Good afternoon, ladies and gentlemen, and welcome to the Storebrand analyst call. 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, at the end of this presentation, you'll have opportunity to ask your questions. If any time you need assistance, please press star zero on your telephone keypad, and you will be connected to an operator. I will now hand you over to Kjetil Krøkje to begin today's conference. Thank you.
Good evening, ladies and gentlemen, welcome to Storebrand's second quarter 2017 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 economics, Jan Erik Saugestad . In the presentation today, Odd Arild will give an overview of the development in the second quarter and year-to-date 2017, and Lars will give some more depth on the results. The slides will be similar to the analyst presentation released this morning and are available on our web page. 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.
With this, I now leave the word to Storebrand's CEO, Odd Arild Grefstad, who will start the presentation on slide two.
Thanks, Kjetil, and thank you all for joining the call. Let's move directly to the results. The group result before amortization, amortization and write-downs was NOK 878 million for the quarter and NOK 1,549 million for the first half. It's very satisfying to see that the operational result has a positive development due to growth within savings and good cost control. In addition, a strong financial result characterized the overall result for the quarter. The growth within savings continues, while the guaranteed products are in long-term runoff. Growth in savings is illustrated by an asset growth of 18% within Unit Linked compared to last year and 9% growth in asset management. Retail bank has a strong growth of 28% within retail lending, and by this, we are the fastest growing bank in the Norwegian market.
The underlying solvency position is increased by 5 percentage points during the quarter to 152%, and the solvency ratio, including transitional, are 163%. If we then move to slide 3, this slide illustrates the twofold strategy we have been implementing consistently throughout the past 5 years. The twofold strategy will continue to be important going forward. With capital like growth within savings and insurance and capital release from the guaranteed backbook, which has reached its peak capital consumption level or peak capital. If we then move to slide 4, we can take a look at the changes in the solvency position in the quarter. And to explain the 5% increase in solvency, there is 3 important factors.
First, model and assumption changes causes a 2 percentage point reduction in the quarter, and among other things, it's a small change in the cost allocation in this, in this element. The second is that Storebrand has achieved a very good result in the quarter, which has contributed to increased solvency position. The increase in the paid-up policy portfolio reduces the solvency in the quarter. Summarized, the strengthening from the operations are 3 percentage points, which is somewhat higher than we expect on a quarterly basis. The third element is impacted by good financial markets in the second quarter. This means that we have not only achieved the expected risk premiums in the market, but also achieved returns beyond what we can expect on a normal quarter. Increase in interest rate has positively affected the solvency position.
We have chosen to look at this as economic variance, and that contributes with 4 percentage points in the quarter. Then on slide number 5, we have the movement in Solvency II ratio, described as we used to present it to you, historically. It is worth noting that, a 50 basis point parallel shift of the interest curve now, will, from today's level, will still give a solvency ratio, without transitional rules of above 140%. Then, if we move to slide number 6, and give a small update on the costs. We had a flat nominal cost level between 2012- 2015.
At our capital markets day in 2016, we announced a new target to a flat nominal costs between 2015 and 2018. Since we announced the cost target, our cost base has been affected with NOK 60 million increase on annual cost from the new financial tax in Norway. We have also reallocated costs in order to support the areas within strong growth, such as asset management and the digital development. In the same period, the number of employees has been reduced by 12%, that is 220 employees from the beginning of 2016. We are now at a run rate of approximately NOK 800 million a quarter in cost, and we will, of course, continue to have strong focus on cost improvements also going forward.
Then let's move to slide 7. I have already discussed and commented on the strong growth within our savings area. A few comments now on insurance. The profitability with insurance is good, but the growth within insurance is lower than we want to see going forward. This is caused by the shift from expensive external distribution to more cost effective internal distribution. This, and even more, the transition to a new disability pension product in Norway, implies a lower growth rate for insurance in 2017. Then we can move to slide 8. This quarter, Storebrand Asset Management has passed NOK 620 billion in assets under management.
This study from CEM shows that we have a very competitive cost-income ratio compared with even the large asset manager with substantially more asset management, assets under management. This means that we have a very effective, scalable platform in our asset management, and the reason is that we have a cost level at around 8-9 basis points of assets under management. To continue with asset management, let's move to slide number 9. One of our main growth engines have been the Swedish retail fund company, which has grown by 20% annually over the last 9 years. We are now the fifth biggest fund manager in the Swedish market after the 4 big Swedish banks. We see the strongest growth within external assets, discretionary mandates, and in the Swedish retail markets.
Revenues from the Swedish part of the asset management now amount for 32% of the total revenues in asset management, and 40% of the assets under management. We are now further strengthening our distribution capacity in Sweden, and also utilize our full scale of our full, our scalable Nordic Asset Management platform in the Swedish market, and I expect also strong growth going forward. Let's move to slide number 10. We are back in the Norwegian market. Finally, the Norwegians will get an individual pension product, as we call IPS, with real tax incentives. The Norwegian parliament introduced the product in connection with the revised national budget in 2017. The IPS scheme enters into force from 1st, November, 2017.
Savings of 40,000 kroner per year are tax deductible in ordinary income, and in addition, there are deferred tax on return and exemption from wealth tax. The government has now enabled private pension savings with real tax benefits, and there is a great need for increased pension savings in Norway, and we look forward to, entering into this market. Storebrand is well positioned for individual pension savings with our pension expertise, sustainability, focused asset management, and several world class funds with good historical return. This market is, of course, starting from zero, and it will not be a boost on the results, on the short term. But of course, this is long-term money and, with a strong growth profile going forward. Then finally, let's move to slide number 11. As I mentioned, talking about the cost earlier, we now shift our activity into more digital solutions.
On the operational side, it is worth noting that we have made successful sales from the new Swedish core system. This is a large undertaking in the Swedish subsidiary, and it's great to see that it's running as planned. During the quarter, we have formed new important partnerships that further digitalize our business model. Storebrand has partnered with the fintech app Dreams for distributing savings. Launch of Dreams in Norway, in cooperation with Storebrand, will take place this autumn. The app was launched in Sweden in 2016 and has currently 80,000 registered users in Sweden. We have also developed Norway's first and only electric car insurance in cooperation with the Norwegian Electric Vehicle Association. This product will be launched in August 2017. And lastly, we have piloted our insurance chatbot this quarter.
It is really interesting to interact with it, and given that it is the first version, I'm quite impressed and excited about rolling out this technology in the business. By that, I give the word to Lars to go a bit deeper into the numbers.
Good afternoon, everyone. Please refer to page 12, key figures. In the upper left-hand corner, we show the results into operating results, financial results, and special items, typically of a non-recurring in nature. This quarter, the operating result is a solid NOK 565 million. We have previously communicated that this figure will come in at approximately NOK 500 million per quarter and gradually grow from there. With the numbers we present today, we confirm this trend. A normalized result will be somewhat above NOK 500 million going forward. Please note, however, that the results will swing around the normalized number and that significant market movements naturally will impact the actual future profitability. We have been able to harvest good premiums in most asset classes this quarter, which has generated good returns to customers and the company.
The good returns have been used to build a high book return and additional buffers. We have also generated an unallocated result of NOK 3.7 billion, which will be allocated between owners and customers at the end of the year. Part of this result will be used to formally finalize the longevity reserve strengthening, and the majority of the rest will be used to further strengthen our buffers. Earnings per share after tax and adjusted for amortization of intangible assets come to a strong 1.89 kroner in the quarter. Please turn to page 13. The top line, fee and administration income, is once again growing in the quarter and year to date. We have gone through a period where the run off of revenues from the guaranteed business has been faster than the growth in front book revenues, but this is now turning.
The results from the insurance business are also improving in the quarter and year to date. In the reported number, numbers, it looks as if the cost line has been growing, but this is explained entirely by a one-off gain of approximately NOK 100 million in the second quarter of 2016. The underlying cost level is developing according to plan, and there is generally good cost discipline across the group. The financial results are strong. This is explained by the previously announced sale of our shares in Formuesforvaltning, that generated a gain of NOK 88 million kroner, combined with strong returns on company funds and profit split from the Swedish guaranteed business. The tax charge in the quarter is only 4%, as a gain from the profit from Formuesforvaltning sale is exempt from tax and because of estimated return taxes from last year.
Please, turn to page 14. The top table in this picture is the same as on the previous page. The bottom table splits out the results in the three categories: savings, insurance, and guaranteed. We see the improvement in all three areas, despite the previously mentioned one-off gain in the comparable numbers from 2016. Under other, we include the result from the sale of Formuesforvaltning shares. Excluding this, the underlying number is around zero, which is around normalized for this area going forward. In summary, we have delivered a good result so far this year and the group ROE ended at 13.4% for the quarter and 10.9% year to date. And with that, we 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 already have three questions coming through, and the first one is from Paul De'Ath from RBC. Please go ahead, your line is now open.
Yeah, hi there. Thanks for taking my questions, a couple. Please, firstly, on the DB to PUP conversion rate, there was another NOK 5 billion that moved across during the quarter. Was that kind of larger than you had expected, or was it kind of in line with ongoing expectations? And I guess on that, how does that impact anything going forward? Does it change anything around the speed at which capital could come back to shareholders? That's question one. And then the second point was just on the insurance business, looking at the claims ratio in the quarter, it improved significantly, particularly in the health business, which I think was due to dissolution of reserves within employee liability.
I just wanted to check, is that kind of a, a one-off prior year gain coming through? Or should we expect a much lower, claims ratio going forward on that business? Thanks.
Okay, if I take the first question, the conversion from defined benefit. In the first, at year end last year, we had a slightly higher conversion from defined benefit to paid-up policies than we anticipated as explained in the first quarter. What you see in the numbers in the second quarter is that we have due to the change in the public disability pension in Norway, and a consequential change in the legislation around disability insurance for occupational pensions, all of our occupational pension coverage that was previously included in defined benefit plans by force goes into paid-up policies. And that's the main explanation of about NOK 5 billion of the conversion in the second quarter.
It must be said, however, that this disability portion of that becomes policies has a lower guaranteed rate of return and a much shorter duration. It's only has a duration until people retire, not after the retirement. So it's a short duration and low rate of guarantee. And the change taking place as a consequence of the legislative change in disability pension has been finalized for this, so there is no more to come. So from here on, we expect normal transition away from defined benefit to paid-up policies at a declining pace, going forward. And in terms of what it means for dividend and other things, it has been fully been absorbed by the solvency numbers, and as such, no has no further impact on any solidity numbers.
Yeah. On health and group life, there was an effect from dissolution of reserves in the quarter. We had an overall combined ratio of 88% in the quarter. If you just read the dissolution reserves, we are in the targeted range from 90%-92% combined ratio, and that's what we're gonna continue to target going forward.
Okay, thanks very much.
The next question comes from Matti Ahokas from Danske Bank. Please go ahead, your line is now open.
Yes, good afternoon. It's Matti Ahokas here from Danske. Two questions, please, both on the fee and admin income, in Q2. Firstly, you mentioned that the margins in Sweden on the unit-linked side were improving. And what was the reason for this? Was it one-off, or should we expect that the margins remain at this level? And the second is actually slightly the same, but on the DB business in Norway, the reserves, as you said, fell quite a lot, but then the fee and admin income went up. Was this because it happened late in the quarter, or how come the margins also in that business improved during the quarter?
Yes, if I take the first question. I think we said in the first quarter that the defined contribution margin or unit-linked margin in Sweden was a little lower than we expected going forward. And if you look at the quarterly numbers, they typically vary a little bit around these levels from quarter to quarter. So I think you can basically look at the average of the first quarter and the second quarter as an estimation as to where it's going to go forward. And we don't see a trend in these numbers, either positive nor negative. So that's basically just a normal variation.
Yeah. On the DB portfolio in Norway, yeah, I'm afraid it's a little bit of the same answer. If you look at the year-to-date number, that should be an okay estimation going forward. And there's some presentation on when these different contracts are billable, that comes into the numbers.
Great. Thanks a lot.
Ladies and gentlemen, before we get the next person on, if you would like to ask a question, please press star one on your telephone keypad. The next question comes from Peter Elliott from Kepler. Please go ahead. Your line is now open.
Thank you very much. Can I just follow up, first of all, actually, on one of Paul's questions, just to clarify, of that NOK 5 billion that was transferred, could you. Apologies if you said this and I missed it, but could you say how much of that was from the change in disability legal definition and classification? And then my first main question was the Q1 results, you very helpfully showed us the capital requirement of the various parts of the business. And you know, guaranteed business was something like NOK 15.8 billion. Are you able to give us an update on that at all?
And then secondly, the financial results for SPP, I guess, was quite a bit higher than the, I guess what we sort of estimated from the sensitivities that you provided. I'm just wondering if you could give us a little bit of color on that. And then final point, just to prove I'm paying attention and just because I'm trying to understand the growth of the Unit-linked reserves in the quarter. In your presentation, you show NOK 151 billion, but in your supplementary information, you show NOK 71 billion for Norway and NOK 83 billion for Sweden, so NOK 154 billion total. Just wondering if you could clarify what the difference is or which numbers are going on there.
So obviously, you know, makes it a double delta across the quarter is double from one versus the other. Thank you very much.
If I pick up on the first one, the conversion from DB to PUP, I said, 5 billion was the only the conversion of the disability proportion. In terms of savings, we see approximately 1 billion in terms of conversion per quarter. And as I said, that is declining. So, this year—last year, it was NOK 7.6 billion. We estimate a similar number this year, and then going down from there, and then in addition, comes NOK 65 billion from disability.
Yeah. Second question on capital requirements development. We haven't given an update on that, Peter, and I don't think we're gonna do that whole exercise each quarter. Basically, what's happened is that the solvency ratio has been improved, and in that sense, less capital has been tied up, but it's not any large changes as such in the distribution between the various product lines. On the SPP financial results, main deviations here from the sensitivities was the slope of the curve that changed the discounting as it uses the same discounting as the Solvency II interest rate curve with the Smith-Wilson extrapolation model.
This has an effect that can't be read out from the sensitivities, and in addition, we had some return from real estate, which is also not reflected in sensitivities.
I can also add to that, that on the interest rate curve in Sweden, we are also using the volatility adjustment, compared to the one we use for solvency calculations. And the volatility adjustment was one basis point during the quarter, which also had a minor effect.
On the last question, Peter, in my supplementary, I still get NOK 151 billion also on the unit links, the Norway and Sweden combined. We can compare notes afterwards, but I can't find the NOK 154 billion right now, but it might be a mistake somewhere. So, we'll, if that's the case, then my apologies.
Okay. I was just adding the two numbers up at the bottom of page 12, but it was great. Apologies for not paying attention on the first point on the transfers. Thank you.
Ladies and gentlemen, before we let the next person ask his question, if you would like to ask a question, please press star one on your telephone keypad. The next question comes from Johnny Urwin from UBS. Please go ahead, the line is now open.
Well, thanks for taking my question. Just two from me. So firstly, on slide four, the solvency waterfall. Thanks for providing that again. I just wondered why the treatment of new paid-up policies is included in the model and assumption change rather than the operating earnings. Is that because of the sort of one-off nature of the NOK 5 billion conversion? And if we didn't have that NOK 5 billion, would you include it in the operating earnings? I guess I'm just trying to figure out, because obviously you give me 5%-10% solvency capital generation guidance, is that after the paid-up conversions, I assume. And secondly, the buffers in Norway, they've obviously trended down for quite some time now.
You mentioned that they're going to be sort of topped up at the end of this year. I just wondered where do you see the appropriate level for those buffers, once the top up's been done? Thank you.
If I can start with the work of the change in the solvency position. The changes coming from conversion from DB to paid-up policies has to be viewed in connection with the surplus return in the portfolios. It's quite technical because the way we get the resource in from our systems make this somewhat hard to separate. That's why it's included in the economic variance as such.
Every quarter it will be included in the economic?
That's... Yes, it will.
Well, it says it's footnote one, so it says it's in model and assumption changes, right?
Yeah, just... Yeah, sorry, sorry, John, it's two different things. From the one that's on the model and assumption changes is actually an assumption change from how we invest new paid-up policies. So it's more, I would say, a correction of the model on how we invest new paid-up policies. So we say that when you now get new paid-up policies, which has high buffers and have more risk capacity, we will invest them in slightly more risk assets than the average paid-up policy. This gives a slightly negative effect on the solvency calculation. So that's just.
It's basically a one-off model change. That makes sense.
Yeah, that, that is. Yeah.
It also obviously makes you have expect, give you a higher expected return.
Sure.
I think there was a question about the buffer levels as well, on paid-up policies. It's difficult to say exactly what is the right buffer level, because we have different sub-portfolios here, and some of these sub-portfolios are fully reserved with all the necessary reserves. Others have very little reserves, and we are trying to build that up. The more reserves we have, the better we are suited to deal with future financial volatility or market volatility in financial markets. So, I think the maximum in all portfolios is around 8%, but it's never going to reach that area, but somewhat up from 5.3%, it makes sense in the current markets.
Okay, thanks very much.
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 now hand the call back to you. Thank you.
Okay. Then I just want to thank you all for joining the call. For those of you who have not had a summer vacation yet, we wish you all a nice summer vacation, and I hope to see some of you in London tomorrow. Thank you.
Thank you for joining today's conference. You may now replace your handsets to end this call. Thank you.