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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, everyone, and welcome to the Sampo Group First Half 2023 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 Torbjorn. 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 Sampo 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 U.K. 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 If P&C. 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 the 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 varying market conditions. And assets under management now grew to about €11.2 billion.
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 outlook support that this should not increase.
Rate 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 rockslide nat cat 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 statistical 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 U.K. 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 Sampo 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 the 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 U.K., but only an issue because of the compounding in the U.K. with the inflation in average claims. So with the uniquely rapid hardening of the U.K. 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 U.K.
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 low levels -- 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 are 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 nat cat outcome and also the claims inflation in the U.K. Then 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 If P&C 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 spin-off of Mandatum 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 U.K., 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, Torben. Operator, we're now ready for the Q&A.
[Operator Instructions] Our first question is from Jakob Brink from Nordea.
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 sent out this announcement about the internal capital model application expected in H1 next year, but you also had a comment regarding changing to the Swedish regulator. I guess that will take place after the demerger of Mandatum in October. So just 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 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. I hope you can hear me. On the internal model, we try to be -- sort of have -- 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, Torbjorn. We have a -- we just completed the buyback. Then of course, we do have a -- in some ways, a big capital distribution coming up 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 demerger, 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 year 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?
Yes. 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 year claims and then movements on different lines of businesses, but nothing really particular to report about.
Of course, 6% is clearly above 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 philosophy sort of with strong reserve, conservative reserves.
Our next question is from Alex Evans from Citibank.
Firstly, just on the 50 basis points improvement in adjusted risk ratio. Just wondered if you could give a little bit of color here. I think you're saying sort of claims inflation is roughly stable. How has sort of pricing developed? And how do you expect that to develop going forward? And sort of what are you seeing from competitors here? If I, for example, look at the gross written premium growth in Motor, this is only 3%. So 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 U.K. 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?
Yes. I'll start with -- you kind of -- a fairly long question on risk ratio sort of improvement. The situation is fairly stable now over the last few quarters. We see an inflation about 4% to 5% 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 it's -- we're having still a bit of headwind from the low new car sales in Sweden. I think we talked about this 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 a 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.
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.
Hastings and consumer duty, customer duty, of course, new regulation, giving the obligation to create good solutions for clients. We have always had that at 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, the GIPP reform actually provided us with good opportunities in the market rather than the opposite.
There has been some discussions around premium financing in the U.K. 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 the non-life insurance.
And can I just, sorry, follow up on -- 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.
No, I will say sort of the 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 remain disciplined, absolutely.
[Operator Instructions] Our next question is from Jan Erik Gjerland from ABG.
I just wanted to get a little bit deeper into the Mandatum. And if you could shed some more light into the -- how the CSM margin have been impacted from the change in the interest rate this quarter? And how the investment return of €50 million has evolved? Is it purely on top of the guaranteed rate levels that you have to distribute? Or is it 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 I said, Morten, is a little bit higher than normal. Is it interest rates? Is it change in behavior somewhere, like 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.
By way of introduction before the others, Morten and Knut pick up, the run-off 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 IFRS 17 regulations. It's not supposed to meet 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 is much -- seem to be much less of an insurance issue maybe than the large loss in Norway in June. So if you start.
Yes. No, it's not that much to add on the run-off 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 a certain positive run-off gain. I mean, with the IFRS 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 sort of we are a well-diversified sort of company. It's quite natural that there are sort of storms, cloud burst in the months of July, August, September in the Nordics that -- we typically have that in the 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 [Eric], to Mandatum? It sounded like you had a follow-up.
Yes, just on the heavy weather side. We saw Hableany two years ago being underwater. Was that sort of a more -- even more expensive weather-related stuff than this, as you have mentioned, Torbjorn, in the start here?
That's not possible to say...
But it seems to be more infrastructure...
That's not possible to me. And remember that we were not the Company that was hit the most by the Hableany 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 city rather than in the nonurban areas?
That is correct. But again, I think it's too early to speculate. And I think this is not sort of, again, a significant event from our perspective. So this is sort of...
We put it this way, Morten. I mean 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.
[Operator Instructions] Our next question is from Nadia Claressa from JPMorgan.
Just going back to Hastings and the potential impact from the implementation of the FCA 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 the ancillary product offering, because I'm just trying to understand if there's been any impact there and whether ancillary product sales have been reduced?
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 duty?
Yes. More specifically -- 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.
Our next question is from Michele Ballatore from KBW.
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 Hastings exactly the combined ratio?
Yes. I could start with that. The synergies between If and Hastings, the largest ones are within sort of pricing and then but in 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 a Hastings pricing specialist and obviously exchanging all site type of insight, but also exchanging methods, tools, including sort of working on a system for sort of calculating rates. So it's kind of not one single area, but sort of a lot of sort of initiatives in 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.
Our next question is from Jaakko Tyrvainen from SEB.
Yes, this is Jaakko Tyrvainen from SEB. I would 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 Sampo's mitigating efforts for such an event, or move?
I think the reinsurance market so far, at least, has been hardening. Of course, it's a little bit difficult for us to predict sort of the development. But I think it's not unfair to expect certain hardening in -- 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 segment. So I think -- 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.
If you look at, Morten, than what you pay for reinsurance in the core programs for a year, it's €80 million or something like that. So this is tiny for us compared to the group volumes.
Yes.
Okay. Good. And then my second one regarding the inflation and pricing. I think we are seeing some signs of a bit of at least CPI easening towards autumn and '24. How about the inflation that you're seeing in your claims? Are you seeing that leveling off going forward? And have you seen the Nordic P&C market already reacting to this, i.e., should we expect more moderate price hike going forward or is the current 5% to 6% will be enough?
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 more month-on-month.
We have a question from Vinit Malhotra from Mediobanca.
Just two very quick simple ones, please. One is just the Slide 55, I think ratios, new cost sales are up 8% year-on-year or lower 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% in 2Q. Is that something to note here because it seems to be very strong?
Yes. I think when it comes to the new cars sold, what typically affect our premiums is the amount of new cars sold in Sweden. And again, sort of 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, 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 and particularly impacted by the development in Sweden. So hopefully, the Sweds 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 written 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 gross written premium is elevated a bit. So I think it's more fair to look at the year-to-date development.
Sure. And Swedish car sales are not growing yet if we compared to last year, because I don't see the data. I don't.
No, I think Torbjorn mentioned that in the beginning that I think that those are pretty flattish, I think even down 3% or something like that.
Our next question is from [Daryl Gold] from RBC.
Just one question, please, on U.K. 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 through 5%? Any indication like of the sort?
I didn't recognize the numbers that you mentioned.
Could you just repeat the question? It was a bit difficult to hear you.
Yes. Sorry. I'll speak a bit louder. Yes, the question which is on Motor claims frequency in the U.K. 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.
We have another question from Jan Erik Gjerland from ABG.
I just wanted to check this Mandatum question was not 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 in the second half of this year when it comes to the overall margin? And secondly, on the Mandatum, the roughly €50 million on financial income. Is that kind of any kind of called profit sharing or anything about the hurdle rate going into that number at all when it comes to versus the guaranteed levels? And if so, how should we see to that going forward with the higher running yields also seeing in the Mandatum business?
Sorry for not answering your question when you first asked Jan Eric. In terms of the rate movements in the second half and the impact on Mandatum -- 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 normalized assumption or CSM assumptions compared to rate developments in the second quarter.
In terms of the investment income, neither was there any special items there, which in the second quarter, which impacted the net investment income, and you have the split of the net finance result 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, Mandatum will 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.
We have a question from Youdish Chicooree from Autonomous Research.
I've got two questions, please. So the first one is on claims inflation. I appreciate you said that it's been unchanged for the last 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 the top of my head. So I think some of UPMs have talked about higher Motor frequency in Norway and Denmark and also some severity issues in Norwegian Motor due to FX, for example. I was wondering whether there is anything particular in your radar that we should be aware of probably inflation? So that's my first question.
My second question is on actually on the UPM and consumer duty. I appreciate you said your APR 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 anything in certain in the pricing mentioned by some players, the 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 largely test of the FCA?
I can start on the claims inflation and frequencies. So 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, sort of there's been a normalization after COVID. But we do see, again, on a total Nordic level, very stable Motor frequencies and really no issues. Then of course, you can have monthly movements between sort of countries, but we see a very stable situation sort of that and we are very able to predict sort of 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 is credit, how big is the credit risk, et cetera, et cetera. I think one has to have a 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 if 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 changed pricing accordingly.
Okay. I appreciate that. So it's kind of -- it's probably you are saying that there's probably a rebalancing that's required between products, I guess, like probably a less high margin on ancillary products, including provenance finance and probably better profitability on the core motor product. Is that what you're trying to say?
Yes. The answer is no longer than that. But Youdish, just to be clear, we're very happy with our product as it is.
Yes. We -- 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.
We have another question from TryfonasSpyrou from Berenberg.
And apologies if you may have finally answered this identical a bit late. Can you maybe just press comment on which lines of business in these geographies, are you seeing rates more adequate and the ones to be more comfortable about a week and by vice versa? That would be my only question.
Sorry, Tryf, there was a bit of a trouble on the line there again. Could you just state that one again, please?
Yes. I was wondering whether you can comment on when it comes to the Nordics, which lines business and geographies, do you think pricing tension pressure. So in other words, which we find some more rate adequate, in which areas you saw there's more to be done to get to a better level versus your expectation?
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 in any sort of portfolios where we have 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 yes, 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 more than 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 problem is still true sort of property being again at the lower end of that motor being at the higher end of that.
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 your attention, and we look forward to seeing you all on the road soon. Thank you very much.