Q&A – Termination of FICO

The Finnish Financial Supervisory Authority has today approved Sampo’s application for the termination of the financial and insurance conglomerate (FICO). Henceforth, Sampo Group’s solvency will be calculated only by Solvency II rules. In other words, Sampo becomes an insurance group again. https://www.sampo.com/media/releases/2019/sampo-has-received-the-approva...

Background in brief

Sampo’s ownership in Nordea exceeded 20 per cent at the end of 2009. Since 2010, the Finnish Financial Supervisory Authority has considered Sampo Group as a financial and insurance conglomerate and Nordea as an associated company of Sampo. Thus, Sampo Group’s solvency has been calculated by both Solvency II rules for insurance companies and FICO rules.

In 2018, Nordea’s Annual General Meeting decided to re-domicile the company’s headquarters to Finland from Sweden. Due to the re-domiciliation, capital requirements for Sampo’s Nordea ownership have increased significantly. This is because, as part of the decision of the European Central Bank on Nordea’s capital requirement, risk-weighted items (REA) were transferred from non-binding Pillar I to Pillar II, which are binding when calculating the capital requirement for financial and insurance conglomerates as well. Sampo Group’s factual risk position has not changed, but its share of Nordea’s capital requirement increased as Nordea’s Pillar I capital requirement increased. Since the end of 2018, Sampo’s capital requirement has increased by roughly EUR 800 million by the end of June 2019. The adoption of the Systemic Risk Buffer as of 1 July 2019 has further increased Nordea’s capital requirement.

To counter the impacts of the increased capital requirements, Sampo’s Board proposed the AGM in Spring 2019 that the Board be authorized to distribute an extra dividend in cash and/or in financial instruments. The Board received the authorization by the AGM and in the summer, the Board announced that it plans to distribute an extra dividend in the form of Nordea shares with the aim of reducing Sampo’s ownership below 20 per cent. By going below 20 per cent, Sampo Group would no longer be considered as a financial and insurance conglomerate nor Nordea as an associated company in the Group’s solvency calculations. The change was subject to the approval of the Finnish Financial Supervisory Authority.

On 7 August 2019, the Board resolved on the distribution of an extra dividend. As a result of the distribution, Sampo’s ownership in Nordea decreased to 19.87 per cent. On the same day, Sampo filed an application with the Finnish Financial Supervisory Authority for the termination of FICO. The Finnish Financial Supervisory Authority approved the application on 21 October 2019. Henceforth, Sampo Group’s solvency will be calculated only by Solvency II rules and Nordea is treated as an ordinary equity investment instead of an associated company. The change will significantly improve Sampo’s solvency.

How much will Sampo’s solvency improve?

At the end of June 2019, Sampo’s Solvency II ratio was 137 per cent. If Nordea would have been treated as an equity investment, Sampo’s pro forma Solvency II ratio would have been 170 per cent on 30 June 2019. The change released roughly EUR 1 billion of capital. Solvency figures for the end September 2019 will be published normally in the Interim Statement for January-September on 6 November 2019.

At what level does Sampo want its solvency to be at least?

Sampo started to take action when its solvency ratio was, for the reasons mentioned above, decreasing below 140 per cent. However, Sampo does not have any specific minimum level for solvency ratio target, but we aim to maintain a level that, in addition to our normal operations, provides room to seize opportunities that may arise in the markets.

Nordea is now treated as an equity investment in Solvency II calculation. How does this differ from the previous treatment as an associated company?

The solvency ratio is calculated by dividing Sampo Group’s own funds by its solvency capital requirement. Going forward, Sampo's own funds will no longer include a share of Nordea’s own funds as defined in banking regulations and corresponding to Sampo's share of ownership in Nordea. Instead, Sampo’s own funds will include the market value of the Nordea shares owned by Sampo. Similarly, going forward, Sampo's capital requirement will no longer include a share of Nordea’s capital requirement as defined in banking regulations and corresponding to Sampo's share of ownership in Nordea. Instead, the capital requirement for the Nordea shares owned by Sampo will be determined by equity market risk as defined in insurance company regulations and in a similar way with other equity investments made by Sampo.

How will the changes in Nordea’s share price affect Sampo’s solvency?

Since Nordea is now treated as an ordinary equity investment, an increase in the share price will improve Sampo’s solvency and decline will weaken it. A 10 per cent increase in Nordea’s share price from the dividend payment date level (EUR 5.661) would improve Sampo’s solvency ratio roughly by 3-4 per cent.

How does the change affect Nordea’s treatment in Sampo’s financial statement?

The consolidation of Nordea as an associated company in Sampo Group’s financial statement (IFRS) remains unchanged. Thus, Sampo’s share (19.87 %) of Nordea’s net profit will be consolidated in Sampo’s results.

Why is Nordea still treated as an associated company in Sampo’s financial statement?

Solvency II, FICO and IFRS rules are independent, separate regulatory frameworks and the definition for an associated company is different in each. Thus, a change in one regulatory framework does not necessarily lead to a corresponding change in another.

How does the distribution of an extra dividend affect Sampo’s results?

Sampo will book a non-recurring loss of EUR 155 million for January-September 2019. The loss consists of a loss of EUR 143 million from the valuation difference between the value of the share dividend (5.661) and the book value of Nordea share in our balance sheet (EUR 8.238) and a loss of EUR 12 million from recycling of previous OCI items trough P&L. The loss has no impact in cashflow.

Mirko Hurmerinta, IR and Communications Specialist, Sampo plc
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