Good afternoon, ladies and gentlemen, and welcome to the Storebrand Analyst Conference Call. My name is Anna, and I will be your coordinator for today's conference. For the duration of this call, you'll be on listening only. However, at the end of the presentation, you will have opportunity to ask questions. If at any time you need assistance, please press star zero on your telephone keypad, and you will be connected to an operator. I will now hand you over to Kjetil Krøkje to begin today's conference. Thank you.
Welcome, everyone, to Storebrand's fourth quarter 2014 conference call. My name is Kjetil Ramberg Krøkje, and I'm the head of investor relations at Storebrand. Together with me, I have Group CEO Odd Arild Grefstad, CFO Lars Løddesøl, and Head of Guaranteed Pension Geir Holmgren. In the presentation today, Odd Arild will give an overview of the development in Q4 2014, and Lars will give some more details on some of the elements in the results this quarter. The slides will be similar to the analyst presentation released this morning and are available on our webpage as well. After the presentation, the operator will open up for questions. To be able to ask questions, you will need to be dialed into the conference call.
I now leave the word to Storebrand's CEO, Odd Arild Grefstad, who will start the presentation on slide two.
Thank you, Kjetil, and welcome, everyone, to the presentation. The results of Storebrand is strong, totaling NOK 923 million for the quarter and NOK 3,032 million for the year. The results are affected by some special items, which Lars will comment on in more detail. The transition of Storebrand's own pension scheme is the largest item in the positive net, NOK 477 million, that we characterize as special items. We have reached the cost target of NOK 400 million and will follow up the costs going forward related to a relative basis, a cost-income ratio of 60%, as we announced in our Capital Markets Day. The transition from guaranteed to non-guaranteed and insurance in the balance sheet and the result continues.
The result from the segment savings increased with 44% compared to last year. There is strong sales and return in the balance sheet and in, the P&L, and there's strong growth in asset under management with more than 10% growth for the year. We have started up with paid-up policies with the investment choice, and I'm very happy to report that we have transferred close to NOK 900 million for the full year. The buffer capital situation is strengthened significantly in the fourth quarter by NOK 10 billion, and we have also set aside now NOK 6.2 billion altogether for longevity reserve. That is half of what is required altogether. Despite falling interest rates, we have managed to increase the Solvency II ratio up to 148%.
It means that our internal measures have canceled out the effect of the falling interest rates. We now go to page three. This shows Storebrand's strategy, and it's still to manage the guaranteed balance sheet with more than 130% Solvency II margin, and to continue to grow our savings and insurance business. Let's first take a look at the guaranteed part of the business. That's on slide four. We have transferred out approximately NOK 30 billion during the last 2.5 year. In 2014, we moved out NOK 15 billion from the guaranteed book of business.
11 billion was from the public sector, guaranteed public sector in Norway, NOK 3 billion was in the Swedish business, and NOK 1 billion, as I already have mentioned, was then the paid-up policies converting into investment choice in the fourth quarter. I'm also very pleased to see that NOK 8 billion of our assets within the public sector have moved into closed pension fund solutions that was sold to municipalities during 2014. The cost program is completed with more than NOK 400 billion delivered, and we also see that we have been able to take some additional measures when it comes to risk reduction, also in the fourth quarter, reduced equity exposure and better tailoring the assets to the liabilities of the business in a more segmented way. Then I... Yes, that was slide number four.
Then I move to slide number five. And, this is an important picture for us. The focus in the fourth quarter has very much been to strengthen our solvency, capital position in a falling interest rate environment. The effort to strengthen the solvency position has been a clear target above the prioritize, short-term IFRS profits. Some of the most important, measures, the consolidations we have made is, one, to increase the longevity reserve, instead of, leaving, results to the risk equalization fund and for profit sharing. We have also significantly strengthened the buffer capital. That is mainly the market value adjustment reserve, but also additional statutory reserves and excess value on the bonds at amortized cost. Increase on these three elements is more than NOK 11 billion in the third, in the fourth quarter.
And we have also done some strengthening of the technical provisions in SPP, where we have been able to use the, conditional bonuses into the technical provisions. That has also strengthened the solvency position altogether. And this is done also altogether with a better risk management, better matching, principles altogether. So together, all these measures has contributed to the strengthening of the Solvency II position with approximately 20 percentage points. This compensates the reduction in the fall, in the Solvency II position as a consequence of the decline in the interest rates. The Solvency II position, inclusive transition measures, is limited.
The Solvency II position, inclusive transition measures, is very limited impact by the changes in the interest rate level, and by the first, all the way up to the first of January 2016, and it's now estimated to 148%, and that is approximately a 20 percentage point increase from the third quarter. If we then move to slide number six, we have a total reserve strengthening of up NOK 12.4 billion to do for longevity. The longevity reservation is strengthened by NOK 2.7 billion in the fourth, in 2014. There has been a direct contribution of NOK 121 billion in the fourth quarter. That is the NOK 90 million that we used to see on a quarterly basis.
On top of that, we have included NOK 31 million that is supporting the transfer of the paid-up policies into paid-up policies with the investment choice. There is also some indirect contribution, like the foregone profit sharing, and also, as I already have mentioned, the use of the risk result directly into reservation. I'm very pleased to see that now, after the first year of this program, over seven years, we have been able to reserve half of the total amount needed. We also know that we are expected to contribute NOK 2.2 billion with the results over the next six years. And after that, it's NOK 4 billion left for the last six years to reserve made out of additional return on the policyholders' funds.
If we then move to slide number seven, this is an illustration that shows the expected return in the most challenging portfolio, the paid-up policies going forward. Of course, the low interest rate is challenging for our business with annual interest rates guarantees. However, we have been able to build up an asset allocation and a buffer capital situation in this portfolio that ensures good returns going forward. The expected return in the paid-up policies is high enough to cover for the interest rate guarantee and also the needed, buffer building for longevity over the next period, until 2020, when this is, expected to be finished. Then after 2020, we know that the interest rate guarantee will fall down to approximately a 3% level, down below the 3% level.
Expected return, even with today's very low interest rate level going forward, should be enough to also cover for the interest rate guarantee thereafter. And also know that there is a big shift in the balance sheet from guaranteed to non-guaranteed, so we feel very comfortable about the capital situation altogether, even in a low interest rate level. If we then move to slide number eight, it's to point out that we on the growth side of the business are experiencing very strong growth, especially in our asset management business and with our linked reserves. And moving into slide number nine, you see that the paid-up policies with investment choice has been a very important focus area for us in 2014. The early stages of this process has been very promising.
Around 3,500 customers and NOK 900 million have been converted to paid-up policies in the fourth quarter. And so far this year, together with the fourth quarter, we have been able to convert NOK 1.5 billion and almost 5,000 customers altogether. Moving into slide number 10, we see that the growth in the unit linked premium has been strong in 2014, and it's expected to also be very strong in 2015. Also, because we experience a very strong sales, new customers coming into the company, and increased savings rate and income growth altogether. It's worth mentioning that this is the first year where we see unit linked premiums exceeds the guaranteed premiums altogether.
This shift will of course continue as we see it into 2015. So that's so far, and I now leave the word to Lars, that will give more insight into the numbers and results for the fourth quarter.
Good afternoon, everyone. If you look at the key figures on page 12, you see how the result of NOK 923 million is composed by net profit sharing and loan losses by sale, discontinued business, and one-off items, which is a fairly large item of NOK 477 million this quarter. The result before profit sharing and loan losses, which is the highest quality component of the earnings. Even in a quarter where we've had a low financial return and where we had to strengthen or had a weak disability result and strengthen disability reserves, we still have a quite strong underlying result before profit sharing and loan losses.
On the lower part, on the left-hand side of this picture, we see the solvency ratio of the SEB group, and the solvency capital has been built up consistently quarter- by- quarter, and indeed, by 20% or NOK 10 billion through the year 2014, according to the work and the priorities that Odd Arild has just been through. On earnings per share, I'd like to. These are earnings per share after tax, and I'd just like to comment that the tax cost has been estimated to around 20% for the year 2014. When it comes to customer buffers, there has been a decrease in buffers in Sweden, customer buffers in Sweden, and an increase in Norway.
The reason for the decrease in Sweden is because we've strengthened longevity reserves for certain portfolios, and we've been able to take the reserve strengthening from these customer buffers in Sweden. The consequence is an expected higher result going forward and an improved solvency position. Moving over to page 13 are all of the numbers. However, due to the one-off effects or the special items that we have briefly commented upon, these numbers are difficult to understand in terms of value drivers going forward. Therefore, I would like to move you over to page 14, where we talk a little bit more about the special item and thereby be able to see the value drivers in the underlying profitability afterwards. Basically, the special item can be contributed to three different things.
The first and most important thing is that we have closed the defined benefit plan, Storebrand in Norway. The consequence is a positive effect in the accounting of NOK 571 million, which is accounted for as a lower operational cost. That is a one-off item in the quarter. However, with the change from defined benefit to defined contribution scheme, we will see less volatility and over time, lower pension cost in the company. So this is part of the cost reduction and cost control program. The second item I would like to point out is that in Sweden, we've done a review of the reserves in different parts of the portfolio, and where it says, "Dissolved ATP compensation," that is a historic coverage that is no longer needed, and that is no longer given to Swedish employees.
And we've been able to dissolve the reserve related to ATP compensation. As I said, is no longer an insurance that we give. On the other hand, we have strengthened longevity reserves and also reserves for future costs related to tax. That is accounted for here, with under what's called special items, financial result, SPP. What we've done is that we've strengthened the reserves by a total of NOK 1.3 billion, and then we've taken NOK 1 billion out of the conditional bonuses of the client, which we saw on the previous page, and NOK 300 million or NOK 322 million of shareholders contribution in order to strengthen these reserves, and that comes as a negative financial result.
So for the Swedish business as a whole, the +NOK 322 and the -NOK 322 cancel each other out. It's actually coincidental that these numbers are exactly the same, but the effect is therefore neutral for the Swedish business, but it comes on two different profitability lines. The third and last special item that I would like to comment is what Odd Arild has already commented upon, that previously we've been able to build part of the risk result in the guaranteed business to a risk equalization fund, which is 50% of a surplus. The other 50% has been given to policyholders. Through a letter from the FSA, received in October, they said that we should not build the risk equalization fund as long as we are under-reserved for long life.
Therefore, the NOK 98 billion given back to customers, as well as the NOK 98 million contributed to and into the risk equalization fund, is now being put into longevity reserve strengthening and will continue to be done so for the next six years. So this will reduce income from the risk result in this period. So all in all, these items account for NOK 477 million, and if we deduct them from the result lines in the Storebrand overall result overview. On page 15, we see that the fee and administration income is up 0.4% year-on-year. It's actually, if you deduct the corporate bank and the public sector, up 5%, so when you take out the discontinued business.
The risk result life and pension is stronger than last year due to the fact that we now have new longevity tables, and despite the fact that we've taken out the risk adjustment, the risk equalization fund, as I mentioned. Insurance premiums and claims account for in together the insurance results, and we can see that there has been higher claims in the fourth quarter because it's cold and slippery in Norway. And also, the disability results are weaker, and we've continued to build disability buffers, which we started in the third quarter. We now feel that the buffers are adequate and are finishing this part of the disability and reserve strengthening. On operational costs, they are down for the full year.
It's up in the fourth quarter compared to the third, the fourth quarter, 2013, and that is a result of more market spending and more market activity connected with all the sales that we've achieved in the fourth quarter. The financial result is strong for the full year, somewhat weaker in the fourth quarter. Giving a result before profit sharing and loan losses of NOK 541 for the quarter. The net profit sharing and loan losses, that's primarily profit sharing from the Swedish business, which is again strong for the full year, but is weaker than the market had reason to expect in the quarter due to the sensitivities that we've given in the supplementary information.
The reason why it's weaker than you can expect from the sensitivities is due to the very significant fall in interest rates and the turbulence in the financial market in the fourth quarter, where our sensitivities has not been given, has not been giving the full picture of when, when the movements are as they were. Provisions for longevity, you are used to see NOK 90 million per quarter on this line, but as Lars said a moment ago, the charge is NOK 31 million higher now due to the fact that we have transferred NOK 900 million into paid-up policies with investment choice. And some of these paid-up policies have been under-reserved for longevity, and we have on average contributed about 3% of the reserves to strengthen longevity before the transfer.
That gives us a result before amortization and write-downs, excluding non-recurring items of NOK 445, and you add on the special items, and you end up with the NOK 922 for the quarter. So that's just a brief overview of the results, and you will find on the following pages more breakdown into different product groups and value, and business sectors. But I won't go through that in detail now, but be happy to take any questions.
Operator will now open up for questions.
Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. If you change your mind and wish to withdraw your question, please press star one again. You will be advised when to ask your question. The first question comes from Daniel Dutoit from JP Morgan. Please go ahead. Your line is now open.
Hi, good morning. I just have three questions on, all on solvency, actually. You mentioned earlier about, three or so key measures that you've taken over the course of the quarter to offset the 20 percentage point drag from lower rates. Could you just give us a feel for sort of the, roughly how much each measure contributed? And then secondly, can you just comment on the, sort of ongoing P&L impact that we should expect as a result of these measures that you've taken, so looking into next year? And then lastly, I guess on the sensitivities, the updated sensitivities, the growth impact from a further 50 basis point decline in interest rates is, I guess, broadly unchanged. But just wondering, how we should think about the net impact going forward.
Are there any other, offsetting measures or internal measures that you can take to, to reduce this, growth, 20 percentage point impact for every 50 basis points? Thank you.
Thank you. Try to comment on it, and also, of course, we'll use some of the surrounding here. Starting with the solvency numbers. I think it's quite evenly on these four different elements that I have spread out that adds up to around 20%. We have been able to strengthen longevity above the level we were supposed to do during the year. And I would say there is a full effect of that. That was somewhat underestimated when we came up with our numbers in the third quarter. So it's more a full effect of the total NOK 2.7 billion build up compared to the NOK 1.8 billion that should be built up during this year.
That is an important part of it, and is more or less one part of it. Then it's also the case that we have been building other buffers, like in special the market value adjustment reserves. That is a very strong increase in the fourth quarter. We have been very focused on measuring that. We have realized on losses also to make sure that we have built up a market value adjustment reserve, and that together also is a very good impact on the solvency position, and gives three to four percentage points altogether. Then, it's clear that what we have done in Sweden, where we have used the conditional bonuses, that has not been very effective for solvency purposes.
Been able to transform that into technical reserves on the insurance side is also a very strong effect on the solvency ratio. And then altogether, all the small items with segmentation, making sure that we have the right risk matching of asset liabilities in the different portfolios altogether, also some reductions of the equity portions, because when we are more tailor-made, we can use we have not used, so the excess return that we can take out expected from the equity market. So that altogether is also a very important element in it. It's also, of course, we're working with the model altogether, so it's somewhat changes in the model in itself. But this is the main element.
It's actually things that is done with the business, and it adds up to a 20 percentage point increase. Going forward, on the P&L effect, I would say it's what brings to my mind is two elements that goes the different ways. As we have said, we used to take a part of the risk result out of P&L. It's more like a hybrid type of equity because it's equity that we build up in this risk equalization reserve that is not commonly possible to use for everything. It can only be used for negative risk results. So in that way, it's something between equity and debt, actually. But anyway, it's been under IFRS been taken into the result, NOK 98 million this year.
It will be lower numbers going forward, but this is an element that you not will expect to see for the next couple of years, through the, the P&L. On the other hand, the strengthening of the reserves in Sweden should bring into a situation where we have stronger risk result in Sweden, going forward, that goes in the opposite direction. I don't know if, Lars, or anyone has other elements from this that, you'd like to draw going forward?
Yeah. No, we will continue to build underlying solvency through continued building up of capital and results, and holding part of the results back in the life business. The transition to non-guaranteed product continues, and the growth in non-guaranteed products increase. Sorry, the guaranteed products are slowly maturing in terms of shortening the duration and lowering the guarantees. So there are a number of things that, over time, will decrease the capital charge related to the guaranteed products and the capital build-up from the non-guaranteed products. So these are some of the measures that... We will look at other things as well, in terms of fully coordinating our models with this final Solvency II requirements, et cetera.
I'd also say that when we do our planning or forecasts on solvency ratios, of course, we expect to have increase in the underlying solvency ratio during 2015. And there's a lot of measures that is under performance to come into the balance sheet, the results. And as we have shown in the fourth quarter, we are also working with this to be completed and give effect in first quarter or second quarter, and the rest of 2015.
In terms of sensitivities, you can see on slide number five that when we managed to keep the underlying solvency without transition rules stable from Q3 to Q4, the effect of the transitional rules increased from approximately 24 percentage points to approximately 47 percentage points. That is a consequence of the different capital position under Solvency I and Solvency II. The transitional rules take one minus the other and add it onto the capital, and then you write it off over the next 16 years. This is the way the transition rules work. If the interest rate level falls or one of the other sensitivities happens in the first quarter, then you may see that you have an underlying movement, which is impacted pretty much according to the sensitivities shown here.
But the effect with transitional rules up until January 1st, 2016, will be rather stable. So, that's the-- But after 2016, then these sensitivities will be relevant also for the headline number.
Okay, but just to follow up, I guess I was just wondering if, you know, over the course of the quarter, we see another 50 basis point decline in interest rates. I understand that the ratio with transition rules would remain broadly unchanged-
Yeah.
- but the underlying would come down by roughly that sensitivity, so 20 percentage points.
Everything equal, it will come down with that sensitivity. But as we have shown this quarter, of course, we will perform a lot of measures also going forward that will where we will try to mitigate such a movement in the interest rates.
Okay, understood. All right, thank you very much.
The next question comes from Matti Ahokas from Danske Bank. Please go ahead, your line is now open.
...Hi, yes, good afternoon. Three questions, if I may. Firstly, just technically, the paid-up policies with investment choice, they are now booked, I guess, under Unit Linked Norway. Is that correct?
Yeah.
Then there was a 4.2 billion increase in Unit Linked Sweden on the reserves under the other. It's a fairly sizable figure, quarter-on-quarter. I was wondering if you could explain that a bit. The third question is regarding page seven. It's a very interesting chart you're presenting here. Could you talk a bit about the assumptions that you're using in this expected return? For example, what are the current reinvestment yields that you're able to generate in guaranteed pension in Norway? Thanks.
The first question, paid-up policies with investment choice. Yes, they are part of Unit Linked Norway. The second on Sweden, I guess you have both an effect from currency in the quarter instead of investors. I said earlier, it was pretty neutral during the year, but it increased quite a lot in the quarter, and we use end of quarter numbers on the balance sheet. So part of that increase stands for that, and also SPP, of course. And when it comes to returns and what we can reinvest to, I guess the Norwegian swap rates now are at 1.7-ish, and over that, you have different normalized risk premiums depending on different asset classes.
That said, we are selective on where we invest now, given the current interest rate environment and our need for reinvestment.
It's also a portfolio that is declining, not increasing, so that is also an element on all together with the total guaranteed book of business. When it comes to the assumption, when it comes to return to build up this 4.2, 4.1% return, it's very much based on the maturity of our portfolio. It's typically a 50%-60% assume out of this portfolio. Then we have the real estate portfolio in Norway having a direct yield of around 8.49%. That is added here, as also a substantial part of it. And that is the bonds that mark to market with the actually market values we have under there.
Then it's very much when you look at the paid-up policies, it's a very low allocation to that. I will accept like the five to six percentage points when it comes to this paid-up policy. So of course, that is an element that might have some changes in the values here. It's a normalized expectation, but for 94%-95% of the total portfolio, it's very much quite a robust and quite secure return that we have added on this expected return going forward.
It's based on current interest rates also for.
Yeah. So basically, looking at the actual yield in the different portfolios, and the ones that amortize, as you know, is stable. Stable portfolio with a duration of some 6.5 years. So, and then whatever comes out of that and matures is reinvested at today's interest rate level.
So basically, the portfolio currently, I remember, was it 4.8%, was the maturity portfolio running yield, and this is basically based on the redemption of that portfolio?
Yes, because it's based on the chart. It's based on both the redemption on that portfolio. It is also it's also based on the issuance of new paid up policies, which we reinvest at the current yield curve.
Great. Thanks a lot.
The next question comes from David Andrich from Morgan Stanley. Please go ahead. Your line is now open.
Hi. Good afternoon. Thank you for taking my questions. I was just wondering, I mean, in terms of the internal measures you implemented to help keep Solvency II stable on a look-through basis, so without the transition rules quarter-over-quarter. I was just wondering, I mean, how, you know, how far can you kind of shift the needle going forward? You know, say, like on a scale from one to 10, how high can you turn up the volume on that? Are you kind of already at a nine then, in terms of what you've achieved, or do you feel there's a lot more that you can achieve there?
And then secondly, I was just wondering, in terms of the higher incidence of disability, in the quarter, is that coming through mainly kind of on the DC side or on the DB side, or pretty even between the two? Thank you.
We have a toolbox of available tools to strengthen Solvency II. And there are uncertainties still related to the final outcome of how the rules will finally be set. And the effect of, or how many tools we use in the toolbox depends on the interest rate level and on the final finalization of the rules. And obviously, we've done a lot of the easy stuff so far. But there are still things we are working on, and I don't want to go into detail about that. But Solvency II is quite a sophisticated and complicated set of rules. And as we go through our economic models and adapt them to Solvency II, we do see ways to improve product-...
in different scenarios as set under Solvency II, and we see ways that we can introduce management actions and pricing features that are meaningful under the Solvency II regime. So the purpose of Solvency II is to improve risk management and long-term profitability in the insurance business. And we see that Solvency II has helped us to become even better on this, and we will continue to strive to be excellent. With respect to higher disability, we see higher disability, first and foremost, in the both Swedish and Norwegian unit link portfolios. And it's not like it's a huge difference, but the margins in this business are thin, so therefore, when we see an increase in disability, and at the same time we're strengthening some reserves, it does impact the quarterly results.
All right. Thank you very much.
The next question comes from Blair Stewart, from Bank of America, Merrill Lynch. Please go ahead, your line is now open.
Thanks, thanks very much. Good afternoon. I've got a couple of questions left. A lot of them have been asked. Firstly, on the transfers paid-up with investment choice. I was wondering, what impact did that have on your economic capital numbers, given that you did almost NOK 1 billion? It wasn't something that you talked about as having an impact, but I wonder if it did move the needle. Related to that, given you're targeting NOK 5 billion for this year, would you... Or, to get to NOK 5 billion for this year, would you expect that to increase further the cost of the longevity provisioning?
And again, related to that, are you still confident in your initial expectations as to how much of that book can actually be moved ultimately? And then, I think I had one further question. Just on, again, just coming back to the new money rates, you know, what you're investing money in today. You talked about the swap rate being at 1.7, plus a normal risk premium. I guess, plus some real estate, et cetera. Are you able to get the new money yield up above 2.5% to possibly 3% at the moment, or is that too high in this market? Thank you.
Okay. Let's start with the transfers. Yes, we have the target of NOK 5 billion. As we see it now, around 3% of the assets that we move, we need to top up with the long life reserves. That gives you the number. You saw NOK 30 million on around NOK 1 billion now in the fourth quarter, and we expect that ratio to be the same also going forward for the assets that we move from paid-up into paid-up policies with investment choice. Yes, we have our segmentation model, and we still have the same target. We expect, of course, this also to continue after 2015. We have put a target up for 2015.
We also see that it's important for us to be in good contact with the companies and the employees in the company, when they do changes from defined benefits into defined contribution. Then everyone will have a new pension scheme, like we do in Storebrand ourself these days. And that is a very good situation to do workshop marketing, to really make sure that we give the total message to all the employees in the company. And if this moves the needle when it comes to Solvency II, well, one thing is what happens in the first quarter, and the NOK 1 billion in itself doesn't, of course, much.
But going forward, the expectation of being able to move this and also for the new paid-up policies that comes in, in a conversion from defined benefit into unit-linked reserves. That gives, of course, a very important toolbox to also make sure that we have a good situation solvency-wise out of the new paid-up policies. I don't know if anyone like to. I think we on, on Capital Markets Day, we said that the old paid-up policies had up to 20% capital charge.
If you have NOK 1 billion times 20% capital charge, and you transfer that into a new product that has a negative capital charge or it contributes capital in a life company, then you can look at some of the capital consequences by using those numbers. In terms of reinvestment levels, I can confirm that between 2.5% and 3% is a reasonable reinvestment level at this stage.
Okay. Thank you. Just coming back on the paid-up book. Would you still expect the net net/net for the book to continue to increase over the next coming years? Because while you're transferring out, of course, there's further transfers in from the closure of active DB schemes. How do you see that book evolving in size over the next two to three years?
Yes, Blair. As we showed on the illustration on the Capital Markets Day, we expect it to increase over the next year, years, and go up to somewhere around 110 billion but then there's a big uncertainty here, relating to when transfers happen [audio distortion]
...and also how fast people move into paid-up policies with investment choice. So it could be bigger, and it could be smaller, but I think that is the best guess for the three to five-year period. I don't know if any of you all-
But I also want to say that that estimate is also taken into account when we are doing our solvency ratio and numbers. And so that is what we have put into our models. If we are to succeed with even a higher portion into paid-up policies with investment choice or keep the assets buffer in DB schemes, that will be an upside on that calculation.
Yeah.
If you look in the supplementary information, you see that the balance of paid-up policies increased by NOK 12 billion last year from NOK 80 billion-NOK 92 billion.
Yep.
That is probably, as far as we can see, the largest increase in one year. But there will still be an increase in the next couple of years, but it will be decreasing in size.
Yeah. Okay, thank you.
Before we let the next person through, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. The next question comes from Hari Antones from KBW. Please go ahead. Your line is now open.
Yes, hello, and thank you very much for taking my questions today. I just have two. The first one is from this indirect charge, where you use the risk result now rather than the equalization fund, and you have NOK 98 million for this year. Is this a good number where we can do our forecast for the next few years, or does it largely depend on what happens with the foregone charge, the charge from the foregone profit sharing, which was NOK 230 million this year? And the second question is on the solvency. Basically, if you could give us a kind of an idea of the measures you have taken, whether these have impacted the required capital side or the available capital side. Thank you very much.
Okay, I can start with the first question about the risk equalization fund. For 2014, we spent NOK 90 million that is used as put into the longevity reserve. We expect that number to decrease going on. What we also can say is that, when the contracts on DB and paid-up policies are fully reserved regarding longevity, we don't need to use the risk equalization plan to the longevity reserves. We have to look at that contract by contract, which means that going on, the next years, when more contracts are fully reserved, we will increase the risk result and decrease the amount spent to the longevity reserve, which would in other way, would have been in as a result.
So when we look at the number NOK 98 million for 2014, it will slowly go decrease during the next years. I can also add that we have already some contracts that are fully reserved, and for these contracts, we are actually also in 2014, in a position where we in somewhere build a little bit into the risk equalization fund. So, it's fair to say that this number will go down in a slow pace during the next year.
With respect to the risk capital or the solvency question you had, it both builds available capital and it reduces required capital. So it's a balanced answer to that question. I don't want to go into, you know, a lot, a lot of detail on that. That becomes extremely complicated to do on a phone call.
Okay, understood. Thank you very much.
The next question comes from Gianandrea Roberti, from Carnegie. Please go ahead, your line is now open.
Yes, hello, good afternoon from me as well. I have a couple of questions, I guess, on the same tune that we have been discussing until now, just perhaps a little bit more precise. This sensitivity that you're showing, 50 basis points down, it's around 20% on the solvency margin. Basically, the internal measures you have taken in this quarter have improved the solvency margin by around NOK 5 billion. Would it be—how, how should we look at it? If rates go down 50 basis points, do you have another NOK 5 billion on internal measures that would put the solvency margin, excluding transitional rules, around 101, or even a bit better, considering return earnings? Or well, actually, you don't have another NOK 5 billion to find like this. How we should really think about it?
Even more importantly, back to the dividend situation here, I think in past discussion, the assumption that you should have had a solvency margin, excluding transition rule above 100, with some buffer to sort of make the FSA happy before paying dividend, was a right assumption. In conversation that I had today, I don't know anymore what is the right assumption. Can you spend some words in trying to tell us how do you see this point, which I guess is quite important? Thanks a lot.
Okay. Well, I think we have answered already on how we are building our capital. We are focusing on doing that.
... has been the main focus throughout the fourth quarter, and we have put emphasis on that rather than building short-term IFRS results. We'll continue to do that. I think both me and Lars has given you some examples of what we are working with, and we are very dedicated of doing that also going forward, even if the interest rates falls or rises as such. It's of course not easy. Yeah, it's not easy to find NOK 5 billion every quarter. I agree on that. But this quarter, we have been really also positive when it comes to the financial markets. We have been able to build buffers above the levels that should be expected in a normal situation, both in market value adjustment reserves and also when it comes to longevity reservation.
We have also been able to do some reclassification of the buffers in Sweden. This is some examples of what we are doing, and as Lars said, we have a toolbox, and we have used a lot of the tools, of course, in the easy way now, but we are still working with this on a daily basis, and I'm confident that we'll also find good solutions and good measures that will keep strengthening the Solvency II position going forward.
If I may add, the way you put the question forward, it seems to indicate that we just neutralize whatever comes. Obviously, we can't do that. We are working very in a very high quality way to improve the modeling, to improve the product, and to improve the solvency position. It so happened that that neutralized pretty much 100% the fall of interest rates in the fourth quarter, but it's quite obvious that we will be able to find either more or less than whatever comes from the interest rate sensitivity in the quarters ahead.
When it comes to dividend discussions, we have put a clear target forward, saying that we should be above 100% in the regulatory solvency position. That is the target we are watching when it comes to solvency. And of course, the movement in the fourth quarter in itself is very positive, moving towards a dividend position. Then, of course, it will be a total view from the board when that is the time for looking at that. And that will be forward-looking. It will be based on buffer capital situation, interest rates, and everything. But the number that we measure us around is the headline solvency ratio of 148% as we speak.
Just one follow-up on this. What happens if your solvency ratio, excluding transitional rules, falls to 90, as an example, at the end of 2015? Just to make the hypothesis here, right? How do you see that situation where one ratio is well above what you're targeting and the other one is at 90%? How do we need to think about this?
Well, of course, the regulatory number is the headline number. That is what is put forward, that is what is needed and set forward. Make sure that we have the right transition in a 16-year period into Solvency II. And that is what is really the regulatory framework that we are measured against. Then again, of course, we also need to look forward, how will, on a yearly basis, that headline solvency ratio evolve? And we will be in a situation where we are able to keep up the solvency ratio going forward. So we have to take a total view of the company, of the results and the balance sheet in such a situation.
But it's hard to just answer that question based on a point number of the headline solvency number and the underlying solvency number.
Okay, thanks a lot. I appreciate that.
The last question for today comes from Daniel Dutoit from JP Morgan. Please go ahead. Your line is now open.
Hi, Daniel Dutoit again. Just a couple of follow-up questions. The first one was on. I want to ask about the, the operating cost this quarter, which I guess on an underlying basis is quite a bit ahead of what you had been reporting in terms of a run rate year- to- date. Also in the context of, or at least my expectation, that, a lot of the cost savings that you were, that were scheduled for this year were very much back-end loaded. That was the first question. The second one is on, the, the Moody's credit rating downgrade. I just wondered if that had any impact in terms of your day-to-day operations, whether that's trying to win new business or whether, or, or growing in different parts of, the business.
And then I guess related to that and, and the previous question on the dividend, how do you think about that when it comes to the year-end? I, you-- if you are ahead of your 130%, with a good outlook, but you are still below your, target A rating, how do you take that into account then? Thank you.
With respect to the operating costs, as I mentioned, we've had a very, very high market activity in the fourth quarter, which has resulted in significant improvement in sales and also sales bonuses to the sales force. So that explains most of the increase in operating costs in the fourth quarter. As we have mentioned, or as we have pointed out to you on the Capital Markets Day, we will continue to follow the cost level of the group very closely, but we are allowing ourselves to look at this on the cost-income ratio as a result of the consequence that we see a lot of investment opportunities in new, new sales and, and new customers, and we need to be able to, to meet those customers in a, in a prudent way.
So we will continue the cost focus. You should not expect cost to go significantly up, but we will measure this on a cost-income basis going forward in order to allow profitable growth. In terms of the Moody's downgrade, we have not seen that that has impacted sales or daily operation in any way. We've been on negative outlook for a long period of time, and as Moody's writes in their report, basically, Storebrand and management to Storebrand does the right things in a challenging macroeconomic environment. But they are concerned about low interest rates, and that is certainly something that we are working on every day to deal with as well. And on dividends, I don't know if you want to add anything more than we've already said about it.
I think we've already been into that discussion. The number we are following very close is the headline Solvency II number, and are very pleased to see that it's well above 130%. That is a very good starting point for being able to take up dividends again. Credit rating, we have our financial targets, so a target is absolutely a part of our targets, but that is also to be in a dividend position to pay dividends. So, I'm not sure that I can add any more to that discussion at this point of time.
Okay, great. Thank you.
There are no further questions coming through, and now we'll hand the call back to Kjetil Krøkje for any concluding remarks. Thank you.
All right, everyone. Thank you so much for calling in on this fourth quarter call, and have a good day, and I hope to see some of you at the analyst conference tomorrow.
Thank you for joining today's conference. You may now replace your handset to end this call. Thank you.