Sampo Oyj (SAMPO) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the Sampo Group second quarter 2022 conference call. My name is Sami Taipalus, and I am Head of Investor Relations at Sampo Group. I'm joined on the call by group CEO, Torbjorn Magnusson; group CFO, Knut Arne Alsaker; and CEO of If, Morten Thorsrud. The call will feature a short presentation from Torbjorn, followed by Q&A. A recording of the call will later be available on sampo.com/result. With that, I hand over to Torbjorn. Please go ahead.

Thanks, Sami, and welcome, everyone. We have had a more or less flawless quarter, despite the volatile surroundings. Let me first list a few simple facts from our largest entity, If P&C. Combine ratio of 77 in the quarter with average rate increases marginally above present claims inflation, say 5 versus 4%. No reduction in retention rates or customer satisfaction as a consequence. Quite the contrary, in fact. No segment with special issues in the book. And there is no significant segment where we cannot increase rates at least in parallel with claims inflation. Hastings next shows the results of having the same underwriting focus as the rest of Sampo. Clearly a challenging market, but the claims inflation is no secret, and Hastings immediately reacted. Of course, the company also benefits from a smaller back book than many peers without chip issues. So a combined ratio close to our target even for the first half year, this challenging year. And furthermore, the GIPP reform provided home insurance opportunity and growth this year exceeds 20% in this line. Q2 for us also saw our complete exit from Nordea with excellent results and impeccable timing. This was the big step we had to take to become a pure play insurance company. And what remains now in terms of structural simplification is very small in comparison. The world is volatile, and so are investment returns at the moment, but Sampo benefits from this in several ways. We have increased the nominal discount rate for finished liabilities to 1%, and our running yield has quickly come up significantly. As a consequence of all of the above, our solvency ratio is very high at 245%. And already in the middle of the quarter, we were able to launch another buyback program of EUR 1 billion. Our next checkpoint for this is the full year result in February when we will consider any further distribution of capital. Giving a little bit more color to the P&C operations, the key question at the moment is, of course, claims inflation versus rate increases. And in the Nordics, claims inflation has edged upwards gradually during 2022, and now varies, say, between 3 and 6% with a 4% average. It's driven by general inflation in spare parts, some building materials, but not to any significant degree by wage inflation. And there are no structural changes into repair shop chains or contracting firms, as in other markets. We expect a modest further increase in claims inflation for the rest of the year, and price for that. So far, competition is unchanged and rational. There are no substantial new movements of market shares in the Nordics, and our retention levels and the customer satisfaction is even slightly higher than a quarter ago. For large corporate business, the situation is a bit different. Some international competitors have left the market after a number of years of poor results, and we benefit from their absence. We have a 22% volume increase in the first half year, and 2 thirds of that is rate increases or improved terms. We also enjoyed a somewhat favorable large claims outcome in Q2. When it comes to the UK and Hastings, we now see the effect of Hastings being part of Sampo Group with no group volume pressure in market segments with inadequate rates, just as for the rest of the Sampo. Hastings management team has handled the development really well. First, by not participating in the price pressures late last year, then by taking the opportunities presented to us by GIPP, and then finally reacting immediately and intelligently to the sudden increase in claims inflation. Maybe just to point out there that if you try to explain the UK market results this year, sorry, this quarter, the rate changes in Q4 last year are not least important. And Hastings was very careful not to underprice then. With a smaller back book than many peers and very little price walking, we had a very minor need for price adjustments from GIPP on 1/1 this year. Also in home insurance, as I already mentioned, we saw a substantial opportunity, which is now ongoing. There are also other segments that became attractive in the new market situation. Claims to inflation in particularly in the UK, also with structural changes with suppliers develops, and we continue to react carefully and without delay. Rates in the market are clearly, on average, insufficient and will cause a lot of pain to some participants going forward the longer this goes on. The last few months, we have seen some small rate increases, but far from enough for the market as a whole, we continue to develop our book, our selection of segments to operate in, and to avoid being volume-driven. But of course, taking the opportunities from this special situation. This next slide shows some of the effects of higher interest rates for us. As most of you are aware, we have a good starting point, relatively speaking, as we have kept a very short duration in the fixed income portfolio. Now, higher interest rates help us in 2 ways going forward, by increasing the running yield and by reducing the liabilities. One should bear in mind that, over the last decade, we have had to reduce the discount rate gradually to extremely low levels with corresponding risk reported losses. And now, this is reversed. So you have some details here. If P&C has gained some EUR 120 million from discount rate changes in the first 6 months, and the running yield came up 50 basis points in the last quarter from purchases of investment grade papers. Also of importance to us in this context is the fact that higher interest rates support [indiscernible] solvency ratio. The increased rates have offset by a margin the challenging development of risky assets this first half year. Let me finally also point out that, as usual, we prefer prudent reserving. And when there is a discretional element, we have in no way maximized the possibilities from higher discount rates. This, my final slide, shows our results compared to our financial targets. This quarter, it would seem that we can have an extended holiday, as we are well ahead of our targets, maybe with the exception of Hastings. However, this is, of course, most certainly not the way we think about it or see our opportunities. If P&C is in a very promising position looking forward right now, with a leading position in the growing digital channel, but also, of course, having achieved the excellent growth this year without what is normally one of our strongest channels, the car industry collaborations, as car sales have been so extremely low. Furthermore, we have no intention relaxing our relentless work with costs in If. And the synergies from Hastings add to our ambitions for overperforming on accurate and tactical pricing over the coming period, also in the Nordics. As regards Hastings, we like the development of skills and the broadening of the product portfolio this year. Whatever the near term behavior on the market, we will continue to push, stay, or become the best digital insurer for personal lines, but always with our usual eye on profitability. This is still a growing channel, and we are definitely already ahead of most of our competitors. With the momentum we have in If P&C, both in the Nordics and in the UK, there is a lot of value to be created by organic growth rather than acquisitions. So this is clearly our strategy at this point in time. Looking at the totality of all of this, we feel very motivated to continue running at high speed. And as a team of insurance specialists now running a pure insurance company, we look forward to your questions. Sami.

Thank you to, Torbjorn. Operator, we're now ready for Q&A.

[Operator Instructions] And our first question comes from the line of Jan Erik Gjerland of ABG.

Two questions from my side. The first one is on the distribution side. And it's regarding your saying that you will wait until the conversation of this full year before you decide anything more on the extra dividend potential. Would you shed some light to what you sort of could walk down to on the solvency ratio versus the leverage ratio to see what kind of magnitude we could expect from such a dividend? That is my first question.

Its Knut-Arne here. As you know, we have a solvency range between 170 and 190 as a target. And I would consequently define a solvency ratio above 190 as excess capital. And then, of course, we have a flexibility to work within that 170 to 190. But a solvency ratio above 190, it's excess capital. And I don't see that we have any leverage issues to work our way down there. It will require us to work on our debt stack, which we have said for a while that we will do. And you will see us take some actions to do exactly that and be below the 30% leverage ratio target as we work our way down towards our solvency range. And just to add a comment on that, there's nothing that I see in terms of transitional effects on our equity going into new accounting rules that would change that fact.

Okay. Very good. And secondly, on the insurance operation, both if Hastings delivered very well, and Hastings probably are little bit above expectations, could you share some light to what it did overall, of course, to reprisal and stay away from the most aggressive market? And then secondly, on the If P&C side, what kind of price increases do you think the market would have to put into '23, as well as maybe into '24, to cope with the sort of higher inflation speeds at the moment?

Well, on Hastings' end first, as I pointed out, I think one of the most important things that we did with Hastings was to avoid being too aggressive late at the end of last year, when the market was clearly not putting in the price increases that would have been needed with hindsight, so that was one. And then GIPP of course hit us less than the average in the market and that's a bit difficult to assess exactly what the consequence of that is. And then being part of Sampo, Hastings has reacted immediately when we saw claims inflation. There's no need for us to speculate. When such a situation occurs, we should wait and see what happens. We reacted right away.

Jan Erik, Morten here. When it comes to price increases, first, perhaps just repeating what Torbjorn said in the introduction, today we have seen a little bit more than 4% inflation on the claim side, and we are pricing on average around 5%, so slightly ahead of what we have observed so far. We see that property inflation over the last few months have stabilized. Then we see that motor inflation is still ticking up somewhat. Of course, we make sure that we are ahead of the curve and price for the inflation that we expect to see in the future, but of course I would like to refrain from speculating in what that will be in 2023 and 2024. But of course we will make sure to continue to stay ahead of the curve.

Very good. Just to follow up on the wage side, I think [indiscernible] mentioned that you haven't seen any particular claims inflation from the wage part yet. Is that something you expect to come [indiscernible] during the fall, as we see next year, as we see wage inflation picking up in several countries?

I don't think I necessarily said yet, but...

[indiscernible]. I think the system [indiscernible] in the Nordics that it's basically a result of collective agreements. We haven't seen any really significant movements yet for this year, and I guess the general outlook for the Nordic is that we will have a quite disciplined behavior also going forward. But of course that remains to be seen. But of course, again, the Nordic markets are far more disciplined due to the collective agreements we have when it comes to [indiscernible] increases, so it's much more of a gradual movement here than what you might see in outside of the Nordics.

Our next question comes from the line of Jakob Brink of Nordea.

The first question is on the quite significant drop in the SCR quarter-on-quarter of around $1.4 billion, as far as I can estimate, and roughly half of it comes from the [indiscernible], then maybe a few hundred million more from the drop in equity markets and the symmetric adjustment, but then still probably left with around $500 million unexplained reduction in SCR. Have you done anything to reduce risk exposure, or is it just me that did the calculation on market exposure wrong?

Yes, there are clearly some drops in the SCR during the quarter, and of course the main item EUR in terms of the Nordea sell down, which is reducing SCR, and there's of course nothing happened when with the SCR when we do the buyback. So that's clearly explaining the main delta. Then there are some other, I would still call it combined smaller changes, where the SA is actually the largest of them. Then there are some which I would call more volatile items from quarter to quarter in the SCR movements, which almost all moved our way. One of them, for example, being lower ethics risk due to ethics movements, which impacts a couple of different market risk elements in our market risk stack. Which it wasn't significant, it was 4% or 5% this particular quarter, and that could, of course, also reverse back quite quickly. But it had, I would say, a significant impact this quarter. Then we did a little bit of de-risking across the group during Q2. There was a little bit of de-risking in top ten mark, and then on a marginal basis, closing the duration gap, this also reducing the SCR by reducing the market risk SCR of [indiscernible] and of Sampo. So, those are some of the flavors of things that contributed to the reduction in SCR, and again, some of them I would call volatile items, which can increase the SCR again quickly. But the majority is of course permanent in terms of the risky market risk from [indiscernible] and some of the smaller things we did under the same label.

Okay. Very clear. Second question on the interest rate sensitivity. Torbjorn, you showed the slide. Just wondering, I think I've asked the question once before, but just to make sure, obviously there is an upfront impact on the whole reserving part when you change the discount in [indiscernible], Sweden, Finland, and Denmark, but also, I guess there must be a running impact on new claims, which is not that insignificant, I guess, given the impact you're having on the reserving part. So, doing the math of the impact of the change you did in Finland this quarter, and also the sensitivity in Sweden, then I see your average duration and if it's around 7 years, so I get to a running impact on the combined [ criteria ] of just about 1%, or 1% change in the interest rate level. Does that sound accurate?

I think the previous time I answered that, it was a relatively minor effect, and you've just tried to prove that, I think. It is small, and depends on a number of other things also.

If I should add to that, Jakob, Knut-Arne here. Of course, the main change, some discount rates are coming from long tail reserves annuities, not on our nominal reserves, which we don't discount neither on an IBNR basis or a case reserve basis under current accounting regimes. So, the impact of new claims being annuity, so on an annual basis, is clearly minor compared to the impact we have of reducing the discount rates on prior year claims. But there is of course a small effect. I would call it clearly minor.

Does 1% sound too much? I was just wondering what, where would that end up?

I think 1% sound sounds too much, and again, as Knut-Arne reminds you about a lot of the claims reserves that we have are not discounted, they are nominal, so it's really on an annuities that you will have any effect, and that's quite a small part of it in every single year.

The annuities in Sweden are real and discounted with real rates for good reason, so that's also different. But it just sounds a bit much to us, Jakob.

Okay. Yes. Makes sense. Okay. Last question. I think you wrote in the report that you have raised the assumption for large claims. Maybe I missed how much, but could you just elaborate on how many millions have you increased at large claims assumption on an annual basis?

Yes, we are of course revising the large claims budget every year, and of course since our industrial book of business has grown a bit both last year and this year, then the large claim budget in nominal terms is reflecting that. I think roughly we talk about a little bit more than on a totally early basis, a little bit more than EUR 20 million in an increased large claims project. But again, it's fully in line with the growth that we have in that book of business. That's what drives it.

Our next question comes from the line of Youdish Chicooree of Autonomous Research.

I've got 3 questions, please. The first one is really on underwriting and claims inflation. You still sound quite confident that you will be able to actually at least price in line with claims inflation. So, from that perspective, would it be fair to expect what you call your adjusted risk ratio to continue to improve in the coming years? That's my first question. Secondly, I've got one question on solvency. There was obviously a very strong benefit from markets in the second quarter, and I'm just considering given that the risk free rates have pulled back in the last month, so I was just wondering whether you had a more up to date position to give us on solvency. That's my second question. Then finally, just on leverage, and the plan that reduction of EUR 800 million, does this all relate to senior debt, or are you also planning to reduce sub debt, which is currently included in your solvency capital?

On the first one, both for the Nordics and Hastings, I said in my introduction that we of course expect to aim to continue to improve on the underwriting and at the moment that there's no segment where we have an issue with rate increases. So, at the very minimum, no deterioration, but of course, much of our work is aimed at improving.

Hello, Youdish. On the solvency side, I haven't a today number to give you. We haven't published that in our report and disclosed that. But obviously rates, which we all know, dropped a bit in June, but then returns on other asset classes was good, meaning that it's not a materially different position than what we had. But again, these volatile items I alluded to are volatile on a monthly basis and a quarterly basis, so we should of course be careful to think that it necessarily have to be at the same high level as of 30th of June, but that would only be to these volatile items and not any other negative sustainable impacts that has happened since we closed the book. On the leverage, I know it's going to point to individual loans on our balance sheet, but as we've said before, and which you also see on our maturity profile, it would be natural for us to include senior debt in our thinking. And just also for the purpose that the hybrid capital we have work well as an regulated insurance entity in terms of being used as solvency capital. But I'm not going to point to exact which outstanding loan we sort of have thoughts around.

Our next question comes from the line of Alexander Evans at Credit Suisse.

I just want to touch on the discounting impact SEMC. If I look at what you said, it's EUR 120 million across the first half, and I think in your 1Q report, that was EUR 44 million. So it implies sort of about 6% of earned premium in this quarter, and reserve releases were sort of just behind that. So I just wanted to get your thoughts of is this sort of increased prudence on your behalf or are there some sort of degree of concerns around inflation? And then as you pointed out on sort of rates that have stepped down since when you closed the book, that would be a little bit of a headwind in Q3 at the moment. And given the action that you've taken, can we assume that this is probably going to be smooth? Then secondly just on industrial, how much of that growth is rate related and how much is volume, and what's the appetite? So sort of a little bit increased volume there. And then sort of thirdly, if I may, just on Hastings, you're sort of saying that the operating ratio and the loss ratio should come in line with targets for this year. I guess sort of in the backdrop of the rest of the UK players that've been struggling quite significantly, what do you think that means for the Hastings' outlook in 2023 and 2024, given where you should be best positioned relative to the market?

Good. I'll take then the 2 first ones. First on discounting, yes, it's correct that a larger part of the runoff gain both in the first quarter and second quarter comes from discounting effects. In the first quarter, mainly from Sweden. And then in the second quarter from Finland. Then, I think it's fair to point out that we have increased prudency in our reserving during the second quarter to really make sure that we also account for short term inflation risk in their serving. So there is definitely a bit of prudency on top of that. When it comes to interest rate movements, the Swedish part is more a market to market type of development, whilst the Finnish one, as you might recall, is more rate set as a management decision. So whilst the interest rate in Sweden has gone down a little bit in July, there is still quite a lot of room up to sort of the potential sort of market to market interest level in Finland. Then when it comes to industrial, we have sort of about 2 thirds of the volume increase is sort of price increases. Half of that, so one third of the total growth in industrial is what you could call rate increases. And then the other one third is adjustment of insurance values. In sort of a commercial or private market, sort of both of these elements would sort of be classified as premium increases whilst in industrial, sort of you typically talk about rate increases being then again, one third, which is really sort of supposed to improve the online profitability, whilst the last one third is more updating to new insurance values as a result of inflation on insured objects.

And on Hastings, evidence so far from the few companies that have published results and also rate statistics on the price comparison sites seem to indicate that Hastings has a very good position compared to the market at the moment. And then if the market would not react to the claims inflation, that would be extremely painful after a while for the market. So it would seem that Hastings could come out of this from a position of strength.