Good afternoon, everyone, and thanks for calling into the conference call. This is Storebrand's second quarter 2015 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 and CFO Lars Aa. Løddesøl. In the presentation today, Odd Arild will give an overall view of the developments in the second quarter and first half, and Lars will give some more details on some of the elements in the results. The slides will be similar to the analyst presentation released this morning, and they are available on our web pages. After the presentation, the operator will open up for questions. To be able to ask questions, you will need to be dialed into the conference call. I now leave the word to Storebrand's CEO Odd Arild Grefstad, who will start the presentation on slide two.
Thank you, Kjetil. Slide number two, highlights second quarter, 2015. Storebrand delivered a group result of NOK 459 million for the second quarter in 2015, and NOK 909 million year to date. This result is characterized by a strong result before profit sharing. That is the high quality part of our results. And the result before profit sharing and loan losses was NOK 661 million. It was a weak result, financial result in SPP, and a direct negative contribution to the result of NOK 151 million related to longevity reserve strengthening. Despite the ongoing transition from guaranteed to non-guaranteed business, we achieve a strong 11.5% top line growth, adjusted for current changes and discontinued businesses. That is, corporate banking and public sector.
On the right-hand side of this slide, you see some important key numbers that I like to comment. The insurance business is developing strongly, and the written premium increased by 16% compared to the first half of last year. Unit-linked based pensions grow by 23%, the first half of 2015. We entered into 2014 with a need for longevity reserve strengthening of NOK 12.4 billion. Eighteen months later, we have already reserved 65% of this amount, equal to approximately NOK 8.1 billion. During this quarter, we have done a reserve strengthening of NOK 700 million.
The solvency margin, including transition rules, is strengthened from 152%- 154% during second quarter, and the solvency margin without transition rules is estimated to 114%. That is an increase of 16% points from last quarter. If I then move to slide number three, as you know, Storebrand's business is undergoing a fundamental transformation. We have a dual strategy, where we handle the guaranteed balance while implementing measures to continue the strong growth in savings and insurance. We handle the guaranteed balance with the aim of more than 130% Solvency II margin, including transition rules. We will also continue the growth in savings and insurance by using our market position in an increasingly individualized pension market.
Let me start with an update on the guaranteed business, and then move into the update on the growth in savings and insurance. Then we move to slide number four. And as mentioned, the Solvency II margin, including transition rules, is strengthened from 152% to 154% during the second quarter. The effect of the transition rules is reduced during the quarter due to the increase in the interest rates. But overall, the solvency margin remains stable. We see that the transition rules is functioning as a buffer against interest rate volatility in line with it, its intention. The Solvency II margin without transition rules is estimated to 114%, which is a strengthening of 16 percentage points from last quarter.
Of that increase, 13 percentage points are due to the increase in the interest rates, about 50 basis points in the quarter, and 3 percentage points are due to result creation, buffer building, and other management actions. To summarize, we are well on the way to realize an improvement in the Solvency II ratio of 10 percentage points, based on our own improvement measures. Then I move to slide number five on longevity. As you know, we entered into 2014 with a total need of reserve strengthening of NOK 12.4 billion. One and a half years later, we have reserved NOK 8.1 billion, while NOK 4.3 billion remains. Of the remaining strengthening needs, NOK 2 billion is covered by the NOK 90 million charged over the result each quarter.
This implies that only NOK 2.3 billion remains, which will be covered by excess return of customer funds during the next five and a half year. We prioritize to accelerate the reserve strengthening. It's important to keep in mind that this will have a negative impact on the results short term. In addition to the quarterly NOK 90 million, we have this quarter contributed NOK 61 million to the full reserve of the paid-up policies, converted into paid-up policies with investment choice. In addition to this direct impact on the result, lost profit sharing and risk result further impact the result negatively. In total, longevity reserve strengthening has reduced the result by NOK 253 million in the quarter. If I then move to slide six, this is a similar slide to what I showed you in the fourth quarter 2014.
It is a slide that illustrates the expected portfolio return within paid-up policies. Since fourth quarter 2014, the expected return has increased significantly. Two important factors contributes to this change. First, the allocation to bonds at amortized cost within the entire guaranteed portfolio has increased from 43%-47%. For paid-up policies, the allocation has increased to 53%. The reallocation has been conducted with the strong investment yielding well above 3%, and the average weighted yield for the total portfolio has just been reduced just from 4.8%- 4.7%. The other factor which has increased the return is, of course, the increase in the interest rates.
Looking ahead, we see that the return will cover the interest rate guarantee and the longevity provision in the entire period until 2020, with only a limited use of market value adjustment reserves. Beyond 2020, we see that the guarantee level falls down to around the 3% annual level, and that is equal or lower than the reinvestment rates we have in the market today. Moving to slide number seven, it's natural that our guaranteed balance sheet achieves high attention. However, the development within the savings and insurance segment is highly exciting. Let me turn to some highlights. Unit-linked reserves are growing steadily with 26% year-to-year. The growth is driven by a premium growth of 23% compared to the first half of 2014.
A total of NOK 2.8 billion converted to paid-up policies with the investment choice so far this year. It was NOK 1.2 billion in the quarter, and good financial returns in the first half of 2015. We also see that we have a strong growth in asset management, with 10% assets under management growth compared to the second quarter of 2014. Increased interest rates and weak equity market in the second quarter have led to a weak development in the volumes in the second quarter isolated. I'm very pleased with the growth in insurance, with 16% premium growth, and we also see a start of the growth of the retail loans, with NOK 700 million increase in the volumes in the second quarter.
If I then turn to page number eight, on June 17th, I announced some changes in Storebrand's Group Operating Model. The main change we have done is to establish a unified product and customer service area across our products and markets. The change facilitate improved customer orientation and increased profitability. With regard to customer orientation, holistic and seamless customer service processes, independent of single product and distribution channel, will make it easier to become and be a Storebrand customer. In addition, the new operating model facilitates better use of best practice and increased use of offshoring and automation. If I then jump to slide number 10, before I leave the word to Lars Løddesøl, I will just give some more insight in the growth in the insurance area.
Strong growth, both, in the life area for group life and for the traditional, P&C in the retail, area. In the second quarter, we achieved also a very important internal milestone by welcoming the P&C customer number 100,000 into the company, after we reentered the P&C market in 2006. The growth also continues into the second half of 2015. And then, Lars, I leave the word to you.
Thank you, Odd Arild. Then I would like to focus on page 12 with the heading Storebrand Group, and I will go through some of the lines in somewhat more detail. The fee and administration result is, as Odd Arild mentioned, 11.5% up, adjusted for currency and non-discontinued business. The risk results in the quarter are good, and in terms of indicating where they should go forward, the half year numbers are probably a better estimation on future profitability on this line. We had strong results in the second quarter. There is a good growth in insurance, and the combined ratio is at 87%, which is also satisfactory development with cost control and good claims development.
The financial results are also satisfactory in light of the lower interest rate environment level, which gives us a result before profit sharing and loan losses of NOK 661 million, which is the earnings power that we need from the underlying high-quality business in order to deal with the following issues on this page. Namely, the net profit sharing and loan losses, which shows -NOK 51 million for the quarter, which is led primarily from a reverse in the profit split in the Swedish business as a result of a fall in the equity markets in Sweden, and also a significant increase in loan rates. The negative return in the second quarter, therefore, reverses the profit split we had in the first quarter.
The results on this line are weaker than you can if you calculate from the sensitivities that we show in the supplementary information, you will find get a higher number. This is a consequence of the twist in the interest rate curve, where long-term interest rates have gone up at the same time as short-term interest rates have gone down. That, combined with an increase in credit spreads, have led to the fact that the indications or the sensitivities that we've given are not were not a good indicator for the final result. We have been going through the sensitivities, and we have improved them and improved also the explanation on the quoted basis in the supplementary information.
So hopefully, we will be able to closer estimate the results for the following quarters, but there will be some volatility in this number. Furthermore, on the second or the next line, is provisions for longevity, and as Odd mentioned, NOK 90 million in the regular quarterly longevity provision, and NOK 61 million in addition for converting paid-up policies to paid-up policies with investment choice. But with the earnings power we have from the result before profit sharing and loan losses, we can carry both the negative impact of financial markets in the second quarter and longevity reserve strengthening, and still maintain a profit before amortization of NOK 459 million. To sum it all up, I think the or our, we are satisfied with the top line growth.
The results from risk and finance are good, and we have weak results from profit split in the Swedish market. On the following page, page 13, we show the transition taking place with a significant fall in profitability from the guaranteed pensions business. But that is to a large extent compensated by an improvement in profitability from savings, and savings non-guaranteed, and insurance. Turning the page to page 14, and that will be my final page. On the Capital Markets Day we had in November 2014, we communicated a measure for cost income that the group cost income should be below 60%. This is an ambitious goal.
The fundamental transition we are in, in the group, it means that we have the profitability from the or the income that we have from the guaranteed business is disappearing, and it tends to disappear somewhat quicker than we manage to bring down the cost level. At the same time, we have significant investments and growth in non-guaranteed savings and insurance, but from a low relative level. We also see that the margin in the unit-linked business is significantly lower than in the traditional defined benefit business, and we expect and plan for a continued margin pressure in this business.
To maintain the profitability or to maintain our profitability and the cost income below 60%, that means that we need to have flat or reduced cost, which is, in reality, an improvement of more than NOK 100 million in cost savings each year from an inflation-based fixed level. We have chosen to report this on a twelve-month rolling basis, and as you can see from these numbers, the cost income in the quarter or on the 12 month rolling basis after the second quarter is 58.8, i.e., under the goal that we've set. And you can also see the different components that are part of the equation. These are total operating costs, and on the income side, it's fee and administration income and underwriting results, including insurance premium for own account, claims for own account, and the risk result from life and pension.
With that, that concludes our presentation, and we open up for Q&A.
Ladies and gentlemen, if you'd like to ask a question, please press star one on your telephone keypad. You will be advised when to ask your question. Our first question comes from the line of Daniel. Go ahead, please.
Hi, good afternoon, Daniel, JP Morgan here. Just have three questions, one on solvency and two on the insurance results. Firstly, you mentioned last quarter a total of about 10 percentage points of capital generation for the rest of the year, of which you've achieved three percentage points this quarter. Just wondering whether that we should see that as another seven percentage points remaining in the second half of the year? And then secondly, on insurance, both P&C and group life premiums up quite considerably year-on-year. Could you just comment on the main drivers here and also on the sustainability of those growth rates going forward? And thirdly, in disability, I guess both in terms of top line and combined ratios, still fairly disappointing. Just wondering whether you could also comment on the trends that you're seeing here and also on the scope to improve margins going forward. Thank you.
I'll start on the solvency question. And it's right, as you say, we stated a 10% increase in the underlying solvency level seen from own elements not taking interest rate fluctuations into account. We posted that we achieved three percentage points, so that in this quarter. And we have plans to create seven percentage points going forward for the second half. And the basis for that is, of course, result generation in itself. It's also a longevity reservation, but it's also improvement in the models. It's a lot of elements that we're still working with, and that we have hopes for giving increased underlying solvency ratios. Then on the insurance question.
Yeah, I can comment on the insurance question. We see that the agreement we got with Akademikerne, the White Collar Association in Norway, has significantly led to a pickup in premiums. However, we have not in any way been through the potential in that agreement, so we expect that to continue to be a contributor to future growth. So we should be able to maintain a good development in insurance premiums, both in, well, in all of these business lines, basically, as you see on the graphs that we've shown on page 18. I think also that, you know, we have a strong brand name, especially for the P&C retail market in Norway, and we started up that business again after having had a very strong market share.
And, we are now seeing that we are able to take growth in that market, and, and we have ambition to take, steady growth in that market going forward. I think it will be more volatile when you look at the growth rates on the life side. Group life was very strong this quarter. That will vary from, from quarter- to- quarter. But on the pure P&C retail area, we expected to have, a steady growth, going forward.
On your last question, Daniel, I think you asked about the life disability pension Nordics, and, of course, it's been, somewhat volatile and, with the weak results, especially in the Norwegian line of business. Of course, pricing here is a we need to look at the total profitability of the customer relationship of our DC customers, which we have earnings from both in D Life Company in the risk segment and also in the asset management division. So it's a balancing act between the and looking at the whole customer profitability.
Okay. So the outlook here remains fairly unchanged on the disability, and within P&C, we should see the first half growth rates sustained into the second half of the year. Is that correct?
Well, to guide exactly on the numbers is, of course, difficult, but we see that we have a good situation now in the market, when it comes to retail P&C. We have this agreement with Akademikerne, and we have not tapped that potential, so we expect to see growth rates, also sustainable in the second half, in that area.
Okay, great. Thanks very much.
Our next question comes from the line of Peter Elliott. Go ahead, please.
Thank you very much. I have three as well, please. The first one actually was a follow-up on the solvency. When you talked about management actions, I guess one thing you specifically mentioned at Q1 was the possibility of raising subordinated debt in the second half of the year. Given how interest rates have risen and the current solvency position, I was wondering if you could share with us where you currently stand on that. The second thing was on the development of paid-up reserves. I guess just looking at the quarter in isolation, they grew by NOK 1 billion, despite the sort of strong progress, transfers out. And when I, and I guess also despite the sort of the seasonality, you guess, of a lot of inflows in Q1.
I think it was basically because the book return was quite high, but I'm just wondering if you could perhaps comment a little bit on that and how we should expect the sort of quarterly progression from here. And then the third question was on the health and group life. Just the, the combined ratio, the underwriting there has been quite volatile, I think 78% this quarter, 104% last quarter. Just wondering if you could sort of touch on what you think is sustainable, ongoing level is there. Thank you.
Okay. I'll start on the, on the solvency question. We have a toolbox, as we have said before, a lot of elements. One of those elements is, of course, to increase subordinated debt. We are looking into that. We have not decided yet, whether we will do that or not do that it 's, of course, a balancing act, and as higher the underlying solvency are, of course, the cost of increasing the solvency with an extra percentage point is something that we have to look very close into. Cost of interest rates on one side versus increasing the solvency ratio on the other side. So that is a part of our toolbox. It's available for us, and we have not decided yet on how to use it.
When it comes to the paid-up policies, I think what you see is that we have in the first quarter normally are quite a strong or high conversion from defined benefits into paid-up policies. We also had that this year. And we have guided on NOK 8 billion-NOK 10 billion on an annual basis in conversion from the defined benefits book into paid-up policies. And I think that guiding is still the guiding we stand with. Is no surprises in the second quarter in the numbers as far as we see it when it comes to the rate of conversion.
I could add, if you look at the table 41 in the supplementary information, you see all the different flows in that book, so you can follow that quarter by quarter in some detail. Yeah, and the last question, I think, was on the health and group life combined ratio, and I think it's been volatile. But if you look at the year-to-date number, I think around that level is a reasonable level going forward.
Okay. Thanks very much.
Our next question comes from the line of Matti. Go ahead, please.
Yes, good afternoon, Matti Ahokas, Danske Bank Markets. Two questions from my side, please. Firstly, regarding internal dividends, have you, how much, or have you at all, upstreamed dividends from the bank asset management and life company, during this year? And how much should we expect that you would upstream during the full year, 2015? And the second question is regarding the conversion, asked previously as well. NOK 2 billion is quite a lot above what you've been guiding, roughly above NOK 1 billion. What was the reason for the higher than expected or higher than what you guided for, conversion out of paid ups into paid ups with investment choice? Was it the interest rate level, or was there something special with that?
If I start with the second part of your question, I'm not sure that I fully understood it, but the conversion from paid up policies into investment choice in the second quarter was NOK 1.2 billion. It is so far this year, NOK 2.8 billion, and when you take with you the NOK 900 million last year, we have so far been converted NOK 3.7 billion. And our guiding is that we should achieve NOK 5 billion in total for the last quarter, last year and this year. And we are well ahead of that route. But we also see that it is a balancing act of how we use our distribution forces into different areas.
We have strong growth in insurance and other elements, and you also see that we have somewhat higher charge to the longevity reservation of this quarter. You should expect us to take that down to be around 3%-4% in the charges versus the volumes we move from paid-up policies into investment choice going forward. Yes, and the dividend question, maybe Sigbjørn Birkeland, the Finance Director, can tell what we actually did in 2014.
Yes, when it comes to the dividends, in this quarter, it's NOK 20 million coming in dividend from the health insurance company to the holding company. In the first quarter, there was transfers from the asset management operations and also from the P&C operations, and a rather large transfer from the bank. All those were from the, based on the 2014 accounts. The reason why the bank contributed more than the result was due to the build-down of the portfolios on the corporate banking side. So, we have an upstreaming of approximately NOK 700 million from last year's results.
And I think, as a general rule, we, we try to keep the, access, capital as high as possible in the group structure and the holding company. And the exception is, of course, D Life Company that has been, not giving a dividend for the last couple of years due to their, the buildup of the reserving in, on longevity side.
NOK 700 million is a good working figure for this year as well?
We are not kind of guiding on the different internal pay, but there is a room for dividends from the asset management operations, the banking and the P&C insurance side.
You see a good result generation in asset management that could be upstreamed. I also see strong result, the generation and the insurance company. And I think when you revert and look at 2014, it was higher upstream from the bank compared to what you should expect ongoing basis.
Thanks, if you just may, remind me about the costs in the holding company, how much is the kind of run rate of the costs, interest costs and operational costs that you need to cover?
NOK 20 million in the quarter. 90, I think, if I remember correctly, but approximately NOK 20 million in the quarter.
Yeah.
NOK 70 million-NOK 80 million a year, though.
Great. Thanks a lot.
Our next question comes from the line of David Andrich. Go ahead, please.
Hi, good afternoon. T wo questions on my side, y our unit-linked growth has been really strong and continues to be, b ut I was noticing that the premiums on the disability insurance linked to that seems to be pretty flat. And I guess that's kind of a follow-up question to Daniel's earlier. And is that purely kind of a margin pressure, or is that a business mix? And just wondering, what's the dynamic there between those two? And then I was just wondering, in the past, you've given some guidance in terms of the capital required under Solvency II as a percent of reserves for the different product lines. I was just wondering if you had any kind of update on that as you've progressed through the process of, you know, your Solvency II models, and if there was any big changes there. Thank you.
Yeah. On the Unit-linked Disability premiums, they're a mix between Norway and Sweden. It's dependent upon the product sold, if the disability or premium waiver is connected to the Unit-linked premium sold or not. So you won't see growth rates in that line following the growth rates in the savings part of the unit-linked line. So I think that explains the difference between the two.
Okay.
If I try to give some insight into the Solvency II charges, I think we gave an update in our Capital Markets Day on the different areas. What happens is that, and basically, that is the guidance we still give into the market. But what happens, that I like to say, is that when we move now the defined benefit assets into paid-up policies, that is a higher quality of these assets compared to what it used to be. Because we are now more or less fully reserved for longevity in the defined benefit portfolio. That means that it's fully reserved contracts that goes into paid-up policies. It's also tend to be a lower interest rate level guarantee on these products.
So, we see that we have lower capital charge compared to the ratio we gave to you on Capital Markets Day on the new paid-up policies. And overall, of course, that also give a higher or a better ratio in the total portfolio as we develop and go further.
Thank you very much.
Our next question comes from the line of Gianandrea. Go ahead, please.
Yes, hello. This is, Gianandrea from Carnegie. I have three question as well, t he first one really is on the paid-up to paid-up with investment choice. Odd Arild, I think you mentioned before, and it's in the report, that you've done NOK 1.2 billion in the quarter and NOK 2.8 billion for H1. It's my understanding that you're still targeting NOK 4 billion for the full year. And I'm trying to understand what is the reason for that. Are you trying not to depress earnings, or, do you see a slowdown in general? And this NOK 4 billion that has been mentioned before, would it be fair to think, that it should be slightly lower than that in the next couple of years, or how do you see the entire process?
That's my first question. And then the second question is really, I think you touched before about the dividend paid by the subsidiary to the holding company. But I was wondering if you can tell us really a little bit about the dividend that the group could actually paid or pay not. Did you have any discussion with the FSA at this point? Do you know what they are thinking? I mean, I suppose there are several issues here, including the fact that they may be unhappy for you to pay a dividend, considering the still sizable longevity strength. But if you can spend some words on this, I think it would be, it would be quite interesting. Thanks a lot.
Thank you for your question, Gianandrea. Starting with the paid-up policies, we gave a target of NOK 5 billion for the end of 2015 for these five quarters, and we have not changed that guidance. Of course, having already now NOK 3.7 billion with what we have seen in the conversion in the first and the second quarter, you should expect us to at least be able to meet that target of NOK 5 billion and maybe somewhat more than that in 2015. But of course, it's slow during the summer now; there's not much conversion going on.
It is dependent also how we use actually our sales force, so we want to use it on the different areas. We have not given any indication of what happens in 2016 and 2017 when it comes to conversion from paid-up to paid-up policies with investment choice, and we have to revert on that. As I said, we will ensure that we don't have any higher charges percent-wise compared to what we have seen in the second quarter.
The guiding on 3%-4% is still the guiding we are are looking at. When it comes to dividends, I would just repeat what I already have said, and it's not a new guiding on this in this quarter compared to what it was in the first quarter. We put forward this target and this strategy to make sure that we were able to meet Solvency II without asking for new capital. We put the target of more than 130% in Solvency II ratio, including transfer rules. We are well in process to meet these targets, and we also see that we have very good situation when it comes to longevity reservation of 65% so far.
We also give you progress, some insight in how we actually see our returns on the paid policies going forward with a strong asset mix that gives quite strong reassurance around about meeting the interest rate levels or the guarantees, and also the the remaining reservations. We we feel comfortable, but we also, of course, understand that there is volatility in these numbers compared especially based on on the interest rate levels going forward. We are also very clear that when we now enter into the market to give a dividend, that is not a dividend for one time or one year only. It should be a dividend that we on a regular basis, every year, is prepared to to to give.
So I suppose this is not very new for you. It's the same elements that I gave in the first quarter, but it's still the same views we have on dividend. And of course, at the end of the day, the Board will take everything into account and look at the situation at year-end.
Okay, thanks. Thanks for the answer. Just my final question, sorry. It's actually about the recent downgrade from S&P on your credit rating, which I suppose comes somewhat to surprise, at least to me, considering that really the very low level of rates has been passed for some time, so they seem to be a bit late. But in general, I'm just wondering, I mean, does that impact your plans in any way? And you touched before about the subdebt. For sure, this will cost you more if you decided to issue more subdebt. And isn't it the case that we are talking about a max of NOK 1-1.5 billion of additional subdebt capacity?
I know under Solvency II, you have more, but I understand there is an issue also in terms of fixed, fixed charge coverage there. Thanks.
Yes. When it comes to, to the rating, I fully agree with you. It seems to be a very lagging indicator. Low interest rate is not new for us. Actually, the interest rate has increased in the second quarter, compared to what we have used to see. And, when you look at the description of the downgrade, it's very much about expectations for low interest rate for a long time, from S&P. Now we have the same, we had a situation where the negative outlook for a long time. Now we have the same rating of both Moody's and S&P. So it doesn't impact very much the interest rate costs as we see it.
It's based on the lowest rating as it was with Moody's before this. So it doesn't impact the cost, and I would say it doesn't impact the way we are running the business, and the way we are doing the transfer from guaranteed to non-guaranteed business in any way. But seems to be quite a lagging indicator. I agree with you in that.
Thank you.
We have no further questions, so callers, please be reminded, if you wish to ask a question, please press star one on your telephone keypad.
Well, if there's no further question, then we would like to take the opportunity to wish everyone a nice summer, and thank you for dialing into our second quarter conference call.
Tomorrow.
Tomorrow, we will be in London, and I hope to see as many as possible of you there at 14:00 hour at our analyst meeting. Thank you.