Sampo Oyj (SAMPO) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to this conference call on Sampo Group's 2020 results. I'm Jarmo Salonen, Head of Investor Relations. And I have with me here our Group CEO, Torbjorn Magnusson; and Ricard Wennerklint, Chief of Strategy for the Group; Group CFO, Knut Arne Alsaker; and Morten Thorsrud, CEO of If; and Toby van der Meer, who's CEO of Hastings. And I hope I did not forget any names. So we're here to discuss the full year results and you're more than welcome to join us in a couple of weeks' time, 24th of February, to discuss more strategy and that sort of issues at the Capital Market Day. We'll start, as always, with the presentation from Torbjorn, and after that, we'll take your questions. Let me remind you that you can follow this transmission on sampo.com/results, and a recorded version of the call will later be available at that same address. Now I hand over to Torbjorn. Torbjorn, please.

Thanks, Jarmo. I'm very pleased indeed to present a set of extremely strong number to 2020, which was, at the same time, also a year of intense activity to develop our group. First and foremost, of course, the operational performance of our biggest division, If P&C, didn't leave much to wish for, I think. The lowest combined ratio ever, very strong indeed compared to peers and even at the lower end of our outlook from Q3. And this, combined with further improvements in efficiency and good growth, again, especially in the digital channels. I'm sure that the momentum in If P&C has never been stronger and better, and as you know, I have a rather long history with that company. Today, some attention is also given to the extraordinary accounting step to reduce the book value of Nordea at Sampo. However, this has nothing to do with Nordea's business. As you will have seen, Nordea is progressing impressively well towards their targets and our confidence in this is unperturbed. A brief remark on Mandatum Life. It's encouraging to see that the high-guarantee liabilities have never run off faster than this year. This, of course, reduces risk and releases capital in this solvency-intense segment. When it comes to our preparations for the future, I think our actions from the last year are well known. Suffice it to say now that with hindsight, the timing for the acquisition of Hastings and the date for the Nordea sell-down seem to have been well chosen or at least done with good timing. For If P&C, let's begin with a few remarks on the combined ratio. As a large motor insurer, it was certainly helped by COVID effects. On the other hand, large losses came in quite a bit above normal, except for Q4. So the net effect of those 2 effects is not huge. The starting point for the coming years is thus very strong, and we gave an outlook of below 85% for the year, not a range as we usually do, as estimating COVID effects is uncertain, to say the least. Growth continued to be distinctly higher than the GDP, and this is despite a negative premium effect in excess of 1% due to the low new car sales. As many of you are aware, car dealers is a channel in which we have excelled for many years and continue to do so as several of the largest agreements were renewed last year in all cases for long time periods, long contract time period. All in all, underwriting profits continue to grow, and the Nordic markets seem to be on the way to even more consolidation, thanks to Tryg and RSA. Hastings. For the first time, we have Toby van der Meer, CEO of Hastings Group, on the call. So a special welcome to you, Toby. We have now had a chance to work together for a couple of months. So let me give you some impressions on Hastings as it is now a new part of our group. It's been exciting to start to work together. The corporate cultures are definitely so similar that we should have done this a long time ago. Toby and his team are hands-on, thrifty insurance professionals with high long-term ambitions, all characteristics we value at Sampo. And when we looked at the company last year, we became convinced that we did not share the doubts about the company that the markets seem to have, and consequently, we look more positively at valuations. 2020 ended well for Hastings, in line with their previous plans on growth and loss ratio, and we're also stable -- and we're also able to strengthen the balance sheet of Hastings at the year-end so that it holds the same standards we are used to at Sampo, and all this combined with a strong 76.5% loss ratio. We have also designed a structured process for synergy development. That started in January, which I have planned to discuss more in detail with you at our Capital Markets Day in 2 weeks' time. Turning finally to the dividend. You could consider Sampo to be in a transition phase in some respect as we're moving towards a more focused, more simply structured insurance group. For this reason, it is natural to look to the insurance operations to supply the means for the dividend, and this slide details the numbers. We will work on increasing the insurance dividends as a reflection of the underwriting profits as a solid basis for our group dividends. Volatility in underwriting profit is certainly much lower than other lines that are more exposed to the investment markets. The present market situation supports our ambitions, better than in many years. And our insurance operations are better equipped than I can remember to win these increasingly digital markets. And now we look forward to your questions. Operator?

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

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

I've got 2 questions, please. The first one is on dividends. I was wondering if restrictions on bank dividends are lifted later this year, Nordea seems to be further EUR 0.72 per share. I was wondering whether Sampo will then distribute that dividend income on a special dividend, well, later this year, maybe next year. That's my first question. And then secondly, in terms of pricing in P&C, can you give us a sense of the price increases you have managed to achieve on the January 1 renewals in your industrial and commercial lines, please?

Morten, if you answer the price increase, I'll take the dividend after that.

Yes, sure. Price increases in -- at the first -- or first renews, I think the general statement would be that they are very high in a historical perspective in -- particularly, in the large corporate segment, so i.e., our industrial book of business. Also fairly substantial in the commercial book of business, in particular, still in Norway, which is a situation that we've seen now for quite a while. And all in all, price increase is well above what is assumed sort of inflation.

And so just...

So that momentum continues also on the first and first renewed.

Are they as last year or better?

I would say, on the commerce -- on the industrial side, I would say, it's perhaps slightly stronger. And then commercial, in line with last year in general.

On the dividend, if the recommendation or ban on dividends was to be lifted in the autumn, we would potentially then get a dividend from Nordea, hopefully, I trust. And that would actually -- the timing of that would not be too different from when we receive normally the dividend from If P&C. We have a policy that's in excess of 70% of earnings. There is no ceiling to that, and we don't have any M&A agenda, except possibly if possibilities will occur for bolt-ons in the Nordics. So that is probably as much as I can give us an answer.

Our next question comes from Jon Denham from Morgan Stanley.

Firstly, on If. You flagged a, I think, it was a 4-point benefit to the combined ratio from COVID. Are you or your competitors passing any of the benefit on to consumers by a lower pricing yet or still no? And I think, you said less than 85% instead of a range because it was hard to estimate the COVID effects. Just wondering what would that range be before assuming any impact on COVID? And I guess take the opportunity, as Toby's here. And what's driving the acceleration in policy count at Hastings? What kind of rate changes are you putting through versus the market? And just finally, I think you mentioned that you strengthened Hastings' balance sheet at year-end. What kind of benefit do you think COVID has on Hastings' loss ratio in 2020?

On the range, first. We have typically given a range of 4 percentage points at the beginning of the year, which is the uncertainty that we've held -- had in our normal planning. So that's what history indicates. Morten, If and COVID.

Yes. Yes. You say we estimate 4% COVID effect in the fourth quarter. I think one should bear in mind that it's, of course, extremely difficult to really estimate that effect. It's hard to really understand what's more sort of -- what's weather, what more normal frequency development and what's kind of specifically COVID-related, so it's a very rough estimate. And similarly, we have a very rough estimate of a 3% effect on a full year level. We are not passing that benefit back to the customers, mainly because most customers placed a number of products with us. And again, we see a beneficial development on motor insurance due to low frequencies, but then of course, we have other lines of businesses where we see a more negative development. So that's, I think, the situation on the COVID and maybe pass on to the customers.

And Toby, the last one.

Yes. Jon, thanks for the question. On your first question related to Hastings on policy count growth. And I guess there's a couple of moving parts to the 8% policy count growth that we've seen for the full year 2020. The first is that we saw continued strong retention rates throughout the year. So very pleased with all the team -- the work the teams have done to continue what is now pretty close to market-leading levels of customer retention. And then secondly, we -- throughout the year, we've been able to deliver a series of enhancements to our pricing models that have helped our new business volumes, i.e., increases our share of price-comparison website sales during the year. And that was particularly true during the second quarter and in the third quarter where we were able to continue running the business without too much interruption from COVID, and at a time when some of our competitors had to retrench. As they dealt with operation or systems issues, we were able to keep forging ahead. On your second question on the impact of COVID on the loss ratio. You'll have seen in the numbers that Torbjorn talked about, a 6-point-or-so improvement in the loss ratio. Embedded in that, although we haven't quantified the effect of COVID, but embedded in that is, of course, the benefit of lower frequencies, particularly in the second quarter, or some very limited driving then -- sort of driving behavior increase during the third quarter and the beginning of the fourth quarter. And then tail off again, of course, when the third national lockdown hit in the U.K. toward the end of the year. But as Torbjorn has also said, overall, we have delivered a good loss ratio with that 6-point improvement but also strengthened our reserving position. And I guess when you bring all of that together then, when we think about 2021, it leaves us in a very confident position to be able to say that the combination of the current accident year performance and the development patterns for prior years will leave us in a position where we can say it should be expected to improve.

Is it possible just to get the magnitude of reserve strengthening?

We wouldn't normally comment on that as there are so many moving parts in that statement.

Our next question comes from the line of Blair Stewart from Bank of America.

I have a few questions. Firstly, just with regards to the Hastings underlying performance in the year, it's very difficult to get much from the 6-week period that you've reported. Perhaps, not today, but I wonder if that's something you'll talk about more at the Capital Markets Day so we can have an idea of what to expect from Hastings going forwards. Secondly, just on the reserve strengthening, you're clearly not going to comment on the number, but was that done just internally from Hastings so there's no need to transfer anything from Sampo Group into Hastings? I'm assuming that was just done internally. Also on Hastings, I wonder if you -- just take the opportunity to ask management what the expected impact of the FCA pricing review and changes will be on the company and its competitive position. And my final question, I'm sorry to ask so many, but they're all quite simple ones. This dividend from If P&C was only EUR 600 million against, I think, over EUR 700 million last year. Is that really just a balancing item in terms of what you need to fund the external dividend? Or is there something else going on there?

On the first 2, we will speak more about Hastings' performance in the Capital Markets Day, and Toby will be there and have a separate session on Hastings. On the reserving, yes, it's been done within Hastings resources. And then, oh yes, the next one was for you, Toby.

Yes. Great. So just to comment briefly on the FCA pricing practices work and its impact on us, and we will talk more about this at the Capital Markets Day in a couple of weeks' time as well. But at a headline level, for today's purposes, I would just say that the FCA has identified, as you will be aware of, a large number of players in the industry have been making disproportionate returns and profits from renewing customers through practices such as price walking. And as you can imagine, that has been most prevalent in the businesses that have been around for the longest, have the most all surrounding customer bases. And for a company like ourselves that attract customers mainly from price-comparison websites and mainly over the last, say, 4 or 5 years, you can imagine that we don't have the sorts of customers who would let us do price walking. So we do charge our customers a little bit more today on renewal than for new businesses, but for us, that's a negligible amount. And therefore, I guess, as we look ahead, and we would expect FCA's changes to have an impact on those sorts of profits, that it is largely irrelevant for us but may have a big impact on some of our competitors. The second dynamic that is how it will change shopping-around behavior in the longer-term and will it have an impact on price-comparison websites as a distribution channel, I know some of our competitors are hoping that customers will all of a sudden become a lot more loyal, love their brands and start shopping around directly a lot more. I guess we're not sure about that. We suspect that customers across the U.K. have been told and educated and shop around, like using price-comparison websites of sites to do so, and will continue to do so in the future. So I think we're relatively optimistic about the impact of all of the changes that the FCA will bring are supportive of them. But of course, we'll monitor them very closely as they start to have an effect on the market, depending on the timing, the final FCA expectations, but much likely towards the end of the year.

And finally, Knut, have you emptied the coffers of If P&C?

I know for a fact he hasn't done that, Torbjorn.

One other thing. So of course, we have not -- the dividends from If P&C was based on the earnings in 2019, but also on a view that it was reasonable to leave If P&C with a little bit extra-strong solvency ratio at the end of the year, which they have, given the uncertainties that we still have around us.

Our next question comes from Jakob Brink from Nordea.

I guess the question is on the leverage in Sampo Group after the write-down, which was announced this morning of roughly EUR 900 million. Could you just talk us through what would be the impact on the financial leverage in Sampo Group and what that might have of consequences or might not have of consequences? That was my first question. And secondly, a bit more broader question, and I don't know if you can or will answer it, but I see there is a change to the Board composition where your main owner is, as far as I can read, no longer going to be represented in the Board of Sampo. Can I read anything into this? Then lastly, why exactly did you choose to write-down the Nordea value now? Anything specifically happened that made you do the change now?

Knut, will you talk about leverage and Nordea's timing?

Sure. Jakob, leverage in Sampo at the end of the year based on our booked equity was just below 29%. If you would calculate it based on the market value of Nordea, we would be just above 29%. The impairment, as such, which had an impact on our equity of EUR 900 million, as you know, impacted the leverage ratio based on booked equity by around 1.5 percentage points. Obviously, no change on the ratio based on Nordea's market value. This is an adequate level for us. It has no impact on any considerations for us in terms of ratings and obviously, not solvency. When it comes to the timing, we have, of course, have had a market value of Nordea that is -- has been below our book value for some time. And we have done impairment testing on a regular basis every quarter according to accounting regulation. What has changed during 2020 and also in the fourth quarter? So of course that Nordea has made good profit, and we have consolidated our part of it, which is increasing the book value. But different than in historical years, there's been very little or no dividend payments, and that has not adjusted the book value downwards. The book value is a mechanical exercise of the acquisition price plus all the accumulated profit less dividend. That brought the book value up to a level which we're about to exceed what we had as the value in use in our model. And it was needed to do an impairment. And that basically happened now when Nordea announced their fourth quarter and also announced their plans to postpone the dividend further to the fourth quarter of this year. So it's a -- it's basically -- the timing is basically due to the fact that Nordea is doing very well and not a changed view from our side on Nordea and not because the Nordea profitability is not in line with what we expect.

And then on Board representation, Antti Mäkinen is not available for another season. But remember that Jannica Fagerholm, my -- our Deputy Chairman, is actually also on the Board of Solidium. So I don't know -- you shouldn't read anything into this as far as I am aware.

Our next question comes from Per Grønborg with SEB.

Yes. Per Grønborg from SEB. A couple of questions from my side as well. First of all, why 7.5% and not down to 7% as the current market value roughly is on the Nordea impairment?

I couldn't hear the question, Per. Can you repeat it?

I try once again. You are impairing Nordea down to 7.5%. You -- why don't you -- why not impairing it down to the market value? What's the rationale behind that?

This -- the impair -- this is -- we make an accounting consideration according to accounting rules. We use a model which is based on requirements under accounting regulations. We use assumptions which are based -- market-based, particularly based on what we observed were cost of equities at the time when we sold Nordea stakes -- the 4% in Nordea in November. So it's not based on the actual market value. If we were to pay a rate down to the exact market value, which there are no reasons to do based on our view of Nordea, that would more be an indication of a change in accounting principle going mark-to-market on Nordea. And that's not what we do. We still count it as an associate company and not hope that's an available-for-sale asset.

How far should your owner's stake in Nordea drop before you couldn't account for it as an associate any longer?

There is no such exact limit. It used to be more clear before, but there is no such an exact limit. That consideration is based, of course, on the size of the ownership, on the size of the ownership versus other shareholders, our Board representation, the fact Torbjorn is Chairman, et cetera. So there -- I can't give you an exact limit but it's lower than where we are today, obviously.

Not everything in the world is exact, at least that tells us where we are. My second question, back to what is important, the P&C underwriting. If I should make a very rough width from your 2020 results until and after COVID situation, you have 3 percentage point in COVID impact that will reverse. If I look at Q2 report, weather-related, say, for -- if I look at a peer like Tryg, they are guiding for weather-related being a positive 1 percentage point better in '20 than in a normal year. I doubt your numbers are that different. Then you have the large claims that are a couple of percentage points above your normal run rate. Does this imply that after COVID, we should look for a combined ratio or claims ratio that is approximately 2 percentage points worse than it was last year, plus/minus, of course, the improvements you will do to the business in between?

I think, yes, we have probably discussed this before, you and I. And let me give you an indication of what I think, and then Morten will correct me. But we, of course, do planning. And the factors that you mentioned are 2 of the more important ones, but also going into this, these calculations are, of course, the price increases, the rate increases that we've done during the year and the exact timing of those as well as the weather influence on our results. So it is a little bit more comprehensive than what you have described. Morten, what do you think?

Yes. I think when we do our calculation, we do read to quite a fair underlying improvement, if it may. Large gains, 1.9% higher this year than last year. Runovers felt more or less in line with last year. And COVID is a very rough estimate, rounding up to 3% on the full year. And net of those being about 1% on the full year. Weather and events, for us, it's quite a similar 2020 as 2019. When we look at weather and also event, of course, in that bearing in mind, the tragic landslide claim in Norway at the very end of the year. So all in all, sort of this leaves us with the improvement in the combined ratio of 2020 versus 2019 of somewhere between 1% and 2%. So I think it's a -- the way we see it is a good underlying improvement as a result of general underwriting improvements but also pricing being above inflation now for a time period.

Our next question comes from Derald Goh from Citigroup.

The first of the questions I have relate to If P&C. So firstly, in terms of the large losses, which I think for the first 3 quarters and even for the fourth quarter, exceeded budget or expectations. Are there any specific trends that you've observed? Were there specific lines of businesses or regions where the large losses have occurred?

Morten.

Yes. No particular play trend. Of course, the large claims in the industrial segment will be a bit volatile, and you need to go really far back in time to find a deviation, a negative deviation on the level that we had in 2020. So it's typically sort of normal property claims. No specific geography, clients that's been with us for a long, long time period typically. So we look upon this as being the normal volatility that you will have in the industrial market. So yes.

Yes. And my next question is just on your run-off trends. So it's roughly stable year-on-year. Can you maybe talk about the sources of the runoffs and maybe the outlook for them, given that some peers have been commenting on a more moderated level going forward?

Yes. It will be, of course, repeating a little bit what we said before. But the main source of the run-off profit still is from the motor business in Sweden, which is one of the most long-tailed businesses in all of Europe, actually. And again, the drivers that we've seen over the last 10 years and more benign development on bodily injury claims than what was assumed in the reserving model. We typically, of course, do not try to predict too much about the future. And then, of course, of -- at a certain point in time, so if this development is leveling out, but of course, we continue to have strong reserves. So I guess -- and again, the development has been positive and constant over the last 10 years in -- when it comes to motor bodily injury claims payments.

Yes. And just one more on If P&C, please. Just looking at the underlying trends between the 4 segments. It's quite hard to assess from the outside, but could you maybe give some comments on the 2020 performance relative to 2019? So which were the main segments of improvements? And what were the main drivers, if you like?