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Sampo Oyj
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Ladies and Gentleman, welcome to this conference call on SAMPO's First Quarter 2019 Results. My name is Jarmo Salonen. I'm the Head of Investor Relations at Sampo. And 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 Alsaker. As has become tradition, I'll first hand over to Kari with his -- for his highlights on the first quarter developments. But let me remind you before that, 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 a 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, and 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 owned 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 RAAs, risk-adjusted assets, following the banks reconciliation to Finland. To include a bank in the 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 always destocks 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 on 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, at the end of 2018.
I feel that this is really a technical issue and a regulatory issue where our structure is such that the, in a way, we feel that we fall between chairs. And I think that now we have on the table enough remedies for these issues over pure technical nature because, of course, when Nordea moved their headquarters to Finland, our risks as an owner didn't increase at all. So this is 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.
[Operator Instructions] Our first question comes from the line of Youdish Chicooree from Autonomous Research.
I've got three questions, please. The first one is on the plans in P&C. You reported a flat combined ratio. But if were just for prior reserve release in large claims, it's slightly up year-on-year. So I was wondering is this due to weather or are there any underlying trends that got worse relative to last year. So that's my first question.The second one is on solvency. You already gave us some indications in your opening comments. So I was wondering, I mean, your solvency -- your group solvency ratio is not a reflection of the cash generation or dividend capacity of the underlying business units. So I was wondering how would the ratio [ crested ] at 120% minimum threshold you've talked in the buzz affect you're thinking on the group dividend. So that's my second. And 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 a symbol of going below 20%? Or are there any aspects where the regulator -- for example, did they want to see whether you have control of a Nordea or having significant influence? Or is it just a question of being -- of having just a lower shareholding?
Okay. 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 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. And the prior year gains was 3.8 down from 3.9 -- 4.8 sorry, down from 4.9 last year. So it means that if you adjust for that, there is a small improvement in the combined ratio and then no business -- winter effects are quite different across the Nordic region.
Okay. So -- but because that improvement you're talking is all coming from expenses, so your cost ratio or your loss ratio would still be slightly up.
It will be on a last year level.
Okay. So 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 had excess capital on their side. So I do not see a link between the consolidated solvency capital and the internal dividends within the group. When it comes -- and of course, we expect this to be sold by the year-end. So 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 Board -- agenda side 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 was referring to, with the regulator. That is also based on the fact that we actually have 2 capital regimes that we are under both the financial conglomerate directive and Solvency II regulations. And these two are 2 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 refer to in my opening comments.
Our next question comes from the line of Jakob Brink from Nordea.
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 is. Estimates are now indicating, and 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 one to have seen significant runoff gains this quarter. And I've tried to calculate your pay-to-incurred ratio from last year, and it seems like it's dropped a lot indicating maybe you're building significant reserves. So is it fair to assume that we should continue to see an elevated level of runoff gains going forward?
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.
And then on the runoff gain, yes, we report 4.8 in runoff gain this quarter, which is in line with what we reported in Q1 2018, but also, as you say, somewhat about the more longer term runoff gains that we've seen in the past. The runoff gain is, of course, driven by the fact that we're seeing a more positive development on old underwriting years than what we have assumed in our models. And of course, we're not speculating on future runoff gains. That depends on the continued claims development whether that continue to develop more favorable than what we have assumed in our reserving models.
So any specific sectors driving it?
Yes. 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 really see some volatility on the runoff gains if your assumptions on claims development is different than what you actually experience.
Our next question comes from the line of Matti Ahokas from Danske Bank.
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, will this dividend shortfall be covered by a higher internal dividends from If and Mandatum Life or increasing the net debt in the holding?
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, the Nordea still increases their dividend by EUR 0.1, 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 mix or Mandatum life or increasing the debt? What do you think is the preferred alternative?
I think that we have a room to increase the dividends from our subsidiaries if necessary.
Our next question comes from the line of Kevin Ryan from Bloomberg Intelligence.
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's going forward your ideal Solvency II level would be. And the second question, which is prompted by your reduction in your Nordea or proposed reduction in your Nordea stake, is how has this prompted you to think about any of your other investments such as Topdanmark?
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, and therefore, we wouldn't like to sell Nordea either. We would like to pass them on to our shareholders.
And if I could 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 will have from changing the calculation basis of Nordea will bring us above -- way above a minimum solvency ratio, give us plenty of excess capital. And 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.
Our next question comes from the line of Michael Huttner from JPMorgan.
Really well done on combined ratio, that's unbelievable. That's -- well, anyway, so on the combined ratio, I just have, well, loads of questions. But the first one is, this year, even though the number was the same as last, you actually improved your outlook with -- by a lot, so 85% to 88%, I think, versus last year you were in the minimum range was -- I think it was a 86% to 89%. So I just wondered if you can explain where this confidence comes from relative to last year. And the more color on the combined ratio, the lovely it should be. And maybe you could explain how come Sweden, which is a big country, had a 78% combined ratio. I can hardly believe it. This is a -- yes, it's particularly in winter. So those are two questions. And then on the Nordea. When you start selling, temptation will always be to sell more. And so I just wondered, once you've done this special dividends if it's approved or whatever, what is to stop you to thinking, oh, we've sold some and our solvency went up and it didn't seem to hurt any, maybe you can sell some more. You see here, I've seen it in so many companies. When you start selling an asset, you don't -- 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?
Okay. I'll answer to your 2 first questions on the If performance. Yes. We delivered an excellent combined ratio for the first quarter, in line with what we see -- saw last year, 86.5%. So that's excellent. We do see also a strong growth of 3.9% if you adjust for currency effects and net -- part of that growth is driven by price actions, and 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 a guiding on a combined ratio level of 85% to 88% for the full year. This 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, and I think it's fair to say it's exceptionally low because a larger part of the runoff gains that we see in first quarter stems from Sweden and in particular from motor insurance in Sweden. So that is obviously supporting the Swedish combined ratio. Nevertheless, underlying combined ratio level is at a decent level in Sweden as well.
What we did 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. So it's 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. But of course, I guess we can conclude that the winter is over. Of course, it could be older events taking place in Q2, but the winter in 2018, most especially in the respect that it lasted well into Q2. So of course, that is a significant difference Q2 this year versus last year.
On your second question or third question on how we view the value of our assets, I think that we have to separate 2 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 it's not built for a structure that we have. And therefore -- and as Knut Arne said, we have 2 different regulations that affect our solvency. So I -- the solution we are now proposing is not to sell Nordea at all. I repeat, we are not selling. We are -- because we don't want to sell, so 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 such. This is a solution for a regulatory issue. I think that -- then if you -- your second question was that how much should we own of Nordea and able to be -- to influence the Board composition and the Chairman. It doesn't work that way, that we count percentages. I think that when I'm on the -- chairing the Non Com of Nordea, I feel that I represent all shareholders there. And of course, I want the Board composition to be the best possible and the chairman to be the best possible person for that job. And I actually think that after -- Björn had chaired it, and the Board had taken all the big decisions on redomiciling; ramification; derisking Baltics, Russia. It's a long list. Then it was time to focus more on operations, and 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. And I don't think that has to do with our percentage of ownership. You must remember that Nom Com when proposing this board composition, and for instance, saving was part of it, it was unanimous. And 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 the assets are -- 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. So it's not a question of how we see the value, it's clear that we see a significant upside in the share.
If I may just add the 2 chairs you mentioned, I think one is very substancy, insurance regulators substance wrong word, but they certainly show understanding. I'm not sure that the chair, the banking regulators are quite comfortable.
Our next question comes from the line of Blair Stewart from Bank of America.
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's significantly higher than some of your peers. And I just wondered if you've done any comparative work to compare the level of reserves that you have compared to some of 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 have observed that and if you've got an explanation for that. And finally, just coming on to the Nordea dividend point, and I wouldn't expect you to comment on 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?
Well, if I start with Nordea, so it's -- 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, and that means that there are -- we have accumulated billions of euros into Nordea as capital from the profits. And 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. So that's just a comment I have that -- then it's more a political question of how the surplus capital is treated in Europe. But 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, that would not -- 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, except but -- it was more a care question of whether you see that filtering through to the P&L at some point or whether it's just a bit value item?
I think that if we sell assets when we think that they are fully valued or overvalued, then it will come into the P&L.
Then your on P&C Insurance question and the reserve to premium ratio, it's 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. So having a big exposure towards Swedish motor and Swedish bodily injury claims gives you a high reverse ratio to premiums. So it's quite hard to compare that to be between companies.
Our next question comes from the line of Jan Erik from ABG.
I have a couple of questions on the If P&C business, if you could shed some light into that. Also, the Swedish improvement on combined ratio from 78 -- 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. And suddenly on the private versus commercial industrial segment, could you also shed some light into how and where -- how the combined ratios changed so much over the year, of course.
Yes. I'll start 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 somewhat worse large claims outcome in Norway compared to what we assumed to be normal. And 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 to 7 percentage points, this outcome?
Yes, yes, yes. And then you had a question on combined ratio development on private and...
Commercial and industrial, which looks the same, but of course, it could have been the same kind of explanation.
Well, it's -- yes, 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 year losses, some development on large -- single large claims. And of course, again, being first quarter, it's going to give some volatility in the figures.
So 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, and again, larger part of that will be in the private business area.
If you could just elaborate on the trend underlining 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, and 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. And of course, this differs a lot from country to country and business era to business era. More price increases obviously in Norway than in other countries. Apart from that, the claims inflation as such is in line with what we expect, what we've seen in Q1, just in line with what we have -- what we expect.
[Operator Instructions] Our next question comes Phil Ross from Mediobanca
It's just one point of clarification on me -- for me, sorry, 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 non-divestment, which you have to decide upon. I wonder if you're thinking about those 2 things separately particularly when you talk about the impact on capital moving above to where it was at the year-end. So 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? Or are you thinking about those 2 things together and not necessarily projecting it exactly where solvency will end up?
Not sure exactly I understand your question, but I understand you said that whether or not we sort of 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% automatically.
Sure. That makes sense. I guess I just wondered on the regulatory discussions whether there was sort of something material in that, which, if you didn't change the Nordea stake, then the regulatory discussions might be on something different and they could move you above, say, 147%. Or is that -- I might think it might add too much detail that they all sort weaved in together.
There's a few different things, but that is sort of we still -- there will be -- the change in solvency treatment will be as a consequence of going below 20%. So it's not the change and remain with 21.25% we're talking about. That is a change following a reduction of our shareholding below 20%.
Our next question is a follow-up from Blair Stewart from Bank of America.
Just a quick one. I'm just curious as to why you're swapping the senior will stop that -- if we sell that off Nordea's going to be highly significant I would think on your solvency. I always thought that alone will be enough. So interested in the decision to raise capital qualifying debt at the same time.
Well, we have a possibility to insure this some more hybrid capital, just in terms of the room for utilizing hybrid capital both in our solvency calculation and rating calculation. And we are happy with the current leverage levels we have, and there is -- as you to alluded to Blair, there is 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 and when we have changed the solvency treatment. A hybrid capital would further increase our excess capital position long term.
Yes. Presumably, the SRB would only matter if you still consolidated Nordea.
That is correct.
Our next question comes from the line of Jonny Urwin from UBS.
Just one left for me. I mean on the P&C business, things are obviously progressing very well from a top line prospective. You're adding customer numbers, the growth level. Constant FX is good, it grows to 4%. Retention's coming up. You're also saying your pricing had a claims inflation, which is the first time we heard that from you guys for awhile. I mean that -- what you attribute that to? It's a bit of an improvement. Is it investment in the brand, the distribution? Is it just market conditions improving? And more importantly, how sustainable do you think that is?
Yes. I think as you point out, the 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 relief. And at the same time, I think the competitive environment is stable and I would say with somewhat more pricing discipline than what you perhaps have seen in earlier years. So that, of course, is also supporting that. And of course, again, since large part of the growth is driven by high retention, we also expect to see a fairly positive development also going forward.
[Operator Instructions] Our next question is a follow-up from Michael Huttner from JPMorgan.
It's really a fishing question. I just wanted to -- if you could give an indication when you say higher solvency would be higher than the full year. I just wondered if could give an indication of what you mean. I suppose the more detailed question is not that important as whether you refer to Solvency II or conglomerate solvency. But any kind of indication would be precious, but it is fishing question.
I'm -- we are referring to Solvency II since we expect us not to be a financial conglomerate following that change or a reduction below 20%. And the solvency II ratio was 140% as of year-end. I wouldn't be too worried. I'm also referring to the financial conglomerate ratio, which was 147%.
Our next question comes from the line of Jan Erik from ABG.
Just trying to square the equation on the solvency. If you take the ATS you referred to earlier on the 46.75%, which is the requirement, and take the 39%, which is the new sort of requirement if you go below 20%. Should we go then -- 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, which will reduce -- or in formal Nordea shares, which will reduce our capital base by that amount, 500, and then we intend to issue a hybrid capital, whatever exact amount that will be. And also one adjustment you have to make in your calculation is the fact that the current owned 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 owned funds, and of course, it could also move, be the other way around, if the Nordea share price and currently market cap would be above our current owned funds. So with that simple calculation you did, it's somewhat above what I would consider to be a good pro forma calculation.
Thank you. And 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 gentleman, thank you for your attention and have a very good evening, all of you. Thanks.