In insurance business, boring equals profitable

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.