Good afternoon, ladies and gentlemen, and welcome to the Storebrand Analyst Conference Call. My name is Anne, and I will be your coordinator for today's meeting. 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 at 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 Sigbjørn Birkeland to begin today's conference. Thank you.
Good afternoon, ladies and gentlemen. Welcome to Storebrand's third quarter conference call. My name is Sigbjørn Birkeland. I'm finance director of Storebrand. Together with me, I have Group CFO, Lars Løddesøl, and Head of Economic Capital, Trond Finn Eriksen. Group CEO, Odd Arild Grefstad, and Head of IR is on their way to U.S. roadshow, so they are not present on the call today. In the presentation today, Lars will give an overall view of the development in the third quarter. The slides will be similar to the analyst presentation released this morning and are available on our webpage. After the presentation, the operator will open up for questions. To be able to ask questions, you will need to dial into the conference call. I will leave the word to Storebrand's CFO, Lars Løddesøl, who will start the presentation on slide two.
Good afternoon, everybody. The group results for the third quarter are NOK 176 million, and NOK 1,085 million year-to-date. We see continued strong growth in our core business, and the top line is growing by 8.5%, adjusted for discontinued business and currency developments. There is a positive development in operational costs, which are down in the third quarter compared to the second and first quarter. However, the results are negatively impacted by financial results following increased credit spreads, negative equity markets, and a generally very low interest rate environment in Norway and Sweden, and indeed, Swedish short-term interest rates are negative.
However, the core business grows well, with 17% growth in written premium in insurance business, 27% growth in the Unit Linked business and premiums. I would also like to emphasize that the longevity strengthening program continues, and we have done another NOK 200 million this quarter, even if this has been a challenging quarter, and 2/3 of the overall longevity strengthening has been completed now, less than two years into a seven-year plan of doing so. The estimated Solvency II ratio is at 146%, and I'll revert to more common details around that in a moment.
If you flip over to slide three, this is to just to remind you that we have a twofold strategy where we are managing the back book with an objective to enter into a Solvency II world and operate in the Solvency II world with a Solvency ratio in excess of 130%. At the same time, we're also growing a front book with savings for retirement and insurance business without guarantees, and this is indeed important to have as a background when we flip over to the following page, page four. The Solvency II ratio is 146% with transitional rules and 104% without transitional rules in the quarter.
The fall in from 154%- 146% with transitional rules is due to falling equity markets, which gives two effects. One effect is that as part of our dynamic hedging program, we sell equities in a falling market, and also they fall in value relative to other things, so the equities as part of a total goes down. The second factor is that the stress under Solvency II is reduced when stock markets fall, and they have been reduced by four from 42%- 36%, according to the methodology in this quarter. So that is the reason why the with transitional rule number goes down.
The development in the number without transitional rules from 114%- 104% includes our own improvements of approximately 2 percentage points on top of the 3 percentage points we did in the second quarter. Also, it includes a revision of expected development in paid-up policies with investment choice, paid-up policies, and defined benefits in the defined benefit book, where we expect somewhat less conversion than previously, which gives us more paid-up policies than we had in the previous estimate. At the same time, we've done improvements in the risk management and dynamic investment policy, which is the explanation for the total number. When we look at the estimated sensitivities, we've done a slight change in the way we present this compared to what we did last year.
This is because when interest rates fall, as you can see in the second column on the right-hand side, interest rates - 50 basis points, typically the number without transitional rules will go down. However, the transitional rules will increase in value, and therefore, the top number of 146% does not necessarily change at all with the fall in interest rates. So this is an important part to keep in the back of your heads when you look at sensitivities going forward, and this may will make it easier maybe to understand those sensitivities than it has been previously.
I would also like to add that we do have a pipeline of additional measures, including how we model tax as a cushion, if you want, or a buffer in terms of income volatility, and also segmentation and risk management. There are additional measures that we are in the process of implementing. This makes us confident that we will be able to deliver another 5 percentage points by own measures by the end of the year, according to the previously communicated plan, that we will be able to do at least 10 percentage points by own measures. If we flip over to the following page, page five, this is to show graphically how the development in income is changing, and how indeed we are growing the front book.
You can see this on the left-hand side, where we have the revenues or the income from the third quarter of 2014. We have a significant increase in revenue from the savings business. There's a small income increase in guaranteed pensions. But then in the public sector, which we are getting out of, as well as corporate banking, which are both to be closed within a very short period of time, we obviously lose the revenues at the same time. We're actually able to maintain a reasonable growth in the top line, despite the fact that we have significant parts of our business, which we are exiting from.
This is also illustrated on the right-hand side, where we see that the revenue from the savings business grows quite predictably and linearly, while the development in guaranteed pensions has a very significant shift in the beginning of 2014 as a consequence of the fact that we were started to the longevity reserve strengthening program at this time but also as a part of the strategic shift away from guaranteed pensions. Flipping over to page six, our CEO presented the new organization this summer, and the new organization has the objective of increasing profitability and improving customer centricity. We have also introduced in our Capital Markets D ay, about a year ago, a cost income target.
You may have seen press release or press in Norway talking about layoffs within the distribution area in Norway earlier this year. No, sorry, earlier this quarter, earlier in October, where it was announced that staff reductions of about 65 full-time employees within this year. That's approximately 15% of the staff in this area. We are going through the whole group in order to strengthen profitability, reduce cost, and improve efficiencies. Some of the cost reductions will be a reallocation of resources to other areas, but overall, the cost level needs to come down, and we will continue to do so.
However, this is not part of a cost reduction program as such, but more a part of ongoing business this year, next year, and forever. We also announced this morning that we are in final negotiations with the potential partners on the owner, partial ownership of Storebrand Baltic, our operations, back-office operations in Vilnius, Lithuania, where we currently have 370 employees. The ambition with these negotiations and the strategic partnership that we are looking at is to leverage innovation capacity and create more customer-friendly solutions. At the same time, automate manual processes to reduce operational cost and to move from a world where we have a lot of fixed cost to more variable cost base. We're quite confident that this will give, achieve those objectives.
However, we are not going to give you any number at this stage, as we are still in final negotiations with the partner, with partners, in, but we'll revert to the market, with more details on this in, in due course, and well before Christmas. On page seven, we see the continued strong growth in the front book, with 26% increase in Unit Linked reserves, 12% increase in asset management reserves, the strong growth in premiums and insurance, as I've already commented upon. Also, we see in the last couple of quarters, an improvement in retail loans.
Indeed, we've had an increase in mortgages of about 5% over the last six months, so we're now taking market shares in this market. Then I would like to flip over to page 18. So flipping towards the end of the presentation. And on page 18, we show that we have strengthened longevity reserves, or we continue this strengthening of longevity reserves by an additional NOK 200 million this quarter, and now done 2/3 of what is needed. The group has had a charge of NOK 96 million in this quarter as a direct contribution in order to achieve that reserve strengthening. Moving over to page 19, we see the development or the expected development of cost to shareholders of the remaining longevity reserve strengthening.
The public sector has now been fully reserved, and it's in, in runoff. At the same time, we have a lot of individual contracts, which has achieved full reservation, as well as reservations done through the, conversions to paid-up policies with investment choice. When we now look at the estimated, reserve strengthening needs going forward and the estimated cost to, shareholders, we see that this will, decrease from NOK 90 million a quarter to an average of NOK 65 million a quarter. That is somewhat front loaded, with more charges in, 2015 and 2016, and then falling to about NOK 50 million per quarter in 2017 onwards. As a total, this will decrease the charge to shareholders of about NOK 0.5 billion compared to previous, estimates.
Finally, on page 20, we continue to show you the estimated return on the paid policy book, which is the most challenging book that we have in on the balance sheet. As a consequence of the significant hold to maturity bond portfolio, or bonds at amortized cost portfolio, and with a good running yield, as well as a low investment risk in the rest of the portfolio, we do expect to continue to achieve a return of about 4% or in excess of 4% for the whole period out to 2020. I would like to remind you that after 2020, we've finalized the longevity reserve strengthening, and the average guarantee goes down to approximately 3% then, from then onwards.
We will therefore be able to also meet that guarantee by reinvestments currently being done at well above 3%. 3.5% was one of the last investments we had. So we're still making investments in this portfolio at levels which are well above the guaranteed. I think I would like to conclude the presentation by just saying we have weak results in SPP or the Swedish operation, due to lack of profit split with a low financial return in those portfolios in the quarter.
We also have weak results on the company portfolios as a consequence of many of them being invested in, or a large part of the company portfolios being invested in credit bonds, and credit bonds have spread out during the quarter, which means that we have a mark-to-market loss. These are not realized losses. And in reality, the fact that the mark-to-market at a higher rate gives us a higher running yield on these portfolios. That's on the weak side. On the positive side, we see continued strong growth in savings and insurance. We see a satisfactory development in Solvency despite a challenging quarter in the financial markets.
We see lower operational costs, and we see a lower charge to shareholders, or estimated charge to shareholders going forward when we look at the longevity reserve strengthening plans. That concludes my presentation, and operator, you may now 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. If you change your mind and wish to withdraw your question, please press star one again. The first question comes from Matti Ahokas from the Danske Bank. Please go ahead, your line is now open.
Yes, good afternoon. It's Matti Ahokas here from Danske Bank. Two questions, if I may. Firstly, on the other comprehensive income, there's a fairly sizable amount, NOK 592 million translation difference in your figures. I guess this is due to the stronger Swedish krona versus the NOK. But what was the positive impact, if any, of the exchange rate on the Solvency margin as such? And the second question is, you mentioned previously that the regulator actually looks at the progression of the longevity reserves when they assess your capital requirements, and obviously it seems like you are actually ahead of plan here. Does it also mean that there would be a positive bias in terms of, of Solvency and, and a potential dividend payouts for 2015 as well?
...Well, if I start with the second question on the regulator, obviously looking at all the different things related to our Solvency and liquidity and so on. And they, I'm not sure where you that we've said that they have a particular look at the longevity reserve strengthening. But we are under reserved for longevity today, and obviously the regulator wants it to be fully reserved. So, but we're ahead of the plan that has been put in place, and we are planning to conclude the rest of the reserve strengthening in a shareholder-friendly way as soon as possible, and this is what we have presented in terms of cost to shareholders.
And you are quite correct that the other comprehensive income is strengthened by the strengthening of the Swedish kronor compared to the Norwegian kroner. But in terms of the Solvency effect of that, I am not quite sure, but Trond Finn Eriksen may be able to answer your question.
The FX effect is actually quite small because you have a strengthening of the own funds, but you also have a strengthening of the SCR that you're bringing up to group level. You have more own funds on SCR and SPP, which you take up to the group level. On the other hand, you have a swap that goes the other way around. So the effect on the group Solvency number is quite limited.
Great. If I also may have a follow-up, you mentioned that you've lowered your conversion forecasts regarding the paid-up policies to paid-up policies with investment choice. What, what's the reason for this, and, and what kind of, kind of, changes are we talking about here?
Well, we have now talked to most of the customers that have a good value proposition from a customer point of view, in respect to making a conversion from a paid-up policy to a paid-up policy with investment choice. And about 4.5 billion of customers or funds owned by those customers have been transferred. We don't see necessarily that it doesn't make sense for everyone to convert, and many people where it does make sense to convert have decided not to, for different reasons. So therefore, we do not expect to be able to maintain the same level of conversions going forward. However, we do see on the other hand that many companies or not many, but many small companies continue to look at closing their defined benefit plans.
Most of the large ones have done so already. But when companies are closing the defined benefit plans, it makes sense to give advice to customers of the, or the employees, that they do have this opportunity to change to paid-up policy with investment choice. So partly it's, it's a question of who it makes sense for and the demand from the customer side, and partly it's a consequence of a shift in our own distribution force, where we are putting more emphasis on other parts of the product distribution within banking and insurance.
This is basically the 30% that you mentioned previously, and the potential would be probably lower than 30% now?
Well, we have said all along that we expect to do NOK 5 billion by the end of this year, and, and that's what we continue to say. At the same time, we have said that it does make sense for up to about 30 billion of our customers, but we've never said that 30 billion of our customers would actually make that choice.
No, I said 30% was the potential of the-
Yeah. And the potential is still there, but as I said, when people make a choice not to convert, there's chance that they... the likelihood that they will revert year two compared to year one, is probably smaller and not bigger.
Great, thanks a lot.
The next question comes from Ashik Musaddi, from JP Morgan. Please go ahead, line is now open.
Yeah. Hi, thank you. Just a couple of questions. One, as you mentioned, that you have some potential for Solvency II improvement under standard model. Maybe get some color about what are you talking about? You mentioned some tax thing that you can benefit, so that's one thing. Secondly, can you give us some update on how much of your Solvency II standard model includes the benefit from UFR? The reason why I'm asking this is because there is a news from EIOPA, that they may look to review the UFR. So can you give us some color, how much percentage point come from the benefit of UFR? And thirdly, you also mentioned about cost, that there is more potential cost saving you can do.
But can we talk about like, in more specific numbers, what sort of million Norwegian Kroner you are talking about here, on top of your current guidance? Thank you.
Okay. I'll ask the first—no, the last question first, and then I'll hand the word over to Trond Finn Eriksen, who will respond on the Solvency. We have, as I said, not introduced a new cost program, and we don't, we do not want to talk to the market about a particular target at this stage. We have talked about what we have done, and we have cut costs significantly during the last couple of years, and we are telling the market about all the different measures that we're doing to continue to cut the cost. However, we live in a dynamic world, and therefore, we do not would not like to present a number as such.
But we would like to be able to show you every quarter that we've continued to do cost things on the cost side in order to become more efficient and more competitive. At the same time, I mentioned that we are now entering into a strategic partnership with a large BPO and ITO partner, and we are in the negotiations of doing so as of right now. The consequences of that cooperation will be reported when we can publish the final agreement. That should happen in this quarter.
Thank you. Thank you.
When it comes to the Solvency and the Solvency II improvements, I'd say that we have a list of different initiatives that we're working with. Tax and the loss absorbing or risk absorbing effects from tax is one of them, which could potentially have a good impact on the Solvency II number. Today, we are to a very known extent actually taking the tax into account and loss absorbing capacity of the tax. The other thing that the CEO mentioned earlier today was that we are, of course, revising our investment strategy.
In Sweden, we are doing a more granular diversification or split of the investment portfolio and down into single contracts in some of the guaranteed portfolios, which also gives potential. It's also a potential here in how we are actually modeling the CPPI strategy that we are currently using in Norway.
And-
There is a number of different initiatives.
What sort of magnitude should we expect in terms of benefit? Is it like 10, 20 percentage point or like 30, 40 percentage point? Are we talking about the standard model only or the total number?
We are talking about what the CEO said in the presentation earlier today, is that we feel confident that we have guided on 10 percentage points underlying improvement for the year. We certainly have done five so far, and we feel confident that we will reach the last 5 percentage points in Q4.
Sorry, if I get it right, so just to summarize, if I get it right, so the measures you're talking about is already included in your 10 percentage point guidance, or is it over and above that? That's what I'm a bit confused with that.
Okay. It's included in the 10, 10, 10 percentage points.
It is already included in the 10 percentage points?
Yeah. And, but, if, if I was also asked if we have more work to do in 2016, and yes, the answer to that is yes. And so, but, but let us first reach the 10 percentage points, and, and but we, we will continue to work after we have reached them as well.
Okay.
When it comes to Ultimate Forward Rate, I think I answered that question on the previous call as well. The reason why we use that is because there is no liquid markets after the 10 years. So it's kind of difficult to answer what the position will be when you don't have a market rate use. Of course, we have done sensitivities taking the U ltimate Forward Rate down. And I can say that it's, it's actually a smaller effect than what I think people would like to think if you go from, let's say 4.2%- 3.2%.
So from 4.2%, if you go to 3.2%, it's a smaller effect, so kind of in low, low single digit. Is it fair to assume that?
It's at least the single digits.
Single digits?
Yeah.
Okay, that's very clear. Thank you.
The next question comes from Blair Stewart from Bank of America. Please go ahead, your line is now open.
Yeah, thank you. Good afternoon. I think I only have one left, actually. Your guidance on the longevity cost provisioning, I'm assuming that if and when you do get transfers out of paid-up into paid-up with investment choice in the coming years, even if they're smaller than you originally thought, that that would increase the longevity provisioning cost? I just wanted to clarify that, please.
That's correct.
Okay. And is it fair to say that you still, even though you've downgraded your expectations, that you still expect to see a smaller run rate of conversions going forward? And is it possible to put any sort of number on that?
We have chosen not to put a number on that, but I guess we still have an ambition of doing some, and we will make sure that the employees, when they exit the defined benefit plan or they close the defined benefit plan, are made aware of the possibility to switch to a paid-up policy with investment choice. I know also that some customers are looking for the market to fall back and maybe, you know, do a paid-up policy with investment choice when they find the market to be cheaper than it is today. So there's some flexibility compared to when you do the switch, so that is something that some customers are talking about.
Okay. And then perhaps if I can just ask one more, the Baltics business initiative, is the primary objective there to remove essentially a fixed cost from your-
... from your business and turn it into variable costs, so you can then be more flexible as the business changes shape in the future. Is that the primary goal here?
No, the primary goal is to be able to create more customer-centric and good solution, be a faster time to market, and to concentrate management resources and other resources on better customer solutions. We also have a clear objective to improve efficiency and reduce costs. Let me give you one example. When DNB wanted to create a mobile pay solution in the Norwegian market, they looked at this, and they had, like, a two-year plan to do so. Then they have a strategic cooperation with the Tata Group, which had already developed this for Barclays in the U.K., and they managed to create a Norwegian solution in five months. That solution now has 700,000 or 800,000 users after only three months after it was entered into the Norwegian market.
So this is an example of how the international innovation and force of some of these large BPO and ITO players can improve customer orientation and commercial solutions in the Norwegian market.
Okay, very interesting. And do you think that's something that will have an upfront cost for you, or how should we think about it in terms of numbers?
You should not think about it as an upfront cost. This is a strategic cooperation and a partial ownership in our Baltic operation. By selling something, you usually do not have to put up cash.
Okay, very good. Thank you.
The next question comes from Jonny Urwin from UBS. Please go ahead, your line is now open.
Hi, good afternoon, Jonny Urwin from UBS. Thanks for taking my questions. Just two questions on, on regulation, if I may. Firstly, could you, could you just give us any, any color on, on current consumer protection initiatives coming out of the, the Swedish and the Norwegian regulators, if any? And secondly, please, could you update us on your view of the two bits of legislation potentially coming out of the Norwegian regulators? So, so around the treatment of technical provisions, so that the results of transitional application can't fall below current minimum levels, and also the treatment of the, the tax rules on the technical provisions, which I believe has been postponed until next year. Just any additional color on that would be much appreciated. Thank you.
Yeah. Well, when it comes to the tax rules, you know, for to, to do the tax accounts, they today use the same as they use for the, you know, when you do the customer accounts. Then there has been an initiative to look at into whether you should use the Solvency way of calculating liabilities in the tax accounts. That was pushed back, and there is, you know, the government has said that they will investigate opportunities to look at this in a broader perspective over the next year. We-- this is in a very early stage, and we don't really have any guidance on how this will turn out. When it comes to...
I guess that was the question on the tax rules?
Yeah.
Uh-
And also the Norwegian regulator's interpretation of transitionals. So I remember in August there was some national legislation that-
Yeah.
This might limit the maximum benefit of transitionals.
That, that's correct, and that has been taken into account in the numbers. So, the way we are doing the numbers on the Solvency has been, we have done it this way, all the way. We have, we've done it correctly, so there is no changes to the numbers due to this, this floor on the, calculation. And on your final question on consumer protection, I don't expect that there are any new things coming out in the Norwegian market, right now. Consumer protection has been, is an important part of the legislation already. However, we have MiFID II, which are coming all over Europe in, in next year or the year thereafter, and the impact there is likely to be larger in Sweden than in Norway.
We don't see that there are going to be very significant effects for our group at this stage, but we continue to follow the legislation and regulatory developments.
Well, why is, why is that likely to be more impactful in Sweden?
It has to do with how the broker market works and the amount of kickbacks you can give in the Swedish market, which are already removed from the Norwegian market.
Okay, great. Thanks very much.
The next question comes from Paris Hadjiantonis from KBW. Please go ahead, your line is now open.
Yes, good afternoon. Thank you very much for taking my questions. I have two today. The first one on the use of the Risk Equalization Fund for longevity reserving. I understand there were some changes in the quarter. Can you please explain those? And then the second one is basically on something that we saw a couple of weeks ago, about potential capital charges on municipalities' debt. Is there any effect that for Storebrand particularly, and do you own any municipality debt? Thank you very much.
... Okay, if we start with the Risk Equalization Fund, and then I would like to go back to the page that we showed you on page 19. It is so that the Risk Equalization Fund is a fund that according to the regulations or clarification from the regulator, we have to use as part of the longevity reserve strengthening. And we have used NOK 378 million in this quarter, and we will do another NOK 122 million in the fourth quarter, for a total of NOK 500 million for the year as a whole. Then we have NOK 276 million left to be used next year.
The Risk Equalization Fund can be used to strengthen reserves where it's most needed, and therefore we use it across the board for different contracts. It reduces the amount of shareholders' equity that we have to use for the same contracts, and therefore it's positive to the extent that you don't have to use real equity when you use the Risk Equalization Fund. But we have to use a part of both.
When it comes to the question on the municipalities, all across Europe, I think municipalities is treated a little bit differently in the Solvency calculations and by the government. In Norway, there is a 20% risk weight on municipalities, although they cannot really go bankrupt, there is a special law considering the wind up of or to administer the economies of municipalities in cases whether they have troubles. And that's so and there's no change to that. I think in other Nordic countries, there is other. They're treated differently in municipalities. When it comes to, there is also an issue of rating, because some is to require official ratings from municipalities.
In Norway, very few municipalities have a rating, only the biggest one. But that said, I think in Storebrand, we have a relatively small amount of investments in municipalities, so we are not very much affected by this kind of more stringent regulation around municipalities in Norway.
But also to add to that, it is, of course, less stringent regulation than, of course, it is a wider investment opportunities.
Thank you.
Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. There are no further questions coming through, so I will hand the call back. Thank you.
Okay. Then, thank you very much, everybody, for joining the call.
If you are in London tomorrow, we'd be happy to see you on the analyst meeting, which is in the ME Hotel.
Mm-hmm. Right, but, but don't skip out.
Yep.
Thank you very much. Bye-bye.
Thank you for joining today's conference. You may now replace your handsets to end this call. Thank you.