bit less than EUR 80 million unwinding cost for year 2024. Original portfolio's fixed income asset mark-to-market yield is 5.7%, which means that the spread between mark-to-market yield and unwinding cost is more or less the same as it was before. And then solvency, notice that all components related to separation and asset transfers between Sampo and Mandatum are now included into our other solvency position. So no separate pro forma figures anymore. Solvency ratio 221% decreased by 15 basis points since September pro forma ratio. Main reasons behind solvency ratio movement is increased symmetrical adjustment which increased capital charge of equity, private equity and private credit assets. Other material component that had impact on solvency ratio is dividend, which is now fully deducted from own funds and which was also higher than anticipated in September. All in all, solvency position is strong. Last quarter, organic capital generation was EUR 37 million, which is less than in previous quarters. Capital Light segment did generate well capital also in Q4 but group of it's segment generated less capital that in first 3 quarters. Full year organic capital generation, EUR 270 million. Around EUR 130 million of that comes from own funds generation meaning that we could create EUR 130 million higher result -- excess results compared to expected result that is already included in solvency II own funds. Majority of that comes from the net finance result. Capital requirement decreased by EUR 70 million due to business evolution, which means that EUR 140 million capital was released if assuming 200% solvency ratio. And Petri will continue with the financial targets. Please Petri.

So to conclude, I'm very pleased with our first annual result as a listed company. We are on the right track with our business, and we performed in line with our financial targets. Our core competencies are valid in the current business and market environment, and we have laid excellent groundwork for continuing our first full year as an independent listed company. This was all from my part. Now let's move on to questions and answers.

[Operator Instructions] The next question comes from Jakob Brink from Nordea.

Have 2 questions, please. The first one is related to the net growth or the net flow in the capital light business. As you correctly mentioned, it was fairly strong for the full year, above 7%. But if I do the math for the second half, it looks to be just around 5%, which is in line with your sort of longer-term targets. Is there any reason for this decline in growth in the second half of the year? And especially the retail segment is a bit more negative than at least I had expected. It could be nice to get some more color on that, please.

Yes. Thank you, Jakob. Petri here. So I guess the main reason is still the seasonality as we stated after Q4 results. So the latter part of the year is somewhat weaker because of there is a Q3 on that part of the year. And the Q3 net flow was normal compared to any other year before, but it includes the July, August. And I guess, going forward, it will be in the future the weakest quarter in a year because of the seasonality and the holiday season. So that's the main reason for that. So it has always been weak because there's just no business on that much on that quarter.

And there is no sort of signs of I think some of the larger banks have mentioned this quarter that clients are taking more public funds and less sort of private funds. I know you have a public offering as well, but I was just wondering if you maybe see clients taking money into more deposits or other public funds with other providers?

We haven't seen any softening in our business for our products and services. And so no signs of that in Q4. So Q4 was really like normal, like Q2 and Q1 when it comes to demand of our production services.

Fair enough. Then my second question on the hedging of liabilities in with profit segment. I was just wondering now, of course, Q4 was quite turbulent with a massive drop in long rates. But I was just wondering if, of course, being an independent company that have been part of the Sampo Group would maybe make you, what should we say, we consider the hedging strategy to maybe take out more risk? Or are you still happy with the current hedging profile, even though it does impact solvency quite a lot when rates comes down.

Thank you, Jakob. This is Jukka. Yes, we are still happy with our current plan, and we have no plans to change that. And we have presented our hedging ratio in the comprehensive investor presentation and now hedging ratio is around 70%, and we are happy with that one.

The next question comes from Hans Rettedal Christiansen from Danske Bank.

I was just wondering on -- or 3 questions from my side. I was wondering on the asset classes that you have in the original portfolio. And looking into 2024, if you have any plans sort of increasing the equities or other asset classes during 2024 relative to the credit that you've had growing in 2023? That's my first question. And then on the second question is on the breakdown of the SCR that you provide where the market risk component is increasing quite a lot this quarter. So I was wondering if that's just related to the balance sheet transactions that were done between the quarters or if there's anything else sort of underlying there? And then my third question is on your Solvency II ratio sensitivity where you're providing a sort of 2 new sensitivities on the bottom of the table there and on the equity component and the symmetrical adjustments. So I was just wondering what -- if you could explain these 2, and you're thinking behind including them. That's all for me.

It is Jukka. So first one, we don't have any material plans to change our fee profit portfolios, asset allocation, and notice that when it comes to group level, we still have those [indiscernible] So we have some equity risk anyway, even though that we have been decreasing equity risk inside with product portfolio a lot, so at least at this point, we have a clear plan to continue in the same way as we have done during last year. And then second one, main reason for the increase. If you compare the pro forma figures at the end of September and now these official figures, which are comparable solvency ratios. Main reason for the increased capital requirement is the symmetrical adjustments, which increased the capital charge related to equities, private equities and also private credit. And then third one related to the sensitivities. Now you are referring to actually Page 26, when it comes to this comprehensive presentation. So yes, there we have two new sensitivities and those which are in the bottom ones. First one is the base case, so what would our solvency ratio be if symmetric adjustment would be 0? So that is -- that shows that, okay, symmetric adjustments at this point because base solvency ratio is 221%. So if symmetric adjustment would be 0, then our solvency ratio would be 226%. And the reason why we wanted to show this is that because symmetric adjustment, anyway, creates some volatility, some could say artificial volatility into our solvency ratio, you wanted to show also what is the base case if symmetric adjustment is 0? And also to show sensitivity related to equities, if there would be no changes in symmetrical adjustment or -- so then you would see that, okay, what is the equity? What is the impact on the equity drop if symmetric adjustment would not buffer that type of stress.

[Operator Instructions] The next question comes from Jaakko Tyrvainen from SEB.

It's Jaakko from SEB. Regarding the international institution AUM, I reckon that came down a bit during the quarter during the fourth quarter. What was behind this? And what is the overall international other than the management, at the year-end?

So can you repeat the latter part before I answer the whole question?

Well, the overall international assets under management in the year-end is that this -- that only in the institutional international AUM that you gave out on your slides? Or do you have elsewhere, international?

Yes. Petri here. So yes, it's -- there's nothing special behind it. Small changes, our international business. So nothing special to your first part of your question and -- so this international institutional is our international as under management because we are only doing business outside of Finland with the institutions. So there is no assets under management somewhere else.

Okay. Fair enough. Perhaps a few words on your cost and your -- what you're kind of budgeting in terms of costs, looking at 24, -- are you -- what kind of inflation you are seeing? And are you planning material increases in your resources?

Jaakko, this is Jukka. So I see that when it comes to listing and consequences on that, we have done majority of our -- again, we are not any additional plan to increase our resources due to that, okay, you all know that Matti Ahokas is joining us, but that's more or less only things that we have left at this point. And yes, we have been focusing on growth for years already. And now it's also time to focus also on the efficiency of our projects and so on. So we will take a look also like expensive. And to be able to -- okay, that's also another focus area for this year definitely.

Okay. Then my final one. I'm not sure whether you already described this, but could you explain the key factors impacting the CSM release in the with-profit segment? And what should we expect going forward in terms of the with-profit CSM release?

Yes. We -- this is Jukka again. So we made -- once in a year, we update our cash flow projections related to all portfolios and during -- and we did that during Q4, and that actually increased our unit in CSM and but that decreased also more or less in the same -- with the same amount with-profit CSM. But part of that was released through profit and loss. So that element in our result is something that you cannot expect to continue next year. So remaining CSM, when it comes to with-profit portfolio is EUR 9 million. and we expect around 10% of that to be released during coming years. So that is the best estimate when it comes to that part of our results for this year and for coming years.

The next question comes from Jan Erik Gjerland from ABG Sundal Collier.

I have a couple of ones, if I may. Do you have any news on the P/E stage you took over from Sampo any pipeline or how we should think about that for '24 or '25? Secondly, you mentioned that the expansion into Sweden and Denmark is going as planned. When should we expect assets under management or net flow to increase positively from those 2 countries? Or how much have it contributed during 2023. The retail asset under management is down, as I said, what should we think? And how should we expect or model that going forward? Should it still be a small decline or is it sort of going to be stable in year-over-year? Then fourthly, you said in your disclosure that you have either sold or it's about to sell anything on the If P&C portfolio on the risk side. Is that already happened or should we expect the risk result to be done lower into 2024 after the sale? And finally, the revenue yield with hedges on the with-profit portfolio. Could you give us any insight to that?

Jan Erik. It's Patrick here. If I understood correctly, your first question was the same from P/E from Sampo, was that the question?

Yes, you have sort of taken over 2 P/E stakes, which you have put on your book. So how should we think about them going forward? Is it something you consider to sell during this year? Or is this something that you just want to keep until it is a better momentum to do either the 1 on 3 or 1 or 2 or the Saxo Bank?

Yes, of course, that's subject to market conditions. And of course, as we pointed out, Saxo is the big one. That's EUR 300 million. And of course, we have also other shareholders in Saxo as we are the third largest owner with 19.9 percentage. But of course, we have stated clearly that we are seeking an exit pattern that as soon as possible as the subject to market conditions and, of course, taking consideration to the other -- who knows. Then there are other smaller ones that people sell them, and it's a good time. But everything is for sale.

Yes. And Petri here, I will take the question # 2 and # 3. It Is international part of our business, meaning Sweden and Denmark. As you know, we don't have any substantial amount of own distribution or own people in Denmark or Sweden. So we have sustain a early stage of our path there. So we are looking at carefully what shall we do in order to speed up the growth in those areas, but we are happy with this. The resources and investments we have put in those markets at this point our growth in -- during the last year in Sweden and Denmark. And when it comes to retail side and its assets under management, as you know, it's mainly Danske Corporation and the portfolio from Danske Corporation. The question was how we should think about, is it growing, declining or being stable, I guess, the right prognose or forecast might be to look at it more stable. So there is -- there has been lately quite a negative trend in sales, but also the customers -- the outflow is quite small. So as we have seen last year was EUR 75 million negative net flow, but it, of course, the asset under management growth because of the market movements. So more or less the stable in -- might be the right answer to that question.

Can I just have a follow-up on the cost side on the international expansion because I think Jukka said something about -- or asked about the cost side. How should we think about your sort of investment or costs in these 2 countries into 2024? Is this ought to be extraordinarily high? Or is it going to be taken as an investment and written off over time? Or how should we even think about your sort of investment or cost allocation to those three areas into '24 and '25.

We will definitely -- I said that we will be careful when it comes to cost for this year, and we will focus also on those areas. But of course, we recognize what our focus areas and where we want to grow. So -- but we don't have any exact investment plan when it comes to those areas at this point.

Yes. And if I may add, it's -- we are going forward with this existing plan, what we have had. So quite modest investments to our distribution locally. So we have only 3 people in Stockholm and no one in Denmark.

Fourth question that was related to risk portfolio. So we expect that is that is agreed that deal, but not yet closed. We are expecting that closing will be in Q3 or Q4. And -- but that is already taken into account in our profit and loss. So remaining CSM related to that portfolio is around EUR 7 million, and that will be released until the closing during this year. And we have also disclosed and I also mentioned other remaining risk policies, CSM, and that was EUR 129 million. And that is -- that do not -- that do not include If-portfolio. And then I partially missed your questions 5?

The running yield in the with-profit book on your asset side because you add this hedges or the swaps or something. Is it so that the running yield is higher or lower than the market we can observe in the marketplace. How -- just please tell me how I should think about the hedges on the cash flow profile, which you have shown us in the presentation.

Okay, you mean that cash flow profile. So everything is calculated and recognized through fair value at the fair value through profit and loss. So to be honest, I don't even know what is that kind of running yield for our fixed income assets, if running yield is something that you mean acquisition yield. So -- because everything is recognized at fair value. So -- that's why we are only disclosing this mark-to-market yield. Then I, Okay. So what is the impact on hedges that is included in this mark-to-market yield already. So of course, when interest rates are decreasing, then hedges are helping us -- helping us to defend a higher mark-to-market yield.

Jan Erik, it's Patrick here. But just to describe the nature of it, so it's really playing vanilla when you look. So we are paying floating 6 months and receive fixed.

The next question comes from Thomas Bittedbro from Detanian Corporate Finance.

I have a question regarding the change in assumptions in the -- in CSM regarding the with-profits. In the past, we have seen some gains from the longetivity reserves. And now we see that it seemed that you have reversed assumptions towards the longer longevity. So I would like to have some more flavor on that and also on the change in operating expenses that you apply in the cash flow

Majority of that movement in with-profit liabilities and hasn't changes that was related to expected future expenses, administration expenses and more or less the same amount than with-profit expense -- expected expenses increased more or less same amount unit linked pension policies expenses decreased assumed expected expenses decreased. So that is -- we updated our costs and cost allocation. So that is the main reason. And did you have another question also? I missed that.

Yes. I think it was more on the assumptions regarding mortality because in the past, we've seen some gains related to the longevity reserves that have been reduced. But now we see that the assumptions trend towards the longer longevity. So I would like to understand that effect and why it's been changed now in the Q4.

Well, actually, we haven't changed our longevity assumption this quarter, at least nothing material in that area. And also longevity result is -- so the actual mortality related to with-profit portfolio that is very well in line with our expectations. So I don't recognize that kind of changes into our cash flow assumptions.

That's -- I'm referring to the Page 37 of the presentation, where it's mentioned that assumptions related to mortality have been changed.

Okay. So that is part of our process that we annually update our assumption. But the main change is related to expenses, not mortality. There is on a very small changes in that area.

So thank you for your attention today. Please do not hesitate to reach out to us at Investor Relations, should you have any further questions. With these concluding remarks, have a pleasant day. Goodbye.