Sampo Oyj (SAMPO) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the Sampo Group Fourth Quarter 2022 Conference Call. My name is Sami Taipalus and I'm 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. With that, I hand over to you, Torbjorn. Please go ahead.

Thanks, Sami, and welcome, everyone. I am pleased to be able to release yet again very solid figures for the quarter and the full year. Both the backward-looking cost and claims ratios as well as the forward-looking retention and rate change numbers are overall very satisfactory, especially in the Nordics. Furthermore, in this main market of ours, we observed no changes to the market structure in the latter part of the year, no start-ups, either from fintechs or international insurers. The second leg of any insurance business, investments also look promising, and we saw EUR 230 million in increased run rate profits from higher yields compared to 2021. The balance sheet looks very strong, of course, and we plan for both the regular dividend based on the insurance operations as well as an additional dividend and buybacks. The last quarter has been a bit technical in accounting with a goodwill write-down for Topdanmark Liv and reallocation of non-life provisions. But this does not, in any way, reflect a deterioration in the underlying development. So for key developments in our P&C operations. They look very healthy at the beginning of 2023. We have actually not seen any meaningful increase in claims inflation in the quarter. And at the same time, the necessary rate increases are implemented in the market. There are comments in this slide about increased marketing activity in certain areas, but we were actually very close not to include that comment. It has not had any significant effects. Claims inflation still varies between roughly 3% and 6% across the Nordic geographies and products. So no product standing out with any extreme number. And we have focused more on customer satisfaction and corresponding growth in Q4 at increasing rates furthermore. In the Nordics, we also rearranged provisions a bit, increasing the Finnish discount rate, more in line with reality, but still with the margin, but keeping the prudence in the regular reserves. Thus, the positive discount effect of EUR 218 million and corresponding negative reserve increase of EUR 103 million. All in all, we have kept our long-standing prudent stance on provisions at roughly the same level. The U.K. then, the premium numbers are quite extreme for us in the quarter as we did not participate in the aggressive market behavior in Q4 2021. And then we have, of course, increased rates in line with the 12% claims inflation this year. So our total growth in Hastings in Q4 was a very high 31%. This also reflects rapid growth in home insurance and growth in telematics as well as the multicar product. Even if home insurance still is much smaller than motor for us at more than 400,000 policies, it's no longer a negligible line for Hastings. The U.K. market has, it seems, met but not exceeded the increase in reinsurance rates at the year-end now, which means that we still see average rates somewhat inadequate in motor. As mentioned already, for the first time in many years, running yields have increased and contributed in a non-negligible way to our results. Underwriting still makes up the majority of our total profits before taxes. But the more normal, at least from a historic perspective, interest rates makes the underwriting discipline even more valuable. The running yield at If P&C was 3.2% and Mandatum 4% at year-end, and we have strived to lengthen the maturities also in these beneficial surroundings since roughly the half year and average maturities are just now below -- are now just below 2 years for the same entities for If P&C up from 1 year just 12 months ago. This slide is a dull one, but let me comment briefly on 2 things. First of all, we continue to grow the underwriting profits rapidly, and the underlying combined ratio has improved in the Nordics, both from cost reductions and continued underwriting improvements. There's no change to that development. Secondly, the Hastings figures look a bit odd, much due to the same effect as previously in 2022 due to technical items having to do with our acquisition as well as the reinsurance structure changes. We missed our target for the year by just below 2% for Hastings, which reflects the unusually tough winter in the U.K., something not at all unique to us, of course. The more important remark is that the motor rates in general need to come up more than they have for this market to perform adequately in 2023. Needless to say, as part of Sampo Group, Hastings will never chase volumes unless rates are sufficient to meet our targets. Then in the Capital Markets Day in 2021, we introduced a new balance sheet framework, and we have also tried to show a lot of discipline in this respect. With the conclusion yesterday of the EUR 1 billion buyback program and with the proposal today of EUR 2.60 dividend plus an intended EUR 400 million buyback, we continue on this path. The remaining excess capital after this is, by and large, the capital tied up in the PE portfolios. Finally, a couple of words on the ongoing Mandatum evaluation that the Board initiated in December. This, I think, came as no surprise after the last few years of strategic process. We are considering a broad range of alternatives, including a sale, demerger or just continue as is. Remember, Mandatum provides some dividend support from for the group and also is gradually, but at a high pace, growing a business, which is more less with profits and more present day business. And this sub-sentence of possibility for support for the dividend for the Group is in no way intended as an indication of the end result of this process, just to be clear. We carry out this evaluation, as usual, at high speed and expect to be able to provide a concrete update before the end of the first quarter. And with that, Sami, we open up for questions.

Yes. Thank you, Torbjorn. Operator, we are now ready to start the question-and-answer session.

We will take the first question from line, Faizan Lakhani from HSBC.

I have 3 questions. The first one was on your potential excess capital left on your balance sheet of [Audio Gap].

Sorry, Faizan, we can hear you very badly. You sort of dropped off the line there.

I have 3 questions. The first one was on the excess capital that you have. One hand, you suggest that there's EUR 2 per share based on the PE stakes. But on the other hand, you mentioned [Audio Gap] slowing down and...

Sorry, Faizan, you keep cutting out all the time. Can we -- operator, can we move on to the next question and we'll come back to you, Faizan, if you rejoin the queue.

We will take the next question from line Jakob Brink from Nordea.

Yes. Sorry, if I take your question then. But my first one was actually also on the excess capital. And the last year, I think, Knut-Arne, we talked about the leverage rate, which seems to be your most binding requirement now, being at 30% roughly after the payout. But back then, we also talked about you being willing to let it drift above 30% for a while because you basically have the cash or the liquid assets as well. Now it seems like you have changed that strategy. And when you, Torbjorn, talk about the last 2 years being tied up in the PE stakes, at least if you look at it from a solvency perspective, you do have those EUR 2 already present. So what is it that has changed in your sort of way of looking at the leverage rates of being sort of across that instead of a net debt approach?

Good afternoon, Jakob. I don't think I would agree that we have changed everything -- anything. The reference last year was more in the order of things that if we have a leverage that goes slightly above 30% for a while and a plan to take it below our target, we would be fine with that. What we now have done is decided to return EUR 1.7 billion in capital, including the planned buyback. That brings the solvency, as you alluded, to comfortably above the 170% to 190% range. And I would also say that the leverage we are comfortable with, landing slightly below 30% with the older accounting regime and 1% to 2% lower as we speak since that's the benefit of own equity of the new accounting regime. So the decision on the buyback -- the planned buyback and the dividend we have done is not related to the fact that we have a constraint as such, which is here right now. It's in line with our communication to do gradual capital return, and we just concluded a sizable buyback and we have today announced further sizable capital distributions.

Fair enough. But just to make clear for my sake is, would you agree that if we take from a Solvency II perspective, 210% versus 170%, if you take the bottom end, that's around EUR 1.5 billion and the same if you would include your sort of net liquid position in your -- so basically taking net debt instead of a gross debt leverage rate, so that would be roughly the same. So even without selling the PE stakes, you would have at least EUR 2 per share today, which you have then chosen to save for later. Is that correct?

Not sure I followed all of it. But maybe one thing, I wouldn't necessarily say that we define excess capital above 170%. We have a capital management framework with a target range of between 170% and 190%. So excess capital would more be above 190% than 170%.

But that's still EUR 1 billion then roughly?

I think we still have a comfortable capital position and would say that we do have excess capital, which, of course, some of that needs to be monetized in terms of the private equity stakes. We are, after all, distributing EUR 1.7 billion. So to distribute more in terms of liquidity, we need to monetize some of the private equity stake or do other things to get liquidity up to the Group.

Jakob, on Slide 17 of the investor presentation, you've got the position on the solvency without selling the PE assets. There we point to EUR 0.8 billion of headroom on the solvency.

Yes. And so that's down to 190%.

Correct.

But I guess you do have the liquidity though. If you look at the plc balance sheet, you have EUR 2.5 billion, which would also be EUR 800 million more than you pay out.

True. We do have liquidity left, absolutely. But now we have decided on this dividend and planned buyback. It's a gradual return. Could we have sort of paid out a little bit more? Probably could argue that we could. It doesn't mean that this is sort of the last time we announced a capital return. And like I also said many times before, a buyback takes the time a buyback takes. You can't speed up the buyback just because you announced a larger buyback than the planned buyback we currently -- we announced today.

I think I get it. And then on the underwriting, there's been some talk, I think, in the market, what the underlying claims rate or combined rate is actually doing in this quarter. But stripping out all the extra stuff that we can't see but you can see, what would you say is sort of the development of the underlying combined ratio claims rates year-on-year, please?

I'll start and then leave the details -- the insights to Morten, but there's been no dramatic or significant change on previous years. We've had a good development for several years with growth due to our long-standing investments in IT and the web. We have also been able to improve the underwriting also this year, stripping out the volatile items, as you can see from some of the -- one of the pages in the package, say, 0.5% for the year and also been able to improve the cost ratio [ 0.3%]. So virtually the same development as we have seen for the past few years, underlying.

Yes. And then the more detailed figures. Underlying improvement, 80 basis points, 30 basis points from cost reductions, which, of course, is important to bear in mind. It's part of our sort of long-term strategy of always reducing that and then the 50 basis points on the risk ratio. And I think sort of full year underlying improvement of 80 basis points is sort of what is really representative. Doing underlying combined ratio on a quarterly basis is always a lot of sort of smaller volatility that they influence. So I think the 80 basis points that you see on the full year is really what's representing the underlying improvement.

And then, given the price initiatives you have done and the claims inflation, which, I guess, seems to be leveling off a bit, would you then expect something similar in 2023? Or is that too optimistic?

No, I don't want to speculate too much about sort of the future development. But of course, we are implementing price increases now between 5% and 6% into 2023. We have seen inflation so far, 4% to 5%. And it is correct that it's cooling off somewhat. Motor seems to have reached sort of the level that we expected and property clearly leveling off and even seeing some reductions as we see some of the raw materials even being reduced in price. So again, don't want to speculate too much about sort of future development on underlying, but I think we are clearly pricing in order to really take care of the inflation that we have seen and sort of anticipate in the market. So I think we feel very comfortable about that situation.

And then Morten, you're not going to get off the next year without having improved the cost ratio once again, of course.

That's again, as I said, the long-term strategy of always improving that with 20 basis points, which, of course, is important part of the underlying improvement.

Last question from my side. The reinsurance, what -- how have your program retention levels and pricing changed? What would be the potential negative impact to combined ratio in '23 from reinsurance prices having gone up?

Yes. The reinsurance market was finally hardening. We expected it to harden already a year ago, but now it was finally hardening. I think it's important to bear in mind that, that's a positive for us. It's helping us driving up rates in the large corporate market and being the largest insurer in the Nordics, of course, we benefit from, in a way, a hardening reinsurance market. We have slightly increased our net retention from SEK [ 250 ] million to SEK 300 million. But that's a more flippant comment, you can say that over the last 10 years, in euros, it's been more or less unchanged. So we have EUR 27.5 million as net retention today, which was exactly the same we had 10 years ago, actually. Price increases, the brokers report 20% to 50% price increases on the reinsurance renewals. We are in the very, very low end of that range. This was fully anticipated for us. So we have already included this in the pricing for 2023.

And I usually quote the number for our total reinsurance spend for the core programs are to the tune of EUR 70 million, something like that. You can compare that to the overall If premiums and figure out whether that has an importance or not.

And you said 20% or the lower end of the range starting with 20%?

Yes, I said that range in the market in terms of increases, 20% to 50%, and we're at towards the lower end of that range, yes.

We will take the next question from the line, Youdish Chicooree from Autonomous Research.

If I could ask you about just the competitive environment. I get the point that there has been no dramatic change. I mean you mentioned it several times, but I think in your slides, you talked about there's some -- about market activity in some areas. So maybe you could elaborate on that to start with. And then secondly, on the U.K., on Hastings, I mean, you changed the quota share reinsurance last year. So it's a bit hard for us to work out the earned premium dynamics versus the rating actions you've taken and claims inflation. So I was wondering, could you tell us like is the first half probably like a difficult half when you can get back to the operating ratio? Or do you think that's achievable?

I can comment the first one. I think it's quite exaggerating saying that we see any changed behavior in the Nordic market. It's sort of -- quite often we see a bit of marketing campaigns and different types of activities towards the end of the year. So I think this is no change in the market at all.

Then as I said on Hastings, it's part of Sampo Group. So we price according to what we need to meet the targets, and we have done so in 2022. And we would expect -- hope that the market will follow. Otherwise, we will find it increasingly difficult to increase our market share, of course, by the usual dynamics. Having said that, I'm impressed that Hastings has been able to keep up their top position in the price comparison websites even with higher prices. So there's some -- there's obviously something to the brand and the way that they do business that is very skillful.

Great. Can I ask a follow-up just on the U.K., please, because there are some -- at least some suggestions in the market that there's been a quite material improvement in pricing for both new business and renewals in January. Are you able to comment on that, please?

I think it's -- there's lots of public statistics in the U.K. Rates have improved in the second half of '22. And you could say that, that's good. We don't see that as quite enough. So -- but the position -- the general position is better now, better, [ adequate now ] compared to 6 months ago. And then an early indication of the rate increases at the beginning of the year is that they reflect the increases in the reinsurance prices that we just discussed here, but not more.

We will take the next line from Tryfonas Spyrou from Berenberg.

I just have one question on Mandatum. You mentioned in the slide about a listing to give shareholders control over the valuation. But I'm just wondering that this could also create a risk, for example, from a potential overhang on the shares, given that you could [ perceive ] as potentially looking to sell the stake at some point. Wouldn't a potential sale be a better option here, presumably the large sale would result in a more immediate cash infusion and more value creation?

I think I could follow roughly half of your question, unfortunately. But anyway, on Mandatum, I don't think that we wish to comment more than that. At the moment, we have all options open, and it's reasonable after just a little bit more than a month's exercise here. We'll return to this during Q1.

We will take the next question from the line, Alex Evans from Citi.

First, I just wanted to circle back on Jakob's point about the adjusted risk ratio outlook. Because I think before you were saying pricing increase was 5-plus-percent in Nordics and claims inflation was 4% to 5%. It now looks like you're saying pricing is 5% to 6% and claims inflation is the same. So are you implicitly saying that margins are going to improve going forward there? And then secondly, just around the sort of geographies that you're seeing in the combined ratio improvement, is that sort of 20 bps underlying improvement consistent across all the geographies that you're seeing there? And then just finally, just if there's any update on discussions on PE time lines and anything that you could give on that?

Yes, I'll start with the underlying improvement, just to repeat that again. I think the fair view there is to look at the full year 50 basis points risk ratio improvement and 30 basis points cost ratio improvement, so 80 basis points in total. I would say that, that's sort of the representative number for 2022. And it's more -- most of the improvements is in large corporate and commercial and then a smaller of it in private, but clearly, improvement in all areas. When it comes to inflation and pricing, the 5% to 6% is what we are implementing now, obviously, then looking forward into 2023. Then the 4% to 5% inflation is what we've seen historically, in a way, sort of during 2022. And then we are not expecting really inflation to increase further from this level. We are seeing that inflation in motor is now stabilizing. It's been increasing throughout the year exactly as we forecasted, it's been now stabilizing somewhat and the same we have seen for a while now even on property. Then, of course, the big uncertainty when it comes to inflation in 2023 is the wage improvement -- wage development in the Nordic region, but that is a fairly controlled sort of development since it's mainly done through the big union negotiations. So yes, I think that's what we can say about pricing and inflation.

We will take the next question from line, Blair Stewart from Bank of America.

A couple of questions left for me. Firstly, has the higher interest rate effect fully [ earned ] through now in '22? Or is there -- would you expect more of that to come through in 2023? Second question is, I wonder if you can give any color on the reserve addition that you made, I think, 0.8 points, what is going on there? Is that just reflecting inflation or something else? And finally, on Mandatum, I know you're not going to say much, but to what extent is the lost dividend consideration with respect to the coverage of your insurance dividend, should you decide to spin Mandatum without any proceeds coming to Sampo?

Good afternoon, Blair. Knut-Arne here. In terms of effect from higher rates, there is a little bit more to come in terms of the running yield. I would expect that to continue to tick upwards a bit during the next couple of quarters, not to the same tune as we've seen during the second half or so of '22, but to continue slightly upwards, given the investments we are doing. And also, before addressing your second questions on the effect of the higher rates, the reserve adjustment or the discount rate adjustment we now did under the old accounting regime wasn't up to the level where we will start '22. So there will be, you can say, an additional positive effect in equity from implementing IFRS 17 at an even higher discount rate.

Yes. And then I could add on the prudency. We always have had, as you know, a philosophy of having prudent reserves. This quarter, we are moving some of that prudence from Finland to other countries, obviously driven by the fact that we have a rapidly increasing discount rate in Finland. That gives us EUR 218 million in positive effect. We are taking EUR 115 million of that and moving prudency to other countries. And then in addition, it comes EUR 8 million in claims adjustment reserve, which on the waterfall in the presentation, is classified as current year reserve strengthening. So again, we are, as always, having prudent reserve and moving some of that prudency in the fourth quarter, which obviously makes the figures a little bit difficult for you to fully interpret, unfortunately.

And if I should add, Blair, just on the beauty of doing what we have done in Q4 and going into IFRS 17 and 9 for that sake, of course, we will be mark-to-market in terms of interest rates, where interest rate prudency is a blast from the past. Now we go into IFRS 17 actually having -- we shuffled some of our prudency into the best estimate, which will continue to be prudency also under IFRS 17.

Okay. And on Mandatum? Loss of dividend?

Well, Blair, isn't it -- it's very helpful that Morten has been able to grow his underwriting profit so much lately so that dividends can come from different sources, can't they?

Okay. And then when you say end of Q1, Torbjorn, do you mean end of calendar year Q1, so in the next 6 weeks?

Thanks for asking a question I hadn't thought about.

I mean not just the Q1 results, you talked about end of Q1, right?

We're, of course, as always, working as quickly as we can, Blair.

We will take the next question from line, Jan Erik Gjerland from ABG.