Good afternoon, ladies and gentlemen, and welcome to the Storebrand third quarter analyst call. My name is Anna, and I will be your coordinator for today's conference. However, presentation, you will have opportunity to ask questions. If any time you need assistance, please press star zero on your telephone keypad, and you will be connected to an operator. I would now hand you over to Head of Investor Relations, Kjetil Ramberg Krøkje, to begin today's conference. Thank you.
... Third quarter conference call. My name is Kjetil Krøkje, and I'm Head of Investor Relations at Storebrand. Together with me today, I have Group CEO, Odd Arild Grefstad, Lars Aasulv Løddesøl, and Head of Economic Capital, Tore Ingebrigtsen. An update on the Q2, Q3 and 2017. 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. Read the word on slide 2.
Thank you, Kjetil. First of all, it's a great pleasure for me to present very strong results for the third quarter. I'm very pleased, especially with the strong operating results, close to NOK 600 million, actually on NOK 596 million. Overall, a strong development also in the financial results. The front book is developing very good on all different elements. But the most important news this quarter is, of course, around the acquisitions, so that we made it clear this morning and also yesterday. It's acquisition of the asset management company, Skagen, and also an acquisition of the individual pension providers to the last years. It's the twofold strategy. It's all about the creating growth and value from the front book in savings and insurance.
And combined with that, that's the capital, like, the growth, and that we've reached now development of the organic growth. We are also very clear to do that, that this quarter. But in this quarter, we have also added substantial growth in the savings and pension of our fee-based business, our capitalized business, through the acquisition. So I'll jump to 7, to give the highlights from the acquisition of Skagen. This is asset management company. You have the details in the previous slides. It is a company that has a leading position in Norway when it comes to mutual funds, and a leading provider for retail savings in Norway. And that is a very complementary strength compared to Storebrand, that has a leading position when it comes to pension in the Norwegian and the Nordic market.
Together, we combine our market from Storebrand and market shares. We also see a lot of opportunities when it comes to distribution, distributing Storebrand's products through the retail, but distribution network, the institutional area. We have a lot of possibilities to work together in Norway and in Sweden, where we both are present, but also with a strong presence as Skagen have in Europe and in International. And of course, adding this acquisition and also the acquisition of Silver together, we move up to a very scalable business, now up to about 700 asset under management. Quite clear, it's the increased scale in asset management in Silver that gives good opportunities for, of course, synergies, but also for scalable business in different segments and markets.
With the shift our total business toward the fee-based, the non-guaranteed, income streams and revenue streams, and that there are, of course, synergy opportunities, both cost synergies and more income based going forward. As in the market, and we see that, although, we've reached the solid direction with, together 3 percentage points, it creates a long-term, good income and capacity. If I then, just move to slide number 15, that is the sum of Skagen. It's 1.6 billion in payment. It's 75% in shares with Storebrand and 25% in cash. There is some a lot mechanisms, and also a split of profit sharing, a split of the performance split going forward.
I just want to say that, we will really like to see these coming, because if they do, then this will create both results and others, for Storebrand. But the growth payment is stream in. Just also briefly then on slide 17 and 18, on the acquisition of Silver. This is close to 20,000 customers in, while there will be no longer in this transaction. We will have close to NOK 10 billion in, paid-up policies with the investment choice, the non-guaranteed, part, or the non-guaranteed product. And we also assist on the 18, buying portfolio, with the company portfolio in, the life insurance company, paying, NOK 620 million, and expect an increase in the administration results of approximately in the year.
With that, I think I give the go to you.
Thank you, Odd. I'm proud to present, and I'm starting on page 18. I'm proud to present the strong first this quarter, NOK 596 million in operating results is a new record. I guided last quarter that the operating results is expected to land somewhat between or somewhat above NOK 500 million per quarter on a normalized basis. I repeat that guiding, and these results are somewhat above what we can expect going forward. There is, however, no specific items that improve the figures significantly by themselves, the contributions from across the business. At the same time, good returns allow us to continue with our dividend. The EPS is strong due to a low quarter, impacted by tenor, market movements, technical adjustments, and operating value creation.
Starting with the first movement on the left-hand side, model improvements have this quarter contributed to the negative 1 percentage points. We're constantly working to improve our models, and this time it has led to a marginal 1 percentage point. Over time, model improvements have contributed positively. On a more technical nature, volatility adjustment was reduced by 3 basis points to 18 in Norway and by 1 basis point to 3 in Sweden. This led to a 1 percentage point fall in the steepness of the impact without a change in the interest level as such. This has contributed another negative 1 percentage point. The third element is that the equity stress factor increases when equity markets go up. This led to the final negative, combined negative contribution of 3 percentage points from primarily technical factors.
Importantly, the operating earnings and asset return contributed positively 3 percentage points operational. Add to this 2 of 10 percentage points for a regulatory solvency of 160%. Turning to page 20, these movements give us the following overview. The picture includes the sensitivities related to movements in rates, equity markets, spreads, and UFR. The sensitivities are more or less unchanged from the previous quarter. Turning the page once again to page 21, it is satisfying to see that the growth in the top line is picking up speed. The top line growth, adjusted for changes in currency rates between Norwegian kroner and Swedish kroner, is up 5%. That is driven by an 11% front book growth, more than making up for the decline during the quarter down from last year level.
The tax rate for the quarter is negative, i.e., we have tax income due to the sale of a property which has released the tax liability. Our expected long-term tax rate remains slightly above 20%. We're now up for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone. You will be RBC.
Thanks for taking my questions. A couple, please. Firstly, looking at the Skagen acquisition, kind of going back to one of the questions very early presentation this morning. Really, can you tell us any more about why you think Storebrand as an owner will help to turn around the fortunes of Skagen, when, you know, you're ultimately keeping the business quite separate from Storebrand, so, you know, there's not that much kind of in the way of synergies to come from combined just more than two acquisitions. Today, were these just kind of opportunistic, given the situation that the companies were in?
Or is growth through M&A more of a sort of longer-term strategy for you, and if so, are there opportunities out there that you can see? Thanks.
Yes, thank you. Start with Skagen. I think we strongly believe in the quality of the investment processes in Skagen. We see that there has been a strong turnaround, and we are able owner will be a very good factor to also calm down the markets around ownership in Skagen and Silver. We are very clear that we will keep Skagen investments, but functions are independent. Frankly, that we will work together with when it comes to distribution, when it comes to operating a platform, and to make it as scalable as the synergies that is possible to take it out in that.
And we are starting that in close relation with the top management in Skagen, and I really look forward to engage into that and to work together with the Skagen management on that point going forward. So to some degree, about what we should work together on. When it comes to the M&A strategy, I think I would say that looking at Storebrand's business, we have a very attractive product that is growing very fast this quarter with International. We have a very M&A strategy to keep our business growing forward. That has been a very key statement for me for a while now, and it's still a very key statement. What we saw here was two very clear opportunities in the market where we had direct strategy.
We were in the other, the balance from balance, from guaranteed business into fee-based, non-guaranteed business, in a way that we create stronger results and also stronger dividend capacity going forward. And it was a new. We were pleased to see that we were able to, to, fulfill that opportunity and create this value that we see.
Excellent. Thanks.
The next question.
I've got a ton of questions. First two on the Silver portfolio. When I try and do my sort of back of the envelope sums, I think, I mean, to get to the NOK 60 million, I basically need to assume that you make roughly the same revenue margin on the acquired assets as you do on your existing assets, and that there's basically almost no increase to the cost. I'm missing something bizarre around. The second thing was on the... Could you say something about the sort of ALM in the acquired portfolio? You know, whether there's a duration gap, for instance, et cetera.
Doing different sum, just on the Silver, I guess my very lay and ignorant view is that, you know, model improvements usually lead to a requirement to be less conservative. I mean, generally, it, you know, it, it's, I guess, they generally... Yeah, very much.
Well, I think that definitely is something with the first question. The Skandia portfolio will be converted to paid-up policies with investment choice. We are assuming on those, as we are doing on our current unit-linked, but there is a substantial part which is occupational pension with in general lower margins than what we have on the personal products. So that's the extent that these guaranteed products. There is no ALM, no liability-driven asset management there as such. It's more about the customer's risk preference and life cycle portfolios.
Yeah. Sorry, of course. Yeah.
And on the last point, under that, what we do every year is that we are using Q3 to update all assumptions regarding the total business on a sort of activity. That will typically lead to small changes in different assumptions, and small model changes, and this quarter that was also expected, a small negative on a quarterly basis. But that's what we showed this quarter. And as I said, initially as well, this has led to significant improvements in the solvency over time, but there are adjustments done every quarter, and in this quarter, we got a negative.
Quickly on that, on that last. Thank you.
The next questions comes from Ashik Musaddi, from JPMorgan Please go ahead, the line is now open.
Hi, good afternoon. Ashik here from JPMorgan Just three questions I have. First of all, I mean, can we get some color about the Skandia assets under management? It has gone down for past, 4 years in a row. So what was the reason for that? Can we get some color on that? So that is one question I have. The second is, the non-life combined ratio, especially claims ratio, has improved percentage point. So right number, 68%, or are there... Are these numbers driven by reserve releases? So how should we think about normalized number, and, and what is the reason for such an improvement? Because 7 percentage point improvement in one year seems quite a lot. And the third question is: how should we think about this capital generation? Because you were doing around 3% quarter, was around 5-10.
About that, and just related to that, is, the model changes has been there for past three quarters, which are negative items, minus 2, minus 2, and minus 1. So shall we continue to model a negative number going forward as well, or do you think that this is...? Thank you.
Understand that the first announcement in Skagen. It of course has been a tremendous journey from the start of the company in 1993. And they had some fantastic years when it comes to performance. We've got, and it was really top year of Skagen. We have seen for the last couple of three years that there have been outflow from Skagen. Mainly has been institutional clients that has left the company, has to do ownership of the processes around the investment are now in place. It's a strong management that is taking this going forward.
We will add on with our competence, whether we can support, work with, with the people to make sure that we have a stable development, and a good growth, going forward. On non-life, claims, I guess we've said we are 92, and, we have had some reserve releases within, group life. We also have some seasonally good, results in health insurance this quarter that, that, further better the, the results. So I think, 90-92% combined ratio are,
Strong. Last 3-4 quarters has been exceptionally strong, and we should revert back to 90%-92%?
That's our base case when we look forward, yes. If you look at the movement in solvency, I think you're right, that we have seen a strong typically on the solvency ratio from interest rates curve and volatility, I mean, volatility adjustment and equity adjustments. And especially this quarter, I have a 1 percentage point negative impact from decreased volatility adjustments, and 1 percentage point negative impact from increased equity stresses. At the same time, those are increasing or decreasing in the capital markets as on our capital, and have hence led to good asset return and hence somewhat higher capital generation from assets return this quarter. But that hasn't done across from the negative impact.
The guidance on capital generation, we still look at a 6-10 percentage point each year coming from operational and cash returns.
That's after dividends? After dividends.
Market day. Yeah, more than that. But, that's correct.
Okay. Thanks a lot.
Before we let the next person through, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Jonny Urwin.
Two questions for us to talk a bit about how the solvency ratio has developed and has been steered by you guys over the last two years or so. I mean, it's clear, you know, you guys, as the management team, have done a good job in optimizing them. It's above the footing. You know, we are seeing more sort of action in other areas, i.e., M&A, you know, a bit of negative model change coming through, perhaps, you know, unwinding the positives that have already been. And I just wanted to gauge, do you have, like, an upper bound in mind? Is this actually a sort of good level to be running the business to, or do you think we should still go higher from here?
You know, should we expect you to sort of use the additional firepower that you've got, if you're generating capital over and above that NOK 150? And what are priorities? I mean, is it M&A? Is it capital return? I guess that's the key debate after the deal's done to... That's quite a long question. Secondly, I just wanted to pick your brains on the Skagen deal. I mean, what do you see as the addressable cost base for us to form our own view on synergy potential? I get that chunks of the business are going to be kept separate, but, I mean, the NOK 50 million to me seems like when you say it's first phase, but it does seem a bit conservative. So any color there will be great. Thank you.
Okay. Thank you. About, we have set forward a very clear, I think, heat map around our solvency ratios. We like to see a normal span of solvency to be between 160% and 180%. We have also stated in our dividend policy that you should expect extraordinary dividends if we move, well, up Solvency. We expect to build across build solvency capital levels, so as you have to just revert to clear on the, you know, former questions.
And, we will tend to do that to create and build the solvency ratio going forward, based on our normal volatility that with this will be a capital positive and solvency business going forward, and we want to be in that span as we have talked about, and that we assure the market on our latest capital.
Just to follow up on that quickly. As you all reached peak levels, as you're saying, and, you know, we're going to start to see a lot of capital being spun off, then what... I mean, why did you have to issue equity to do the deal today? Surely there'd be plenty, you know, to come, and maybe you'd be able to bridge it by doing something else.
To do equity with this equity portion in the market. We also see that it's a good alignment between us as buyers and the sellers. I really like the story and like to also be a shareholder in Storebrand, and going back together, the split of the performance and fees and so on makes a good alignment with the sellers and the buyers in that deal. So we thought that this was a very good way of financing the deal altogether. But it's not based on that to do it that way. We expect to increase that also going forward.
On the Skagen synergies in office?
Yeah, then on the Skagen synergies, I think, well, you lost track of all the numbers, but, on the top of my mind, it's around, about NOK 400 million in cost base in, in the Skagen company, and it's also around NOK 600 million in business or in capital base on these two businesses.
Thank you very much.
Ladies and gentlemen, I will do a reminder. If you would like to ask a question, please press star one on your telephone keypad. We do have a question, one more from Ashik Musaddi from JPMorgan Please go ahead, line is now open.
Hi, this is Ashik here again. Sorry, it's compared to Skagen, two-thirds of your asset base, and their cost base is 600-700. So pretty small relative asset under management, third-party, but pretty space savings and now back to the capital generation. You continue to have this asset de-risking benefit and solvency ratio. So till what time can we expect that number, that positive number to continue?
Starting with the very different business we are running in Storebrand, very much on based on what we do for our life insurance companies in Norway and Sweden. Less than do external business, mainly in institutional markets. And, of course, with a much lower, much lower, business in the mutual funds, quite clear alpha, all those targets. So the cost structure is very different in these two companies. And I also like to add that, of course there is a significant cost base, but the main cost is seen in our pension and savings market, that we see going forward will be more and more the same markets, in especially Norway.
Taking this position, taking a part of this growth together, is really what is driving us in that field and not reductions.
Your revenue versus your own revenue margin is around 70-80. So is it driven by asset mix or mix? Because 120 basis point seems a bit large compared to what typically it would be, the margin in Europe.
It's by both asset mix and also by the fact that it's pure alpha in Skagen.
I think we can add also that the Skagen business, you should view that not only as an asset manager as such, but also as a wealth management business combined with an asset manager. So it's the distribution cost is a lot higher than it is with us. We have mostly digital and captive distribution, while here you have a network in order to understand the differences in cost base.
Okay, that's clear. Thank you.
But, I guess your second question regarding capital generation on the Solvency II. I'm not sure if I picked up, you had some... you mentioned something about, reducing SCR through, de-risking?
No, I mean, it could be asset, I mean, asset de-risking as well, because if I look on slide number 19, where you have the split of the solvency ratio, slide number 19, there is something called asset return business mix change. Has a 1 percentage point improvement in the solvency ratio. I guess you mentioned that in the past as well, that you see this regularly. So how much more to do? So any thoughts?
More risk than we have done, or increased risk with financial markets. This is really that we have had strong returns, which have created more buffer capital, which is very, very good. We could have taking more risk off, but what we're trying to do with the solvency or the capital mix or the asset mix is really to give both at the level of solvency, the operational solvency capital and as well as the volatility in that number. So there are different levers that you could pull, but for the moment, we are happy to try to again make sure that these are in connection to each other.
Okay. That's clear. Thank you.
We have another question. The question comes from Matti Ahokas from Danske Bank. Please go ahead, line is now open.
Yes, good afternoon. I have two questions, please. Just to clarify on the Skagen acquisition, if we assume that the current fee would that also mean that there will be no further earn-out, so this would be the final price paid for it? The second question is also on the capital generation and from a slightly different angle. The 16 percentage point increase that you've guided on, how much of that or how much is the impact of the guaranteed business do we expect?
So if I start with the Skagen acquisition and the earn-out model. If Skagen does well and perform well in terms of both performance fees as well as increased management, this is paid in more, you still get the bulk of the value creation. However, if we are not able to turn it around and the business does not perform well, this is the limit to how much we have paid. So we have caught the deal where we share some of the upside, but where we have basically locked the downside. Well, they are growing, although the average interest rates are coming down in that portfolio as well. But I don't think that's something that we will have to rework on.
It's doing actually interest-
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