How to read Sampo’s result reports

In general, P&C insurance business is quite easy to understand. The customer buys an insurance policy, gets financial protection against losses from certain events and, if the insurance company has managed to assess and price the risks correctly, it makes a profit. However, insurance companies’ result reports may sometimes be a bit difficult to comprehend, given that the industry specific terminology is often quite technical, and the P&L lines are different than for example industrial companies have. Therefore, in this blog post we go through the main P&L items and key figures disclosed in Sampo’s result reports.

Let’s start the journey by looking at If’s results table, which can be found in the Business areas section in our quarterly reports (page 11 on January-June 2023 report). Please note that this is a summary of the main P&L items. The full comprehensive P&L as well as balance sheet and other notes can be found in the tables section at the back of the report.

 

Gross written premiums

Gross written premiums can be considered as the key top line figure to pay attention to. It is the sum of all premiums for insurance policies that have become effective during the reporting period, regardless of whether they have been invoiced or paid. 

For example, if a customer buys a home insurance policy on 1 January and the premium is EUR 100 for the full year, an insurance company will book the whole EUR 100 for the first quarter as gross written premiums.

Insurance revenue

When the insurance company has fulfilled its obligation to cover the risk and provide financial protection for its customers over the predefined period, written premiums turn to earned premiums i.e. insurance revenue. 

In the example above, 1/4 of that EUR 100 premium, i.e. EUR 25 would have been earned as insurance revenue in the first quarter as the insurance company has fulfilled its obligation for the first 3 months. 

In Sampo’s result summaries, insurance revenue and claims incurred as well as all the key ratios are presented net of reinsurance.

Claims incurred

Claims incurred for the reporting period include claims payments during the period and changes in the liability for incurred claims, i.e. the reserves an insurance company has held back to pay out the future claims.

In the old IFRS 4 accounting standard, changes in discount rates affected the claims figure but in IFRS 17, which became effective in 2023, this effect was moved to net financial result. 

Operating expenses 

Operating expenses consist of all the other everyday expenses, such as rent and staff costs, except claims. In If’s table, claims handling costs are considered as part of operating expenses, but at the Group level and for Hastings and Topdanmark, claims handling costs are part of claims. More about this difference in the ratio section below.

Insurance service result / underwriting result

Insurance service result is the insurance revenue less claims and operating expenses. For If and Topdanmark, this is the same as underwriting profit. However, Hastings has some items in underwriting result that are not included in the insurance service result. 

Tip: insurance service result can simply be calculated by using the calculation formula insurance revenue x (100% - combined ratio, %).

Net financial result

The underwriting result is the main profit component in Sampo’s P&L, but the other major item is net financial result.

The two main components of net financial result are net investment income and insurance finance income or expense (IFIE).

Net investment income consists of the returns on investments that cover liabilities. Interest and dividend income provide stable returns, but short-term market volatility may occasionally have big impacts, positive or negative, on net investment income. In the IFRS 9 accounting standard, that Sampo adopted in the beginning of 2023, changes in market values are booked mark-to-market in the P&L, whereas under the old standard, only realised gains and losses went through the P&L. This means that 2023 figures are not fully comparable with 2022 figures.

The second component, IFIE, consists of a couple of sub-components related to the liability side, with changes in discount rates being the most prone to market fluctuations. The effect can be positive or negative depending on which direction interest rates move. Increase in discount rates has a positive effect and vice versa. 

IFIE also includes an ongoing unwind of discounting, which reflects the loss of discounting benefit as time goes by and liability for incurred claims approach the payment date. This effect, as well as the indexation of annuities, which is more of a technical item, should be quite stable over time.

Key ratios

Combined ratio

Combined ratio is probably the most used key figure for a P&C insurer as it shows how well the company has succeeded in underwriting and being efficient. The calculation formula is (claims incurred + operating expenses) / insurance revenue. The lower the combined ratio, the better.

In Q2/2023, If’s combined ratio was 82.9 per cent. This means that for every EUR 100 as an insurance revenue, EUR 82.90 was consumed by claims and operating expenses. The residual, EUR 17.10 forms the insurance service result.

Expense ratio and loss ratio

As the name combined ratio implies, it is a combination of something. More specifically, it is the sum of expense ratio and loss ratio. These ratios are disclosed at the Group level as well as for each subsidiary. 

The calculation formula for expense ratio is operating expenses / insurance revenue. For loss ratio, it is claims incurred / insurance revenue.

Cost ratio and risk ratio

In addition to the expense ratio and loss ratio, for If, we also disclose cost ratio and risk ratio as one of our financial targets is to reduce If’s cost ratio annually. 

The difference comes from the allocation of claims handling costs. In expense ratio / loss ratio, the claims handling costs are included in claims, whereas in cost ratio / risk ratio, those are part of operating expense.

Adjusted risk ratio

Severe weather events, natural catastrophes and large claims are part of normal everyday business for Sampo, but these do not occur evenly over each quarter. For example, Q2/2023 was affected by a rockslide in Norway as well as few property-related large claims, whereas in Q1/2023, large claims were below the budget.

As investors and analysts pay attention to the underlying performance, we disclose an adjusted risk ratio for If. This excludes the volatile claim items as well as some technical items. These items are disclosed in the table as percentage of insurance revenue. More about these adjustments below.

Large claims and severe weather

Large claims are usually property-related damages such as a factory fire. These are measured against a budget, meaning we expect some large claims every quarter. Severe weather claims, which also include natural catastrophes, on the other hand, are reported in full. In If’s key figures table, a negative figure indicates a positive outcome and vice versa. For example, large claims and severe weather had negative effect of 7.1 percentage points in If’s risk ratio in Q2/2023.

Risk adjustment and other technical effects

Items on this line are more or less technical and mainly related to IFRS 17 accounting. Risk adjustment reflects the uncertainty with the amount and timing of cash flows arising from non-financial risks, such as longevity risk and inflation risk. The management applies judgement regarding the determination of this. 

Prior year development (PYD)

Prior year development, also known as run-off, is a profit or loss that arises when claims originating from prior years are either finally settled or revaluated. For example, if an insurance company has originally reserved EUR 100 for a claim but later it turns out that the cost was only EUR 98, a run-off gain of EUR 2 emerges. 

Discounting effect

Under IFRS 17, all claims are discounted, including current year claims. This has a positive effect in the current year combined ratio, and it increases or decreases as discount rates increase or decrease. The discounting effect is included in the adjusted risk ratio, but we just disclose the effect for clarity. 

Hastings-related key figures

Hastings’ operating model and revenue streams differ somewhat from If and Topdanmark and that is why the result tables for Hastings (page 15 on January-June 2023 report) have some differences as well.

RESULTS, EURm	1-6/2023	1-6/2022	Change, %	4-6/2023	4-6/2022	Change, %
Gross written premiums	798	605	32	435	331	32
Other income from insurance contracts	113	107	6	60	53	14
Insurance revenue, net	518	406	28	272	222	22
Claims incurred and claims handling costs, net	-330	-218	52	-168	-117	44
Operating expenses	-124	-110	12	-65	-55	18
Insurance service result	64	78	-18	39	51	-23
Other P&C insurance related income or expense	-10	-19	-46	-4	-10	-59
Underwriting result	54	59	-9	35	41	-14
Net investment income	-2	4	-	-16	1	-
Insurance finance income or expense, net	-4	15	-	3	-1	-
Net financial result	-6	19	-	-12	-	-
Other items	-21	-32	-35	-6	-16	-65
Profit before taxes	27	46	-42	17	25	-31
KEY FIGURES, EURm	1-6/2022	1-6/2022	Change	4-6/2023	4-6/2022	Change
Operating ratio, %	90.8	87.1	3.7	88.6	83.7	5
Loss ratio, %	63.8	53.6	10.1	61.6	52.5	9
Total revenue, EURm*	584	461	27	309	250	23
Live customer policies (millions)	3.4	3.2	0.2