Ladies and gentlemen, welcome to this call on Sampo's Q2 2020 results, and on the bid on Hastings that we have disclosed this morning. I'm Jarmo Salonen, head of investor relations at Sampo, and I have with me at this call our Group CEO and President, Torbjörn Magnusson, Group CFO, Knut Arne Alsaker, Chief of Strategy, Ricard Wennerklint, and CEO of If, Morten Thorsrud. We'll start with Torbjörn's presentation, and then open up for your questions. Let me remind you that you can follow this on sampo.com/result. There you can actually see Torbjörn's slides as well, and a recorded version will later be available at that same address. That's all from me now. I'll hand over to Torbjörn. Torbjörn, please.
Thanks, Jarmo. Welcome everyone. Sampo has performed well during the COVID-19 period, and all our businesses have been able to run smoothly and remotely, continuing to develop and produce good results. This is not least true for the biggest part of our group, If P&C, but I also think so for our associated bank, Nordea, which recommitted to the 2022 targets in their Q2 report. Overshadowing this today is our offer together with the South African company, RMI, for the U.K. motor insurer, Hastings Group. I will spend my introductory words on this only. Hastings Group, as you will know, is a leading P&C insurer in the digital distribution part of the U.K. retail market. The company is focused on and optimized for this segment, and has been developing well over the past decade.
This segment has, in itself, for a number of years, been a growing one, and Hastings has operated there with an average combined ratio of 91.5 over the past five years since the IPO. The average growth in number of policies over the same period has been 9%, and the company has, at the same time, also made substantial investments in modern technology. The offer is made in partnership with the now largest shareholder, Rand Merchant Investment Holdings, RMI, a South African financial services investment company holding almost 30% of the shares. We have spent a lot of time together with RMI and share similar views on how to create value in non-life insurance, on governance, and on underwriting, amongst other things. If the bid is accepted, we are to own 70% of the company and RMI 30.
We also both believe that Hastings can develop more rapidly in a non-public setting. The execution risk for us is limited by this fact that we're acting together with the largest existing shareholder, and it is further minimized, as we do not expect operational integration, and that the Hastings management team is a motivated and really strong one. Sampo is an insurance company. We have for some time viewed non-life insurance with strong underwriting skills as a business model that is quite resilient to the low interest rate environment, or even to changing interest rates. Allocating more capital to this line is also based on our team's wealth of general insurance experience. Our assessment of the Hastings opportunity is an unusually positive one. The valuation of Hastings will be an attractive one just by meeting the company's own loss ratio target.
The offer price is GBP 2.50 per share, which is a premium of 37% to the three-month average until Wednesday last week, and 35% if you instead make that date July 9th, the day before one of the biggest owners sold down. The offer corresponds to roughly EUR 1.3 billion for our part, and is unanimously recommended by the Hastings board of directors. This is a sizable acquisition for Sampo. However, relative to Sampo's total size, the EUR 1.3 billion only constitutes some 7%-8% of our present market cap. Transaction is to be financed partly by internal cash and partly by hybrid 2 capital. We expect the solvency ratio to stay robust at 175%. No change to the dividend policy is necessary. Of course, in longer term, we expect the deal to contribute to Sampo's dividend capacity.
I have already talked about the rationale for this a bit. The knowledge and technology fit between Hastings and Sampo is an unusually good one, with similar cultures and possibilities for learning and usage of each other's capabilities. They are a pure play non-life insurer in a growing segment of a large Western European market, with leading digital and data analytics capabilities. We are able to do this with very limited risk. Financially, to the right-hand side of this slide, we expect some small savings from withdrawing the listing. We expect our focus on underwriting to support strong loss ratio development, and we will explore possibilities to keep more of the insurance premiums in Hastings for own account.
We expect the deal to be EPS accretive from the first year, and return on equity invested is to be very attractive given our expected funding costs and the expected trajectory of Hastings' earnings. Hastings' business model is, as already mentioned, a motor-focused U.K. insurer where data-driven risk selection and modern technology are competitive advantages. The digital distribution part of the U.K. market is still growing, and Hastings has not yet, to any significant degree, grown in home insurance. These are opportunities that remain to explore for this company. Maybe one more and final slide. This slide shows Hastings' growth and combined ratio since the IPO in 2015. A slide that I think substantiates my comment at the beginning of this introduction about the performance over time for this company. With that, I think we should open for questions, Jarmo.
Thank you, Torbjörn . Operator, we are now ready for the questions.
Thank you. If you wish to ask an audio question, you may do so by pressing zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Again, it's zero one on your telephone keypad if you wish to ask a question. There's going to be a brief pause while we wait for questions to be registered. Our first question comes from Yudhisthira Sirivadhana from Autonomous Research. The floor is now open to you.
Hi, everyone. I've got three questions, if I may please. The two questions is really on strategy. You tend to have a strong market position in all markets you operate. You tend to see your market share is like 80% or above. Should we assume your ambition in U.K. P&C is to become a top tier player? That's my first question. Secondly, your geographic expansion and the entry to the U.K. market is quite a surprise to many of us. I was just wondering which other markets and countries are of interest to you. Finally, just want to check something. In terms of the solvency impact of this transaction, is it correct that this transaction is costing you 32 points of solvency capital? Those are my questions. Thank you.
I'm sorry, would you mind repeating the first question? I don't think any of us could hear it here.
Okay, sorry. I was talking about in terms of your ambition in the U.K. P&C market, because you tend to have strong market positions in all the markets you operate, your share is usually 18% or above. Are you planning to become a top tier player in the U.K.?
All right. I'll give you some thoughts on the first questions, and maybe Knut can talk about the impacts. Sampo's current strategy certainly includes allocating more resources to P&C insurance, the field where we have the most expertise in the management team and where we have the most experience in the company. We have talked for some time about the possibilities to expand into other geographies, and the U.K. is, of course, a large market, where we have pure play P&C insurers. It's a digitally savvy market. It's a market where, if you look at separate segments like the digital distributed segment, you have peers to Hastings itself, and peers that have been successful. Furthermore, of course, the U.K. is a market which is culturally and language-wise easier for us to relate to.
That was the high-level version of why the U.K. was of interest to us. Of course, I, in some of the slides, described the strengths of Hastings in this market and the fit with ourselves, with the market possibilities that they have, the best-in-class abilities in data analytics, digital, and the low execution risk that this opportunity holds for us.
Yudhisthira, could you repeat your question on the solvency impact as well?
Yeah. How much is it costing you in terms of solvency capital? I know you've disclosed the pro forma ratio, but that is after you raise an extra EUR 1 billion of debt.
Yes.
It seems that this transaction is costing you roughly like 30 points of solvency capital.
Yeah. What we've said is post the Tier 2 transaction of EUR 1 billion, the pro forma solvency ratio would be approximately 175%. If you take EUR 1 billion.
Tier 2 of additional own funds and apply it to our Q2 SCR of just above EUR 5 billion, that would be around 20 percentage points, meaning that a Tier 2 transaction of EUR 1 billion would add approximately 20 percentage points to our solvency ratio as of Q2.
Okay, fine. I think I'll take that for finally here, because I probably need to clarify some more detail.
We have a problem hearing you, Yudhisthira. Could you repeat the question?
Sorry. I think I will take that offline too. Thank you very much for your answers.
Thank you. Our next question comes from Michael Huttner, Berenberg. The floor is now open to you.
Yeah. Can you hear me?
Far, so good.
Can you hear me?
Carry on.
Yeah. So far, so good. That's pretty good. I hope you won't be disappointed by the question. Well done for the audacity of your move, if I may describe it like that. Three questions. One, I think relating pretty much to the previous question and, kind of, how much do you think Hastings can grow or will grow? Because, I mean, as you said, relative to Sampo, it's actually quite a small business. And to me, it seems strange given how you're a big player, in big, in small markets, suddenly you're becoming a small player in a big market. That's, you know, how big do you want to become in the U.K.?
The second question is, and I think in the offered kind of background, there's an option for RMI to go from 30%, which was their share of the initial transaction, to 40%. I just wondered if, why is that there? It seems weird if you want to control and own Hastings, you know. Maybe the last question would be on synergies. Maybe you can talk a little bit more about both the cultural synergies in terms of exchange of data, whether, is it more you intend to profit from Hastings or they can profit from you? I'm not sure. Also on the reinsurance side. Thank you. Well done. It's nice to see deals.
Thanks for those kind words. How much can Hastings grow? Well, that's a question that we don't even answer for our present non-life insurance holdings. We certainly see upside from realizing the management plans that are there. A small player in a big market. Well, in a way, Hastings is number six in the overall U.K. motor market. As I tried to point out in my introduction, they operate in a subsegment of this, the digitally distributed part. As any part of any group, we will attempt to be successful and grow.
On RMI, we have tried to formulate a long-term partnership with an agreement that contains the a compromise of the objectives of both parties, and we are very happy with the fact that they wish to do this together with us and the conversations that we've had. Again, as I pointed out, it's been very easy and very enjoyable to discuss value creation in a P&C setting with them. Reinsurance, obviously this company cedes a very large proportion of its premiums in to reinsurers. Something we need to explore whether that is a potential synergy that we can change.
Morten here. I could also add on the synergy part. I think today in the P&C insurance industry, it's more important about synergies of skills and technology insight than synergies of scale. Obviously, Hastings and If has a lot of skills and technology insight that we can share within areas such as underwriting expertise, data and analytics, digital distribution, claims handling, and so forth.
Very clear. Thank you. Good luck.
Thank you. Our next question comes from Blair Stewart, Bank of America. The floor is now open to you.
Yes. Thank you. I hope you can hear me okay. I've got three questions. Torbjörn, I thought it was interesting that you described the results as overshadowed by the Hastings deal. It's a interesting description. The share price reaction over the last few weeks would tend to corroborate that. Anyhow, that wasn't the question. Firstly, do you think that your presence in the U.K. market can change the fundamentals in the way that you did in the Scandinavian markets? In terms of having a more concentrated share of the market within the hands of rational players. Just from a growth perspective, clearly through the price comparison websites, price is absolutely key, which might be slightly different from the Scandi market, but you tell me, is there any other way to compete other than price? Secondly, you described Sampo as an insurance company.
You could also describe it as a financial holding company because you do have private equity stakes and a significant stake in a bank. I wonder, as you reflect on the relatively poor performance of the shares over the last few years, is that something that you look to address and actually become an insurance company, wholly focused insurance company? Thirdly, a question on leverage. The leverage goes up to 33% under your measure. Is that a number you're comfortable with, or should there be, or will there be a plan to reduce leverage in the coming years? Thank you.
Yeah, you're right. Maybe I should have talked more about if record-breaking combined ratio or actually be quite good performance of all parts of the group. I decided to do it this way. Change the fundamentals of the U.K. insurance market, that is not part of this story. It would be lovely, wouldn't it? The reflection on what we are. Well, the biggest part of the group is non-life insurance. Now we're trying to take one more step in that direction. That is what's happening today. I think I've commented maybe enough on that over the past six months. Knut, leverage.
Yes. You're right. We recognize that leverage ratio will be a little higher than our historical average, although below 33%, which you point out. Both S&P and Moody's have confirmed our credit ratings, where leverage is the key aspect of the evaluation. They are comfortable with our current rating, and we are also comfortable with our pro forma leverage ratio. However, we have no plans at all to raise more debt, going forward, which means that over time it will be more natural to see that leverage ratio go down from the pro forma Q2 level.
Okay. Thank you. Can I come back on just the first questions? Perhaps I didn't ask them well enough. On the U.K. insurance market, do you think you can achieve what you're looking to achieve through only owning Hastings? I think coming back to the very first question on this call, you're accustomed to operating with high market shares, which you don't really have in the U.K. as yet. I just wonder if Hastings is enough to fulfill your ambition. Coming back to the structure of the group, is there a desire from the board to simplify the structure of the group in the future?
Our ambition is to be successful with Hastings in their development going forward. As I said, we believe that there is an upside from realizing their existing plans. Our ambition is not to change the U.K. market from this move. What we are looking at here is limited to the offer for Hastings together with RMI. You mentioned quite rightly that price is fundamental to the choice of insurer in the U.K. market, and there's a lot of focus on that. However, I don't think there's any market in the world where price is not the most important or one of the most important parameters for the choice of your insurer. It is very pronounced in the U.K. market, and markets are different. Maybe there are things that we will take with us from the U.K. market and more insights from there.
Maybe there is work that we can do on, for instance, retention levels from the Nordic markets to bring there. That remains to be seen when we start the work. On the structure of the group, let me maybe add one comment to your original question. The PE stakes, as you call them, we don't see them as strategic. That is not the strategy that we are following anywhere.
Is it a desire to simplify the group, Torbjörn?
I wouldn't express myself that way. We have a strategy currently to allocate more capital to non-life insurance. We are trying to do that with this offer that we're discussing today, and that is a good step in that direction. The PE stakes, we have talked a lot about in the past, and we will of course try to make them succeed, but that is not part of the strategy. It's because of the fact that they are in the holding company that they have been so much in focus, nothing else. Well, there we are.
Okay. Thank you.
Thank you. Our next question comes from Jonas Zürcher from Mediobanca. The floor is now open to you.
Thanks for taking my questions. Hopefully, you can hear me fine. I have a question regarding the net interest-bearing debt on your supplementary information, page 76. We're basically seeing a declining trend in the interest-bearing assets, and particularly in the liquidity buffer plus fixed income line. At the same time, the subordinated loans remain stable for roughly four quarters, and approached been a roughly steady decline for the last four quarters. The result of that is that the net debt is in a somewhat steady incline, actually. I'm asking you a little bit, do you have to be concerned of the growing net debt, somewhat growing net debt, while at the same time the gross debt is in a steady decline, especially when you consider the upcoming Hastings acquisition that you have? The second question, could you elaborate a little bit on that?
What are the main drivers concerning the growing amount of net debt in Sampo's capital position? Thank you.
As I mentioned, we are comfortable with the pro forma leverage ratio. That will be below 33%, so are the rating agencies. We neither see any problem at all to service our debt. Our sort of debt service ratios in terms of our income and liquidity to the holding company where the majority of our debt is very strong. That's also recognized by the rating agencies in one of their many measures when evaluating the credit profile and financial strength and financial flexibility of the group.
All right. Thank you very much.
Thank you. Our next question comes from Michael Huttner, Berenberg. The floor is now open to you.
Oh, wow. Sorry about that. Well, sorry. Thank you for the opportunity of asking the next question. I had three. One is, if you're going to focus on Hastings, what is the risk that you might take your eye off the ball a little bit in the Nordic markets? Here, what I'm thinking is, no competitor is going to, they're all going to be thinking of how can we boost our own digital, et cetera, while maybe you're focusing on what Hastings is doing. The second question is, you kind of alluded to it, can you set a If we were to assume that the debt rolls off according to the maturities that you have, when would we get to below 30%?
The final question is, maybe since you are justly proud of the results of this and you improved the guidance to, I think, 82%-85%, so by two points on the low end, maybe you can talk a little, you can help me and explain what's changed so much that you've changed the guidance by two points, which is a huge amount. Thank you.
I'll take the first one then. Are eyes off the ball in the Nordic market, that will not happen. We fully understand that the success of Sampo is, to a large degree, dominated by the combined ratio of our Nordic P&C operations. Also over time, we have had a situation for many years. We have fostered a large group of really strong insurance professionals, and we have the traditional, as you may have seen today, way of incentivizing this group of individuals and professionals, which I think makes sure that there's no way that we are going to lose the ball in the Nordic P&C market.
On the leverage, the maturity profile of the debt in the group is well spread out over the next 10 years or so with the debt that we currently have on the balance sheet. That also means that there are long-dated debt maturing 2028, 2029, 2030. We also have a possibility to, if we want to, when we come to that point, to reduce leverage ratios somewhat when we have some maturing issues that matures over the next couple of years.
Maybe Morten Thorsrud could answer.
He will do that on the guidance. Yeah, we are guiding 82%- 85% on the combined ratio for the full year. Of course, that's reflecting that we are reporting 82.1% for the first six months, and that we have a very strong 80.5% combined ratio in the Q2 standalone. Profitability for the first six months is driven both by improved underlying performance and also driven by some positive one-off effects from the ongoing COVID-19 situation. Of course, we bear that in mind when giving the forecast that we have a very strong first six months. We have a 3% range, which is a bit higher than what we normally have at this time of the year. Bearing in mind that there is still quite a bit of uncertainty in the current market. That's explanation on the guidance.
Thank you very much. Thank you.
Thank you. Our next question comes from Per Grönborg, SEB. The floor is now open to you.
Yes, thank you. It's Per from SEB. Just one single question from me. Hastings said that you are addressing a synergy of being at insourcing of the current quite extensive use of reinsurance. When I look at your balance sheet, there's probably no problem with it. If I look at RMI, they are not really putting new money on the table in connection with this deal. Have you an agreement with them that they are able and willing to support a potential higher solvency requirement after you have stopped the quite extensive use of reinsurance at Hastings? Can you say anything about that at this stage?
No, I said we were going to explore this possibility together with Hastings if the bid becomes reality.
Okay. We will see what happens.
Yeah.
Thank you.
Our next question comes from Jan Erik Gjerland, ABG. The floor is now open to you.
Yeah, good morning. Could you elaborate a little bit on how you see this accretive on your EPS, both short and long term, versus the debt you are issuing? We just can understand how well accretive it is, if it's just marginally the first year and then more the years after. If you can give us some more insight to that's my first question.
Do you want to do that, Knut?
Yes, it's EPS accretive for the first year. That's also when stating that, with mid-single digits accretion, it's also taking into account the funding costs. The funding cost will of course be more or less fixed over the period of the Tier 2 bond, and then you can speculate in the development of the Hastings earnings during that period.
Okay, thank you. On your other investments that you just touched upon, you are getting more into the non-life sector. How should we read you in both the bank Nordea and all of the other small investments you have holdings in? Are they in the holding company as an associate, as you now say? We should expect more to be moving out of those long term rather than keeping them, and try to make as much money out of them as possible. Is that what really you're thinking over such a 10, 15 years horizon there?
It was an interesting phrase, Nordea and all the other small investments. We will support the small investments in holding and try to make as much money as we can. They have developed well as a group investments. We do not intend to double the number of those investments going forward or anything like that. That is not the strategy.
Okay. More on the seller side than on buying more. Just on the If side, the premium growth has abated from a very strong numbers in the Q1. Is that due to the GDP changes, which you have highlighted, Morten? Or is it just that it was very too high at the start of the year and then more coming out to a normal level now in the H1 and the Q2?
We have seen quite clear negative effects from the lowered activity levels in the Nordic society. First and foremost, the record low new car sales is giving us quite a big impact. We have strong presence within the new car sales part of the business in all Nordic markets. In Q2, I think the new car sales on the Nordic level was down 33%. Obviously that sort of impacts growth in Q2, in particular in business area Private, that is kind of the business area responsible for that. In addition to that, we've seen some kind of effects from some companies reducing turnover, reducing number of employees, taking cars, buses out of traffic. Also giving them a bit of a headwind on the growth in the Q2. The Q1 was very strong, with more than 7% growth.
The Q2 was clearly below what we would expect, more as a normal growth rate due to then these effects. Of course, high uncertainty on how this will develop going forward. I do see that the new car sales is starting to stabilize somewhat in the Nordic countries. Just looked at the statistics from Norway this morning. Sales in July was minus 3% in terms of new cars in Norway. A bit of a sort of COVID-19 effect, if you like, on the growth in the Q2.
Okay, perfect. Finally, on the combined ratio, you touched upon the COVID-19 sort of gains, if you follow up to that, having effects on the combined ratio. Has there been any other kind of effects that you can isolate, which has not been COVID-19 effect that drove the combined ratio down to 80.5 for the quarter?
No, we've been commenting on that. We've seen reduced motor frequencies. On the other hand, we of course continue to see increase in travel claims. However, on the travel part, we have a reinsurance protection. The net of this we have said is roughly 4% positive impact on the Q2 combined ratio standalone.
Of course, you also see that the cost ratio is low. Of course, we are benefiting from the fact that we are, for instance, not traveling these days.
We're claims oriented, Morten, but of course, we're also benefiting from the rate increases for the past few years.
That's of course improving the underlying.
Of course. Okay. Thanks a lot for your time. Good luck with Hastings.
Thank you.
Our next question comes from Steven Haywood, HSBC. The floor is now open to you.
Thank you very much. On one question just related to Topdanmark. What's your view on the company now? Has it changed? Does it appear too expensive currently to acquire? Reality is, why Hastings not Topdanmark currently? Thanks.
Yeah. Topdanmark develops well. That's the first starting point maybe. We haven't changed our view on the company. It's not cheap for us to acquire. In comparing Hastings with acquiring the rest of Topdanmark, the price that we expect to have to pay for that, Hastings is a more attractive proposition to us.
Okay. That's very helpful. Thanks.
Our next question comes from Blair Stewart, Bank of America. The floor is now open to you.
Thanks. Just want to come back on the financials of the Hastings deal. I think the return on invested capital is maybe 6%. It's almost impossible not to get EPS accretion when you're debt funding. Given the multiples you paid, clearly the financials are not as attractive as buying your own shares. This is obviously a strategic transaction, which you've talked about clearly. Just from a strategic perspective, what can you share with us at this stage, and it might be too early, but what can you share with us in terms of what the Hastings management plan is or what your plan is to improve the underwriting and growth profile of the company? The expense ratio looks low. The balance sheet's very efficient. What can you do particularly on the underwriting side that perhaps we can't see in the stated financials?
You are maybe, unfortunately, right that there is a limit to what we can discuss at this stage. You could hypothetically say that maybe the buyback shares wouldn't be necessarily that, let's say hypothetically, the same order of magnitude of return as the EPS from Hastings. There's a difference for the longer term, of course, in the way that we can develop and work with Hastings compared to the buybacks. Short term, yeah, sure, we can hypothesize that it's similar, but long term, the Hastings proposition again looks much more attractive.
I'm assuming we'll get to look inside your strategic box as and when you're able to open it and show us it.
Yes, absolutely.
That'd be nice.
Our next question comes from Michael Huttner, Berenberg. The floor is now open to you.
Thank you. This is my last question. I noticed from the slides, and you alluded to it, that the S&P capital adequacy of If has improved markedly. It was EUR 200 million less than S&P wanted in Q1 or desired, or whatever, and it's EUR 200 million above in Q2. Can you maybe say where that swing came from? Thank you.
Hello again, Michael. Obviously, the main driver for the improvement in S&P's standalone capital model for If is the really good result that If had in the Q2, both on the underwriting side and obviously, bounce back in terms of investment returns from the meager Q1. The main driver is simply the net profit in the If group in the Q2.
Brilliant. Thank you.
Just as a reminder, if you do wish to ask your question, you may do so by pressing zero on your telephone keypad. Our next question comes from Jon Denham, Morgan Stanley. The floor is now open to you.
Thanks. Just one from me. Policy count growth at Hastings has slowed pretty dramatically over time. I was just wondering what makes you confident that Hastings can grow at a rate not possible for you in the Nordics while maintaining an attractive loss ratio. Thanks.
I didn't catch the question. I'm sorry.
I was just saying policy count growth at Hastings has slowed dramatically over time. I guess it's fallen from almost 25% in 2013 to just about 5% now. Just wondering what makes you confident that Hastings can grow at a rate that's not possible for you in the Nordics whilst maintaining attractive loss ratio.
I think I described the positive view that we have on the company. 2019 was, for various reasons, a special or a challenging year for the company, as can be seen from the numbers, the figures. Maybe looking at their first six months gives more of an indication of the continuation from 20, let's say 2017 and 2018, than the 2019 numbers. By and large, I described our view on the company, their special or the segment that they are operating in that is still increasing with the price comparison website proportion of the U.K. motor market, the way that they have been able to do this over quite a long time with the low combined ratio that they have and their capabilities in the modern world technology data-driven analysis, et cetera. We've done our homework with this.
We worked hard at understanding this company, and we have followed it for quite a period.
Thanks. Okay.
Thank you. There appears to be no further questions. I will hand back to the speakers for any further remarks.
Thank you, operator, and thank you all for your attention.