Mandatum Oyj (MANTA) Earnings Call Transcript

Good morning, and thank you for joining Mandatum's Q2 2025 audio cast. My name is Lotta Borgström, and I lead Investor Relations here at Mandatum. I am pleased to be joined by our CEO, Petri Niemisvirta; and CFO, Matti Ahokas, who will walk you through the highlights of our second quarter after which we'll take the Q&A where you have the possibility to dial in for any questions. Without further ado, I would now like to hand over to our CEO, Petri Niemisvirta, who will take you through Mandatum's key achievements and developments for the second quarter. Petri, the floor is yours.

Thank you, Lotta. And now let's move on with the second quarter. The start for the second quarter was somewhat shaky due to planned tariffs and aggressive trade policy in the U.S., leading to a widespread market uncertainty. However, the sentiment rebounded swiftly after April and the markets stabilized. Fee result grew by 26% year-on-year, reaching EUR 18.5 million, reflecting mainly improved cost efficiency and an increase of 11% in client assets under management. Cost efficiency improved significantly with the cost-to-income ratio dropping by 11 percentage points to 53%. The result related to risk policies in the second quarter decreased to EUR 2 million. Main reason for this was the high comparison figure that included a profit of EUR 6 million related to the insurance portfolio transferred to if during 2024. Profit before taxes fell to EUR 34.2 million during the second quarter, impacted mostly by the decline in net finance result. The net finance result decreased EUR 21.6 million, mainly driven by the decline in long-term interest rates used in the discounting of insurance contract liabilities. Also, the comparison figure was notably strong due to the sharp price in the long-term interest rates during the second quarter of last year. It is important to remember that fluctuations in the net financial results are part of the nature of life and pension insurance business, even if the volatility has decreased significantly in the recent years, thanks to interest rate hedging measures taken. Capital-light profit before taxes was EUR 20.6 million in the quarter. The decrease from last year is primarily due to negative one-off factors and adjusting for the EUR 6 million one-off gain from the portfolio transfer to If. We have actually grown our underlying capital light profit before taxes by some 8% quarter-on-quarter and 25% year-to-date. The Solvency II ratio adjusted for dividend accruals and without the transitional measures remained strong at 193%. Organic capital generation, one of the key factors driving our ability to pay dividends was especially strong. Capital was also released through the divestment of our Enento Holding and other public listed shares, which means that Mandatum continues to be a very well-capitalized company. The steady growth of client assets under management continued to a new record high level. Even though it was weighted down by a weaker U.S. dollar, especially in retail funds and lower investment product sales in April. The increase in assets under management was largest among Institutional & Wealth Management business, 16% year-over-year, followed by the Corporate business 12%. The impact of weakened U.S. dollar was largest in retail assets under management that remained flat year-over-year. Net flow from the corporate clients increased significantly year-to-date, the growth coming mainly from personal funds. Sales to corporate clients remain strong. The unit-linked pension business continued to grow steadily, while sales of both risk life insurance and personal funds remain at good level. Eight new personal funds were established during the quarter. The strong corporate net flow shows also the diversification of our capital-light business, highlighting the importance of corporate business to our growth story. Net flow from the Institutional Wealth Management business grew less than last year, mainly driven by the lower investment product sales in April. Sales of investment products declined in April due to an uncertain market environment, but picked up significantly during the May and June, increasing the net flow of the second quarter to EUR 164 million. Overall, we have managed to keep the net flow positive even in turbulent market conditions. Client assets under management were increased by the positive net flow and a positive market movement of EUR 240 million. The steady growth in our Institutional Wealth Management business continued in the second quarter. In terms of assets under management, the largest growth came once again from international institutional clients 40% and amounted to EUR 1.7 billion. New client accounts were established in, among others, France and Norway. To further accelerate growth, especially in Continental Europe, we are establishing a new sales unit in Luxembourg, bringing us closer to a potential European customer base. The largest increase in assets under management was once again in credit and allocation products followed closely by external products. Also, we launched a new European high-yield total return fund. Our award-winning credit products, such as the Nordic high-yield fund are good examples of leading industry expertise. Operational efficiency continued to improve significantly with the cost to income ratio dropping by 11 percentage points to 53% over the trailing 12 months. To improve operational leverage demonstrates that a determined focus on cost efficiency is paying off, supporting sustainable profitability. While the fee margin decreased slightly to 1.14% to the growth in lower margin international institutional business and personal funds standalone product margin remained stable. Mandatum organized a Capital Markets Day early in June, during which we announced our new financial targets. Setting new targets was essential to reflect our ambition to grow in capital-light business areas while also enhancing profitability. The updated financial targets for 2025 to 2028 are: Return on equity above 20%. Above 10% compound annual growth rate in capital-light profit before taxes and solvency margin of 160% to 180% with cumulative shareholder payout exceeding EUR 1 billion. We want to develop into an even more capital efficient and increasingly fee-based company, while committed to being a good dividend payer also in the future. Our vision is to be fastest-growing Nordic asset and wealth manager with optimized growth in Finnish life and pension sectors, positioning us strongly for the future. Although our new targets are ambitious. I have every confidence that we will achieve them by 2028 through determined actions and the dedication of all Mandatum employees. And now let's move over to Matti and the figures.

Thank you, Petri. Let's take a closer look at the second quarter result components. As Petri mentioned, the fee result was up 26% year-on-year with assets under management up by 11%. And if we compare to Q1, our AUM was up by some 3%, but we still had quite a substantial negative of some EUR 300 million from the weaker U.S. dollar in the quarter. As we pointed out earlier, around 1/4 of our client AUM is in -- is denominated in U.S. dollars, and this is especially big in the higher-margin retail funds. Also, the weaker U.S. dollar had a negative P&L impact on the H1 fee result itself. Client fee margins were down a bit in the second quarter. We're looking on a rolling 12-month basis, and this reflects the mix impact from the fast-growing international institutional business. The cost income ratio of our client AUM continued to decrease according to plan and was 53% in the quarter. Our net finance result was EUR 22 million. And despite the very weak investment markets in April, especially our fixed income investments were at a good level in the second quarter. At the same time, the discounting impact in Q2 was significantly negative following the decline in the long IFRS discounting rates, and I'll come back to this a bit more later on. Worth noting is that the Q2 net finance result also included a EUR 12 million capital gain from the sale of our shares in Enento in June. Our results related to risk policies in Q2 was down compared to '24. Note that the comparison figure in '24 included some EUR 6 million one-off income from the portfolio transferred to If. Also, H1 has typically a seasonally higher costs in the risk insurance business, mainly due to the accrual of the previous year's reinsurance costs. Also, the CSM release in the quarter was lower, but this was only due to timing effects, not the CSM itself. Despite the turbulent markets, we consistently continue to generate capital. Organic capital generation was up to EUR 85 million from EUR 58 million in the last year. This translates to EUR 0.17 per share altogether. The main positive driver in the quarter was the faster AUM growth in the quarter. Return on equity was 7.6% in the quarter, mainly due to the lower net finance result. As you know, one of our financial target is to grow our capital-light profit before taxes by more than 10% annually by 2028 compared to '24. And if we look at the first half of '25, the reported profit before tax was EUR 41 million, basically in line with '24 despite the very turbulent financial markets, the mentioned FX headwinds and lower sales in H1. Worth noting is that the comparison figure last year includes a EUR 7 million one-off gain from the portfolio transfer of If. So adjusted for this, the growth was around 25%, as Petri mentioned. So if we then look closer at the group net finance result, it was down to EUR 22 million. And in the with-profit segment, it was down to EUR 9 million. However, the with-profit investment return in the quarter at 1.3% was above last year and broadly in line with a normalized quarterly run rate. Especially, our fixed income portfolio returns were good at 1.6% or over 6% annualized. The fixed income mark-to-market yield was down to 4.3% due to lower rates and tightening spreads as well as some internal portfolio adjustments. This is still well above the cost of liabilities. Although equities contributed positively this quarter, and we continue to decrease our equity exposure during the quarter, now the listed equity exposure was down to 4% of total assets at the end of Q2. And as you all know, this is in line what we have communicated previously. We sold equities worth some EUR 30 million during the quarter. Private credit actually had a fairly normal quarterly return but then we had negative value change in our own real estate portfolio and also private equity returns were negative in the quarter. So these were both below normal. Although the swap rates actually were quite unchanged in the second quarter, the IFRS rates that we use for discounting in the long end of the yield curve actually decreased in the quarter. The change in the shape of the yield curve was quite unusual and had a EUR 25 million negative P&L impact in the quarter. This was mainly a result of a 20 to 30 basis point lower liquidity premium in the long IFRS discount rates that we use. The move actually was unusually large in Q2 and happened mainly in the 20-year plus maturity where our hedging ratio is very low. As you can see from Page 19 in our investor presentation. The with-profit portfolio interest rate hedging ratio increased further and was probably unusually high at 97% at the end of Q2. The reason for this was a technical asset class mix change. The overall fixed income exposure increased mainly in the 5- to 10-year bucket, while the share of listed equities decreased, as I mentioned. As we show although the average hedging ratio is high, there are big differences in the maturities. The hedging ratio is very high in the short end, but low in the very long end. And I'd like to also note that the IFRS discount rate mark-to-market changes have no impact on the actual contractual cash flows nor our dividend paying capacity. Despite the turbulent markets, we continue to consistently generate capital. Organic capital generation was up to EUR 85 million in Q2 or significantly higher than the reported IFRS result. This measure, as you know, takes into account also, for example, the own funds generation from income booked in the CSM as well as potential capital release from a lower solvency capital requirement. As pointed out before, we think the OCG is a more relevant measure to assess our performance and capital generation. Our own fund generation increased the solvency margin by roughly 9 percentage points in the quarter. To reflect our new financial targets, we now report our solvency margin also including the transitional measure. The group solvency margin increased by 10 percentage points quarter-on-quarter but decreased by 3 percentage points when taking into account the larger dividend deduction assumption compared to last year. Last year, we had EUR 0.33 and now we use EUR 0.50. In addition to the announced sale of the Saxo Bank share is expected to increase the solvency margin by around 35 percentage points once the transaction is finalized, then of course, this means that we will be significantly above the target range at the end of the year. Back to you, Lotta.

Thank you, Matti. And now let's move on to the Q&A. Please dial in for any questions.

[Operator Instructions] The next question comes from Hans Rettedal Christiansen from Danske Bank Markets.

The first question I have is on the sort of fee margin and net flow. And so thank you for the Slide 14, where you started reporting the cost income and fee margins. You say on the slide that you have strong growth in international client business, which is affecting the mix. And so what I was really wondering is, are you able to quantify how much of the EUR 160 million in net flows this quarter is coming from the international business in Institutional & Wealth Management versus how much is if I can sort of say local, I guess?

Okay. Yes. So the number, what we are getting from -- what is the portion of international sales, it's quite substantial during this quarter. Lotta, remind me, do you have an exact number? No, we don't publish that exact number, but I would say it's the fastest growing as you have seen the numbers, 40% growth year-on-year. So it's quite substantial among what we are getting. And another growing part is really fast growing is our private wealth management in Finland, which is growing more or less the same speed, but it's a very big part of our sales nowadays.

Okay. And then I guess my second question is bit more technical in nature, but on the transitional measure that you're starting to report on this quarter, I was wondering how to kind of think about the unwinding of this measure and especially up against your target of 160% to 180% on solvency over the next 4 years. So if your solvency was at sort of 193% with that measure at the end of last year. I guess that would imply that it was EUR 170 million at Q4 and then it's EUR 155 million this quarter. So am I thinking correctly that it's down sort of EUR 15 million, EUR 14 million for half year, and that would imply sort of an unwinding of EUR 30 million each year? I guess my question is, is that the right way to think about it up against your total goal? Or am I completely off here?

No, I think that's the right way to think about it. But remember, the 193% is an all-in figure. So of course, technically, that's the figure we look at, so that's -- there is no unwinding there at all. But of course, in the actual figure that we report then that will be lower and gradually unwinding until 2028. So -- but that's exactly the reason why we look at the -- 193% is the all-in figure and there is no unwinding effect on that at all. And as you know, our new financial target is exactly for that reason that otherwise, the ratio would technically decrease every year simply because of the lower impact of the transitional measures. So 193% is comparable to the 160%, 180% and there is no kind of unwinding or transition figure impacting that at all. And just to remind you that, obviously, once the Saxo Bank transaction is finalized, the ratio will jump quite significantly, as I mentioned.

The next question comes from Antti Saari from OP Markets.

From an international growth perspective, I would like to ask whether you can mention us any blockbuster products? Or are there any like few products that are leading the sales and in a way, causing this lower margin level?

Yes. Thank you, Antti. So we have stated already before that our fee margin will go down once we -- our fastest-growing part is our wealth management, Institutional Wealth Management division. And traditionally, that business is lower margin than what we have in our retail and corporate, which not growing that fast than our wealth management division. So it's not specifically international, it's all institutional business, both in Finland and outside of Finland, which are, let's say, lower margin business. But still, we are in asset classes that we have a wide reason -- decent and quite high fee levels altogether. So what we are selling in our international is our Nordic high-yield fund, which is not very low margin, but of course, it's not 1.2% over 1%. And what we are also selling is in your secured loan fund, European high-yield fund and a little bit also we started to see some growth in our managed futures fund, which is a hedge fund, which is high-margin product. So -- but it's our wealth management division or fee level is around 0.8%. So that's something which is more we sell that, of course, the combined number will go down.

Okay. So the reason for lower margin is client mix, not product mix?

It's the client mix, yes. Yes, that's true. So more we sell to institutions. So it's not retail or corporate, we traditionally in those areas, we have higher margins. And I guess most of our companies have the same things happening for them as well once they're selling different customer segments.

I see. Then more technical question. Looking at with-profit business, the other result was now negative for second quarter in a row. So what should we expect about this? And is this sort of a new normal?

It's Matti here. No, it's a good question. And here again, there, we had some actually portfolio transfers related to kind of IT system renewal. So no, it's not the new normal. And of course, when you have a couple of quarters where you see negative figures, it's kind of annoying but the figure should be pretty close to 0 going forward. So in our line of business with very long tail of liabilities and hundred thousands of customers and different client segments and cohorts, what we call, there's always this kind of some movements here. But actually, this quarter, it was mainly caused by a technical move from actual corporate to with-profit other some of the portfolios that have both with-profit and unit-linked capabilities. It's not a big figure, so -- but I think the figure should be pretty close to 0 going forward.

Okay. And then one more question. You mentioned this distribution agreement with Pohjantähti. Could you remind us whether you have other distributors in insurance space? And do you expect this deal to have meaningful impact to your sales?

Yes. So we have 2 distributors in Finland. So it's Danske Bank, of course, is our main partner in Finland selling both risk insurance, which is called loan insurance, it's creditors protection loan product and of course, enrollment, the capital redemptions, so savings products as well. Pohjantähti is only concentrating due to risk policies to private people and micro companies, so very small companies. So -- and is it meaningful? We hope so, and we believe that otherwise we wouldn't have done that. So -- but of course, in our figures, if you look at the risk premium numbers, they -- of course, they are not that big. But it's a meaningful partner and they have a very substantial distribution and close to 200 salespeople all around to Finland. So we are waiting a good results for -- and this is a good add-on to our risk sales for retail segment.

The next question comes from Kasper from Mellas.