Sampo Oyj (OTCPK:SAXPF) Q3 2022 Earnings Conference Call November 2, 2022 10:00 AM ET
Company Participants
Sami Taipalus – Head of Investor Relations
Torbjörn Magnusson – Chief Executive Officer & President
Knut Alsaker – Chief Financial Officer
Conference Call Participants
Faizan Lakhani – HSBC
Jakob Brink – Nordea
Tryfonas Spyrou – Berenberg
Blair Stewart – Bank of America
Jimmy Fan – UBS
Jan Gjerland – ABG
Vinit Malhotra – Mediobanca
Jaakko Tyrvainen – SEB
Youdish Chicooree – Autonomous Research
Jakob Brink – Nordea
Sami Taipalus
Good afternoon everyone and welcome to the Sampo Group’s Third Quarter 2022 Conference Call. My name is Sami Taipalus and I am Head of Investor Relations at Sampo Group. I’m joined on the call today by Group CEO, Torbjorn Magnusson; and Group CFO, Knut-Arne Alsaker.
The call will feature a short presentation from Torbjorn followed by Q&A. A recording of the call will later be available on sampo.com.
With that, I hand over to Torbjorn. Please go ahead.
Torbjörn Magnusson
Thanks Sami and good afternoon, everyone. The third quarter 2022 was very much a continuation of the successful and robust developments we have seen this year and in 2021 at Sampo. We have very strong operational momentum in our businesses and very much build and benefit from the digital capabilities we have built over the over a number of years. At the same time, we have been positioned for higher interest rates and benefit from this in our balance sheet in fixed income returns and in discount rates for all liabilities.
In the Nordics, claims inflation develops as we expected, more or less exactly after Q2 as it has stayed closer to 4% and 5%. We do not at the moment see any dramatic change development in motor repair costs in building materials or wage inflation. We continue to be able to increase rates a little more than that, keeping the very high retention rates we’ve had for a period. In fact, these retention levels are a more important key to our good work volume figures, maybe even in sales. In general, the Nordics has remained rational, pricing according to expected inflation for the different segments in the insurance industry.
As regards profitability, we have for the past 12 months been able to meet claims inflation with rate increases than in the Nordics. This is true also throughout Q3 and the resulting combined ratio behaves very much as expected. This quarter we’ve had a few more large claims than budgeted but really nothing dramatic that would indicate any trend for the future and of course, we now have no COVID effects. But on the other hand, we have lifted discounting rates cautiously in the turbulent world around us.
Taking these volatile but relatively small items into account, If P&C’s combined ratio for the quarter is a very satisfactory 81.6% and the underlying development is stable and positive. The outlook is strengthened for the full year to 80% to 82%. Business wise for If P&C, the year has continued very much as we outlined in the Investor Update in London last month. We gained customers in the digital channels, now notably also in the SME segment but still suffer from the extremely low car sales as the close collaboration with the car industry is an important channel for us. The total is thus, as already mentioned, I think, a positive 7% growth for the 9 months, out of which say 2/3 is rate increases.
In the U.K., claims inflation has stayed elevated but without deteriorating significantly from the second quarter. In response, we have implemented further price increases that have limited our motor insurance growth. However, our pricing discipline has ensured that margins remain where they must be and we delivered an 87% operating ratio for the quarter. As for previous quarters, we benefit from the situation for home insurance that evolved from the GIPP reform and we continue to grow in that segment quickly.
There have been some positive rate adjustments in the U.K. market — motor market in Q3 and Hastings continues to develop very strongly in terms of technical abilities. So I look with optimism to the future of Hastings. All in all, in P&C, our group combined ratio for the quarter was a satisfactory 82.4%, well below our 86% target.
I said initially that we benefit from higher interest rates in several ways and here is a slide with some numbers. The yearly running yield increase in If P&C’s profit of €120 million is certainly significant and we have ample room to continue to increase duration. Secondly, an increase of the discount rate in Finland to 1.25% gave €43 million in Q3. And thirdly, for Mandatum, it’s pleasing to see the running yield reaching the average guaranteed rate with profits book.
Another interest rate sensitive element is, of course, the solvency ratio of Mandatum which now reached a record 282%. Business-wise, to mention that also, Mandatum had strong momentum despite the tumultuous markets and they had positive net flows into capital-light fee products during the third quarter.
Turning now to our capital. Our solvency ratio has continued to increase in Q3, now reaching 256%, the biggest quarterly increase coming from underwriting profits, of course. We estimate roughly €2 per share in excess capital remaining mainly from the Nordea exit. In these times, it seems sensible to continue with the gradual returns of these. We will announce the Board’s proposal for further capital returns together with the full year results in February, early next year. Furthermore, we expect another €2 per share or so to be freed up once we sell the PE assets. Further than this, we will continue to work on enhancing capital efficiency always with all the tools we have and I hope we will see some effects towards the end of next year from the work on our group internal model.
Finally, with a simple slide detailing our good progress compared to targets as background, I just want to express my satisfaction that the Board has decided today to work towards a dual listing in Stockholm in the second half of this month, given, of course, the necessary approvals and market conditions. But I think this is a very natural step for us and we’ll facilitate ownership for investors in what is our biggest market operationally at this point in time.
I finish there and open for questions. Sami?
Sami Taipalus
Thank you, Torbjorn. Operator, we’re now ready for the Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] We will take our first question from Faizan Lakhani from HSBC.
Faizan Lakhani
This is Faizan Lakhani from HSBC. The first is on the PE stakes that you’ve mentioned and potential capital you freed up. More immediately, it appears that Saxo Bank coming up for IPO. Would you look to dispose the full stake in that situation? And if so, would the correct way of thinking about it be that, that would release about €130 million worth of SCR, given that your stake is about €340 million? And the second question is on Mandatum. You’re on a clear path to transition to pure and non-life there. How does Mandatum fit into that picture? Are you happy with the current mix and model? Or is there something that you could do on that front? And my final one is on liquidity. I’m sorry, I know I’ve asked the question in the past. I understand there’s plenty of liquidity in the various segments. But at what point does liquidity become a constraint when thinking about returning capital?
Torbjörn Magnusson
Knut, I think they’re all yours.
Knut Alsaker
Yes, I think I missed the full second question but I’ll start with the first. Saxo, as you know, working on the listing, you probably shouldn’t expect us to, in the short term, sell our full stake in Saxo from that work. Let’s first see if that project succeed and then you shouldn’t expect that to mean that we can exit the full stake. In terms of the capital treatment for Saxo and all the other PE assets we have, it’s roughly in line with what you said, depending a little bit on sort of equity charge but roughly in line with what you said about half or so of the — sort of market value which is the capital commitment we need to take.
Torbjörn Magnusson
And on Mandatum then, we’re a happy owner. They are a very successful company in the finished life insurance market. Obviously, we will try to optimize capital in Sampo Group. And that’s the whole story.
Knut Alsaker
In terms of liquidity, it becomes a bit of a philosophical answer I might give. But still, this is how it will work. I mean, we obviously hold assets to cover our technical liabilities as well as the capital on any balance sheet that is required from a solvency perspective. If that capital that we need to hold reduces because of lower capital requirement, it’s of course covered by assets which we can sell to create liquidity. So in some ways, I would say that it never becomes a concern because if we didn’t have sort of assets, proper assets that covered our capital, we would have a challenge in the first place. But of course, there’s limits to how much we can create of excess capital with the current liquidity we have. We can’t plan for that liquidity pool before it materializes, so to speak, in terms of lower capital requirement and a possibility to free up these assets.
Operator
We will take our next question from Jakob Brink from Nordea.
Jakob Brink
Two questions on rates to start with. Running yield in is 2.7%. Could you tell us what is the reinvestment yield? And how quickly should we expect to get to that level? Secondly, maybe just trying to look at the finished discount rate, currently 1.25%. Looking at your duration in If which, of course, are quite long in Finland, it seems like 1.25% is still relatively low. Could you maybe give us some clarity of, is this 1.25% the sort of the new run rate or is there scope for more increases? That was my 2 questions on interest rates and then I have 1 more afterwards, please.
Knut Alsaker
Okay. Good afternoon, Jakob, Knut-Arne here. You’re right that the running yield increased to 2.7%, sort of up from 2.4% or so in the second quarter — 2.1%, sorry, in the second quarter. The reinvestment yield is, as you say, 4.2% on the stuff that we’ve done which means that the running yield would probably continue to increase not to the maybe the same magnitude as we had in the third quarter but towards 3% at the end of the year. That is obviously an estimate from my side and depending on how rates develop in the fourth quarter but that would be a reasonable expectation from my side towards the end of the year.
Then on the Finnish discount rate, 1.25%. Of course, this is a — this is related to an accounting regime which we currently have, where this discount rate is at a bit discretionary. But obviously, over time, should follow market rates. Now we’re entering soon into IFRS 17, where discount rates on all liabilities, certainly also the long duration liabilities which you are referring to would be the market rates which means that, that level currently, without giving you our exact discount curve under IFRS 17 that we will revert to would clearly be at a higher level than 1.25%.
So the reason that why that’s not the line today is that it’s not exactly how the accounting regime for Finish discounting works under IFRS 4. We couldn’t use even the same rate as we would use under IFRS 17.
Jakob Brink
No, I know it’s different in Finland. I was just simply trying to figure out if there would be one more step up in Q4 before you enter into IFRS 17.
Knut Alsaker
Let’s see how rates develop. But of course, if rates develop as they have developed throughout the year, that could, of course, be a possibility. There is not a restriction on our side because we’re transiting in that next quarter into IFRS 17 to not increase it further. We still should follow the current sort of accounting rules, so to speak.
Torbjörn Magnusson
We have been in no way aggressive when lifting to 1.25%.
Knut Alsaker
No.
Jakob Brink
Exactly. And just one question also. Torbjorn, you mentioned, I think, you have ample room to keep increasing duration. What did you mean by that?
Torbjörn Magnusson
Duration is still shorter than the liability matching duration.
Jakob Brink
So is that something we should expect in connection? And I know you’ll come back in December with IFRS 17 but…
Torbjörn Magnusson
I was just saying that we have that opportunity if we would like to do that.
Jakob Brink
Okay. Fair enough. And then let me just see one final on investments as well. I was just looking at the If annual report and your rating split within fixed income. And obviously, some is higher rated than other. I was just — could you give us some sense of how maybe the lower rated fixed income classes are performing in these total end markets, please? And then ultimately, is there any risk of you having to do impairments at some point?
Knut Alsaker
I mean some of the high yields we have actually been the best performers of lately. But it’s broadly in line with sort of what you already know in terms of Nordic fixed income performance — but also related to my comment on the high yields, the impairments in Q3 were limited. And it was roughly €50 million for the group and around half of that was If which I think was your question. And almost nothing of that impairment in If was related to fixed income. It was some smaller impairments totaling in If and included in the Q3 AFS result of around €8 million or so mainly related to the equity portfolio.
Operator
We’ll take our next question from Tryfonas Spyrou from Berenberg.
Tryfonas Spyrou
I was just wondering if you can maybe give us some color on the outlook for sort of If combined ratio for next year. I appreciate there are various moving part in Q3. But you gave a really long table showing the adjusted If ratio and you talked about pricing being in line with claims inflation. So everything else equal, should we expect that to continue into Q4 and going into the next year?
Torbjörn Magnusson
I didn’t catch the last part of your question but maybe it doesn’t matter. We have now an outlook for the full year of 80% to 82%. We’re saying that we are increasing rates actually with a slight margin above the claims inflation which is the main prediction for next year that we can make at this point in time for If P&C. That should, of course, lead to slightly lower combined ratios, not least together with the promise that we will always and every year, reduce the cost ratio. And then when it comes to — I mentioned also in my introduction that the market so far in the Nordics has behaved rationally in the face of slightly higher. I mean the claims inflation is not that high in the Nordics. In many periods of my life, I’ve seen relatively high numbers compared to this. So a rational market so far. And certainly, we will continue to behave rationally.
Operator
We will take our next question from Blair Stewart from Bank of America.
Blair Stewart
I’ve got 2 questions. Starting with excess capital. You talked about €3 to €4 per share which is at the top end is about €2 billion or so. Using the midpoint of your range, your 170% to 190% range. I estimate 58 point of excess capital which gets me to that €2 billion number. However, if you sell your private equity stakes, I’m assuming you would reduce your SCR by around €500 million which would obviously increase your capital surplus. I estimate comfortably over €3 billion. So I just wonder what’s wrong with my thinking there? If you could comment on that?
And secondly, I really don’t want to complain about an 82% combined ratio in any manner. But just looking at the private segment in the quarter, it was about 2 points higher than the previous Q3. Is that just usual quarterly volatility? Or is there something more underlying which just led to that 2-point deterioration in the Private segment?
Knut Alsaker
Blair, let me see if I got your question. I don’t think there was a lot of wrong with your thinking. We have a solvency ratio at the end of Q3 of just shy of 240%. And if you take the midrange of the solvency target range of 170% to 190%, as you said, that gives you shy of €4. So in other words, we sort of have said €3 to €4 in excess capital. That comes from, of course, different areas in the group than only Nordea which isn’t even a part of our solvency calculation even more. It comes from the private equity assets but also some other areas where there’s excess capital, so to speak, can be related to.
What we try to indicate in terms of the surplus from Nordea and also the private equity is what we have already done in terms of materializing the excess capital. In other words, also creating liquidity and which is Nordea and also the fact that we have said that we will sell the private equity stakes. So one thing is relating it to the solvency which is calculated now with the risks we have, that’s not including Nordea. The other one is sort of the actions we’ve taken and the return of excess capital which obviously is a liquidity consideration as well.
Torbjörn Magnusson
And then, Blair, I’m not complaining about the combined ratio either actually because as you know, we have increased rates in parallel with claims inflation. So there shouldn’t be a problem in the underlying combined ratio development and there isn’t. I’m very satisfied with this combined ratio. But compared to last year, we had no benefit from COVID. We had some 5% more in large claims because last year, Q3 was a low large claim quarter. We had a little bit better weather this year and a little bit more prior year gains. And if you take those items into account, you can see that we actually have a slight improvement in the underlying combined ratio compared to last year.
Blair Stewart
Okay. If I can come back on the first one, Knut-Arne. So on the assumption that you sell your private equity stakes for the equivalent of own funds. So your own funds doesn’t change. Your SCR would go down by €500 million, let’s say, in this example. So your solvency would then go to €290 million something. And the point I was trying to make is that even on the lower SCR, that would imply that you’ve got comfortably more than €2 billion of excess capital. It’s probably more like €3.5 billion. I just wonder what’s wrong with that calculation?
Knut Alsaker
And I don’t want to speculate in where we would be at a point in time we would sell the private equity assets in terms of solvency ratios. I’m not going to say that then we would be at €290 million. But if we were to sell the private equity stakes, it’s absolutely correct that the SCR would go down. There is nothing wrong with that calculation. What I tried to say is that the Q3 number where we indicate an excess capital based on our solvency capital framework, 3 to 4 is an absolutely correct number. And then we could discuss whether or not it’s closer to €4 than €3. But there are some volatile items also in the solvency calculation, as you know.
And then what we talk about in terms of returning excess capital is what we already have done in terms of actions — and that is where we are left with a bit more than €2 per share from the Nordea actions. And then when we take actions on the private equity portfolio that would really realize about €2 more per shares because that’s basically the market value of the private equity stake. But what you are saying of course…
Blair Stewart
I don’t think it’s more like — for what it’s worth, we can debate that later.
Knut Alsaker
Yes. But what you are referring to and I would put it almost in a slightly different way, is that we do have possibility to work on our excess capital also after Nordea which is already out from our SCR stack and the private equity stake because we have a possibility to make our balance sheet even more efficient than it currently is.
Operator
We will take our next question from Jimmy Fan from UBS.
Jimmy Fan
On the same slide that Blair mentioned, I mean there’s under the fading column showing the future actions. And Torbjorn, you mentioned that part of the future action for excess capital is from an internal model work. And perhaps there is some others coming from your repositioning your investment portfolio that’s going to reduce your SCR. And could you give us some color in terms of the extent of the SCR reduction going forward, please?
Torbjörn Magnusson
My comment in the introduction was probably saying that we have a much firmer framework around our balance sheet and our approach to the balance sheet in this planning period that we published in the Capital Markets Day last year. And we have shown that we try to find ways to make the balance sheet more efficient all the time. And obviously, we are working on the internal model. We have the PE stakes and we will probably try to find more tools in the toolbox to continue that intense work to make the company more efficient.
Jimmy Fan
And I guess, like if you keep reducing your solvency capital requirements, I guess, I mean, from a return on risk capital perspective is very different to what you have before. Has that back to any source about your ordinary or the insurance dividend element going forward? Should we start to think about you are able to a bit higher than before on that?
Knut Alsaker
I think the…
Jimmy Fan
And of the payout ratio.
Knut Alsaker
I think the ordinary dividend is not necessarily directly impacted what we’re talking about. We don’t make more money on a sort of — from our operations from an internal model. That would be purely to sort of get the geographical diversification included in our SCR. The combined ratio doesn’t go down from that activity. And that’s, of course, the main part of the insurance dividend. Then, of course, over time, if we’re able to make to invest the fixed income portfolios in the non-life part of the business which is the sort of majority of the non-life operations investment policy or an asset allocation at higher rates, that would of course contribute to the earnings that we over time would generate from our insurance business. But making the balance sheet sort of more efficient from — or SCR more efficient on internal models, you shouldn’t expect that to be positive for the insurance dividend.
Jimmy Fan
Okay. I guess also means that making it more efficient means that going forward you need definitely can retain or bid less capital. Is that fair?
Knut Alsaker
Making more efficient would be to commit less capital, yes. I mean, obviously, if you have higher rates, there opens up some possibilities to think around duration on the asset side versus liability side which haven’t really been available to Sampo for many years.
Operator
We will take our next question from Jan Erik Gjerland from ABG.
Jan Gjerland
I have 2 questions as well. The first one is on your comment on the gradual payment of extraordinary dividend versus buybacks. Should we expect you to sort of continue to do buybacks in this magnitude which you have now done for a long time now? And then expect a not as high extraordinary dividend for the Q4 and more buybacks down the road. Is that what you sort of tried to suggest with your comment? The second one is on the improvement, you mentioned also that you’re pricing above the current inflation and that you had 50 basis points improvement. Should we then expect this 50 basis points to be the sort of the run rate going forward? Or is this more flattish development with a higher increased frequency, we should expect?
Torbjörn Magnusson
On the gradual distribution, it was more a reflection of the world around us. But thinking about buybacks in general, it has been appreciated by our shareholders, the fact that we don’t only do dividends anymore. So that is something that I think the Board will take into account when they come with their proposal. And then 50 basis points, Jan Erik, in nonlife insurance is not a huge number. So I don’t think that it is possible to extrapolate that precisely for us. I’m just reflecting on the fact that we still have a very rational market here that we’re able to price for inflation with a little slim margin from a rather good starting point. And yes and of course, we will continue to work with the tools that are available to improve that even further, like better underwriting based on all the digital information that we have, like reducing the cost ratio as we have for the past 13, 14, 15 years, et cetera.
Jan Gjerland
How much did this private new sales sort of make the combined ratio weaker this quarter, if you could shed some light into the lower growth in the new car sales which you have seen for the last year? How should we think about that impacting the combined ratio in the private area? Such you should mentioned also a little bit that weaker than probably we thought.
Torbjörn Magnusson
There’s no big difference in the profitability between the business that we sort of didn’t write then in the for the car dealer channel. So it didn’t really change the combined ratio a whole lot. But of course, the growth in private was hit by somewhere between 1.5% and 2% for the Nordic number.
Operator
We’ll take our next question from Vinit Malhotra from Mediobanca.
Vinit Malhotra
Three questions, please. Firstly, I’m surprised with the commentary around new car sales because at least on the slides, I can see Slide 8, both 1H and 9 months, it seems your key market in this area shows a remarkable progress in 3Q, where 1H was minus 17% but 3 to 9 months is minus 12%. I’m just curious whether you’ve already seen some relief there in Sweden or not? So just curious about that data point. Second is that in commercial lines which has been also talked about at other Nordic insurers this quarter. Could you comment on your portfolio a little bit? Because obviously, it’s grown very well in 3Q, 11% and also 77% combined ratio, the best in the segment. So just any commentary there would be helpful.
And last question is on the private equity portfolio sales. And just curious as to the rising rates and growth starts, growth areas and these kind of assets not doing so well apparently. And also I’ve heard other insurers flag risk of private equity write-downs next year. I mean how do you foresee any issues in the environment? Do you think it’s — you seem to be quite confident to project that sale happening next year. Any clarity on that would be much appreciated.
Torbjörn Magnusson
On the car industry-driven portfolio in Sweden, let me first say that this is not really a strategic problem, although it’s a bit disappointing. We are dependent on the level of car sales, especially in Sweden, as you quite rightly point out but we don’t expect people to avoid buying cars or abstain from buying cars sort of forever. Now the number looks a little bit better for Sweden in Q3 than for some of the other countries but that’s because car sales were low already in Q3 last year. So not a strategic problem but I find it a little bit encouraging to see that we have such good growth numbers without that. And people will have to buy cars even more — there will be more reason to do that over time once the car portfolio of Sweden is not being renewed as it were.
Commercial lines, I think I mentioned that we introduced digital sales last year there and started with the pilot and it was really appreciated. And we’ve had a very good reception of that and then spread it over the Nordic countries. At the same time, we have correct and adequate pricing and quite normal large losses actually also. So a good results and more digital sales and service than we’ve had in the past which, again, also in this area is an advantage for us. Then I didn’t quite hear all of your PE question. The only thing that I can say and Knut will add to this is that we are not confident about the exact timing of the disposal of those assets as we don’t lead that process in any of the cases. But Knut, you probably heard more.
Knut Alsaker
Yes. No, we — the commentary we made in splitting off sort of liquidity we already have available from the Nordea sale and sort of what we have said we will do eventually was not to sort of make both of those actions next year. I’m not at all sure that we will have exited the — all of the assets in Sampo P&C by the end of next year. Let’s see how things develop. In terms of valuation of these assets which I think was also part of it, some of these assets we’re talking about, 4 or 5, is listed companies in some ways. And then those small assets, I mean, the investment we have in Nexi, although through a private equity vehicle, Nexi is also a listed company. So market values there are very much mark-to-market in some ways. And then on private equity, of course, there is a little bit of a lag in terms of how that valuation is done according to our accounting principles and probably for all private equity owners a lag of maybe 3 months or so.
So private equity returns, as you well know, is not really mark-to-market. Meaning that very easily said without making any forecast based on our reported numbers today. But you get the current quarters return into next quarter’s investment result.
Operator
We’ll take our next question from Jaakko Tyrvainen from SEB.
Jaakko Tyrväinen
Yes, I’m from SEB. You mentioned the rate hike somewhat above 5%. I assume that this is still driven by the industrial and commercial. So could you give any color on the rate hikes on the private side? And are the hikes kind of sufficient to cover the current inflation?
Torbjörn Magnusson
The rate increases for all lines and all mass market lines, private or commercial is between 3% and 6% at the moment and there is basically no big difference between commercial and private, maybe slightly more commercial than private. But they are in all segments separately, reflecting the claims inflation that we see.
Jaakko Tyrväinen
Okay. That’s very helpful. Then on the rate hikes in Hastings, how your kind of current rate compared to the rivals and their rate hikes? Are they hiking prices in a similar magnitude that you are? And if they’re not, are you able to keep the kind of volume-based flat or continue with increasing that?
Torbjörn Magnusson
That would be wonderful to know exactly, wouldn’t it? There’s a lot of information in the U.K. In Q3 we increased according to our knowledge and expectation about the claims inflation. We do not see — our estimate is that the market is not quite adequate after Q3 when it comes to the rates. But of course, we underwrite the business that we can and we’re actually doing — we’ve done quite well. So we have a flat development of the number of customers in motor. And then because of this very special situation in home, we have the very, very rapid development in home insurance. So for Hastings, this is not a bad situation actually.
Operator
We will take our next question from Youdish Chicooree from Autonomous Research.
Youdish Chicooree
Three questions, if I may, please. The first one is on prior year reserve releases. I mean, if I exclude adjustments to the annuity discount rates, the releases are around 2% which is quite low compared to recent years. So I was wondering whether this is the new run rate going forward given where inflation is. Or whether you’ve probably taken the opportunity actually to be more prudent in your reserves? So that’s my first question. Secondly, I wanted to ask you about the group excess capital. I think on Slide 15, you have denoted an area of future actions. And I guess, securing an approval for your group internal model is one of them. I was just wondering if you could tell us a bit your thinking around the time line. Is that something that can be done in 2023? Or is that most these future actions relate more to the next strategic plan, so to speak?
And then finally, on Hastings and the U.K. motor market, the loss ratio reported for the 9 months was slightly weaker than the 76% you’re targeting — sorry, the less than 76% you’re targeting. But within that, I think in the third quarter, specifically, it was more like 81.5%, so quite relative to where you want to be. So I was wondering whether given what the actions you’re taking, whether achieving that target is possible in the fourth quarter or in 2023? So those are my three questions.
Torbjörn Magnusson
Let the former actuary say just one word about reserves first. That is — well, there’s actually 2 of us here. But anyway, prior year gains, I think in Q3, we actually only had 1.4% prior year gains in excess of the discount rate change…
Youdish Chicooree
All right to say.
Torbjörn Magnusson
It’s that a future run rate. No, we’ve never had such a thing. We never had a target for this. But we do like to have strong reserves. So you will have seen very few quarters in the past 10 years, if any, when we’ve had negative prior year results and we’d like to keep it that way.
Knut Alsaker
All right. Then the norm actuary here. In terms of growth in excess capital is future actions, it’s — it is I realize a bit of philosophical graph there were no specific time line but a good one because there will be. But there is — in terms of time line on an internal model, we have a dialogue with regulators. I would, as Torbjorn also confirmed, I would hope that we could talk to you about the impact of an internal model in Sampo towards the end of next year which — since you related to our strategic period towards the end of this strategic period, doesn’t mean that this nice looking light blue graph here will not continue also into our next strategic period. Let’s see where we are when that time comes. In terms of the loss ratio in Hastings, you’re absolutely correct that, that was above 76% in the third quarter. It’s been somewhat volatile during the year, as you have seen from our reports, currently now a bit above 77% for the 9 months.
And of course, the fact that this is above 76% is a reflection of what we have talked about throughout the year, that price should increase in U.K. motor because of inflation. Then having said that of course, what we are really focused on just given Hastings business model which isn’t only underwriting profit is the operating ratio and the 88% target where we have, where we are spot on after 9 months and where we also have repeated that target for the full year.
Torbjörn Magnusson
Maybe Knut, it’s worth saying that it’s easier also for us to follow the combined ratio or operating ratio because there are other technical changes and we also changed the reinsurance program. So that target and that number is easier to see as a continuation of previous numbers.
Operator
We’ll take our next question from Jakob Brink from Nordea.
Jakob Brink
I just have one follow-up. Finance cost in holding after the debt buyback, it drops quite a lot the finance cost. Is this the new level? Or is there some sort of one-off related to Q3 that makes it lower than we should expect going forward?
Knut Alsaker
There is a few other moving parts in the finance cost in the holding company than just the pure debt payment or payment for debt that we have. But you are, of course, right that there will be a reduction in the funding costs for the holding company. But it’s not a reflection of the debt buyback. We did that debt buyback in September. So it’s a fairly, I would say, a very small impact, particularly for that €500 million and change that we bought back in September in our Q3 result. There’s a few other moving items as well in terms of some derivatives positions we have in place, et cetera.
Jakob Brink
Okay. Fair enough. And then actually, just one more question. On the liabilities, with profit liabilities in Mandatum, I see they dropped around 16% year-on-year, according to your slides. Is there any discounting impact on that? Or is that just basically you working with profit and getting them to switch to unit-linked or similar?
Torbjörn Magnusson
That’s straight nominal numbers.
Operator
We will take our next question from Jan Erik Gjerland.
Jan Gjerland
Just 3 ones. The first one is the reinsurance program which you touched upon Torbjorn in Hastings. What should we think about that for 2023 when it comes to level of reinsurance level? The second one is in Mandatum, potentially profit sharing. When should this sort of start to expect you to have about roughly 3.1% guarantee levels you are, is it during 2023? Or is firstly in ’24, you can see run rates are you running yields being above that? And finally, on the large loss change in budget, it seems to be a technicality when it comes to this stuff. But is it anything here we sort of missed out on the large loss that it looks like it came out much weaker this quarter than it actually should have been if you have not changed your budget? Or could you just shed some light into what happened between the 9 months to 6 months in the Q3 numbers?
Torbjörn Magnusson
I’ll take the reinsurance and the large losses and leave Mandatum to you, Knut. On the reinsurance program for Hastings, we’re in the middle of the negotiations. Can I just not tell you exactly what we’re aiming for. But of course, we will not write — we will not, sorry, get more cover at least, that’s for certain. And then maybe and maybe not is the right time to reduce the program even further; we’ll see. Large loss actually, I think that the level of detail was a bit unnecessary. We, of course, changed the large loss budget when we see that as necessary because the portfolio has shifted or increased, reduced and we’ve done that a number of times over the past 10 years, for instance. So on large losses, as you know, as we said every quarter, we’ve had a couple of — almost 3 years now with really good changes to rates in the large corporate book. We can see that from the attritional losses or the ordinary losses because the loss ratio for those is at a very good level. And there is no — I have no concern about these. The 3 large losses we had in this quarter were around a mill, normal, 1 machinery breakdown and a couple of large fires in the Nordics. So nothing special, no at all.
Knut Alsaker
And on profit sharing or bonuses in Mandatum, you should not see any bonuses in Mandatum in ’22, except from some marginal small single-digit euro numbers in that closed book which we, from time to time, call Nova S which has some slightly different features than the main business in the old Mandatum structure but it’s really small numbers. So I would say that no bonuses for this year. What happens with all kind of financial variables for the future, we’ll have to revert to.
Jan Gjerland
Just to shed some light, if we were to have a run rate of around 3.25%, then if that’s something we should think about as a potential. If you saw that you then have an opportunity to take out a bonus above the 3.1% average, so it’s down to the individual portfolios, et cetera and also the individual policyholders to get or even to take the bonus out of that. Is that how we should think about it in the future?
Torbjörn Magnusson
Yes. Guarantees needs to be met on an annual basis. So that annual — that guarantee, we need to meet this year. We have had to meet it every year also during the super low interest rate environment. The principle of fairness in Finland and the sort of reading of that and spirit of that is that bonuses should be based on longer-term returns. And of course, we’ve had a number of years where we have met our guarantees while still had rates which have been significantly below the guarantees and the returns we’ve had from that.
Operator
There are no further questions on the line. Please proceed.
Sami Taipalus
All right. Thank you, everyone, for your attention today. Let me just remind you that we’re planning to host an IFRS 17 session on the 1st of December with Knut-Arne Alsaker, our CFO. That’s all for today. Thanks very much.
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