Sampo Oyj (SAMPO) Earnings Call Transcript & Summary

Welcome to today's presentation that we have the pleasure to present Sampo Group. To help us through and answer questions and give a short introduction, and then we will run a Q&A afterwards, I think we will focus on the Q&A, is Head of Investor Relations, Sami Taipalus. As always, of course, this event is covering the Q2 half year report out this morning. Do feel free to ask questions in the box down below. We have had a couple of questions in, but do feel free to put in more questions in the box down there. Do feel free to do it in Danish, and I will try and translate to the best of my ability. But I think for now, I'll hand the call over to you, Sami.

Thank you, Michael. I'll start with a few remarks on the quarter, and then we'll go to Q&A. I'll try and not keep it -- I'll try to keep it reasonably brief. Overall, a very solid quarter, a sort of continuation of what we saw in the first quarter with very strong growth, somewhat benign weather, but also strong underlying development on the margin. If you follow the numbers in detail today, you'll have seen that we beat the consensus by quite a lot. Most of that comes from investment income, which was partly a little bit fortunate. But if you look through the detail of the numbers, you can also see that actually the operational story is coming through very, very strongly. So we'll go more into that detail in that in a second, but strong organic growth, strong underlying margin development, which has allowed us to upgrade our guidance by [indiscernible] for the underwriting result to a range now of EUR 1.425 billion to EUR 1.525 billion for this year, and that was a EUR 25 million upgrade on both ends. In total then, we have delivered an operating EPS growth of 16% year-on-year in the second quarter, which is a solid result and compares very well with more than 7% target that we have for the current strategic period from '24 to '26. And in addition to these results then -- and I should have changed the slide already, so you can see a lovely summary of all this. And in addition to the strong results, we've also launched another share buyback program, so EUR 200 million announced today. And we continue to have a very solid balance sheet with a solvency ratio of 174%, which is slightly above the midpoint of our target range of 150% to 190%. So in a very comfortable position. Let's go through a few details then. And I'll just start with this slide here, where really -- and without going through all the numbers here, really the main point is that the breadth of the strength in the results. So we're growing top line in all divisions except one, and I'll tell you why in a second. And more importantly, we're growing underwriting profit by significant amounts in all of our divisions across the business. So it's not like we're lucky in one area and just have momentum there and you'll fade there, but the whole business is very well positioned. And I'll come back to talk about the private businesses in a second, but if we look at our corporate units, so Commercial and Industrial, we have a little bit of headwind on the revenue in Industrial, and that comes from a derisking program that we've undertaken over the last year or so, where we had a little bit more exposure to large corporate risk, large corporate property risks than we would ideally liked. What we've done now is we've cut back that exposure. We've had very good pricing quality on that business, and that will ensure that we deliver results that are also very stable as well as with strong margins. That's on corporate. Let's look a little bit more in detail then on the private segment. And let me start with the Nordic business, which had another really excellent quarter. We -- in fact, it was so excellent that it was the third consecutive quarter where we have record gross written premiums, so effectively gross revenue growth in the quarter. Where is that coming from then? Well, first of all, and very pleasingly, we have a high so-called retention rate. So a very large share of our customers, more than 89% renew their insurance with us every year, which is -- which we're very pleased with because it obviously reflects our strong competitive position. We are giving good service at a good price to our customers. So they're choosing to stay. Then again, if you drill into the details of the private segment, so the segment where we sell insurance to our retail customers, the growth is very broadly based here as well. Both in terms of countries, so we're above -- at or above 5% in all the countries in the retail segment, but also in all the products. So we're at or above 5% in all the major products across retail. Norway stands out as being particularly strong. That's because there's been some quite significant claims cost increases in Norway over the last few years for different reasons, inflation, weak Norwegian kroner, et cetera. And then by product, it's personal insurance and motor insurance actually that are developing very nicely in the Nordic region right now. That's Nordics. Let's look at the U.K. and a small reminder first, in the U.K., we have a very clear focus. We're in the digital channel, the price comparison websites. We have a business that's up to operate in those, and it doesn't compete outside of those channels. So we don't do any corporate business or any sort of business through traditional brokers or anything like that in the U.K. The story here really is, we entered the U.K. through the acquisition of Hastings in 2020. And since then, we've managed to almost or more than actually double the premium volume in that business to 2024 and continue to grow in 2025. We've added more than 1 million customers during that period in the U.K. And we've done all of this whilst delivering very, very solid results. So the U.K. market has tended to be known for having high cyclicality of margins. But actually, our margins have been very stable. And the reason for that is that we've been very disciplined in underwriting. We've been growing when the market has been giving us an opportunity to do so as it has been doing this half year. So policy count, the number of customers that we have is up 19% year-on-year to the end of the first half. And then we've been very much more cautious when the market hasn't allowed us to grow. So this hasn't been -- this hasn't come through in a straight line, but rather, it's been -- we've been taking the opportunities when we've been able to, and that's what we expect to continue to do in the second half. We will play market conditions in every single quarter. We have really excellent pricing capabilities that mean that we can select risk really well. And when we see that the market isn't there, we'll hold back on growth, when we see that we can hit our target margins, we'll continue to grow. And what about those margins then? Well, we've delivered a return on capital in this quarter of 24%, which is fully in line with the returns on capital that we're achieving in the Nordic region. So we sometimes get questions about whether the U.K. dilutes our returns or not. And the answer is no. It's just as profitable as the Nordics. Then we did an interesting transaction last year with the acquisition of the minority in Topdanmark. And now we have, in earnest, started the integration of the Topdanmark business into If, which is the big brand that we have in the Nordics. And so far, everything is delivering and developing exactly according to plan. The synergies to date have been very much sort of hard cost synergies across central functions primarily. And then we obviously expect this to accelerate as we continue to implement our plans. So really, this first half has been the half where we've had the least amount of synergies of any period now over the next couple of years, and then it's going to accelerate in the second quarter, which will help our -- particularly our cost ratio. And then over time, we'll get more into more complex synergies like the IT transformation, for example, which will deliver even bigger values. Remember, we upgraded our cost ratio target on the back of these synergies last quarter. So instead of improving the cost ratio by 20 bps year-on-year, we expect to improve it by 40 bps year-on-year now until 2028, which is when we plan to hit the EUR 140 million pretax synergies that we've announced. And then finally, a slightly closer look at the outlook range. I mentioned the numbers already, so I won't go into them too much in detail. But basically, we're looking at 8% to 16% underwriting profit growth in 2025 versus 2024. 8%, that's more of a -- if we have a bit of bad luck in the second half, which is always possible in P&C insurance, whereas 16% would represent neutral luck, but good continued execution against our targets. Two more things to add that aren't strictly related to the outlook. First of all, as I mentioned, we've announced a new EUR 200 million buyback program this quarter. That is funded out of profits we made already in 2024. But as I'm sure a lot of you know, we've been waiting for this Noba IPO to happen this year. And it didn't happen before the summer. We're hoping that it's going to happen in the second half. And if it does indeed happen, then we -- the Board will look to top up the buyback program to return the proceeds from that IPO because we don't have any need to retain them. And then finally, worth a brief mention as well is that this was the last quarter of our current CEO, Torbjorn Magnusson, who will be replaced with the current CEO of If, Mortan Thorsrud from the third quarter onwards or from the 1st of October onwards to be exact, but he will be presenting the third quarter results. And that is all I have to say.

Let's jump into the question. The first one, your combined ratio is well below your long-term ambitions. You also showed here 85%. And I guess -- and I know it's only a first half year and you are an insurance company. But the question here is 2025 just a good year. And I think it's a wise way to ask, are you actually needing to look at your long-term ambitions or is this just a good year with very low large claims and very benign weather claims?

The answer is yes and no. We do have some good fortune on both weather and large claims so far in the first half this year. So I wouldn't necessarily assume that this is a run rate number that we're at. Our target, as you mentioned, is below 85%. Some of the good luck that we had in the first half, we've used to strengthen the conservatism on our balance sheet. So it hasn't necessarily all fully flowed through. But at the same time, if you look at the underlying development, we improved the underlying combined ratio by around 60 bps in the second quarter, so 0.6 percentage points, mostly driven by expenses. So we were managing a significant expense ratio improvement and -- but also driven by good pricing against claims inflation.

Is that the general inflation coming down a little bit faster? I think we start to see pretty benign inflation numbers in the Nordic region. I know it can go up again, but is that a part of the answer?

Yes, it is. I mean, in insurance, we are exposed to a slightly different basket of services and goods than what the general economy is. So the mix -- it's like taking a cut out of the overall inflation and looking at that. But it is right that also our claims inflation number, as we call it, has been trending down broadly in line actually with the overall CPI. So there is a benefit from that, and that's a better development than what we had assumed when we set the prices for -- that are in force on the policies that we have right now. So some of it is indeed from that. Some of it is actually from things like the claims handling initiatives that we have in Topdanmark as well. So it's a mix of a couple of different things. But I guess the important thing here is that now the market -- when the market looks at our margins, they don't project forward the luck that we have. Most of our valuation is obviously on future earnings. So the fact that we have a bit of luck this year on weather and large claims is great, but really this underlying improvement that we're delivering is what drives the value in the stock and what the investors tend to be very focused on.

Then there's a question here. How much of the growth is coming from prices? And are they ahead of inflation?

Yes. So the prices are still a little bit ahead of inflation. We are a very disciplined underwriter, and we always want to make sure with inflation. We never want to miss on the under side. So we'd rather be a little bit too disciplined than to miss inflation because it's very difficult once you miss inflation, then you have to catch up and that really upsets customers. So we'd rather be cautious upfront and then maybe miss a few new customers and be sort of as straight as we can with the ones that we have. So we are a little bit ahead of claims inflation still. Claims inflation is at 4%, and I'm talking Nordics now. Claims inflation is at 4%, and we're maybe a percentage point or something about like that above that on pricing. The growth is coming from high retention, so higher renewal rates for our customers. It is coming from these price increases, but then it is also coming from an increase in volumes. There's a bunch of different areas where we are adding new customers, particularly in Norway now actually because a lot of our peers are having to increase prices much more than us because they're having to go through this process of repairing their margins. And that's an opportunity for us to be more competitive, but also in other areas, including Sweden, Finland, some parts of the Danish market as well.

And you mentioned the retention rate. So there's a couple of questions here. How is the retention rate in Topdanmark compared with the whole of Sampo Group after the takeover. Sometimes you can experience some hiccups, so a little bit of indication on whether that's actually not happening.

It's not happening to any significant degree. There's always some customers who churn almost just for this reason that you write a letter to them and they remember that they have an insurance policy. But there's no material churn related to the transaction. Topdanmark's retention compared to the Nordic business as a whole is quite similar to the If business. It's similar rates of retention. This is one of the things that we liked about the company and continue to like about that business. It operates in many ways similarly strategically to If and retention is one of those sort of focus areas. In Denmark alone, actually, Topdanmark has had higher retention than the If business had historically.

And then there's the high retention rate, how much is that your own initiatives and how much is about competition? I think a way of asking, have you seen any changes in competition? Or is it still a little bit of benign and everybody is still adopting to a higher inflation level, and that is kind of helping maybe the retention rate a little bit.

It's both. It's both. And your own initiatives are also related to how you handle competition. What we try to do in this inflation cycle, if I talk big picture, was to be very early with reflecting inflation in pricing. And we'd rather do it preemptively in more reasonable steps so that we never end up with this position where we have to write to our customers and increase and make really high increases because that's when people generally get really fed up and look for a new insurance company. So we've tried to do it in nice digestible steps for our consumers. And I think we've been quite successful with that. And I think that's a big reason for why we're seeing high retention and positive customer flows in quite a few areas, where some of our competitors have been taking -- they fell behind a little bit maybe in the beginning and then they've been taking big steps after that to try and catch up, and that tends to retain customers.

And then I know you had a busy summer last summer, we just spoke about it. And now someone is asking, will you again have a busy schedule. Are you seeing any other candidates for M&A in Denmark, specifically here, but maybe you can also elaborate a little bit about the Nordic? Or are you pretty much done with the larger one? There's not many possibilities out there. So a little bit of thoughts about that.

Larger one, I think we can exclude. That's -- there's just nothing as large left anymore really. And we would -- we have basically 20% market share in pretty much every market. So doing a really large deal on top of that, similar -- adding another 15 percentage points market share as we did with Topdanmark, then you -- then the competition authorities would have something to say about that, I think. So that we can exclude. Could -- eventually, over time, could a smaller deal be possible in the Nordics? Maybe if something interesting turns up, you never know. I wouldn't want to exclude that. But M&A is always opportunity-driven. We don't have our eye on anything right now. And let's see, the future is a long time.

Perfect. And you actually mentioned a little bit about your financial income, and that was part of the beat here. So there's a question here. Is the financial income in H1 a good proxy for the full year, meaning can you just double up on this bottom line? Or has there been some large movement on the interest side, share side or something like that, that is giving you a better-than-expected financial income, and we shouldn't just tie that to for the full year?

Well, that is a very good question. I mean every financial period always has large movements because we have a big balance sheet with a lot of assets and a lot of -- a reasonably big chunk of liabilities as well. So you have some one-offs in every period. I would say net, we've had some luck in the first half. So I wouldn't just double it up. And that comes from -- in the second quarter, it comes from equity markets. We tend to -- most of our equities are invested in the Nordics, but we have also some funds in Asia and the U.S., for example, that did really well in the second quarter. And then we have an interest rate move that -- because also the liability side is counted into our net financial result. We had an interest rate move that was particularly favorable for us. So I wouldn't quite go as far as doubling it.

Because you don't guide on that item. Is that correct? You only guide on the operational side?

That's right. That's right. That's right. We don't give a guidance. And for the very specific reason that you can have some quite significant one-offs either way there. What I would say, though, is that the market tends to react less to those movements than what it does to movements in the underwriting profit. Really most of our valuation is based on the underwriting profit and the insurance services result and much less is attributed to the investment result.