Sampo Oyj (SAMPO) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to this call on Sampo Group's Third Quarter 2020 Results. I'm Jarmo Salonen, Head of Investor Relations at Sampo. And with me at this call, I have our group CEO and President, Torbjorn Magnusson; Group CFO; Knut Arne Alsaker; CEO of If, Morten Thorsrud; and Chief Strategist, Ricard Wennerklint. We'll have a short presentation by Torbjorn, Knut Arne and Morten to begin with. But before handing over to Torbjorn, let me just remind you that you can follow this call on sampo.com/results, and a recorded version will later be available at the same address. With these words, I'll hand over to Torbjorn. Torbjorn, please.

Good afternoon, everyone. Sampo Group reported strong results for the third quarter of 2020. The largest profit contributor If P&C continued to deliver excellent underwriting combined with healthy top line growth. It's pleasing to see the payoff from our long-term investments in web and multichannel, and equally gratifying to see the Nordic market is as rational as ever implementing rate increases where necessary. The 82.4% combined ratio is also rather stronger than the first impression as it contains more large claims than normal; a discount rate change in Finland; and working in the other direction, a 2% COVID-19 reduction in claims. And the total effect of all of this is that a normalized combined ratio would be some 2% better than last year. The offer to acquire Hastings Group that we made together with RMI in August is proceeding according to plan. The offer was approved by the requisite majorities of Hastings' shareholders in September and all approvals, regulatory and antitrust ones have now been received. We look forward to welcoming Hastings to the -- to our group after the court hearing, which is expected to be held on the 13th of November. Including Hastings, as you can see from the bottom left side of this slide, P&C insurance now makes up roughly 2/3 of the profits of the group, against only some 40% of the capital. Another measure is the high-quality earnings in the underwriting profits, which we have grown quite significantly from 2015 to '19 and '20 and which is now more than 40% of Sampo's net income. The numbers on this slide are not an exact science, but the idea is important to us. Topdanmark then. Topdanmark's share price fell back to levels a little below where it's been most of the summer. The company reported stable current year results, gave their usual outlook for the coming year, and I am very confident that they will continue to focus on underwriting profits as their main target. Turning then to Nordea. Encouragingly, the company produced a solid set of numbers and increase both efficiency and market shares. The bank exceeded investor expectations on virtually all lines and remains committed to their 2022 financial targets. Everyone in the new management team is now finally in place, and I'm personally very impressed already at the team's determination to increase both customer work and reduce unnecessary costs at the same time. As is visible from the numbers, this is now 4 quarters of good progress, and I'm as committed as ever to contributing to the company's development as Chairman of the Board. Nordea has a strong balance sheet, also means that it's well positioned to pay out dividends, and the bank intends to pay a dividend for the financial year 2019 given the necessary regulatory approvals. In addition, finally then to Nordea's dividend statement, I note that If P&C this week has decided to distribute EUR 600 million in December of this year. Topdanmark has also repeated its early commitment to paying the remainder of the 2019 dividend. And finally, Mandatum having canceled its dividend in the spring is now at a solvency ratio of 206%, which in total gives me confidence that Sampo has no cash flow issues with a dividend in the spring in accordance with our dividend policy. Knut?

Thank you, Torbjorn, and good afternoon, everybody. A few words about the balance sheet as of the end of third quarter. We want to operate a prudent but disciplined capital management regime without large buffers. This means that we aim to maintain solvency and debt leverage at robust levels, with buffers above regulatory and rating agency limits that reflects our risk profile. However, we do not plan to build in large buffers beyond what we need to manage our risks nor will we create a big war chest for M&A. What we have reported today based on Q3 numbers is a Solvency II coverage ratio of 214%, which is in itself a record high level. But as we have described in our report, with respect to impact of the Hastings consolidation, this ratio will drop to 185% based on Q3 numbers, given that this transaction is closed later this month. What we show you on this slide is a pro forma number, also including an accrued dividend at a level equal to what we paid out earlier this year as a distribution of profit for 2019. This should not be interpreted as an accrual of this pro forma -- it should only be interpreted as accrual for this pro forma calculation purpose, should not be interpreted as a dividend decision for 2020. 173% is a robust level and indicates that our solvency strength is currently not a limiting factor in our ability to pay a dividend for 2020, in line with our dividend policy, which, as you know, is at least 70% of earnings. However, our solvency coverage should be seen in the context of the market risk exposure we have, particularly through our ownership in Nordea. Hence, we need to maintain some prudence in our solvency ratio. Our debt leverage remains within rating agency limits, but is higher than historical levels. We have no plans to increase our gross debts nor our debt leverage from the current levels. To the contrary, we will work to bring down debt leverage on what we have today over the next couple of years. As already mentioned, our solvency strength is currently not the limiting factor in our ability to pay an attractive dividend of at least 70% of EPS this year. With the dividend from of If -- from If of EUR 600 million, which Torbjorn also referred to a minute ago and which we announced today, Sampo's insurance operations is on a good track to deliver dividends to our holding company of at least EUR 1.5 per Sampo share, which was the dividend we paid in June. If's solvency also remains, post the dividend announced today, at a robust level, Mandatum's solvency has clearly improved since the company's dividend for last year was canceled, and we also expect to receive a dividend from Topdanmark in the beginning of next year. In other words, we are in a position where we think that we can pay a reasonable dividend for this year, even if Nordea does not contribute, although we obviously hope that it will. Paying an attractive and predictable dividend remains a key focus for us. We believe the best way to deliver this is by further improving the quality of our balance sheet. And by basing our dividend on paying out at least 70% of group earnings, group earnings which we aim to make even more predictable going forward. Over to you, Morten.

[Audio Gap] and has a combined ratio of 82.9% reported for the third quarter isolated. However, when adjusting for the effect of reduced discount rate in Finland, the third quarter combined ratio isolated would end up at a record low 78.3%. As Torbjorn already mentioned, the year-to-date combined ratio is 82.4%. And again, when adjusting for the discount rate changes in Finland, these figures -- figure would end up at 80.5%. So very strong insurance performance indeed. The profitability in If is clearly improved during the year as a result of our continuous work on pricing sophistication and risk selection. At the same time, large claims outcome is above plan level, whilst the net -- there is a net positive COVID-19 effect, which is about 2% on year-to-date and 3% is our best estimate for the third quarter isolated. We show a strong growth of 5.2%, both year-to-date and for the third quarter isolated in a market where we did have some headwind from low new car sales and negative volume effect from reduced business activity in certain industries as a result of the ongoing COVID-19 situation. We continued to increase the number of customers and had stable retention rates throughout all segments. And I think despite now being in the middle of a crisis, we really experienced a record-high customer activity level, in particular in the private segment during the third quarter. For instance, Nordic new car sales in the third quarter isolated was actually back at 2019 level. We saw record high used car sales levels. We also saw a peak in sale of number of both insurances, pet insurances, risk life insurances. So a very high activity level among the Nordic households. If continues to be well positioned as the largest P&C insurance player in the growing P&C market that is becoming more digital. The growth that we've seen year-to-date has been supported by a very strong performance in digital channels and already by the third quarter, we have sold more than SEK 1 billion in new sales purely through the web shops in our private business area. So the Nordic P&C market is clearly becoming more digital in this environment. Our cost ratio ended up at a record low 20.7%, and we benefit now from both the high top line growth and continued efficiency improvements in the operations as well as low cost spending in certain areas as a result of the COVID-19 situation. We have revised our outlook to an 82% to 84% combined ratio for the full year, reflecting a strong performance for the first 9 months and a continued strong underlying earnings momentum. Then I thought I should give also just a quick update on the current operational situation in light of the recent development on COVID-19. During the third quarter, we started slowly to move people back to the offices. And in many geographies, we had about half of the workforce back in the office at the peak during the third quarter. However, now with the second wave setting in, we are now moving people back again more to home offices and currently, about 80% of our workforce work out of home offices. Still, customer service levels remains high also through the third quarter. We see a high level of customer contracts, strong Net Promoter Score and really high customer loyalty in all customer segments. As already mentioned, there is a strong shift now towards digital channels, both for insurance sales; services, where we see 15% increased log-ins in my pages and online reporting of claims, where we also see a similar 15% increase in number of claims reported online. The capital market has been benign. In the third quarter, we have had strong earning power, which results in a strong result and an improved solvency ratio to 176% after deducting for the planned dividend of some EUR 600 million or SEK 6.3 billion. Finally, in the third quarter, we saw some normalization of claims frequencies. And this, of course, adds to the complexity of really separating the COVID-19 effects from underlying improvements. But again, our best estimate is that we have a positive impact of about 3% in the third quarter isolated and about 2% then year-to-date. So with that, I hand back to Torbjorn.

Thanks, Morten. Just 2 final words. We have made steady progress this year, both operationally and strategically despite the turbulent times. And we plan to give a full presentation of our strategy at our next planned Capital Markets Day to be held on the 24th of February next year. And I hope that the COVID-19 situation has eased enough by then for us all to meet in-person in London. Jarmo?

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

[Operator Instructions] Our first question is from John Denham of Morgan Stanley.

Firstly, you've been quite aggressive in industrial as peers have been pulling back. And even if I strip out the large claims being worse than expected year-to-date, the combined ratio in industrial is still just above 100%. Just wondering what's causing this? And is it more than just simply a large loss issue? And secondly, your comments on dividends suggest that you can just about reach the 70% payout ratio entirely from insurance dividends. If the ECB review next month does result in Nordea being able to pay a dividend, how should we think about Sampo's payout ratio this year? Would it be higher than if you just had dividends for insurance entities? Or would you be looking to increase the cash at the PLC level?

Well, on the dividend issue, I think we shouldn't speculate but rather wait for the ECB and development of COVID-19. Industrial, Morten?

[Audio Gap] so can really be attributed to large claims only, we see a good development on frequency claims. I think it's good to bear in mind that both the large claims, of course, impact industrial and also the change in discount rate is to a large extent also something that hits industrial assets typically affects workers' comp reserves in Finland. So we do see a good frequency development in industrial and then more the volatility that you once in a while have on the large claims side. I think it's also fair to comment that a very large proportion of the growth is actually rate increases. So we see a hardening market in the industrial market, which we, of course, will then benefit from going forward.

[Audio Gap] were minus 4% in August to minus 9% to minus 7% on average. And basically, this means lower [Audio Gap]

If there was a question, I don't think we have heard it.

Operator, can we have the last question repeated, please?

[indiscernible].

Sorry, was there another question from John Denham?

John?

John, your line is open. Did you have another question?

No. There was nothing from me. I think it was a question from someone else on the line.

Right. Okay. Our next question is from Michael Huttner from Berenberg.

Fantastic. I had, actually, only 1 question, which is the cash payment from If. So if I look at -- I'm not sure my numbers are correct, but 2016, EUR 586 million; 2017, EUR 620 million; 2018, EUR 675 million; 2019, EUR 710 million; and 2020, EUR 600 million. And I'm kind of thinking, why is it down given that we've had such an unbroken trend of rising dividends from If? And maybe you can give us a feel for what it says about how you see If or how you see group cash? I'm really puzzled by that figure.

Thanks for the question, Michael. We don't necessarily have any target to have from 1 specific subsidiary ever-increasing internal dividend as such. We manage If's balance sheet on an individual basis and group liquidity on a holistic basis. If's -- I would say, though, that If's dividend is a little bit on the conservative side because we felt it made sense to leave If with a strong solvency which is what we did, which means that we took up a little bit below 90% of last year's earnings, while we last year reduced the solvency a little bit more than reported earnings for the year before. So that's the answer to the first one. On the second question, in terms of cash flow from the insurance operations, if I heard you correctly, obviously, If -- we just talked about the solvency in Mandatum is strong at the end of the third quarter with 206%. There's nothing currently that doesn't make me think that we can take up a good dividend from Mandatum as well. And also with Topdanmark's results and solvency and of course, the fact that they only also have paid 50% of last year's dividend so far in '20, we expect to have a good cash flow also from Topdanmark in the beginning of next year.

Just so I can understand. When you pay the dividend, so your 2021 -- sorry, sorry about that. Your 2021 cash payable -- so 2020 dividend, is it funded out of the -- which part of money is it funded out of? Is it -- should I think of the If payment you've just made plus the Mandatum and Top that is going to come in Q1, is that how you look at it?

Well, obviously, If's dividend as such will be paid in December, Mandatum normally, which it will this year next year as well, everything else we will pay in the beginning of the year, and so does Top. So we have...

Then obviously, we're hoping for an ECB, a positive ECB decision before that as well.

From Nordea, yes.

Yes.

So I was more referring to the insurance dividends, which I understood was your correction -- was your question. But that's right. Of course, Nordea usually pay its dividend at the beginning of the year as well. So we don't look upon it in any special way. There is no specific need in the holding company in December, which makes us take up this dividend from If at this point in time. The dividend payment from If has, for some years, been at the end of the year, instead of the beginning of the year. But there's nothing special in terms of holding company' needs this year, which means that it sort of will come soon parts of the EUR 600 million for any particular purpose, other than being a part of the dividend for next year.

Our next question is from Blair Stewart of Bank of America.

I've got a couple of questions. Can I just clarify the pro forma solvency figure if we pro forma it for the completion of Hastings and also accruing a dividend at EUR 1.5. Was that the 173% figure that was quoted in your comments? And I have some follow-up questions, but maybe just take that one first.

Thanks, Blair. Good to clarify those numbers. What we have in the report with the pro forma of Hastings is 185%. That's up 10% from what we indicated as a pro forma solvency level in Q2. It has nothing to do with Hastings. It's improvement in the solvency ratio of the rest of the Sampo Group. The 173% is in addition to pro forma Hastings. We also accrue a dividend. As you know, sort of under Solvency II, you don't accrue dividend in terms of your regulatory reporting on a quarterly basis. So we have just done that for this illustrative purposes by basically accruing last year's dividend, which is how banks reports, for example, on a quarterly basis to accrue a quarterly dividend based on last year payments.

Okay. Great. So the 173% is pro forma for Hastings and the accrued dividend at the 9-month stage?

Yes.

And so just -- that takes my second question -- takes me on to the second question then, given that you've said that you don't want to hoard capital or build war chests, should we then assume that should Sampo receive a dividend from Nordea this year or indeed next that, that would then be available for pay out via a dividend to Sampo shareholders? And my final question is, we're another quarter on after the initial announcement of Hastings. I just wonder, is there anything you can say that you've seen in the last quarter with regards to the performance or otherwise of the Hastings business over that period of time any new news?

Let me start with Hastings. There's very little we can say other than that, of course, a pure-play car insurer in the U.K. We would assume that they find life a little bit easier for sad reasons, but still than normal. That's that. And then if we speculate in Nordea being allowed to pay a dividend, that would certainly be nice. And what should be done with that, that would, of course, depend on the exact reasons why they were able to pay it, what we expect the future to be and what our situation is then. So I -- if I can, -- if I may, abstain from speculating further.

But you have said that Sampo will not maintain capital over and above what you need to run the business, right?

Over time, that's correct.

Our next question is from Steven Haywood of HSBC.