Good afternoon, ladies and gentlemen. Welcome to Storebrand's second quarter 2019 conference call. My name is Kjetil Ramberg Krøkje, and I'm Head of Finance and Strategy at Storebrand. Together with me, I have Group CEO, Odd Arild Grefstad, CFO Lars Aasulv Løddesøl, and Trond Finn Eriksen, Head of Capital Management. In the presentation today, Odd Arild will give an update on the developments in the second quarter. CFO Lars Aasulv Løddesøl will give an overall view of the financial development and dig into some of the more technical elements in the quarter.
The slides will be similar to the analyst presentation released this morning and are available on our webpage. After the presentation, the operator will open up for questions. To be able to ask questions, you will need to dial into the conference call. I now give the word to Storebrand's CEO, Odd Arild Grefstad, who will start the presentation on slide two.
Thank you, Kjetil, and good afternoon, everyone. I present today a result of NOK 578 million , with an operating profit of NOK 474 million for the second quarter of 2019. This is a weak operating profit, but as I will show you on the following slide, the underlying profit is significantly better due to restructuring costs, and not least, as a consequence of a good performance in the asset management, resulting in performance fees not booked, while the corresponding performance-related costs are truly booked in the quarter. In total, the performance-related income not booked is calculated to NOK 100 million in the quarter and NOK 166 million year to date. We see solid growth within our asset management business, with, NOK 45 billion in growth so far this year, that's a 6% growth rate.
Our unit-linked business has an annual growth of 11%. The solvency ratio is weakened six percentage points to 167% in the quarter, with lowered interest rates and a temporary adjustment in the asset allocation being the primary causes for the change. Lars will go into further details later. If we then move to slide number three, the accounting principles related to performance-related income and costs are asymmetric. The cost has to be booked quarterly, quarter- by- quarter, while the corresponding income are to be booked only at year-end. This causes the operating profit in the first, second, and third quarter to be weakened when we have good performance in the portfolios. In the second quarter, we have booked costs of NOK 44 million in the operating profit in our asset management business. The corresponding income of NOK 100 million is not booked.
In this, in this picture, I have adjusted the underlying profit for performance-related cost of NOK 44 million, resulting in an equivalent increase in the underlying profit. In addition, we are taking measures to reduce FTEs in both Norway and Sweden in order to reduce our permanent cost base. This, together with some transaction costs, results in a one-off restructuring cost in the quarter of NOK 60 million. Adjusted for these, the underlying operating profit is estimated to NOK 568 million. If we then move to slide number 4, this is the picture of our strategy. Our twofold strategy stands. We focus on actively managing the guaranteed products in our back book, and at the same time, achieving strong growth in our front book of occupational unit links, private savings, and asset management. As mentioned, we are implementing restructuring to reduce our cost base.
We are committed to delivering flat nominal costs through 2020. In addition, we are working on measures to further strengthen solvency and secure capital release in accordance with our capital market day communication. In the following slides, I will further address the growth in our front book. So let's move to slide five. Our unit- linked business show a growth of 11%, and the Norwegian unit- linked assets reached NOK 100 billion in the quarter, while our Swedish unit- linked business also surpassed SEK 100 billion . The growth is expected to continue and strengthened by Storebrand's ability to sign important contracts for occupational pension in both Norway and Sweden. I will address the growth in our asset management further in the following slide.
It is also pleasing to see a 2% growth in the insurance business with a 6% growth in the retail segment of P&C Insurance. Moving to slide number six. Our asset management has reached NOK 750 billion in assets under management, and we registers our growth in all segments. On the left side, you see the development in internal transfers from occupational pension contracts and private savings year to date. While on the right side, this is the development of institutional clients and retail savings. So it's internal assets on the left-hand side and more external assets on the right-hand side. We show that the share of external assets are in strong growth, and the share now of external assets are 34.5% of the total assets under management.
We are working on more specific analysis of these flows, and will, in the following, show analysis of flow from internal transfers in the first half of 2019. So let's move to slide seven. On the left, we see that there is a modest flow of premiums from the guaranteed business of NOK 3.2 billion, primarily from profitable active schemes with low guarantee levels. The claims transfers from this mature portfolio are substantial and amount to NOK 6.8 billion year to date. Over time, this will reduce the guaranteed portfolio. The returns have been solid in the portfolio in the first half of 2019. It's well above the guaranteed interest rate level, meaning that close to half of the returns have been allocated to building buffer capital. Within unit- linked, the situation is quite different.
This is a young portfolio where premiums by far exceeds claims and transfers, and where a high equity share results in a solid growth so far this year. Moving to slide number eight. The public sector pension market is large and growing in Norway. In terms of premiums, the market is twice the size of the private market for occupational pension, where we are the market leader. The market is today dominated by one actor, KLP. Changes to the public sector pension product draws the market closer in resemblance to the private markets. We will make use of our existing platform and systems to reenter these markets. We strongly believe we will achieve profitable growth in this market and will execute within the communicated cost targets.
On slide nine, we show that we are intensifying the digitalization of our business, both with regard to improving efficiency and in our processes, and with the goal of improving the digital solutions we provide to our customers. We give four concrete examples of this journey on this slide. By that, I give the word to Lars for further details about the numbers.
Thank you, Odd Arild. Let me briefly go through some of the key figures with you, starting on page 10. The operating profit of NOK 568 million, after adjustment for restructuring costs and performance-related bonuses, is somewhat on the weak side. The figure includes NOK 25 million in normal stock incentivized cost, incentives cost for employees that we book in the second quarter, but not in the other quarters. Including this, the result is acceptable. Furthermore, if we were to include the earned but not booked performance fees, the result would be good. The graph illustrates strong customer buffers in both Norway and Sweden. This builds further resilience in our risk management. Moving over to page 11, the solvency position has fallen to 165%, and 167% with transitionals.
Model and assumption changes give a negative contribution of 1 percentage points in the quarter. Behind this number, there are some positive elements, like increased volatility adjustment, and some negative effects, like increased equity stress and model improvements and corrections. Interest rates fell significantly in both Norway and Sweden in the second quarter. In Norway, the NOK 10-year swap is down 13 basis points, and in Sweden, the 10-year swap rate is down 32 basis points in the second quarter. This hits the solvency rate by approximately 3 percentage points. In the business mix and asset allocation, there are three main effects. One, the strong growth in unit- linked by more than NOK 8 billion is positive for Storebrand, but contributes negatively in the solvency, as these products have an embedded solvency of approximately 130%, diluting the group solvency of 165%.
Secondly, some large maturities in the bonds at amortized cost portfolio came to maturity late in the second quarter. These have already been reinvested in the third quarter, but weaken the solvency as of the end of the quarter. Three, good returns and increased buffers have improved our risk-bearing capacity. We have used this increased risk capacity to purchase equities. The equity investments weaken the solvency short term, but increase expected returns and solvency creation over time. On the M&A side, we have finalized the previously communicated acquisition of Cubera and the sale of Nordben. In total, the solvency is weakened by one percentage point, but the transactions will add profitability and solvency creation going forward. Operating profit, adjusted for dividend reservation, contributes positively by one percentage point.
Profit after tax and adjusted for amortization strengthened the solvency by approximately 2 percentage points, of which half is set aside for expected dividends. Despite the interest rates fall in the quarter, we are still outside the transitional rules for interest rates, and the 2 percentage points are related to equity stress on equities owned coming into the Solvency II regime. This effect will be over phased out during the year. Turning over to page 12, the solvency position is weakened by 6 percentage points in the quarter. As explained, the main drivers are lower interest rates, which is a negative, but also long-term positive elements like growth in unit- linked and increased risk in the portfolios. Please notice that if rates fall further, we will once again get solvency capital from the transitional rules, and the regulatory and reported solvency will be strengthened.
The sensitivities show a strong resilience to volatility in financial markets under different scenarios shown. Storebrand announced on our Capital Markets Day in May 2018 that we expect to reach 180% in solvency during 2021, and that we envisage to release around NOK 10 billion tied up in the guaranteed back book between 2022 and 2028. Despite lower interest rates and weaker solvency this quarter, we confirm this ambition. We have numerous tools to secure and strengthen our solvency position. Moving over to the next page, ahead in Storebrand Group. In short, we put behind us a weak quarter in terms of the reported numbers. The growth has slowed, and the costs have increased. Adjusted for restructuring costs and performance-related bonus charges, and including earned but not booked performance fees, the results are satisfactory.
We expect increased growth in the coming quarters. The growth will come from several sources. In asset management, especially linked to international sales. In private equity, we have, we already have record commitments in Cubera and Storebrand funds this year. SKAGEN performance is good, and the transfer balance is improving. Pension sales are up in Sweden in particular. In Norway, we just won the single largest contract in the market. Many exciting digital initiatives are expected to improve efficiency in the group operation and increase sales overall. Finally, yet importantly, the opening public sector market is promising a few years down the road. Restructuring costs and performance-related bonuses affect the results in the quarter, but lay the foundation for continued cost efficiency and increased profitability going forward. Previously communicated cost ambitions are confirmed.
As I already said, on the solvency, our ambition to return excess capital from 2021, or building up the solvency to 180% in 2021, and distributing excess capital from the back book is confirmed. I think we can go over to Q&A.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. We will then introduce you with your name, then it's your turn to ask a question. The first question comes from Peter Eliot from Kepler Cheuvreux. Please go ahead, line is now open.
Thank you very much. First question, I want to start on earnings. I guess if, if you adjust for the one-off items, then you get a Norwegian unit-linked result of NOK 76 and a Swedish Unit Link result of NOK 58. I guess those numbers are still a little bit below the recent run rate. I'm just wondering, is that a good view of the current run rate and, and what we should be putting into our models?
Or are there still, you know, other factors there to consider? And, and maybe specifically on Unit Link Sweden, I mean, I note that it's consistently reported a negative financial and risk result, well, each and for the last sort of six quarters or so. I just wondered if you could explain what's happening there. And then secondly, on the solvency, I think I understand most of the moving parts after going through with IR, who are very helpful this morning.
Thank you.
But I guess if I could just focus a little bit on exactly, you know, how and when you might get the benefits of the transitionals again. I mean, largely said, you know, when interest rates, if interest rates were to fall, then you would get the benefit. But my understanding is, you know, the unit-l inked book is still growing, and might the bar, you know, be raised going forward? So if you could talk us through the moving parts a bit, that would be very helpful. And the second point, you know, you showed 1 percentage point from ongoing solvency capital generation this quarter.
I mean, there's probably some rounding and stuff in there, but I'm just wondering if you could update us on our guidance for, you know, what you expect in terms of ongoing generation and how that depends on the growth rate that you see. Thank you very much.
Okay. If I start with earnings on unit-l inked. If you look at the first quarter for Unit Link Norway and the second quarter together, there is some volatility due to some prioritization and some seasonal effects in those numbers. So I would look at the first half numbers seen together and divide that in two to get a good guiding on future profitability. And as you say, you would have to adjust it for the restructuring costs in the quarter, which were NOK 9 million in Unit Link in Norway. In Sweden, the one-off restructuring charge was NOK 16 million in Unit Link SPP, so that's the adjustment you would have to make there.
I would also emphasize that there is very strong growth in the Swedish Unit Link business. We have very good premium development there, and the cost base is fixed, so you should see increased profitability from that area as well.
Hi, Peter. When it comes to when we will enter or if a potential we enter back into some transitional measures, that's not a straightforward question to answer. Because as you say, you are very right that increased value from unit-linked business will postpone a fall in interest rate and money and enter back into the transitionals. At the moment or in this quarter, there were the technical provisions was approximately NOK 200 million away from getting back into transitional measures. So and that was approximately a half or the, in Q1, it was 500 million away from entering back into transitionals. So that's the magnitude that you're looking at.
So, but as long as we experience a good growth in the front book, which is a very good thing, then we shouldn't get back into transitional measures unless you see significant drops in the markets.
On solvency capital generation, as we have previously guided, we expect to generate 10-12, basis points, sorry, percentage points per year, of which half is allocated to, or reserved for dividends, on a quarterly basis. I think also when it comes to the reserve generation and the 1%, you should bear in mind that we take, half of the result, out of that calculation, because it goes to expected dividends. So it's a two percentage point, percentage point increase, where one of them increases the solvency directly.
Okay. It sounds like no change to the ongoing guidance then. Sorry, can I just come back very quickly on the first point? In the breakdown you gave us special items, you showed 16 of the one-off costs being attributed to Unit Link Norway, and NOK 2 million being attributed to Unit Link Sweden. It sounded like you quoted slightly different figures there.
Yeah, I think, Peter, sorry, that's a little mistake on my part. It should be the other way in the special items, the figures online. We will update them after the call.
Oh, okay. Sorry, could you repeat the numbers then? Sorry, I, I didn't quite catch them.
Sorry. It's SEK 616 million on the Swedish Unit Link business, Lars said.
Oh, okay. They're just inverted. Okay. Thank you.
The next questions come from Matti Ahokas from Danske Bank. Please go ahead, the line is now open.
Yes, good afternoon. A question, firstly on the solvency capital and the return of capital that Lars, you mentioned earlier on, or the ambitions. When you look at the interest rates, obviously, they've been trending down this year, now recently, we've seen a little bit of a pickup in Norway, but how much should the 10-year swap rate, or could it fall before it would really start to have an impact on this capital release plan? Or is it just so that if the interest rate falls enough, then the transitionals will kick in, so it really doesn't matter? I'm just kind of trying to gauge the timing of the plans of the guaranteed pension back book capital release.
Then on the second question on the insurance business, could you just remind us what the issue in the health and group life was, and is that now solved, or should we expect that that will continue in the coming quarters as well? Thanks.
So on solvency and interest rate pulled , you are correct that there is a sensitivity there. But I also said that we do have a number of different tools available to us, so we'll have to try and manage that as well as we can. But there is some kind of limitation at some stage in terms of how much rates can fall in Norway. But it's very difficult for me to give you a fixed answer as there are many tools in the toolbox to counter that depending on how dramatic the changes are. In terms of insurance and group life, we mentioned in the first quarter that we had an issue with especially one industry contract or one group contract with one particular client.
We also mentioned that we had announced price changes on that contract. However, there is a 12-month delay, so those price changes will only take place on January 1, 2020. So this quarter, we've also had weak profitability, and we strengthened reserves in this particular, on this particular contract by NOK 58 million, in order to ensure that we can expect around zero result for the rest of the year. So while group life and health insurance this quarter also has a small negative contribution, we do expect a small positive contribution for the remainder of the year, and then significant improvements as these price increases come through in the first quarter next year.
Could you, Lars, just give us a bit more flavor on what exactly are the most important tools in this toolbox you mentioned to kind of combat the potential decline in interest rates?
Yeah, no, I can say you can maybe divide them into three different categories. The first is, of course, the asset allocation on the ALM as such, where you can always adjust your risk taking in your portfolios. So that's number one. Measure number two is what you can do on the capital side, either buy more subordinated loan capital, or you can do reinsurance. And the third element is what goes on, what I should say, internal structures of how you set up and run the business, and how you are making the model work as well. So you have at least three different main levers with that, so you have some levers in it.
Great. Thanks, Lars.
The next questions come from Jan Erik from ABG, and please, Jan Erik, if you can also mention your last name. Your line is now open. Thank you.
Yes, Jan Erik from ABG in Oslo. I just wanted to pick up the, how much cost you added in the Cubera acquisition from first of April, if it was anything added there at all, because it looks like the asset management cost base went up a little bit on top of whatever you had as a, restructuring cost. And secondly, there is some negative profit sharing, and this is technically in the asset management and then also in the Defined benefit for Norway. What is kind of, what is that? Is that something recurring, or it's something particular which we should be aware of? Thank you.
All right. So there's two things here. The cost base in Cubera, I believe, is somewhere in the area of NOK 7 million-NOK 8 million. I can get back to you on that, Jan Erik, but somewhere in that area for the quarter.
Okay.
When it comes to the negative sum in the Defined benefit, this is basically a technical adjustment where we had a small deviation into insurance systems, and this was fixed in the quarter, and it led to a charge for NOK 21 million.
Okay. In the asset management side, you have also some NOK 6.6 million in negatives are being there. I just couldn't understand what that was.
These are... Yeah, apologies, I probably already mentioned that. That is tied to both the value of the earn-out, which is on the balance sheet, after we bought Cubera.
Yeah.
It's also some other financial effects that occur in the asset management business.
Okay. How much was the earn-out in Cubera, if you could remind me?
Roughly half of that should be from that.
Okay. And the other half is from SKAGEN, or where?
No, it's just from general financial effects in the asset management business, not from SKAGEN.
Okay. Would you say that you are in the money on the SKAGEN buyout story as well, or how is that progressing?
So the SKAGEN business and turnaround is really progressing well according to plan. Performance is very well up this year in all the large funds and also the smaller funds. The flow in that business has been negative for a while, but that's turning and flattening now. And the operational platform is very much integrated. I think we've already said previously that we run this business basically for a small profit without performance fees and performance-related costs. But at the end of the year, we do expect quite significant performance related bonuses, which should then contribute significantly to the end result.
In terms of the earn-out, we have due to lower funds under management during last year, as well as weak performance last year, the earn-out reserve was reduced down from what was set aside initially. But this so far this year, it's basically stable.
Okay. So it, it's a fund which you provide to, so it's not going to be a sort of a big one-off cost when, if, that happened. Is that correct?
Yeah, it's so the earn-out itself is on the balance sheet based on expected level,
Exactly.
Yeah.
Exactly, yeah.
As well, unless it's large deviations from that, it should not be any large one-off coming from that.
Okay, perfect. Thanks, Jan.
The earn-out liability is in Storebrand ASA, not in Storebrand Asset Management.
Okay.
Thank you!
Ladies and gentlemen, if you would like to ask a question in this meeting, please press star one on your telephone keypad. The next person is Jonny Urwin from UBS. Please go ahead. Your line is now open.
Hello, good afternoon. Thanks for taking my questions too. So firstly, just on the business mix drag to Solvency II, I'm sorry, apologies if I missed this earlier, but is there any recurring impact there? Any comments there would be great. And then secondly, just on the cost side of things. So I get that you guys are still committed to flat operating costs, good cost discipline. But just... I've asked you this before, but just strategically, you know, given the level of growth that's, you know, sort of there for you guys, how wedded are you to that target? If you know, you could say invest more for greater growth, particularly given the new products that you're going into. So I guess it's a balancing act, but any comments there would be great. Thank you.
... Sorry, Jonny. Well, the first question was that if there was any recurring element in the movement on the solvency?
No, on the business mix, asset allocation. So, basically, I can just do a short answer, and you can fill in from, if you have anything. So, basically, we had three factors. So increased allocation to equities, that is not anything recurring. That is, of course, something that we adjust our equity exposure every now and again, but it's not a recurring feature on that part of the movement. The second of all was that we had a little bit shorter duration, just on the turn of the quarter. That is not a recurring feature. We did have strong growth in unit-l inked, which, of course, gives some also requires some capital, as Lars alluded to. That is, of course, a recurring feature we would much like to see again.
So strong growth in unit-l inked is very good, and that we set aside a little bit capital for that, that is, that is fine.
Thanks.
When it comes to the cost levels, try to answer that. I think first of all, the cost is clean with the nominal flat cost that we have been doing since 2012, actually, is a very good way of running the business. And I'm sure that we have a well steady more effective way of doing the business. And our platform, as we have put it forward now, is very scalable. And we have seen, of course, extremely strong growth over these years. But it's based on digitalization and sourcing actions, and et cetera. We have been able to keep the cost levels at the right level.
That is, of course, not, say, seeing the same, that if we have good opportunities in the market, we see opportunities, for growth, as we do, have done with acquisition of SKAGEN and also Cubera. Of course, we will go into these, type of solutions, and that will change the, the cost levels as such. But we also see that we, we have the opportunity to scale our platform, as we now do when we go into the public sector market, with our, existing, systems and, and people. And, believe that we will be able to take on this, huge opportunity without, stretching, the cost, levels, further, but do that within the cost, limits we have already set forward.
But just to be very clear, Jonny, we are going to be. It's going to be a very good profitability opportunity if we were to reach our cost communicated goals, and we would communicate clearly if that was to be the case. So you should not expect that we just float into higher costs. We will continue to be very, very strict on the cost base according to the communicated levels.
Got it. Thanks, guys.
Ladies and gentlemen, yet again, if you would like to ask a question in this meeting, please press star one. We do have another question from Peter Elliot from Kepler Cheuvreux. Please go ahead, your line is now open.
Thank you very much. Sorry, I just wanted to follow up actually on, well, I guess, my earlier question, but also Jonny's question there. I mean, I know we're talking sort of small numbers and rounding and all the rest of it, and other tools in the box. But if we just take the numbers that you've reported now of, you know, one point of solvency, capital generation, post-dividend, and actually, when you factor in the business mix change, and you hope to get, you know, ongoing growth, then actually the net ongoing capital generation looks to have been below one point this quarter. And, you know, if you extrapolate that out from 165%, then, you know, you've got a lot more than two years to get to 180%.
I appreciate you've got other tools in the box, which, you know, you might use if interest rates were to fall. But am I just rounding too much there? I mean, is... Would you expect the normal run rate to have been higher than this quarter? Sorry, it's a long-winded way of asking a fairly simple question. But I guess you understand where I'm coming from. Thank you.
I think we're. No, I think we're still, we're still confident that around 12, around 10% increase in solvency annually, pre-dividend. That's the level we are, we're at. As you see in the presentation, there is definitely rounding when you look at these different factors. Nothing new here, really. And also we have factored into our capital generation that we will set some capital aside for for capital growth.
Yeah. If I can also add on that, Peter, because the movement that we show and the capital generation we show is really shown compared to the financial risk to the result in isolation. Of course, we are expecting in a non-life world to pick up some risk premiums in the market. So we will—we are expecting to have market return above the discount rate down until the buffer capital, which in itself will lower the capital requirement, as well as the move towards a lower average interest rate guarantee in the portfolio. Which you can also reflect to the picture that Odd Arild showed earlier in the presentation, where you see larger outflow than inflow.
So, adding that up, you will see that we will also get a capital generation from excess return about the risk-free rate, a slightly decline in the guaranteed liabilities or the capital requirements from the guaranteed liabilities over time. That will add to the results as such.
Okay. Thank you very much.
Ladies and gentlemen, at the moment, there's nobody in the queue, but if you would like to ask a question, please press star one now. We do a last reminder, ladies and gentlemen, if you would like to ask a question, please press star one now on your telephone keypad. There is no further questions coming through. We'll hand the call back to you. Thank you.
Thank you all for joining the call today. Before we end, I just would like to remind you that we'll be present in London on Monday, and I hope to see several of you there at the Analyst Meeting and in meetings during the day. Have a good afternoon.