Sampo Oyj (SAMPO) Earnings Call Transcript & Summary

Welcome to this call on Sampo Second Quarter 2020 Results and on the bid on Hastings that we have disclosed this morning. I'm Jarmo Salonen, Head of Investor Relations at Sampo. And I have with me at this call, our group CEO and President, Torbjorn Magnusson; group CFO, Knut Arne Alsaker; Chief of Strategy, Ricard Wennerklint; and CEO of If, Morten Thorsrud. We'll start with Torbjorn's presentation and then open up for your questions. Let me remind you that you can follow this on sampo.com/result. You can actually see Torbjorn's slides as well and a recorded version will later be available at that same address. That's all from me now. I'll hand over to Torbjorn. Torbjorn, please.

Thanks, Jarmo, and welcome, everyone. Sampo has performed well during the COVID-19 period and all our business have been able to run smoothly and remotely, continuing to develop and produce good results. This is not least, true for the biggest part of our group, If P&C, but I also think so for our associated bank, Nordea, which recommitted to the 2022 targets in their Q2 report. Overshadowing this today is our offer together with the South African company, RMI, for the U.K. motor insurer, Hastings Group, so I will spend my introductory words on this only. Hastings Group, as you will know, is a leading P&C insurer in the digital distribution part of the U.K. retail market. The company is focused on and optimized for the segment and has been developing well over the past decade. This segment has, in itself for a number of years, been a growing one and Hastings has operated there with an average combined ratio of 91.5% over the past 5 years since the IPO and the average growth in number of policies over the same period has been 9%. And the company has, at the same time, also made substantial investments in modern technology. The offer is made in partnership with the now largest shareholder, Rand Merchant Investments, RMI, a South African financial services investment company holding almost 30% of the shares. We have spent a lot of time together with RMI and share similar views on how to create value in non-life insurance, on governance and on underwriting, amongst other things. If the bid is accepted, we are to own 70% of the company and RMI, 30%. We also both believe that Hastings can develop more rapidly in a non-public setting. The execution risk for us is limited by this fact, that we're acting together with the largest existing shareholder, and it is further minimized as we do not expect operational integration and that the Hastings management team is a motivated and really strong one. Sampo is an insurance company, and we have for some time, viewed non-life insurance with strong underwriting scales as a business model that is quite resilient to the low interest rate environment or even to changing interest rates. Allocating more capital to this line is also based on our team's wealth of general insurance experience and our assessment of the Hastings opportunity is an unusually positive one. The valuation of Hastings will be an attractive one just by meeting the company's own loss ratio target. The offer price is 250p per share, which is a premium of 37% to the 3-month average until Wednesday last week and 35%, if you instead make that date, July 9, the day before one of the biggest owners slowed down. This corresponds to roughly EUR 1.3 billion for our part, and the offer is unanimously recommended by the Hastings Board of Directors. This is a sizable acquisition for Sampo. However, relative to Sampo's total size, the EUR 1.3 billion only constitutes some 7% to 8% of our present market cap. Transaction is to be financed partly by internal cash and partly by hybrid Tier 2 capital. And we expect the solvency ratio to stay robust at 175%, no change to the dividend policies necessary. And of course, in longer term, we expect the deal to contribute to Sampo's dividend capacity. I have already talked about the rationale for this a bit. The knowledge and technology fit between Hastings and Sampo is an unusually good one, with similar cultures and possibilities for learning and usage of each other's capabilities. They are in pure non -- pure-play non-life insurer in a growing segment of a large Western European market with leading digital and data analytics capabilities. And we are able to do this with very limited risk. Financially, to the right-hand side of this slide, we expect some small savings from withdrawing the listing. We expect our focus on underwriting to support strong loss ratio development, and we will explore possibilities to keep more of the insurance premiums in Hastings for our own account. We expect the deal to be EPS accretive from the first year, and return on equity invested is to be very attractive given our expected fund and costs -- funding costs and the expected trajectory of Hastings earnings. Hastings' business model is, as already mentioned, a motor-focused U.K. insurer, where data-driven risk selection and modern technology are competitive advantages. The digital distribution part of the U.K. market is still growing, and Hastings has not yet, to any significant degree, grown in home insurance. These are opportunities that remain to explore for this company. Maybe one more and final slide. This slide shows Hastings' growth and combined ratio since the IPO in 2015, a slide that I think substantiates my comment at the beginning of this introduction about the performance over time for this company. And with that, I think we should open for questions, Jarmo.

Thank you, Torbjorn. And operator, we are now ready for the questions.

[Operator Instructions] Our first question comes from Youdish Chicooree from Autonomous Research.

I've got 3 questions, if I may, please. The 2 questions is really on the strategy. You tend to have a strong market position in all markets you operate. Your market share is like 18% or above. So should we assume your ambition in U.K. P&C to become a top player? That's my first question. Secondly, your geographic expansion in the year, into the U.K. market is quite a surprise to many of us. So I was just wondering, which other markets and countries are of interest to you? And then finally, just wanted to check something. In terms of the solvency impact of this transaction, is it right that this transaction is costing you 32 points of solvency capital? Those are my questions.

I'm sorry, would you mind repeating the first question? I don't think any of us could hear it here.

Okay, sorry. So I was talking about in terms of your ambition in the U.K. P&C market, because you tend to have strong market positions in all the markets you operate, so share is usually 18% or above. So are you planning to become like a top 3 player in the U.K.?

Right. I'll give you some thoughts on the first questions, and maybe Knut can talk about the impacts. Sampo's current strategy certainly includes allocating more resources to P&C insurance, the field where we have the most expertise in the management team and where we have the most experience in the company. We have talked for some time about the possibilities to expand into other geographies. And the U.K. is, of course, a large market where we have pure-play P&C insurers. It's a digitally savvy market. It's a market where if you look at separate segments like the digital distributed segment, you have peers to Hastings, Hastings itself and peers that have been successful. And furthermore, of course, the U.K. is a market which is culturally and language wise, easier for us to relate to. So that was the high level version of why the U.K. was of interest to us. And then, of course, I, in some of the slides, described the strengths of Hastings in this market and how -- and the fit with ourselves; with the market possibilities that they have; the best-in-class abilities in data analytics, digital; and the low execution risk that this opportunity holds for us.

Youdish, could you repeat your question on the solvency impact as well? I didn't...

Yes. How much is it costing in terms of solvency capital? I know you've disclosed the pro forma ratio, but that is after you raised an extra EUR 1 billion of debt. And it seems that this transaction is costing you roughly like 30 points of solvency capital.

Yes. If you take -- what we've said is post the Tier 2 transaction of EUR 1 billion, the pro forma solvency ratio would be approximately 175. If you take EUR 1 billion, Tier 2 of additional own funds and apply it to our Q2 SCR of just above EUR 5 billion, that would be around 20 percentage points, meaning that Tier 2 transaction of EUR 1 billion would add approximately 20 percentage points to our solvency ratio as of Q2.

Okay, fine. I think I'll take that in front of you because I probably need to clarify some more detail.

We have difficulty hearing you. Could you repeat...

Sorry, sorry, I think I will take that off-line.

Our next question comes from Michael Huttner, Berenberg.

I hope you won't be disappointed by the question. Well, well done for the audacity of your move, if I may describe it like that. Three questions. One, I think relating pretty much to the previous question and kind of how much do you want -- do you think Hastings can grow, will grow? Because I mean, as you said, relative to Sampo, it's actually quite a small business. And it seems -- to me it seems trades, given you're a big player in big -- in small markets, suddenly, you're becoming a small player in a big market. So that's -- how big do you want to become in the U.K.? The second question is, I think in the offer kind of background, there's an option for RMI to go from 30%, which was their share of the initial transaction to 40%. And I just wondered if -- why is that there? It seems weird if you want to control and own Hastings to kind of -- and maybe the last question would be on synergies. And maybe you can talk a little bit more about both the cultural synergies in terms of exchange of data, whether is it more you intense profit from Hastings or they can profit from you? I wouldn't -- I'm not sure -- and also on the reinsurance side. And well done. It's nice to see deals.

Thanks for those kind words. How much can Hastings grow? Well that's a question that we don't even an answer for our present in non-life insurance holdings. But we certainly see upside from realizing the management plans that are there. A small player in a big market. Well in a way, but Hastings is #6 in the overall U.K. motor market. But as I tried to point out in my introduction, they operate in a subsegment of this, the digitally distributed part. And as any part of any group, we will attempt to be successful and grow. On RMI, we have tried to formulate a long-term partnership with an agreement that contains the compromise of the objectives of both parties, and we are very happy with the fact that they wish to do this together with us, and the conversations that we've had. Again, as I pointed out, it's been it's been very easy and very enjoyable to discuss value creation in a P&C setting with them. Reinsurance, obviously, this company seeds a very large proportion of its premiums in -- to reinsurers, something we need to explore whether that is a potential synergy that we can change.

And then there, I could also add on the synergy part. I think today, in the P&C insurance industry, it's more important about synergies of skills and technology insight than synergies of scale. And obviously, Hastings, and If has a lot of skills and technology insight that we can share within areas such as underwriting expertise, data and analytics, digital distribution, claims handling and so forth.

Our next question comes from Blair Stewart, Bank of America.

And I hope you can hear me okay. I've got 3 questions. Torbjorn, I thought it was interesting that you described the results as overshadowed by the Hastings deal. Interesting disruption. And the share price reaction would -- over the last few weeks, we tend to corroborate that. Anyhow, that wasn't the question. Firstly, do you think that your presence in the U.K. market can change the fundamentals in the way that you did in the Scandinavian markets. In terms of having a more concentrated share of the market within the hands of rational players? And just from a growth perspective, [indiscernible] through the press comparison website's price is absolutely key, which might be slightly different from the Scandi market, but you tell me. Is there any other way to compete other than price? Secondly, you described Sampo as an insurance company. You could also describe it as a financial holding company because you do have private equity stakes and a significant stake in a bank. And I wonder, as you reflect on the relatively poor performance of the shares over the last few years, is that something that you look to address and actually, the common insurance company, wholly focused insurance company? And thirdly, a question on leverage. The leverage goes up to 33% under your measure. Is that a number you're comfortable with or should there be or will there be a plan to reduce leverage in the coming years?

Yes, you're right. Maybe I should have talked more about its record-breaking combined ratio or actually, the quite good performance of all parts of the group. But I decided to do it this way. Change the fundamentals of the U.K. insurance market, that is not part of this story. It would be lovely, wouldn't it? And then the reflection on what we are. Well, we -- the biggest part of the group is non-life insurance. And now we're taking 1 more step -- trying to take 1 more step in that direction. And that is what's happening today. I think I have commented maybe enough on that in -- over the past 6 months. Knut, leverage.

Yes, you're right. We recognize that leverage ratio will be a little higher than our historical average, although below 33%, which you point out, both S&P and Moody's have confirmed our credit ratings, where leverage is a key aspect of the evaluation. They are comfortable with our current rating, and we are also comfortable with our pro forma leverage ratio. However, we have no plans at all to raise more debt going forward which means that over time, it will be more natural to see that leverage ratio go down from the pro forma Q2 level.

Okay, can I come back on just the first questions, perhaps I didn't ask them well enough. But on the U.K. insurance market, do you think you can achieve what you're looking to achieve through only owning Hastings? Or would you -- I think coming back to the very first question on this call, you're accustomed to operating with high market shares, which you don't really have in the U.K. as yet. I just wonder if Hastings is enough to fulfill your ambition. And coming back to the structure of the group, is there a desire from the Board to simplify the structure of the group in the future?

Our ambition is to be successful with Hastings in their development going forward. And as I said, we believe that there is an upside from realizing their existing plans. Our ambition is not to change the U.K. market from this move. So what we are looking at here is limited to the offer for Hastings together with RMI. You mentioned quite rightly that price is fundamental to the choice of insurer in the U.K. market, and there's a lot of focus on that. However, I don't think there's any market in the world where price is not the most important or one of the most important parameters for the choice of your insurer. But it has -- it is very pronounced in the U.K. market. And maybe there are things -- the markets are different, maybe there are things that we will take with us from the U.K. market and more insights there -- from there. And maybe there are work -- there's work that we can do on, for instance, retention levels from the Nordic markets to bring there. That remains to be seen when we start to work. On the structure of the group, let me maybe add 1 comment to your original question, the PE stakes, as you call them. We don't see them as strategic, that's part of the investments in the holding company, but that is not a strategy that we are following anywhere.

Is there a desire to simplify the group, Torbjorn?

I wouldn't express myself that way. We have a strategy currently to allocate more capital to non-life insurance. We are trying to do that with this offer that we're discussing today and that is a good step in that direction. The PE stakes, we have talked a lot about in the past and we will, of course, try to make them succeed but that is not part of the strategy. It's because of the fact that they are in the holding company that they have been so much in focus, nothing else. And well, there we are.

Our next question comes from [ Jonas Sickler ] from [ Medishore ].

Hopefully, you can hear me fine. I have a question regarding the net interest-bearing debt on your supplementary information, Page 76. So we are basically seeing a declining trend in the interest-bearing assets and the particular, in the liquidity buffer plus fixed income line. And at the same time, the subordinated loans remained stable for roughly 4 quarters and the gross, been roughly steady decline for the last 4 quarters. So the result of that is that the net debt is in a somewhat steady incline, actually. So I'm asking you a little bit, do we have to be concerned of the growing net debt, somewhat growing net debt, while at the same time, the gross debt is in a steady decline, especially when you consider the upcoming Hastings acquisition that you have. And the second question, could you elaborate a little bit on that? What are the main drivers concerning the growing amount of net debt in Sampo's capital position?

As I mentioned, we are comfortable with the pro forma leverage ratio. That will be below 33%. So other rating agencies, we neither see any problem at all to service our debt, our sort of debt service ratios in terms of our income and liquidity to the holding company where the majority of our debt is very strong. And that's also recognized by the rating agencies in one of their many measures when evaluating the credit profile and financial strength and financial flexibility of the group.

Our next question comes from Michael Huttner, Berenberg.

All right. Sorry about that -- well, sorry. So I had 3. One is if you need to focus on Hastings, what is the risk that you might take your eye off the ball a little bit in the Nordic market? And here, what I'm thinking is no competitor is going to -- they're all going to be thinking of how can we boost our own digital, et cetera, while maybe you're focusing on what Hastings is doing. The second question is, and you kind of alluded to it, but is there -- can you set a -- if we were to assume that the debt rolls off according to the maturities that you have, when would we get to below 30%? And then the final question is, maybe since you are justly proud of the results of If and you improved the guidance to, I think, 82% to 85%, so by 2 points on the low end. Maybe you can talk a little -- you can help me and explain what's changed so much that you've changed the guidance by 2 points, which is a huge amount.

I'll take the first one and our eyes off the ball in the Nordic market. That will not happen. We fully understand that the success of Sampo is, to a large degree, dominated by the combined ratio, are Nordic P&C operations. But also, over time, we have had a situation for many years. We have fostered a large group of really strong insurance professionals. And we have the traditional, as you may have seen today, way of incentivizing this group of individuals and professionals, which, I think, make sure -- makes sure that there's no way that we are going to lose the ball in the Nordic P&C market.

Again, on the leverage, the maturity profile of the debt in the group is well spread out over the next 10 years or so, with the debt that we currently have on the balance sheet. And that also means that there are long-dated debts, maturing 28, 29, 30. We also have a possibility to -- if we wanted, when we come to that point, to reduce leverage ratios somewhat, when we have maturing -- some maturing issues that matures over the next couple of years.

And then maybe, Jan, Mr. Thorsrud could answer the...

He will do that on the guidance. Yes. We are guiding at 82% to 85% on the combined ratio for the full year. And of course, that's reflecting that we are reporting 82.1% for the first 6 months and that we have a very strong 80.5% combined ratio in the second quarter stand-alone. Profitability for the first 6 months is driven both by improved sort of underlying performance and also driven by some positive kind of one-off effects from the ongoing COVID-19 situation. So of course, we bear that in mind when giving the forecast, that we have a very strong first 6 months. Then we have a 3% range, which is a bit higher than what we normally have at this time of the year, kind of bearing in mind that there is still some -- quite a bit of uncertainty in the current market. So that's explanation on the guidance.

Next question comes from Per Grønborg, SEB.

It's Per from SEB. [indiscernible] One question from me. Hastings and you are addressing synergy of being the in-sourcing of the current quite extensive use of reinsurance. When I look at your balance sheet, it's probably no problem. If I look at RMI, they are not really putting new money on the table in connection with this deal. Have you an agreement with them that they are able and willing to support a potential higher solvency requirement after you have stopped the quite extensive use of reinsurance at Hastings? Can you say anything about that at this stage?

No, I said we were going to explore this possibility together with Hastings if we -- if the bid becomes reality.

Next question comes from Jan Erik Gjerland, ABG.

Yes. Could you elaborate a little bit on how you see this accretive on your EPS, both short and long-term versus the debt you're issuing so we just can understand how well accretive it is? If it's just marginally the first year and then more in the years after? If you can give us some more insight to that, that's my first question.

Do you want to do that, Knut?

Yes, it's EPS accretive for the first year. And that's also when stating that, with sort of mid-single digit accretion. It's also taking into account the funding costs. And then the funding cost is -- will, of course be more or less, fixed over the period of the Tier 2 bond, and then we can -- you can speculate in the development of the Hastings earnings during that period.

Okay. On your other investments, as you just touched upon, you are getting more into the non-life sector. How should we read you then in both the bank, Nordea, and all of the other small investments you have holdings in? Are they in the holding company as sort of an associate, as you did say? So we should expect more to be moving out of those long-term rather than keeping them and try to make as much money out of them as possible, if that was really your thinking over such a 10-, 15-year horizon here.

It was an interesting phrase, Nordea and all the other small investments. We will support the small investments in holding and try to make as much money as we can. They have developed well as a group investment and we do not intend to double the number of those investments going forward when -- or anything like that. That is not the strategy.

Okay, so more on the seller side than on buying more. Just on the If side, the premium growth has sort of abated from a very strong numbers in the first quarter. Is that due to the GDP changes, which you have highlighted, Morten? Or is it just that it was very too high at the start of the year and then more so, sort of coming out to a normal level now in the first half and the second quarter?

We have seen quite clear sort of negative effects from the lowered activity levels sort of in the Nordic society. First and foremost, of the record low new car sales is giving us quite a big impact. We have strong presence within the new car sales sort of part of the business in all Nordic markets. In Q2, I think the new car sales on the Nordic level was down 33%. So obviously, that sort of impact growth in second quarter, in particular in business area private, that is kind of the business area responsible for that. In addition to that, we've seen some kind of effects from some companies reducing turnover, reducing number of employees, taking cars, buses out of traffic, also giving them a bit of a headwind on the growth in the second quarter. The first quarter was very strong, with more than 7% growth. Then the second quarter was clearly sort of below what we would expect, sort of more as a normal growth rate due to then, these sort of -- these effects. And then, of course, high uncertainty on how this will develop going forward, but I do see that the new car sales is starting to stabilize somewhat in the Nordic countries. Just looked at statistics from Norway this morning. Sales in July was minus 3% in terms of new cars in Norway. So a bit of a sort of COVID-19 effect, if you like, sort of on the growth in the second quarter.

Okay. Perfect. So finally, on the combined ratio, you touched upon the COVID-19 sort of gains, if you felt that having effect on the combined ratio. Has there been any other kind of effects that you can isolate, which has not been COVID-19 effect that drove the combined ratio down to 80.5% for the quarter?

No, we've been commenting on that we've seen reduced motor frequencies. And on the other hand, we, of course, continue to see increase in travel claims. However, on the travel part, we have a reinsurance protection. So the net-net of this, Jan said, is roughly 4% positive impact on the Q2 combined ratio stand-alone. Then, of course, you also see that the cost ratio is low. Of course, we are benefiting from the fact that we are, for instance, not traveling these days. So...

Claims-oriented, Morten, but of course, we're also benefiting from the rate increases from -- for the past few years.

That's, of course, improving down the line.

Our next question comes from Steven Haywood, HSBC.

On 1 question, just related to Topdanmark. What's your view on the company now? Has it changed? Does it appear too expensive currently to acquire? And reality is why Hastings, not Topdanmark, currently?

Yes, Topdanmark develops well. That's the first starting point maybe. And we haven't changed our view on the company. It's not cheap for us to acquire. And in comparing Hastings with acquiring the rest of Topdanmark, the price that we expect to have to pay for that, Hastings is a more attractive proposition to us.

Our next question comes from Blair Stewart, Bank of America.

Just want to come back on the financials of the Hastings deal. I think the return on invested capital is maybe 6%. It's almost impossible not to get EPS accretion when you're debt funding. So the -- given the multiples you paid, clearly, the financials are not as attractive as buying your own shares. So this is obviously a strategic transaction which have not -- which you've talked about clearly. And just from a strategic perspective, what can you share with us at this stage? And it might be too early but what can you share with us in terms of what the Hastings management plan is or what your plan is to improve the underwriting and growth profile of the company? The expense ratio looks low. The balance sheet is very efficient. What can you do, particularly on the underwriting side that perhaps we can't see in the stated financials?

You are maybe unfortunately right that there is a limit to what we can discuss at this stage. But you could hypothetically say that maybe the buyback shares wouldn't be necessarily that, let's say, hypothetically, the same order of magnitude of return as the EPS from Hastings. However, there's a difference for the longer term, of course, in the way that we can develop and work with Hastings compared to the buybacks. So short term, yes, sure, we can hypothesize that it's similar. But long term, the Hastings proposition again looks much more attractive.

I'm assuming we'll get to look inside your strategic box as and when you're able to open it and show us it.

Yes, absolutely.

Our next question comes from Michael Huttner, Berenberg.

This should be my last question. I noticed on the slide, and you alluded to it that the S&P capital adequacy of If has improved markedly. So it was EUR 200 million less than S&P wanted in Q1 or designed or whatever and it's EUR 200 million above in Q2. Can you explain -- can you maybe say how -- where that swing came from?

Well, again, Michael, obviously the main driver for the improvement in S&P's stand-alone capital model for If is the really good result that If had in the second quarter, both on the underwriting side and obviously, bounce back in terms of investment returns from the meager Q1. So the main driver is simply the net profit, in the If group in the second quarter.

[Operator Instructions] Our next question comes from Jon Denham, Morgan Stanley.

And just 1 for me. Policy count growth at Hastings has slowed pretty dramatically over time. I was just wondering what makes you confident that Hastings can grow at a rate not possible for you in the Nordics, whilst maintaining an attractive loss ratio.

I didn't catch the question. I'm sorry.

I was just saying policy count growth at Hastings have slowed dramatically over time. And I guess it's fallen from almost 25% in 2013 to just about 5% now. Just wondering what makes you confident that Hastings can grow at a rate that's not possible for you in the Nordics, whilst maintaining attractive loss ratio.

I think I described the positive view that we have on the company. And then 2019 was, for various reasons, a special or a challenging year for the company, as can be seen from the numbers, the figures. So maybe looking at their first 6 months gives more of an indication of a continuation from 20 -- let's say, '17 and '18 than the 2020, '19 numbers. But by and large, I described our view of -- on the company, their special -- or the segment that they are operating in that is still increasing with the price comparison website, a proportion of the U.K. motor market, the way that they have been able to do this over quite a long time with the low combined ratio that they have and their capabilities in the modern world technology, data-driven analysis, et cetera. So that is -- we've done our homework with this -- we have really -- we worked hard at understanding this company and we have followed it for quite a period.

Thank you. There appears to be no further questions. So I will hand back to the speakers for any further remarks.

Thank you, operator, and thank you all for your attention.