Good afternoon, ladies and gentlemen. Welcome to Storebrand's first 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 and CFO Lars Løddesøl. In the presentation today, Odd Arild will give an update on the developments in the first quarter. Lars will give an overall view of the financial development and dig into some of the more technical elements. 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 2.
Thank you, Kjetil. Storebrand presented a group result of NOK 733 million today, and an operating profit of NOK 531 million. On top of this, we have earned, but not booked, performance fees in our asset management arms of NOK 66 million. The associated costs related to performance, however, amounts to NOK 18 million, and are included in our operating results. The volatile markets in the last quarter of 2018 resulted in a lower starting level for our asset under management, consequently, adding pressure to our fee income in first quarter 2019. Good returns through the first quarter has contributed to uplift the AUM, asset under management levels, and fee income is subsequently expected to grow going forward. Good market conditions in the quarter has provided a solid financial result.
In addition, the buffer capital saw a growth of more than NOK 2 billion in the quarter, resulting in a continued strong solvency position of 173%. Volumes in Unit Linked increased by 11% compared to the corresponding period last year, and it is especially worth noting the strong premium income growth of 23% in our Swedish arm, SPP. Moving to Slide number 3, we have a twofold strategy in Storebrand. We actively manage the guaranteed products in long-term runoff, and have strengthened our solvency to 173%, approaching the level that triggers capital release and extraordinary dividends, set to 180%. We are well positioned for capital light growth within savings through our leading position in occupational pension in Norway and Sweden, as well as in the individual savings market in Norway and our asset management business.
Moving to Slide number 4. Speaking about asset management, during the quarter, we have taken important steps in the international venture of our asset management business. We have introduced five funds in Nasdaq in Denmark. These are index funds with sustainability profiles, and we see potential for these to take market share in the Danish market, characterized by actively managed funds with high margins. As part of our international venue, we have also launched a new international website for Storebrand Funds, and are about to list three funds in Luxembourg for the European market. I should also mention the finalized transaction with Cubera April the first. The result of Cubera will consequently be included in Storebrand's numbers from the second quarter of 2019. Moving to Slide 5. The growth in savings continue.
Growth in unit-linked reserves are 11% compared to corresponding period last year's. In particular, strong sales in SPP. Asset under management has grown 3% since year end. On a quarterly basis, growth is dampened due to weaker Swedish krona towards Norwegian krona, reducing the asset under management with NOK 13 billion. In the banking segment, retail lending has grown with 8%, while growth in insurance overall is weak. However, we see positive development in the P&C area. Moving to Slide 6, our Swedish arm on occupational pension, SPP, has achieved solid growth in premiums since 2017.
We have a continuing positive trend in the first quarter of 2019, with a 23% increase in premium income compared to first quarter 2018. In addition to solid sales, with the positive net transfers, continuing digitalization and new distribution partnerships, strengthening the competitiveness, and increasing SPP's market share in the Swedish market. And by that, I give the word to our CFO, Lars Løddesøl.
Thank you, Odd Arild. Let's start on Page number 7 with the key figures, and let me briefly go through some of the key figures with you. The ordinary operating profit of NOK 549 million is weak. The profit before amortization of NOK 733 million is okay, and it's lifted by good financial returns. It is, however, a significant fall from the first quarter of 2018, which was inflated by unusually good insurance results and a one-off gain of NOK 149 million. As Odd Arild has already mentioned, the year started with a lower assets under management due to market turbulence in the end of last year. Through the first quarter, the financial markets have recovered, and the assets under management have gone up to an all-time high of NOK 729 million. It would have been even higher had it not been for the weaker Swedish krona in the quarter.
We maintain strong cost control, and the favorable financial markets have been used to strengthen buffers. This has contributed to strong solvency. Also, in the company portfolios, higher short term rates and lower credit spreads have led to good returns. In the first quarter, we have booked NOK 18 million in performance related bonuses. We are not allowed to book the corresponding NOK 66 million in performance related earnings. In this illustration, we have chosen to specify the bonus related cost, together with the special items in order to avoid the counterintuitive effect of lower operating results due to a good performance and vice versa. The graph, the graphs illustrates stronger customer buffers in both Norway and Sweden. Turning the page to Page 8 on the solvency movement. The solvency position is unchanged at 173%.
On a general note, we see that the volatility reducing mechanisms in the Solvency II standard model works as intended. The reduced equity stress and higher volatility adjustment contributed positively in the fourth quarter. W hile the reduced equity stress and higher volatility adjustment contributed positively in the fourth quarter, the effect was the opposite in the first quarter. This is illustrated in the first step of the movement. Behind the - 23 basis points lies lower volatility adjustment by 5 basis points in Norway and 4 basis points in Sweden, and a higher equity stress. This quarter, we also implemented the lower UFR of 3.9%, which contributes negatively to the solvency. Certain model improvements contribute positively. The next element is market changes.
Lower long-term interest rates by 30 basis points in Sweden and 14 basis points in Norway, as well as a flattening of the interest rate curve, contributes negatively. On the positive side, good returns from equities and credit spread contraction contributes through positive returns and buffer building. Market Value Adjustment Reserves are up by NOK 2.1 billion. The last element in the movement is operating earnings. This reflects the capital generation in excess of what is set aside for dividends. With this, we have a solvency margin of 171 before transitionals and 173 after transitionals. Please notice that we are no longer getting any transitional capital from interest rates, only from a lower equity stress on equity investments owned since the implementation of Solvency II. These will be almost phased out during this year.
Turning the page to the solvency position of Storebrand Group, Page 9. The solvency position is pretty much unchanged to the beginning of the quarter. However, the buffer capital and the underlying profitability from the growth in unit linked products have improved. The sensitivity for a fall in the equity markets has been reduced, primarily due to the better buffers. Furthermore, the sensitivity to higher interest rates increase, and there is more symmetry between interest rates up and interest rates down. The sensitivities show an increased resilience to volatility in financial markets. Turning the page to Storebrand Group, Page 10. In this more traditional presentation of the results, we see that the fee and admin income is slightly down in the quarter. Adjusted for currency movements, the fee and admin income is up 0.5%.
The growth in the actively sold products make up for the long-term run-off of the guaranteed business. The insurance results are significantly lower than last year. The first quarter of 2018 was characterized by reserve releases and runoff gains not repeated this year. The combined ratio for insurance as a whole was 90% within the targeted profitability band. We saw somewhat weaker seasonal results from P&C and some large claims within group life. We have continued to show strict cost control in the quarter. The objective of flat nominal cost is confirmed. The financial results benefit from strong financial markets. We've set aside NOK 139 million, or 19%, in an estimated tax charge in line with previously communicated levels. The tax is non-payable due to large tax losses on the balance sheet. Turning over to Page 11.
Here we have the same setup as on the previous page, broken into the three business areas, savings and insurance and guarantees. We see the significant fall in results from last year, largely explained by the exceptional strong insurance results last year, as well as a one-off gain within guaranteed, recorded in the first quarter of 2018. In summary, the first quarter of 2019 is on the weak side, but we enter the second quarter with a market leading position in our key business areas, with a strong solvency, strengthened buffers, and a good absolute and relative returns in our savings products. The operator will now open up for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. We have some questions coming through already, and the first one in line is Peter Eliot from Kepler Cheuvreux. Please go ahead, the line is now open.
Thank you very much. If I could start with, with three questions, please. The first one, you, you mentioned about on the asset management side, so a slightly weaker, margins, less actively managed, et cetera. Just wondering if you could give us an outlook. Is this a trend? Do you see it sort of continuing? Yeah, perhaps you could just give us a, a couple of words on, on how you see that developing. The second one was on the, the group life. You talked about the large claims. Could you give us a little bit more color, about what happened there? Was it one or two, you know, particularly large claims? Yeah, maybe just a little, perhaps a little bit more color as to what happened there.
Finally, on the solvency, I mean, I can certainly follow up with IR if my numbers are wrong, but just using the sensitivities that you reported the full year, I was expecting something a little bit higher. I was just wondering if you could sort of perhaps talk maybe about why those sensitivities hadn't played out. I mean, if interest rates were now to rise 50 basis points, implying 185% solvency, would that put you in a position where you would now be able to return capital or are there other factors that perhaps still need to play out a little bit? I'm thinking in particular about, you know, whether you're at the stage of capital release from the books, but also ticks that box. Thank you very much.
Okay, if I start with the asset management business and margins. What we have seen in the quarter was, first and foremost, that we went into the quarter with lower AUM. Secondly, we see that we've had an outflow of AUM from the Skagen and Delphi portfolios during 2018. That has been replaced in volume terms by fund investments in the SPP and Storebrand funds. However, at a lower margin. And the whole asset management business, like many other businesses, are a little bit like an escalator moving against you, i.e., there is margin pressure coming down the escalator, and then you have to move upwards on the escalator in order to maintain your position. This is what we are doing by introducing a lot of sustainable funds, factor funds.
We have bought Cubera, and we are offering more alternative asset classes. Fortunately, now, the Skagen funds are, as of right now, all of the equity funds in Skagen are ahead of their benchmarks and really providing good value for their customers, and likewise, generating performance fees towards the end of the year. So, there is margin pressure in the business, also in the asset management business. We see this showing through in the numbers in the first quarter of the Storebrand Asset Management business, and we're actively pursuing measures to offset that. On the second question, group life and claims, there were less than 10 large claims, but a few more claims than we would normally expect in workers' comp and group life.
The payouts were slightly bigger than anticipated. So this was within the normal volatility we see in a single quarter. However, on the outside of the normal in a negative sense. So this has not led us to change our beliefs for the future, but it does provide for a weak quarter. Also, within group life, we have one business line within the group life, which is underpriced, and we have implemented measures to reprice that, but we will not get the full effect of the repricing before the end of the year. Which means that we do expect to have weaker results within group life for 2019 than what we had in 2018. However, we don't believe that it will. We do expect improvements in the three coming quarters compared to what it was as of the, in the first quarter.
Sure. If I then try to answer your question on solvency, I think the sensitivity should be quite in line here, and I think you have to take into account that both the increase in the stress of shares, the reduction in the Volatility Adjustment, in combination with the reduction in the estimated forward rate, has a quite significant impact on the solvency. So the more businesslike impact has been very positive in this quarter, but the input from EIOPA, of course, has been countercyclical, as it's meant to be in the solvency calculation.
Just one quick comment on it as well, Peter, I guess. We don't give an equity up sensitivity, and that makes also the solvency a little bit hard to predict when equity moves up like this, and also the associated equity stress. So that makes it harder to estimate from the outside.
Absolutely. When it comes to the guiding around 180%, there's no new element in that. We believe that is the level where we are overcapitalized, and of course has the view that we will either start extraordinary dividends or share buybacks or a combination of that, at that point.
Okay, great. Thank you very much.
The next question comes from Matti Ahokas from Danske Bank. Please go ahead, your line is now open.
Yes, good afternoon. Two questions, please. Firstly, if I look at the Unit Linked Norway, we've had a very strong inflow here, but also it looks like, has there been some transfers from asset management into Unit Linked Norway, or how come there was such a big jump, jump in that side at the same time when you're talking about margin pressure altogether? Then also, if you could elaborate a bit more on the kind of margin pressure statement, as you pointed out, even in the report, in the outlook statement that you're seeing or the board is seeing margin pressure. Is this mainly referring to the asset management business, and, uh, uh, how do you plan to tackle this? And if possible, could you quantify the impact of this margin pressure at all in Q1? Thanks.
Okay. So, on the first question, I think it also goes a little bit back to Peter's question, because there has been a change in the fee arrangement between the life companies and the asset manager in Storebrand, meaning that there is somewhat more or lower cost for asset management in the Unit Linked business, and thus, a lower top line in the asset manager, leading to somewhat higher profitability in the Unit Linked Norway line.
How much was this impact, if I may ask, Kjetil?
Somewhere in the area of NOK 20 million for not only Unit Linked Norway, but for all the internal lines of business that buy asset management services from Storebrand Asset Management.
Okay.
On the margin pressure, I guess this is something you see in all active markets, that there is margin pressure. And where you can, I think Unit Linked Norway is an example where margins in the supplementary have gone in the right direction for us this quarter. However, we see an ongoing margin pressure. We have already talked about the asset management business. In the banking, you see that the lending margin has come down. That's partly explained by higher interbank rates, interbank rates during the first quarter. And we have implemented price, or we have raised prices for mortgages towards the end of the first quarter, with effect in the second quarter, when the rate from the central bank was increased. So it was more of a general statement.
You see it a little bit in all the kind of business that we have. I guess we also talked a little bit about in defined contribution contracts, there is a typical pressure on the disability element in those kind of contracts. And when I mentioned that one of the group life association or contract that we had was weak profitability, is also a result of margin pressure in that business.
We are managing this in a broad sense, and I think the most important takeaway from the comment in the report is the fact that having cost leadership is always a very robust strategy in a market which is competitive, and that is one of the reasons why we keep on pushing for lower costs and higher efficiency in the business. That's the only way to maintain profitability in a competitive market.
Did this margin pressure come as a surprise? I know you've talked about this before, but was it somehow accelerated in the first quarter? And if possible, what was the reason for this? Who was more competitive, or in which segment was this?
There's no specific change in the first quarter, so this is more of a general comment over time.
Got it. Thanks.
The next question comes from Ashik Musaddi from JP Morgan. Please go ahead, your line is now open.
Yeah. Hi, thank you. I have a couple of questions. I mean, sorry, I'm going back to margin pressure comment again. I mean, how do we think about margin pressure? Is it just because of the mix shift that you flagged, like, outflows from Skagen and Delphi and inflows into SPP and Storebrand? Or you're seeing some reduction in the fees that you collect, on other, asset classes as well? So that's one thing I would be interested in getting some thoughts. Secondly, one of your, competitor, who reported numbers today, is flagging that they are pushing sort of something around 10% price increase in P&C in Norway. I mean, whereas if I look at your numbers, your combined ratio deteriorated quite a lot year-on-year, maybe because of one-offs, et cetera, that was there last year.
But are you trying to do any sort of price increases as well, or you think that 90% is a, is a good run rate that we should follow? And lastly, just again, going back to asset management revenue margin. If I look at your first quarter number, it's around 19 basis point annualized. So is that the right number we should keep for next four quarters and adding the performance fee on top of that, in the fourth quarter? Thank you.
Let me just start. I think, when you're talking about margin pressure, it's absolutely what you see is a shift in this quarter from high margin funds into more low margin funds. But then again, we have also seen an extremely good performance in, especially Skagen during the quarter. So we believe this will be more evened out going forward. But of course, that is a trend in the market and also something that we see. When it comes to the margins in the first quarter or asset management business, then you should also take into account what Kjetil just said. We have reduced some of the the pricing from our asset management towards our life insurance companies. That, of course, is also play in the group altogether, but it has an impact on the margins in asset management standalone.
Just a quick comment on asset management. We now go into the second quarter with higher assets under management and also growth in the active part of assets under management. So the run rate should be materially higher than the NOK 73 million we reported at Q1. So you should not use that as the new normal for asset management.
Yeah.
And on the-
On the insurance prices.
Yeah.
On P&C insurance prices, we're not doing anything in particular or on a general basis or for P&C insurance prices. However, as I mentioned, within Group Life, we have initiated a price increase on certain contracts, and we're constantly monitoring the different business lines in order to see that they are correctly priced. And we are doing minor adjustment basically all the time, but we're not having a general price increase of 10% as such.
Okay, that's very clear. Yeah.
I think also, just to reiterate that on the Combined Ratio, we said that the target is 90%-92%, that's still at the target.
On the 19 basis points in Storebrand Asset Management, the higher volume, we are constantly striving to increase that. And one of the things I mentioned was that transaction fees were much lower in the first quarter. They will pick up in the coming quarters, and there are also other key elements that we expect to be able to receive in the coming quarters to improve the margin somewhat, in addition to the volume growing as such. And a shift towards more alternative asset classes, like the acquisition of Cubera, which comes in with NOK 9 billion in assets under management now from April, of course, helps both the returns and margins in our asset management business.
Okay. And then, sorry, just one more small follow-up. Is there, is there any chance you can get the close number on asset management? That would be helpful to model the asset management unit a bit better. I mean, maybe today, maybe later on, whenever you think it's right, okay?
Yeah. We're, yeah, we're working on that disclosure. I think we hope to have it now the first quarter, but I think we want to work a little bit more on it and present it on the second quarter on a running basis.
That would be really helpful. Thank you.
Ladies and gentlemen, there's a couple of questions in queue, but if you would like to ask a question, ask them, please press star one on your telephone keypad. The next question comes from Blair Stewart from Bank of America. Please go ahead, your line is now open.
Thank you. Good afternoon. A couple of questions just to pick up on, most of the ones have been addressed. But the new funds that you're introducing in the Asset Management segment, what do you expect the margin to be on those funds? Are those high or low margin funds? And you mentioned the lack of transaction fees in the quarter. What would a typical quarter be for transaction fees, please? Moving on to the Group Life segment. There's been a lot of volatility over the last few years in the profit from that segment, you know, from the low 100s into the mid 200s, looking at it over the last few years.
Is there any way to give any indication of a good run rate for that, for that part of the business? And finally, you've given some guidance on when excess capital might be released. You talked about NOK 10 billion being released over 2021-2027, and then you talked about, I think from 2021, you'd expect the solvency ratio to be above 180, and that would trigger some additional payments as well. So I just wonder, is there any change or upgrade to your guidance on any of the timing of these things, given where we are today? Thank you.
I can start with the new funds of Storebrand Asset Management. They are the funds we already have, but we are now launching them internationally. So Skagen, they had an international distribution set up. We are now putting Storebrand funds and SPP funds into that same distribution network. So it's existing funds with a special focus on sustainable investments as well as index funds. So index funds, in particular in the Danish market, which has much lower index funds as a proportion of total funds than other markets, so we see an opportunity there. And in the other markets, primarily different kinds of sustainability funds, either index funds with a sustainability enhancement or factor funds with a sustainability take.
They are usually priced between 25 basis points-75 basis points. In terms of transaction fees in the Storebrand Asset Management business, I believe they booked around NOK 14 million last year, so about NOK 10 million a quarter would be a normal run rate, but that would obviously go up and down somewhat. On Group Life, if Group Life achieves the combined ratio target of 90-92, and with the normalized financial return, it will be somewhere in the area of NOK 150 million. But again, as Lars said, we do expect 2019 to be less profitable than what you've seen last year and but better than Q1.
I hope so.
I think when it comes to entering the 180% solvency, as I said last quarter, we guided on our capital markets day on a starting point of 2021. Everything equal, this has come somewhat earlier, and it's more like the 2020. We expect now to be at the level of 180%, then start doing either extraordinary dividends or share buybacks.
the evolution of the guaranteed book, you know, you talked about this NOK 10 billion that would be released-
Yeah.
from 2021 to 2027. Is it, is that evolving as expected or any differently?
Yeah, absolutely. Everything equal, I would say, being able to build NOK 3 billion in buffer capital and especially NOK 2 billion in Market Value Adjustment Reserve this quarter. Of course, that's a huge step forward when it comes to the quality of our back book, and it only strengthens our message, I think, around how that development and the capital release from the back book will evolve going forward.
Yeah, that's a good point, actually. Thank you.
The next question comes from Peter Eliot from Kepler Cheuvreux. Please go ahead, the line is now open.
Thank you. I was just gonna follow up actually on the insurance segment. I just had a couple of questions. I guess on the top line, you're commenting that the P&C sales are starting to pick up. I'm just wondering if you could comment on the outlook for the other lines, 'cause, I mean, you know, you sort of deliberately positioned this segment, I guess, in some markets that you saw as growth markets. And I'm just wondering whether, you know, what your sort of, at this stage, your longer-term outlook is for the top line growth?
And then secondly, in terms of the results, we've talked about the underwriting results. I struggle a little bit with the financial results, sometimes as well. I mean, and I'm just wondering how you would guide us to think of that or forecast it. You've had some quite big numbers going through there in the past, but this quarter, you had very little despite the good markets. So, wondering if you could just help me out there. Thank you.
On the insurance growth, if you look at the different lines, it's on Page 14, for those of you who follow the presentation. It says: Profit per product line. And in actual fact, there are three lines here, but it actually consists of seven different products. So firstly, you have P&C, and as we talked about, P&C is increasing. Second is individual life. That has been stable over some time. It's a very profitable line. We also see some growth in that business. On health insurance, we have a number one quality position in the Norwegian market, and that is developing with high single-digit growth. Group Life is a market where we have a pretty stable market share and a fairly stable market.
But there is also some workers' comp in that line, and that workers' comp, we have a very small market share, and we are not. That is also quite a stable market. Then the last bit is pension-related disability insurance in the Nordic. That's what's with disability insurance related to defined contribution schemes in Norway and sold typically together with, but on a separate basis, with pension schemes in Sweden. Both of those markets are in the order of 5%-5+% increase.
Yeah, and that is also aligned to what we said our capital markets day, that we go for around 5% growth in insurance going forward.
And on the financial results, Peter, just quickly, it's understandable. I guess one of the main reason here is that the Health and Group Life service segment is co-invested with the guaranteed life portfolios, since this is a product that legally sits on the life insurance company's balance sheet. So it means that the result, or sorry, the return this quarter is stronger than what is being than what shows in the IFRS results, because it means that it has a part of all the Market Value Adjustment Reserves, or aka the unrealized gains that were built in the quarter. On a normalized basis, you should expect somewhere in the area of NOK 20-NOK 30 a quarter from the insurance segment as such.
So this is just a timing issue, actually. This is a result that, well, normally could have been booked this quarter, but when we then add everything into Market Value Adjustment Reserve, that postpone, of course, that in income into the financial result, but it will come going forward.
Thank you.
Ladies and gentlemen, there is no one in the queue, so if you would like to have a quick question, please press star one now on your telephone keypad. So if you would like to ask a question in this meeting, please press star one. And there's a question coming through from Jan Erik from ABG. Please go ahead, the line is now open.
Yeah, just one follow-up on the new Cubera Private Equity margins. What kind of level should we think about, having, on those NOK 9 billion adding from the first of April? If you could shed some light to that. Thank you.
We said in the stock exchange release that for 2018, they have a profit before tax on NOK 550 million. So I think that should give a rough guidance in relation to the NOK 1 billion in capital.
Perfect.
They're also raising, they're also raising new funds these days, which will increase the AUM during the year, and expected higher results at the end of 2019 correspond with that.
Perfect. Thanks a lot.
So ladies and gentlemen, a kind reminder again, if you would like to ask a question, please press star one on your telephone keypad. Thank you. Do a last reminder, if you would like to ask a question, please press star one now. There is no further questions coming through in this meeting, so I will hand the call back to you again. Thank you.
Oh, thank you. Before we end, I would just like to remind you that we will be present in London tomorrow at 12:30 local time, so get in touch if you want to join the analyst meeting there. So, I'll just end with thank everyone for joining the call, and wish you a good day. Thank you.
Thank you for joining today's conference. You may now replace your handsets to end this call. Thank you.