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Sampo Oyj
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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 got Kari Stadigh, Group CEO and President; Knut Alsaker, our Group CFO; and Morten Thorsrud, our 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 6 months of this year. But 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 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 record 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. So adjusted for these 3 one-offs, our Q2 profit improved actually by EUR 69 million or 16%. The insurance business in Sampo is performing excellently. We've had a Q2 combined ratio of 83%, and the 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 2 months -- or actually, first 2 quarters contributed to giving If their best-ever operating profit for the first 6 months of the year and 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. So we are really an insurance group. In -- 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. And with investment yields that will be lower for longer, the attractiveness of Sampo's high underwriting profitability has increased even further. Mandatum's unit-linked 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 am optimistic when it comes to Mandatum's continued growth going forward as well. When looking at Nordea, I want to divide the approach into 2 different parts. As a client, I'm happy. I'm a client of 4 -- 5 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 are now communicating. It is essential for Nordea to operate on a clear lower cost-income ratio in their retail business as well as it's 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 had record years. This means that we 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. So 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 or moderately growing dividend payout. 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. And operator, we are now ready for the questions, please.
[Operator Instructions] And our first question comes from the line of Youdish Chicooree from Autonomous Research.
I've got 2 questions, please. The first one is on your combined ratio guidance, which has improved 2 percentage points relative to the first half of 2018. And roughly speaking, how much of the improvement would you attribute to better weather compared to last year? And how much would you say is more structural in nature and sustainable going forward? That's my first question. And the second question is on the dividend. You just gave us 2 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, I mean, do you have any other plans, specific plans for those buffers? Or could these be used to actually make up for a shortfall from Nordea?
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 have ever given. And 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. So it's more down the line improvement that we see in the business that is causing the improved combined ratio guidance.
On the dividend. I -- of course, our toolbox includes many other instruments as well. One obvious one is to issue hybrids in the subsidiaries and upstream more capital but also, you asked about how to deploy the cash in the order -- funds in the parent. We -- let's see what kind of investment objectives 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 1/4 of the investment, they announced that they are successful with their EUR 400 million bid on BinckBank, and 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 big project. And 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 significant amount of new assets under management, and it's also a synergy and a cost savings play. So good news on Saxo in that sense. And of course, you also -- the announcement on Nets yesterday where they sell their corporate business to Mastercard. And I'm here only referring to public information that they will receive roughly half of what they paid for Nets when -- and they sell a business, which is roughly 1/3 of their volume. So if a private equity group, so early after the investment, exits something, I interpret this as very good news. Interim, of course, they have sold main -- their funding issue and reported good numbers, and you could see in Nordax, the profit share -- positive profit share. So 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. But it sounds like in the near term, you don't have -- you're not committing to spending materially more from what you already have. So that still leaves you with significant flexibility at the parent company.
I think that the flexibility is always good to be there. We -- if you look at historically how we have created shareholder value, it has been by being contrarian. And 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 P&C, the holding company. The current liquidity buffer, which we referred to, will increase even further later this year when we'll know the assets. [indiscernible] in Nordea is maturing, which will bring that liquidity buffer to slightly above EUR 800 million, everything else equal. So liquidity is not a big concern in terms of our internal cash flows.
Our next question comes from the line of Matti Ahokas from Danske Bank.
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 on earnings will this have in your opinion? And what are the main tools to mitigate potential negative impact of this? And more specific, if we look at Mandatum life, the solvency margin, excluding the transition rules, was below 120. If it 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?
Well, I think that the interest rate development has been especially dramatic in the last few months. So it has partly taken us by surprise that the decrease is so rapid. And 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. So 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 the -- meet the inflationary targets. But it's too early to say as the development has been the reason. 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 impact -- most sensitive to the current deals. And we have activities ongoing to try to strengthen further the solvency ratio of Mandatum. Obviously, the sort of 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.
So we shouldn't expect any changes from the kind of normal streams?
I think it's too early to say, but as we look at it today, we see no reason for that, but let's see how this interest -- 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. So it becomes pretty attractive.
Our next question comes from the line of Jon Denham from Morgan Stanley.
I'm 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? And then 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 on at least [ dividend ] out additional Nordea shares to keep your ownership below 20% and the capital requirement down?
I think that if Nordea would start to do buybacks, we would sell out pro rata. But 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 but 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 0 is an absolute lower boundary. On the part of the rating-sensitive business. Morten?
Yes. It's clearly in business area Industrial, that is, of course, niche. And it doesn't go for all of the industrial clients. But clearly, kind of, the larger ones, in particular, the clients having captives are concerned about rating of an insurance company.
Next question comes from the line of Christoffer Adams from Kepler Cheuvreux.
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 the change in number of policies? And secondly, you report staff costs up 6% in If, what's driving this? And how should we expect these figures to develop going forward?
Yes. On your first question on growth, I would split it roughly 50-50. We have a clear growth in [ normal ] customers in basically all business areas and regions. And then we do have price increases that are somewhat above-expected inflation going forward. So I -- we expected roughly 50-50 between those 2 effects. And the staff cost is going up due to in-sourcing, in particularly in Sweden and Norway. We have in-sourced some of the external distribution capacity that we had. So that has gone over from being kind of other cost to being staff cost. And then we also in-sourced some IT functions where we have used consultants previously. So I would not expect the staff cost to continue to increase like that. It is more kind of one-offs driving the cost increase on staff cost this time.
And total cost, we are as committed as ever.
On total cost, we are still committed on continuing and reducing the cost ratio going forward. And as you see, we report 21.7% year-to-date compared to 21.8% last year.
Our next question comes from the line of Blair Stewart from Bank of America Merrill Lynch.
I have got 3 questions, please. On the...
You are not the first one with 3.
Yes.
Yes. Okay. Go ahead.
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. So just wonder, if there's any indication from Nets what they might do with the disposal proceeds? And secondly, with regards to the P&C business. Is there -- with a very low interest rate and low inflation environment, is there an argument for excess levels of reserves in the company given the reserves 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? And 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%, 5-0, dividend cut at Nordea, and that would leave you a shortfall that, I think, will be more difficult to plug. And of course, the market will not really give you credit, if you are paying a dividend out of additional debt, for example. So just wonder if you've got any further thoughts that you can share on that particular aspect?
So if we -- Net disposals, we have no Nets 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. So we are neutral on that.
And 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, 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. Then 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, If versus competitors, you need to bear in mind that there is quite a different business mix between the different competitors. If, in particular, has a large exposure to Swedish motor that is extremely long-tailed. And but they have -- naturally have a 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 am absolutely sure that we will continue with our guidance and moderately increase our dividend. So 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 force a new floor, and then it would start to climb up again. So then it would be a question how to bridge it. So I'm not worried on this part. And the liquidity is there. So we will continue moderately to increase our dividend. That is what we will propose to the Board.
And 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 1 year or 2 years, I wouldn't mind if I am confident that I am back on track after that period. Yes.
Our next question comes from the line of Michael Huttner from JP Morgan.
Getting back to dividends, so 2 on the dividend and 1 on the combined ratio, if I may. And -- on the dividend, so you said high dividends from If or you -- I think, highest or whatever. But the figure I have, in 2016, they paid out EUR 879 million, which includes the one-offs. And I'm just wondering whether your, kind of, statement of yours is relative to that, say, high figures relative to the more normal, kind of, the recurring dividends. And second similar question from Mandatum, so Mandatum's 2 years has had, what I perceive or maybe I am wrong here, a kind of EUR 150 million a year positive adjustment probably related to the Danske deal. And I just wondered if you would see that as a kind of semi recurring? You alluded to the reducing reserves. Any help on this would be very and gratefully received. And then finally, just going back to that amazing combined ratio. And here, I know you don't like giving anything looking-forward, but you kind of alluded to low interest rates, so it means you have to focus more on a combined ratio of things. Where do you see -- I mean, 83% or even 84.6%, it's just an amazing number. Is there any kind of limit to this in the way, I mean, in terms of how much you can improve?
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 how -- what we upstream from which entity and how much. So 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 EUR 150 million is the right number. Also there, I would not, this time of the year, go out and speculate. Is it that exactly that number or other, but 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 target of If to reflect a low interest rate environment. So that is what is pushing down the combined ratio requirement for If as well as the P&C industry in general. But of course, there is a trade-off there. There's always a trade-off between profitability and growth. So of course, we have -- 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. So it's -- it will be, at the end of the day, a trade-off between the combined ratio and also the competition kind of where you want to see also growth in the market.
May I just ask a follow-on just on this trade-off point. So growth 4%, of which, say, 2% or 2.5% is volume. And this amazing combined ratio improvement is 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 just saying, well, would you be more inclined to, say, well actually with excellent combined ratios, more growth would be welcome? Or would you rather say, well actually I'd like to grow more and improve the combined ratio more. So just to get a feel. I think you have the amazing flexibility to do what you like, but any kind of view would be helpful.
I don't think I'll answer that directly. But I think -- of course, we are extremely happy about the growth that we see, 4.3% first 6 months; 4.8% in Q2 stand-alone; and in particular, so if you will 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. So -- but I will not speculate, sort of, on the exact -- sort of exact trade-off there. It's something that we do, sort of, on the more granular basis, kind of, down on the products and segments, sort of, per country basis.
Our next question comes from the line of Per Grønborg from SEB.
Couple of questions from my side. First of all, a technical accounting question on your distribution of Nordea shares. [ You those ] shares booked at [ 8 24 ] 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 foreign equity or somewhere in the P&L? My second question is on the solvency. You addressing that you would be willing to increase the leverage in the holding company. Any views on after the Nordea transaction solvency of EUR 170 million. How far you would accept that one to go? Do we have any lower limit on the new -- where you are calculating it? Or how do you see the solvency rate, your worst-case development going forward?
On your first question, the number you have is, of course, correctly calculating that will show up in the Q3 P&L. So not look directly to equity, but in the P&L. And on the solvency, the 170, we don't have a policy with the limit stated. You saw us take action with the current solvency situation when we were approaching 140 in solvency ratio. And 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, will that be booked under Nordea line or somewhere else, or is that too early to say?
It's going to be booked there.
Our next question comes from the line of Jan Erik Gjerland from ABG.
Some couple of questions from my side as well. I just wanted to check the -- on the premium growth in the If side. Could you -- what was 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 expected it to continue? Or how should we elaborate on that? That's my first one.
Yes. Of course, we tried to avoid speculating too much about the future. And -- but 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. And that's -- that is something that is not turning around totally overnight at least. We expect that to give us some support also going forward.
We saw that the competition was increased or decreased in that time.
I think on the Nordic total scale, it's not very -- not very changed. Total in the Nordea is very much the same players.
Exactly, Morten. Also so that we saw this excellent growth, especially in our biggest market in Sweden, despite the fact that car sales were down and wasn't it so that the cut date for the very, very good cuts per car sales were was the tax issue decree then.
Yes. I guess, most of you remember that there was a 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. And then the second half of last year was, of course, much more modest. And 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 geographic?
We see an improvement basically in all business areas. If you look at sort of somehow an underlying trend. As you see, kind of -- we report 2.1% improvement Q2 this year versus Q2 last year, 1.1% improvement for the sector 6 months compared to last year. And I think all of you know that sort of -- through quite some price actions in the commercial segment in quite many countries. So of course, we do see then some improvement there. And then also in motor, we do see improvement in Norway and Finland.
Yes, and especially Finland was very good. Is that something that you wouldn't expect to be continued going forward, that is this decrease, which was quite heavily for some years is somewhat behind us.
I think to understand the Finnish development, you need to remember the quite big changes that was done to the multi-TPL bonus systems in Finland. That was reducing more to TPL premiums quite a lot going back in time. And of course, that has now kind of been fully [ earned ] into the premiums. So now we -- now we expect a more normal, sort of, development going forward.
Okay. Just 2 -- 1 more on the life side. We have seen investment reserves of some 60-plus over the last 2 quarters. Is it something that we should expect to come down to around 40-plus-ish? Or is that 60 now new recurring level? And finally, on the capital side, how much CapEx can you really relieve from your old back -- book is now running off.
I think that the -- what the quarterly results will be for If -- for Mandatum, you have to wait and see. So that will -- that is, of course, always dependent on the capital market development, on how much the old book decreases...
The EUR 200 million is roughly -- it depends a little bit on what kind of reserves, but roughly EUR 50 million in capital and release.
In the quarter or in the year.
For full year. So EUR 200 million in a year is roughly EUR 50 million. It doesn't matter sort of which time period, it's run down about EUR 200 million lower with profit reserves is roughly EUR 30 million per year and EUR 50 million capital.
Yes. Exactly. So EUR 50 million of capital potential release of those EUR 200 million reduction in total underlying reserves?
Yes.
Yes. And it's, of course, that EUR 50 million change if the -- if it's run down at a quicker pace during the year. It will be a little bit more -- can be bigger.
Yes.
And just I'm sitting -- thinking myself on your question where it will show in the P&L. This accounting loss of EUR 140 million. 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. So I correct myself, that we will -- it is a part of that -- part of the P&L, but we will make that an explicit item in the Q3 report.
Our next question comes from the line of Sami Taipalus from Goldman Sachs.
Just a couple of quick ones, actually. First one is a bit of a follow-up on the last question on Mandatum Life, you said 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 a little bit of a, sort of, indication of what sort of level -- what capital generation you'd expect from new business value in Mandatum life? And also, I appreciate, obviously, the actual investment result is going to be volatile after that business. But what would sort of a sensible number be to think about in terms of sort of plan or budget investment income contribution to capital generation? So that's question number one. And number two, you're talking a bit about debt issuance. Can you just remind us what's 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, interest cover, or how far could you go on this?
The actual investment result going forward that you can see our investment mix, how much equity risk, how much fixed income we have -- you can see our running yields. So unfortunately, you have to figure out that yourself because I have no clue where the markets will go. So your guess is as good as mine. On the Mandatum back book, yes, the -- 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 are -- we have changed the company to do more fee-based business. And especially, the main products that it sells now are alternative asset management products. And as it -- when you go into private equity or infrastructure and such, and you sell it to customers, what you really do is you sell it on a commitment basis. So actually, I don't know if we have published the commitment-based numbers, but we are talking of premiums, but we can see that the committed capital is increasing faster than our booked sales. So we are building a buffer on top of the premium sales that we have today because we are selling alternative asset products. However, it's -- 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. So that's, I think, important to realize. Then 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. And 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 issue...
And sorry, just to follow up on that briefly. I mean, my question wasn't so much about how much it sort of burdens the SCR. It was more about the amount [ of own ] funds it generates. Is it possible to -- I mean, I appreciate you might not want to give your exact numbers there, but is it possible to say anything about the order of magnitude of this capital generation?
Well, I think that you -- then you should look at our fee income. And that you can see in our expenses -- risk ratio. And you can start to analyze that how much could we improve our risk ratio on an annual basis. And there, I think we have room for 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. And therefore, we got the EUR 197 million compensation last year. And therefore, we have seen a drop in the expense ratio. And now it should then start to improve once the fee income grows slowly. So this is -- these are the parameters you have to work around.
But I guess it is a multiyear policies. So it's quite difficult to get to those numbers from your P&L disclosures. Are we talking single-digit million, low double-digit million. Is it possible to give any sort of [ steer ] .
One part, we are talking single digit. And on the other part, probably low double-digit numbers but not significant numbers on an annual basis yet. But it's a high-ROE business. Now I am talking of the improvement from the present levels.
We're actually just doing -- 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. So let's revert to that a little bit later when we have gone through this possible positive effect on the Mandatum's own fund, which you bring up an important point.
On the debt issuance...
On debt issuance, the theoretical, sort of -- of course, it's 50% of SCR, 20% of -- in terms of Tier 1 on the own funds. And in a sort of new world where after we have changed the calculation basis of Nordea, that would mean a theoretic capacity of more than 2.5 -- a little bit more than EUR 2.5 billion, which is 5x what the sample PFC has. Then the group has a few hundred million more in If. So it's to the tune of an additional EUR 2 billion theoretically. Of course, that's not the realistic issuance capacity. But we certainly could use parts of that. But at the same time, also probably look at the senior debt if we're to issue more. That we have to try to not significantly increase the leverage ratio from here.
Sorry, just a follow up on that. I didn't quite understand your comments there about theoretical versus realistic? I mean, are you saying that you could actually issue that much? Or are you saying that, that's theoretically the capacity, but you would never quite issue that much?
Theoretic capacity in terms of Solvency II, I don't think we have plans to issue 50% of our SCR in hybrid capital.
But how much would you be comfortable with actually issuing? I mean, 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.
Yes. So you wouldn't want to go much further than we currently have?
Not much further. But of course, we could, over time, change the composition of that debt with a 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 -- to only sort of shy of EUR 1 billion in the group and then EUR 4 billion in senior or EUR 3.5 billion in senior.
Our next question is a follow up from Blair Stewart from Bank of America Merrill Lynch.
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. And I know that's a call for Nordea, but you do have the chair at Nordea, so I think it's fair game to ask. I'm just not clear why it's such a good time. The actual timing ahead of a new CEO joining seems rather strange to me from the outside, that new CEO has got an inherent set of targets you might want to set as on-targets. I just wondering if you could be able to comment on that though?
I think that if we look at how Torbjorn as the new Chairman works, he's planning things really carefully. So 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. And 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. So they need to -- and because all the targets that they are going to present, they must be based on the new business plan. There are no targets without the business plan. So 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. And 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. And that we -- that also has to include a more ambitious cost plan than what they have communicated so far.
I certainly hope they are not going to deliver less shareholder value.
I agree with you once again.
Our next question comes from the line of Niccolo Dalla-Palma from Exane BNP Paribas.
Couple of questions from me on the investment portfolio of If. And I wondered if you could share the -- if there's currently any significant or worthwhile mentioning hedges in place. That means that the economic exposure is maybe 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? And the second question on the portfolio is you have 1.3 years duration on the asset side. So you run a short -- a 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?
We invest all our assets, all the float in a way as it would be our own money. So we don't do anything exotic. So we have no hedges of the kind that we would not have disclosed to the market. What -- the second question was, what would we think of matching. I think this is the completely the wrong moment to go along 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. So we are not even contemplating or matching that. We have the reserves to maintain the mismatch.
And 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, and it's more marginal.
And the next question is a follow-up from Jan Erik Gjerland from ABG.
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, 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, and it is -- and I feel personally very confident that the regulator understands our position and will handle the matter in a way which has been made the basis from a -- for the Board to make the decision it did today.
[Operator Instructions] Our next question is a follow-up from Michael Huttner from JP Morgan.
And really to ask again just -- 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 -- and my perception, the answer was it was more changing it at the edges. So 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. Any clarification, that would be very helpful.
I think that Knut Arne said that we are happy with the debt level that we have today. And 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 because 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. But if the -- and we have no intention to take on more debt on a gross basis at this moment. But 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, and the figure on the capacity, did I understand right, was EUR 2.5 billion?
In excess of -- it will be -- it's 50% of the SCR, which will mean for the group in excess of EUR 2.5 billion after we changed the calculation basis for Nordea. And we have shy of EUR 1 billion. So we have roughly EUR 2 billion in hybrid, what I called, theoretical hybrid capacity, additional hybrid capacity.
And 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. And thank you all for your attention. Have a very nice evening.