Hey, everyone, and a warm welcome to our capital update presentation here at our offices in Lysaker, and to our audience who are participating from elsewhere in the world digitally. It's been exactly two years since we hosted our last Capital Markets Day, and since then, we've seen significant changes in financial markets, and we've received numerous questions from analysts, from investors, on what this means for Storebrand. Our aim today is to give you an update on this, and our CFO, Lars Løddesøl, will take you on a deep dive into how our capital generation now increases and how we plan on distributing capital. At the end, Kjetil Krøkje, our Head of Finance and Strategy, will give you a high-level introduction to what the new reporting standards, IFRS 17 and IFRS 9, mean for our reporting next year before we move over to Q&A.
But first, let us hear from our CEO, Odd Arild Grefstad, how the group has performed since our Capital Markets Day in 2020, and what he thinks you need to take with you from today's presentation. Odd Arild, please come up on stage.
Thank you, Daniel, for that introduction. Well, it's a pleasure to welcome you here at our offices and see so many of you in real life again, and, of course, a warm welcome also to those of you that follow us digitally. Storebrand has followed an active and consistent strategy to shift our business mix towards capital-like savings and insurance products, replacing guaranteed business. You are probably well familiar with our strategy at this point. We are the market leader in occupational pension and asset management, and we are a challenger in the Norwegian retail market for financial services. We operate in structurally strong markets with resilient economic development, and we are one of the world's most sustainable insurance companies with more than 25 years' proven track record within sustainable investments.
Today's presentation will not focus on our strategic ambitions, but instead focus on our capital management in light of higher interest rates and substantial change in our business mix. As you can see on the picture, we will now shift our focus from capital release from our back book to total capital generation in the business and talk more about growing ordinary dividends and the NOK 10 billion in share buybacks by 2030. You will hear much more about this throughout the presentation. So, we come from a period with low return on equity to now being in a position to deliver higher return on equity as our capital-like business becomes a larger part of the total balance sheet.
We have, over the last years, used the capital and cash we have generated to strengthen our capital position, but are now in a position to increase the free cash flow available for distribution to shareholders, and coming from a decade of record low interest rates, we now see higher and more supportive interest rates for our business. As interest rates have climbed this year, we have been flying through some turbulence with negative mark-to-market effects on our financial results, but with higher interest rates, we are on our way to a new cruising altitude looking into 2023 and onwards. Looking forward, we are also entering a new era of reporting standards with the introduction of IFRS 17 and 9. However, our key message today is that the business does not change with the introduction of new accounting standards, nor do our cash flows, our solvency, or expectations of dividends.
Going forward, we will use the IFRS 17 accounting as an additional source of information and disclosure. But let me first give you an update on our progress since the last CMD. We are well on track to deliver on our profitable growth ambitions, and I'm very pleased to see that we are well on the way to deliver on our group profit ambition of 4 billion NOK in 2023, despite significant headwinds in the markets in 2022. When it comes to the numbers, we have delivered double-digit growth in all our front book. We have seen 19% annual growth in unit-linked and 10% annual growth in assets under management over the last decade. Since the last CMD, we see the growth in insurance and bank accelerating with close to 20% annual growth. Unit-linked and asset management is, however, somewhat more muted by the market volatility in 2022.
but if we look at the net flow since our last CMD, we see strong momentum and growth from new customers in asset management and growing and recurring premium payments from customers in the pension business. so, going into the next year, we expect stronger profit contribution from financial results because of higher interest rates and somewhat lower contribution from asset s under management-based fees due to this year's market turmoil. but altogether, we confirm the NOK 4 billion target for 2023. so, to sum up, both growth and margins are developing according to plan. but let us turn to the focus of the day, which is capital generation and capital deployment. Both in terms of assets under management and capital requirement, the guaranteed book on the far right-hand side of this slide has peaked, and the change to more capital-like business is happening fast.
But the guaranteed book will also create much more value going forward than what has been the case over the last years. In this picture, which I believe most of you are well familiar with, we have used Solvency II to equity, or more precise, Tangible Unrestricted Tier 1 to give an overview of a pro forma return. For good order, this is an illustrative slide as the capital sits in the legal entities, but it works well to show the different return characteristics of the new and the old business in Storebrand. As you can see, we show that we have a fantastic return on equity in our front book, Future Storebrand. But our guaranteed business has delivered a very low return on equity in the past. Going forward, the return or reserve generation will increase substantially while capital will continue to be released.
The guaranteed business will therefore improve over the time from being a financial liability to become a financial asset and contribute with increasing returns to shareholders. At our last Capital Markets Day, we said that we aim to release 10 billion NOK in capital until 2030. We also showed a roadmap that said if interest rates were higher, capital release should also be higher. Well, interest rates are now higher, and we have generated a substantial amount of capital already since our last CMD. We have strengthened our solvency ratio without transitional with 24 percentage points, while at the same time, we have been funding very high growth in all our business lines in Future Storebrand. We have also paid or set a side 4.4 billion NOK in dividends and started share buyback with 0.5 billion NOK completed so far, one year earlier than guided on in 2020.
On top of this, we have done some bolt-on acquisitions for a total cash consideration of around NOK 2.7 billion. Looking into the future, we see a continued shift in the business, and we expect an additional NOK 10-12 billion capital release from the back book by 2030 based on today's interest rate levels. But just to be perfectly clear, the most important part is not how much capital the back book in itself releases, but how much the total free cash flow of the group will become. Our main focus will be on total free cash flow, trigger rate, and this is the sum that at the end of the day will be available for shareholders. So, with that backdrop, let me give you today's key takeaways before I hand over to Lars.
Number one, we changed our dividend policy by lowering the threshold for extraordinary capital deployment to 175% from 180% due to a more capital-like business mix. Second, with higher capital and cash generation, we will be able to fund growth in ordinary dividend per share, strong organic growth in the business, and share buybacks as long as the solvency is above 175%. Our ambition is to return at least NOK 10 billion in share buybacks by 2030. And lastly, the business does not change with the implementation of IFRS 17. The main focus for Storebrand will still be on cash earnings, Solvency II capital generation, and the ability to convert earnings to free cash flow for shareholders. IFRS 17 will therefore be a source of additional information.
And with these opening remarks, I leave the word to our CFO, Lars Løddesøl, for a deep dive into capital generation and our thinking of capital deployment. Please, Lars.
Thank you, Odd Arild Grefstad, and good morning, everyone. I will now dig into the numbers with an ambition to show you how higher rates will contribute to enhanced shareholder values for Storebrand. Let me just start with saying that the numbers we present today are based on our current cash-based IFRS accounting and factors outside our control, including the forward rate, normal risk premiums in the markets, and the current regulatory environment. Let me start with how the guaranteed back book transforms into a financial asset for shareholders in a higher interest rate environment. The fundamental for returns in both Norway and Sweden are high-quality investment portfolios with diversified assets.
The majority of investments are in bond portfolios with an average rating of AA. We have limited rating migration and no defaults in the portfolio through the COVID period or the recent turbulent markets. Our real estate investments are high-quality, diversified, unleveraged, almost fully let out, and with CPI indexation contributing to high rentals in an inflationary environment. Through turbulent financial markets, the risk management of the guaranteed book in Norway has been active and yet fully according to our existing risk management policies. With higher interest rates, we have seen reduced duration in our liabilities, and we have reduced the duration gap between assets and liabilities. We have been able to extend our investments further out on the yield curve in high-quality bonds. The long-term nature of the investment portfolio means that it takes time to roll over.
As our bond portfolio gradually amortizes and reaches maturity, the proceeds are reinvested in higher-quality bonds with better yields. The graph in the middle seeks to illustrate that, one, gradually shorter duration in existing investments reduces capital requirements on the same investments, and two, that reinvestments at longer duration with higher quality reduce the SCR further. That means higher risk-adjusted and nominal returns with lower risk for the benefit of customers and shareholders alike. The new accounting standard, IFRS 9, will allow for more active management of our bonds at amortized cost through greater flexibility and when these are sold, laying the foundation for even better risk management going forward. Based on previous slides and today's interest rates, the financial result from guaranteed pensions and Company Capital will go up from approximately NOK 0.5 billion to around NOK 1 billion, subject, of course, to actual market development.
To be clear, I'm now talking about the financial result reported under financial result and Risk Result Life in the group's result table as presented on the picture. We can split the effects into three buckets: Guaranteed Norway, Guaranteed Sweden, and the combination of the Company Capital and cost of debt. In the next slides, I'll go a little deeper into each one. Compared with our guidance at the CMD in 2020, expected returns are up and will continue to go up as we reinvest in new bonds with higher yields. At the same time, the effective average guarantee continues to fall. Short-term, we'll use excess returns to build buffer capital. Buffer capital protects customers and shareholders under adverse market scenarios and, as a consequence, reduces capital requirements. Medium-term, we'll use excess returns for profit sharing, 80% to customers and 20% to shareholders.
The customer investment portfolios are organized according to risk capacity, and hence the investments are split into subsegments to maximize returns. On an expected level, gradual profit sharing will start in the next few years with the best capitalized contracts. Each percentage point spread in booked return over the guaranteed rate of return will give around NOK 200 million in annual profit sharing from paid-up policies when buffer levels are at reasonable levels. We do expect buffers to be fully restored 3-4 years from now. Then, over to the Swedish business. We have three sources of financial results in the Swedish guaranteed book. We can win back previously booked deferred capital contribution from loss-making contracts achieving a booked return above the discount rate. We can earn profit sharing if returns beat predefined thresholds, and we can charge a fee if pensions are index-adjusted with inflation.
We have a close to perfectly ALM-matched portfolio in Sweden, meaning limited impact from changes in interest rates. But we have a drag on results from higher discount rate for long-term cash flows in the IFRS accounting. This is the so-called UFR drag. With higher rates, this headwind is now all but gone. Combined with risk premia, it gives us better capital generation and a stronger profit contribution. We expect around NOK 200 million from the Swedish guaranteed business financial result in the short term. We have now looked at two of the three profit contributors to the guaranteed book and the financial result, Norwegian guaranteed and Swedish guaranteed. Let me then turn to the last one that is affected by higher interest rates, namely the company portfolios. We have around NOK 32 billion of cash Company Capital.
These assets have a total annual expected return in the next few years of around 4%, which implies approximately NOK 1.3 billion in income annually. The cost of the subordinated debt in the group is around NOK 600 million per year, which in combination equates to a net of around NOK 700 million in profits for shareholders from return on Company Capital less cost of debt. I have now demonstrated how the guaranteed book and the Company Capital will give higher and more stable returns going forward. Not only do we expect higher returns from guaranteed products, but as the guaranteed liabilities are in long-term runoff, the capital requirements will go down over time. With an average policyholder age of 64 years, this only goes one way. Over time, this graph will shift to the right as we are not adding new individuals to the book.
We can therefore say with high confidence that we will be paying out more than NOK 100 billion in the next five to 10 years. Mind you, the nominal liabilities will not go down by the same amount due to the running guarantee of return. In summary, the guaranteed segment and Company Capital is expected to contribute around NOK 1 billion in financial result, in addition to the risk results and administration results, for a total of NOK 1.6 billion on a normalized level. In a few years, additional profit sharing is expected. The growing results, combined with reduced capital requirements as a result of one, higher rates, two, lower guarantees, and three, shorter duration, will significantly increase return on equity in this segment from around 3% currently towards 10% in 2030. Let's move on to the growing front book and change in business mix.
This slide says everything about the transition of the business model from capital-consumptive guaranteed business to capital-light savings and insurance business. You can see a substantial change in the composition of increasing premiums, a change in earnings contribution from back book to front book, and a significant growth in capital-light assets under management. These changes also impact the risk in the business, as I will illustrate in the following slides. Looking at the business from an SCR point of view, solvency capital requirements, we see how the composition of the SCR has shifted from the introduction of Solvency II in 2016. When we look into the future, we know that liabilities will run off from the guaranteed business, while we expect structural growth in premiums from unit -linked. It means that we have good predictability in the balance sheet development and how capital tied up in the back book will be reduced.
What is less secure is how much we will grow the front book as a whole. In reality, we will either generate more capital from the front book and at the same time tie up some capital for growth, or alternatively, the front book will grow less but also tie up less capital for growth. In both scenarios, we will free up the back book capital. In either case, free cash flow will grow. I'll revert to this point a little later. Storebrand Bank and Storebrand Asset Management are strongly capitalized under the regulatory framework called CRD IV and do not need a significant buffer above their capital requirements of 100%. The CRD IV business, therefore, dilutes the group's reported solvency ratio when included in the consolidated numbers. This is a pure technical factor because banks have their buffer to the capital requirements in the capital requirement itself, not in the Own Funds.
If we combine contribution of the well-capitalized CRD IV business with the Solvency II business, we see that the solvency ratio of 181% falls to a consolidated ratio of 174%. As a consequence of the shift in the weight of the group's capital requirements, the board has decided to lower the top end of the capital range in the capital policy from 180% to 175%. This is in line with the communication on our Capital Markets Day in 2020 and the ongoing transition in the group away from guaranteed business towards a more capital-light business model. Now, over to my last point, deployment of capital. We have now used some time understanding how the back book turns into a positive financial contributor and how the change in business mix leads to a new dividend policy. Let me spend the next few minutes to take you through how we prioritize deployment of capital.
Historically, the capital generation has mostly been used to strengthen the solvency ratio from an underlying 117% at the time of the introduction of Solvency II in 2016 to today's 174%. In addition, the solvency capital generated has been used for ordinary dividends and M&A, as illustrated on this picture. Looking at the net group profit over the last five years, we see that practically all of it has been upstreamed as cash. The takeaway is that the reported Storebrand results have been close to cash and that they are fully fungible. As we no longer need to strengthen the solvency of the group, most of the cash will be available for distribution to shareholders. Let me also briefly look at our recent M&A history. Since 2017, the group has acquired several businesses.
Skagen in 2017 and Danica in 2022 were somewhat larger bolt-ons within the asset management and pension space, and in addition, we have done several smaller bolt-ons. Common for all of these acquisitions is that they strengthen the capital-light front book and align well with the group's strategy. In addition, they have a clear strategic rationale on a standalone basis and concrete group synergies in terms of capital, cost, distribution, and systems. We firmly believe that these transactions have been of high importance for recent and future value creation in the group. This picture seeks to illustrate what contribution these transactions have had in terms of profits after tax. I will skip the most recent transactions as it is too early to fairly evaluate them.
The group paid an aggregate consideration of NOK 3.1 billion for these acquisitions, and today they have earned back more than NOK 1.7 billion after tax, meaning that 56% of the consideration has been earned back. The weighted payback period is projected to be around eight and a half years. We believe this represents a decent value creation for shareholders to date and that more will come in the future when the long-term synergies can be fully realized. Let us now look at the bridge between capital generation and capital deployment. I know there is a lot of interest around this figure, so I just want to start with a couple of reflections. We write illustrative for a reason. Changes in financial markets, changes in regulatory capital requirements, and more mean that a fixed number for future capital generation will never be exact.
Cash earnings give increasing solvency generation as transformation to capital-light continues. Capital consumption changes through significant release from the guaranteed business and runoff, partly offset by strong growth in other Solvency II regulated lines of business. If we succeed with growth, we produce high results as free cash flows. If we don't succeed, we'll free up more capital. Either way, the free cash flow available for dividends and share buybacks is strong. Now, let's look at capital deployment going forward. The board is firm on promising nominally growing dividends over time. The remaining net capital generation after ordinary dividends will be used to maximize shareholder value. We will allow for organic growth in entities outside Solvency II as long as it is value creative for shareholders.
The CRD IV business is not a runoff business, and we will continue with sensible growth whenever we see that we can capitalize on our strategic resources and group synergies. When the solvency ratio is above 175%, the board has an intention to continue with share buybacks with an ambition of NOK 10 billion by 2030. We will continue to look for opportunities for a creative M&A, but we will be selective as we now have a strong platform for organic growth in all the markets we are active in. In this picture, we have illustrated two scenarios. The first scenario is a long-term modest growth scenario. This scenario builds on group results of the announced NOK 4 billion next year and gradually growing for the next 10 years. The runoff business will release capital as planned, but the growth will require some of that capital.
The capital generation from earnings, however, will grow strongly, and there will be ample cash for ordinary dividends and share buybacks. The other scenario is that we will reach the NOK 4 billion in result for next year, but that the profitability shows no growth in the next 10 years. In this scenario, the free cash flow from earnings will be less, around NOK 3.4 billion per year times 10, equivalent to NOK 34 billion. But the lack of growth will mean that all of the capital released from the back book will be free cash flow available to be returned to shareholders. So you see, in either case, free cash flow available for shareholders will be strong and ensure a capacity to fund growing dividends and share buybacks. Obviously, the company will have significantly higher terminal value in the growth scenario.
Of course, factors like regulations, financial market movements, competition, and evolution of commercial markets can change these hypothetical scenarios significantly when the future unfolds. But I still think that these examples illustrate well the cash generation potential for shareholders. Finally, this means that the board has decided that the threshold for repatriation of excess capital has been lowered to 175%. To sum it up, the group aims to pay ordinary dividends of at least 50% of group profit after tax and nominally growing. When the solvency is above 175%, the board will consider share buybacks with the ambition, where the ambition is to buy back shares of NOK 10 billion by 2030. And that concludes my comments at this stage, and I leave the word up to you, Kjetil.
Perfect. Thank you, Lars. I'll spend 10 minutes roughly talking you through the main effects from IFRS 17 on Storebrand Group accounts and how we will report going forward. Let me just start with the key messages here. I guess the real key message is that the group fundamentals will remain unchanged under IFRS 17. Consequently, there are no changes to dividends, solvency, and cash generation, nor will there be changes to the group strategy, risk appetite, business plans because of IFRS 17 or 9. The company will continue its focus on cash earnings and solvency, and these reporting formats will be continued in its current form. While IFRS 9 will be implemented in all products, IFRS 17 will be applied only for products with a significant insurance element. There will be several changes both to the P&L and the balance sheet as the consequences of IFRS 17 in particular.
Most notably, shareholder equity in the opening balance sheet will be reduced with approximately 20% and replaced by a Contractual Service Margin, and I'll refer to that as CSM hereafter. CSM is a balance sheet liability, and it's containing the present value of future profits of the in-force business in Storebrand. It's important to note that unit -linked is scoped outside of IFRS 17 since the products in Norway and Sweden don't have a significant insurance element. Unit -linked in Norway and Sweden is measured under IFRS 9 and IFRS 15 opposed to similar products across some continental European peers. As a consequence, the unit -linked business in Storebrand will not contribute to CSM, and all else equal, CSM in Storebrand will be more of a back book metric compared to some of our peers. Let's look a little bit closer at the scope for IFRS 17 in the group.
All of the lines of business, approximately 50% of the current earnings will be outside of our IFRS 17, while the other half is under IFRS 17, but measured under different measurement models as shown on this slide. We have included one page in the appendix that provides some high-level information about these measurement models. Let me turn to the balance sheet of the group. This illustration gives some perspective on the balance sheet composition under today's IFRS, Solvency II, and IFRS 17. Equity and Own Funds are set approximately to scale. The key points here are three things. First, insurance liabilities will be of similar size as in the solvency calculation. Second, the equity under IFRS 17 will be similar to, or roughly similar to, Solvency II unrestricted Tier 1 and around 20% lower than today's IFRS for equity.
Lastly, the IFRS 17 equity plus CSM will be larger than the current group equity. As for IFRS 9 on the asset side, the main point is that the group can still use bonds at amortized cost in the statutory accounting as this is the best match for liabilities under Norwegian product rules. We view this flexibility in IFRS 9 as a positive due to the fact that it enables better matching of assets and liabilities. Let me look a little bit more at earnings and some selected KPIs. Today's group profit will be renamed to cash earnings, but it will be very similar to the current profit before amortization. On the P&L side under IFRS 17, we expect somewhat higher normalized result due to unwind of CSM, but we also expect IFRS 17 result to be more volatile than the book value accounting under IFRS 4.
As said previously, the IFRS 17 equity will be lower, and that means that the ROE will increase substantially, both measured on a cash basis and measured under IFRS 17. In terms of combined ratio for the insurance company, it will be lower due to discounting and some other effects. The insurance segment as a whole will be quite similar as today, as most of the lines of business will be based on today's statutory accounting from the life insurance company. In terms of dividend, we expect unchanged level from IFRS 17, and the last point on the P&L side I want to mention is that payable tax will be unchanged as it's based on statutory accounting in the legal entities of the group. While all legal companies will implement IFRS 9, Storebrand Group is the most significant entity to report under IFRS 17 from the first quarter of 2023.
All other legal entities except Storebrand Forsikring, the P&L company, will report under today's IFRS standards. And I want to emphasize that we have decided to continue our close to cash earnings reporting more or less like reported today. This is because we believe it's a very useful reporting format to understand the value creation in Storebrand and because the minor changes in statutory accounts enables this reporting to be continued with some minor revisions. We will revert with some revisions at the first quarter at the latest. For shareholders, the continuation of our statutory accounts means that Storebrand will continue to report on the segments Savings, Insurance, and Guaranteed in the quarterly report and the supplementary information like today.
We view IFRS 17 as another lens together with existing reporting, and I want to emphasize that we do believe IFRS 17 provides useful information about the value creation in the business. The valuation and profit emergence principles increase transparency and provide information that complements current reporting. So, to sum up, I guess we feel that the implementation is according to plan. We do monthly parallel runs to get familiar with the standard and the numbers, and we look forward to report our first quarterly result under the two accounting standards in connection with the first quarter reporting, 10th of May 2023. We will also revert to the market with more details on concrete effects in addition to KPIs implications when the first quarter results are published.
With that introduction to IFRS 17 and 9 and our reporting, I will leave the word back to CEO Odd Arild Grefstad before we head into Q&A.
Well, thank you, Kjetil, and thank you to you also, Lars. To just sum it all up, what you should have taken with you from today's presentation is that, first, we change our dividend policy by lowering the threshold for extraordinary capital deployment to 175% due to a more capitalized business mix. Second, with higher capital and cash generation, we will be able to fund growth in ordinary dividend per share, strong organic growth in the business, and share buyback as long as the solvency is above 175. And our ambition is to return at least NOK 10 billion in share buybacks by 2030. And third, the business does not change with the implementation of IFRS 17.
The main focus for Storebrand will still be on cash earnings, Solvency II capital generation, and the ability to convert earnings to free cash flows for shareholders. IFRS 17 will therefore be a source of additional information. And with that, we have reached the end of the presentation, and we'll hand it over to Daniel again for introduction of the Q&A session.
Thank you, Odd Arild, and Kjetil and Lars. Yes, we will now move over to Q&A, and we will take questions from the floor, and we will take questions on Teams. And to ask a question on Teams, just raise the hand, and we will open up for you to ask your question eventually. But I will start here on the floor, and I think we'll start with Håkon Astrup here from DNB. Please go ahead.
Thank you. Two questions for me.
The first one on the solvency target now reduced to 175. How do you look at that going forward? You still have the same kind of mechanisms that the new growth will come in at the lower capital requirements. Going into 2030, is it possible that that can be reduced even further? And then the second question on the M&A, can you just update us on your strategy with regards to bolt-on acquisitionss? What kind of businesses, for instance, life insurance outside Norway and Sweden? Could that be of interest? And also with regards to guaranteed business in Norway now as the profit has come up on that business? Thank you.
Yes, we can start then with the further reduction in the solvency ratio.
It's quite mechanical because, of course, when there's change in the business mix, if we have more bank assets on the balance sheet and more on asset management, then we really monitor each bucket in itself. So if that change continues as we expect over time, the 175 can also be changed. That's clear.
So it's a possibility that by 2030, that could be actually a lower requirement than today?
It's a possibility. We do that internally all the time, and then it's a discussion about also what we then do externally as a threshold for really saying that we are over-capitalized. Then on M&A, as Lars said, we really feel that we now have a platform that can grow very strongly, organic. So we don't need to do any M&A to get the growth in the business going. That is a starting point.
Then I think you will see that we have been quite clear on doing domestic M&A activities, very much focused on Norway, Sweden, the Nordics. And we have focused also very much on asset management to broaden our platform, which is now quite the size of the broadening we want to have. And also with the very clear synergies we have on insurance, we also look at insurance assets as a possibility when we do bolt-on M&A. We also see opportunities in the guaranteed business with closed pension books in Norway and Sweden. We have done some of those into our balance sheet also this year. And I must stress that this is solvency effective. It's low guarantees, so it's a very ROE positive business we take on board when we do that. We are not looking for large-scale Nordic pension assets as a part of this M&A strategy.
You should not expect Storebrand to engage in that.
So life insurance companies in, for instance, Finland, it's not.
That's exactly what I meant.
Good.
Yeah, please continue.
Thank you, Roy Tilley from Arctic Securities.
I have a few questions. I'll limit myself to three. I'll try. Just the first question. We've had this discussion before if this excess capital will only be buybacks or if we also do extraordinary cash dividends. I noticed today you say NOK 10 billion in buybacks. Does that close the door on any extraordinary dividends? Is it only buybacks from now?
Should I answer that quite? Well, for us, that's an illustration. And we have a dialogue with our shareholders all the time. We look at the regulatory frameworks that our shareholders are a part of.
And of course, if there is any views from our shareholders that it's more effective to do dividends instead of share buybacks, we will listen to that. So I think it's for illustration of growing nominal dividends and everything else on share buybacks. But that might be changed, of course. It's the sum that is important.
Okay, thank you.
We do it for the benefit of the shareholders, so we listen to the shareholders in terms of what they prefer.
Okay, great. Thank you. And then two quick questions. One follow-up on Håkon on the solvency level going forward. I noticed in the pro forma ROE where you showed the front book, back book, return on equity, I think when you've done that before, you've used 150% solvency margin for the front book. I noticed now you use 160%. Is that correct? And why?
I can comment on that briefly.
What we have done now is previously we did it on IFRS 4 equity. IFRS 4 equity will disappear. So we've now done it on Solvency II capital. So that's one difference. The second difference is that we have lifted the unit-linked to 160, and that is to reflect that there will be some tangible capital also in the unit-linked business, not only value of in-force that needs to back it. So I think that's the slight change you see there.
Okay, thank you. And the last one, just you mentioned, Kjetil, that the group profit will be renamed group cash result. Does that mean you don't see any payable tax for the foreseeable future? Are you confident that your cash position or tax position will remain unchanged? It will also be a tax rate and a result after tax.
So we still believe that there will be a tax cost in our accounting. And then the payable tax is, as some of you know, subject to the decision in some ongoing tax cases.
Okay, thank you.
I think I'm just going to, before we move on in the audience here, I'm going to let Blair Stewart, who's with us online from London and Bank of America, to ask your question. Please go ahead.
Thanks, Daniel. Very famous, Daniel. I've got three quick questions. The first question is on dividend growth. If you just take an average of your buyback ambitions, you'd be buying back about 3.5% of your shares every year. So that suggests that even if your nominal dividend amount is flat, you're growing at 3.5%. I just wonder why you should think about dividend per share growth in the coming years.
My second question is related to slide 26, where you talk about NOK 1.6 billion from the guaranteed book, the guaranteed segment. That includes NOK 700 million from the company portfolios, which is normally included in the hold. I just found that was a strange way to categorize it. So I just wonder if I'm understanding that correctly. And thirdly, just related to IFRS 17 and your decision to maintain hold to maturity or bonds at amortized costs, which is great, very sensible decision in the statutory accounting. But I wonder what volatility does that create under IFRS 17? Where will we see the mark-to-market of those assets? Will that come through changes to the CSM, or will it come through somewhere else? Thank you.
If I take the two first questions on dividend growth, what we've done in order to get to the numbers that you've seen on the screen is just put in 5% nominal growth during this 10-year period. The actual growth could deviate from that depending on the board's decision, and as a minimum, it should be 50% of the results as we have communicated in the past.
I can just add one comment, Lars. On the per-share growth, Blair, that will, of course, be much higher, but dependent on when we actually do the buybacks, so yeah, it's possible to do the math to see a very much higher growth in actual dividend per share as we continuously buy back shares.
Yeah, so 5% growth is based on the nominal NOK million amount. Yeah, so obviously that would translate to a much higher DPS growth.
Yeah, that's what I was wanting to clarify. Thank you.
And in terms of the NOK 1.6 billion, I understand the question. It's a combination we don't usually do. The reason why we did it this way is because those are the parts affected by higher interest rates and higher inflation, and that's where you will see it go through in the results. So it's maybe a way to present it, but it's just to illustrate where higher rates has the largest impact on the results.
And I also can add that, of course, the Company Capital is really there to support the guaranteed book of business. The magnitude of the Company Capital is as large as it is because we have these guarantees at the book.
So on this reporting, we add together the guaranteed segment with other and have a return on equity of those, as it always has been in the way we put these numbers forward. So that's also why we see this as an integrated part. On IFRS 17.
Just on that point, sorry, guys, before we move on to IFRS 17, why the emphasis on buffer building over the next, I think you said three to four years. It's slightly surprising that we won't get any profit sharing through the Norwegian business for three to four years.
No, I think I said that it will be gradually improving over the next three to four years, but you should expect full profit split or profit sharing in three to four years.
So it will gradually build up as there are subsegments that will achieve a higher return and already have significant buffers where profit split can happen earlier.
Thank you.
And then to IFRS 17, just for background, I think we received the last clarification from the Ministry of Finance on the treatment of bonds under IFRS 17 quite late in October. So it means that we are still working on how to take them into the balance sheet on the IFRS 17 group result. The hypothesis is that they will go as fair value, and you will see some volatility, but also matched with the movements in the liability as they move with the same discounting. And then there's a discussion on what will be taken to the OCI and what will be taken to the normal result.
And there we need to conclude our internal discussions before we get back to the market. Just to add, we have also, of course, been able now to test this in a really turbulent market going from very low interest rate levels to high interest rate levels and seeing that this has been limited volatility into the numbers. So I think this framework takes well account for this healthy maturity bond portfolio without too much volatility.
Yeah, yeah. The more you can put it through OCI or the CSM, I think the better. Keep volatility out of the P&L. But thank you very much, guys.
Thank you, Blair. I think the microphone is close to you, Vegard. Then please go ahead and please introduce yourself as well. Thanks.
Thank you. Vegard Toverud from Pareto . I have three questions as well.
In discussing buybacks with the FSA, have you gotten any feedback or any indication on a level or thresholds that you should be within? Or, yeah, end the question.
And you want an answer right away. Now, the way we do this is that we do thorough processes internally. The board does thorough processes around what is the right capitalization of the group. And of course, we have also close dialogue with the regulators, especially around our risk assessment processes that we have on this time of the year. And we, of course, also give them the information that comes out of our own risk assessments. But that's the way this works. We do our own assessment and inform the regulators about our findings.
But you need an approval as well.
Yeah, when we do come to a situation where we want to start share buybacks as we already have done once, then we have to apply again and have a go from the regulator to start doing share buybacks, and that will happen when we are in that situation, hopefully by year-end.
Okay, thank you. On the M&A side, is there anything with the new IFRS 17 that changes the thresholds on the way that you calculate M&A so that, for instance, some projects or some industries would be easier to pass the internal thresholds you have? Or is it completely the same as previously?
I don't think we can comment on that on a general basis, but obviously, we'll have to look at all the different factors affecting our investment decisions when and if new opportunities arise.
But it's important to understand that we don't want the til to wag the dog. I mean, we do what's right for the business from a financial and economic point of view, and then the reporting comes as a consequence.
I think cash flow would be the important metrics also going forward doing M&As.
And then lastly, it appears that the net reduction in guaranteed business is slightly less now than the last time you updated at the last CMD by 2030. Do you have any comments to add to that?
I'll try to start.
I think we have one slide in the appendix that we didn't bring aboard, but it shows the growth also in what we call good guarantees or hybrid-like products, which has grown quite substantially since the last CMD, both in Sweden with more or less a nominal guarantee product, the public sector here in Norway, and also some very well-funded closed pension funds. So I think that's the main difference that we are selectively growing in cases where we get ROI, accretive, and risk-manageable portfolios on board.
Excellent. Thank you.
Can we pass the microphone to Peter Eliot down at the corner? There we go. Thank you.
Thank you very much, Peter Eliot from Kepler Cheuvreux. And thank you very much for the very useful presentation and positive messages.
Just to narrow in a couple of things that I didn't fully understand, you show a very useful slide in the appendix 53 on the capital allocation. If I compare that to the ones that you've shown in previous capital markets days, then the contribution from the VIF for the guaranteed products has fallen quite a lot, sort of suggesting a higher need for hard capital in those. I'm just wondering what has caused that, whether it's sort of buffer capital related and how that might change, and this may be related, but also related to that, the 15%-16% net solvency generation that you show, I appreciate all your comments last, it's illustrative, lots of moving parts, etc., but I guess the increase is sort of two to three points above what you showed two years ago.
And mathematically, just sort of applying the increase in interest rates, we might have got to a slightly higher number. Just wondering if I'm overthinking that or if there's anything you can add on that. And then the third question, the solvency target reduction. I understand the business mix is changing, so it's right that should come down in time. Just wondering if there was sort of any particular reason for the timing being now. I think in the past, perhaps the communication led us to think you might sort of look at it a bit later. Just wondering if anything sort of accelerated that. And maybe in line with that, whether there's, I know it's early days, but any comments on what an internal model, what impact that might have?
Thank you very much. Yeah. Should I start on the appendix?
I think it is because we have applied a slightly higher threshold to the guaranteed book of business now. So we apply a higher targeted solvency ratio to it than the last time. But I will need to check to be sure, Peter, that that's the reason why.
Well, that's correct.
The difference between how we show the slide now is it's based on the target solvency ratio that we show when we have done the transition to under 75. Last time we showed it, it was the average based on the 179 solvency ratio we had then. So that's how much does it consume? How much should it consume based on its target solvency ratio now versus what was its contribution on average back then?
Yeah, on solvency generation, I think we need to have comparable numbers because what the slides show now is that you have 14%-15% solvency generation from results. And then on top of that, you have in gross around 6% in runoff from the runoff portfolio. So on top, that is more or less 20%. But then he has also deducted 3% already from the expected growth in Solvency II business. So that's why you then fall down to this number that you allude to. But I think the gross capital creation is much higher than it used to be compared to what we reported last time.
Can I just clarify the definition of the last one, the 13% you showed before? I'd assume that was on a net basis.
No, I think it was 10% from results and then 3% from runoff from the guarantees before we have taken into account any growth in the business, so I think there is a difference in that explanation.
I think the important thing is that earnings will grow, capital requirements will go down, the percentage increase will grow as a consequence of both the denominator and the numerator in that equation, but as I said again, it's illustrative. It's absolutely impossible to control all of the different factors impacting this, so this gives you an illustration as to the development, which is quite positive compared to what we showed last time, very much according to the higher interest rate and the strong earnings momentum in the group. I'm sorry, I lost the last question.
The last one was internal model, well, internal model.
It will be a long journey, of course, before we start now next year to have the dialogue with the regulator. Our internal modeling itself gives good response for us to do risk management, to do our own assessments, and we use it in the business very much. And it shows, well, positive numbers compared to the standard model, I would say. But at the end of the day, that has to be calibrated also in the dialogue with the regulator. So I don't want to give any numbers around the internal model at this time.
And I think the second to last question was, why did we change it now? I forgot, Peter. So why did you change from 180 to 175 now?
Oh, yeah, but that is just because of the mechanics of the business. We have seen that last time we had our Capital Markets Day, 180 was the right composition between these different buckets of CRD IV and Solvency II business. Now that shift has really happened. So we could then take that into account and change this to 175. Then you can discuss, should you change it more often or should you do it more like steps in five? Well, that is what we have done now, and we have to look at that going forward.
Thanks very much.
I think I see we have one question here from Tryfonas. Yes, here in the middle.
Hi, Tryfonas Spyrou from Berenberg. Thank you for the presentation. Two questions. One is on the NOK 10 billion of excess capital you mentioned by 2030. Are there any comments you could make as to sort of the timing of the distribution?
Should we just basically assume a linear distribution shareholders? And the second question is on customer buffers. You previously alluded to the fact that as interest rates rise, there's less of a need to hold as much buffer as you used to before. And obviously, you mentioned that you're going to be building those in Norway in the next two or three years. Does that assume any change in the level of buffers? And is there sort of, I guess, a positive risk that if the buffer comes down, the profit sharing comes earlier? Any comments on that would be great.
T hank you, Tryfonas. In terms of the NOK 10 billion, we know that financial markets and things outside our control go up and down, so it's difficult to give you an exact number per year.
If you make a normalized result from here on and up until 2030, it's fairly evenly distributed. But we are very clear to say subject to more than 175 because we know it's not a straight arrow to get to where we expect to be in 2030. So I can't give you an exact timing as to when it happens, but if the world is half normal, we will reach it by 2030. In terms of customer buffers, we will need somewhat lower buffers when rates are higher. So I can't give you one exact number for all of the different portfolios, but on average, we were seeking approximately 12% buffers in the past. We're happy to have approximately 10% buffers now. But that's an average number and not an exact number.
I also like to add that, of course, building buffers is also extremely positive for shareholders because it's capital in the calculations. So it's always a trade-off also that we do based on the situation, what is also most profitable for the shareholders, taking the whole amount into buffer capital creation or to take 20% of it in our P&L as profit sharing. And that is what we can do in our model to see what is the most, well, profitable to do actually in these cases. Thank you.
Thank you.
If you pass it back to Johan and then Jan Erik afterwards.
Thank you very much. Johan Ström, Carnegie, quick questions on, first of all, the buffers, continuing on that. What are your targets in terms of buffers? Can you give us any numbers there? And then on the solvency ratio, what's the current solvency ratio?
And finally, when do you expect to start buying back shares again? Thank you.
I think I mentioned to Tryfonas that we're seeking to have approximately 10% of Norwegian customer buffers. So that is a little lower than it has been in the past. But as I said, it's an average number and it's not a precise number. The solvency ratio today?
The solvency ratio today, well, that's the NOK 1,000 question, I suppose. It's hard to give a clear indication on that. We reported 174% at the third quarter. There has been positive development in the markets, but then we also have these countercyclical elements that is something to keep an eye on. And you also know that we have some more buffers that comes into the calculation by year-end. So we cross our fingers, but I think we don't can give any estimate now on solvency.
We have to wait for year-end and do the math.
Is it higher or lower than it was in Q3?
Let's hope it's close to the target anyway for 175%. I'll stop there. Thank you.
Yeah. And that probably goes into the question on when we will start buybacks as well as it is.
Yeah, of course. This is an important question, of course, because if we then are above the 175% based on year-end numbers, we will do the application for starting share buybacks.
Yes, Jan Erik.
Yes. Thank you. Jan Erik Gjerland from ABG. Some couple of questions from my side as well. The first one is about how much of your reported earnings can you pay out in one year and how does it really work?
How should we be able to take that new EPS from the IFRS 17 and then apply it down to a dividend and a buyback situation? How should we think about it? Should we rather use the cash EPS as a running tool? And how does this run with the FSA? Second question is about the portfolio on the paid-up side. You showed us some lower duration on the asset side and also lower duration on the liability side. What have you done now during the last half year on adding bonds which has been beneficial for you? And have you sold any bonds to finance those which then will hit the Q4 numbers? And finally, on the buffer side again, could you give us some more clarification on the 10% level? Is that including the defined benefit today and the hybrid capital, etc.?
So that means that could we see lower levels of buffers in the paid-ups as a consequence for the higher rates? Thank you.
Okay. Should I try to start on the first one just on the we'll continue the cash-based earnings, and that is based on the statutory accounting in legal entities. The application to the regulator is also based on statutory accounting, so our thinking now is that the statutory accounting is what both controls the upstreaming to the holdco and out of the holdco, and that will continue as it is today. Yeah, as it is today, really,
and just to confirm for those of you who do not know, we can just send a message what we are going to pay as a dividend when it's between 50% and 100%, and then we have to apply if it's more than 100% of the results in the entities.
But in Norway, in Sweden, the SPP operation has paid more than 100% of results dividend for several years already, where the maturing of the back book has come further than in Norway.
Yeah. On the paid-up side, just very quickly what I got from it. No, there will be no. There's kind of not sold anything in a hold to maturity book in Norway, so there's not done any realization that will lead to any losses. What's happening gradually here is that the bonds at amortized costs are maturing, and then we are buying bonds with higher rating and then higher returns than what's been there historically.
And with also longer life, longer duration.
Yep. And we can, of course, also do reallocation from asset classes into bonds with longer duration if the team thinks that's a reasonable thing to do.
It's already a very high-quality portfolio, but it has been even higher quality through the year this year, and we expect to do even more in the same direction next year.
And then there was a last question on the buffer. Can you repeat that question, Jan Erik, please?
Yes. You said in Norway, there are around 10% average buffers. Could you split that a little bit better? Is it so that you should have 20 in the paid-ups, or is it okay with 5 to 10?
It doesn't work like that because you have some paid-up, no, some paid-ups in payout and some which are still growing. You have some with large buffers. You have some old ones with 4% guarantees. You have some with 3% guarantees. So you have different duration, different buffer levels, and different guarantees in these different sub-portfolios.
So we have to optimize between the actual risk in these elements. So 10%, as I mentioned, was an average number across the different subsegments in the paid-up policies.
Just one clarification then. So if you have a sort of matched portfolio on the paid-up side, which has a low buffer and a high guarantee, but
It's still really hard to match them perfectly, and you will have some other assets going in there, and you will have stresses on those assets in the solvency calculation. These buffers help shield us from those stresses, and then probably people who know the business even better than me will probably say that when you go far out in time and you have much lower guarantees than you have today and also shorter duration, the need for buffers are probably smaller, but I'll let the team who really knows how to do that job confirm that.
Just one final, then. On the runoff solvency gains, you said 3% last time. You said 6% this time around. Is the 6 the new level from 2023, or is it a gradual pickup from the 3 towards the 6? I think it's really not gradual at all.
It's taken into account that we get a new buffer level at year-end here now that helps with the solvency generation in the short term, and then, again, this is, as Lars said, illustrative, but an attempt on a medium-term guidance, and then we'll need to get back kind of in the next leg of time.
Any more questions?
Yeah. Let's move over to Hans. Yeah.
One moment. Sorry.
Oh, yeah. Go ahead.
Please go ahead.
Yeah. I thought you got picked first when you said it in the first one. Anyway, I just have one follow-up on the because as I see it written, you get a reset of the buffer, the additional statutory reserves this year, and then you'll have a bigger effect from building the customer buffers next year.
So shouldn't this, when you say 15%-16%, it would actually be a bit front-end loaded until you go and just get 20%? So my point is then, and then I guess we don't know your growth, but I see like you will have a it looks like you have a very high gross capital build, and then it will go a bit down. Is that a correct way to think about it?
I think that's correct, yes. Okay.
That was the question?
Yeah. We can pass it back to Hans.
Yes. Hans Rettedal, Danske Bank. Just two questions. One on the buffer, and that is you've been trying sort of over time to change the regulation regarding or to influence how you treat the buffers and the use of buffers.
There hasn't been much willingness to do so when you were losing money or making very little money on these contracts. Do you think there could be a change in sentiment from the regulator now that you're making money on the contracts? Then my second question is, I understand it's a capital update relating to higher interest rates, but it's hard to speak about higher interest rates without speaking about inflation. I was just wondering if you have any updates regarding the cost aspirations that you made during your Capital Markets Day in 2020.
I can discuss and give insight in the regulation for guaranteed products. As you say, it has been a long process with discussion with the regulators around this. It's been some progress, actually.
Last year, we got the new regulation coming on for the public pension, where we can use all the buffers, not only the fractions down to 0% result one year, and we have actually a dialogue with the Ministry of Finance next week also on this topic. We believe that it's still possible and hopefully we will have the change in the regulation that will be positive most for the policyholders because it means that we can use the buffer capital more effectively to take risk for the policyholders and that earlier come into a situation with profit sharing and writing up the pensions. We feel this is a very good, and we get actually support from the FSA in this view. It's more a political situation where we need to get this through. I'm positive that that will happen.
The timing is, of course, more difficult to tell.
In terms of inflation, we are going through the budget process, and we are neutralizing excess inflation through efficiency programs taking place throughout the organization. However, it won't be that easy to compare the numbers from last year to this year due to the inclusion of Danica and Kron and other things into next year's numbers. So I'm not going to give you a new number for cost guiding for next year at this stage, but we may revert to that on the fourth quarter reporting point.
Thank you.
I see there's a question from Vegard behind, and that's fine.
Just a very small detail. It seems that you are guiding on above 4% return on the paid-up policies in Norway, as well as 4% on the company portfolios. Historically, there has been quite a difference between those returns.
So is it possible for you to discuss just the difference now? Is it that the above 4% is way above, or are you doing something on the asset mix, or is the 4% on the company portfolio somewhat of a stretch?
The company portfolio is basically short-term interest rates with a small risk premium. The paid-up policy has a hold-to-maturity bond portfolio, which takes a lot of time to roll over. So you have a negative drag from previous investments for some time before you can stabilize on a higher level. So this is an estimate as to where we are now, and that will change over time.
And that's kind of also why it changed, right? Because previously, you had bonds that amortized with higher rates than what you have market rates.
Now you have it the other way around, and that's why you get a higher pickup in the Company Capital. But no change in asset mix or risk appetite.
Okay. Thank you.
Go ahead.
Okay. Thank you. Just one question on the IFRS 17. On the CSM, you said it's around 20% of equity. So is it NOK 6-8 billion ballpark, the CSM you'll recognize? I was just wondering, you said it's mainly back book-related. Does that mean that this will decline over time? You're not adding any new CSM? And secondly, what's kind of the duration of that CSM? What's the annual recognition it's going to be?
Yep. No, it's a good question. No, you will get some new CSM because as you roll forward, if you beat, just like in MCEV, if you beat the discount rate, you will create new CSM from the existing in-force business.
So although it's a closed book, you can still create new CSM, but you will probably not have a lot of value of new business. You will not bring in a lot of new guaranteed business that will create value of new business. And then on the duration, that is linked, of course, to the duration of the business. And when it comes to the pace of the unwind, we are not ready to give a very precise number on that yet, so that we need to rework it.
Okay. Thank you.
But if the public market really opens up, then you will have new CSM coming in, of course. Okay. Please go ahead.
Yeah. A quick follow-up question. I know it's a long time until 2030, but looking beyond 2030 and what you see at the moment, do you see any more excess capital released than the NOK 10-NOK 12 billion, or will that be depleted by 2030?
Well, when we have no more paid-up policies, we will have no more capital tied up in the paid-up policies. So all of the capital will be released in the end. But we will have a business that will require capital for other things, like the municipality sector, like the unit-linked business, etc. So there will be parts of the business which will require less capital and parts of the business which will require more capital. And we've tried to done this shift now because there was a lot of technical discussion around the NOK 10 billion related to the guaranteed book since our last capital markets day up until now.
We tried to shift that to a general open picture in terms of how much will be released and how much will be tied up in new business, and as a consequence, how much is available free cash flow for shareholders. We tried to shift it more into something which is tangible for you to measure and to actually get your hands on.
But you can still have paid-up policies after 2030, but then you will, if I understand you correctly, you will use that capital to fund growth in other parts of the business.
I think it's a bit early to say. I think that's maybe fair, but there will be capital left, and it will be released as everyone dies. And then I think there are some decisions that need to be taken between now and after 2030.
But of course, if the management really does the job, the growth of the business will continue to be strong. The resource generation will continue to be strong. And most of the capital that is freed, it also used to create these excess results compared to what we see today. And then most of the capital will be freed from the guaranteed, but it will be used to create the new recurring results that you will see in the business. I think the slide last showed that, in two very different scenarios, you will have quite a lot of capital freed up in the next, well, decade. Shows very much these scenarios and what is really going on.
Either it will be capital from the back book in a no-growth scenario that goes out to the shareholder, but hopefully, we can give it as recurring results instead that really is capital that is the best way to create value for shareholders.
Very clear. Thank you.
Any more questions from our audience yet? Roy, please go ahead.
Just a final quick one. Sorry. The NOK 10 billion, that's under assumption of standard model, right? So if you get an internal model, that number could change as well.
Everything is done under the standard model.
Yeah. So no assumptions on internal models. Okay. Thank you.
Any more questions from the audience in here or on Teams? I have no more questions on Teams. Looks like we're finished with questions. So thank you, everyone, very much for coming to Storebrand to listen in to our presentation today.
Thank you, everyone who's joined us digitally. The next opportunity to meet, or we'll have more opportunities, but next time we'll be here is on the 8th of February when we have our fourth quarter results that will still be on current reporting formats before we move into IFRS 17 in May. Now, everyone, it's welcome to have some refreshments upstairs and have a chat with Lars and Odd Arild and ourselves, and yes, once again, thank you so much for tuning in. Thank you so much for coming. Thank you.