Ladies and gentlemen, welcome to this conference call on Sampo's first quarter 2019 results. My name is Jarmo Salonen, I am the Head of Investor Relations at Sampo. With me at this call, I have our Group CEO and President, Kari Stadigh, CEO of If P&C, Mr. Morten Thorsrud, and Group CFO, Knut Arne Alsaker. As has become tradition, I will first hand over to Kari for his highlights on the first quarter developments. Let me remind you before that you can follow this call at sampo.com/results, and a recorded version of the call will later be available at the same address. Kari, please.
Thank you, Jarmo. Welcome to the conference call on my behalf as well. Well, what do we have in front of us now after the first quarter? First of all, we have very strong results in our insurance operations, especially in the P&C insurance, with a combined ratio of 86.5 in If and 78.2 in Topdanmark. Both either best ever or on par with best ever for the first quarter results. Also, Mandatum Life performed well with the result on the same level as the corresponding quarter the previous year. However, one has to take into account that EUR 54 million was used to lower the discount rates. All in all, very strong results. Secondly, the strong rebounds in equity markets impacted our total comprehensive income significantly. We report EUR 561 million for the first quarter, which actually is more than half of what we reported for the full year 2018.
In If, it is also noteworthy that the number of retail clients continues to grow in all markets. In general, there is a healthy premium growth for both If and Topdanmark. Our P&C operations are performing better than ever, on plan or above. Nordea's numbers have been available already for a while. I see no need to comment on these. From an owner's perspective, the important thing is the new board composition and the new chairman nominated by the AGM. It is too early to see any results of their work. However, I'm convinced that their input will be critical when crystallizing the potential for the improved performance we expect to see going forward.
As we have received several pretty technical questions on capital prior to this call, I would like to stop here and hand over to Knut Arne, who will give a short summary on the regulatory issues of a more technical nature.
Thank you, Kari. As you have seen in our Q1 report, our solvency ratio deteriorated during the quarter despite the growth in own funds due to good results on the insurance side of our business and high investment returns. The deterioration is due to an increase in our capital requirement related to our 21.25% holding in Nordea. The increased capital requirement is coming from a significant increase in Nordea's RWAs, risk-adjusted assets, following the bank's re-domiciliation to Finland. To include a bank in a Solvency II capital regime gives unwanted consequences. As part of the remedy for our reduced solvency ratio, we have this afternoon announced that we are looking to issue some hybrid capital out of Sampo plc. This will stabilize our solvency ratio short-term and increase our excess capital long-term.
In addition, we are looking to reduce our holding in Nordea to below 20%, and by doing so, treat Nordea as an equity investment in our solvency calculations. This will significantly reduce the capital we have to commit for owning shares in Nordea. The standard capital requirement for OECD stocks in the Solvency II regime is 39% of market value. The SCR related to Nordea as of end of Q1 for Sampo was equal to 80% of Nordea's market value. There are some technical discussions related to changing the treatment of Nordea, which we currently are having with our regulator. These discussions have progressed during the last few weeks, and we expect to revert to our board with conclusions from these discussions at the board's next meeting in June.
We expect that the solution will be so that our solvency ratio will exceed the level it was at the end of 2018.
I feel that this is really a technical issue and a regulatory issue where our structure is such that in a way we feel that we fall between chairs. I think that now we have on the table enough remedies for these issues of a pure technical nature, because of course, when Nordea moved their headquarters to Finland, our risks as an owner didn't increase at all. This whole discussion is more of a technical nature, but now we have the remedies in our toolbox. We can choose how to proceed more of that then in June.
Thank you, Kari, and thank you, Knut Arne. Operator, I think we are now ready for the questions, please.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad and you enter a queue. After you are announced, please ask your question. Our first question comes to the line of Jonny Urwin from Autonomous Research. Please go ahead. Your line is now open.
Good afternoon, everyone. I've got three questions, please. The first one is on the trends in P&C. You reported a flat combined ratio, if it were just for prior year reserve releases and large claims, it's slightly up year-on-year. I was wondering, is this due to weather or are there any underlying trends that got worse relative to last year? That's my first question. The second one is on solvency. You already gave us some indications in your opening comments. I was just wondering, your group solvency ratio is not a reflection of the cash generation or dividend capacity of the underlying business units. I was wondering, how would the ratio closer to that 120% minimum threshold you've talked in the past affect your thinking on the group dividend? That's my second.
My last question is, sorry to come back on solvency. I was just wondering, to secure the deconsolidation of Nordea from a solvency perspective, is it as simple as going below 20%? Are there any aspects where the regulator, for example, do they want to see whether you have control of a Nordea or having a significant influence? Is it just a question of having just a lower shareholding?
Morten Thorsrud here. I will answer the question on the P&C part. We reported a combined ratio of 86.5 for the first quarter. This is an excellent combined ratio, bearing in mind that this is a first quarter and a winter quarter. The large claims outcome was EUR 5 million higher than what we assume to be normal, which is actually in line with what we also saw last year. The prior year gains was EUR 4.8, down from EUR 4.9 last year. It means that if you adjust for that, there is a small improvement in the combined ratio. Then obviously winter effects are quite different across the Nordic region.
Okay. Because that improvement you're talking is all coming from expenses, so your cost ratio, your loss ratio would still be slightly up.
It will be on last year level.
Okay. It's stable basically versus last year in terms of underlying margins.
Yes.
On your second question regarding group dividend. When it comes to internal dividends in the group, the subsidiaries are strongly capitalized, and of course, Nordea also have excess capital on their side. I do not see a link between the consolidated solvency capital and the internal dividends within the group. Of course, we expect this to be solved by the year-end. Also when it comes to the external dividend, our dividend to our shareholders from Sampo, we do not expect this to play a role when we decide on that dividend, when the AGM decide on that dividend next year. When it comes to the technical matters, there's a number of technical matters we currently are discussing as I'm referring to with the regulator.
That is also based on the fact that we actually have two capital regimes that we are under, both the Financial Conglomerates Directive and Solvency II regulations. These two are two different regulation, meaning that there are a few things that we just need to have clarity together with our regulator before we can proceed with the plan I referred to in my opening comments.
All right. Great. Thank you very much.
Thank you. Our next question comes to the line of Jakob Brink from Nordea. Please go ahead. Your line is now open.
Thank you very much, and good afternoon. Two questions from my side. Sorry for one of them coming back to internal dividends. There's been a lot of talks also recently about whether Nordea can pay out more than 100%, which consensus estimates are now indicating. One thing is, of course, regulation, but secondly, if I'm not remembering wrong, it seems like historically you, Sampo, have had an ambition to keep payout ratios below 100%. Does that also go for Nordea this year? That was the first question. Second question is regarding runoff gains. You're not the only ones who have seen significant runoff gains this quarter, and I tried to calculate your paid to incurred ratio from last year, and it seems like it's dropped a lot, indicating maybe you're building significant reserves.
Is it fair to assume that we should continue to see an elevated level of runoff gains going forward? That was my questions. Thank you.
Thank you, Jakob. As you are actually well aware of, I can't answer on Nordea anything else than what they have communicated, and Nordea has communicated that their ambition is to increase their dividend year after year.
On the run-off gain. Yes, we report EUR 4.8 in run-off gain this quarter, which is in line with what we reported Q1 2018, but also as you say, somewhat above the more longer term run-off gains that we've seen in the past. The run-off gain is, of course, driven by the fact that we've seen a more positive development on all the underwriting years than what we have assumed in our models. Of course, we're not speculating on future run-off gains. That depends on the continued claims development, whether that continue to develop more favorable than what we have assumed in our reserving models.
Is there any specific sectors driving it?
Yeah. It's obviously the long-tailed exposures that we have, and among those, motor insurance in Sweden is the most long-tailed, and of course, where you will see some volatility on the run-off gains, if your assumptions on claims development is different than what you actually experience.
Okay, fair enough. Thanks a lot.
Thank you. Our next question comes from the line of Matti Ahokas from Danske Bank. Please go ahead, your line is now open.
Yes, good afternoon. Question on the dividend as well. As it looks now more likely that Nordea may have to cut its dividend, and assuming that Sampo Group wants to maintain the increasing dividend policy, would this dividend shortfall be covered by higher internal dividends from If and Mandatum Life, or increasing the net debt in the holding? Thanks.
I don't have an indication that Nordea has changed their guidance for dividends, so I don't really want to speculate on that. I feel confident that we can stick to our own ambition to increase our dividend yearly.
Fair enough. But if, let's say that Nordea still increases their dividend by EUR 0.01, which would be in line with their policy, still increasing the Sampo dividends would imply that you would actually have to get the increase somewhere else. Would this be done mainly from higher dividends from If or Mandatum Life or increasing the debt? What do you think is the preferred alternative?
I think that we have room to increase the dividends from our subsidiaries if necessary.
Thank you.
Thank you. Our next question comes from the line of Kevin Ryan from Bloomberg Intelligence. Please go ahead, your line is now open.
Thank you. Thank you for being so clear on the capital. I just have one final question on that, if I may. Could you share with us what, going forward, your ideal Solvency II level would be? The second question, which is prompted by your reduction in your Nordea, or proposed reduction in your Nordea stake is, has this prompted you to think about any of your other investments, such as Topdanmark ? Thank you.
Maybe I start with the other investments. This has nothing to do with our investments. The reason why we would distribute Nordea shares as dividends is only the regulatory technicalities, and therefore, we don't want to sell any of our holdings. Therefore, we wouldn't like to sell Nordea either. We would like to pass them on to our shareholders.
If I should take the first question, we haven't set an exact range of what would be an ideal solvency ratio. I am comfortable that the solution we believe we will have from changing the calculation basis of Nordea will bring us way above a minimum solvency ratio, give us plenty of excess capital. With the stability of the earnings we have in the businesses that we own, that will just add to our view of our excess capital position.
Thank you.
Thank you. Our next question comes to the line of Michael Huttner from JP Morgan. Please go ahead, your line is now open.
Fantastic. Thank you so much. Really well done on the combined ratio. That's unbelievable. That's wow. On the combined ratio, I just had loads of questions. The first one is, this year, even though the number was the same as last, you actually improved your outlook by a lot, so 85% to 88%, I think. Whereas last year, the minimum range I think was 86% to 89%. I just wondered if you can explain where this confidence comes from relative to last year. The more color on the combined ratio, the lovelier it would be, and maybe you could explain how come Sweden, which is a big country, had a 78% combined ratio. I can hardly believe it. Particularly in winter. Those are two questions.
On the Nordea, when you start selling, the temptation will always be to sell more. I just wondered, once you've done this special dividend, if it's approved or whatever, what is to stop you just thinking, "Ooh, we sold some, and our solvency went up, and it didn't seem to hurt any. Maybe we can sell some more." You see, here, I've seen it in so many companies, when you start selling an asset, your mindset changes. I suppose that the technical question, if I try to put it more formally, would be at what level would there be a risk to you being able to appoint the chairman of Nordea? Thank you.
Okay. I'll answer your two first questions on the If performance. Yes, we deliver an excellent combined ratio for the first quarter, in line with what we saw last year. It's a 6.5, so that's excellent. We do see also a strong growth of 3.9% if you adjust for currency effects. Part of that growth is driven by price actions. It's fair to say that price actions are somewhat above expected inflation, which means that we have a good outlook for the P&C insurance business, and that's why we are guiding on a combined ratio level of 85%-88% for the full year. Which is somewhat better than what we guided after Q1 last year. When it comes to your question on the combined ratio in Sweden, yes, it is indeed very low.
I think it's fair to say it's exceptionally low because a larger part of the run of gains that we see in the first quarter stems from Sweden and in particular from motor insurance in Sweden. That is obviously supporting the Swedish combined ratio. Nevertheless, underlying combined ratio level is at a decent level in Sweden as well.
Morten, last year, if I remember, the winter was in a way different from this year. It lasted much longer into the spring, into the second quarter. Had that any effect on your view on guidance, or is that just so minor things that it doesn't affect it?
It has some effect. Of course, it's early to conclude on what will happen in Q2. Of course, I guess we can conclude that the winter is over. Of course, there could be other events taking place in Q2, but the winter in 2018, was special in the respect that it lasted well into Q2. Of course, that is a significant difference, Q2 this year versus last year.
Yeah. On your second question or third question on how we view the value of our assets, I think that we have to separate two very different things. One is that we are in a regulatory hiccup, or we are, as I said, between the chairs that the regulatory framework really doesn't or is not built for a structure that we have. As Knut Arne said, we have two different regulations that affect our solvency. The solution we are now proposing is not to sell Nordea at all. I repeat, we are not selling because we don't want to sell. We are dividending out Nordea shares to our owners if we go that route, and that is not the stance on the value of Nordea as such. This is a solution for a regulatory issue.
If your second question was that how much should we own of Nordea and able to influence the board composition and the chairman. It doesn't work that way that we count percentages. I think that when I'm chairing the NomCom of Nordea, I feel that I represent all shareholders there. Of course, I want the board composition to be the best possible and the chairman to be the best possible person for that job. I actually think that after Björn had chaired it and the board had taken all the big decisions on re-domiciling, branchification, de-risking Baltics, Russia, it's a long list. It was time to focus more on operations. Now we put our best man from the operations side to chair it because we feel that's exactly the qualities of the chairman Nordea should have.
I don't think that has to do with our percentage of ownership. You must remember that the NomCom, when proposing this board composition, and for instance, Cevian was part of it was unanimous. I think someone even expressed that they were very happy that Torbjörn took the task to be the chairman of that company. We have said earlier that we are not a group where we are in love with any of the assets. If we see a value in the assets that someone is willing to pay us, which is above what we can accomplish with our own work. We are obliged to sell the assets, but Nordea's case is, of course, the complete opposite. We see a lot of upside, and we see a lot of upside that can be created through pure operational management work, and that's the task that the board has taken.
It's not a question of how we see the value. It's clear that we see a significant upside in the share.
Thank you. I may just add, the two chairs you mentioned, I think one is very soft. It's the insurance regulator. Soft is the wrong word, but they're certainly so understanding. I'm not sure that the chair of the banking regulator is quite as comfortable. Anyway, thank you.
Thank you. Our next question comes to the line of Blair Stewart from Bank of America. Please go ahead. Your line is now open.
Thank you. Good afternoon. I've got a couple of questions. Firstly, just on the fair value adjustment reserve, which has gone up in the quarter, how do you see economic value in that and how will you use those unrealized gains in the coming years? Secondly, just on the non-life business and looking at the reserve to premium ratio, which is a very crude measure I accept, but it is significantly higher than some of your peers. I just wondered if you've done any comparative work to compare the level of reserves that you have compared to some of the peer group. It does suggest that you're very heavily reserved against peers. Is that a business mix impact or I just wonder if you've observed that and if you've got an explanation for that.
Finally, just coming onto the Nordea dividend point, I wouldn't expect you to comment on what Nordea may or may not do with its dividend, but conceptually, if you look at the estimates in the market conceptually, how do you feel as owners about Nordea potentially paying out more than 100% of its earnings to fund its dividend? Thank you.
If I start with Nordea, as an owner, I think that we follow the guidance from the bank and as an owner, we are happy if Nordea delivers on what they guide. In the end, I don't want to talk about bank regulation, but the fact is that over the last 10 years, Nordea has been able to meet all capital requirements from the regulator from its own cash flow. That means that we have accumulated billions of EUR into Nordea as capital from the profits. If the bank is not growing, and once the bank has met all the regulatory requirements, it means that the cash flow generates extra capital, which the bank really doesn't need. That's just a comment I have that then it's more a political question of how the surplus capital is treated in Europe.
The fact is that Nordea's capital generation capacity is of the level that at one moment there will be excess capital because I don't assume that the regulator will, for an indefinite time, increase the capital requirements. That would also be detrimental for the development in the society. On the fair value, I didn't really understand your question. Fair value is a result of increased valuations in the stock market and dropping interest rates. It's a normal buffer in our accounting.
It wasn't a great question, Kari, I accept, but it was more a care question of whether you see that filtering through into the P&L at some point or whether it's just a book value item.
I think that if we sell assets when we think that they are fully valued or overvalued, it will come into the P&L.
Yeah.
On your P&C insurance question, the reserve to premium ratio is quite difficult to compare between companies because as you were indicating yourself, it is highly dependent on the business mix, and even on mix between countries. For instance, the Swedish motor insurance, again, is one of the most long-tailed businesses in all of Europe. Having a big exposure towards Swedish motor and Swedish bodily injury claims gives you a high reserve ratio to premiums. It's quite hard to compare that between companies.
Yeah. That's fine. Thank you.
Thank you. Our next question comes to the line of Jan Erik from ABG. Please go ahead. Your line is now open.
Good afternoon. I have a couple of questions on the If P&C business, if you could shed some light into that. You answered the Swedish improvement on combined ratio from 7% to 8% from 88%. Could you also shed some light into what happened in Norway from 82.5% to 93.7%, while Finland and Denmark looks sort of more fairly. Finally, on the private versus commercial industrial segment, could you also shed some light into how and where the combined ratios changed so much over the year thus far? Thank you.
I'll start then with Norway. The difference in outcome for Norway 2018 Q1 versus 2019 Q1 is quite simply explained by the large claims outcome. Last year in first quarter, we had a better outcome than what we assumed to be normal in Norway. This year we have a somewhat worse large claims outcome in Norway compared to what we assumed to be normal. Of course, this impacts combined ratio quite a lot in the first quarter, in particular.
It could be 3 to 7 percentage points?
Excuse me.
It could be as much as 3-7 percentage points.
Yes
These large claims.
Yes.
Okay.
You had a question on combined ratio development on private and.
Commercial and industrial, which looks the same, of course it could be the same kind of explanation.
Commercial is somewhat impacted by large claims this year. They have somewhat more large claims than normal. Industry is actually having somewhat less large claims than normal, but they have somewhat negative development on some prior losses, some development on single large claims. Of course, again, being a first quarter, it gives some volatility in the figures.
On the private side, it's mainly the runoff gains in Sweden, which is entitled to the private on the motor side.
Yes, a larger part of the runoff gains come from motor, as I said. Again, larger part of that will be in the private business area.
If you could just elaborate on the trend underlying for private commercial and industrial. Could you shed some light into what you have seen in the quarter?
I think no particular trend as such in the quarter. I think we do see good price discipline across the Nordics, and we do see that pricing is somewhat above expected inflation at the current level. Of course, this differs a lot from country to country and business area to business area. More price increases, obviously in Norway than in other countries.
Okay.
Apart from that, the claims inflation as such is in line with what we expect. What we see in Q1 is just in line with what we expect.
Okay, perfect. Thank you.
Thank you. Just as a reminder, if you do wish to ask a question, then please press zero one on your telephone keypad. Our next question comes from the line of Philip Ross from Mediobanca. Please go ahead. Your line is now open.
Hi there. Thanks for taking my question. It's just one point of clarification from me, and it's revisiting solvency. The detail you gave at the start of the call was very helpful. Just thinking about the regulatory discussions that are obviously ongoing and then the potential Nordea divestment, which you have to decide upon. I wonder if you're thinking about those two things separately, particularly when you talk about the impact on capital moving above where it was at the year-end. For instance, is it that the regulatory discussions alone, if they were successful, whatever that might look like, that they would move the ratio above 147 at year-end? Are you thinking about those two things together and not necessarily projecting exactly where solvency will end up? Thank you.
Not sure I exactly understand your question. I understand it so that whether or not we combined a reduction in our shareholding on Nordea with the change in solvency treatment, and that is combined. We expect that we will have to reduce our shareholding in Nordea to below 20% to change the solvency treatment.
The solvency treatment will change as a consequence to the fact that we go below 20.
Yes.
Automatically.
Sure. That makes sense. I guess I just wondered on the regulatory discussions whether there was something material in that which, if you didn't change the Nordea stake, the regulatory discussions might be on something different, and they could move you above, say, 147. Am I thinking about that in too much detail, that they all weaved in together?
There's a few different things, the change in solvency treatment will be as a consequence of going below 20%. It's not the change and remain with 21.25% we're talking about. It is a change following a reduction of our shareholding below 20%.
Yeah. Okay, fine. Thank you.
Thank you. Our next question is a follow-up from Blair Stewart from Bank of America. Please go ahead. Your line is now open.
Thank you. Just a quick one. I just curious as to why you're swapping the senior with sub debt. If the sell-down of Nordea is going to be highly significant, I would think on your solvency, I would thought that alone would be enough. Interested in the decision to raise capital qualifying debt at the same time. Thank you.
Well, we have a possibility to issue some more hybrid capital just in terms of the room for utilizing hybrid capital, both in our solvency calculation and rating calculation. We are happy with the current leverage levels we have. There is a, as you allude to, Blair, there is a EUR 500 senior that is maturing now in May. This hybrid will stabilize the solvency ratio, which will otherwise deteriorate 1st of July, when the SRB is introduced. When we have changed the solvency treatment, a hybrid capital would further increase our excess capital position long term.
Yeah. Presumably the SRB would only matter if you still consolidated Nordea.
That is correct.
Okay. All right. Thank you.
Thank you. Our next question comes from the line of Jonny Urwin from UBS. Please go ahead. Your line is now open.
Hi there. Thanks. Just one there from me. On the P&C business, things are obviously progressing very well from a top-line perspective. You are adding customer numbers. The growth level constant FX is good at close to 4%. Retention is coming up. You are also saying you are pricing ahead of claims inflation, which is the first time we have heard that from you guys for a while. What do you attribute that to? Because it is a bit of an improvement. Is it investment in the brand, the distribution? Is it just market conditions improving? More importantly, how sustainable do you think that is? Thank you.
Yeah, I think, as you point out, a large part of the growth is actually coming from improved retention levels across the business areas, but in particular in business area private. I think a large part of that is coming from hundreds of internal improvements, making it easier and better to be a customer with If. At the same time, I think the competitive environment is stable, I would say with somewhat more pricing discipline than what you perhaps have seen in earlier years. That, of course, is also supporting that. Of course, again, since a large part of the growth is driven by high retention, we also expect to see a fairly positive development also going forward.
Great. Thank you.
Thank you. As another reminder, if you want to ask a question, please press 01 on your telephone keypad. Our next question is a follower from Michael Huttner from JP Morgan. Please go ahead. Your line is now open.
Thank you very much for this opportunity. It's really a fishing question. If you could give an indication when you say solvency would be higher than the full year. I just wondered if you could give an indication of what you mean. I suppose the more detailed question is not that important, is whether you refer to Solvency II or conglomerate solvency. Any kind of indication would be precious, but it is a fishing question.
We are referring to Solvency II since we expect us not to be a financial conglomerate following that change or a reduction below 20%. The Solvency II ratio was 140 as of year-end. I wouldn't be too worried of also referring to the financial conglomerate ratio, which was 147.
Lovely. Thank you.
Thank you. Our next question comes to the line of Jan Erik from ABG. Please go ahead. Your line is now open.
Thank you. Just trying to square the equation on the solvency here. If you take the 80, as you referred to earlier on the 4,675, which is the requirement, and take the 39%, which is the new requirement if you go below 20. Should we go be above 180% solvency ratio, or is that too high?
180% sounds a bit too high. There's a couple of things, additional moving parts which you have to take into consideration. Two of them is actually neutralizing each other, more or less, depending on our issuance of hybrid capital, where we will pay a dividend in form of Nordea shares, which will reduce our capital base by that amount, EUR 500. We intend to issue hybrid capital, whatever exact amount that will be. One adjustment you have to make in your calculation is the fact that the current own funds base, which we use in our solvency calculation, is somewhat higher than our share of the market cap of Nordea, which will be currently, which would, everything else equal, be a negative adjustment on the ratio.
The increase I was referring to, or the decrease, sorry, in the SCR because of a lower capital charge would significantly outweigh that reduction in own funds. Of course, could also be the other way around if the Nordea share price and currently market cap would be above our current own funds. With that simple calculation you did, it's somewhat above what I would consider to be a good pro forma calculation.
Okay. Thank you a lot for your insight.
Thank you. As there are no questions registered at this point, I will hand the word back to the speakers for any closing comments.
Thank you, ladies and gentlemen. Thank you for your attention, and have a very good evening, all of you. Thanks.