Yes. Good evening, ladies and gentlemen. Welcome to Storebrand's third quarter 2016 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, Finance Director Sigbjørn Birkeland, and Head of Economic Capital Trond Finn Eriksen. In the presentation today, Odd Arild will give an overall view of the development in Q3 2016, and Lars will give some more detail on some elements in the results and solvency. 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.
Thank you, Kjetil. The group result before amortization and write-downs was NOK 690 million for the quarter. This is a very strong result, which is affected by good financial results and reduced costs, even though we have set aside for ongoing restructuring in the quarter. The growth within savings and insurance continues, while the guaranteed products are in runoff. This is illustrated by the premium growth of 18% year to date within unit linked, and a growth of 28% within retail loans. Insurance premiums grow 6% compared to third quarter last year. The transformation of the business becomes clear when we see that the guaranteed income is reduced by 6% at the same time. Good results and strong buffer building has contributed to a 9 percentage point growth in the underlying solvency position to 131%.
The solvency position, including transitional rules, is reduced because we have taken a more conservative approach and reduced the value of the transitional with tax. If you move to slide number three, we see that the results of the third quarter reflects our dual strategy, which really is the reason why Storebrand is an attractive investment. Three elements. The value creation becomes, comes through strong cost control, with a nominal flat cost from actually 2012 to 2018, as well as capital release from our guaranteed back book. The capital requirement is leveling off and will be reduced going forward. At the same time, we are growing savings and insurance based on a strong position within occupational pensions and asset management. In combination, this makes Storebrand well positioned to create shareholder value and release capital to shareholders through dividends and share buybacks.
If you then move to slide number four, the growth in the unit linked reserves was 11% compared to the third quarter last year. Adjusted for the weakening of the Swedish krona against Norwegian krone, the growth was 16%. The growth is driven by strong growth in premiums and good returns. Growth in asset management is also affected by the substantial appreciation of the Norwegian krone. Adjusted for the effect against the Swedish krona, the growth was 5%. Growth within insurance was 6%. This is lower than our long-term ambition of 10%, and is caused by our shift from expensive external distribution to more cost-effective internal distribution.
This, together with the transition of the new into the new disability pension product in Norway, means that we expect lower growth rate in 2016 and 2017 before we revert to the double-digit growth rates. Last but not least, the growth within retail banking is very good, and the retail lending portfolio grew 28% from third quarter in 2015. Slide number five. Let me go a bit further into our growth strategy. Storebrand's functional organization reflects the customer value chain. All areas share a common goal of creating great customer experiences. We use insights from the sales front and customer service to develop technological solutions, products, and concepts that meet the customer's demands. On this slide, some selected initiatives that we have implemented in the third quarter are shown.
One example is the launch of our fossil-free funds. We have observed that there is a significant and growing demand for near index funds with low carbon footprint. In particular, public institutions in Scandinavia are adding carbon-free to their mandates. We have responded to this demand by launching three fossil free funds so far, and the sales have been strong, and asset under management has so far grown to nearly NOK 5 billion. Moving to slide number six, I want to move a bit deeper into one of the examples from the last slide. Visiting a doctor's office is rarely fits our schedule. The journey is time consuming, and the waiting time is unpredictable, and often all you need is a simple prescription. What is better then, than to simply pick up your smartphone and visit the doctor online?
This is now possible if you are an employer that have a health insurance within Storebrand. Today, we launched medical video consultations in our health app, Get Well, and consultations and prescriptions are available right, right at your fingertips. It doesn't get any easier than that. Well, then let's move back to the business in slide number seven. As you already have touched upon, we are in the middle of a transformation of the business. As illustrated on the graph on the right-hand side, which shows the shift in fee and administration income from guaranteed into savings. The stable operating result to the left illustrates that we are able to substitute the declining income from guaranteed by creating top line growth in savings and insurance, as well as holding strict cost control. And with that, I leave the word to Lars Aasulv Løddesøl.
Hello. As we explained in the last quarter, we will, from this quarter onwards, focus on operating result as the core earnings element that management and the company can primarily influence, as illustrated on page eight in the upper left-hand side with in red colors. So you see that the underlying value creation per quarter here is a stable NOK 450-NOK 500 million. In addition to that, this quarter, we have a strong financial result of NOK 209 million. First and foremost, created by credit spread contraction in the quarter, in which gives a good result in the company portfolios. In addition, we have special items of NOK -27 million in the quarter.
That's a combination of NOK 62 million, sorry, NOK 61 million, related to laying off of staff and provisions for laying off staff, and a release of reserves related to disability. So coverage for high-paid employees in Storebrand, which we are no longer covered with that disability pension, and we can release reserves related to that. So the combination of those two numbers, 61 and 34, is a net NOK 27 million in negative one-off in the quarter. If you look at earnings per share at 1.23 in the quarter, after tax, that's a satisfactory level, and the tax calculated for this quarter is normalized at 23%. Customer buffers and solvency capital is maintained at a good level.
Then I would like you to jump to page 10 before I go back to page nine afterwards, but if we start with page 10, the ex-transitional Solvency II level coming into the third quarter was at 122. Then we have made two major changes to model and assumptions. One is that we have changed our interest rate modeling or the model where we model interest rates development in the future, to a larger extent mirror the fact that interest rates can go negative. That has a negative effect in terms of model changes. And then the EIOPA has introduced a new volatility adjustment factor for Norway, which increases the volatility adjustment from 16 to 26 basis points. That increases the solvency position.
The two factors taken together gives a negative contribution of -0.2 percentage point. Then we've had very good asset returns, primarily driven by good real estate development and credit spread contraction, as I mentioned before, in addition to good value creation in the group as such. That increases solvency by 3.5 percentage points. Higher interest rates in Norway, 13 basis points on the 10-year swap rate in the quarter, has contributed positive to 2.4 percentage points in improved solvency. Interest rates in Sweden have fallen in the same period. However, the asset liability match in Sweden is very strong, and the impact on solvency is limited. Then we entered into a mass lapse reinsurance contract in the end of the third quarter.
That contributes positive to 3.2 percentage points on the solvency. Then, that leaves you a Q3 2016 solvency number of 131 without transitionals, and then we add on the transitional rules by 34 percentage points. We have made a decision to change the way we calculate transitional rules to account for tax in the calculation, which decreases the value of the transitional rules by approximately to a 25 percentage, to 25%. However, that means also that the amortization of transitionals from here on will be 25% lower. This is not cast in stone from EIOPA, how this is, how tax is supposed to be calculated as part of the transitional rules.
But we have decided to make a conservative estimate and take that out of the transitional rules, and then we hope to get the clarification on the calculations from EIOPA in due course. If we move back to page nine, the solvency position of Storebrand Group, we see that the same things I just talked about on the previous picture. But I would like to also mention that the fact that we have introduced a model for interest rate movements in the future that allows for negative interest rates, increases the sensitivity to interest rates from 9 to 15 percentage points on the sensitivity scale here. While at the same time, the sensitivity to spreads decreases as a consequence of the higher volatility adjustment.
So those are, I guess, the most important takeaways from that. And with those, brief comments, I think we can go over to Q&A. Outlook?
Well, just before we open up for Q&A, let me just run it off on slide 20. That is, an outlook slide that we have put into the package. And just brief, third quarter report shows that Storebrand continues to create capital efficient and profitable growth, as well as substantial cost reductions. This happens in parallel with the leveling off and gradual reduction of the guaranteed portfolio. This gives a continuous shift in the balance sheet and the result mix. We also show that we create good result and increasing solvency capital, even in a continued low interest rate environment. On the regulatory side, the government proposes a finance tax in the national budget. The proposed tax is structured as a combination of payroll tax and higher company tax.
We believe it is a pity to introduce more taxation to a productive industry, and, particularly a payroll tax, which potentially will hurt jobs in Norway, the Norwegian financial sector. In addition, we are also disappointed to see that there is a lack of new tax incentives for private pension savings, but we are continuing our work towards the government to ensure better solution also for Pillar Three savings to come along. So with that, I think we just open up for Q&A.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. If you change your mind and wish to withdraw your question, please press star one again. We have a few people already in the queue, and the first one comes from Peter Eliot from Kepler Cheuvreux. Please go ahead, your line is now open.
Thank you very much. The first one was on the solvency ratio with transitionals. Could you just clarify exactly what the change is in terms of the tax assumptions? And just to confirm, if you had not made any changes, then the ratio would have been 190%, so 25 percentage points higher than you've shown at 165. Secondly, on the solvency generation, I have to admit, I didn't quite catch all of the breakdown that you mentioned there. But would you be able to confirm what or how much of that you would consider underlying ongoing that you could expect to get every quarter, in a normal quarter? You know, stripping out financial results or modeling changes or anything else there.
Perhaps finally, just on that tax change that you mentioned, are you able to quantify roughly the impact that you think that will have, the proposed tax change? Thank you.
Okay, let's start with the first one, solvency ratio with the transitionals. It would have been 175, if we didn't do the change. Lars was alluding to the effective tax rate on the transition rule itself. That was 25%. The second question was solvency capital generation, and we've said that we will create 5-10 percentage points each year. And as you also know, then that is also included, the normalized risk premiums, in the unwinding when we go one year forward. So, we don't have a more specific guidance than that on this point in time.
And finally, on the payroll tax, I guess, we have said that with today's structure, without us doing any change, changes, you could estimate that to be in the neighborhood of NOK 50 million, NOK 40 million-NOK 50 million post-tax.
Okay, thanks a lot.
The next question comes from Paul De'Ath from RBC. Please go ahead, your line is now open.
Yeah, hi there. I will also ask a question on solvency, please. So...
... firstly, how much of an impact will the new sub debt issue have on the solvency ratio? You mentioned that on, on slide 9. And secondly, now that you've done this tax change on the transitional rules, does that make any change to your, your target solvency range? So, you know, you've mentioned the potential for buybacks, but I think from the Capital Markets Day, that was using the solvency ratio, including transitional rules over 180%. Is that, is that threshold still 180% now that you've made this change to the transitionals? Thanks.
If I just start, subdebt is around 3 percentage point effect that will come into the accounts in the fourth quarter. On dividends, I think most important is that we keep on creating underlying solvency, and doing that by 9 percentage point this quarter is very satisfactory. When it comes to the mix between dividends and share buybacks, of course, that is something that we have to work with going forward. What we have said is that we are working, or that we want to start paying dividends for 2016, and that you should expect us to pay at least half a dividend.
It's more about the toolbox that we have in place to, of course, work with both dividends and share buybacks to create the right capital situation in the company.
Okay, so just to clarify, so when you talk about buybacks, that's more about the mix of sort of an ordinary capital return rather than any kind of excess capital return?
Yeah, we enter now into a situation where we start paying dividends again. We have said that we will pay at least a half dividend the first year. Going forward, you should expect us, of course, to enter into a full dividend payment. Then, of course, everything I've talked about with the back book really trailing off in combination with the very capital-light growth in our front book that creates, of course, over time, a very positive situation when it comes to capital. It might even call for a new dividend policy. But I think we have to cross that bridge when we come to it. Now the focus is, of course, to start paying dividends again.
Great. Thanks.
Next question comes from Matti Ahokas from Danske Bank. Please go ahead, the line is now open.
Yes, good afternoon, Matti Ahokas here from Danske. Three quick questions. Firstly, just confirming that the solvency ratio will go up in the fourth quarter by 4-5 percentage points because of the subdebt issuance. Secondly, was one regarding the one-offs that Lars mentioned earlier on, where on which divisions or units was this booked in? And then finally on the tax issue. So I guess we'll know a bit more in November about this whole situation, but is this NOK 40 million-NOK 50 million increase per annum based on a 26.5% tax on the financial industry or something else? Thanks.
Okay. Just to start up, as I just said, the sub debt in itself will have an uplift on the numbers we reported on 131 now with 3 percentage points in the fourth quarter.
Yeah, and on the cost side, there was one up in the quarter, and it pivoted as follows: savings, NOK 12 million, increased cost, insurance, NOK 5 million increased cost, again, entering NOK 10 million increased cost. And we will also put out an Excel spreadsheet on the web page where we take it down to the sub segment level.
When we talked about finance, cost, the estimates now is that it will be spread towards a 1.5% increase against the rest of the industry when it comes to the overall company tax, and then a 5% on the payroll tax. So when we talk about the 40-50 million, that is the payroll tax effect that will have direct effect on us, because the tax rate will be reduced for our other companies. So with the proposal that is in there now, it is the same tax rate actually that is already in our books. So it's only affect to put it on the words based on the payroll tax.
All right. Very helpful. Thanks.
The next questions come from Ashik Musaddi from J.P. Morgan. Please go ahead, line is now open.
Hi, good afternoon. I have a couple of questions, if you can help me. First of all, you mentioned that you have now moved to negative interest rate calculation in your Solvency II. What has triggered that? Is it based on your local regulator, or is it based on what EIOPA has said, or is it just your own prudence? Because I'm not sure if other companies have yet adjusted for that, so just want to get a bit of sense on that. What is triggering you to put negative interest rates? Second thing is, in terms of volatility adjustment, you mentioned it has increased from 16 basis points to 24-26 basis points.
Again, what is this change, and why only Norway has experienced such a change? Because it looks like the volatility adjustment for continent or Eurozone is, like, going down. So that would be the second one. And third one would be, can you give us some clarity around UFR? What sort of UFR is in, is there in your underlying numbers, the 131% ratio, and how has it changed? Thank you.
Yeah, thank you. Let me start with the first question on interest rate modeling. It's clear that when first of all, SPP has some economic capital calculations for the last 15 or 16 years. And they have used a CIR++ model since 2007. It's a problem with that model that it don't allow for negative interest rates. As the interest rates have become negative in Sweden, and the interest rate volatility have increased, we have seen that the model has not been good enough. So we have done a change to the model as such, both to allow for negative interest rates, but also to increase for the volatility in the interest rates as such.
That both lead to, of course, a reduction in Own Funds, as you are now discounting with negative interest rates. And it also have increased the Time Value of Options and Guarantees as the volatility of the options that you have given the customers increase. So it's driven by what we see when we model, that our old model has not been good enough for the current interest rate environment, and then we have to change.
Sorry, just to, and then, it's not that regulator has asked you, be it the EIOPA, be it the European FSA has asked you, just like you are doing this change of your own?
We are doing the change on our own because we are also using these same models to steer the risk in the company. We need to believe in our models, and we do that, and it has not been any discussion with the regulators whatsoever.
Okay, thank you.
Yeah. When it comes to the change in volatility adjustment that is given by EIOPA, they have changed their reference portfolio. Norway, it increased from 16 basis points to 26 basis points, and I think it's two countries in Europe where it has increased, and that's Norway and Poland. In Sweden, it decreased from 4 to 3 basis points as a reference. Finally, on the forward rates, what we use is 4.2, as is given by EIOPA. They have also given a sensitivity to move to 3.7 as has been discussed by EIOPA, and that is shown on page 9 as a reduction of 7 basis points on the underlying solvency.
Somewhat smaller reduction on the solvency, including transitional.
Okay. That's very clear. Thank you.
The next question comes from Blair Stewart, from Bank of America. Please, your line is now open.
Thank you. Good afternoon, gentlemen. A few questions. Firstly, the reinsurance agreement that you have entered into, is there any material cost for that reinsurance agreement on an ongoing basis? That's the first question. Related to that, are there any other management actions that you're considering that might help the solvency ratio? That would be good to know. And finally, it was very good to see the evolution of the required capital under the Solvency II model. I noticed the paid-up book is still growing. Is it possible to give us a feeling for how the required capital is moving on a year-on-year basis? Thank you.
I'll answer the two first questions. In terms of the reinsurance contract, it does have a cost, obviously, and we have not published or said what the cost is, but I can assure you it's competitive to other kinds of creating solvency and capital, for example, subordinated loans. This is a more cost-effective way to create solvency capital. In terms of other management actions, we are constantly looking for things that, in a cost-efficient way, can improve the solvency. And you have things that are for free, to some extent, like improving results and closing out longevity gaps and creating excess returns, et cetera.
That doesn't come at an explicit cost, and there are things that does have a cost, like subordinated loans and reinsurance. So we will try to do a lot of the things that can improve solvency, improve of bettering our operation. That doesn't come at an explicit IFRS results cost, and we will from time to time do selective things in addition to that. Obviously, we don't or I can't I will not announce anything explicitly that we're working on now, but we're constantly looking for good ways to improve improve the solvency at a competitive cost.
Maybe I can be more specific on SCR, but I think I would start to say that we is still a transfer from a Defined Benefit into paid-up policies. But we also, as we talked about in our Capital Markets Day, see that the new paid-up policies typically have better buffer capital situation. They are fully reserved for longevity, and there is also lower in general interest rate guarantees in these paid-up policies. So there is more evening out of the total capital need in the portfolios, even if there still is some time to go with the transitions from Defined Benefit to paid-up policies. But maybe Trond Finn wants to elaborate on that.
When it comes to any capital requirements, we are reporting that in note 13 of the quarterly, interim report. Of course, on the total level. When it comes to the product level, I can confirm that during Q3, the capital requirements for paid policies standalone is somewhat decreased due to both the volatility adjustment that we have talked about, but also because of increased interest rates. That and finally, due to the fact that there has been a very good return in those portfolio that have allowed us to build longevity reserves and also strengthen on the buffer capital.
Okay, thank you for the reference to the note. If I can have one follow-up, please. Just on capital generation, is it possible to split out the 3.5 points you have from asset return and results? Should we just take a kind of pro rata number, you know, given the NOK 200 million from financial effects, would it be fair to say that, you know, NOK 500 million out of NOK 700 million, so 5/7 of that 3.5 should be regarded as, you know, the operating capital generation?
I actually think that, although it's a tempting thing to do that, I think it's it wouldn't be completely correct because a lot of the the operating variance comes through changes with from products that are within the net present value framework. So there are some direct financial contributions from asset management, insurance, and et cetera, that comes outside the solvency calculation. And then you have changes within the net present value framework, everything that's in the in the life company. So I don't think you can do that straight off, as I see it, at least.
Ah, okay. Okay, you've worked hard, you know, to get a differentiation between the operating result and the financial market impact in your PNL. It would be good to have that for the solvency capital generation as well.
Yeah.
If possible.
We'll continue to, we'll continue to work on that, disclosure there.
Thanks a lot.
Ladies and gentlemen, we do a quick reminder. If you would like to ask a question, please press star one on your telephone keypad. If you would like to ask a question, please press star one. We have another question from Peter Eliot from Kepler Cheuvreux. Please go ahead, the line is now open.
Thank you. But it's just a bit of a follow-up, actually, on the Volatility Adjustment. I mean, the reason it increased for Norway was that the weighting of corporate bonds was increased in the reference portfolio from sort of 54%- 60%, I believe. Which, I mean, it's quite a high level. I guess, given that you're quite a high proportion of the Norwegian industry, and, you know, the reference portfolio was, with lags quite a long time, you've got some sort of insight into how that's developed, is likely to develop.
I just could you remind us how your own sort of corporate bond weighting, I mean, I think it's been increasing recently, but how that sort of varies to the rest of the industry?
I don't have the stick in front of me, Peter. I think we gave quite a few slides on that during the capital markets event, and I think they are still very representative for our portfolio. It's of course when they make this reference portfolio for Norwegian market, Storebrand, DNB, and KLP goes into that, and of course, Storebrand as being a very big player in this market will have also quite large influence on the reference portfolio. Which actually, I think is very good because the volatility adjustment can go up and it can go down.
That we are really having our weight into, that reference portfolio gives us some risk mitigation for changes in the volatility adjustment. Because if the volatility adjustment increases, that means that the spread on these bonds have increased, and that will have come through in our returns as well. I think, to answer your question, overall, yes, I think we would have in broadly in line with the reference portfolio. And actually, I think that is a good thing.
Okay, thanks a lot.
I will do one more reminder, ladies and gentlemen. If you would like to ask a question, please press star one on your telephone keypad. And we have two questions coming through. So we have first, Ashik Musaddi from J.P. Morgan. Please go ahead. Your line is now open.
Hi, and thanks for another opportunity. Just one follow-up question on UFR. You, you reminded that every 50 basis point drop is 7 points. Now, if we have to believe that UFR goes to the current level of whatever, 1%, so if we need to strip off, say, two, say 3.2% of UFR, would the relationship be linear? Do we need to do 7x 3.2, or would it be more than 7 x 3.2, or would it be less? I'm just trying to understand the magnitude. Is it going up or down based on the convexity? Any thoughts on that would be great. I'm not looking for absolute number. Thank you.
Did I understand the question correctly, that you asked what would happen to the magnitude of the impact, if the UFR were to go to 3.2% instead of 3.7%?
Yeah.
All other equal, that would be probably due to complexity, as you say, a larger number than the 7 percentage points.
You mean every 50 basis point additional drop would be less than 7 percentage points?
It'd be more than 7 percentage points.
More than seven. Okay, sounds good. Thank you.
The next question comes from Blair Stewart, and that is the last question. Blair, your line is now open.
Thanks. Just to follow up, Trond, on the SCR, now that you've given me the ammunition. I noticed the life capital requirement went down by about NOK 1.8 billion in the quarter. I'm guessing part of that is the reinsurance agreement, but it doesn't, it wouldn't possibly account for half of the change. What else is going on there, please?
I don't have a detailed answer for you on that at the moment, Blair. I need to look more into that, but I can confirm that what you are is that the reinsurance on the mass lapse is going into the life module of the Solvency II calculation-
Yeah.
and reduce that risk.
Yeah, okay. If you can come back on that, it'd be very helpful. Thank you. Because I think that change is about seven points from in the quarter. So obviously that's about half, you know, the reinsurance is about half of that, or a bit less than half of that, so there's another three or four points. But we can come back to that. Thank you.
There are no questions coming through, so I will hand the call back to you for any concluding remarks. Thank you.
Okay. We just want to thank you all for joining the call today, and we are also present in London at 2:00 P.M. tomorrow at the Walbrook Building, if you want to-