OUTsurance Group Limited (SAMPO) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to today's conference call on the acquisition of RMI's holdings in Hastings. My name is Sami Taipalus, and I am Head of Investor Relations at Sampo Group. I'm joined on the call today by Group CEO and President, Torbjorn Magnusson; Group CFO, Knut-Arne Alsaker; and Chief of Strategy, Ricard Wennerklint. The call will feature a short presentation from Torbjorn followed by Q&A. We have a maximum of 30 minutes for the call today, so please limit yourself to questions about the transaction announced today. A recording of the call will later be available on sampo.com. With that, I hand over to Torbjorn. Please go ahead.

Thank you, Sami. I am pleased to be able to report that we keep up the good strategic pace of development from the last 24 months and that we have been able to acquire full ownership of Hastings Group in a straightforward transaction with RMI today, to RMI, the only other owner. I've got a few slides to introduce the transaction. We acquired the first 70% of the company in November last year. And in every respect, they have proved as good as expected or better. They have also kept the underwriting focus strong during the pandemic and not been tempted to go for uncontrolled growth in a period of beneficial claims environment. Our interaction with Hastings management team has in all situations been rapid and efficient. Thus, we have a very positive view on their culture, their performance, the balance sheet and also the potential for synergies. We reported on identified synergies so far after Q2 this year. And obviously, this transaction gives us the full value of these synergies rather than just part of them. In line with Sampo's other strategic developments, we like to reinvest capital in P&C and simplify our group structure. The move, of course, simplifies the collaboration within the group. It makes capital allocation more flexible and make sure that we can decide ourselves about any investments, developments or bolt-ons for Hastings in the future. Then when it comes to the acquisition price, we have now purchased all of Hastings at a price below 13x earnings, the total price per share is 278p. The EPS accretion from this last transaction only is 4%. We see a lot of potential for Hastings for the future, and they are very well placed to meet the turbulence that could occur next year in the U.K. market due to the GIP reform, and we see that as an opportunity. With the underwriting discipline, underlying all actions in Sampo, the downside is really very small. Hastings will stay a pure digital market segment insurer in the U.K. where they have been so very successful in the past decade, and they will not venture into other segments or geographies. We look forward to developing the company together with Hastings management and to report back to you on this next year. And with that, Sami, we open up for questions.

Thank you, Torbjorn. That concludes the presentation. Operator, we're ready for Q&A.

[Operator Instructions] Our first question comes from the line of Blair Stewart from Bank of America.

I've got a couple of questions. First is you talked, I think, when you did the last disposal of Nordea shares that you would continue the buyback program over and above the EUR 750 million that you've already got in place. So I just wonder what the latest thinking on that is, does this transaction effectively absorb the additional buyback capacity that you had. And secondly, now that you're in the full swing of buying in minorities, what does it mean for the top holding?

There's basically no influence impact on this -- from this transaction on the buyback program as such. And of course, we buy -- with the transactions we make, strategic moves we take are assessed individually and not in the swing of doing things rationale.

Thanks, Torbjorn. I know you said that the EUR 750 million buyback is unaffected, but you have also said in the past that, that will be extended. Is that still the case?

Knut-Arne here. We still intend to go -- propose to the Board to go to the AGM with the proposal for a mandate to an authorization to have the option to do a buyback also next year. Obviously, just -- the simple answer to your question that we do spend EUR 800 million on this transaction. So it naturally to consider that any buyback we will do of our excess capital will be EUR 800 million smaller. However, obviously, the EPS accretion from this transaction is compensating whatever would come from a buyback of a somewhat larger size without this transaction.

And the next question comes from the line of Will Hardcastle from UBS.

I guess really a simple one is what's changed versus initially desiring the relationship with RMI to both obtain the benefits. And then the second one, are you saying essentially that the maximum level of synergies has not changed. It's just you're taking a greater share or is there further optionality now to obtain greater synergies?

I couldn't actually catch the first question. We couldn't hear your first question. On the synergies, we -- today, we only say that, obviously, we will receive 100% of the synergies to the Sampo Group, and that's the only change. But it will, of course, be easier. We will be more flexible in the discussions going forward, identifying new synergies and implementing them. Could you repeat the first question, please?

Yes, that's absolutely. It's maybe just what's changed versus the initial desiring of a relationship with RMI to both obtain the benefit. So you're very pleased initially with working together. I guess what's changed in the meantime?

Well, we have always said that we would like to own 100% of the company and an opportunity arose where that could happen. So that's the only thing that changed. We had an arrangement initially for a long relationship with one that had an end point now that we were able to bring that end point forward quite a bit. So that was only positive.

And the next question comes from the line of Marcus Rivaldi from Jefferies.

I had a quick question, please, again, on the synergies piece. At half year, you talked about synergies and capital management including reinsurance optimization and internal financing of Hastings debt and the revolver. Were those synergies perhaps not fully available to you whilst you didn't own 100% of the group? And would they now be more easily achievable now that you do own 100% of Hastings? I'm thinking, in particular, of course, around debt instruments at Hastings, now that you have 100% control, are you able to capitalize the Hastings business as you would wish to without the interference of minorities?

It's Knut-Arne here. We don't announce any new synergies this morning, as Torbjorn just said. But needless to say, to have 100% ownership doesn't make it more difficult to both realize capital synergies and look for capital optimization across the Sampo Group going forward.

I mean just to -- so good use of word. But I was just wondering, would there been any impediments by having a minority holder to extract some of those synergies that are now removed?

No. I can't say that. But obviously, we would, going forward, be totally free to optimize the capital and capital allocation across the group and also the way that the solvency capital requirements are calculated in any part of the Sampo Group.

Maybe this discussion is a bit unnecessarily implicit. I mean if we were to want to do something that would cause synergies in Sampo Group, it is much easier if we don't have to take that to a Board with an external party with a strong ownership in that entity. And that holds for any activity or a system or process. And then to Knut-Arne's point, capital, same thing. If we were to find something, let's say, a home insurance portfolio in the U.K. that we would like to acquire and then we don't have to ask another buyer to support that with capital in that process. It's going to be much easier. It's early maybe, but yes.

[Operator Instructions] Our next question comes from the line of Faizan Lakhani from HSBC.

I had some very simple questions. So one, does this change the policy around upstream dividends from Hastings? Secondly, when I look at the -- you provided a guide in terms of how this compares to the deal versus sort of consensus is 2022 P/E. But when I look at the operating ratio the consensus has is well below your target range. Is it the case that if we were to apply to your target range that the deal is probably not as valuation sort of friendly. Would that be a fair statement? And finally, on one of your slides at the half there, you mentioned the re-rating effect when you compare Hastings versus as closest to U.K. motor peers. But when you look at the price of the likes of Sabre and Direct Line of the past year, how does that deal comparing your mind given where its peers are trading at right now?

All right. I'll take the dividend. There's no material change. They are thinking around upstreaming of dividend from Hastings. We're comfortable, obviously, with reinvesting some of the profit that Hastings generate in the business to grow that business going forward and leave a bit of that profit of on Hastings balance sheet to do so. So no material plans to significantly change Hastings current dividend setup.

And on the peer review, if you look at Sabre and Direct Line, I don't think they are really peers to Hastings. Those are very different businesses. So I don't really see their valuation as a good comparison to this one. Admiral, obviously, being the company that is closer to Hastings in the type of business they write.

And if I were to take -- I think you asked about the EPS accretion and consensus. We used the consensus numbers. We haven't guided specifically for a decimal on Hastings' profit. I don't think there would be a material difference in the numbers we published this morning, whatever set of numbers we were basing that conclusion on. The EPS accretion from Hastings is at least as high as for a share buyback. And then, of course, it would always also -- you also need to make some assumptions about where the Sampo share price would be going given our ongoing buyback program, and we haven't made any such assumptions just used current share prices.

And we have one more question from Tryfonas Spyrou from Berenberg.

I just had a question around capital. Will owning 100% of Hastings allow you to eventually move to sort of a group partial internal model and benefit from capital requirements? And if the answer is yes, could there be more synergies on this topic when eventually looking at taking the remaining minorities of Denmark from a solvency point of view?

This is not -- this is probably the most difficult Q&A that we've ever had because the sound quality is a bit difficult. But Knut, I think you got the question.

I think I got the question. Thanks for the question. In our business case around Hastings, we haven't included anything around an internal model for Hastings. Obviously, as we now are a P&C group. And when we own 100% of P&C businesses, it is clearly easier to manage capital across the group and calculate capital requirements on a Sampo Group level according to model, which we find appropriate. But an internal model for Hastings capital requirement, you shouldn't expect this is happening overnight, so to speak. But the governance that we know will have with Hastings makes it easier to have such thoughts since an internal model is more than just a technical instrument. It's also the use test and governance structure that we have around the business.

And as there are no further questions, I will hand it back to the speakers.

Thank you, operator. This concludes our call today. Thank you all for participating, and we look forward to speaking more to you in the near future.