Sampo Oyj (SAMPO) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the Sampo Group First Quarter 2024 Conference Call. My name is Sami Taipalus, and I'm Head of Investor Relations at Sampo. 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 Torbjorn. Please go ahead.

Thanks, Sami, and good afternoon, everyone. The first quarter results follow our recent Capital Markets Day and the messages from that day are confirmed. The momentum in our organization is excellent. The underlying combined ratio development continues to improve at roughly the same pace and the increase in digital sales is very positive. Our Q1 growth is a strong 10% for the group, supported by positive development across all divisions. At the same time, we saw the most severe Nordic winter weather, since 2010 in January and February. This is non-life insurance. And now and then we have events or unusually large individual losses. This quarter, the winter effect for If P&C was 8%, clearly much more than an average winter, whilst the large loss amount was some 3% below budget, so clearly less than normal. Definitions of winter losses vary between companies and markets, but we try to be as specific as we can, not excluding any line of business. We see no reason at all to believe short-term volatility in this case, some EUR 100 million, EUR 100 million from the winter will have any long-term effects for us while we certainly do see clear and continuous improvements in our operations. Furthermore, the Nordic market has stayed rational, yet another quarter, and our hit rates, for instance, indicate no change in market behavior. Hence, we narrowed our combined ratio outlook for 2024 and now expect to land in that 83% to 85% range. Indeed, April weather has been rather normal in the Nordics, which gives us further confidence. At our Capital Markets Day on the sixth of March, we outlined an agenda that puts organic growth at the heart of our ambition to grow operating EPS by at least 7% per annum in '24 to '26. We have made an excellent start on this in the first quarter with Private in the U.K., growing premiums by 7% and 25%, respectively. Our Private division saw premiums increase by 14% in Personal Insurance and 7% in Property Insurance. Both numbers clearly increasing Nordic market share in prioritized areas. Digital sales are up by 9% in the number of objects this quarter, again, increasing its proportion of the total. In the U.K., we continue to see the effect of the significant price increases taken during the second half of '23 and a rise in customer count, both in Motor and in Home. Technology continues to be a competitive advantage for us. For example, we are leading the development in telematics solutions with good profitability, now accounting some 240,000 policies. Turning back to the Nordics. Claims inflation remained below our prudent pricing assumptions. The adjusted risk ratio in If P&C improved by around 30 basis points with Private seeing the most positive momentum. We continue to cover estimated Nordic claims inflation of 4% to 5% with price increases even as this appears to be trending towards the lower part of the range. And as usual, we are reducing the cost ratio for If P&C despite increasing the spend on digital developments. On profitability in the U.K. the substantial price increases taken over '23 are now earning their way into the P&L. Our headline U.K. operating ratio improved by 2 percentage points to 91.4% in Q1, which is also typically the toughest quarter seasonally. Together with strong premium growth, this enables Hastings to deliver a very high increase in underwriting profits year-on-year adding 5 percentage points to group level growth. Claims inflation in the U.K. has come down quite a bit, since last autumn and looks set to continue to trend lower in '24, which gives some reason to be optimistic for the U.K. market results in this segment. This final slide just gives all the numbers to the results for this quarter, boiling down for me to the improvement in the underlying combined ratio and the increased underwriting profit in the U.K., I think. Let me instead comment on another piece of the jigsaw that finally found its place last week when we got the decision by the Swedish FSA to approve our internal model application, giving a reduction of the SCR by the expected EUR 300 million or so. The process was delayed by the change of regulator after the Mandatum demerger, but we are happy to have successfully completed it in less than a year. The Board and the management will now consider all the relevant effects and provide an update once we see the balance sheet run with a new model for our second quarter directly after the summer. And with that, I turn back to you in questions, Sami.

Thank you, Torbjorn. Operator, we are now ready to start the Q&A.

[Operator Instructions] The first question comes from the line of Alex Evans calling from Citi.

Firstly, just back to the Capital Markets Day. You talked about reducing the midpoint of solvency by 10 points and the partial internal model [ appraisal ] relate to EUR 700 million of deployable capital. Is that still the case there? And you clearly highlighted you look at this at Q2. Is that just sort of a timing that it takes to work things through? Or are there any constraints in the short term to making that decision? Secondly, just on Hastings. I appreciate small numbers, but there's a quarter-on-quarter decline in policy count there in 1Q. Naturally, Hastings is a bit sort of leaner cost base and you'd anticipate some growth. Is that just a reflection of the competitive market in 1Q? And is it possible to give any color on the sort of that dynamics in Q2 so far? And sort of thirdly, if I may, just on the improved adjusted risk ratio. I know you don't target this on a sort of yearly basis let alone quarterly. But if you could just help me understand sort of how you think about this through the year. Should we expect sort of 1Q to be the low point? And clearly, there's a bit of sort of favorable comps on frequency, particularly in 3Q and 4Q?

Good afternoon, Alex, it's Knut-Arne here. If I take -- at least the first 1 with -- in terms of the effect from the partial internal model and the change in the capital management framework from the CMD, there is no change to that EUR 700 million. And there is no sort of new restrictions. Obviously, we want to plug-in our internal model and calculate the solvency ratio officially for the first time, which now will then be in Q2. But that's a formality. And the numbers will be, like we talked about that at the CMD and like we announced when we got the approval the other day.

On the adjusted risk ratio, that is not a number that will be exactly the same every quarter, of course. And for If P&C, that has developed roughly in line with the past few years. So I don't expect any particular pattern over the year there. Declining policy count for Hastings in the first quarter is not the number that I have. We see stable development for the core motor portfolio with some good additions from a bike and van products, and of course, especially so for home insurance. So good development on policy accountant. And yes -- and certainly on premiums, but you've seen that.

The next question comes from the line of Freya Kong calling from Bank of America.

Just following up on Hastings. So the operating ratio improvement year-on-year has mostly just been driven by the expenses and operating leverage there and the loss ratio, I think, has actually deteriorated a bit, which is somewhat confusing, given insurance revenues there up over 1/3, claims inflation is 12% and abating. I'm just trying to understand what I'm missing here in the deterioration both year-on-year and in the quarter? And secondly, on Hastings, is there any more color that you can share on the profitability development between motor and home? How is home claims inflation developing?

I'll take this second one, whilst Knut is thinking of the first one. The home is still -- average home premiums are quite low in the U.K. and the motor premiums are completely dominant in the overall result. And the first quarter this year for home insurance has been benign in terms of weather. And of course, we benefit from that. But as I said, these are small amounts. The driving force between -- behind the improvements in the U.K. is the improvement in premiums compared to the claims inflation. And that is what we will be seeing over the coming quarters as well, of course.

In terms of the start of the year for Hastings, it was also a good quarter with respect to frequency developments loss ratio, as you will have seen from our group underlying combined ratio development, Hastings also contributed to making that a 1.1%, which means in clarity that we decided because of the very good frequency development to put aside a bit of conservatism in terms of balance sheet reserving.

Okay. Can I just follow-up on Alex's question as well? It did look like quarter-on-quarter, your motor policy is reduced a bit, less than 1%. Is there any reason why you would be not more positive on the market or cautious on growth going forward?

Well, we're always cautious on growth, I guess, and a 1 quarter development in that product of 1% is a very small development. The overall bigger development is, of course, a good one. I think we had 6% growth year-over-year. But then we always take tactical discussions every month. I haven't actually thought of that development as anything that will affect the longer-term development. We see good growth opportunities for Hastings going forward.

The next question comes from the line of Tryfonas Spyrou calling from Berenberg.

I had 2 questions, 1 of it was answered just now on Hastings. I guess the other 1 is on If, specifically on gasoline. You made a comment -- could be on the thing in your comments that some of the below budget large claims could be as a result of the tighter risk appetite last year. Can you maybe elaborate on this? And might as well underwriting actions you've taken there? And I guess how sustainable could this be for this year? Should we expect large losses to be structurally lower going forward? And finally, can you maybe say how much of that 13% increase in gross premiums in gasoline's related to volume and price. And I guess the question I had is on some weather. I think you gave a slide, on Slide 6 you gave some color on sort of the last 3 years to be a weather claims have been averaging 1%. Clearly, Q1 was exceptional. And I think, the other worst quarter we had is 2010. So I guess, I think you're speaking of the weather impact, how should we look at it broadly going forward? It appears that the 1% seems on the low side and 8% seems very high. So should we -- any number you can give us in terms of expected to sort of budgeted for the claims that we should be expecting on a normalized basis?

It's Morten here. I'll try to answer your questions. First, the derisking on industrial. That's sort of something that we do in certain industries where we basically are taking down our lion's share sort of -- in typically sort of exposures, where you have kind of structured programs where we can take down our lion's share. Of course, that derisking is included when we make a budget. And so the budget, of course, is adjusted for the exposure that we have. So the large claim outcome favorable in the first quarter is simply that we had fewer large claims than budgeted, but again, already factored for the derisking. The 13% price increase or volume increase in Industrial is fully driven from rate increases and value increases. So net gain of business is very marginal. So again, fully driven by either values or rate changes. Then on weather. This quarter, as you saw, we had 8% above what we assume being a normal sort of winter. And then typically, we've been talking about that we sort of on a yearly basis, have roughly 1% or so in events. Of course, in the first quarter, there were some events, some storms as well. But 8% is sort of what we expect on top of a normal winter. Then in terms of expectations going forward, of course, we expect to price for sort of a normal winter, and we expect to price for normal events in our pricing. If you go back in time, I think 2023 was a little bit harsh winter, the 2 winters before that was sort of just around 0, 2021, I think, was slightly better than sort of a normal one. So this were -- will vary a lot, but obviously sort of very little bit -- but obviously, 2024 was exceptional and again you need to go back to 2010 in order to find the similar sort of harsh winter.

So, you think, but just to confirm, so the Slide 6 shows that severe weather claims [ substantial ] insurance revenue. Is that what is above your sort of expectation? Or is that the absolute number of sort of severe weather claims, just to make sense?

Above our expectation of a normal winter.

The next question comes from the line of Faizan Lakhani, calling from HSBC. Please go ahead.

The first 1 is coming back to Hastings. Thanks for your explanation on the loss ratio, but I just wanted to dig into a little bit more. Could you help disaggregate how much of the deterioration is down to the conservatism the better claims frequency? And if you could sort of split out how much you've actually benefited underlying from positive rate development there? The second question is, again, on Hastings, it's severity you mentioned is near 12% year-on-year coming down slightly. But when I look at some of the key indicators in the U.K., like used car prices have come down significantly, down sort of 9%, the suggestions are parts are more ready available, why is the claim severity so sticky within the U.K. motor market, if you could sort of clarify that? And the third question is on Finland. Actually, the combined ratio is up 6% year-on-year. There's no indication that was weather related, if you could help break out what that's related to?

We don't typically give, so detailed information as to the split that you're asking for, I think suffice it to say that we've had a good first quarter in Hastings, which gave us an opportunity to make sure that we are fairly and prudently reserved. The severity of 12% or 10% or whatever high number for the U.K. is compared to a year ago, and you're right that a number of the key indices like used cars is looking a lot better now, and we don't expect -- or we expect claims inflation to fall as a consequence in the U.K. going forward.

And I think on Finland, I think I rather would look at a combined ratio of 85.2%, which I think is a fair combined ratio for a winter quarter. There were clearly sort of winter effects also in Finland, but clearly much more than what we saw in Sweden and Norway. So Sweden and Norway was accounted for almost 90% of the winter effects. But again, there were some winter effects in Finland. But I think the combined ratio of 85.2% again is a good fair combined ratio in the winter quarter also in Finland.

The next question comes from Vinit Malhotra calling from Mediobanca.

I hope you can hear me. My questions are mostly regarding the claims side. So that -- three, hopefully, very quick ones. So first 1 is the large losses proved to be better than budget also this quarter, also last year, 1Q. And I'm just wondering if you could comment, is there any sort of conservatism built in? Or is it just good luck factors? Or is there anything that you could help us understand because it seems to be that it's in 2 quarters in a row now, but not better than feared. So that's the large losses. Second question is just on the -- you commented April weather was more normal. I'm just curious if you look at March and April, was it more normal? Or was it actually much better than previous year or something because that's what the -- your peers have kind of hinted at in this clearly, so that clarity. And last thing is just the feed back the U.K. inflation commentary you have said is more debt reduction in inflation. I'm just curious, is there anything that is stickier because when we see headlines, we think, oh the inflation is getting much better. So also a base effect of last year. So I'm just curious why it's only moderately lower and not much lower?

Can I just do the U.K. before?

Yes.

I agree. I think, everyone has been surprised how sticky claims inflation has been in the U.K. not only you. But now we clearly see, for instance, the used car prices at a lower claim -- a lower inflation level than before. So we have good hopes that this is now going to improve a lot. And then Morten will ask the surprising question that now that we've had 2 quarters of good large loss outcome. We get a question whether that is permanent.

No. And that's, of course, the large loss pattern is purely random. So even though, obviously, we saw a good large claim outcome in Q1 2023 and Q1 this year, that's, of course, purely random. So there is no kind of quarterly sort of pattern on that. And on the April sort of March weather I guess it doesn't make a lot of sense starting to comment sort of weather on a per month or per week or per day level really. But of course, I mean, there's been no big storms, no big floodings, no big events and a good decent sort of insurance weather, but I guess -- yes.

The next question comes from the line of Ulrik Zürcher calling from Nordea.

Three questions from me, if I may. Is it fair to assume that the 7% growth within Private lines for If will be quite sticky this year given that the inflation is high and your peers appears to be chasing quite big margin improvements? Secondly, I wonder if you could comment on how much your motor claims frequencies have gone up since 2022, again, for If even if they're in line with your expectations? And thirdly, just why not grow more in commercial? It's the lowest growth rate you have and it seems like a quite good combined ratio.

Yes. Morten here again. 7% growth in Private. Yes, I think we have a rather good growth prospects and outlook for the private business area. It's worthwhile bearing in mind that sort of over the last couple of years, we've had quite a bit of headwind from low motor sales as we talked about many, many time in these conference call. That headwind is starting too, is not as we start to compare with the years with also low new car sales. So in Private, 8.1% growth this quarter, excluding the Mobility business, 5.6% was the corresponding figure excluding Mobility business last year. And I think we see that we benefit from maintaining the high retention rates and, of course, then continue high price actions. And we expect price actions also to remain at a somewhat elevated level also going forward since we see that inflation is still, even though it's kind of gradually coming down, we see that it's still on a high level compared to historic levels. In terms of motor claims frequencies, the development that we have seen, and I think you have a good graph on this in the Capital Markets Day material actually. It's a very gradual increase from sort of the time after COVID until today. Of course, varying a little bit from country-to-country quarter-to-quarter. But for us, it has been very stable and very minor increase in frequencies. And again, very much what we had expected returning sort of to more normal traffic levels after COVID. On commercial growth, yes, we have an ambition to grow further in that market. We are making heavy investments in particular in digital solutions and remote distribution setup. And I do expect us to be able to grow as the market will become more digital. Of course, the other alternative will be to invest in the more old-fashioned distribution capacity, which would be a fairly shortsighted sort of way of growing in the SME market.

Yes. Just on the claim frequency for motors. Is there -- as this is increasing slowly or marginally, but you still have to reprice for that top of the claims inflation, right?

Yes. The 3 factors that you need to sort of price for in motor, one is the underlying inflation, second 1 is a slight decrease in frequencies. And the third 1 is that the repair cost of repairing a new car is significantly higher than the repair cost of repairing an old car. And that latter one, we are not sort of in our calculations, kind of calling inflation because that's something that we price for when selling new insurances for new cars. But again, you need to get all of those 3 rights in order to kind of have good pricing or correct pricing within motor. And I think sometimes people confuse and sort of mix inflation and frequencies and also this more underlying increased repair costs from repairing new cars and mix all of that into claims inflation.

So you're talking about claims inflation plus a couple of percent maybe growth and then a potential market share. Is that the top line growth then?