Ladies and gentlemen, welcome to this conference call on Sampo Group's January-June 2019 results. I'm Jarmo Salonen, Head of Investor Relations at Sampo, and with me here in the studio, I have Kari Stadigh, our Group CEO and President, Knut Arne Alsaker, our Group CFO, and Morten Thorsrud, CEO for If P&C. As always, we'll start with Kari's presentation, where he will highlight the most important things in the first six months of this year. Before handing over to Kari, let me just remind you that you can follow this transmission live at sampo.com/results, and a recorded version of the call will later be available at that same address. That's all from me. Now I'll hand over to Kari. Kari, please.
Thank you, Jarmo. Good afternoon, and welcome to the conference call on my behalf as well. Sampo Group reported a profit before tax for the second quarter of EUR 506 million. This is lower than the Q2 last year, but we should remember that the second quarter of 2018 benefited from a recorded profit related to Mandatum's deal with Danske of EUR 197 million. As well as one-off gains in Nordea from divestment of shares in UC and sale of their life and pension business in Denmark, which combined added EUR 74 million to last year's second quarter profit in Sampo. Adjusted for these three one-offs, our Q2 profit improved actually by EUR 69 million, or 16%. The insurance business in Sampo is performing excellently.
If had a Q2 combined ratio of 83% and a first-half year combined ratio of 84.7%, an improvement of 2.1% and 1.1% percentage points respectively, and both were best ever combined ratios. Growth in If is also really, really strong, with a growth rate of 4.3% in local currencies in the first half year compared to last year, even though new car sales slowed down in the beginning of this year. All business areas, as well as number of clients in all countries grew. A strong investment result for the first two months or actually first two quarters contributed to giving If their best ever operating profit for the first six months of the year, anecdotally in their own reporting currency, Swedish krona. Topdanmark also improved their underwriting result and reported combined ratios according to our reporting principles below 80 percentage points for both Q2 and the first half year.
Another clear sign of the great P&C operation which the management of Topdanmark is running. The life business in Topdanmark performed also very well and doubled its profit for the first half year compared to 2018. P&C business is today already more than 60% of Sampo, and insurance altogether roughly 75%. We are apparently back to our origins, we are really an insurance group. P&C insurance is an excellent business. We continue to have world-class underwriting. Our cost ratios are extremely competitive. If's online offerings are now advanced compared to market as well as winning rewards. All of this contributes to strong growth and very strong profitability. With investment yields that will be lower for longer, the attractiveness of Sampo's high underwriting profitability has increased even further. Mandatum's unit link reserves were at an all-time high by the end of Q2.
The company's own sales force continues to perform well, and towards the end of Q2, we could see some signs that sales from our distribution partner, Danske, was picking up. I'm optimistic when it comes to Mandatum's continued growth going forward as well. When looking at Nordea, I want to divide the approach into two different parts. As a client, I'm happy. I'm a client of four, five banks, but I'm really happy with Nordea's offering and competitiveness compared to them. No need for me to change. From an owner's view, the picture is different. Nordea did not surprise positively in Q2, although the development in the last quarter was not very different from what I expected. The most important news from Nordea was that they are now working on setting new targets. We, as a shareholder, appreciate that Nordea now calls a spade a spade.
The environment around Nordea has changed compared to when the previous targets were set. The bank has changed. The board has changed. The chairman has changed. There is a new CEO on the way in. This is the right time to set new targets. New ambitious targets based on a detailed business plan. There are no targets without a business plan. Nordea needs to improve both revenue and cost, and it is our view as a shareholder that the cost targets in particular should be more ambitious than the ones Nordea is now communicating. It is essential for Nordea to operate on a clearly lower cost-income ratio in their retail business, as well as it is clearly important for them to meet higher ROE targets in their wholesale and commercial banking divisions.
When it comes to Nordea's dividend, let's see how the communication will look when released, but I am confident that cash flows from Nordea will continue to be a significant part of the buildup of Sampo's own dividend. Which brings me to my last point, Sampo's dividend. I have just told you that Sampo's P&C operations have record years. This means that I expect dividends from this part of our business to be record high as well. We are also about to generate excess capital by changing the calculation basis for our solvency. Even if we would receive less dividend in the short term from Nordea, there is absolutely no need for Sampo to change the existing guidance of moderately growing dividend payouts. This is no news to many of you. Sampo continues to deliver a high dividend yield, as one could expect from a dividend stock.
Thank you, Kari. Operator, we are now ready for the questions, please.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. Our first question comes to the line of Judy Chicore from Autonomous Research. Please go ahead. Your line is now open.
Good afternoon, everyone. I've got two questions, please. The first one is on your combined ratio guidance, which has improved two percentage points relative to the first half of 2018. Roughly speaking, how much of the improvement would you attribute to better weather compared to last year? How much would you say is more structural in nature and sustainable going forward? That's my first question. The second question is on the dividend. You just gave us two sources of potentially higher dividends should Nordea review their dividend policy, namely higher dividends from P&C and your excess capital. I was wondering if there are other specific actions you could take, to offset the impact of a lower dividend from Nordea. Here, I'm specifically thinking of the EUR 700 million in liquidity buffers you have at the holdco.
Do you have any other specific plans for those buffers, or could these be used to actually make up for a shortfall from Nordea? Thank you.
Okay. Morten Thorsrud here. I will answer your first question about the combined ratio guidance from If. It's correct, we have improved the guidance and are giving a guidance of 84% to 86% in combined ratio for the full year, which is I think the best guidance we ever given. I would say that the major part of this is attributable to more structural improvements. Weather is on a Nordic scale, not having that big impact. It might impact more on individual countries. It's more the underlying improvement that we see in the business that is causing the improved combined ratio guidance.
Okay, thank you.
On the dividend, of course, our toolbox includes many other instruments as well. One obvious one is to issue hybrids in the subsidiaries and upstream more capital. Also you ask about how to deploy the cash or the funds in the parent. Let's see what kind of investment objects we find, but I think, as you remember, we deployed EUR 1 billion last year and on the existing investments, we have actually mainly good news because Saxo, which was roughly a quarter of the investment, they announced that they are successful with their €400 billion bid on BinckBank. Therefore, we are going to maintain our shareholding, and the bid will be financed with equity and debt, so we will inject EUR 20 million more into the Binck project.
Even if the trading platform market as such has not been very benign, the fact that they can acquire Binck is really positive because they get a significant amount of new assets under management, and it's also a synergy and a cost savings play. Good news on Saxo in that sense. Of course, you all saw the announcement on Nets yesterday, where they sell their corporate business to Mastercard. I'm here only referring to public information that they will receive roughly half or what they paid for Nets and they sell a business which is roughly a third of their volume. If a private equity group so early after the investment exits something, I interpret this as very good news. Intrum, of course, they have solved their funding issue and reported good numbers, and you could see in Nordax, the positive profit share.
Good news on the parent company investments, and if there are new investments that we find, we are, of course, going to deploy more capital from the parent as well.
Okay. Thank you. It sounds like in the near term, you're not committing to spending materially more from what you already have. That still leaves you with significant flexibility at the parent company.
I think that the flexibility is always good to be there. If you look at historically how we have created shareholder value, it has been by being contrarian. In these volatile times, it's good to be well-capitalized and have buffers to do things that create shareholder value. Knut Arne, do you want to add something?
Just a small addition in terms of the liquidity and flexibility in Sampo plc, the holding company. The current liquidity buffer, which we referred to will increase even further later this year when one of the assets, 81 in Nordea, is maturing, which will bring that liquidity buffer to slightly above EUR 800 million, everything else equal. Liquidity is not the big concern in terms of our internal cash flows.
Okay, great. Thank you for the clarification. Thank you very much.
Thank you. Our next question comes to the line of Matti Ahokas from Danske Bank. Please go ahead. Your line is now open.
Yes, good afternoon. Two questions, please. Firstly, a more general question on the interest rate outlook. Now we've seen a fairly dramatic deterioration of the interest rate outlook, bond yields falling quite a lot. How much of an impact for earnings will this have, in your opinion? What are the main tools to mitigate potential negative impact of this? More specifically, if we look at Mandatum Life, the solvency margin, excluding the transition rules, was below 120. If straight stays at these levels, is there a risk that you cannot take the kind of normal EUR 150 million that you've previously taken in dividends from Mandatum Life? Thank you.
Well, I think that the interest rate development has been especially dramatic in the last few months. It has partly taken us by surprise that the decrease is so rapid. Therefore, of course, we have to see what kind of measures we have to mitigate that development. It will not be one issue that has to be done. We have to look through our whole operations. We have to become more cost-efficient. We have to look at the terms of our products and pricing. It's a combination of many things. On the investment side, we have to see how this plays out now. It's very unclear. I don't personally believe that the quantitative easing will work the way the central banks want, unless they find a way to force banks to have negative deposit interest rates.
Otherwise, the consumers are not going to consume and invest the way the bank hopes, and we will not see them meet the inflationary targets. It's too early to say as the development has been so recent. I don't know, Knut Arne, if you want to add something.
Mandatum solvency, Matti, as you referred to, is the part of our business which has been most impacted, most sensitive to the current yields. We have activities ongoing to try to strengthen further the solvency ratio of Mandatum. Obviously, the high-rate guarantees are running off, as you know, and has been doing so over a period of time, and we work proactively to reduce that even further. Also to look at other measures to reduce the risks and increase the solvency ratio somewhat to secure the dividend capacity of a really well-performing business currently in the first half of the year.
We shouldn't expect any changes from the normal streams?
I think it's too early to say, as we look at it today, we see no reason for that. Let's see how the interest rates really play out and where they finally settle. Also, the hybrids are one of the things we have in our toolbox, because of course, if you issue hybrids in this environment, their interest rates are much lower than we earlier thought. It becomes pretty attractive.
Thank you.
Thank you. Our next question comes to the line of Jon Tennant from Morgan Stanley. Please go ahead. Your line is now open.
Good afternoon. Thank you for taking my questions. Just thinking about excess capital and If, what proportion of If's profit is from business which requires a credit rating? Is it all of the industrial business? I know you can't speculate too much on Nordea. However, if they move to a policy of dividends and buybacks, would you participate in any buybacks even if it meant realizing losses? Presumably, you'd be forced to participate, or at least dividend out additional Nordea shares to keep your ownership below 20% and the capital requirement down. Thank you.
I think that if Nordea would start to do buybacks, we would sell out pro rata. As we today see a significant upside in Nordea, we wouldn't like to sell, and therefore, I don't think we are too positive on buybacks at this moment in Nordea. The proposal has to come to the owners from Nordea, and we haven't seen any proposal of that nature so far.
In terms of If dividend, I don't see the rating to be restrictive on the dividend capacity of If in 2019 versus what the owner would like If to upstream. There's flexibility, also on that rating model. Given that the rating agencies use the strength of If and Sampo from various perspective, there's already a big buffer in If's rating model, and it's not an exact science in terms of the fact that zero is an absolute lower boundary. On the part of the rating sensitive business, Morten.
Yeah. It's clearly in business area industrial that is, of course, an issue. It doesn't go for all of the industrial clients. Clearly, the larger ones, and in particular the clients having captives, are concerned about rating of an insurance company.
Clear. Thank you very much.
Thank you. Our next question comes to the line of Christopher Adams from Kepler Cheuvreux. Please go ahead. Your line is now open.
Good afternoon. Two questions from me, please. Firstly, the currency adjusted premium growth in If was a healthy 4.3% in the first half. Could you please break that down by price changes and change in number of policies? Secondly, you report staff costs up 6% in If. What's driving this, and how should we expect these figures to develop going forward? Thank you.
Yeah. On your first question on growth, I would split it roughly 50/50. We have a clear growth in number of customers in basically all business areas and regions. We do have price increases that are somewhat above expected inflation going forward. I would split it roughly 50/50 between those two effects. The staff cost is going up due to insourcing. Particularly in Sweden and Norway, we have insourced some of the external distribution capacity that we had. That has gone over from being other cost to being staff cost. We also insourced some IT functions where we have used consultants previously. I would not expect the staff cost to continue to increase like that. This is more one-offs driving the cost increase on staff cost this time.
On total cost, you are as committed as ever.
On total cost, we are still committed on continuing reducing the cost ratio going forward. As you see, we report 21.7% year-to-date compared to 21.8% last year.
Great. Thank you very much.
Thank you. Our next question comes to the line of Blair Stewart from Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Thank you very much, and good afternoon, everyone. I've got three questions, please.
Your first one was three.
Yeah.
Yeah. Okay. Go ahead.
Don't panic, Kari. It'll be fine.
Yeah, thanks.
On the Nets disposal, is it too early to assess what they might do with those proceeds? I guess just looking at the proceeds as a proportion of your stake, it would be, I think, more than EUR 100 million coming back to you if they decide to distribute. I just wonder if there's any indication from Nets what they might do with the disposal proceeds. Secondly, with regards to the P&C business, with a very low interest rate and low inflation environment, is there an argument for excess levels of reserves in the company given the reserve to premium ratio is high, particularly versus some of the peer group. Just wondering again if that's possibly a source of additional income as we go through the next few years. Finally, I had to ask this, Kari, but what would it take for you to cut your dividend?
Some aspects of consensus are looking for a 50, five zero % dividend cut at Nordea, and that would leave you a shortfall that I think would be more difficult to plug. Of course, the market will not really give you credit if you're paying a dividend out of additional debt, for example. Just wondered if you've got any further thoughts that you can share on that particular aspect.
Net disposals, we have no net disposals. We have no information. It's a significant number because with this deal they get back 50% of the purchase price, but I don't want to speculate how they will treat it. We are happy to receive it, but if they don't give it back to us, then they have found something fantastic to deploy it with, and we wouldn't mind that either. We are neutral on that.
On the reserving side, on the P&C business, as you know, we are always having a reserve level that we assume to be appropriate, and it's, of course, estimated every month. We do have a run-off profit, which is historically on a fairly high level these days, and I think we already communicated that is mostly driven by a benign development on bodily injury claims in motor insurance in Sweden, where we see less bodily injury cases developing. Of course, we do not speculate in sort of whether this will continue. It kind of depends on whether we see the trends continuing. When you try to compare reserve ratios versus competitors, you need to bear in mind that there is quite a different business mix between the different competitors.
If, in particular, have a large exposure to Swedish motor that is extremely long tailed, and we therefore naturally have higher reserve ratios than many other kind of peers in the Nordics.
On the dividend speculation, I don't really want to speculate on this. Let's see what Nordea communicates. I'm absolutely sure that we will continue with our guidance and moderately increase our dividend. I see no reason to change that view. If we take a longer view, I think that the expectation is still that even if there would be a dividend cut, it would be a dividend cut, which forms a new floor, and then it would start to climb up again. It would be a question how to bridge it. I'm not worried on this part, and the liquidity is there. We will continue moderately to increase our dividend. That is what we will propose to the board.
You would do that, Kari, even if the dividend was uncovered from ongoing cash flows?
Temporarily, I could do it because the world is such that if it's for one year or two years, I wouldn't mind if I'm confident that I'm back on track after that period. Yes.
Okay. Thank you.
Thank you. Our next question comes to the line of Michael Huttner from JPMorgan. Please go ahead. Your line is now open.
Fantastic. Thank you so much. I think back to dividend. Two on the dividend and one on the combined ratio, if I may. On the dividend, you said high dividend from If or I think highest or whatever. The figure I have, in 2016, they paid out EUR 879 million, which includes a one-off. I'm just wondering whether your kind of statement or views is relative to that very high figure, or is it relative to the more normal kind of recurring dividend from If. The second, a similar question from Mandatum. Mandatum, for two years, has had what I perceive or maybe I'm wrong here, a kind of EUR 150 million a year positive adjustment, probably related to the Danske deal. I just wondered if you would see that as a kind of semi-recurring. You alluded to the reducing reserve.
Any help on this would be very, very gratefully received. Finally, just going back to that amazing combined ratio, and here, I know you hate giving anything looking forward, but you kind of alluded to low interest rates. It means you have to focus more on the combined ratio and things. I mean, 83% or even 84.6% is just an amazing number. Is there any kind of limit to this on the way, I mean, in terms of how much you can improve? Thank you.
There is very little I can add actually to the dividend discussion. I just repeat that we are committed to the moderate increase of our dividend, and we have to see what we upstream from which entity and how much. Let's come back to that when we get more clarity on the Nordea plan, because it will affect our internal upstreaming and the issue also that if we issue hybrids, what will that have as an effect. We are strongly reserved in If and then we, of course, will receive dividends from Topdanmark as well. Mandatum, whether 150 is the right number, also there I would not this time of the year go out and speculate is it exactly that number or other. The total sum of all these dividend streams, give and take the scale or the magnitude, I feel comfortable with my statement.
On your question on the combined ratio, of course, over many years now, we have been adjusting the combined ratio targets of If to reflect a low interest rate environment. That is what is pushing down the combined ratio requirement for If, as well as the P&C industry in general. Of course, there is a trade-off there. There is always a trade-off between profitability and growth. Of course, we're trying to make a good assessment of that when we put up our actual targets for the different business areas, different products, different markets. It will be, at the end of the day, a trade-off between the combined ratio and also the competition kind of where we want to see also growth in the market.
May I just ask a follow-on just on this trade-off point? Growth 4%, of which, say 2% or 2.5% is volume, and this amazing combined ratio improvement of somewhere around 1% or 2%, depending how you look at it. If you look at this trade-off environment, which way are you inclined to move? Are you saying, well, would you be more inclined to say, well, actually, at such excellent combined ratios, more growth would be welcome? Would you rather say, well, actually, I'd like to grow more and, sorry, improve the combined ratio more? Just to get a feel. I think you have amazing flexibility to do what you like, but any kind of view would be helpful. Thank you.
I don't think I'll answer that directly, I think, of course, we are extremely happy about the growth that we see, 4.3% for six months, 4.8% in Q2 standalone. In particular, if you also bear in mind that car sales in the Nordics have been rather low so far this year, it kind of makes the growth numbers even more impressive, and it's purely organic driven. I will not speculate on the exact sort of trade-off there. It's something that we do sort of on a more granular basis, kind of down on a product and segment sort of per country basis.
Got it. Thank you very much.
Thank you. Our next question comes to the line of Per Granborg from SEB. Please go ahead. Your line is now open.
Yes, thank you. A couple of questions from my side. First of all, a technical accounting question on your distribution of Nordea shares. Those shares booked at EUR 824 currently, I assume you are distributing them at market price to the shareholders. That must imply an accounting loss of some EUR 140 million, EUR 150 million. How should we expect that to show up in the Q3 report on equity or somewhere in the P&L? My second question is on the solvency. You are addressing that you will be willing to increase leverage in the holding company. Any views on your after the Nordea transaction solvency of 170%, how far you would accept that one to go? Do you have any lower limit on the new way you are calculating it, or how do you see the solvency ratio worst case developing going forward?
Good afternoon, Per. On your first questions, the number you have is of course correctly calculated, and that will show up in the Q3 P&L. Not booked directly to equity, but in the P&L. On the solvency, the 170, we don't have a policy with a limit stated. You saw us take action with the current solvency situation when we were approaching 140 in solvency ratio. I think you could consider around that level to be what we would consider to be a minimum on a running basis.
Okay, perfect. Just on the loss on the Nordea stake, will that be booked on the Nordea line or somewhere else, or is that too early to say?
No, it's going to be booked there.
Okay, perfect. Thank you.
Thank you. Our next question comes to the line of Jan Erik Gjerland from ABG. Please go ahead. Your line is now open.
Good afternoon. Some couple of questions from my side as well. I just wanted to check on the premium growth in the If side. What are your expectations going forward versus product and geographically growth in customers? Is it so that this trend is an ongoing trend, which you have seen for some couple of quarters, and you expect it to continue, or how should we elaborate on that? That's my first one.
Yeah. Of course, we try to avoid speculating too much about the future. We've seen a good growth rate now in If over the last few quarters. Part of this is driven by improved retention in most business areas. As that is something that is not turning around totally overnight, at least, we expect that to give us some support also going forward.
Is it so that the competition has increased or decreased in that sense?
I think on a Nordic total scale, it's not very changed totally in the Nordics. It's very much the same players.
Isn't it, Morten, also so that we saw this excellent growth, especially in our biggest market in Sweden, despite the fact that car sales were down? Wasn't it so that the cut date for the very good car sales was the tax issue in Sweden?
Yeah, I guess most of you remember that there was quite a special year last year, tax change in Sweden as of 1st of July. Which meant that there was a record high number of new cars being sold up until that date. The second half of last year was, of course, much more modest. Of course, that's also going to give us some support now in Q3 and Q4, where we expect more normal sales levels to the car sales in Sweden, and comparing them to quite weak Q3 and Q4 last year.
Okay. On the combined ratio improvement, could you shed some more light into where the improvement has come, both from product side and geographics?
We see an improvement basically in all business areas, if you look at somehow an underlying trend. As you see, we report 2.1% improvement Q2 this year versus Q2 last year, 1.1% improvement for six months compared to last year. I think all of you know that there are quite some price actions in the commercial segment in quite many countries. Of course, we do see then some improvement there. Then also in motor, we do see improvement in Norway and Finland.
Especially Finland was very good. Is that something that you would expect to continue going forward then? That this decrease, which was quite heavily for some years, is now behind us.
I think to understand Finnish development, you need to remember the quite big changes that was done to the motor TPL bonus systems in Finland. That was reducing motor TPL premiums quite a lot going back in time. Of course, that has now been fully earned into the premiums. Now we expect a more normal sort of development going forward.
Okay, thank you. Just one more on the life side. We have seen investment results of some 60 plus over the last two quarters. Is it so that we should expect to come down to around 40 plus-ish, or is that 60 the new recurring level? Finally, on the capital side, how much capital can you really release from your old back book is now running off?
I think that what the quarterly results will be for Mandatum, you have to wait and see. That is, of course, always dependent on the capital market development. On how much the old book decreases.
200 million is roughly, it depends a little bit on what kind of reserves, but roughly EUR 50 million in capital in release.
In a quarter or in a year.
For a full year.
Exactly.
EUR 200 in a year is roughly EUR 50 million.
Yes.
It doesn't matter which time period it's run down on, but EUR 200 million lower with profit reserves is roughly EUR 50 million per year-
Per year, yeah.
EUR 50 million capital.
Yeah, exactly. EUR 50 million of capital potential release off of those EUR 200 reduction in underlying reserves.
Yes.
Yeah. Of course, that EUR 50 will change if it's run down at a quicker pace during the year. It will be a little bit more.
It will be bigger, yes.
Can be bigger.
Yes.
Thank you.
Per, just I'm sitting thinking myself on your question, where it will show in the P&L, this accounting loss of EUR 140. It is a part of the share of associate profit and loss, but I think we will decide to actually specify it explicitly this time in the profit and loss, just to have a continuity going forward, a comparison for the back on that particular associated profit and loss line for your model. I correct myself there. It is a part of the P&L, but we will make that an explicit item in the Q3 report.
Thank you. Our next question comes to the line of Sami Taipalus from Goldman Sachs. Please go ahead. Your line is now open.
Yeah. Good afternoon, everyone. Just a couple of quick ones, actually. First one is a bit of a follow-up on the last question on Mandatum Life. You say EUR 50 million or EUR 200 million per year from the runoff of the back book. Could you say a little bit, you talked a little bit about new business at the start of the call. Could you give us a little bit of an indication of what level of capital generation you'd expect from new business value in Mandatum Life? Also I appreciate obviously the actual investment result is going to be volatile out of that business. What would a sensible number be to think about in terms of plan or budget investment income contribution to capital generation? That's question number one. Number two, you're talking a bit about debt issuance.
Can you just remind us what the upper limit for debt issuance, what you see as the upper limit for debt issuance within the group? Are you thinking about debt leverage ratios or interest cover or how far could you go on this? Thanks.
The actual investment result going forward, you can see our investment mix, how much equity risk, how much fixed income we have. You can see our running yields. Unfortunately, you have to figure out that yourself because I have no clue where the markets will go. Your guess is as good as mine. On the Mandatum back book, yes, it runs off with EUR 200 million plus per year and releases this EUR 50 million. On the new business, it doesn't really tie up that much capital because as you know, we have changed the company to do more fee-based business. Especially the main products that it sells now are alternative asset management products. When you go into private equity or infrastructure and such and you sell it to your customers, what you really do is you sell it on a commitment basis.
Actually, I don't know if we have published the commitment-based numbers, but we are talking of premiums. We can see that the committed capital is increasing faster than our booked sales. We are building a buffer on top of the premium sales that we have today because we are selling alternative asset products. However, there is an additional good news here, and that is that when you sell commitments, clients start to pay fees on the commitments even before it comes into premiums. That's, I think important to realize. When we look at the Danske deal, even if they are small numbers, we must remember that part of the business that's risk products, that's mainly loan insurance to mortgages.
There, the top line is extremely small, but it's a high ROE business, and that is also picking up, and that you will then see in an improved risk ratio going forward. On debt issuance.
Sorry, just to follow up on that briefly. My question wasn't so much about how much it burdens the SCR, it was more about the amount of own funds it generates. I appreciate you might not want to give the exact numbers here, but is it possible to say anything about the order of magnitude of this capital generation?
I think that then you should look at our fee income. That you can see in our expense ratio and risk ratio. You can start to analyze that how much could we improve our risk ratio on an annual basis. There, I think we have room of improvement. On our expense ratio, we have clearly stated that the new deal that we have done with Danske is not as favorable as the old one. Therefore we got the EUR 197 million compensation last year. Therefore, we have seen a drop in the expense ratio. Now it should then start to improve once the fee income grows slowly. These are the parameters you have to work around.
I guess these are multi-year policies, so it's quite difficult to get to those numbers from your P&L disclosures. Are we talking single digit EUR million, low double digit EUR million? Is it possible to give any sort of steer?
I think on one part we are talking single digit, and on the other part, probably low double digit numbers. Not significant numbers on an annual basis yet, but it's a high ROE business. I'm talking of the improvement from the present levels.
Okay.
We're looking into how to optimize even contract wording to optimize also the capital generation and own funds generation, which you are referring to. Let's revert to that a little bit later when we have gone through this possible positive effect on the Mandatum own fund, which you bring up an important point.
On the debt issuance.
On debt issuance, the theoretical, of course, it's 50% of SCR, 20% in terms of Tier 1 on the own funds. In a new world where after we have changed the calculation basis of Nordea, that would mean a theoretical capacity of more than 2.5 billion, a little bit more than EUR 2.5 billion, which is five times what the Sampo plc has, and then the group has a few hundred millions more in If. It's to the tune of an additional EUR 2 billion theoretically. Of course, that's not the realistic issuance capacity. We certainly could use parts of that, but at the same time also probably look at the senior debt if we were to issue more, that we have to try to not significantly increase the leverage ratio from here.
Sorry, just to follow up on that. I didn't quite understand your comments there about theoretical versus realistic. Were you saying that you could actually issue that much, or are you saying that that's theoretical capacity, but you would never quite issue that much?
Theoretical capacity in terms of Solvency II , I don't think we have plans to issue 50% of our SCR in hybrid capital.
How much would you be comfortable with actually issuing, in terms of total debt, both senior and hybrid combined from current levels?
I think we're fairly comfortable with the level we currently have.
Yeah. You wouldn't want to go much further than what you currently have?
Not much further. Of course, we could, over time, change the composition of that debt with the majority of the debt we have issued is not hybrid capital and not counted towards our solvency capital and excess capital base. That was my link to only shy of EUR 1 billion-
Okay
In the group, EUR 4 billion in senior or EUR 3.5 billion in senior.
Perfect. Thanks very much.
Thank you. Our next question is a follow-up from Blair Stewart from Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Thank you. I just wanted to follow up on the comment you made earlier, Kari, about this being a good time or an appropriate time for Nordea to undertake a review of its targets, et cetera. I know that's a call for Nordea, but you do have the chair at Nordea, so I think it is fair game to ask. I'm just not clear why it is a good time. The actual timing ahead of a new CEO joining seemed rather strange to me from the outside that a new CEO is going to inherit a set of targets, and he might want to set his own targets. I just wonder if you could able to comment on that at all.
I think that if we look at how Torbjörn as the new chairman works, he is planning things really carefully. I think that all new targets would be such that he would have them well-aligned with the management, the present and the future management. I think this is a very good time to do it because they have announced that they will change the CEO. There is a new CEO on the way in, and because of the recent development we have seen on interest rates, and because of the modest development on their results. Because all the targets that they are going to present, they must be based on a new business plan. There are no targets without the business plan.
I think actually the key is the plan that they are preparing internally, what they want to deliver, because that is then the way you will transfer it into actions. Nordea needs As a client, I'm really happy, but as a shareholder, I think that Nordea really needs to improve its internal efficiency and deliver more shareholder value. That also has to include a more ambitious cost plan than what they have communicated so far.
Yeah. I certainly hope they're not going to deliver less shareholder value.
I agree with you once again.
Thank you.
Thank you. Our next question comes to the line of Niccolo de La Palma from Exane BNP Paribas. Please go ahead. Your line is now open.
Hi. Good afternoon. A couple of questions from me on the investment portfolio of If. I wondered if you could share if there's currently any significant or worth of mentioning hedges in place that mean that the economic exposures may be slightly different to what we see. Particularly interested on the equity side. Is 10% of the portfolio the real exposure, or is there any significant hedge that means it's actually slightly different at the moment? The second question on the portfolio is, you have 1.3 years duration on the asset side, so you run a short duration mismatch. What's the solvency cost of that, and what would it take for you to change your view and have a closer matching of assets and liabilities on that book? Thank you.
We invest all our assets, all the float, in a way as it would be our own money. We don't do anything exotic. We have no hedges of the kind that we would not have disclosed to the market. The second question was, what would we think of matching? I think this is completely the wrong moment to go long on the yield curve now after the drop we have seen. It would have been wiser to do it earlier, but there we have been wrong because we could not foresee this exceptional drop in interest rates, but the timing would be wrong. We are not even contemplating on matching that. We have the reserves to maintain the mismatch.
Does the mismatch have a significant impact on the solvency ratio of the entity, or is it marginal?
In Mandatum, it has an impact on the solvency ratio. In If, it's more marginal.
Thank you. The next question is a follow-up from Jan Erik Gjerland from ABG. Please go ahead. Your line is now open.
Thank you. Very short from my side. Your discussions with the Finnish FSA about your solvency situation, could you give us some insight to the discussions on how fruitful they have been?
It's been a good discussion. It's been going on, as you know, Jan Erik, for a long time, since the start of the year. It's been a good discussion. The board has made a decision today on distributing the dividend based on that discussion. I feel personally very confident that the regulator understands our position and will handle the matter in a way which has made the basis for the board to make the decision it did today.
Thank you very much.
Thank you. Just as a reminder, if you would like to ask a question, then please press 01 on your telephone keypad. Our next question is a follow-up from Michael Huttner from JPMorgan. Please go ahead. Your line is now open.
Thank you very much. It's really to ask again, because I'm really sorry I didn't follow the points about the debt and the limit. I'm sorry I got confused. Would you be able to maybe just say it again or say it in just the main bits? I think the question was originally how much capacity you have and how much willingness you would have to. My perception, the answer was, it was more changing it at the edges. Maybe replacing some of the senior with hybrid, but rather than issuing what I think I heard was a kind of limit at the parent level of an extra EUR 2 billion, but any clarification, that would be very helpful. Thank you.
I think that Knut Arne said that we are happy with the debt level that we have today. I remember when this question has been put forward many times during the years. I have said that we can't really have a fixed number because it also depends on the attractiveness on where we would deploy it. If you take on more leverage, then you take on more risk, and then the investments have to be attractive. We have more capacity than we need. That is, I think, the main point. We have no intention to take on more debt on a gross basis at this moment. If there was something unusually attractive, we could use this firepower for that, but we have no such plans at this moment. Maybe this clarifies.
Brilliant. The figure on the capacity, did I understand right, was EUR two and a half billion?
It's 50% of the SCR, which will mean for the group in excess of EUR 2.5 billion after we change the calculation basis from Nordea, and we have shy of EUR 1 billion. We have roughly EUR 2 billion in hybrid, what I call theoretical hybrid capacity. Additional hybrid capacity.
Thank you very much.
Thank you. As there are no further questions registered at the moment, I will return the word to the speakers for any closing comments, please.
Thank you, operator. Thank you all for your attention. Have a very nice evening.