Good afternoon, ladies and gentlemen. Welcome to the Storebrand Conference 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 the 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 will now hand you over to Kjetil Krøkje to begin today's conference. Thank you.
Yes, good afternoon, ladies and gentlemen. Welcome to Storebrand's first 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 Eriksen. In the presentation today, Odd Arild will give an overview of the development in the quarter and also give some more detail on some of the elements in the results. 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. I will describe the Storebrand's first quarter results as good in a turbulent market. The group results before amortization and write-downs was NOK 546 million for the quarter. It is affected, in particular, by good financial returns in the company portfolios, strong results within asset management, and strong cost control. The growth within capital light savings is still strong, and the unit-linked premium growth is 29% since the same quarter last year. The growth within insurance is also good, with 8% compared to first quarter last year. The growth within retail bank has really picked up, with 18% retail lending growth compared to first quarter 2015. And an estimated Solvency II ratio of the first quarter is 175%. I'll get back to this in more detail later. Then let's move to slide number 3.
This is a well-known slide, although still relevant. The value creation in Storebrand comes through growth in non-guaranteed savings and insurance, and through handling the guaranteed balance, which is in a long-term run off. In slide number 4, we see that the dealing with the paid- up policy portfolio is central as a part of the management of our guaranteed business. We have divided our guaranteed paid-up policies in 4 sub-portfolios. Three of these portfolios has 60%-90% allocation, bonds at amortized cost. In today's low interest rate environment, the healthy maturity portfolio secures a long-term expected return above the interest rate guarantee. In fact, the excess value of these bonds is now at NOK 12 billion, which contributes to increased book return in the years ahead.
We are still able to add to this portfolio, and so far this year, we have built NOK 3 billion in new investments at 3.2% yield and 14 years average life. In total, this means that we have an investment portfolio that exceeds the interest guarantee in the years ahead. If you then move to slide 5, the Solvency II position in Storebrand has been strengthened by 7 percentage points into 175% in this quarter. The reduced interest rates are, to a large extent, reflected in increased transitionals, while the 7 percentage points increase is caused by result generation and improved asset allocation. The solvency margin, excluding transitional rules, is 117%, a 7 percentage point decrease from last quarter.
If you then move to slide number 6, looking at this, simplified view of the movement from fourth quarter to first quarter, we see that the result generation in first quarter has improved solvency with about 3 percentage points. In addition, we have reduced the equity and real estate exposure in the paid-up policies. In total, the de-risk and asset allocation have improved the solvency position by 4 percentage points. Financial market movements have reduced the underlying solvency by about 14 percentage points, of which 12-13 percentage points from lower interest rates, and the rest from weak equity markets and other conditions. If we then move to slide number 7, the growth within non-guaranteed savings and insurance continues. As mentioned, the unit-linked premium growth was 29%.
However, the growth in unit-linked reserves was a more moderate 8% compared to first quarter last year. The reserve development was dampened by negative equity markets. In Unit-linked Norway, about 50% of the allocation is into index equities, while about 75% in Unit-linked Sweden. The challenging market condition also have affected the reserve development within asset management in the quarter. However, the underlying growth rate is still good. As I mentioned earlier, the growth rate within insurance is good. However, it is somewhat more moderate than in earlier quarters. The reason for this include the fact that we are replacing expensive external distribution with more cost effective internal distribution. Internal distribution also allows for more cross sales. This shift in the distribution mix is expected to dampen the insurance growth in the next quarters.
Last but not least, it is very satisfying to see that we are succeeding within retail banking. Retail banking is instrumental to our success in the private market strategy, not least because of the cross-selling we experience based on our banking relationship. If we then move to slide number 8, we see that the development within Storebrand Asset Management is very strong, and in this quarter, we have booked a result of NOK 130 million. We have built an effective and scalable asset management business, and in the last few years, we have succeeded combining a strong top line growth with reduced costs. This has led to a doubling of the results from asset management since 2012.
Sustainability is at the core of our asset management, and we see now that our position as one of the world's leading sustainable asset managers contributes to our commercial success. Slide number nine. The sum of all this is that we continue to shift from guaranteed products to non-guaranteed savings. The income from our guaranteed business is declining. Public DB and corporate banking is in runoff, and migration from defined benefit to lower margin paid- up policies reduces fee and administration income. However, thanks to the strong growth within savings segment, we are able to grow total fee and administration income. The shift in our business is illustrated well by the graph on the right-hand side, where we see that the reduction in guaranteed income is more than compensated for by the growing income in savings. Then I leave the floor to Lars Løddesøl.
Hello, everybody, and good afternoon. I would like to bring your attention to page 10 with key figures. Last quarter, I spent a considerable amount of time explaining a lot of extraordinary items. This quarter, there are very few. The one special item that we would like to highlight is the NOK 73 million shown on the upper right, left-hand side, which is the profit that we got from the sale of Storebrand Baltic, as we discussed also in the previous quarter. That leaves an underlying result, result before profit sharing and loan losses of NOK 605 million, which is a good number for core earnings.
The net profit sharing and loan losses of -133 NOK is negatively impacted by negative profit split in the Swedish guaranteed operation as a consequence of the falling interest rate level. Earnings per share were 93 EUR or 0.93 NOK in the quarter after tax. Solvency capital is maintained at a high level, and customer buffers are continued to be satisfactory, although customer buffers in the Swedish operation has been negatively impacted by the falling interest rates. Moving over to slide 11. Fee and administration income is slightly up from last year.
If we normalize or if we consider currency movements as well as discontinued business, the underlying development is 1.8% up from last year, which means that we managed to replace the revenues that we lose from the guaranteed back book with a stronger growth in the front book, as Odd Arild just talked about. The risk result, the life and pension, is at 24, improved by one-off reinsurance contract gain of NOK 20 million. This result line will gradually go away as a new disability pension in the public system in Norway will decrease the coverage that we've previously recorded under this line.
So this will go towards zero and will be removed in due course, or the result line will be removed in due course. The insurance premiums and claims for own account shows a slight improvement of NOK 4 million from last year. Operational costs seems flat, but as the Swedish kronor has strengthened since last year, there is an underlying improvement of NOK 27 million from the first quarter last year.
This is somewhat better improvement than we expect for the rest of the year, so we will have some double costs relating to the Cognizant contract that we entered into in the last quarter, which will give us double costs through the course of 2016 and significant savings in 2017 and 2018. The financial result is positively impacted by a good return on company portfolios in Norway and Sweden, and that partly offsets bad returns in the second half of last year, where we had widening of spreads, credit spreads. These have contracted in this quarter and given us a gain somewhat higher than we expect going forward. This number also includes the gain of NOK 73 million from the sale of Storebrand Baltic, as I mentioned on the previous slide.
The net profit sharing and loan losses, as I mentioned, the main part of the -133 comes from the guaranteed business in Sweden and is caused by the fall in interest rates during the course of the quarter. However, we have also, during the course of the quarter, reduced the, or practically eliminated the, duration mismatch in this portfolio, and we expect less sensitivity and less volatility in this number going forward. Moving over to page 14. Page 14, on the lower right-hand side, shows how we grow the retail bank and how we managed to place a lot of those new loans on the life balance sheet. This gives us, this gives strong capital efficient investment in the life company.
The lending rate is beneficial for our banking clients and fuels the growth in lending in the bank. So this is a good way to use the strength of the synergies that we have within the group. Then I would like you to turn to page 18, and on the lower left-hand side of the page 18, we have the buffer capital, and you will see how the flip side of the fall in interest rates is the fact that the excess value of bonds at amortized cost increase in value.
The fall in interest rates weakens somewhat the solvency ratio, and it also gives very good reserve strengthening in excess bond value of bonds at amortized cost, which again gives us a stronger buffer to pull from if rates continue to stay at these lower levels. Furthermore, I would like to draw your attention to the unallocated results. We have created almost NOK 1 billion in unallocated results that will be used to continue to close the remaining gap in longevity reserve strengthening, as well as strengthening other customer buffers at the end of the year when this is fully allocated down on the individual contracts. That concludes my brief walking through some of the main numbers.
Thank you, Lars and Odd. The operator will now open up for Q&A.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press one on your telephone keypad. And if you wish to withdraw your question, please press star one again. The first question from Matti Ahokas from Danske Bank. Your line is now open.
Hi. Yes, good afternoon. It's Matti here from Danske Bank. Two questions, please. Firstly, in the press conference earlier today, I think, Odd Arild, you were talking about the dividend, and especially that the solvency margin had increased, obviously, because of the increasing interest rates in the second quarter already. Just for clarity's sake, could you repeat what you said regarding the potential dividend payout for 2016? I guess you mentioned something about that.
Yes, we'll start with that. On that question, I just said that during the second quarter and the movements we have seen in the market, we should expect that our solvency ratio without transitional is back on the same level that we had at the end of last year. That is around 124 percentage points. And based on that, and based on the strong numbers altogether, of course, I just alluded to what the board said in the first quarter, in the fourth quarter. And of course, this gives a good view on the year, and our expectation is, as the board said, to pay a dividend for 2016 in 2017.
Great. That's very clear. The second question is regarding the Unit-linked business. I see there was a very strong inflow on the retail side in Norway, but also the margins were also very strong in Norway on the Unit-linked overall. Were there any one-offs or kind of unusual impacts in the first quarter Unit-linked Norway figures?
Let me try, Matti. On the fee margins, we usually book a fee for some paper-based handling in the first and third quarter. So we usually have a little bit higher margins in the first and third quarters. The inflows in Unit-linked is just the sale both to our or cross-sales to our pension customers for the most part.
Okay, great. Thanks a lot.
... The next question comes from Peter Eliott from Kepler Cheuvreux . Please go ahead. Your line is now open.
Thanks very much. I just had a couple of questions focusing on the paid up policy development, actually. You've been guiding, I think, to sort of NOK 8 billion a year in terms of the transfers into paid up, but the run rate was less than that in Q1. I think on slide 5, it looks like it was just another NOK 7 billion across the rest of the year. I'm just wondering if whether your view on that has changed, and in particular, your view of sort of where the balance might sort of top out, start to plateau, because I think we're sort of approaching the level that you've guided to in the past.
And perhaps on that, just in terms of the transfers that you have made, could you perhaps comment on the capital requirement of those is substantially lower than the paid- up policies that were already in force? I'm wondering if you could just comment on that. And also whether there was any sort of residual requirement, I'm guessing not, didn't appear in the line. Just whether we should expect any sort of topping up of longevity reserves. I mean, I know you've done everything that, you know, you sort of think you need at the end of the year.
But I, I wasn't clear whether, if some policies transferred across where on a, an individual level, they still need some topping up, whether there is anything that might not still need to be done there. Thank you.
Yes, on the, thank you, Peter, this is Lars. On the development of paid-up, in the first quarter, last year, we had NOK 5.3 billion converting. The first quarter this year, we had NOK 3.9 billion. So the trend is definitely going down, and the first quarter is always the bigger quarter in terms of what happens, because some of these hard closes typically happens at year-end. So we expect the number to gradually go down. We have previously guided on approximately NOK 8 billion for the year as a whole, and we maintain that guiding. However, there is a certain uncertainty around that number relating to some large corporate contracts, which may close this year, they may close next year, they may soft close, and they may hard close.
There will be a couple of billions that could go in, each, like either above or below the NOK 8 billion that we have guided. In terms of capital requirements for new paid-up policies, you are right in assuming that they are generally at a lower level. They will be fully reserved for long life, and they will typically be at a lower average guarantee. Last, for longevity, as we have said, we've taken the bulk of longevity reserve strengthening, and while there may be some smaller contribution of individual paid-up policies with investment choice, this will be not material, either in this quarter or in the quarters ahead of us.
With the strong analogy, the result that I mentioned previously, we will have more than sufficient return as of this stage to truly cover the remaining longevity reserve strengthening by excess return in customer portfolios.
Thanks very much.
The next question comes from Paul De'Ath from RBS. Please go ahead. Line is now open.
Yeah, hi there. Just a couple of questions from me, please. Firstly, on the unit-linked reserves, they're up on Q1 last year, but they're slightly down on the full year 2015. Over the quarter, I think there was a significant other move in Sweden, which accounts for most of the change. Just wondering if you could talk a little bit about what was driving that. Secondly, just on the solvency ratio, do you have any thoughts or anything you want to share with us on the potential impact of a change in the level of the UFR going forward? That would be great. Thanks.
Yeah. I'll, I'll, this is Peter. I'll talk to the unit link reserves. The development in the unit link reserves are highly dependent, of course, on the equity market. Plus 50% of the Norwegian book is in equities, and about 75% of the Swedish book is in equities. So, the bulk of the change from year-end to now has come from negative equity markets, which in the movement analysis, you alluded to a lot of that is in other due to some translation differences and other factors, but it's basically negative equity reserve.
Yeah, and if you look at the solvency ratio, first of all, of course, there is a proposal now out there around the UFR. We are also expecting to give our views into that proposal. One element, of course, is that you see in Norway, we have an expectation of inflation of 2.5% compared to the 2% used in the European Central Bank.
... and then also, of course, is very much impact on the actual interest rate level. So with this fluctuation of the interest rate levels we have seen over this quarter and also so far this quarter, we are following this close, and we expect to be able to give you much more insight in the solvency situation and also this sensitivity when we come back to you on our capital markets day in the thirteenth of May.
Okay, thanks.
The next questions come from Jonny Urwin from UBS. Please go ahead, the line is now open.
Hello, good afternoon. Thanks for-
To-
I am so sorry, Johnny. Could you please repeat that again? Your line was muted or awhile.
Okay, sure. Hi, guys, thanks for taking the questions. I'd just like to go to slide 6. Thanks for the disclosure around the Solvency II capital generation in the quarter. It's interesting that you disclose it as results, which I assume is earnings and other, and that's the 3 points of accretion in the quarter. So I'd be interested to hear what is the other and what is the split? Obviously, just trying to think about what an annual number might be for your solvency capital generation. I don't—I know you're probably going to touch on that on the thirteenth of May, but it would just be very interesting to hear your thoughts around that. Also, the second question is around the de-risking actions that you've done on the capital requirement.
So does that have any impact on the future profits or the future capital generation sort of capacity of the group? So I imagine if you're de-risking now, then you're taking away some profits. I imagine it's not for free, but yeah, any comments around that would be much appreciated. Thanks.
Thanks, Johnny. We could split it into somewhat more detail for you. Partly, there is a model improvement, and I'll explain exactly what that is. When you have asset-backed securities, you can either model them just as an asset-backed security, or you can actually model also the assets that actually backs the security, i.e., the security you have behind. That is model improvement, which improves the solvency ratio according to the rules set by the EIOPA and included in the solvency regulations. There is certain elements of improved pricing involved in these elements. And there is, on the de-risk and change asset allocation, the fact that we continue to match liabilities and assets in sub-portfolios to make them more manageable from a solvency perspective.
And we also invest in new asset classes like asset-backed securities, like the retail lending that I mentioned on my... on the call earlier today. That improves the capital efficiency of the investment. And last but not least, on the results and others, is obviously the additional returns that we have achieved during the quarter, as well as the hard capital that we've built up. So we are not losing any significant part of future profit as a consequence of this. This is more, a more tailored way to manage solvency, both on the modeling and in the actual asset liability matching.
Okay. So that's a lot of the de-risking actions then. But on the other in the results frame, but what's the split between the earnings and those other actions? Because it seems like a lot of that is one-off in nature, perhaps, in terms of the initial benefit now. But just in terms of the ongoing flow of capital, what do you think comes from earnings?
I think what you see, of course, is that you have the real equity generation you have had in this quarter. And you also heard Lars say that it was around NOK 1 billion in allocated risk. And a large part of that will be used to cover up for the small remaining part of the longevity reserve. And that, in a solvency view, is taken into account as a possible use of equity. And by creating these kind of values, that is helpful for market value creation, actually. So all of these elements together is adding up to this 3%. And it is higher than you should expect, of course, in a quarter like quarter risk generation.
And we are planning to give more insight, again, in the Capital Markets Day of expected value creation and solvency creation, on an annual basis, as such.
Okay. Yeah, I mean, I guess I was assuming sort of 5-8 points of solvency capital generation. I'm just wondering if that's too low or not.
I don't think we're not going to give a number of solvency capital generation today, Johnny, but-
Okay.
I appreciate the question.
In May, I look forward to it. Thanks so much.
Thank you.
Before we let the next person on, ladies and gentlemen, if you would like to ask questions, please press star one on your phone keypad... Our next question comes from Blair Stewart from Bank of America. Please go ahead, your line is now open.
Thank you very much. I've got a couple of questions left, but one of them was asking about capital generation, so I'm not, I'm not sure I'll bother asking it now. But, I think it would be useful at the capital markets day to see all the moving parts, because clearly you've got your earnings coming through. You've got the, you know, you've got the unwinding of the transitionals every year, which is going to be something like NOK 900 million a year, which is a big number. And you've got the increase in the paid up book, which has a capital charge attached to it as well. So I, I would be very interested to see how that, how that breaks down.
Certainly the three points that you've shown is a high number relative to certainly what I have with regards to ongoing capital generation. But I'll leave that there. I don't expect you to comment further. The other question I had was referring to the loss absorbing tax number, which is NOK 4.6 billion. I just wonder if you can give a bit more color behind how that's derived and what you know, period of recoverability you'd be assuming, et cetera, if there's any detail you can give there. Maybe that's another question for the thirteenth, but I'm interested to know.
Yeah, if I might try to answer that, Blair. I think you can have more details on that on the capital markets day. But just to give you some color, then I also did a case study for a European life insurance. The average tax absorbing capacity for European groups was 19% on the solvency ratios. What we have done is to see how the balance sheets will look after a number of stresses. And we have seen to what extent it's probable that future taxable profits will be available against those losses. We have documented that quite thoroughly.
On that behalf, we think that we can defend taking the full loss absorbing capacity of deferred taxes into the calculations.
So sorry, did you say it was 19 points for the other companies that you studied?
Yeah, that was in the QIS5 study published by I back in 2011, I guess.
Okay. Okay, and I think yours is about 16 points, isn't it?
Yeah, something like that.
Okay. Just coming back to one of the points that was made earlier, with regards to the risk result. I think you said it was going to go to zero over time. I just wonder if you can help us figure out where in the segmented breakdown of profits that might appear, and how long will it take for that number to go to zero? Thank you.
Yeah. On the risk result line, the Norwegian risk results from the life and pension, which is now in the guaranteed segment, that is expected to be very low going forward, partly because the new disability legislation, which moves a lot of this over to the insurance segment, and partly because the remaining risk results will be used to build buffers, which are much more efficient than the Solvency II. The risk results that will remain are the risk results from SPP and our subsidiary called BenCo, which is in the other segment. Those risk results will remain, but we will perhaps not report them on a separate line in the table.
In the Norwegian part of the business, it's not that the result disappears. It just shifts over to the insurance segment, instead of having been on this risk result line.
I see. I see. That's clear. Thank you very much.
Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. We do have another question from Peter Elliott, from Kepler Cheuvreux . Please go ahead. Your line is now open.
Thank you. We're talking small numbers here a little bit, but I just wanted to just clarify on the Solvency II ratio with transitional rules. The 7 percentage points of solvency generation across the quarter basically translated fully into the increase from 168 to 175. So, you know, net of financial markets and the transitional rules fully offset those. I guess that was a little bit of surprise, given that, you know, part of the impact will have been from equity markets, where the transitional don't fully offset. And I guess, you know, there's a small amount of amortizing of the transitional rules.
So I was just wondering if you could comment perhaps on, you know, whether that's really been sort of complete steady or whether the numbers I'm talking about are sort of too small to notice? And secondly, on the de-risking, I was just wondering if you could comment how much further, you know, how much more space you see to take further actions there. Thank you.
When it comes to the transitional picture, that goes, you know, the transitional is mainly made up from the difference between the Solvency I values or the liabilities for our paid-up policies and the Solvency II values. And falling interest rates have quite sharply increased the Solvency II liabilities for the paid-up policies, which is the main reason why this has been increased during the quarter. Then it's very difficult to exactly pinpoint all the different moving parts. But what you actually see this quarter is that the transitional measures more than compensate for the total effects.
I think you also have, of course, falling equity markets, but there has also been a lower charge on equities based on the rules from AOCO.
Mm-hmm.
Yeah, and on the de-risking, Peter, I guess we could always de-risk more and get a higher solvency ratio today, but that is an ongoing risk reward assessment made by the investment team and the Solvency II team. What you see we have done this quarter is to still add on into the held maturity bond portfolio. And we are able to buy bonds at high quality that covers up very much for the period now from 2020 to 2030, and are still well above the guarantee level this year. And that, of course, is de-risking the portfolios.
It reduces the opportunities for profit sharing in the years to come, but it, of course, quite effectively also reduces the downside risk in the paid-up policy portfolio. You should expect us to look for these opportunities also going forward.
Okay, thanks a lot.
To give you one more reminder, if you would like to ask a question, please press star one on your phone keypad, and we get one straight away from Blair Stewart from Bank of America. Please go ahead, line is now open.
Thank you. I'm just wondering, what assets are you bringing on to the books with a, was it 14-15-year duration and a 3.2% yield?
Blair, that is typically single A rated bonds. One example would be international insurance company. There are also some international agencies that issue debts that we have bought in the quarter. So, that is typically the kind of bonds we have been looking at this quarter.
Remember that we took it back into Norwegian, so we have the Norwegian interest in the bottom.
Yeah, so you're swapping that back into Norwegian?
Yeah.
There's a 3.2%, include the cost of the swaps?
Uh, yes.
Very good. Thank you.
Ladies and gentlemen, this is the last reminder. If you would like to ask a question, please press star one on your phone keypad. There is no questions coming through, so I will hand the call back to you.
Thanks. We would just like to remind you that we will be present in London tomorrow and hold the presentations at the Four Seasons offices at 2:00 P.M. UK time. I hope to see several of you there. And lastly, we are holding a capital markets day on the thirteenth of May, also in London. Please go to the IR website to register if you wish to attend. So with that, I said thank you, say thank you to all of you for joining the call, and have a nice afternoon.
Thank you for joining today's conference. You may now replace your handsets to end the call. Thank you.