Sampo Q4'24 preview: Integration costs weigh on reported results

Translation: Original published in Finnish on 1/23/2025 at 8:30 am EET.

In terms of results, we are expecting a rather weak quarter by Sampo's standards. The main reason for this is Topdanmark’s frontloaded integration costs. We also expect insurance profitability to remain subdued due to seasonally higher claims costs and lower-than-usual investment returns. However, our forecast revisions were mainly for Q4’24, so their significance in the big picture is limited. Therefore, we reiterate our Reduce recommendation and our target price of EUR 42.

Earnings forecasts down before Q4 report

Prior to the Q4 report, we have made forecast cuts based on the information provided by the company. According to the company, the full cost of the integration of Topdanmark (150 MEUR) will be booked in 2024. We had previously expected these to be spread over 2024-2025, so there has been some movement between the earnings forecasts for the two years. Half of the one-off costs are charged to Topdanmark and half to If P&C’s other expenses, so that the profitability of the insurance business is not affected.

At the same time, we've increased our forecast for If P&C’s Q4 claims costs to reflect the seasonally challenging weather conditions in early winter and lowered our net finance income forecast due to the sluggish capital markets. However, the increase in interest rates should offset the effect of the decrease in the present value of the insurance liabilities. These changes have had a significant negative impact (-7%) on our profit forecast for the year.

Our dividend forecasts have also fallen. This is in line with the company's intention to focus on the share buybacks in order to redistribute excess capital. This had no material impact on our overall profit distribution forecasts.

One-off costs weigh on the result for the rest of the year

In the fourth quarter, we expect If P&C's insurance revenue to grow by around 7% year-on-year. Insurance revenue continues to be driven primarily by price increases, as new car sales remain weak in the Nordic countries, among other things. Our combined ratio forecast is 83.5% (Q4’23: 83.1%). Our forecast for If P&C’s pre-tax profit (including integration costs of 75 EUR) is 204 MEUR. Even after adjusting for one-off charges, our forecasts for the segment's results are therefore below normal, reflecting moderate expectations for finance income.

One-time charges will also weigh on Topdanmark's pre-tax profit, which we expect to be -26 MEUR. However, we do not expect a material change in insurance profitability, although the more seasonally difficult weather conditions will also affect the Danish insurer. For Hastings, we expect a pre-tax result of 49 MEUR. Our forecast for the Group's Q4 pre-tax profit is 194 MEUR and for the dividend for 2024 is EUR 1.85 per share (previously EUR 2.00).

As in 2024, the company is expected to guide for a Group-level combined ratio of 83-85%. Even a range one percentage point lower could be justified by the gradual realization of cost synergies from Topdanmark and If, but the company is typically quite conservative in its guidance at the beginning of the year. In addition to the guidance, we look forward to receiving further information on the timeline of the integration of Topdanmark.

There's no rush to get on board

In our valuation, our focus is particularly on the discounted dividend model, as the investment needs of the business are low and Sampo is able to distribute most of its earnings to its shareholders. The value of Sampo's share under our dividend model, which takes into account excess capital on the balance sheet, remains unchanged at around EUR 42. 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. Overall, we consider the stock to be quite neutrally priced (2025e P/E >15x).