Sampo: Initiating Coverage; Sampo Balances Underwriting Quality With Growth

We are initiating coverage of Sampo SAMPO with exemplary capital allocation, a stable moat trend, a narrow economic moat, and Medium Uncertainty Rating. Our fair value estimate is EUR 40 per share. Sampo generated an average return on equity of 13.5% over the last 10 years. We believe Sampo will earn an average return on equity of 14.5% over the next 10 years. Our stage two forecasts use a 12% average return on equity. We apply a 9% cost of equity in line with what we apply to other personal lines insurance businesses.

We award Sampo a narrow economic moat based on its intangible assets and cost advantage. Sampo set up WayPoint, its proprietary technology system, around 15 years ago. Since then, Sampo has been using WayPoint for data collection and analysis, including data on the insured asset and data on the customer. This data has been amassed over a sustained period, aided by its car manufacturer partnerships where Sampo holds the largest partnership portfolio in the Nordics. Relationships with these auto manufacturers have also likely provided a data source through telematics. In the first instance, we believe this data and the analysis of it has helped Sampo identify a customer’s propensity to claim and the likely value of a claim. This has likely been augmented with data feedback on driving habits. We also believe this data has helped Sampo with pricing.

In general, we believe the Nordics are nice personal lines insurance markets. At least two of the top four positions in each market are generally held by mutuals. We believe this makes these markets more rational. Private operators tend to focus on underwriting quality and improvements.

Our forecasts include a 15-basis-point annual claims ratio improvement. That stacks up modestly against a 70-basis-point average annual improvement over the last 15 years. Our forecasts also include 20 basis points of annual expense extraction. This is a management target, and 25 basis points per year has been achieved historically.