Good afternoon, ladies and gentlemen, and welcome to the Storebrand quarter 1, 2018. My name is Anna, and I will be your coordinator for today's conference. For the duration of the call, you will be on listening only. However, in the end of this presentation, you will have opportunity to ask questions. If you at any time need assistance, please press star zero on your telephone keypad and you will be connected to an operator. I will now hand over to Head of Investor Relations, Kjetil Krøkje, to begin today's conference. Thank you.
Good afternoon, ladies and gentlemen. Welcome to Storebrand's Q1 2018 conference call. My name is Kjetil Ramberg Krøkje, and I'm Head of Investor Relations at Storebrand. Together with me today, I have Group CEO, Odd Arild Grefstad, CFO Lars Aasulv Løddesøl, and Head of Economic Capital, Trond Finn Eriksen. In the presentation today, Odd Arild Grefstad will give an update on developments in the Q1, while the CFO, Lars Aasulv Lødde , will give some more detail on the financial development 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 be dialed into the conference call. So with that, I will leave the word to Storebrand's CEO, Odd Arild Grefstad, who will start the presentation on slide 2.
Thank you, Kjetil. First, let me lead your attention to the forthcoming Capital Markets Day. We will be in London and host presentations from 9 to 12 on Thursday, May the thirty-first. Go to storebrand.com/ir to register your attendance or save the date for some webcasting in your calendar. Then, move to slide number 3. I'm very pleased to present a good result before amortization and write-downs of NOK 931 million for the first quarter. Savings volume growth, combined with strong insurance and risk results, contributes to the strong result in the quarter. One special effect this quarter is a positive non-recurring reserve release of NOK 149 million, due to the completion of the scheme for longevity reservation. Operating profits in the first quarter was six hundred and thirty-five million, an increase of 37% compared to the same period last year.
A 17% Unit Linked improvement on a strong result, insurance results, 14% growth in retail bank with improved margins drive the strong operating profits. The underlying solvency position improved by 5 percentage points, 360% in the first quarter before transitionals. Including transitionals, the solvency ratio was 165%. Let's move to slide number four. This is a very familiar slide in illustrating our threefold strategy, which we have been implementing through the past five years. It is pleasing to see that we are really delivering on both sides of the strategy in the first quarter, with strengthened capital position and growth within savings. Let's move to slide number five. In the movements of the underlying, underlying solvency position, I want to highlight three main elements.
Firstly, the market movements, and especially the increase in the Norwegian 10-year rate of 31 basis points, resulted in an increase of 5 percentage points in the first quarter. Second, EIOPA provides quarterly updates on VA and equity stress, as well as implementation of a new UFR of 4.0 5%, in this quarter. In sum, these changes give a 3.5% increase in the solvency. Lastly, operational performance. This result generation this quarter gives a 3 percentage points increase, of which half is reserved for expected dividends. In addition, an acquisition of Silver and a net reduction in subordinated debt reduces the solvency by 3.5 percentage points. And this then moves us up to a solvency position of 160%.
The effect of the transitional rules are reduced from 16 percentage points to 4 percentage points during this quarter. Increased interest rates and increased VA reduces the Solvency II liability, and that also then reduces the value of the transitional rules. The effect is in line with the reported sensitivities from the last quarter. Moving to slide number 6. Talking about development in the sensitivities, we see that the sensitivity for increased solvency due to an increase in interest rates is reduced. The reason for this is that we now are at the point of time where paid-up policies are becoming more profitable, and this will increase the lapse stress on the solvency too.
Regardless, a limited immediate solvency effect, increased interest rates are very positive for Storebrand, and that is because increased interest rates give reduced investment risk and increased results and solvency over time to customers and owners. Then let's move to slide number six. With slide number seven, actually. With the acquisition of Skagen, the group is well positioned for strong growth in the Norwegian individual savings market. In Q1, the group acquired the remaining 9% of the shares, and this was financed with liquidity from Skagen AS . As for the integration update, we have decided to converge into one common operational platform using technology solutions from both SKAGEN and Storebrand. We have also decided to establish a common institutional distribution platform.
Lastly, on the onboarding of Storebrand customers, this has been a very successful onboarding, and they are now all being fully served on Storebrand's platform. Turning to slide number 8. I also want to comment on the development of the Swedish business as in the previous quarter. The development has been an impressive turnaround. From a situation a few years back, with very weak administration results and volatile results, due to ALM and mismatch, we now see solid results contribution. And on top of this, we see a growth within the Swedish business with 22% premium growth from the same period last year, due to strong sales and positive net transfers. Moving to slide number 9. The strong growth in savings continues with a growth in unit linked reserves of 17% and in asset management of 18%.
On a quarterly basis, growth is dampened due to weak financial markets, both equities and bonds, as well as a weaker Swedish product. Retail lending has grown with 14%, with margin improvements and growth in insurance is weak, but the results are strong, and we are in the process of implementing new growth initiatives that we expect to give positive effects going forward. With that, I give the word to Lars.
Thank you, Arild, and asking you to turn to page 10, key figures. The group result is good at NOK 931 million. The operating result at NOK 635 million is somewhat above the normalized level that we have previously communicated, around NOK 550 million per quarter. This is primarily driven by good risk results and firm cost control. As a reminder, we record performance fees in the fourth quarter, and this quarter, i.e., the fourth quarter, will normally be a lot better than the first three quarters, as you can also see from the graph. Financial return in the first quarter was quite satisfactory, despite turbulent equity and bond markets. Good returns in real estate and credit markets led to profit split in Sweden and acceptable returns in company portfolios.
The special item in the quarter of NOK 149 million relates, as Odd Arild alluded to, to reserves for longevity. Just to remind you of the history here, in 2013, Storebrand started a plan to strengthen the longevity reserves by NOK 12.4 billion. In the fourth quarter of 2015, we set aside NOK 1.4 billion in a one-off charge to cover the Storebrand part of the bill. In the fourth quarter of 2017, Storebrand finished reserve strengthening well ahead of plan. In the final allocation of reserves down on each individual contract, which happened in March this year, it became clear that we had set aside too much under caps before this first, for this purpose.
As a consequence of good risk management and buffer building throughout last year and the last few years, we were able to return a total of NOK 149 million to company profits. As Odd Arild has commented on, the underlying solvency margin improved in the quarter. As you can see from this graph, the capital requirements fell with higher interest rates and lower equity stress, once the solvency capital increased into operating performance. Customer reserves in Norway fell with equity markets and bond markets, and we now benefit from the risk management and buffer building done last year. The cash earnings per share ended at a strong 1.69 NOK in the quarter. Turning over to the next page, 11, fee and administration income is one billion two hundred and twenty million in the quarter, of which NOK 107 million comes from SKAGEN.
The insurance result is strong, primarily driven by run-off gains from from previous years. The operational cost line includes NOK 110 million from SKAGEN, which means the SKAGEN contribution is a negative NOK 3 million in the quarter. In the first quarter this year, relative performance in SKAGEN has been weak, and we've not had to set off too much for fund manager bonuses. This far in April, performance has picked up significantly, and we may have to set off for bonuses in the second quarter. However, we are not allowed, under IFRS, to take corresponding profits into income before at the end of the year. So far this year, we have earned, but not booked, NOK 55 million in performance fees from SKAGEN and Delphi.
Adjusting for the SKAGEN cost, the Storebrand cost level is well under control, and we confirm our cost targets for the year. Financial results and risk result life includes NOK 149 million reserves from longevity. Amortization is positively impacted by a technical accounting effect relating to the acquisition of Silver. A normal amortization charge will be NOK 105 million per quarter. Tax has been estimated to 16% in the quarter. The normalized tax charge will be around 20%. Turning over to page 12, this picture shows the same results fit into the business areas, savings, insurance, and guaranteed. Savings profits continue to grow according to plan. Insurance results are strong in the quarter and somewhat stronger than we expect going forward. Guaranteed include the NOK 149 million longevity profit, which show underlying resilient profitability despite being in long-term runoff.
That concludes our initial remarks, and we open up for Q&A.
Thank you. Ladies and gentlemen, if you would like to ask a question in this meeting, please press star one on your telephone keypad. I can see there's questions already coming through, and the first one is from Matti Ahokas from Danske Bank. Please go ahead. Your line is now open.
Hi. Good afternoon. It's Matti Ahokas here from Danske Bank. Two questions, please. Firstly, regarding the development of the assets under management, they were down quite a lot from NOK 721 billion to NOK 707 billion. So, is this a function of were there any outflows, or it's just a function of the market movements altogether? And then a small clarification on slide number 13, where you say about the fees earned, not booked NOK 55 million. So if everything would continue as is, it would be NOK 210 million booked in the fourth quarter with no impact on cost. Did I understand this correctly? Thanks.
Yes, on AUM, that's a consequence of a positive contribution from the Silver funds and a negative translation effect of a similar size coming from the exchange rates, the change from Norwegian to Swedish kroner, so which has been 6% in the quarter, i.e., all of the funds we have in Sweden translated into Norwegian kroner are worth 6% less than Norwegian kroner. In addition, comes turbulence in financial markets, where both the bond market and the equity market has fallen. There is also a limited continued outflow in Silver, sorry, in Skagen, which is expected with ownership. So, but as I said, the performance in Skagen is picking up nicely now, so that may be reversed later on.
So that's the main components of the AUM change. On the fees earned but not booked, that is the performance fees that I mentioned in my comments earlier. That's where we are not allowed to book performance fees before they are sure or secured at the end of the year. However, as I mentioned, we have to book the estimated performance bonuses to the portfolio managers on a running basis. Therefore, if performance is great one quarter, we have to set off for bonuses to the portfolio managers, but we cannot take into account the fees earned, but not booked before the end of the fourth quarter. So that creates some volatility in the recorded results.
The 55 million consists of 16 million from the DNB and 39 million from SKAGEN. There's ... You cannot just times that by four to get the final number, because that will be typically volatile through the year. Hopefully, it will go up to a larger number than you mentioned, but it can also fall to a lower number.
Got it, very clear. Thanks a lot.
The next question comes from Peter Eliot from Kepler Cheuvreux. Please go ahead. The line is now open.
Thank you very much. Perhaps if I could just follow up on that question from Matti, first of all, and I'm just wondering if you can quantify the, the SKAGEN outflows at all. And then I had some questions of my own. The, the main area actually was on the, the insurance, operations. Obviously, a very impressive cost, ratio, 3 percentage points below last year. I'm wondering if you can, just comment on how sustainable that is, and also on the composition of the reserve releases, which, which seem to have come from, all three divisions. And finally, on, on, on insurance, the, the premium, the quarterly disclosure shows disability premiums up, 20% on quarter one last year. But in overall, you're showing seem to be sort of talking about flats.
I'm just wondering if you could square that number. And then if I am allowed to add one more, I was just a little bit confused by the sensitivities you showed on the solvency on slide 6. Specifically on the equity sensitivity, which has gone up a lot, although you don't seem to have increased your exposure, you increased your exposure a little bit in Sweden, but doesn't really account for the increase. And also on the UFR. I mean, I would have thought you're already accounting for 4.05, so I'm surprised that there's a sensitivity to that, and I'm surprised it doesn't get worse under 3.65. And sorry for a lot of questions there. But yeah, thank you.
... If I may start with clarifying on the sensitivity slide on for solvency feature. When it comes to the UFR, it's, as I thought, it should run 3.9% in the charts, sorry about that. And I think that should clarify the question. On the equity sensitivity, actually, in last quarter, the equity sensitivity was quite low because we had developed also the buffer capital during the year. So, we could actually where we could have our actual equity spread and still have enough buffer to stand next to equity just once more.
Now that we have fallen with some of the buffer capital, and now on the equity structure would actually start to then hit also other elements than the market value of properties. So that's the reason to increase both sensitivity. If you go up from the bottom of your questions on insurance side, and growth, we see payments for own account increasing the disability line. This is due to that we saw a new from the last year on a lower level, and which has now come up that more or less normally run rate with all the clients coming in.
This was already, when you look at the different payments, accounted for in the premiums during the year, last year. And that's the difference between the two metrics, payment for own account and the (different payments), which is more forward-looking nature. On the cost base, I mean, so we still take that loss.
Can I just say, sorry. It's quite a bad line. I'm not sure if it's only me, but I'm struggling to understand everything you're saying, Trond. Apologies if it's just me. I can follow up offline if that's the case. Sorry.
Sure.
I'm sorry, this is the phone operator. It is when the second person is talking, there is ... I think you're sitting a little bit far away from the microphone. If you just go, move a little bit closer, and we can see how it sounds. Otherwise, I think it's come through clear. Thank you.
And Peter, the SKAGEN outflow was NOK 2.3 billion in the quarter. And on insurance cost, we constantly manage the cost level. We will continue to do so. I'm not able to give you any concrete guidance on further development, although I think we need to maintain it in the area of 15 basis points in order to be competitive. If that answered your question?
Yeah. I'm just maybe just a quick follow-up on that. I mean, obviously the improvement has been quite significant from sort of 18 to 15. So I'm just wondering, you know, are there any one-offs in there, or, I mean, is there any reason that we should have sort of expect that to revert to the previous level or to stay on the current... I mean, I'm just wondering if there are any one-offs, basically, in either number?
On the costs, in the insurance, area?
Yeah, I think what we'll mainly see there is reallocation to savings from insurance, and it reflects the actual investments and values used in the business. So it's not a one-off as such, it is a reallocation of costs compared to last year.
You see that we have somewhat lower costs on both, the P&C business and on insurance, and somewhat higher costs on, on the savings area, due to the fact that they're using more resources on the savings area, as we speak. I also want to just add on to, to this SKAGEN, because, the net outflow is NOK 2.4 billion. But the good thing is that we see a quarterly inflow in SKAGEN, that is still on a high level, of NOK 3 billion on a quarterly basis here. So that is, of course, pretty important, also going forward.
And if I may add an additional comment on insurance and growth. We work, as you are very familiar with, there are a number of different product classes here, and we work quite hard to strengthen growth in all of the different product lines. So there is a sense within SMEs, small and medium-sized enterprises, on group life and term products, is growing strongly this year, which will come into effect in the next few quarters. There's also initiatives on P&C and on health insurance that will gradually pick up growth in this area throughout the year and even with a higher effect next year.
Okay, great. Thank you.
The next question comes from Blair Stewart from Bank of America. Please go ahead, your line is now open.
Thank you. Afternoon, gentlemen. Couple of questions. Firstly, just on the unit-linked savings segment in Norway. I noticed that just looking at the fee line was unchanged despite the addition of Silver, which slightly surprised me. I think you'd previously indicated that Silver would add, I think, NOK 60 million on a full year basis, maybe NOK 15 a quarter. So slightly surprised that the fee line wasn't higher, and the cost line went up. I just wonder if you can explain that. You did mention some margin pressure, but is there anything else going on there? And secondly, just relating to the higher interest rates, and one comment that Odd Arild made in his introductory remarks. Is there any likelihood of profit sharing reemerging in the paid-up books, in any significant way?
And finally, again, on the higher interest rates theme, is there any difference or any changes to your asset allocation over the last quarter? And how is the expected investment return evolving? You used to show a slide giving the expected investment return over the next few years. You stopped giving that. It's possibly something you'll return to at the Capital Markets Day, but just wondered generally how that was evolving. Thank you.
Blair, if I start with the Unit Linked savings in Norway, the funds from Silver came in during February, so therefore, you have the balance is up by the whole amount, but the income is only up by one month of income. So that will gradually improve both the margin and the absolute income in the coming quarters.
Okay.
On the cost side, there has been a reallocation of cost to the areas that are where we use more manpower these days, which is in the savings area. It started with ASK and IPS last year, and we continued to focus more on savings and pension, and therefore, the cost to this area and allocated cost to this area is somewhat higher. I should mention, in the same context, that we do not have deferred acquisition costs on this, the way we account for costs in Norway. So we take all of the costs up front while the revenues will come in later. Therefore, you will see some some cost loading from then on, on these initiatives.
When it comes to increased interest rates and profit sharing, it's of course we can expect earlier profit sharing when we see a pick up in interest rates. And there is also different portfolios when it comes to paid-up policies, and some of the portfolios starts to have high capital. But there is always, of course, a trade-off in the risk management area versus building buffers or starting taking out profit share. I also like to mention that there is a discussion, a debate in Norway now, also with the regulator and the Ministry of Finance, to look at some of the elements of the paid-up policies to make it a better product both for customers and the companies.
It is possible to do some trade when it comes to the hard annual interest rate guarantee, and also the flexibility of building up buffers and use of buffers. So hopefully, that also will have a positive impact that can increase the opportunity to start profit sharing somewhat earlier.
When it comes to asset allocation, there has not been any major changes to the asset allocation during Q1. In the supplementary information package on table 44, there is a state every quarter on expected return over the next 12 months. But I can also assure you that we will reverse on the Capital Markets Day with updated slides on on this.
Okay, thank you. Odd Arild, just going back to the discussions that are happening at the government level on the paid-up books. Is it just the removal of the annual guarantee? That's something that has been talked about for years. Is there anything else in discussion?
There's a lot of elements in discussion, actually, and some of them from the labor organizations is more about also the state to take more of the risks, when it comes to paid-up policy, to ensure that you have, over time, a better, well, better outcome when it comes to pensions for people. Because you see, of course, the allocation you have for paid-up policies today, that will be a real loss for the pensioners going forward. And that is being obvious for many in Norway, as we are now seeing these paid-up policies portfolios is growing. But I think, the most realistic element is about affordability, it's about annual interest rate guarantees, and that will also be very helpful.
Yeah. Thank you.
Before we let the next person come through the call, ladies and gentlemen, if you would like to ask a question in this meeting, please press star one on your telephone keypad. The next question comes from Jonny Urwin, from UBS. Please go ahead, your line is now open.
Hi there. Thanks for taking my questions. Just two for me. So firstly, looking at the roll forward of the Solvency II ratio, the own funds and the SCR, there was limited improvement in own funds this quarter, despite a decent level of profitability. So could you help us bridge that gap? Obviously, the accrued dividends will take up part, but I just wondered what you know, the driver was. And then secondly, we can see from Gjensidige today, that the regulator in Norway has become a little more active on capital models. Are there any risks to your model from potential changes from here, or is it a company-specific issue to Gjensidige? I know at least part of it is. Thanks.
On the last one, we have not seen anything around the Gjensidige reports today. We have been busy with our own, but there is no news around our modeling. It's been, of course,
... now, for a while, we have had discussions about it with the regulator, and there's no, as we can say, outstanding issues when it comes to the modeling we are reporting. And thanks. When it comes to changes in own funds, that's actually a bit more complicated than what it might sound like in the first place. First of all, decreases in equity markets and increases in bond prices have, to some extent, lowered the value in force from the non-guaranteed business, bringing the own funds down from that part of the business.
Then on also what goes into the own funds is surplus value of bonds that at amortized cost and also have come down during the quarter due to increased interest rates again. I guess that's the two main explanations for any additional effects from Sweden. Yeah. This part this quarter. But we also see the same effect on the quarter from it. Yeah.
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. There's no one in the queue at the moment, so please press star one, and you will be connected straight away. Thank you. Just one more reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. There are no questions coming through, so I will hand the call back to you. Thank you.
Perfect. Then I would like to thank you all for joining this call. I would like to remind you that we will be presenting in London tomorrow, for our analyst meeting, and we look forward to see you there. And lastly, reminder to register for our Capital Markets Day on May 31, on the IR webpage. Have a good afternoon.
Thank you for joining today's conference. You may now replace your handset to end this call. Thank you.