Good morning, ladies and gentlemen, and welcome to Storebrand's Q1 result presentation. As usual, our CEO, Odd Arild Grefstad, will present the key highlights of the quarter, followed by CFO Lars Løddesøl, who will dive deeper into the numbers and explain reporting under IFRS 17. At the end of the presentation, participants in the Teams webinar will have a chance to ask questions. Details on how to join the webinar are found on the investor relations website. Without further ado, I give the word to our CEO, Odd Arild Grefstad.
Thank you, Johannes. Good morning, everyone. Storebrand continues to deliver strong growth in all business areas, occupational pension, asset management and the Norwegian retail market. Let's look at the Q1 highlights. This is the Q1 in which we officially report in accordance with IFRS 17 and IFRS 9, and our reported IFRS profit before amortization and tax was NOK 1,157 million in the quarter. Lars will revert with some more details on the impact of the new IFRS standards later in the presentation. As previously communicated, our primary focus will continue to be on our alternative income statement, which you all are very familiar with. The results are fundamentally different and cannot be reconciled with the official IFRS results.
What's important to know is that the alternative income statement is close approximation of the cash generated in the period, and hence we have renamed it to Cash Earnings for clarification. As shown next to the IFRS result on this picture, Storebrand's cash earnings from operations amounted to NOK 518 million, and the financial and risk result amounted to NOK 255 million. The operating result is negatively impacted by integration costs related to acquired businesses and weak insurance result due to seasonally high claims and increased disability. Looking at the growth, I am very proud that we have reached an all-time high level of assets under management of NOK 1,111 billion, supported by NOK 18 billion in positive net inflow in the quarter.
Furthermore, our insurance business has grown 19%, our bank by 18%, and unit-linked premiums have grown by 30% since the Q1 last year. The solvency ratio remains solid at 179% in the quarter and continues to be above the threshold for our capitalization of 175%. We will apply for additional share buybacks after the current tranche of NOK 500 million is completed. During the quarter, we have continued to see turbulent financial markets with international banks struggling and the credit market being volatile. It is satisfactory to see that our high quality investments are able to shield customer funds and at the same time, we continue to create value for shareholders. We have seen continued increased interest rates driven by high inflation. This is benefiting the guaranteed book and the company portfolios, as communicated at our capital update.
At the same time, it will drive growth in the unit-linked and risk premium products. Weakened domestic currency and high inflation put pressure on costs, but we are prepared to maintain strict cost control and increase profit also in such an environment. Let me turn to the development in disability that we observe in the society. Since the pandemic, there has been a significant increase in disability levels in Norway. 10.5% of the workforce is currently unfit to work and receive disability benefits from the State. Our expectations have been that disability rates should decline after the pandemic towards previous levels. Last year, we saw lower numbers receiving work assessment allowance, meaning fewer people going into long term disability. Unfortunately, we now see this trend reversing as so far this year, and we will follow this development very close the coming months.
For Storebrand, disability levels are high both in group life and pension related disability insurance in Norway. Further price increases will be implemented with full effect from 2024. Storebrand also seeks to be a part of the solution through both reactivation and preventive measures. We will actively use our toolbox in collaboration with customers to help more people back to work. We encourage government, businesses, and society to collaborate and curb this growing trend to secure a sustainable welfare system. As you are well familiar with, Storebrand aims to take three commercial positions in the market we operate in. To be the leading provider of occupational pension in both Norway and Sweden, to be a Nordic powerhouse in asset management, and to be a fast growing challenger in the Norwegian retail market for financial services.
Despite the increased uncertainty around external factors such as persistent high inflation and an increased disability, the NOK 4 billion profit ambition for 2023 is maintained. Our focus is on total capital generation in the business, and we aim to deliver growing ordinary dividends and NOK 10 billion in share buybacks by 2030. On top of this, we expect to generate excess capital available for growth or returns to shareholders. Unit linked premiums grew 30% year-on-year, and synergies from the Danica acquisition will gradually be realized according to plan. Furthermore, we generate positive new sales, and the strong trend of positive inflow continues in both Norway and Sweden. An important achievement worth mentioning this quarter is that SPP's products now will become selectable in both segments of the unionized pension market in Sweden, both within unit linked and with capitalized guarantees.
Storebrand delivers all-time high asset under management in the quarter. The group synergies between pension and asset management are evident and continue to be a growth enabler. Storebrand Asset Management is especially well-positioned within sustainability and alternative asset classes. We have a strategy to grow external mandates, and we have succeeded in growing the external share while growing our total asset under management. This shows that we have attractive solutions for investors, and we have had consecutive years with positive inflow despite turbulent financial markets. Moving to our retail operations. Storebrand continues to grow in the retail market. The bank has reached a mortgage balance of NOK 70 billion this quarter and has more than doubled its quarterly cash earnings year-on-year to NOK 96 billion in the quarter.
The bank is a catalyst for our retail market offering, and we see very strong synergies between the bank and our savings and insurance offering. As an example, 40% of our mortgage customers have now also bought an insurance policy in Storebrand. In Storebrand, we continue our digital journey by migrating fully to the cloud, investing significantly in renewable of our core backend platform, and developing our digital business. We have been applying advanced machine learning to optimize risk pricing, effectively detect insurance fraud, and as a powerful tool into our customer development. Now, we are accelerating our adoption of the next generation of artificial intelligence by building on our in-house experience and competence. Generative AI runs on the cloud, where we have built strong cloud competency in the group and have solid experience of applying technology with privacy, ethical, and legal measures.
Storebrand is built on trust, and our customers and owners should always feel confident that we will use this technology in a safe and responsible manner. With that, I give the word back to you, Johannes.
Thank you, Odd Arild. Now let's take a closer look at the numbers. Lars, please go ahead.
Thank you, Johannes. I will briefly go through our Q1 results in the traditional setup before I run you through the group statutory IFRS results, which are now significantly changed with the new accounting standard for insurance and guaranteed products, IFRS 17. Let me start with a short explanation. For the benefit of analysts and investors that have been accustomed to our alternative presentation of our financials, we will continue with the alternative reporting for the time being. This reporting is a better approximation of the cash generation in the business, which in turn is the basis for dividends and share buybacks. We have renamed the profit lines to cash equivalent earnings, as they can no longer be reconciled with the group's statutory IFRS reporting due to the backward-looking characteristics of the cash reporting and the forward-looking nature of IFRS 17.
The only significant change to historic reporting is that amortizations are reduced. The alternative presentation is based on the consolidated statutory accounts of the legal entities in the group, where group effects related to amortization on acquired businesses are excluded. The Storebrand Q1 results are relatively soft, primarily following weak disability results. The underlying growth, however, continues, and our ambition to reach a group result of NOK 4 billion is upheld, fueled by, 1, structural and market growth in assets under management driving fee income. 2, seasonal improvements and growth in insurance. 3, an increase in return on net financial assets. The solvency has strengthened in the quarter, and we have built 2 percentage points of solvency despite increasing our equity exposure with a negative impact of more than 5%.
Furthermore, we have had headwind from lower long-term rates and from regulatory factors where an increase in the symmetric equity stress is the largest contributor. This has allowed capital allocations to ordinary dividends to share buyback program, repayment of outstanding loans, and the acquisition of Kron. After capital allocations, the solvency remains strong at 179%. The solvency sensitivities are pretty much unchanged in the quarter. The fee and administration income is up from last year following the acquisition of Danica, but still hurt by lower assets under management from weak financial markets through 2022. With the rise in assets under management in the Q1, the fee and administration income should rise in the coming quarters. The insurance result is roughly at the same level we saw last year, but below the targeted level due to weak disability results.
The operational cost is up and in line with the plan and includes the cost from both the acquired businesses, Danica and Kron. The cost and income synergies from these transactions will be realized throughout the year for full effect next year. The financial results are improving as a consequence of higher interest rate level as previously guided. You will note that the amortization line has been restated. The amortizations is including group effects on acquired business due to the changes in the alternative reporting as mentioned in my introduction. In this quarter, we recorded tax income generated by the tax treatment of currency hedges and the strengthened Swedish-Norwegian exchange rate. The normalized tax rate remains at 19% to 22%. The soft results show through in all result areas.
In savings caused by one-offs and low assets under management into the quarter, in insurance from seasonal factors and rising disability, and in guaranteed from less profit sharing. Other is lifted by better returns on net financial assets. Unitlinked Norway shows good growth from the Danica acquisition and strong growth in reserves combined with a stable margin. Unitlinked Sweden is down following margin pressure. Q1 last year included a one year, one-off gain in SPP. Asset management is significantly down. Transaction fees were lower by NOK 20 million in the quarter compared to last year, and the results are hit by periodic effects and other one-offs with a total of NOK 23 million. Costs are up following strong performance and corresponding bonus accruals, a continued ramp up of the business and negative currency effects.
Asset management has significant cost in foreign currency from a range of items like Bloomberg terminals to foreign offices. With a record AUM of 1.1 trillion coming out of the Q1, the momentum into the rest of the year is good. In addition, performance fees has been good, and performance fees as of the end of the Q1 were NOK 47 million. As you may recall, the performance fees are only booked at the end of the year. Retail banking shows the best result in the history of the bank from continued growth and improved margins. This picture shows significant underlying improvements in all the businesses under savings. Going forward, the AUM growth will lead to higher earnings.
As Odd Arild mentioned, the net positive flow in asset management continues. Under insurance, we put behind us a cold and wet quarter with slippery roads and freezing water pipes. Seasonal swings are normal. This year was worse than a Q1 normal. The increase in disability hits both disability insurance, health insurance, and group life products. Fortunately, the reported disability numbers in April show an improvement, and this will be a key area to follow in the coming months. The combined ratio in the quarter is 97% higher than our stated goal. For the last 12 months, the average is still 92% in line with a targeted 90%-92%. With the inclusion of Danica, volume growth in all areas, combined with price adjustments of 6%-10% across different products, we still see premium growth in all segments.
Our market share in retail P&C has grown to 6.4% according to the latest statistics. The cash equivalent earnings from the guaranteed business are generally okay, although profit sharing in Sweden is somewhat below plan. With a higher interest rate level, we prioritize buffer building in the short term and expect an increase in profit sharing in a few years' time. The reserves in guaranteed are up following a currency translation effect from stronger Swedish krona to Norwegian krona. The long term nature of the guaranteed book continues, sorry, the long term run off nature of the guaranteed reserves continue with guaranteed reserves as a percentage of total pension reserves declining and now at 45%. Buffers have been strengthened by approximately NOK 2 billion in the Q1.
Under other, we record the financial results from the net company capital. With the higher interest rate level, we expect continued strong results from this area. Saving the best for the last, over to IFRS 17 reporting. Starting this quarter, our statutory accounts will be according to the new IFRS standards, including IFRS 17 and IFRS 9, sorry, IFRS 9. We publish comparable numbers from last year, and in the appendix, we have included additional information about transition, sensitivities, and vocabulary. We intend to add CSM movements also next quarter. In our quarterly report, we have included detailed notes on the new accounting rules. As a help to the readers, let me give you a short explanation on how to read the interim report published this morning.
The first section will be familiar to you and broadly follow the usual alternative reporting in the result segments savings, insurance, and guaranteed. The second section contains the new statutory financial statements under IFRS for the group. These will deviate from the numbers in the first section due to the forward-looking nature of IFRS 17 on insurance products, including the guaranteed pension products. The third section shows the financial statements for Storebrand ASA under Norwegian GAAP. Norwegian GAAP does not incorporate IFRS 17 and is unchanged from before. Here you see the group financial statements under IFRS. I would like to point out the following. 1, the first section can be reconciled with income from UnitLink and derived from gross income in asset management and bank income.
The only change from the savings segment is that paid-up policies with investment choice are included under insurance due to the embedded insurance elements in this product. 2. Operating income excluding insurance shows the gross income from products outside IFRS 17. 3. Insurance revenue and expenses covers all insurance products, including guaranteed pensions, because they include insurance elements. In the interim report, you will find a detailed breakdown by product category, including CSM and loss component information. 4. The insurance service result gives you the result from the products subject to IFRS 17. 5. The net financial result includes both return on customer funds and owner funds and equals the investment income and financing expenses for the group. Here are the same figures, but now with what I consider to be the main takeaways.
One, the group profit before amortization and tax was NOK 1.157 billion in the quarter, compared to NOK 719 million in 2022. The difference in group profit after tax expenses under IFRS compared to cash equivalent earnings stems from a whole different way to look at result generation, including release of CSM created by equity on transition, release of risk adjustment, and discounting effects on claims. Two, insurance service result under IFRS was NOK 637 million in the Q1. The reduction in insurance service result compared to last year is due to higher claims in the P&C business and disability. Three, under insurance revenue, the CSM release was NOK 513 million in the quarter, and the release of risk adjustment was NOK 84 million. You can find these numbers in the interim report.
The release of CSM and risk adjustment is determined by the coverage unit, which represents the expected duration of the insurance contracts. More details on CSM sensitivities and the IFRS balance sheet are shown in the appendix and in the interim report. As a consequence of the new accounting standard, we will update our dividend policy. With possibly more volatile group results according to IFRS, we remove the part about dividends being more than 50% of group results after tax. We maintain the important remaining part of the statement, paying at least the same nominal amount as the previous year. With that, I pass the word back to you, Johannes.
Thank you, Lars. We are now happy to take questions from our audience. Please use the raise hand function in the team's webinar to be placed in line to ask a question. To give everyone an opportunity to ask questions, we kindly ask you to limit yourself to two questions at a time. The first question comes from Peter Eliot of Kepler Cheuvreux. Please go ahead, Peter.
Thank you very much. The main question really was how we should think about the drag from the disability going forward. I mean, I guess, you know, if the same disability rates that you're currently seeing persist in the current, in the upcoming quarters, should we expect the same drag on your results we're seeing today? I mean, if it gets, keeps getting worse, should we expect the results to deteriorate? I'd appreciate you're gonna be compensating with higher prices, but just wondering, you know, how long that would take, and if they don't come through immediately, you know, whether it will play out as I've just described. I guess related to that, you know, you've reiterated your NOK 4 billion target.
You know, I guess that means you're not thinking the result, you know, will be too long lasting or is it a case of maybe you can find compensation elsewhere? Or is it just that there was some conservatism originally? Just, yeah, if you could help us think about those moving parts and how you're thinking about it. I think that's probably my fair share of questions, so I won't go on with a second one with lots of parts. I'll leave it there. Thank you.
Thank you, Peter. There has been some uncertainty around the disability situation through the COVID period. After the COVID period, as we put that behind us, we saw that the disability figures were improving. Unfortunately, we've seen the Q1 that disability was once again picking up, which is and above our expectations. This is something we follow very closely. We're obviously fully reserved for the situation right now. We have, as I mentioned, also seen better figures in April. This is an area of concern, not only for us, but for society as a whole, if we can't get disability pensions out or down in society. We want people to come back to work. That's good for people, it's good for society, and obviously good for our results.
If I might add, there is seasonal elements also in disability. Typically, we see that the Q1 used to be somewhat worse compared to the other quarters, and we have already seen that effect into the Q2. When it comes to repricing, the main repricing is by year-end, so we have the opportunity now to make changes in the prices effective from Q1 2024.
Okay. Sorry. Just to clarify that, it sounds like any price increases won't come into effect, you know, before the end of this year. If... You know, I appreciate the seasonality and all that, but
Yeah
... just playing devil's advocate or taking worst case scenario, if you were to see the same experience that you saw in Q1 repeated across the following quarters, then we should expect a similar result. Would that be a fair assessment?
You saw that the insurance results were similar to what they were last year. We had expected an improvement with lower disability now. We've not seen that lower disability. Insurance results are weaker than we had expected. It's not like it's a loss or anything. It's like weak results, hopefully they will improve going forward with seasonality and with price increases that has been implemented already in the beginning of the year as we come into a larger and better season in Norway. As I said, so far in the Q2, it looks promising with the figures that we've gotten for April.
It's impossible to give you a number on the uncertainty as this is, we're very much a society problem and not a Storebrand issue as such, and not something that we can control.
Thank you, Peter. The next question comes from Håkon Astrup of DNB Markets. Please go ahead, Håkon.
Good morning. Thank you for taking the questions. Two questions from me, and the first one a follow-up on the insurance and disability side. Just given the headwinds that you're facing at the moment, do you think that it will be difficult to reach the 90%-92% combined ratio target for the year? That was the first question. The second question is regarding dividends and payouts and your updated dividend policy. My question is, have you, say, been in dialogue with the Norwegian FSA regarding the volatility in IFRS 17 earnings and how that should be taken into account with regards to dividend policy and that you may have to send more applications if you were to, say, come above the 100% threshold with the total distributions?
On the first question, insurance and disability, I can confirm that we maintain the objective or the goal of 90-92 for the full year.
Very clear.
When it comes to the dividend policy, this is very technically based on IFRS 17 and the volatility we see in those kind of numbers. When it comes to cash flow, solvency ratios, everything is calculated in the way we always has used to do. We have not been in contact with the regulator around this issue. This is just a change in the policy that is then aligned to the IFRS 17 framework.
If I may add, the results from all of the subsidiaries will be according to S-GAAP and N-GAAP, and therefore not impacted by the changes in IFRS, which is why we say that this is not going to impact the upstream of dividends to the holding company. It's only on the group accounting that the IFRS will come into or will show up in the numbers and with possibly some more volatility.
Could it lead to more, say, dialogue and applications to the FSA than you have been used to due to the earnings volatility on a group level?
We don't expect that to be the case. We have the reporting we have, and of course, all our dividends and share buybacks is based on our solvency position.
Thank you.
Thank you, Hakon. The next question comes from Tryfonas Spyrou of Berenberg. Please go ahead.
Hi. Hi, good morning there. I have two questions, please. The first one is that on buybacks, you said you tend to apply for another buyback once this tranche ends. Should we take that as a signal that you're quite confident on the trajectory of the solvency in the near term? I guess there are a number of scenarios, your solvency can still decide that could bring you below that level 175. Any comments on the visibility of solvency in the near term would be very helpful. The second one is on the buffer capital, particularly in Norway. I think it's up only to sort of 20 basis points, despite no profit sharing, building up the buffer.
I would have expected this to rise a bit more. I was wondering if there's some specific reason for this more movement there. Similar to this, how much has the buffer building contributed to solvency capital in Q1? Thank you.
If we start with the share buybacks, we'll continue with the share buyback program we are into now, as soon as we get the permit from the regulator. That was paused due to the AMG and the need for a new permit based on the new, well, decision in the AMG. That's more technical. Expect to be up and running with that program as soon as possible. We intend to put forward a new application, so we can continue more or less doing share buybacks when this program ends. That is the plan. When it comes to solvency situation and solvency generation, I think we used a lot of insight into that question in our capital update.
As you see, we have a very strong expected increase in solvency. We are in a real run of position on our back book now, and we create good result, increasing result in our front book. Based on that, of course, we expect to be above 175% and can continue doing share buybacks throughout the year.
Just to follow up on that one, the application for the second tranche, is that expected to be of the similar magnitude, NOK 500 million, or do you expect to get authorization for a bigger buyback amount, given that it takes time for each application to go through?
We have the opportunity to do the application now based on our Q2 numbers and then be able to, even if there is some time lag here, to start doing the next share buyback, even with the NOK 500 million tranche, just after we end this tranche. We'll look into this because now we have a new AM-AMG permit, and we, I think we have to come back with the size and the magnitude of the programs. We have started with NOK 500 million programs, but we have to look closer into that going forward.
With respect to the buffer capital, you see that the composition of the buffer capital on page 21 in the analyst presentation is such that especially market adjustment or market value adjustment reserve that are up, which is the most flexible and good buffer that we have. There has been some change in the compositions of the buffers which are positive. The exact impact on solvency for that element alone I don't have. I don't know, Trond, if you have it.
I don't have that as a precise number either. It's also important to remember that IFRS 9 has been introduced and has also allowed us to do a better duration matching down on the different customer portfolios, which also we then have a positive solvency impact this quarter and also reduce the risk going forward.
I suppose you can see that on the allocation also because we have increased long bonds this quarter, leading to a situation where they use the higher interest rate level to better match asset and liabilities compared to before.
If I may add one additional comment. I see that some of you have commented on the solvency being somewhat weaker than was expected. Keep in mind that we've used the chance that we have a strengthened solvency position, we've used to increase equity investments in order to generate a higher expected return, and that alone is in excess of a negative impact on the solvency of 5 percentage points. It's not that we haven't built solvency, we've built solvency, but we use some of the risk capacity to increase the risk in our investments in order to achieve higher expected return going forward. We can immediately reduce the equity exposure again to get back that same 5 percentage points of solvency.
It's very helpful. Thank you. Very clear.
Thank you. The next question comes from Thomas Svendsen of SEB. Thomas, please go ahead.
Yes. Good morning. A question on costs. Looking at your number of employees, it has been steady increase the past years, and of course due to acquisitions. Could you comment on the underlying increase in number of employees over the last years? What do you expect in terms of underlying development in underlying number of employees throughout 2023 and also into 2024?
Thank you, Thomas. We have a strongly growing business in terms of AUM, in terms of the banking lending, in terms of the insurance business, so we need people to do customer service, claims handling, et cetera, et cetera. There is an increase in the number of employees. At the same time, we aim to improve the efficiency of the organization on an ongoing basis, which means that we should have a smaller increase of employees compared to the increase in the business. As you say, we've also taken on board Danica and Kron with the employees from these two organizations. When we acquire business, it's obviously an important objective to take out cost synergies as part of those acquisitions, which means that they will increase the efficiency of the company going forward.
Yes, there has been an increase of employees that has been smaller than the growth of the business, when adjusted for market volatility in the equity markets. Going forward, we will continue to improve the efficiency of the organization. I think Odd Arild mentioned one very exciting example of that in his presentation, half an hour ago in terms of what we are now doing and experimenting with AI.
Okay. question number two on the disability insurance. Could you tell how much you expect to increase prices by, from 2024, and how do you see competition acting here?
No, I don't think we should be precise around price increases in the market. That is something for also competition that we need to come back to. Of course, we need to ensure profitability in these products going forward. We'll look at the numbers that we have in hand and use that as a background for repricing of different contracts into 2024.
What I could add on that is that the inflation in Norway just came out half an hour ago, and it came in at 6.4%. That will influence the G, the base amount in Norwegian or in Norway, which will automatically increase the prices by a similar amount, and also the claims on the similar amount. There's a one-year lag in terms of when the price increases come and when you have the claims increasing, and that has been taken account for in the accounting obviously. That is that will give you an idea of what the price increases will be in some of these products where they are based on this G factor.
Okay. Thank you.
Thank you, Thomas. We have a next question here from Ulrik Årdal Zürcher of Nordea. Please go ahead, Ulrik.
Morning. Thank you for taking the questions. Two from my side. One, has there been any underlying changes on the fee margins? I thought it was a bit soft in Asset Management segment, the defined benefit and paid up Norway. Is that just a coincidence, or is there something we should be aware of going forward? Number two, can you elaborate a bit on why you increased your equity exposure? Because I can't really see that benefiting shareholders, which rather would have a lot of solvencies who can pay out a lot. I guess clients have a impact there as well, or?
Should I start with the last question, why increasing equity in the customer portfolios? First of all, it's to increase expected return. Expected return will create better pension for our customers. It will create a profit split for our shareholders, and it will improve solvency position over time. When we are doing these calculations, we are looking at the return on the solvency capital that this investment requires, and this is clearer positive than return on these investments.
With respect to fee margin in asset management, we had less transaction fees in the quarter due to less transactions happening in the real estate markets in Scandinavia, as well as somewhat lower in the PE. That will swing from quarter to quarter. The amount compared to the Q1 last year was NOK 20 million in that element. If you were to add on those NOK 20 million, then the fee margin would be the same as it was last year. If in addition you were to add on the better performance fees earned in this quarter compared to last year, it would actually be better. There is no. There is normal fee pressure and nothing outside the ordinary within the asset management business. On the pay-up policy side, there has been some.
The fee structure includes several fee elements that are linked to the size of the contract, the base amount of national securities, national security system, et cetera, and it's some elements within this that has changed. The amount that we now present this quarter is on the expected similar level for the rest of the year.
Great. Thanks a lot.
Thank you. The next question comes from Vegard Toverud of Pareto Securities. Vegard, please go ahead.
Thank you. You have repeated the estimated cost base for this year of NOK 5.2 billion, excluding all integration costs and the FX. With the current integration outlook and the FX that you see, is it possible to give us an estimate including these effects?
Not really, no. There are several reasons for this. Integration costs, and also to the extent that there are layoffs or similar things, that will have to happen in the right order, and it's not something that we can communicate on expected basis before we have had the necessary discussions with the different parties involved.
What I can say is that the integration of Danica is going very well with us. We see that we are able to take into account the different products into our systems in a very smooth and good way. There is a good development in transition of both people and integration of systems and operations and also the distribution channels is working very well. I think integration is ahead of plan and going very well with Danica.
Okay, thank you. Sorry if it's a repeat of Peter's earlier question. Are you now modeling still for a reduced disability level from the 10.5% in Norway, but at a later stage? Or are you assuming that it will stay at this level or even have some buffers for a potential increase?
I guess, we are expecting some seasonal improvements because that's something we see all the time, and we are working hard with our customers and with society at large in order to find ways to improve the long-term disability development.
Very specifically, if it stays at this level, 10.5%, will you then have to strengthen your reserves further in the following quarters?
Uh, we-
If it stays at these levels that we saw in the Q1 for the rest of the year, then we will have an impact on the three next quarters that is negative compared to the expectation we had, for we started this quarter. The main timing for repricing, there is some contracts that is repriced also during the year, but the main repricing is by year-end. If you hypothetically think that you will keep the same levels without any seasonally elements, then you will have a negative impact on the results of the three next quarters.
Thank you.
Thank you, Vegard. We have a next question here from Blair Stewart from Bank of America. Blair, your line is now open.
Thanks, guys. A couple of follow-up questions. On the disability side, apologies for coming back to it, but just on the risk of a reserve increase, would that happen if the experience persisted at the current level? Presumably pricing will only adjust for the current and future business without necessarily addressing the reserve position that you have. What would it take to have a reserve addition in disability? Moving on to something completely different. On real estate, there's been some market concerns over the real estate markets, not so much in Norway, but particularly Sweden. What is your experience?
What are you seeing on the ground with your real estate portfolio in Sweden, and how do you assess the risk of having to take negative marks on that on that book? Thank you.
I don't know if we can add a whole lot more on disability that we already have. Most of the risk is a 1-year risk, so we can reprice on an annual basis, which means that there is a short tail on most of the disability risk that we have. Some products are very strongly capitalized or strongly reserved, and we have strong margins, and some have less margins and are more sensitive to swings in disability. We have made an assessment after the Q1, what is our best assessment of the actual situation right now, and that has been built into the numbers and given us weaker numbers than we were expecting and planning for the Q1.
What will happen in the future, unfortunately, I can say little about. We have raised a concern about this, and we've said that we will follow this very closely. I'm not sure I can give you any more tangible impact or results on that.
Should I say something about the real estate portfolio in Sweden? First of all, the real estate portfolio in Sweden is a very well diversified portfolio. It's well diversified both on geography and within different sectors, also when it comes to rentals. It's almost no vacancy in the buildings that we own. We feel very kind of confidence in that in that portfolio. We had a small write down of approximately half a percentage points in the Q1, that was really due to specific elements within the different buildings.
Of course, we see the same kind of worrying about Swedish real estate that are being discussed in the market. Also you have to remember our real estate is 100% equity owned. It's no gearing, which is a kind of I think where, some of the worries are in the Swedish markets.
I think that's very important about the gearing effect that is the concern in the Swedish market and also that this mostly in the housing part of the market you see this disturbance. We have very little exposure to that. Typically we have long leases, and also a lot towards more state owned properties, you know, rented properties. We feel quite confident when it comes to our real estate portfolio, in comparable to other players in the Swedish market.
That's great. Thanks. Thanks very much. Can I just ask one more, if I can? Why is the Norwegian FSA taking so long to reapprove your share buyback, given they'd already approved it and it was a technical delay? Your AGM was weeks ago now. What's going on there? Are they short-staffed or something? What's the problem?
It's a very good question. There is no reason why. I think it's just they have a lot to do, and they have just, don't been able to process this. It's nothing else in it. It should be easy to do, actually. We hope to get it as soon as possible now and start doing share buybacks again.
Thanks.
Thank you, Blair. The next question comes from . . Please go ahead, Hans.
Thanks for taking the question. I just have two follow-up questions. The first one is on the cost guidance of NOK 5.2 billion. You mentioned there's no integration costs there. In the report, you also mention the Kron acquisition has NOK 23 million in negative integration costs this quarter. Could you just say anything about sort of how long those costs are expected to continue? The second one is on Danica. How much is the integration cost there, if there's currently any ongoing?
On the cost guidance, we maintain the cost guidance. The Kron result, Kron is a separate legal entity, and they had negative result in the Q1. We aim to integrate that throughout this year and should be fully integrated early next year. In terms of the cost of running Kron, that's part of the NOK 5.2 billion cost guidance. It's not an integration cost on top of the cost guidance. In terms of the Danica cost, do you have that number? I don't.
The integration cost for Danica in the Q1 was approximately NOK 37 million.
NOK 37 million.
Yeah.
Yeah. You should expect to see some integration cost throughout the year. I think we will have double systems because we have to lease the systems from Danske Bank in the period where we are transforming the products into our own system. That is done gradually. As I said, it's ahead of plan. Anyway, we have double cost for systems throughout the year, and we of course have also the change in staffing and so on that goes on throughout the year.
Okay. The second question I had was just on the transaction fees. You mentioned part of it is because there's lower transactions in the real estate part. I was wondering just on the valuation methodology, how much is that sort of. At some point, I'm guessing the transactions are gonna pick up again in real estate, and how much does that kind of lead to sort of a lag effect on valuations, if when the market picks up, it does pick up at a different level?
I'm not sure I understand what you mean with impact on valuations.
On your property portfolio.
Well, our property portfolio is constantly valued at market values and real values. We use both our own internal models with all the different impact factors that are updated monthly, as well as external views on the same, and we measure that against the transactions that do take in place in the market.
Mm-hmm.
All of our properties should be correctly valued at all times. Transaction fees does not come from necessarily selling or buying our own properties, but it's part of like the capital investment subsidiary in Denmark do a lot of transactions on their own. Also there are some fees in some of the funds that we have in real estate when we sell and buy properties. This is part of the nature of the business that we run
Mm-hmm.
There is currently less transactions taking place in the market impacting our fees, but it does not mean that it has an impact on valuations as such.
Mm-hmm. Okay. Thank you.
We have the next question here from Jan Erik Gjerland of ABG. Please go ahead.
Thank you for taking my questions as well. First one is on the return expectations both in bonds and these renewed ones in the equity portion where you have increased your sort of level. Could you give us some insight to what kind of running yield you have today on the bond side and also this hold-to-maturity bonds, which seems to have sort of been able to increase the size of and duration of, so we can get a further insight to that? Secondly then, how much pickup do you have expect from expected return in the for increasing the equity portion? That will be my sort of first question.
Yeah. It was a lot of questions, as usual, Jan Erik. Let me start here with, first of all, the investments in the bond set amortized cost portfolio. First of all, as we mentioned, there was IFRS 9 coming into play this quarter. That has made us do some reallocation of some credit bonds so that we mainly bought during the COVID crisis in the spring of 2020. That wasn't any longer capital efficient, so they were kind of replaced in the market, mainly in government bonds in Norway and U.S. Then you can find a running yield on the average of the interest rate market over the last quarter.
The running yield on what is mark to market is obviously following the interest rate curve. They have gone up. When it comes to increase in expected return from equity investments, that's that's putting a normal risk premiums on top of the risk free rate and 6% on approximately in increased equity exposure. You can do the math.
Thank you.
On page 21 in the supplementary, you will find the expected return on assets in the different products.
That's very good to hear. Secondly...
Just to mention also, I suppose you have also seen the proposal from the Minister of Finance with the change, proposed change in the regulations for guaranteed payout policies coming hopefully into effect from next year, where you can do the same as we have already done on the public sector to combine the buffers and also use it for negative return. Of course, we believe that will over time build more risk capacity, giving better pensions for our policyholders, and also opportunities to go to profit sharing in a faster and better.
Very good. The second question is about the technicality around the buybacks you say will end on the 30th of June. You have sort of from today until 30th of June if you get the applications through today. Is it possible to do the NOK 500 million in such a short term without violating any rules on the buyback side, or will we actually have a lower level at the end of the day given what you know today?
Well, we obviously have to follow all the rules on how much we can buy back, but we intend to be able. The current share buyback program is expected to go up until the 30th of June, and we do expect to be able to fulfill it within that period, but it will depend on the trading volumes in the market.
Okay. Technically then, the third program could also restart after your, Q2 results. That's the plan?
That's the plan.
Yeah.
Thank you.
Thank you, Jan Erik. I think we have no further questions. That concludes today's presentation. Our next set of results are due on July 14th. We look forward to seeing you then. Thank you and goodbye.