2023-11-19 11:40:00 ET
Summary
- Mandatum, a financial services provider and insurance company, was spun out of Sampo to establish Sampo as a pure property and casualty insurance company.
- Mandatum reported strong financial results in its first quarter as a standalone company, with a substantial increase in net revenue and low operating expenses.
- The company has clear objectives for the future, including plans to distribute €500 million in dividends and maintain a solvency ratio of 170%-200%.
Introduction
Mandatum ( OTC:MANDF ) was recently spun out off Sampo ( OTCPK:SAXPF ) ( OTCPK:SAXPY ), one of the largest insurance companies in the Nordic region. Mandatum is a financial services provider and it provides its customers with several different services like wealth management and pension plans (including life insurance services). The company divides its operational divisions into three segments: Corporate clients, private customers, and institutional customers of the wealth management division. The company enjoys an excellent reputation and it's also treating its employees quite well as Mandatum has been elec ted " best place to work" in both 2020 and 2021.
Mandatum wasn’t spun out of Sampo because it didn’t perform well. No, it was a decision by Sampo to establish itself as a pure property and casualty insurance company and that’s why it made the decision to separate its financial services division from the "real" P&C insurance activities. And as I will explain in this article, Mandatum wasn’t carved out for the sole benefit of Sampo: The company has hit the ground running with a solvency ratio that's substantially higher than the required minimum and even higher than the company’s own targets.
Mandatum’s primary listing is on the Helsinki Stock Exchange where the company is trading with MANTA as its ticker symbol . The average daily volume is in excess of 8 million shares and based on the current share count of almost 502M shares, the market capitalization is approximately 1.9B EUR.
The company recently reported its quarterly results as a standalone entity
As mentioned before, the company only listed just over a month ago after completing the demerger with Sampo . This means the Q3 results are the first results of Mandatum as a standalone company.
The company’s financial results are split up between the insurance service result and the net financial result. As you can see below, both reported classes performed well with a substantial increase in the net revenue (I will discuss this in greater detail), but the income statement clearly shows the relatively low G&A and operating expenses of Mandatum. During the third quarter there virtually were no net overhead expenses thanks to the "other income" generated during the quarter. That other income is related to the income generated by the management of client assets .
Keep in mind it's practically impossible to compare 2023 with 2022 due to the implementation of IFRS 9 accounting rules. The image below shows a more reliable comparison whereby the financial results of both years have been adjusted for the IFRS 9 rules. As you can see, there was a very sharp increase in the pre-tax income compared to the first nine months of last year, mainly due to the very strong net finance result.
That’s mainly caused by the strong performance in the investment portfolio, where Mandatum generated a return of 3.6% in the first nine months of the year. Additionally, the net finance result is boosted by the higher discount rate used to calculate the current fair value of some of the liabilities. Also important is the strong net fee result which increased by 2M EUR in the first nine months of this year. You may have noticed the YoY decline in the third quarter as the company reported a 13M EUR fee result in Q3 VS. 19M EUR in Q3 2022, but the strong performance in the third quarter of last year is entirely caused by the receipt of an 8.5M EUR performance fee. Excluding that fee, the quarterly fee income would obviously have been substantially lower.
Meanwhile, Mandatum continues to see a net inflow of capital. As you can see below, Mandatum grew its assets under management by almost 10% to 11.2B EUR thanks to a 1.3B EUR inflow of funds and a 0.4B EUR positive impact from market movements, partially offset by 0.7B EUR in outflows.
The higher amount of assets under management should help Mandatum to boost its earnings as well, considering the company generates a margin of 1.2% on the fees.
The analyst consensus estimates are calling for a net profit of 165M EUR in 2023 followed by an anticipated net income of 162M EUR next year.
Mandatum has very clear objectives for the future
One of the elements I appreciated in Sampo and Mandatum’s demerger plans was the clear expectations for the next few years. As you can see below, the company has specific dividend and solvency targets in mind.
The company plans to distribute 500M EUR in dividends in the 2024-2026 era. That’s a pretty hefty commitment as this indicates the company will pay at least 94 cents per share in dividends. As that represents approximately 25% of the current share price, investors should be able to look forward to a generous dividend yield of approximately 8%-8.5% per year.
Mandatum also is keeping an eye on its solvency levels. The target level of 170%-200% is reasonable and I was happy to see the company had a solvency level of almost 317% upon the demerger. That being said, that was just a pro forma solvency level as the demerger had a negative impact on the solvency levels. Fortunately, Mandatum does an excellent job in explaining the difference.
First of all, as Mandatum plans to become a dividend-paying company, it needs to accrue the planned dividends as well. As you can see in the image above, Mandatum has earmarked 113M EUR for dividends. Additionally, there was a 102M EUR negative impact related to the demerger. This reduced the own funds from 2.4B EUR to just under 2.2B EUR.
On the other side of the equation, the required capital ratios have increased due to the demerger. As you can see below, there was a negative impact of 168M EUR which increased the capital requirement to 929M EUR. And the combination of both results in a solvency ratio of 237%.
Considering Mandatum has an internal target of 170%-200%, the company would only need 1.86B EUR in its own funds to meet the higher end of that range. This means there is about 340M EUR in "excess capital" which could be used to pay dividends or to accelerate portfolio growth.
It's also important to note the solvency ratio is pretty robust. The company provided a sensitivity analysis (shown below) and even if equity markets would drop and interest rates would decrease, the solvency ratio should still comfortably exceed 200%.
Investment thesis
I currently have no position in Mandatum. As this is a recent listing, I didn’t want to rush into a new story and I wanted to track the stock and its financial performance for a few quarters. I like the strong solvency ratio of the insurance division while it's also encouraging to see the company openly discuss its dividend plans. Unfortunately, the standard dividend withholding tax rate in Finland is 35% and that does act as a deterrent and it is recommended to figure out if a double taxation treaty could be used to reduce or offset that tax bill.
I currently have no position but I am watching with interest.
For further details see:
Mandatum: Recent Sampo Spin-Off Promises 8%+ Dividends