How to calculate Sampo’s operating EPS

At the Capital Markets Day held on 6 March 2024, Sampo introduced operating EPS growth as one of the main financial targets for the 2024-2026 strategic period. We aim to grow operating EPS by more than 7 per cent annually on average over the period.

But why operating EPS instead of reported EPS? After the adoption of IFRS 17 and IFRS 9 in the beginning of 2023, the reported EPS includes market volatility that does not reflect the Group’s underlying earnings power. The operating EPS metric excludes this market volatility, as well as non-operational depreciation and amortization. Hence, it better reflects how we run our businesses and generate cash. Also, our dividend policy is based on the operating result.

Operating result can be derived using a bottom-up or top-down approach. In this blog post, we build it up from the underwriting profit.

1. The underwriting profit is the main component of the operating result and the main growth driver as well. The figure for 2023 can be found from page 7 on our Q4 result report. In 2023, the current year discounting effect on underwriting profit amounted to EUR 246 million. We will get back to this in step 4.

2. Investment returns add earnings on top of the underwriting result. Interest and dividend income form the base for that as they are recurring income. The figure for 2023 can be found from page 34 on our Q4 Investor presentation. Our investment mix on page 31, gives some tools for estimating future interest dividend and income.

3. In addition to interest and dividend income, investments provide returns through market value appreciation. In this calculation, we only include realised gains or losses. It’s very difficult to give any guidelines for estimating this item since it depends on individual investments’ movements and portfolio managers’ decisions. In 2023, total net gains were EUR 488 million (page 34 on Q4 Investor presentation).

4. Unwind of discounting reflects the loss of discounting benefit as time goes by and the insurance contract liabilities approach the payment date. It’s one of the two main components of insurance finance income or expense (IFIE). The other one, changes in discount rates (and indexation of annuities), is treated as non-operational item and hence, not part of operating result. The unwind of discounting depends on discount rates and fluctuates quarterly. However, as a rule of thumb, the discounting effect on underwriting profit and the unwind of discounting should be broadly at the same level, which limits the net effect. The figure for 2023 can be found page 32 on our Q4 Investor presentation.

5. Finance and other items figure for 2023 can be found from page 7 on our Q4 result report (other items line). This mainly consists of finance and other costs in the Holding company and in our subsidiaries. It also includes the non-operational depreciation and amortization, which was EUR -68 million in 2023. Excluding the non-operational D&A, this item was EUR -174 million, of which around EUR -20 million were non-recurring costs in the Holding company.

6. Non-operational depreciation and amortization is added back to the calculation since it is included in the previous figure of EUR -243 million. This is expected to be approximately EUR 73 million in 2024.

7. After completing the additions and deductions, the operating result before taxes for 2023 amounted to EUR 1,420 million.

8. Since our profit and loss statement has a lot of moving parts with different tax rates, we kept the calculation simple and applied a fixed tax rate of 21 per cent for 2023.

9. Sampo owns roughly half of Topdanmark, meaning the other half of its profit is deducted at this stage. The non-controlling interest (NCI) is based on Topdanmark’s operating result calculated with a fixed tax rate. Therefore, the figure of EUR -76 million for 2023 differs from the reported figure of EUR -70 million (page 31 on Q4 result report), which was calculated from net profit with actual tax rates. The NCI is based on 50.4 per cent as Sampo’s owned 49.6 per cent of Topdanmark excluding the company’s own shares held.

10. Finally, the operating result of EUR 1,046 million needs to be divided by the 2023 average share count of 505,939,064, which gives EUR 2.07 per share.