Good afternoon, and welcome to Storebrand Analyst Conference Call. My name is Anna, I will be your coordinator for today's conference. During this call, you will be on listening only. However, in the end of this presentation, you will have the opportunity to ask questions. If at any time you need assistance, please press star zero on your telephone, and you will be connected to an operator. I will now hand you over to Head of Investor Relations, Kjetil Krøkje, to begin the call. Thank you.
Thank you. Good afternoon, ladies and gentlemen. Welcome to Storebrand's third quarter 2018 conference call. My name is Kjetil Ramberg Krøkje, and I'm Head of Investor Relations at Storebrand. Together with me, I have Group CEO, Odd Arild Grefstad, CFO Lars Aasulv Løddesøl , and Head of Economic Capital, Trond Eriksen. In the presentation today, Odd Arild will give an update on the developments in Q3. CFO Lars Løddesøl will give an overview 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 will now leave the word to Storebrand's CEO, Odd Arild Grefstad, who will start the presentation on slide two.
Thanks, Kjetil. A warm welcome to our third quarter presentation, which happens to be on the same day as the United Nations Day. The United Nations 17 Sustainable Development Goals provide a clear direction as to what future society we want to move towards. Reaching these goals will demand massive investments in the years to come. In Storebrand, we firmly believe that there is good money in sustainable investments. That's why we invest in the companies that best meet these criteria and are best positioned to create value going forward. Storebrand Global Solutions is an investment fund that exclusively invest in companies contributing to the UN Sustainable Development Goals. The fund has performed well and manages NOK 2.6 billion today. Let's move to number, slide number three and the headlines from our third quarter.
It is with great satisfaction that I can announce a result of NOK 853 million, and an operating profit of NOK 685 million. This is a 15% increase from the corresponding period last year, and it's a year-to-date result of NOK 2.6 billion. The result is primarily driven by a solid growth in savings, combined with strong risk and insurance results and low operating costs. The underlying solvency margin is strengthened with three percentage points in the quarter to 166%. Including transitional rule, transitional rules, the solvency margin is 169%. Following our improved capitalization and earnings generation, we were also pleased to see a rating upgrade of Storebrand Life to A- in the third quarter. Let's move to slide four.
At our Capital Markets Day in May, we introduced this picture to illustrate our strategy. This is a continuation of our strategy for the last five years, but it reflects that we now have a strong balance sheet and are positioned for capital release from the back book in the coming years. Growth within occupational pension and private savings drives the growth within asset management. In addition, asset management growth is strengthened by winning external mandates based on our good performance and administration, and our position as a leading asset manager on sustainability. Then let's move to slide five. With our strategy in mind, let me start by addressing our guaranteed back book and its largest product, paid-up policies. It is a fact that the regulation in place today for managing paid-up policies only leads to low risk-taking and low returns on these contra-contracts.
On behalf of the Ministry of Finance, a working group recently proposed a set of changes to these regulations in a report that thoroughly explores several possible regulatory improvements. We are very pleased with the proposal allowing for individual buffer building per contract, and the proposal allowing for more flexibility in the buffers to cover negative returns. This may enable higher pensions for contracts already under payment and increased risk capacity for some contracts. These are good proposals by the working group, but our stance is that there are good reasons to go even further in the regulatory changes to ensure better pension for all policyholders. Let's move to slide six. We see that the strong growth in the savings segment continues.
Our core product, Unit-linked, which includes occupational defined contribution pension in both Norway and Sweden, grew by 18% compared to the third quarter in 2017. We also see good returns in this segment relative to our competitors, and sales are good. Asset management continues to grow by 16% since the third quarter last year. Growth within insurance continues to be low, but the profitability is very good. Steps have been taken to increase sales going forward, where bank has had a positive development with 11% volume growth in retail loans during the past year. These loans have been booked on the life insurance balance sheet. Moving to slide seven. The pace of digital development in Skagen is good.
Skagen is launching an extended version of their equity savings account platform, ASK, with the widest fund offering in the Norwegian market, with a total of 600 funds. The offer is strengthened by recommending a shortlist of 20 to 30 funds selected by our award-winning selection team. With this, Skagen is perhaps providing the strongest and most customer-friendly ASK platform in the market. Moving to Slide eight. One of the best funds in this platform is our very own Storebrand [Foreign language] Likviditet Faktor , our factor fund that systematically tracks four well-known documented factors. The fund's assets under management have grown to over NOK 20 billion, and can show a yearly outperformance of 1.3%. In 2017, Morningstar named it the best Norwegian global equity fund. Finally, Slide nine. Our digitalization is continuing with undiminished strength.
A good example of this is the newly launched chatbot in SPP, Gajda. Gajda is a chatbot that provides businesses with a tool to communicate pension in a charming and engaging manner to their employees. Recently, the Swedish Pension Authority awarded Gajda with an award for the most innovative solution for providing information on pension. With that, I give the word to Lars.
Thank you, Arild . Starting on page 10, key figures, the group result of NOK 853 million and operating result of NOK 685 million reflects a good quarter for Storebrand. The results includes two items that reduce the reported cost by a total of NOK 40 million. The first item is linked to reverse performance bonuses caused by weak relative performance in some of our largest funds. I do have to point out, however, that the fourth quarter looks far better so far, and the final performance fees to the group and to the portfolio managers will be concluded at year end. The other item that reduced the cost in the quarter is the distribution compensation that reduced the cost within P&C Insurance . This is a one off item.
The two elements are classified as special items and sum up to NOK 40 million. The financial items and risk result life are good and are supported by satisfactory returns in the company portfolios and a good risk result from paid-up policies. Earnings per share are down, primarily as a consequence of higher tax charge in the quarter. I will revert to this in a moment. Solvency has been further strengthened, and we have continued to build buffers to be able to handle potential market volatility. Moving over to page 11, three main factors explain the development in the solvency ratio in Q3. Every year in the third quarter, we have a full revision of our assumptions, both operational, financial, and actuarial. There are a number of smaller assumption changes that sums up to the negative 1.4 percentage points.
The main contributor to the change is a downward revision of the assumptions for paid-up policies to convert to paid-up policies with investment choice. Second, increased interest rates of approximately 15 basis points in Norway and Sweden is the main contributor behind the 3.2% point increase from market movements, decreasing the value of liabilities more than the value of the assets. In addition, strong equity markets have increased the buffer capital. And third, the results for the third quarter have been good and contributes with another 2.8 percentage points to the solvency position before reduction of 50% of the result to future dividends. So that means 1.4% in that table.
Moving over to the following page, the most significant change from the last quarter is that we no longer have any effect from the transitional rules on technical provisions. This is due to increased interest rates and decreased value of liabilities in the Solvency II balance sheets. It is important to remember that if interest rates were to go lower, lower again, Storebrand will automatically step into the transitional arrangement for technical provisions. Hence, the solvency position, including transitionals for the interest rate sensitivity on a 50 basis points interest rate drop, is largely, largely unchanged. For all other sensitivities reported here, we do not expect sufficiently large effects to trigger the transitional arrangement for technical provisions again. The sensitivities are more or less of the same magnitude as reported last quarter. Then over to page 13.
The growth in fee and administration income was 5.8% year-to-date, adjusted for the acquisition of Skagen and currency movements. As you are well aware, the guaranteed products are in long-term runoff. Therefore, the growth in the actively sold products must make up both for margin pressure and runoff products. The growth in actively sold products, product revenues was 9.3% year-to-date on a comparable basis. There were somewhat lower trading revenues from asset management in the third quarter, partly explaining the price development in revenues between the second quarter and the third quarter. We expect these revenues to pick up towards the end of the year. The insurance results are still good, with a combined ratio of 81%. We see overall low claims and some runoff gains, primarily from improvements in disability.
I mentioned in the key figures that we have reversal of costs amounting to NOK 40 million in the quarter. Furthermore, the third quarter has seasonally lower cost due to the summer and lower marketing. Nevertheless, we still see strong underlying cost control that will ensure delivery on our ambitious cost targets. The financial items and risk result life are strong. This is lifted by an unusually strong disability result from paid-up policies at NOK 91 million in the quarter. Going forward, we expect the contribution from paid-up policy risk results to be in the order of NOK 50 million per quarter, up from zero historically. For the third quarter, we have a calculated tax charge of 30%. Year to date, the tax charge is estimated at 21%, in line with our previous guiding. The higher tax rate in the third quarter is caused by periodic effects and technical factors.
We continue to expect a tax rate of around 20%. The taxes are non-payable due to large tax loss carryforwards. With that, I conclude my part of the presentation and give the word back to you, Kjetil .
Thank you. The operator will now open up for Q&A, please.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. We will introduce you with your name when it's your turn to ask your question. And we do have one question coming through already, and that's from Peter Eliot from Kepler Cheuvreux. Please go ahead, your line is now open.
Thank you very much. Three questions, please. First one is on insurance. You commented that the result benefited from some runoff gains. Just wondering if you can quantify those and say where they came from? The second thing was on solvency sensitivities. I mean, as you say, they are not very different quarter-on-quarter, but compared to last quarter, they do seem less symmetric, and the upside in the solvency ratio has disappeared, especially on the sort of interest rate sensitivity. So, I mean, if I look at that sensitivity, you know, the upside on the solvency seems to have disappeared, whereas the downside now falls nine points rather than six points. Just wondering if you could explain what was happening there.
And maybe, thirdly, I was interested in Gajda and your comments there. Is that chatbot now sort of fully up and running? And I'm just wondering whether you can share whether there's any sort of financial implications, and it's probably maybe too soon, too early, but any comments would be useful. Thank you.
Okay, let me start with insurance. On the runoff gains, we typically don't give you an exact number of this, because this is a number of different product lines, and we have certain runoff gains, and we also have certain runoff losses in other lines. But as I said, broadly, the development in disability has been positive, and when we have a positive development in disability, you have three basic effects. You have one effect, that the number of disabled person in the quarter is less than you expected previously, so you have a gain from that.
Secondly, when you have an improvement in the economy, like we have in Norway right now, people that were disabled in the past are getting well again and get back into the workforce, so you can release some of the resources set aside for their disability. That's called reactivation. And thirdly, when you look forward, you expect somewhat lesser disability and put aside less reserve for the future because you see this positive trend. So these three elements give a positive impact in the quarter and in the year to date. But it's difficult to quantify exactly what is unusual and what is within the normal variation.
Hi, Peter. When it comes to the sensitivities, I think, yeah, most of the sensitivities with the exception of interest rates going down, it's on more or less the same level as the previous quarters. What we have seen is that the sensitivities, the interest rates without transitional rules, have changed a bit over time. The reason this quarter is that somewhat technical are attached to risk margin. Not going in details on that. The other element is what Lars just said, was assumption change, that we have had a revision of how many that are converting from paid-up policies to paid-up policies with investment choice.
Taking that assumption down, that gives us a somewhat larger sensitivity to interest rates going down again.
Okay, talking about Gajda, I think the most important with Gajda is that it shows that SPP and Storebrand is in the forefront when it comes to digitalization in the market. And you can also see that it really has an effect in the Swedish market, where SPP are gaining market share, very strong growth in the sales, and in transfer balances, compared to last year. Saying that, the Gajda in itself is now taken up by a very short time, by more than 15 quite large customers. And there is a, well, small payments for using this because it's the employer that shows this to their employees. So they are using this as a tool of making pension being more, more transparent.
I don't think you will expect to see these numbers coming very much through in the results, but more about the total competition in the market, where SPP really are important when it comes to digitalization and to the laws.
Thanks very much. Could I come back quickly just on the solvency? I mean, I guess, I mean, it's been commented before on calls that we've seen a bit of a trend of negative modeling, and if it features sensitivities as well. Just wondering, are you able to give us any numbers about what your assumptions are on the conversion of the paid-ups?
Yeah. The assumption was revised downwards from 1% of the reserves annually to 0.5 percentage points or 0.5% annually in conversion.
Just remember, Peter, that we had the revision of all the different assumptions in the model, so this was but one of them. So, we can't hardly go through all of the different assumptions in the model, but this was the most important one in making the difference in this quarter.
Sure. Okay. 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, on the cost side, the nominal flat cost target towards 2020. Should we assume this would be kind of the cost in the different business segments would be at the same levels, or how will this move, in your opinion, towards 2020? Are we going to see cost increases in some segments and decreases in others? And then the other question is regarding Lars mentioned that Q4 looks better, the market's been super turbulent in Q4, so I was a bit wondering how come that looks better? And also, as an outsider, is there any way of kind of tracking some of the funds?
Or how could we assume that if you can, if you will, be able to book the profit share in the fourth quarter, what are the sensitivities there? Thanks.
I'll start quickly on the cost side. We guided on roughly NOK 950 a quarter, as the nominally flat cost for the group. That is, excluding any large elements from profit sharing, if there's a superior return in Skagen or in asset management, that leads to bonuses. And then when it comes to if it's on a segment base level, there, it's not on a segment level. We will probably still see cost in the guaranteed business go down over time, and then somewhat more costs can be allocated to other areas.
I think it's important to just, like, emphasize that having flexibility in cost allocation and redistribution of resources in a company like ours, and any other company as well, is a key competitive factor. I mean, if you want to stay competitive, you need to develop with the market, and you need to reallocate resources to where you have profitability and growth or where you want to create growth. So, it's very important to say that this is not static, but we work within a total limitations set by the objectives set out as the capital markets set. Secondly, on performance in the fourth quarter, I did not say that the fourth quarter markets as such were better because they are certainly turbulent. I said that performance in the main funds looks better so far in the fourth quarter.
If you go into Skagenfunds.no, you can follow the performance of each one of the funds on a daily basis, both on absolute terms and relative terms, and that will give you an indication as to the development.
Basically, you're, you're saying, Lars, that the SKAGEN funds, the absolute performance hasn't been great, but the relative performance has been better in Q4?
That's correct.
Thanks.
Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. The next question comes from Ashik Musaddi from J.P. Morgan. Please go ahead, your line is now open.
Yeah, hi, good afternoon. Just one question on Skagen again. I mean, you mentioned that fourth quarter relative performance looks okay, and in first three quarters, I think you mentioned outperformance of 1.5% or something. So, I mean, all together, how should we think about the additional fee revenue that you would be booking at one go in fourth quarter? So any thoughts on that would be great. And secondly, if I look at your capital generation, it used to be around, say, 1.5% in past net of dividend, and in this quarter it was 1.4%. So how much of this is just rounding error, and how much of that is some drop quarter-on-quarter?
But maybe I should start on Skagen . I think first of all last year you saw that Skagen had a performance quite close to the relevant indexes and that gave a lift in the results of around NOK 200 million in the last quarter. This year it's been underperformance in the main months so far and quite significant underperformance in the third quarter leading to a situation where we reduced the cost for the PMs in the third quarter. And if we have to close the book at the third quarter there will be a total of NOK 53 million in performance fee. So that gives you some range here.
Where, I must say, a bad quarter when it comes, or a bad year so far, when it comes to performance, NOK 50 million in performance fee will be booked. And then you have the range up to, well, quite a normal situation than when you have a performance like in indexes, then you will have NOK 200 million. And of course, if you can really perform as we intend to do, alpha on top of that going forward, you will have absolutely also a benefit from that level. But it's not what we expect for the fourth quarter.
Thank you.
On solvency generation, we have said that we expect to create 10 percentage points from operational earnings each year before dividends, with 1.4 after dividends. We are a little bit higher than that level with, you know, approximately 12 percentage points run rate a year. So I guess we are broadly in line with the, with the guidance given.
Okay, perfect. Thank you.
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