Earnings Call: Q4 2019

Feb 6, 2020

Ladies and gentlemen, welcome to this call on Sampo Group's 2019 results. I'm Jarmo Saaronen, Head of Investor Relations at Sample. And with me at this call, I have our Group CEO, Torbjorn Munson Head of P&C Insurance, CEO of 5th, Loften Dorschrud and Group CFO, Knut Arne Alsaker. Torbjorn will start with a brief presentation of the developments in Q4 and 2019. But before handing over to him, let me remind you that you can follow this call, sample.com/results, and a recorded version will later be available at that same address. With these words, I'll hand over to Thurgen. Thurgen, please. Thank you, Jarmo. This is the first time I present Sampo's results as Group CEO, and I'm pleased to be able to present the strong last quarter for 2019 with successful developments in all our business areas as well as in our investment operations. 1st and foremost, the P and C operations continue to excel at underwriting. The stability in combined ratios is second to none, as usual. In addition to this, the combination of a very low and all the time improving cost ratio, together with large investments in digital services, has also produced record growth for Experiancy, over 5% growth for the full year. And the company is in a very strong position indeed in its markets at the moment. Topdanmark, our other P and C asset, had another strong year with a combined ratio of 84% for the full year. The company is very efficient, and it's rapidly building more digital services in the Danish market. In 2020, we will see the benefits of the distribution agreement with Nordea come into play also for Topdanmark. All our insurance operations, not least Mandatum, were helped by the favorable equity markets last year. Mandatum's unit linked savings reached an all time high last year as equity values appreciated substantially. At the same time, efforts to speed up the shrinking of the with profit book bore fruit, and the book is now some EUR 300,000,000 smaller than a year ago. A word on 2 on Nordea. Nordea has gone through a protracted period of difficulties and now has new management and new targets. As owners, it's gratifying to see that the new management shows a great deal of determination to work towards the new targets. And the results this morning were a first step in the right direction. 1 quarter is, of course, a very short time period, but still the Q4 results included progress on capital, progress on costs and high quality income that looks very encouraging. Now to our dividend proposal and the new dividend policy. As we said in October, we were expecting to propose to the Board a dividend of €0.10 to €2.30 per share, and the Board planned to review our dividend policy in early February. The Board has now decided to propose a dividend of €2.20 and has reviewed and updated our dividend policy. I'd like to provide some context to the dividend policy from my perspective. First of all, as a management team, we remain committed to an attractive dividend, and our dividend policy reflects that. We are focused on creating shareholder value and believe that it's best done over time by increasing the earnings of our operations and our holdings, which in turn ultimately underpin the dividends to our shareholders. Consequently, it makes sense to link our dividend to earnings, and we wanted to acknowledge that by updating our dividend policy and committing to payout that is increased from the previous at least 50% to at least 70%. Finally, an important part of the jigsaw, we have today also announced an updated outlook for our operations and our business profile and returns support the new dividend policy, obviously, I might say. And from here, we look forward to growing our earnings and with that to paying an attractive dividend. The completed succession at Sampo is, of course, a very continuous one. All positions were filled internally. The management team has deep knowledge and skills in the financial sector with an emphasis on insurance. The world around us will offer both challenges and opportunities in the period to come, And the team looks forward to using these skills and the possibilities given by the balance sheet for the benefit of our shareholders. And with that, I hand back to you, Guillermo. Thank you, Ruben. And operator, we are now ready for the questions, please. Our first question is from Marty Ahokas from Danske Bank. Please go ahead. Good afternoon. It's Marty Ahokas from Danske Bank. Two questions, please. Firstly, Torbjorn, you mentioned last year, I believe, that you wanted to see Sampo and you see Sampo more as an insurance focused group. And some people have interpreted this that you might be considering divesting the Nordea estate. What's your take on this? Pretty awkward timing to ask that, I guess, today. It's Matti. I was very pleased with the new targets in the autumn. I was very much part of that. Today is a very strong step in the right direction, and I'm certainly not thinking about divesting the stakes. That's very clear. The second question is on the Non Life business and especially the business in Sweden. We've seen quite turbulent new car sales, and you obviously have a fairly big exposure to the motor insurance segment. Would you say that now in Q4, the situation has normalized? Or are still are we still seeing the kind of ripple effect from the tax changes that we had in 2018? And how should we look at the motor insurance in Sweden in 2020? Yes. Morten Froeschel here. I think if you look at the car sales in Sweden for 2019 as a whole, it's actually quite stable compared to 2018. However, we've seen quite some movement sort of from quarter to quarter. And in the Q4, new car sales in Sweden was up by some 50% compared to Q4 2018. So I think depending on tax changes, of course, you can see these changes from kind of 1 quarter to another. But I think it's more fair to look upon this on a full year basis, and then you see quite a stable situation actually. And they should continue into 2020 as well? That's hard to predict. But I think 2018, 2019, fairly stable development in terms of new car sales at least. Our next question is from Timis Tsipolis from Goldman Sachs. Please go ahead. Yes. Hi, everyone. Sami from Goldman Sachs here. So my first question, just coming back to the dividend policy. It also mentions buybacks. I'd be interested to know what the parameters you'd look at here on the buybacks are. Is this linked to capital or exit earnings? Or what are the things that might trigger a buyback? And then my second question is on the industrial P&C business. Could you comment a little bit on what saw at the 1st January renewals here? And second, also related to this. I think you've said before that it's a business that you're interested in longer term. But given that some of your peers appear to be had plans to pull back a bit, Do you see a chance to potentially take a bit of market share here? The buyback, we're, as a management team, committed to paying an attractive dividend, and we believe that our owners are interested in that. Buybacks in the history of Sampo has been used very infrequently. I think the last time was probably 2011 maybe when the share price was very weak. Okay. So are you saying that this is something that you would only the trigger for this would only be a weak share price? Or are there other potential triggers as well? That's obviously a Board decision, but that would be my expectation. Okay. All right. Got it. And your question on industrial growth, Sami. What we saw last year was quite a good combination with increased volumes stemming from increased turnover with key clients, increased shares on some of the more structured and new programs that we participate at. We clearly saw some price increases in the large corporate segment. And we had a record high retention in that segment. When it comes to new sales, it was more of a normal situation, but those other very positive factors gave a very positive outcome in terms of growth for Industrial in 2019. And we've pretty much seen the same development when looking at the 1st to 1st development 1st to 1st renewal. So quite a favorable development in the industrial market. Of course, needless to say, with these growth rates, just now we are somewhat growing market share. But of course, if you look upon this over the longer period, we've been ongoing up and down in volume here. So Okay. But you're happy with the returns, obviously, that you're getting in the market given that you're willing to take on a bit more volume? Okay. Our next question is from Michael Hoffman. Please go ahead. Hi, there. Two questions. The first one is on the stakes. You mentioned more insurance. You've got the list of stakes you've built up mostly in banking and payment, apart from the Viking deal, which is a little season 1. So I just wondered if there's a change there, if you're going to stop doing these more banking stakes, are you going to sell them or just to get a feel for that? And the other one is on the remittance from Mendatum. So excluding the one off in 2018, that remittance is flat. In the past, you said that reducing back book means that you can have less allocated capital to Mandatum. So I would have expected the wrong word, but I was kind of thinking, maybe you could have paid us Mandatum could have paid more to the parent, and I just wondered if there's a moving parts I'm not saying. Michael, it's Kedane. Alstakir here. On the first part in terms of the investment portfolio in the holding company, it had, as you will have seen from the changes in the fair value reserve and the comprehensive income by segment in our report, a really good year in 2019. So the return was strong. And obviously, we could at one point in time decide to sell and take some profit also in that portfolio as we do in other investment portfolios throughout the group. When it comes to Mandatum, I'm not exactly sure I got your question. But the release of capital from the runoff of the with profit book is still happening, so to speak. We released more than SEK 200,000,000 last year of the highest guaranteed products and then also some additional of lower guaranteed products. And that did release capital to the tune of between EUR 100,000,000 and EUR 150,000,000. There's no change there. The possibility for us to pay a dividend from Onbatten remains. And we have said that we expect Randarten to pay a dividend now in March of EUR 150,000,000, which was about in line with what we expected it to do when we started 2019. So everything according to plan in Mont Alto when it comes to the capital release and the dividend for the last year. Next question is from Blair Stewart from Bank of America. Please go ahead. Hi, good afternoon. Thank you. First question on our favorite topic of underlying combined ratio, Torbjorn. The adjustments that we can make from the disclosures we get suggest that for the full year, the underlying combined ratio was broadly stable. And in Q4, it looks like it deteriorated a little. I wonder if you can just give us a little bit of color on that. I know we're not able to do all the adjustments that would be necessary, but one would have expected with pricing at or better than the claims inflation that, that might have improved? And secondly, just interested in your comments around Denmark with the rollout of the new systems, what impact that might have on that business going forward? And finally, just on the growth outlook, the growth, I think, 5.7% and higher than that in Q4 discrete is impressive. I wonder if you expect that going into this year as well. Thank you. I'll take the middle one and then give you a better shot than with me on the underlying combined ratio with Morten. But on top down, Mark's new systems, I don't think that we should see that as a revolution around the corner. But the Danish market is very has been very slow at picking up Internet, web sales services. And Topdanmark has not invested enough to lead the market there, and they're investing heavily in that. And you will see this year, for instance, a number of products being made available on the web there. So it's a gradual development, but we're investing quite a lot Sorry, Klabin, is it only in top? Or is it also in your own Danish operations that the IT investment is increasing? Yes. I can comment on that. Within if we are rolling out a new base system and currently doing that partially in Sweden and also starting up in Denmark. So that means that in Denmark, we have a little bit flip and steady. You could say that we have a little bit of double IT costs right now, kind of still having to maintain the old legacy systems and then at the same time, rolling out a new core system. Then to your other questions, I guess the topic of underlying improvement is probably one of your favorites, perhaps not necessarily ours. I think Marvin loved talking about it in the past, so I'm hoping for a good answer from you. Exactly. No, but I think there are so many moving parts. So it's kind of really hard to do a proper statement on that. I think we are really happy about the current profitability level, delivering 84.5% in combined ratio. We see a good competitive situation. We have said throughout 2019 that we are pricing somewhat above inflation, mainly due to the fact that there is a bit of repricing within the commercial segment. So I think that's what we can say about it. We have also, as you've seen, published an outlook for 2020, which is 1% lower than the outlook that we published at the same period last year. Then finally, to your question about growth. We report, as we mentioned, 5.7% growth in 2019 for the full year and then 8.5% for the Q4 stand alone. Proportion of the growth is coming from increased retention rates, in particular in the private segment. So we do believe that we have a little bit of a tailwind given that we've seen clear improvement in key customer metrics. And that will give us also a good competitive situation in 2020. Okay, great. Just one come back on the Danish situation. When would you expect to not be running with dual costs in IT? And what might the impact of that be? Presumably fairly modest, given it's a small operation, but it would be worth knowing. Hard to put an exact date on that. It takes a couple of years to roll out the current base system that we roll out, and then you need to close out close down the existing or the legacy systems. So it easily takes some few years. But we are progressing according to plan. I think maybe the relevant answer, Martin, is that you know very well that we're committed to improving the cost ratio by a couple of small percentage points every year, and this will contribute to that, and we see to that promise. Okay. Our next question is from Pierre Kemper from ACB. Please go ahead. Yes. Thank you. Three questions from my side. The first relate a bit to Blair's question. When we listen to your peers in this context, probably Tripp being the most relevant, but you have talked about weather related claims being very benign in 2019. Are you seeing the same picture? I know you don't report on the topic. It's a bit different from country to country. So I think on the Nordic level, I wouldn't necessarily say that the weather was more benign in 2019 than 2018. We've seen some few events in Sweden, for instance, in 2019. So it's not a big difference, as I see it, between 2018 2019 on the Nordic level. And then again, there is clearly variations when you go down on the country level. Of course. My second question related to your new dividend policy. Basically, the key question is, any ambitions of showing an annual increase in dividend going forward? Or should we look more for a top Denmark look alike dividend that fluctuates rate earnings? Should we expect a reset from the current 2.2% with approximately 100% payout. You're only promising to payout above 70%. That doesn't really sound like Sampo, but can I help to ask the question? Sampo is a much bigger animal than top down mark. We get diversification on a number of levels and dimension compared to top down market. Our ambition is, you're quite right, to increase earnings and that the dividend will reflect those earnings. But I also expect that to be more stable than for top line. But we but seeing a declining dividend, that is not as ruled out any longer as it was in the old days. Is that correctly and interpreted? I think that's that. Okay, perfect. My final question, your investment returns on the bond side, Give us any indication what the yield to maturity is on your bond portfolio in IF and in Mandatum in these low interest rate markets? The running yields in Mandatum is currently 2.4% and for IFRS 1.8%. And the mark to market yield is roughly some 50 basis points lower than that. Okay. So EUR 1,900,000,000 in madatum and slightly below EUR 1,000,000 in IF? Slightly below EUR 1,000,000 in IFS. Okay, perfect. Thank you. Our next question is from Joach Agustya from ACB. Please go ahead. Hello, Jaakim Hikayalan from ABG. I have some questions about your premium growth. It looks like you have sort of lagging a little bit behind, if you can see things like that on the commercial side. Could you shed some light into that kind of business line to say how you were thinking going forward? And if the claims higher than the premium growth at the moment in that business unit? When it comes to growth in Commercial Lines, I think we pointed out throughout last year that we started with a weakish Q1, mainly driven by loss of some business in workers' comp in And then it's been improving sort of, of course, over the quarters in 2019. And when it comes to pricing, I think, again, we said that within the commercial segment, we do see price increases somewhat above what we would assume to be normal inflation. Okay. On the combined ratio, could you shed some light into the underlying level if you strip out the discount rate in both Sweden and Finland? And is it sort of the normal runoff rate on top of that? Or how should we look upon these 2 countries in specific? Again, I think it's repeating a bit the story as we talked about sort of during the quarters throughout 2019. Good underlying combined ratio. We obviously think it's more important to focus on the total combined ratio. When it comes to runoff gains, yes, they've been on a somewhat higher level over the last, yes, almost 18 months, I guess, now, more around 4%. And then historically, it's been more around 2%. And then we sort of are not giving any sort of guidance on how this will progress. It kind of really depends on the underlying development compared to our reserve models. Why has it been more 2 ish for 4 ish rather than 2 ish for the last sort of 18 months? Is it sort of any trend you have seen, any high cost objections? Or is there anything is it particularly motor accident that has come off? Or is people less ill? Or what is the main reason here? It's back to the development in Swedish Motor TPL, where we've seen clearly a more benign development than what has been assumed in the reserving models. And this, as you know, is an extremely long tail business. So that's what's driving it. But have you changed your reservation? Or if you're still using your old tariff when it comes to this back book and front book? Of course, you update your reserving model sort of constantly, sort of taking into account the new data. Okay. On Denmark, you have a very high cost ratio. Is that linked to the IT system development stuff you had in the Q4? Or is it something structural? It is a situation that's been hurt for a while in Denmark. Obviously, replacing the IT system is one contributor in taking that down. And then it's back to the overall kind of focus on cost improvement in it. It. So clearly, there is a target of reducing the cost ratio in Denmark. Okay. Finally on Barton then. You have lowered your sort of buffer, what is it called again, below your discount rate for down to 1.25 for 22, probably using a very strong financial in the Q4 numbers. How should we look upon the 125 basis points for the over years? Is it so that you want to be down to the 25 basis points as well for Rand Dalton by 'twenty two? And how should we be running there? Is it just by financial strong results that will get you there? We make decisions on the discount rates sort of at every quarter depending on how the rate environment looks. There's, of course, no change in the guarantees in Mandatebn, which on average currently is just around 3%. And for us to prepare for a lower for longer interest rate environment also going forward, we have no plan to change that, but we don't have a guidance for how we will deal exactly with the discount rate reserve going forward. Okay. So the running yield is around 2.4%, as you said to pay. And then we should think about it being coming down towards 1.5% to 2% somewhere and that you should be happy with SEK 1.25 percent in there? We're happy with 1.25 percent right now, but that doesn't mean that we will not take it further down at one point in time going forward. Our next question is from Jager Point from Nordea. Please go ahead. It's Jakob Brink here. I That was me from Nordea. Sorry, just coming back to the payout policy once again, sorry. But how do you look at so this is a payout ratio on net profit. But these days, of course, there's a difference, at least right now, between payout ratio of in Nordea. It's not 100%. So there's a difference between the cash flow and the actual profit that you consolidate. How do you look at that in connection with the dividend policy? And then also in addition to that, what if at some point you'll be able to start to do a buyback? Then I guess that could be a meaningful change to the cash flow that you would be starting to incur. So how would you then look at the potential percentage of that doing buybacks? Or would you accumulate the capital over time? Or how would that work? The dividend policy that we have published today is a balanced one. So clearly, we are taking into account the Nordea dividend policy. Not much more to say about that. On buybacks, that's a potential in the future. As the rules and regulations look today, we cannot allow our holding in Nordea to increase above 20%. But we don't know what that situation will look like if and when Nordea decides to start with buybacks. Okay. Our next question is from Daryl Goss from Citigroup. Please go ahead. Good afternoon all. Thanks for taking my questions. Just going back to the January renewals, please. Could you give a sense of the rate improvements that you're seeing possibly by regions? And how does it compare to 2019? I think in 2019, there's a bit more rates in Industrial Norway. Has that picked up outside Norway as well? I think I'll avoid going too much in details. I think it's been a positive renewal for us. I commented that we do see rate increases in industrial book, and we continue to see rate increases, price increases within commercial. I think apart from that, I think we commented that it's more clear that or the price increases are strong in Norwegian markets, but we see it a little bit across the whole. Okay. And my next question is just on the large losses in the commercial segment. I think it's the 2nd or 3rd year in a row where you've exceeded expectations. Could you maybe talk a bit about what are the issues by specific lines or maybe also by countries? And also, are you taking any actions to address that? No. I think it's kind of a certain volatility that you would expect. I mean, it's we've seen over the last year somewhat more losses in the Commerce segment. In the Q4, stand alone, it was clearly less than expected. So this is moving and it's kind of varying a bit from country to country so and from industry to industry. Let me add to the rate increase question that Sampo, the main target for FP and C is to exceed 70.5% ROE post tax, which it has been able to do with the margin for a long period. The rate increases are designed so that we would meet that. And the rate increases carried out in 2019 and oneone now have been able to meet that. Okay. Our next question is from Nicolas from BNP Paribas. Please go ahead. Yes. Good afternoon. Three questions for me. Firstly, at Q3, you told us that it was reasonable to answer questions about strategy next year. So, here's the next year, I want to double check if you already have something to share or whether we should expect an update on this later in the year. And maybe if you can't tell us what changes, you can already give us a strong view about what will not change. Secondly, on Nordea, I mean, you mentioned earlier that it's a good time to ask whether you'd be selling it. Maybe you can give us a bit of a longer term perspective in terms of whether you can you look at this as a strategic or financial stake, by which I mean do you think your there are reasons you're a better owner than the market of it? And or are there or will you try and create value for your shareholders by, of course, selling it that you think it's at the right price to do so? So that's the second question. And lastly, on the new money yield, if you could tell us what yields you have been investing at most recently in your P and C portfolio? Thank you. Take the first two then. Strategy for next year. I think I actually covered what I could cover in my introduction. The strategy is on a rep operational level, Nordea starting to move towards the target and supporting that for if P and C and top Denmark keep the combined ratios where they are. And obviously, P and C at the strong position they are, should also be able to pursue a higher growth figure than in the past. That will increase the profits of the group. So that's a very operational strategy. Apart from that, we'll use all the skills and knowledge that there is in the management team to see what opportunities the world brings. Then on the longer term perspective on Nordea. Well, Sampo has always been agile. I use phrases like everything is always for sale at an extremely high price, of course. And at this point in time, we believe that we can develop Nordea and Nordea's management team can develop Nordea to much higher values, and that's the focus. So I see no reason to speculate in what happens after that. That's very clear. Arne Kjell, it's Kjell Andersen. Your last question about the yield we had been invested in. You mentioned Q3, referenced Q3, where I was signaling a possible clear drop in the running yield during 2020. The fixed income investments we have done in the 4th quarter helped to stabilize the running yields at the level I indicated earlier, a more positive to being able to maintain the current running yield 2.4 to 1.8 for Mandatumif during 2020 than that was a quarter ago, meaning that we've been able to invest in yields slightly higher during the last 3 months than during the 1st part of the year last year. Thank you. Okay. We have a follow-up question from Juan Agusta from ACB. Please go ahead. Yes. Thank you. My question is really answered. Thank you. So I think I have another one for you. There are no further questions at this time. Please go ahead, speakers. Thank you, operator. Thank you all for your attention, and have a great evening.