IR Blog

In this blog post our IR Team answers private investors' questions that we received by email and through social media. Thank you for excellent questions and active conversation!

Nordea is going through a major IT renewal. Does the other Group companies, especially If, face similar projects in the near-term?

There is no need for large IT projects for other Sampo Group's companies in the near-term. If has constantly updated its IT systems towards one pan-Nordic systems for years. As the largest P&C insurer in the Nordics, If has strong resources for IT investments.

Would Sampo consider share buybacks as part of its distribution policy?

Buybacks are one option that can be considered if the Board of Directors considers Sampo's share to be clearly undervalued.

What are the key political risks for Sampo?

All kind of risks that cause turbulence in the fixed income and stock markets affect Sampo Groups investment activities. From an operational point of view, political risks in our home markets, in the Nordics are relatively small. Main risks are potential changes in taxation and regulation in the finance sector.

How Sampo is prepared for the retirement of its key people?

Sampo has detailed plans in case of changes in personnel when the time comes.

What are the biggest surprises that have happened in Nordea since Sampo invested in it?

Obviously, the biggest surprise has been the significantly tightened regulation in the banking sector. This has required major investments, particularly in compliance. In addition, the changes in regulation and taxation, which were the reasons for Nordea's re-domiciliation, were surprising. Another one is that no one would had guessed that interest rates stay so low for so long period.

Why does Sampo not increase its stake in Nordea?

Nordea has an US branch which is under the local regulation. If Sampo would increase its stake, there is a risk that Sampo would be interpreted, in accordance with the US Bank Holding Company Act, as a bank holding company. This would increase regulation and limit our operations.

Sampo's top management has said that it is difficult to find good investment opportunities in this market environment. However, there are several small technology companies in the market. Would Sampo consider investing in them, at least from a R&D point of view and explore if there is any technological innovations for Sampo's businesses to benefit from?

In strategic, larger-class mergers and acquisitions Sampo's core competence is in the Nordic financial and insurance sector. However, our latest investments, Saxo and Nets, are in fact, true fintech companies. Nets is a pioneer in digital payment technology and Saxo Bank focuses on online trading technology. The same applies for Asiakastieto as well. In addition, from a pure financial point of view, we have invested in different kind of companies, including technology companies. Our largest investments are listed in our Annual Report.

What is Sampo's view on the future of the banking sector in five years horizon?

The technological development will change the industry. However, we believe that the traditional banks will continue to play a key role as recipients of deposits and lenders. Different kind of fintech companies will complete the offering and find business opportunities for example in transfer of payments, which is relatively low-margin business for traditional banks.

What comes to the changes in the industry, one key factor is the increased regulation. In the ever tightening regulation environment, the winners will be small and agile niche players, or as Kari Stadigh, the CEO and President, says "commandos" and in the other hand, "large armies" that have enough recourses to carry the regulation burden and, on the other hand, ability to benefit from the economics of scale. In addition, the new players have to evaluate how much regulation they can or are willing to handle.

As the largest bank in the Nordics, Nordea has an advance compared to its many peers. Nordea operates in all Nordic countries and thus, it is a wanted partner in the eyes of fintech companies.

What are Sampo's main competitors?

If's competitors are all Nordic P&C insurance companies and many of them operate locally only in one country. Main competitors are OP and LähiTapiola in Finland, LF and Folksam in Sweden and Tryg and Gjensidige in Norway. In Denmark, If and Topdanmark compete against Tryg and Codan.

Mandatum Life's main competitors are companies that offer life insurance and wealth management products and services in Finland, for example OP, Nordea, LähiTapiola, Fennia, Evli and eQ.

Nordea competes against Nordic and local banks. Larger competitors are, among others, Handelsbanken, SEB, Swedbank, OP, Danske Bank and DNB.

How is Sampo going to grow its profit in the coming years?

We will keep up the good work and continue to develop our subsidiaries. Growth in the number of customers create a good base for profit growth. Nordea's contribution to the Group's profit is significant. In addition, we believe that our latest direct investments in Saxo Bank, Nets and Nordax will create value for our shareholders in the longer-term.

It is important to note that the fixed income markets have a significant impact to our investment activities, because the majority of the Group's portfolio consists of fixed income investments. We estimate that if the yield curve increased by one percentage point throughout, our financial benefit would be approximately EUR 600 million. The benefit would be generated from higher discount rates for technical provisions, higher running yield and improved interest margins for Nordea.

Instead of investing profits, why does Sampo pay such high dividend?

Sampo has profiled itself as a dividend company and our shareholders expect us to pay high and stable dividend. In addition, we have very strong balance sheet, which gives us ability to pay high dividends.

What comes to investment opportunities, the current market environment, particularly the low interest rates make finding good opportunities quite challenging.

Why Sampo has invested so heavily in fixed income?

Especially If has very large weight in fixed income. It can be explained by two factors: dividends and credit rating. When it comes to return on equity, our objective is to keep If's balance sheet light and efficient. However, at the same time, the high credit rating and ability to pay large dividends require strong solvency. Thus, the risk profile of If's investment portfolio must be low. In addition, the group level profit performance benefits from the fact that If's profit is based on successful risk assessment and pricing i.e. underwriting rather than profits from investments. Mandatum Life, on the other hand, usually takes more equity risk.

Why does Sampo usually report its full year results and held its AGM later than most large-cap companies in Nasdaq Helsinki?

Sampo's schedule for financial reporting are affected by the reporting schedule of the subsidiary Topdanmark and associate Nordea. We have to wait them to publish their reports before we are able to start working on our report. This will also push the AGM and dividend payment further the spring. Before we pay dividend to our shareholders, we wish to collect internal dividends from our subsidiaries and associates.

Sampo has increased its dividend nine years in a row. Would Sampo consider paying more dividend than it makes profit in order to keep dividend curve growing?

Sampo has a strong balance sheet and large amount of capital. If there is any troubles with internal dividend flow, we can release some capital by decreasing the buffers.

Digitalization and automatization increase safety. How this trend affects insurance companies, is there still need for insurances in the future?

Technological development, digitalization, automation and artificial intelligence will change the insurance business and thus, affect the evaluation and pricing of risks. However, there will be need for insurances, because accidents happen. Devices break, ankles wrist, employees get sick and homes will be broken into in the future as well.

One of the key questions is how self-driving cars will change the car insurance businesses.

"Digitalisation and automation have already changed the insurance business – and this transformation is gradually gaining momentum. Although digitalisation and automation fortunately contribute to greater security, they also usher in new kinds of risks. For instance, as electric cars become more common, there might be an increase in unexpected accidents, as the vehicles are more silent and battery charging can pose new fire risks. Equipping vehicles with more automation technology will probably lead to a greater need for different kinds of product liability and cyber insurances. As a result of digitalisation, human activities are becoming not only increasingly automated, but also strongly networked. In the future, due to digitalisation and networks, a traffic accident might result from a system crash and have a broad impact on different locations, instead of being merely a traditional collision. The nature of damages is also constantly changing, from physical damages to financial threats such as interruption of operations. As an insurance company, our task is to identify new, increasingly complex risks and develop solutions for their management for our customers – this is a major focus for us at If", says Matti Sjögren, If's Liability Risk Management Specialist

It is also important to note that technological development will also create new business opportunities (for example cyber-insurances) and help insurance companies to improve their services and to enhance their processes. Automation and artificial intelligence improve and speed up the service by streamlining the assessment and pricing of risks and compensation processes. If is in the forefront of this development.

Sampo published today its first group level Corporate Responsibility Report. The report provides information that we have been publishing before but that can now be found in one report.

Naturally, the fact that the new legislation obliges large corporations to report their non-financial information is one reason for publishing this report. However, as the CEO and President Kari Stadigh states in the preface of the report, the key reason is the increasing importance of corporate responsibility to our business and society at large, and the amount of interest our stakeholders have in the topic.

Corporate responsibility is no longer just a hot trend or a bunch of nice words to boost the image of the company. Corporate responsibility is now part of companies' everyday business, as it should be. The legislation draws the broad lines for responsibility reporting but the largest requirements come from investors. Today, investors are well-informed and require that companies are responsible and transparent. They have a good motive for that; in the long-term these kind of companies tend to perform better compared to their peers and thus create value for their shareholders.

What's new in Sampo's CR Report? For example, the carbon footprint of our direct equity and fixed income investments. In 2017, we measured the carbon footprint of investments made by If, Mandatum Life (excluding wealth management) and Sampo plc for the first time. The total carbon footprint of the equity portfolio was 146,748 tCO2e at the end of 2017. This corresponds to a relative footprint of 75 tCO2e/EUR million invested. The footprint is 49 per cent below the global benchmark index.

Direct Equity Portfolio, Sector Contribution to Financed Emissions (tCO2e) If, Mandatum Life and Sampo plc, 31 December 2017

Another interesting figure disclosed in the report is Sampo’s tax footprint. In 2017, the taxes of Sampo plc, If and Mandatum Life totaled EUR 988 million. In Finland, we paid taxes worth EUR 566 million which makes Sampo one the largest tax payers in the country.

Investors and other stakeholders may be curious about how the responsibility is taken into account in risk management and governance, HR management and customers relations or how diversity and equality is seen in Sampo. All this information can be found in the report.

As mentioned, the CR Report is our first. We are happy with the report, but our ambitions are higher. In 2017, we focused on identifying corporate responsibility data sources and responsibilities within the group. Our goal was to create strong basis for the ongoing processes, and thereby for future reports.

“The work with responsibility matters is continuous development and aim to improve. My view is that we are on the right track. This year, our goal is to develop our reporting and our internal practices. We also aim to clarify the Group’s targets, map out development areas and make responsibility more systematical at the group level”, says Johanna Tynkkynen, CR Manager of Sampo.

Our CR Report for 2017 is available here.

Sampo Group reported somewhat mixed results for January – March 2018. Our insurance businesses continued their strong performance, but tough market environment and unfavorable currency movements reflected to the results in Group level.

The figures are not audited. Income statement items are compared on a year-on-year basis and comparison figures for balance sheet items are from 31 December 2017 unless otherwise stated.

After a few years break, Nordic countries experienced a so called normal winter. Particularly, in Norway the weather conditions were more challenging than a year ago. Despite the challenging conditions, If's performance was excellent. The profit before taxes increased to EUR 193 million from last year's EUR 180 million. If's combined ratio was 86.5 per cent, which was one of the best Q1 performances in the company's history. In addition, Topdanmark showed solid performance with combined ratio of 83.7 per cent. One can say that challenging conditions emphasize Sampo's diversification benefits from operating in all Nordic countries.

One of the main highlights in the first quarter was the growth in insurance businesses. If's customer base grew in all markets compared to the first quarter of 2017. In local currency, If's premiums increased in all business areas and in all markets besides in Finland. In euros, premiums decreased somewhat compared to the first quarter in 2017, affected by the Swedish krone weakening against euro. Topdanmark's premiums increased both in the non-life insurance business and particularly in the life insurance business, in which the growth was near 20 per cent.

Mandatum Life's premiums increased 6 per cent in from last year and profit before taxes was very strong, EUR 73 million. After the end of the reporting period, Mandatum Life and Danske Bank agreed to continue their co-operation and that the transfer of the insurance portfolio agreed earlier will not take place. On closing of the transaction, Mandatum Life will receive a transaction price of EUR 197 million from Danske Bank. In addition, the company's result is estimated to increase annually EUR 20 million compared to the situation where the portfolio would have been transferred. This supports Mandatum Life's growth prospects and ability to pay dividend.

Nordea is on the right path. Large-scale projects proceed as planned and the bank's de-risking has been successful. The banks solvency is stronger than ever and credit losses continued to decrease. Nordea's management reiterates its guidance that net profit will grow in 2018 compared to 2017. As the largest shareholder, we are confident with this guidance.

The profit before taxes for Holding segment was EUR -46 million. Main reason for the large loss was the weak Swedish krona. In total, the credit losses for the Holding segment were EUR 59 million. At the end of March, krona had weakened around 8 per cent against euro from a year ago. The weakening has continued in Q2.

In the financial markets, the big picture has not dramatically changed. Although, the jittering in the markets has reflected to increased volatility. The fear of the tariff war and political risks have remained as the main concerns. In addition, markets watch closely on interest rates. In U.S. the yield of the 10 year government bond exceeded 3 per cent for the first time in 4 years in April. There has been some movement upwards in Europe too, but interest rates are still at very low level. For Sampo, rising interest rates would be the most welcome.

Read more about Sampo's first quarter results at www.sampo.com/result.

In recent years, investors have, depending on the point of view, enjoyed or suffered from record low interest rates, thanks to the central banks' stimulus measures.

For Sampo low interest rates are a headache since the majority of the group's investment portfolio worth over EUR 22 billion consists of fixed income. At the end of 2017, some 67 per cent of our investments were invested in fixed income. The share is large particularly in If, 84 per cent at the end of 2017. In Mandatum Life fixed income investments constituted 42 per cent of total investments.

If's large fixed income weight is explained by two factors: dividends and credit rating. When it comes to return on equity, our objective is to keep If's balance sheet light and efficient. However, at the same time, the high credit rating and ability to pay large dividends require strong solvency. Thus, the risk profile of If's investment portfolio must be low. In addition, the group level profit performance benefits from the fact that If's profit is based on successful risk assessment and pricing i.e. underwriting rather than profits from investments.

From an investor's point of view, one key figure to keep an eye on is the average yield to maturity of the fixed income portfolio without taking into account the FX hedging costs - or in financial jargon, running yield. The figure expresses the average return on the fixed income portfolio when all investments expire normally.

At the end of 2017, the running yield for If amounted to 1.5 per cent and for Mandatum Life to 2.4 per cent. Traditionally, Mandatum Life has taken more risk than If, which usually means higher running yield. However, the trend in running yield has been decreasing during the past years. For example, in 2011 the running yield for If amounted to 4.1 per cent and for Mandatum Life to 5.4 per cent.

Running Yield, If and Mandatum Life 2011-2017, %

The lower the bond yields go, the lower the running yield sinks. When billions are invested, every single basis point matters. Sampo's success in the challenging market environment of recent years can be considered excellent.

Lately, there has been some signs of rising interest rates. In the U.S. Fed has already raised the Federal Funds rate multiple times. Furthermore, in Europe the first raise for ECB since July 2011 is a step closer as the economy is picking up. While writing this, the yield of the European safe heaven, the German 10 year bund was 0.60 per cent. In February the yield temporarily exceeded 0.80 per cent. The near 5 per cent levels seen before the financial crisis are still far but on the other hand, the minus rates seen in 2016 seem to be in the past.

10y Government Bond Yield, %

We are prepared for rising interest rates by keeping the duration of our fixed income portfolio short. Duration expresses the average cash flow weighted maturity of the fixed income portfolio. At the end of 2017, the duration for If was 1.4 years and for Mandatum Life 2.0 years. When interest rates rise, the prices of bonds decrease. However, for shorter-term bonds the decrease is smaller than for longer-term bonds. Respectively, when interest rates go down, bond prices benefit from longer duration.

Sampo would benefit from rising interest rates more than many of its comps. We estimate that if the yield curve increased by one percentage point throughout, our financial benefit would be approximately EUR 600 million. The benefit would be generated from higher discount rates for technical provisions, higher running yield and improved interest margins for Nordea.

Even tough low interest rates have hampered our investment activities, they have had some positive effects as well. Because of the lower interest rates, Sampo has been able raise foreign capital at a very attractive price. In February we issued a EUR 500,000 million bond with a maturity of 10 years. The fixed coupon rate is 1.625 per cent, but we swapped it to variable rate, which is only 0.28 per cent at the moment.

Strong balance sheet and the ability to raise foreign capital at a competitive price support our strategy to create shareholder value with our investments. During the past year, we have made direct investments in three companies that operate in the financial and fintech sector: Nets, Saxo Bank and Nordax. We have reserved approximately one billion euro for these kind of investments and we have now used roughly EUR 750 million of that. Thus, it's quite possible that we make more direct investments of these kind in the future as well.

There are various stocks in the market that offer excitement and increase investor's blood pressure. Sampo is not one of them.

Particularly, Sampo's property and casualty insurance business is stable and, to be honest, quite boring. That is a good thing because in insurance business, boring equals profitable. At the heart of a profitable insurance business is the risk assessment and pricing, i.e. underwriting. That is what we are good at – or as Kari Stadigh, the CEO and President, says: "We are insurance nerds".

Successful underwriting is reflected in the combined ratio, the most important key figure in P&C insurance business. Combined ratio, expressed as a percentage, gauges the claims incurred and operating expenses in relation to premiums earned. If the ratio is below 100, the company is making underwriting profit. Respectively, if the ratio is above 100, the ability to make profit relies on the company's investment activities.

Sampo's subsidiary, If's operational target is to keep the annual combined ratio below 95 per cent every year. In the past years, that target has been reached by a margin. In fact, since 2012, If's combined ratio has stayed below 90 per cent. In 2017 it was 85.3 per cent, the best ever recorded in the company's history.

If's Combined Ratio 2003-2017

Topdanmark, our Danish subsidiary, has also shown excellent performance. The company's operational target is to reach 91 per cent combined ratio excluding run-offs, i.e. the profit or loss arisen when claims originating from prior years are either finally settled or revalued. For Topdanmark, year 2017 was exceptionally strong with combined ratio of 82.0 per cent and 85.8 per cent excluding run-offs.

Topdanmark's Combined Ratio 2009-2017

The combined ratio is affected by number of factors, but in the short term, the greatest fluctuations are caused by increased claim frequency or individual larger claims, e.g. large factory fires. In the short term one of the main reasons for increased claims frequency is, as strange as it sounds, the weather. Exceptionally harsh winter conditions are immediately reflected in car accidents and unpredictable storms in autumn can tear down roofs and cut down acres of trees. Needless to say that mild winters became more common in the Nordics during the past years are the most welcome phenomenon from the point of view of an insurance company.

An Insurance, whether it's property or casualty insurance, is quite special product. It is good to have one but having to use it means that something bad has happened. The most important feature of an insurance is not the compensation paid in the event of damage but the peace of mind for the policyholder.

The insurance business is also characterized by the fact that the prevailing economic cycle does not significantly affect the demand for insurance products, at least in the short term. It does not matter whether it's a boom or recession in the economy when the TV breaks in the middle of move or your ankle twists during exercise. However, in good times, the claims frequency tends to rise slightly – there is more traffic on the roads and work occupational accidents and other damages increase when business activity is picking up. Respectively, in bad times, claims tend to decrease as the activity falls but premiums will not decrease as fast as the claims.

Overall, insurance business is extremely stable and predictable business. In good hands, it can also be very profitable. If's operational target is to reach 17.5 per cent return on equity. In other words, an equity of EUR 100 must produce a profit of EUR 17.5. In 2017, If's return on equity amounted to 21.5 per cent, which is excellent achievement.

The stability and predictability of insurance business is reflected in If's and Topdanmark's, and hence, Sampo Group's profit performance. Large fluctuations in the profit development are rare and that is a good thing for a dividend company like Sampo.

In addition to the strong performance of our insurance business, it is gratifying to see that If's customer base has been growing in all markets. In 2017, the number of household customers of If exceeded three million, a record figure. Together with Topdanmark, the number of household customers is over 3.6 million.