Sampo/Mandatum: demerger gives Nordic insurer new lease of life

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Low interest rates largely explain the poor performance of life insurers over the past decade. Add low premium growth in developed economies to that and a change of gear at Finland’s Sampo makes sense.

On Monday, the Helsinki-based business completed the demerger of its life business Mandatum, whose shares valued the spin-off at €1.9bn. A dip in Sampo shares suggested little value creation on the day, yet a broader plan to focus on non-life sectors still deserves credit.

The move will make Sampo the largest pure property and casualty insurer in the Nordic region. The shares, along with those of peer Tryg, have long commanded a sizeable premium over the broader European insurance sector. Combined ratios for both close to 80 per cent reflect disciplined underwriting. Capital releases for shareholders will cement the spin-off’s logic.

The turnaround in interest rates is already helping. Sampo estimated its Solvency Capital Ratio would be 193 per cent following the split, at the top end of its targeted range. Higher rates mean insurers need to hold less capital against liabilities anyway. But shedding life exposures will also mean lower targeted capital and a surplus for shareholders. A 10 percentage point fall in targeted SCR would mean about €300mn of returns for Sampo shareholders. 

The story at Mandatum is similar. The standalone life business will generate capital in two ways. First, from its growth business managing pension assets for corporate clients. Second, from winding down an old back book of with-profits policies, generating capital as it does.

Mandatum’s standalone SCR is now at about 232 per cent. A target range of between 170-200 per cent is expected in the medium term. Even at the top end of that would mean an extra €300mn to come back to shareholders on top.

Add that on to the €500mn the company expects to return on ordinary dividends over the next three years and the annual yield moves to 15 per cent. Even in the higher rate environment, that should attract interest.