Sampo Q2'24: Insurance pays off

This report is a summary translation of the report “Vakuuttaminen kannattaa” published on 8/8/2024 at 10:00 pm EEST.

Sampo's result was well above expectations due to investment income. Profitability in the insurance businesses remained strong and changes in forecasts for the coming years were relatively moderate. We continue to expect solid earnings growth from Sampo. We consider the share correctly priced from several angles and thus find the risk/reward ratio neutral. We reiterate our Reduce recommendation and revise our target price to EUR 41.0 per share (was 40) after small positive forecast changes.

Earnings beat came from investment income

Sampo's Q2 result clearly exceeded our expectations. Insurance profitability was in line with expectations, but If’ P&Cs investment income landed well above our forecasts. This also accounted for the majority of the quarterly overperformance. Sampo's operating segments continue to perform well, and the development was particularly strong in the UK. Also in the Nordic region, insurance profitability remained at an excellent level, although the company was affected by a few large claims during the quarter. Overall, Sampo's group-level profit before taxes of 444 MEUR was well above both our (+26%) and consensus (+24%) forecasts. Sampo did not touch this year's guidance, but still expects its group-level combined ratio to be 83-85%.

Forecasts up on strong investment returns

Overall, the changes in forecasts following the report remained fairly moderate. We raised our pre-tax profit forecast for the full year by 4%, mainly due to higher-than-expected investment income in the second quarter. Our projections for the coming years remain virtually unchanged, although we have slightly raised our insurance revenue growth forecast for If P&C and lowered our loss expectations for the remainder of the year. For the full year, we now expect a group combined ratio of 84.3%, which is in line with the company's current guidance (83-85%).

Our view on Sampo's performance has remained unchanged and we estimate that the company's normal earnings under the current structure is about EUR 2.4-2.6 per share The level should be growing steadily, driven by operating profit growth and share buybacks, but larger level adjustments should not be expected given the current excellent performance of the businesses.

Current share price not yet attractive

In our valuation our focus is particularly on the dividend model, as the investment needs of the business are low and Sampo is able to distribute most of its earnings to its shareholders. Sampo's value per share under our dividend model, which takes into account excess capital on the balance sheet, is EUR 41. Topdanmark's takeover bid did not materially change the valuation picture, because although the price offered can be justified by cost synergies alone, the positive impact of the arrangement on the group's scale remains quite limited, with If P&C still dominant. Sampo's value is supported by its low investment rate and moderate risk level. In a mature industry, growth opportunities are limited, which lowers the acceptable valuation level. As a whole, we consider the stock to be correctly priced (2024e P/E ~16x) and believe that a better expected return would require faster earnings growth than we expect, now that significant new acquisitions are quite unlikely after the acquisition of the remaining shares in Topdanmark.