Sampo Oyj

Good afternoon, everyone, and welcome to the Sampo Group Second Quarter 2024 Conference Call. My name is Sami Taipalus, and I am Head of Investor Relations at Sampo.

I'm joined on the call today by Group CEO, Torbjorn Magnusson; Group CFO, Knut-Arne Alsaker; and CEO of Hastings, Tobias van der Meer. 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 most talked about Sampo topic from this quarter has naturally been our bid for the remaining half of Topdanmark, possibly one of the least surprising moves in the European insurance industry lately.

We believe we have found a value-creative way forward in this last significant remaining issue in our group simplification process. However, in a way, this is both yesterday's and tomorrow's news, as we discussed the details of the offer in June and the offer period starting shortly will not end until September.

In the meantime, then, we have another set of solid results, on the same path we have followed for some time now with strong profits, cost rate reductions and not least, good growth. Despite the harsh winter and some well-known large losses, our operating EPS increased by EUR 0.02 on last year.

I'll comment more on the individual factor movements, but let me already here point out 2 key positives. The underlying combined ratio adjusted for volatile short-term effects is still improving at roughly the same pace as before, 0.5 percentage point per annum.

This is not really a number that should vary quickly. Only under extreme circumstances would this number be much bigger than this.

And that is exactly what we have in the other key positive, Hastings and the U.K. market.

As expected, we seem to have overshot a bit with our rate increases in the latter part of last year, together with a large part of the market, I suspect. And consequently, the results this year have improved substantially.

Perhaps also on this page a brief comment on the recent volatility in the investment markets. Obviously, this is a situation we are quite well prepared for with much lower market risk than a few years ago and with higher running yields in the background.

Our solvency is also cushioned by the symmetric -- the Solvency II symmetric adjustment in case of more extreme developments than we have seen in the past few days in the financial markets. Let's look at the premium growth in some more detail and --for our private business.

And if -- retention rates remained unchanged for yet another quarter, giving evidence of the stable Nordic market situation. Growth in personal insurance and property, but still not in Motor as the new market continued to contract -- or, sorry, new car market continued to contract, gave 6.2% growth in the quarter.

For commercial, we saw a very healthy growth in SMEs, giving north of 8% growth for this quarter. The U.K.

premium growth is still off the chart after the unique 2023. But we continue also to grow home insurance in numbers and have returned to growth for numbers of policies in our core motor business as well.

As Sami mentioned, Tobias van der Meer is on the call and will be able to give more color and details from the U.K. market.

Yes. The next slide is a lesson in underwriting.

Apologies for the school book tone on the slide. The main message is very simple.

We have in the Nordics about 4% claims inflation in the quarter, a bit higher in motor, a bit lower for property. Obviously, claims frequencies during this challenging winter were high.

But apart from that, they are where they were early last year and where we have priced for. Then we have diversification between countries.

But on this slide, that's a bit of a red herring as we have roughly the same results in private lines for all 3 of our big Nordic markets, as you can see from the bottom of the slide. So in total, we are priced correctly based on the frequency projections and the information we had on claims inflation in all countries.

Then in the U.K., we have continued to benefit from the early reaction to the claims inflation compared to much of the market. The increase in the underwriting result is quite extreme, as you see.

We are, as always, in any market but particularly so in the U.K. trying to be agile and balance growth and rate increases wisely to optimize value creation.

I'm pleased to see us return to policy growth in the motor book at the same time as the operating ratio has reached below 88% in Q2. The underlying claims severity inflation in the U.K.

is slowly and gradually improving from the levels we saw last year and weather and frequencies have been rather benign. As always, we spend a lot of time on projections of these factors and to try to make sure that we adjust rates in a timely fashion.

Together with the improved returns, the profits have increased strongly to EUR 71 million for Hastings for first 6 months. Finally, and this is only repetition and a summary from our June transaction call, on this slide -- in addition to this slide, we have since then obtained all the necessary regulatory approvals as well as the support from Sampo's EGM to issue the corresponding new shares.

This transaction would be the final significant step in our simplification journey and one which creates values in a way we're used to, have practiced for 20 years, Nordic, national and cross-border synergies. And with that, Sami, we open up for questions.

That's right. Operator, we're now ready to take the Q&A.

I have a few questions. The first one is on Slide 7, which shows the undiscounted underlying combined ratio on the group level.

That has improved 2 points year-on-year, Q2. When I back-out the Hastings improvement from the east to Denmark sort of numbers we have, I get around 13.5 points improvement, which is quite significant.

So I guess my question is whether my math is correct. And if so, is it fair to assume that you kept that in reserve.

And is it to do with sort of stock management? So the second question is on sort of more on the macro side and given the assets through the half.

Obviously, there's a little bit of a mismatch in your balance sheet. The duration on the asset side, this is sort of 2.5 years, liability side the LIC is on 6.25 years.

So is there a risk if interest rates come down to see some volatility in the P&L? And do you prefer to expect the benefit on the asset side not to fully offset the headwind from the liability side?

So any comments on that. And whether that will going to have any impact on solvency in any way?

And just finally, on the Baltic. The Baltic operation came up for sale.

Recently -- I appreciate you're looking at the Topdanmark deal. But have you had a look at this?

And will you be willing to look at deals in the Baltics in the future?

I don't think we will comment on the Baltic thing, and that is obviously tiny as well. But the other 2, Knut?

Yes. On the first one, you are right that the underlying improvements in Hastings this particular quarter was significant, also really, really good for the first half year compared to last year, which, of course, was a year where rate increases was the focus of intention and results in the beginning of the year, in particular, were more benign.

And you are also right that the improvement of the reserve strength and the balance sheet in Hastings has continued into Q2, as I also touched upon when commenting on the Q1 results for the U.K. In terms of the second question on duration matching, we have a slide on Page -- I think, Sami, its 26, if I remember correctly, in terms of our sensitivities.

Yes, 26 in the investor presentation in terms of our sensitivities, where you will see that we are fairly well matched in terms of a 100 basis point up or down on the interest rate curve, assuming a parallel shift, I should say. Despite the duration mismatch, because we have clearly more fixed income assets than we have liabilities.

We're also fairly well matched in terms of currency movements. Of course, what you can have is a situation like you had -- have in Q2, where short and long rates moved in a slightly opposite direction, which in Q2 gave us an additional positive compared to what is slightly simplified sensitivities would indicate.

But overall, given the over allocation we have to fixed income on the asset side, we're fairly well matched, I would say.

Two questions, please, on the -- just something I read in the press release, one in the U.K., one in Norway. And one quick accounting check question, please.

So the first one is on Norway, I mean I noted in the press release that you said there were some changes to deductibles as well along with pricing. And I'm just curious that is that something a bit new because my understanding has been in the past that you haven't mentioned deductible much, you just mentioned pricing.

So is that new? Or is it just something that has been mentioned now and has always been going on?

Then on the U.K. Also, from reading the commentary, it feels like you could rather maybe even cut some pricing to get -- or reduce pricing to get some growth.

And I'm just wondering whether you think the time is right? Or is there a risk there.

I'm just curious to hear your thoughts on whether even this understanding is correct. And just on the accounting side, the GDP growth, which we all focus on, is great, but the insurance revenue growth is a bit slower, I think also in 1Q.

Is there something to note there that we probably should think about?

I have the luxury here of a CFO that wants to answer the question on deductibles.

No, it's a fairly simple answer really in terms of just reference to a couple of different things which is included in underwriting decisions. I mean one thing is, of course, to have the right price for the right risk and then also terms and conditions in general where -- deductibles is a tool to use if there is a risk, or an unprofitable part to have, a lot of tiny claims because deductibles are too low, then deductibles have to be reviewed from time to time as well.

But I don't think we have commented on deductibles any time in 20 years in the group communication. So it's not something we avoid commenting on.

Tobias, are you there?

Good afternoon, everybody. I hope you can hear me okay.

We do.

On the U.K., just briefly. One important thing to just remember about the U.K.

market is the high price elasticity we see. In other words, we see relatively big volume changes depending on small to medium-sized changes in pricing.

And what that means is that -- the way the process works in Hastings is we set our target margins. And any leeway or room we have above those target margins, we then either keep it as extra margin or reinvest in volume by passing it through to consumers in the form of lower rates to take advantage of those high elasticities.

And what we've seen in the recent period is high market elasticities, lots of customers shopping around, and therefore, small price changes leading to big extra volume gains for Hastings. And margins that are ones that we're happy with, where there's some room given the claims environment in the U.K.

over the last 6 months, to invest some of those excess margins in the form of volume growth. So I hope that gives you a bit of color on the dynamics we've been seeing and how that's impacted our pricing approach in the first half of the year.

And the accounting question should probably go to me, but I didn't fully catch it actually. Did you, Sami?

You want to do the deductible one instead.

Yes, I want the deductible instead. Yes.

Like...

My understanding was that it was about how the insurance revenue, net insurance revenue is tracking the gross written premium development. Vinit, was that right?

Yes. So for example, there is about 2 points lower insurance revenue growth versus the GWP growth.

And obviously, unless something change -- I mean this is an earn-out pattern? Or is it just -- I mean, the point is that the insurance revenue goes into that or P&L.

So I was just curious.

These 2 things over time will, of course, track. Then there can be a difference between gross written premiums and net insurance revenue also in terms of changes in reinsurance program.

But with the same reinsurance program sort of not impacting gross and net, these 2 things will track over time. Then, of course, in the beginning of the year, continuing into the second half, gross is higher than earned since a lot of the renewals on the corporate side happens in the beginning of the year, which then will be earned as insurance revenue over the full year.

I don't know if that was an answer to your question.

First one is on the growth in the personal insurance or personal risks. Could you elaborate a little bit on what type of products?

Is it pregnancy products? Is it throughout the whole of the Nordics?

Is it better in Sweden, better in Norway? Could you shed some light into that kind of risk the increases in the growth from that product alone?

Secondly, the quota share in the U.K., which is touched upon, what is the level today? Is it 1/3 roughly?

And what's the intention down the road? Is it to be closer to 0%?

Or is it 25% to 20%, something you would sort of aim to get to within some years? And finally, on the Top offer.

How should we think of your potential plan B when it comes to takeout on the EUR 400 million? If you do some accounting here, if you kind of get to the 90%, it will be a lot of those EUR 400 million going to be paid as a cash for Topdanmark.

So how should we read your willingness to do all of those EUR 400 million next just free cash of TopDanmark shares?

So the growth in personal risks is throughout the Nordics, less so in Denmark. I don't have a split off the top of my head on sickness, accident, health, expat insurance, but is throughout the Nordics.

Quota share is 30% today. The direction is downwards.

But it has to be balanced with our relationship to the reinsurance market over time.

Top -- I mean, the -- obviously, we want to get above 90%. And let's see in a month where we are and how much above 90%.

And then parts of the EUR 800 million, in other words, the remaining EUR 400 million compared to the ongoing buyback will be used for a squeeze out. And if they are remaining amount.

Because acceptance rates were very high, we will start in other/extend the current ongoing buyback with the remaining amount up to EUR 800 million.

Okay. Can I just have one follow-up on the private side?

When you look at the inflation, you say 4% to 5% currently and you're sort of trying to price around that level. Does that mean that you're now trying to get some more volume in the Nordics for not pricing too aggressively?

Or are you happy with your sort of combined ratio level? So we should not expect it to sort of continue to drop forever.

And you will sort of more look for an ROE which could give you a satisfactory level of return over time. So is volume becoming a more interesting path when it comes to growing your premiums going forward?

Or is it still very disciplined when it comes to taking and choosing your growth targets?

The general answer is the boring one that we are always trying to balance for each segment volumes and rate increases. Claims inflation now is 4% roughly.

And we're able to price for that and a little bit more. You will have seen from our communications in the past 18 months that we have an ambition and an ability to improve the underlying combined ratio.

And we are very careful publishing that every quarter. However, it's not -- some years back, we could improve the combined ratio by 2%, 3% a year.

We're not there anymore. And volumes have been more important for that reason and also for the reason that we can because of the digital proficiency that we have and the U.K.

situation with the technology leadership that we have there.

I have 2, if I may. I know actually both on Hastings.

So for Hastings, you've grown motor and home policy count and GWP is actually also up quarter-on-quarter. Are you able to split the GWP growth between motor and home?

And maybe also talk a little bit more about the pricing and claims environment in the U.K. So that was my first question.

I know it's a bit long. And then second, can you add sort of any additional color on the Hastings operating ratio, both the moving parts quarter-on-quarter, so where the improvements come from but also how we should think about it going forward for the rest of the year?

Tobi, go for it.

Thank you. Firstly, on the GWP growth, I assume that given the scale of our motor insurance business and the much higher premiums that we have in it relative to the smaller home business with lower average premiums that the vast majority of the 29% GWP growth has come from motor insurance.

We're seeing very significant premium growth in home insurance, too, but it's still relatively modest numbers in the context of the Hastings results overall. On the pricing environment, as Torbjorn said earlier in the call, in the introduction, rates went up a lot during the second half of 2023 and probably overshot in the expectation of very significant ongoing claims inflation.

And coupled this one of my answer on claims in a second, but the pricing environment has moderated a bit. I think not surprisingly, after a rapid period of increases of the scale that we saw in H2 in moderated in the first half of the year.

The ABI data suggests that premiums fell by about 2% in the second quarter after a period of stability in the first quarter. Just to make that come to life view directionally that's consistent with the data we've seen internally.

On claims, on the average cost of an accident or claim severities, we've seen ongoing high inflation broadly in line with our expectations. You might recall we talked about directly 12% claims inflation in 2023.

And it's moderated a bit from those highs but continues to be very high. Competitors talking directionally about around 10%, which, again, would be directionally consistent with the data we've got internally.

On frequencies, however, we have seen benign weather, coupled with the benefits of some of our claims fraud and pricing initiatives come together into a reduction in claims volumes that has partly offset the severity increases. And when you take those together, have meant that rates have been higher than needed to cover the claims costs in the first 6 months of the year.

And frankly, now to cover the claims cost that we expect over the next 6 to 12 months as we look ahead. And the operating ratio improvement is mainly driven by those dynamics by continued very strong top line growth, both average premiums and policy count and those extra premiums being more than sufficient to cover the extra claims costs.

On top of that, our retail income, we've also seen an increase in expenses. But the sorts of expenses that we like, i.e., the strain of writing higher new business volumes and some of the investments we continue to make in technology initiatives because we're seeing very good returns on those and are therefore happy to continue and invest as the team bring us new ideas and new business cases.

Just some follow-ups. You talked about pricing for claims inflation, which is around 4%.

But I think some of the price increases your peers are putting through are in the high single-digits, even low double-digits. For you, does this mean scope for further potentially significant margin improvement?

Or would you look to trade up for volumes? And then, just secondly, on the U.K., thanks for the color on that just then.

But how much do you think U.K. motor pricing actually overshot at the end of last year, you said pricing was down 2% in Q2.

Is there scope for this to fall further in Q3 and beyond?

Yes, if competitors actually go through with price increases to the tune that you mentioned, that will give us some opportunities to create value. And for each segment, we will decide on whether that's margins or volumes, if that happens.

And then, Tobi?

I can't speak for our competitors and what they will do in the second half of the year. What I can say is that we're very comfortable with our current pricing approach and the margins projected from those.

And we believe there's still caution in our assumptions, both on pricing and reserving. And so we're very comfortable with where we are going into the second half of the year.

Typically, what we've found over the years is that because of our pricing and fold capabilities that our margins are much healthier than others at any one given point in time. And therefore, what I can say is we have room to invest in the second half of the year, should we be in an environment where a lot of customers are shopping around, then, we continue to see high price elasticities.

I can't say whether our competitors are in a similar position, and therefore, hard to call what the market will look like in the second half of the year but can reiterate that we're in a comfortable position going into it.

A couple of questions from my side. I'll take them one by one if I may, and start with the question on the overall CPI print in the Nordics have been well below the 4% to 5% for some time now.

Are you seeing the claims inflation also moderating further? And what kind of time lag we should expect there?

And perhaps a follow-up on this, are you seeing rivals starting to price in already the likelihood of rating inflation?

The claims inflation, we changed the language ever so slightly this time, didn't we? We've said 4% to 5%.

Some time ago, we said mid sort of in the middle of 4% to 5%, then became lower part of the range 4% to 5%. And then I'm now at least orally, I'm saying around 4%.

And that is on the basis of very much lower pricing claims inflation for building materials and the like, but slightly higher for spare parts for cars. So these are very specific inflation numbers.

And they're always very difficult to compare to consumer price inflation. The claims inflation is specific to insurance companies and remains will remain so.

Will this moderate further? Well, we have the benefit of long-term agreements, which means that it is unlikely that they will probably -- that they will suddenly fall before the end of the year when we renew some of the biggest long-term agreements.

Then Finland, specifically saw fairly modest premium growth during the quarter. Has, there been any changes in the market dynamics, meaning perhaps more aggressive pricing of some rivals or customers becoming more active in their tendering?

No, that's really not the case. The premium growth is impacting by a loss of a few larger commercial industrial clients.

So it's a couple of specific cases which plays a role in a single quarter, but doesn't indicate a direction of the market.

Perhaps then finally on prior year gains, which you have for some time reported pretty large. Should we expect the runoff gains to moderate going forward?

Or are we on the levels that can be expected also in the coming quarters?

I'm not sure that I would call this pretty large. But these are not unusual levels for us and we keep a strong balance sheet.

But we don't aim to have high prior year gains. Knut?

No, I agree. We don't guide for prior year gains.

I don't think there is one specific figure that is exact normal. Sometimes it's a little bit higher, sometimes it's a little bit lower.

But there's nothing exceptional as such with this quarter. The levels we had in the second quarter last year was, of course, more elevated.

The first one is on the financial leverage. It's relatively close to your 30% still below.

Is there more you can do in terms of bringing that down and giving sort of greater capacity there? That's my first question.

The second one is on U.K. claims inflation.

I appreciate your comments around inflation are similar to your peers. But I just want to understand the driver why do you expect inflation to still be at the sort of double-digit level?

What is the incremental driver against that large BI sort of being okay, we're seeing used car prices come down in the U.K. is also if you could provide some sort of indication there?

And the third one is just sort of more for my understanding. You've been very good to managing the claims frequency in the Nordics, but you can see it's quite volatile quarter-to-quarter.

Could you just sort of elaborate on how do you normalize for that the underlying calculation? And what are your expectations for frequency by country for the rest of the year in 2025?

Will you start with the leverage?

I'll start with leverage. Just to be clear on the pro forma leverage that we have in the quarterly presentation, that's, of course, including EUR 800 million in capital deployment to take place for the next 2 months.

It's not including the profit that we will generate in the same period. So it's just based on the consolidated equity as of end of June.

That was more in technicality. In terms of what we can do going forward, we have some smaller maturities coming up over the next couple of years, some older senior debt.

And as I mentioned, I think, sometimes before we would still work a little on reducing the senior debt and actually letting that mature. Then, of course, we are still not above 30%.

So we don't actively try to manage down leverage from the current levels as we speak. But the possibility to let some of the senior debt that we still have mature and we obviously could take.

Then why is the claims inflation in the U.K., Tobi?

So as you rightly say, there's a large number of factors that go into it. And used car prices, the one that you picked up on is one that is looking more favorable at the moment compared to where it was last year.

I guess the thing that sit on the other side of the equilibrium are minimum wages and the feed through into bodily injury costs in particular. And on bodily injury, also the updates that have made to the judicial college guidelines and further changes expected as we look ahead under a labor government in particular.

And also, we've seen a continued high inflation in repair costs, particularly for more complex technology in cars. And so we do you think it's an uncertain environment when you bring all of those together.

And I did, I guess, comment earlier that there's some caution in our pricing. But nonetheless, or pricing for continued inflation levels at the high single-digit sort of rate.

Sorry, just quickly another one. Are you worried about the total loss cost investigation by the FCA and any implication inflation from that as well?

Yes, good question. So the FCA are, of course, always working on a range of different industry-wide themes, premium finance, as you'll know, ancillaries, claims service and total losses are some of the current industry-wide reviews that they're undertaking.

We are awaiting the details of some of those. And we've built assumptions and caution into both pricing and reserving, recognizing the uncertainty in some of those regulatory dynamics, but not much more to say at this point.

And then finally, on how do you normalize claims frequencies going forward? Or in other words, how do you build the tariff.

You project with statistics, the frequencies, claims for each customer segment, each brand of garage, location of house, et cetera, et cetera. So that's a big exercise using as much data as we can and all the analysts in the house.

Sorry, just the second part of that was, what are your expectations of frequency going forward?

Yes. But we can't give that.

The frequencies are -- we have been able to predict the frequencies very well this year. And there have been no important changes since last year as long as you adjust for the changes in the portfolio.

And of course, the winter that has to be taken out this year.

My questions may have been answered, but I couldn't take myself off the queue, but I go ahead and ask a quick one. Can you maybe say what your previous claims inflation assumption was in the U.K.?

Clearly, that you say now it has come down from sort of 12%. But were you expecting that to be 12% or even higher in the second half of this year and that's why you're sort of a little bit more relaxed in pricing.

That is for you, Tobi.

Yes. We did see 12% claims inflation last year.

We then moderated and adjusted our assumptions going forward. And what I can just repeat is that the claims inflation that we've seen in the first half of the year has been more benign than we had expected and priced for.

Great. Thank you, everyone, for listening in today.