Hello, and welcome to the Storebrand third quarter conference call. My name is Val, and I will be your coordinator for today's event. Please note, this conference is being recorded, and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the presentation. This can be done by pressing star one on your telephone keypad to register your question at any time. If at any point you require assistance, please press star zero, and you will be connected to an operator. I will now hand you over to your host, Kjetil Krøkje, to begin today's conference. Thank you.
Good afternoon, ladies and gentlemen. Welcome to Storebrand's third quarter 2019 conference call. My name is Kjetil Ramberg Krøkje, and I'm the Head of Finance and Strategy at Storebrand. Together with me today, I have Group CEO, Odd Arild Grefstad, and CFO, Lars A. Løddesøl. In the presentation today, Odd Arild will give an update on the developments in the third quarter. CFO Lars Løddesøl will give an overview of the financial development and dig into some of the more technical elements, in the period. The slides will be similar to the analyst presentation released this morning and are available on our webpage. Corresponding NOK 99 million in performance related income being booked, this, without this, income being booked this quarter.
Year to date, the performance related costs are NOK 111 million, and the corresponding income not booked, NOK 265 million. As you know, the performance related income will be booked just at the end of the year, at the fourth quarter. Storebrand are succeeding in our core markets. According to the NKB, the Norwegian Customer Survey, we have the most satisfied customers within occupational pension. This drives a solid growth in our unit-linked business, as well as, asset under management within our asset management business. Our solvency ratio is strengthened during the quarter from 167% to 177%. If we then move to slide number three, this is our twofold strategy that is well known. We plan to release capital over time to our shareholders.
Through active management, our guaranteed products that are in long-term runoff. In addition, we are well positioned for capital-light growth within occupational pension and the individual markets for savings and insurance in Norway and in asset management. At the same time, we operate in markets in constant change, and there are now several regulatory processes running, both in Europe and in Norway, that can affect our business.
First, EIOPA published their consultation paper the fifteenth of October, giving their input on changes in the Solvency II model. After consultation round, they will give their final recommendation to the commission around summertime next year. For Storebrand, the most important topics are interest rate stress, the estimated forward rate, and the volatility adjustments. We are also preparing for the new international financial reporting standard, IFRS 17, that entails new accounting rules for insurance contracts.
The preparations are well en route in Storebrand for the implementation in 2022. In Norway, we are expecting a consultation around the proposed changes to the framework for the, for managing the guaranteed pension products. And lastly, I want to mention that the Ministry of Finance has proposed changes to the rules regarding transfer of customer buffers within public pensions. Expected implementation is estimated 2019, and this is good news for increased competition and market dynamics within public pension going forward. And as you know, this is a market where we look to challenge the monopolist KLP going forward. If we then move to slide four, the growth in savings continues. Compared to third quarter last year, we see a growth of 11% in our unit-linked assets, both in Norway and in Sweden.
Our asset management has strengthened its position as the leading Norwegian asset manager with a growth of 8% in asset under management, now amounting to NOK 786 billion. Our banking business sees moderate growth, but has strengthened its margin. Growth in our retail lending is continuously being weighted against profitability. As previously announced, we see positive development in our insurance business. Within P&C and health insurance, we now have a 10% growth, while areas within corporate insurance have had a more moderate growth rate. In total, the insurance business grew by 4%. Moving to slide number five. As a means to celebrate on growth in our unit-linked business, I wish to give you a bit closer look into the development of our Swedish subsidiary, SPP. SPP is taking a position as the fastest growing provider of occupational pension in Sweden....
This is illustrated through a 40% growth in new sales, a 22% growth in premiums, and a strong net transfer from our competitors. In fact, every fourth Swedish krona moved in the non-unionized occupational pension is now moved to SPP. This is making SPP to aspire to be the largest player within non-unionized occupational pension in Sweden soon. An important factor in SPP's success, besides sustainability, has been its digitalization strategy, providing several new digital and truly optimized services to its customers. Then moving to slide number six. This quarter, Storebrand further strengthened its position as a leader within sustainable investments. We have been acknowledged by PRI, the world's leading sustainable investment organization, as an investor with excellent responsible investment practice, and as the only Norwegian asset owner included in the PRI Global Leaders Group.
The heavy fires in Amazonas have brought reinforced attention to the problem of deforestation. In August, Storebrand committed to an investment policy, strengthening our position as an active owner. Our goal is an investment portfolio with zero contribution to deforestation, and we have joined forces with 230 other investors in this work. During the UN Climate Action Summit in September, we, as one of 12 founding members of the UN-backed Net-Zero Asset Owner Alliance, committed to carbon neutral investment portfolios by 2050. On this backdrop, it is encouraging to see an increasing demand for fossil free investment from our customers. We now have 19 fossil free funds and NOK 100 billion invested in fossil free portfolios, and that is actually 13% of our total assets under management. With that, I give the word to Lars.
Thank you, Krøkje . Let's move to page seven, key figures. I'm happy to present numbers where the operating profit once again exceeds NOK 600 million per quarter. We have had two quarters with somewhat weaker results, but with no significant surprises, positive financial markets, and continued growth in the business, the profit development is now back on track. The solvency has been significantly strengthened since the second quarter, and with satisfactory financial returns, buffer building continues. The returns from good equity markets and falling interest rates are reflected in balance sheet growth and strengthened buffers. Moving to page eight, showing the solvency movement between the second quarter and the third quarter. As per the second quarter, the solvency was 165% without transitional capital and 167% with transitional capital.
During the third quarter, we've done the following: one, further model improvements and updated assumptions. This is something we do every quarter. Combined contribution, just below neutral. There has been a significant drop in rates in the quarter, which leads to a six percentage points drop in solvency. The fall in the 10-year swap rates were 16 basis points in Norway and 30 basis points in Sweden. This drop in interest rates has largely been reversed so far in this fourth quarter. Increased volatility adjustment and reduced equity stress in the standard model have contributed a positive four percentage points in the quarter. Volatility adjustment is up by five bps in Norway and two bps in Sweden. Please note that volatility adjustment in Norway now stands at 45 bps. This is a historically high level.
Business mix and asset allocation contributes positively with 2 percentage points. This is a result of optimized risk management actions in the guaranteed portfolios. Furthermore, old and higher guarantees are maturing, and new guarantees come in at much lower guarantees and with better buffers. Operating earnings, after reserving for 50% dividends, contribute a little more than one percentage point. This quarter, we have optimized our lapse reinsurance program by reducing coverage in Norway and increasing coverage in Sweden. This gives a three percentage points positive contribution. Finally, we have issued a subordinated loan of SEK 1 billion. This gives a positive three percentage points. Please note that this loan may be used to repay a loan that comes to call in March 2020, in which case it will be taken out of the solvency capital by the end of this quarter.
This gives us a solvency without transitional of 172%. With a fall in interest rates that we saw during this third quarter, we once again get transitional capital from interest rates, and the transitional rules gives us five percentage points in additional regulatory capital and a regulatory solvency capital overall of 177%.... Moving over to the next page called Solvency position Storebrand Group, page nine. This picture shows our traditional overview of solvency sensitivity. In many of the sensitivities, we are close to or above 180%. With normal operating profits and market development, and counting in the fact that the three are cutting in, that the three percentage points solvency capital derived from the recently issued subordinated loan is likely to be excluded in the fourth quarter.
We do not expect to reach 180% this year. At our capital market day in 2018, we stated that we expect to reach a 180% in 2021, and following this, we estimated that we would be able to return a total of NOK 10 billion up until 2028. With the volatility in interest rates seen over the last few months, it has been speculated that the start of the capital release could start earlier or later than 2021. Rest assured that we work hard to deliver on stated targets. Moving over to the following page, headed Storebrand Group. Fee and administration income shows a positive development with a 4% growth year-on-year. Results from insurance is down from last year, primarily due to run off gains and reserve releases last year.
There is still good cost control in the group, even when including costs relating to portfolio management bonuses because of good relative performance. As you are well aware, we are not allowed to account for the earned performance fees before year end. Tax is estimated at NOK 124 million or 21% in the quarter. Moving over to the following page, also headed Storebrand Group, it's page 11. In order to further illustrate the consequences of current accounting rules, we have included a new picture showing our operating results, excluding the performance-related costs and income, also showing operating earnings of NOK 635 million in the quarter. That's the middle table on this page.
We have also included a table, including all bonus related income and costs estimated, which gives us an estimated result of NOK 685 million in the quarter. The latter number could be called actual value creation in the quarter. We think the number NOK 635 million in adjusted operating earnings is the most accurate number, but at the same time, we have been significant contingent performance fees that will be booked at the end of the year and included in the fourth quarter accounts. Moving over to page 12. This picture is basically the same as the last two ones, but we see it here, the split between the result segments, savings, insurance, and guarantees. Within savings, we have good profitability growth when adjusting for the NOK 49 million in performance-related costs in the quarter.
In fact, I think it's the best underlying result for this segment ever. The insurance segment has been hit by some larger claims in the quarter, pulling down results. We do not, however, see this as a trend shift, and we do not envisage any significant changes in reserves caused by the recorded claims. Guaranteed pensions continue a gradual decline according to plans and previous communication. That concludes the presentation, now, and we are opening up for questions.
As a reminder.
Yeah.
Apologies. Go ahead.
Thank you, Lars. The operator will now open up for questions.
Thank you. As a reminder, if you'd like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. To withdraw your question, please press star two. You will be advised when to ask your question. So again, it's star one on your keypad. And the first question comes from the line of Peter Eliot from Kepler Cheuvreux. Please go ahead.
Thank you very much. I had three questions, please. The first one was, you mentioned the EIOPA consultation at the start of the call. And I guess, you know, one of the key points of that was, you know, that consulting on moving the last liquid point. I'm just wondering if you can give any sensitivities of your ratio to that? The second question was on the reinsurance deal that you did, and I guess that's similar to the one you did in Norway a couple of years ago. And you, you'd flagged that you had reinsurance as a key tool to use for solvency. I guess too many questions on that. One, are you able to share what the cost was?
I mean, I know the Norwegian one, you know, you're one of only two players, so you know, it was a very easy win for both yourselves and the reinsurance companies. I'm just wondering if the sort of economics worked just as well in Sweden. And secondly, are you able to share if you, if you still have sort of further tools in the toolbox, as it were? Final question was on the consolidation ratio at SPP. I mean, you're at 107% still. Could you just sort of share what that means in terms of, you know, fees that you can take if you're still there at year-end, and what the possible upside or downside risk is? Thank you very much.
... Okay, Peter, let me give you, give it a shot. On the EIOPA consultation paper, last liquid point, there have been many different proposals there, and we are trying to calculate the different proposals and the impact. And it's too early to give you an impact analysis as of now. However, it's quite obvious that the interest rate market in Norway is quite limited compared to the European markets. So, the actual last liquid point is not very much different from what you see today. Secondly, on reinsurance costs, what we look at is this is lapse reinsurance, and the cost for the lapse reinsurance has to be competitive to taking up subordinated loans and other tools that we have in the toolbox.
The pricing has fallen since we started doing this initially, as everyone are getting more familiar with the structures. The Swedish reinsurance was very competitive compared to what we've done previously. On consolidation in Sweden, you're right in saying that this was now slightly above 170%, and we have indeed been able to book a consolidation fee of NOK 10 million for the quarter, and we do expect this to go slightly upwards from here on a quarterly basis. But there will be some well, some volatility in that going forward.
Yeah. And I think just to add a comment on that, it's, we have roughly 40 basis points higher expected return on the assets, than the liabilities in that portfolio, meaning that you will slowly build up towards, towards, a little bit more than 108% level. That means, at best, everything take full indexation. Right. Thanks very much.
The next question comes from the line of Matti Ahokas from Danske Bank. Please go ahead.
Yes, good afternoon. Two questions. Firstly, continuing on the mass lapse reinsurance . Is this toolbox now utilized in full, or do you see kind of potential to increase it? And also on the same note, what was the reason for you kind of deciding to use this tool in Q3? Was it just a pricing thing, or was it related to the interest rates? The second question is regarding, as Lars, you mentioned that, or was it Odd Arild, that you don't expect to reach the 180% solvency margin at the end of the year. Is this based on the current interest rates, or is this... What do you base the view on? Thanks.
Okay, let me start with the reinsurance. On the one hand, we can do more, and there is a constant evaluation of the tools in the toolbox and how much we want to use at any point in time. What I actually said was that it's an optimization, i.e., we reduce the coverage in Norway, and we build it up in Sweden. So this is a way to get more bang for the buck by making these shifts. And there is a possibility to do more, and we always have to trade it off towards the cost.
Yeah, I can take the 100 and the solvency movement. I think it's fair to say that first of all, you have to take out, as Lars said, the subordinated debt, that's 3%. Also, an increased interest rate, as we have seen so far this quarter, has washed out again the transitional rules. Then you are just at, well, maybe 1-2 percentage points in transitional rule that arrives from the equity element. But that is also supposed to move out. So we are very close to being out of the transitional rules by year-end with the interest rates we already see in the market. Based on these two elements and normal operation of solvency capital in the fourth quarter, we guide that we are below 180% at the end of this year.
Great.
The next question comes from the line of Blair Stewart from Bank of America. Please go ahead.
Good afternoon. Thank you. I've got three questions. Firstly, on the EIOPA Solvency II review. Can you make any comment around the interest rate stress? That seems to be one thing that will definitely be changed. And just could you perhaps remind us what interest rate levels you assume? Do you assume negative interest rates, for example, which is one thing that EIOPA talked about?
I realize that's maybe not quite as big an issue in Norway, but it'd be interesting to hear your thoughts around the interest rate stress scenario and just the issue in general. A second question is, you talked about a new framework for managing guarantees within the Norwegian market, which is being looked at by the regulator.
Could you give us an indication as to what's going on there and what the likely timing is? Finally, just the comment you made, Lars, on the volatility adjustment, it now stands at 45 basis points, which is a historically high level. I just wondered why that was. Have you been changing your actual assets against the reference portfolio, or what, what's actually driving that increase in the volatility adjustment? Thank you.
T he interest rate spread. Today, we have negative interest rates in our base calculation, but with, according to the standard model, we don't stress negative interest rates. I guess the general comment here is that all increases in interest rate stress are in isolation a negative aspect. Then, of course, there's a long political process here before we get to the end result. When it comes to the proposals around the guaranteed product in Norway, you have... I think we have touched upon that earlier, and you should bear in mind that this was made to make these products better for the customers to give a better capital return over time. So it's a lot of different elements in it.
Some of them are absolutely positive, some might be negative, but, in some, we expect this to be a positive development, making it possible to give surplus, return to our policyholders over time, and that is, of course, also very positive for, for Storebrand.
On the VA, there, Sorry, Odd Arild . What, what, what's the timing on that, on that review? For the-
Well, we wait now for the Minister of Finance to give out for a hearing process in the market, and we just have to see when that moves out and when it's actually going to be put in effect. It's a bit uncertain, actually.
And on the VA, it comes out of the calculation in the EIOPA, which is published by the EIOPA every month. So we basically take into account what comes there. We just made the comment that it's historically high now. So there's an implicit, I guess there is more downside than upside from this level compared to many other countries.
Okay.
But it will change our models.
Yeah. So it's nothing that you've done. It's just, it's just what comes out from EIOPA. Okay, very clear. Thank you very much.
The next question comes from the line of Jackie Sheridan from JP Morgan. Please go ahead.
Hi, this is Ashik here. I'm just using Jackie's line. I just have a couple of questions. First of all, with respect to the 180%, I mean, if you just remind us, is this 180% that you had guided earlier? I remember if it's including transitionals, right? And I mean, it looks like you will be there again by mid-next year if things don't change, if interest rate don't change, you'll be there mid-next year. So what's the visibility of additional capital return to be announced around, say, mid-next year or late next year? So that would be my first question. Secondly, any thoughts on your spread that you're making, asset spread you're making on the guaranteed book in Norway? Because interest rates have gone down, so that must have put some pressure on the duration mismatch portfolio.
So do you have any negative spread book at the moment on the Norwegian book, or you still believe that, in Norway, you still have a positive spread book? So any thoughts on that would be great. And last question would be about P&C results. P&C results were a bit weak in this quarter. I mean, group life clearly improved quite a lot, but P&C was a bit weak. What are the reason behind it, and any thoughts on outlook for that? Thank you.
Okay. Should I start on the 180%? As I said, you should bear in mind that both the subordinate debt and the transitional rules will, in most... Well, we expect to be out of these transitionals by year-end. So then we are down at the level without these two factors, and it's based on that, we should then expect a normal generation of solvency capital. And I think, we have guided both the fourth and back on, on this issue on the timing . I think as Lars said, in our Capital Markets Day, we said 2021, and we are working hard to make that come true, of course.
Talk about the results, half of the year. I think what you should bear in mind is that we will use a combination of, dividends and share buybacks. That, of course, make it more flexible for us to use these tools also during the year.
Most likely, the board will look at this at the end of the year, not at in the middle of the year.
Okay. Yeah.
Yeah. With respect to the asset spread, it's still positive on an average basis, and we can still invest above the interest rate guarantee on a blended basis. But clearly, the lower interest rates fall, this has a negative effect on solvency and a negative effect on reinvestment levels. But as I said, it's still positive.
Just, to add on that, we also, of course, have large customer buffers, both in Norway and Sweden, and in the Norwegian portfolio as well. Specifically, we don't expect to make any IFRS losses or anything like that, with the current buffer levels and the current financial accounts.
On P&C, we did have some large claims in different business lines this quarter, but none that in any significant way changes our view on the future. You said that the reserves were weak, but I don't think the reserves are weak. I think we just had weaker results in certain P&C lines.
Okay. That's very clear. Thank you.
... The next question comes from the line of Peter Eliot from Kepler Cheuvreux. Please go ahead.
Thanks for allowing some follow-ups. Maybe just a couple on the numbers. I mean, obviously, a great set of results. If I was being picky, maybe there was only one small item that I thought was a little bit negative, which was the SPP risk result. I'm just wondering if you can talk about that at all, you know, whether it was a one-off or anything. And then second, obviously, you've mentioned that, you know, it's great that you're seeing growth in the P&C division. I mean, I'm just wondering whether you can talk a little bit more about that in terms of, you know, the growth we've seen this quarter. Is that something we should expect to continue in future quarters?
Yeah, if you could just comment on that, that'd be great. Thank you very much.
Okay. On the SPP risk result, it's longevity that is weak in the quarter. However, unlike the Norwegian longevity risk, the Swedish longevity can be repriced on an annual basis. And we are constantly doing adjustments to make that reasonably profitable on an ongoing basis. So this is a quarterly weak result, but this is not a reserve risk or anything else. It's just a repricing issue.
Mm-hmm.
Yeah, and when it comes to the P&C market, you know, that both Storebrand has a very strong brand name in the market when it comes to P&C. We also, due to our business, has a huge capital effect, positive capital effects, compared to other companies when it comes to insurance business. So we have appetite for growing our insurance business. We are very, very happy to see the growth now coming through, and we'll work, of course, to make sure that the growth in insurance comes through as we have guided on.
Okay, thanks a lot.
The next question comes from the line of Blair Stewart from Bank of America. Please go ahead.
Thanks. Just two follow-ups. Just on decisions with regards to capital return, would I be right in thinking that you would want to wait for clarity from the Solvency II review before you would make any decisions on capital return? And we talked... You talked about maybe the summer of next year before the EIOPA results are out. Would you expect to have enough clarity at that point in time to be making appropriate decisions on capital return, or will it take longer than that?
Secondly, just on the NOK 10 billion that you talked about at the last Capital Markets Day, I think you indicated at that time that the release of that capital would be somewhat back-end loaded within the 2021-2027 timeframe. I just wonder if your views on that have changed at all. Thank you.
First of all, when it comes to our decision around the 180%, I think, of course, always the board needs to make views on their knowledge, the insight, the situation, and forward-looking view of the company when they issue any dividends. They have to do that, also when this comes into a situation where we are above 180%. But saying that, I think we feel very comfortable about our guiding. We use our ORSA processes to set these limits, both for being overcapitalized and setting limits for our capital situation. And due to that, we have put forward this level of 180%, and still we are very committed to, of course, fulfill that in the market.
Are you saying, Odd Arild, that that's somewhat independent of what the Solvency II review brings out? I would have thought that the Solvency II review would be integral for this.
I think it's fair to say that we and the board needs to take into account all the knowledge we have when we are making decisions around dividends. I don't have that kind of knowledge now, but if I do get new knowledge about this kind of situation, of course, we need to take that into account.
Yeah. I guess the question is if there's too much uncertainty as to what the impact from the Solvency II review is going to be, then I guess that would be a problem.
That might be a problem, but I think also it's fair to say that Storebrand's business will be all the same. It's just the way you measure it into Solvency II, that is done different.
Mm-hmm.
We have to look at that situation, look at our business, what is our real capital situation as we view it, and make new decisions, based on that, together with the board.
Yeah. Yeah. No, that's fair. And the NOK 10 billion?
Yeah, lastly, around the NOK 10 billion, I think it's still the same message there, that it's back-end loaded, the release pattern.
Okay, great. Thank you.
We have no further questions in the queue. As a final reminder, if you'd like to ask a question, press star one on your telephone keypad. There are no further questions, so I will hand you back to your host to conclude today's conference.
Before we end, I would just like to remind you all that we will be present in London tomorrow, Frankfurt on Friday, and Boston and New York next week, and we hope to see several of you there. We'd like to end off by thank you for joining the call, and wish you all a good afternoon. Thank you.
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