Sampo Oyj

Good afternoon, everyone, and welcome to the Sampo Group first half 2023 conference call. My name is Sami Taipulus, and I am head of investor relations at Sampo Group. I'm joined on the call by Group CEO Torbjörn Magnusson, Group CFO Knut Arne Aalsaker, and CEO of IF, Morten Torsrud. The call will feature a short presentation from Torbjörn, followed by Q&A. A recording of the call will later be available on sampo.com. With that, I hand over to Torbjörn. Please go ahead.

Thanks, Sami, and good afternoon, everyone. The report in front of us is basically a direct continuation of our development over the past quite a few years in many ways. This is the sample you will recognize with a great deal of stability and excellence in our operational performance. As in the past few years, we show good growth. Much of this, also this time, comes from rate increases, and also this time, the increases are marginally ahead of a rather stable claims inflation for our Nordic business, that is, the majority of what we write. We have continued to polish our underwriting and distribution abilities with the ever-increasing budget for technology, and the result is, again, an underlying improvement of the margin development. The UK insurance market is going through a rather unusual period where we stay true to our principles of prioritizing underwriting, but also addressing all opportunities that arise. We seem to be doing extremely well on a relative basis. There are no big discontinuities in the investment markets either, and with the increase in interest rates and duration from last year, our running yield is now at a significantly higher level than in the past few years, at 3.8% for FPNC. It remains to be seen, though, where the world is heading, and we cannot let the volatile investment markets affect our underwriting operations. Finally, on this slide, the process to list Mandatum is on track, and I strongly believe that Mandatum will benefit from becoming an independent company. Mandatum has really shown through the past couple of years that they can perform strongly in very varying market conditions, and asset under management now grew to about 11.2 billion euros. On the Nordic business, In the P&C operations, there is little further to add for the overall picture. There's no significant change in the behavior in the market. The Nordic P&C market has remained disciplined. Inflation is a little higher now for motor than property, but the average remains 4% to 5%, and wage inflation outlooks support that this should not increase. Great actions in commercial Norway and industrial have been rationally received by the market. There have been a number of large fire claims and an unusual rock slide, NatCat, in the Nordics. We have looked very carefully into the details of these events and all the evidence says that this is noise, expensive noise, but stochastical noise. Then in the U.K., There's now a wealth of public data showing quite dramatic rate hikes over the past quarter and also in July, leading to increased shopping. However, the number of customers actually finding cheaper offers are fewer than the shopping numbers might indicate. In Hastings, we have been able to increase the number of motor customers a bit and home insurance a lot. The fact that UK inflation and claims inflation in particular is behaving differently than most of continental Europe and Scandinavia is also well publicized. And we have adjusted our full year outlook to reflect this. Whatever happens with inflation, we will continue to price rationally. This is part of sample group. And maybe even with slightly more conservatism going forward after this unique period of claims inflation. A technical comment on Hastings is also that Hastings has grown by 37% in a year and IFRS 17 drives up upfront distribution costs, which is another significant reason for the adjusted outlook. Frequencies in our markets are close to expectations in the Nordics and slightly marginally high in the UK, but only an issue because of the compounding in the UK with the inflation in average claims. So with the uniquely rapid hardening of the UK market and with our performance in the market, we are more confident, not less, that we will be able to deliver a strong 2024 in the UK. One particularly pleasing part of our performance that I wanted to point out or bring out is the quality of our growth in the Nordics. Private lines growth is now again above 5%, despite car sales staying at the same low levels as last year, even coming down some 4% in our most important market, Sweden. This is now driven by good performance in home and personal insurance. Online sales is increasing again, one of our strongest channels, at 22% of total private line sales in Q2. Retention, as I already mentioned, has remained extremely high by historical comparisons and supports the growth, of course. The Hastings page here I think I have already covered, but just reiterating that I think we have created a lot of value there by growing in the segments we have focused on, by being very early with rate hikes, and now expecting claims inflation to moderate. As usual, we're not optimists, but we will be conservative and careful in our approach and only grow when our customer offering is superior and when we get the prices we want. On our standard performance to targets page, we have a more modest underwriting growth this quarter at 3% in local currencies, tempered by the large loss and NatCat outcome, and also the claims inflation in the UK. The numbers over the planning period are, of course, still excellent, and we do not expect to see a repeat of the negative stochastic elements of our business every quarter. A small note on the cost ratio is that we do not work extremely hard to smooth this one every quarter. As for instance, we do not capitalize IT investments in ETH PNC and they vary between quarters naturally. I expect to see the usual 20 basis points or so improvement at the end of the year. Over the long run, we have been able to do this for some 15 years. This is very supportive for our position in the market. Assuming the spinoff of Mandaten proceeds according to plan, Q4 will be the first time we report as a pure P&C insurer. Given the momentum we have in our business, given the attractive market conditions in the Nordics, and given the rapidly improving dynamics in the UK, I'm confident that we can continue to drive attractive shareholder value creation. And with that, Sami, I think we open up for questions.

Yes, thank you, Torbjörn. Operator, we're now ready for the Q&A.

Ladies and gentlemen, as a reminder, if you would like to ask a question or make a contribution on today's call, please press star 1. To withdraw your question, please press star 2. Our first question is from Jacob Bring from Nordea. Please go ahead.

Thank you and good afternoon. First question on the prior year gains which are relatively high this quarter. Would it be possible to give some more details on that please? The second question if I should take them all now. On 20th of June you send out this announcement about the internal capital model application expected in H1 next year. But it also had a comment regarding changing to the Swedish regulator. I guess that will take place after the demerger of Mandatum in October. So it's given that the Swedish regulator has already approved the internal model. Could this approval then actually happen already this year? And then lastly, on buybacks, now you've finished your buyback early August. Given the liquidity position and solvency, I would have thought you would maybe restart a new one now. But what should we think here, please?

Knut, let's test the technical connections here.

All right. Thank you, Torgern. And good afternoon, Jacob. I hope you can hear me. On the internal model, we tried to use all the information we had in terms of timing. It's correct that the change of regulator will happen basically on the day that we do the demerger, meaning beginning of October. And we will send in that application for the internal model on that particular day to make it very concrete. Then, of course, the Swedish regulator will do a proper and professional job with that application, which also was indicated by the timetable, meaning that we expect to get that in place next year. I don't expect that to happen this year. That does not mean that I expect more challenges with our internal model because of the reasons you mentioned and also because of the fact that the Swedish regulator has been a part of this process in Finland already. So they know what we are doing, so to speak. If I should take the buyback as well, maybe Torbjörn? We just completed the buyback. Then, of course, we do have a big capital distribution coming up, if you like, in terms of the mandatum demerger. And then we will review our capital management framework later this year and present the new capital management framework at the Capital Markets Day in December. That and the additional benefits we get from internal model obviously would mean that I expect us to have a strong solvency position following the merger. And we will continue to consider that solvency position in terms of the best use as we have done over the last three years.

And finally, on prior gains, well, first of all, the fact that we have strong reserves and always have had strong reserves will come as no surprise to anyone. And Morten, what have you done?

Yeah, first, a small reminder that, of course, IFRS 17 gives us some sort of automatic runoff gains as we build up the risk adjustment reserve and then sort of are in later years, of course, releasing that. But that's, of course, a smaller part. Then there's nothing in particular sort of to really report. Of course, this is a combination of movement of individual prior claims and then movements on different kinds of businesses, but nothing really particular to report about. Of course, 6% is clearly about what you would expect in a normal quarter, but it's also not unusual to have a bit of volatility on a quarterly basis. So we continue with the same sort of reserving philosophies with strong conservative reserves.

Okay. Thanks a lot. Very clear.

Our next question is from Alex Evans from Citibank. Please go ahead.

Yeah. Thanks for taking my questions. Firstly, just on the 50 basis points improvement in adjusted risk ratio, I Just wondered if you could give a little bit of color here. I think you were saying sort of claims inflation is roughly stable. How is sort of pricing developed and how do you expect that to develop going forwards and sort of what are you seeing from competitors here? If I, for example, look at the growth rate in premium growth in motor, this is only 3%. I mean, is that reflective of a little bit of churn that you're seeing in that segment? Or do you actually think claims inflation is a little bit lower for motor, let's say? And then just on Hastings, we've had the introduction of the UK consumer duty. So I was just wondering if you could elaborate how you think the FCA will approach this for insurers and what Hastings has done to prepare for this. Thanks.

I'll start with your kind of fairly long question on the risk ratio sort of improvement. The situation is fairly stable now over the last few quarters. We see an inflation about 4 to 5 percent on the total Nordic level. And we continue implementing price increases of 5% to 6% on the Nordic level. So a pretty stable situation. Growth in motor, yes, it's 3%. But we're having still a bit of headwind from the low new car sales in Sweden. I think we talked about it. There's many, many times that sort of with the car damage warranty three-year system that they have in Sweden, this is giving us a bit of a headwind when still sort of the new car sales in Sweden is on the yearly basis around 280,000 last year, sort of whilst it was at peak levels around 400,000. So if you adjust for that, sort of you would see sort of more reasonable growth figures also in motor sales. And as I said, sort of 50 basis points improvement in the underlying risk ratio, coming basically from all business areas, 40 basis points year-to-date.

These things and consumer duty, customer duty, of course, new regulation, giving the obligation to create good solutions for clients. We have always had that at the forefront, and Hastings has a tradition of having that at the forefront of their minds. So there has been a lot of work with the details in IT systems and so forth, but we are well prepared and don't expect any disruption to our business, possibly opportunities rather, from the market. Remember in JIP, the JIP reform actually provided us with good opportunities in the market rather than the opposite. There has been some discussions around premium financing in the UK. We have an APR that is not different from the rest of the market, and maybe this is more a pronounced problem in other parts of the finance industry than non-life insurance.

Thanks. And can I just follow up with Morten on what sort of peers, what you're seeing peers do in the market with rate and how they're sort of interacting?

The competition? Yes. Yeah, no, I'd say sort of competition is still very disciplined in the Nordic market, and I think we see all the major players implementing significant price increases in line with sort of the inflation that you see. So I think the market remains disciplined, absolutely.

Thank you very much.

Ladies and gentlemen, as a reminder, please press star one to register your questions. Our next question is from Jan-Erik Gerland from ABG. Please go ahead.

Thank you for taking my questions as well. I just wanted to get a little bit deeper into the mandatum, and if you could shed some more light into how the CSM margin had been impacted from the change in the interest rate this quarter. and how the investment return of 50 million is evolved. Is it purely on top of the guaranteed rate levels that you have to distribute, or is it some sort of windfall gains in that investment book that we should be aware of when it comes to mandatum? Secondly, could you shed some more, even more light into the runoff gains this quarter, the 6% as you said, Morten, is a little bit higher than normal. Is it interest rates? Is it change in behavior somewhere that is the driver? Or what is the real driver behind these changes in each of the business units, if possible? And finally, do you have any outlook for the heavy rain in the Nordics these days called Hans? That will be also very helpful into the third quarter. Thank you.

By way of introduction before the others, Morten and And Knut will pick up. The runoff gains, there's no trend here, so just remember that. We have no target, as some other companies do, for our provisioning. It's fair and prudent and strong and according to the new IFRS 17 regulations. It's not... supposed to meet at any target. So we had a strong runoff gain this quarter. Morten can possibly give you a little bit more detail, but don't expect this to be. Anything else than a number that will vary over time. And then Morten, you will always also discuss the rains, which are destroying some nice summer days here in the Nordics, but seem to be much less of an insurance issue maybe than the large loss in Norway in June. So if you start...

Yeah, no, it's not that much to add on the runoff gain. I mean, it's not coming from one place or one line of business or one business area. It's kind of a number of places and also some single movements on all large claims. There will be volatility on the prior gains over time. Over time, of course, we do expect certain positive runoff gain. I mean, with the RFS 17 again, with the risk adjustment reserve, you get some of that sort of prudency automatically into the books. So there's nothing really special there.

When it comes... No changes to the interest rates, et cetera, which we saw last year, which was a sort of big move.

No. Not this quarter. Then when it comes to the weather in the Nordics, it's sunny and great here in Helsinki at least, which is sort of, I think, important to remember that we are a well-diversified sort of company. It's quite natural that there are sort of storms, cloudbursts in the months of July, August, September in the Nordics. We typically have that in any sort of third quarter. Of course, early to say something about the exact magnitude of this, but, I mean, to me this is a natural event that we typically have sort of in a quarter and even might have more of in a quarter. So this is normal sort of in our business, and so far nothing spectacular from an insurance perspective at least.

Knut, your favorite question on mandatum.

Did you have a follow-up there, Jan-Erik, to Morten? It sounded like you had a follow-up.

Yeah, just on the heavy weather side, we saw Gävle two years ago being underwater. Was that even more expensive weather-related stuff than this, as you had mentioned to Björn in the start there? That's not possible to say.

That's not possible to me. And remember that we were not the company that was hit the most by the Gävle accident.

No. How would you say your market shares are in the areas where you are seeing these storms these days? Because you are normally greater in the cities rather than in the non-urban areas.

That is correct.

But again, I think it's... It's too early to speculate, and I think this is not, again, a significant event from our perspective.

So this is sort of... If we put it this way, Morten, we would be at least... This event maybe haven't even ended yet, but we would be surprised, you and I, if it reached our reinsurance program.

Oh, yeah. Okay, thank you.

As a final reminder, please press star one to register your question. Our next question is from Nadia Clarissa from JP Morgan. Please go ahead.

Hi, afternoon, everyone. Just going back to Hastings and the potential impact from the implementation of the SBA consumer duty, if I may. More specifically, I was just quite interested in the ancillary income. I was wondering if Hastings has made any changes to their facility product offerings, because I'm just trying to understand if there's been any impact there and whether facility product sales have been reduced. Thank you.

We didn't hear you great there, but just to check, your question was about whether Hastings made any changes to the installment income or premiums finance product ahead of the FCA consumer date.

Yes, more specifically for the installment income and also the ancillary product.

We have not had to change any product, not installment income either, in preparation for this new regulation.

Okay, great.

Thank you so much. Our next question is from Michelle Balatori from KBW. Please go ahead.

Yes, thank you. So two questions for me. So first, on the asking and if collaboration, you have a very interesting slide. If you can maybe give some more details on in which way these synergies are developing, especially in pricing and claims, and also the 30 million of benefits that you have realized. I mean, what do they sit in? If or as things exactly, which the combined ratio or... Thank you.

Yeah, I could start with that. The synergies between IF and Hastings, the largest ones are within sort of pricing and then within claims. In pricing, it's kind of a long, long list of initiatives. And I think the important thing is that sort of our pricing specialists are now working closely with the Hastings pricing specialists. And obviously, exchanging all type of insight, but also exchanging methods, tools, including sort of working on a system for calculating rates. So, it's kind of not one single area, but sort of a lot of sort of initiatives within sort of the pricing field. When it comes to claims, it's also the same, but perhaps the largest synergy potential there is to the learnings that we take from fraud and fraud detection where Hastings are more advanced than I think companies in general in the Nordic region and where we obviously benefit from that. Of the synergies realized so far, most of them have materialized in IF, but the synergies goes both ways.

Thank you.

Our next question is from Jaco Tjervainen from SEB. Please go ahead.

Yes, good afternoon. It's Jaco from SEB. I could continue on the elevated weather claims. at least across in Europe, should we expect those to result in increasing reinsurance prices towards 2024 in the Nordics? And if so, what would be kind of a sample mitigating actions for such events or moves?

I think the reinsurance market, so far at least, has been hardening. Of course, it's a little bit difficult for us to predict the development, but I think it's not unfair to expect certain hardening to continue in that market, which actually is beneficial for us because... A hardening reinsurance market is supporting the rate increases that we are pushing through in upper commercial and large corporate segments. And, of course, we as an insurance group are taking most of the risk ourselves, having a high net retention. So I think a continued hardening reinsurance market is actually beneficial for us.

You look at, Morten, what you pay for reinsurance in the core programs for a year, it's 80 million euros or something like that. So this is tiny for us compared to the group volumes. Yes.

Okay, good. Thanks. Then my second one regarding the inflation and pricing. I think we are seeing some signs of a bit of at least CPI easing towards ultimate and 24. How about the inflation that you are seeing in your claims? Are you seeing that leveling off going forward? And have you seen the Nordic P&G market already reacting to this? Should we expect more moderate price hike going forward or is the current 5% to 6%

The third consecutive quarter when we see roughly the same claims inflation, and that's not unnatural since we have a lot of long-term, large agreement with the main suppliers. It shouldn't change month on month.

All right. That's all from me. Thanks.

We have a question from Vinit Malhotra from Mediobank. Please go ahead.

Good afternoon. Thank you for taking my question. Just two very quick, simple ones, please. One is just the slide 55, I think, today shows new car sales are up 8% year-on-year or low level. I'm just wondering if it's helping already or will there be some kind of a lag effect from this? And the second one is also premium related. I see a Finland growth of 12% into QE. Is there something to note here? Because it seems to be very strong.

Thank you. I think when it comes to new cars sold, what typically affects our premiums is the amount of new cars sold in Sweden. And again, sorry for repeating this, but in Sweden they have this car damage warranty, which means that when you buy a car, it comes with a three-year insurance guarantee. So you get a multiplier effect in a way when car sales in Sweden is going up or down. So that's why kind of our figures and growth is particularly impacted by the development in Sweden. So hopefully the Swedes will start buying cars again. And then that will be visible in our growth figures. When it comes to Finland... Again, on a quarterly basis, gross return premiums would, of course, be impacted by sort of a couple of large wins. But the Finnish business is performing strong. We have record high retention rates, really good growth in all business areas. So quite a strong position for us sort of in the Finnish market, sort of obviously sort of the second quarter position. gross return premium is elevated a bit. So I think it's more fair to look at the year-to-date development.

And Swedish car sales are not growing yet, is it, compared to last year? Because I don't see the data, so I don't know.

No, I think Torben mentioned that in the beginning, that I think that those are pretty flattish, I think even down 3% or something like that.

Okay, sorry for that.

Our next question is from Darryl Goh from RBC. Please go ahead.

Hi, everyone. Just one question, please, on UK motor claims frequency specifically. Can you say how has claims frequency trended between Q1 and Q2? Did they go from 10% below pre-pandemic levels to 5%? Any indication of the sort? Thank you.

Sorry. I didn't recognize the numbers that you mentioned.

Sorry, Karel, could you just repeat the question? It was a bit difficult to hear you. Yeah.

Yep, yep, sorry. I'll speak a bit louder. Yeah, the question, which is on motor claims frequency in the UK. I just wanted to get a sense of how it has trended between Q1 and Q2. I was saying just illustratively, for example, if it has gone from 10% below pre-pandemic levels to 5% in Q2, something like that.

Deviations on – first of all, claims frequency is, of course, coming back to the pre-pandemic levels. And then compared to our expectations – this is some time ago, so we have to project, of course, for pricing. But compared to our expectations, they are very close, both in Q1 and Q2. This is not a major deviation like the claims inflation for severities is.

Got it. Thank you.

We have another question from Jan-Erik Gerland from ABT. Please go ahead.

Thank you for taking my following up. I just wanted to check this mandatum question also answered earlier by Knut Arne. And the CSM margin, et cetera, how should we think about the interest rate changes this quarter impact to the CSM margin and how would it affect the second half of this year when it comes to the overall margin? And secondly, on the mandatum, roughly 50 million on financial income, is that kind of called profit sharing or anything about the hurdle rate going into that number at all when it comes to the guaranteed levels? And if so, how should we treat that going forward with the higher running yields also seen in the mandatum business? Thank you.

Sorry for not answering your question when you first asked there, Jan-Erik. In terms of the rate movements in the second half and the impact on mandatums, sorry, in the second quarter, and the impact on mandatum, it was CSM, it was benign. There were no drama at all in terms of of normalized assumptions or CSM assumptions compared to rate developments in the second quarter. In terms of the investment income, neither was there any special items there in the second quarter which impacted the net investment income, and you have the split of the net finance results in those two components in our investor presentation. In terms of outlook for the second half, I will be a bit careful to answer that. We're about to do a demerger, writing a prospectus, publishing a prospectus. Mandatum will talk about its own business in a few weeks' time. Also, in terms of targets and profit model, going forward. So I welcome you to listen to that during the month of September prior to the demerger. Perfect. Thanks a lot for that.

We have a question from Judith Shikore from Autonomous Research. Please go ahead.

Good afternoon, everyone. I've got two questions, please. The first one is on clean inflation. I appreciate you. You said that it's been unchanged for the past three quarters. But I was wondering whether there were any significant underlying trends we should be aware of, considering what your peers have flagged in the past month. So just thinking on top of my head. So, you know, I think some of your peers have talked about higher motor frequency in Norway and Denmark. and also some celerity issues in Norwegian motor due to FX, for example. I was wondering whether there's anything particular in your radar that, you know, we should be aware of this claim cessation. So that's my first question. My second question is on actually, you know, on the UK and consumer duty. I appreciate you said your APL is very much in line with the market. I guess one of the concerns I guess I have and other people have is, whether the APR currently being charged by insurers in the market is too high. Because the number that we see in the press and mentioned by some players is interest rates in the region of 25%. So I guess the question is whether you think that that is a reasonable level for premium finance and whether that delivers actually meets the fair value test of the FCA, I guess. Thank you.

I can start on the claims inflation and frequencies. I think the short answer to this is that we see a very stable situation at the moment. Again, claims inflation remaining at the 4% to 5% level on the total if group level being very stable now over the last few quarters. Same with motor frequencies. Of course, over the Last couple of years, there's been a normalization after COVID, but we do see, again, on the total Nordic level, very stable motor frequencies and really no issues. Then, of course, you can have monthly movements between countries, but we see a very stable situation, and we are very able to predict now the development that we've seen.

On consumer duty, it's easy to get into a discussion about, okay, so is this APR reflecting risk and how big is the credit risk, et cetera, et cetera. I think one has to have perspective here. The U.K. market is far away or nowhere near adequate profitability at the moment with the claims inflation that we've seen, and the market has to address that. And it does. It's the most rapidly hardening market that I've seen in my 30-year career anywhere in the world. And, okay, then if one would have to change the features in one product or some product, then we would have to change pricing accordingly.

Okay, I appreciate that. So it's probably you're saying that there's probably a rebalancing that's required between products, I guess, like probably a less high margin on products, including premium finance, and probably better profitability on the core motor product. Is that what you're trying to say, basically?

Yes. Yes.

Yes. The answer is no longer than that.

Just to be clear, we're very happy with our product as it is.

Yes, thank you, Sami. I said earlier that we did not have to change our products because of the consumer duty reform, but If you talked about the market, if the market had an issue with this, if the authorities had an issue with the market's behavior, then the market would have to address also this.

All right.

Thank you. We have another question from Chief on us, Spiro from Birnbeck. Please go ahead.

Hi there, and apologies if you may have partly answered this identical debate. Can you maybe just briefly comment on which lines of business and which geographies you think rates are more adequate and the ones you feel more comfortable about and which and vice versa.

Sorry, Triff, there was a bit of trouble on the line there again. Could you just take that one again, please?

Yeah, I was wondering whether you can comment on, when it comes to the Nordics, which lines do you think price inflation is better? So, in other words, which lines are more adequate and which areas do you feel there's more to be done to get to a better level that is your expectations?

I think for us we have a situation sort of where the profitability, the underlying profitability is very strong and similar in all business areas and all geographies. So we don't see any sort of larger differences and any sort of portfolios where we have – and any particular challenges really. Claims inflation per line of business is of course varying. It's clearly higher in motor than in property. Property sort of inflation peaked already sort of a couple of years ago, sort of when material prices sort of skyrocketed. So, yeah, motor is higher, property is a bit lower, but again, very stable development now, and our models have been very accurate in predicting this.

And we used to say, Morten, a couple of quarters ago that all claims inflation numbers were between, say, 3% and 6%, something like that, for the Nordics. That's probably still true, isn't it?

That's probably still true, sort of property being, again, at the lower end of that, motor being at the higher end of that.

Thank you. There are no further questions, so I will hand you back to your host to conclude today's conference. Thank you.

Okay. Thank you for attention, and we look forward to seeing you all on the road soon. Thank you very much.