Ladies and gentlemen, welcome to the Storebrand analyst conference call. My name is Jacob, and I will be your coordinator for today's conference. For the duration of the call, you will be on listen only. However, at the end, you have the opportunity to ask questions. If at any time you need assistance, please press star zero, and you will be connected to an operator. I will now hand you over to your host, Trond Finn Eriksen, to begin. Thank you.
Thank you, and good afternoon, and welcome to Storebrand's second quarter of 2014 conference call. My name is Trond Eriksen, I'm Head of Investor Relations at Storebrand. Together with me, I have our Group CEO, Odd Arild Grefstad, and Group CFO, Lars Aa. Løddesøl. In the presentation today, Odd will give an overall view of the development in the second quarter of 2014, and Lars will give some more details on some elements in the results. The slides will be the same as 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 need to dial into the conference call. I will leave the word to Storebrand CEO, Odd Arild Grefstad, who will start the presentation on slide number two.
Thank you, Trond, and thank you all for joining us today. Starting on slide number two, Storebrand delivers a strong result for both second quarter and the first half of 2014, with NOK 750 million in the quarterly result and NOK 1,477 million for the first half. There's been strong equity markets and reduced interest rates during the first half. That has given a good financial result in the company portfolios and for the insurance reserves. It has also led to a profit sharing result of NOK 188 million in our Swedish operation. I'm very pleased with the good results, but I'm just as pleased with the increase in buffer capital.
The buffer capital, including longevity reserves, has increased by NOK 5.8 billion in the first half, whereof an increase in NOK 4.5 billion in the second quarter. These buffers are solid and important in a period with low interest rates and a need for longevity reserve strengthening. Operationally, the transition from guaranteed to non-guaranteed continues. Our guaranteed pensions, fee and administration income is reduced by 12% from the corresponding quarter last year, and our income on non-guaranteed savings has increased by 13%. The cost reductions are following the plan we have set, and is nominally down by 5.4% compared to the same quarter last year. Lastly, the asset management division is developing positively and have now passed NOK 500 billion in assets under management.
There's a corresponding strong development in income and a strong reduction in costs that gives solid results from the asset management business. Moving to slide number 3, Lars will give some more insight in the results. I just want to comment upfront on the development in the fee and in administration income. That shows quite a flat development in the first half of 2014 compared to the same period last year. There are two powerful forces that drive this development. First of all, the discontinued business with the corporate bank and the public sector that is in rapid runoff, and the income from these areas are declining. Secondly, we see that the shift in the business mix also impacts the top line. The non-guaranteed savings and insurance is growing quite rapidly, while income from guaranteed pensions is reduced.
These effects will continue to affect the fee and administration income line also going forward. Let's then turn to slide number four. As usual, this slide introduces our review of measures taken in the quarter to transform the business into changed market and regulatory conditions. Our goal is clear, and that is to move the business into Solvency II without raising new equity capital. Let's turn into the next slide and look what is going on in the second quarter. We continue to adopt measures in the business to ensure the right capitalization of the business. I want to highlight the following action in the second quarter. First, on capital optimization. There has been a limited transfers from guaranteed to non-guaranteed in the quarter.
The bulk of the transfer in the first half was done in the first quarter, with NOK 7 billion of public sector funds moving out of Storebrand. However, we do expect that at least 85 clients with NOK 5 billion in assets will move at the second half of 2014 out of the guaranteed public sector assets. I'm also delighted to see that we are managing to pick up speed in the non-guaranteed fee-based part of the public sector. During the second quarter, we won two tenders to provide asset management and close pension funds solutions to two large municipalities in Norway... Bærum and Tromsø, for those of you who are familiar with Norwegian municipalities. That represents NOK 7 billion in assets in the management that will be moved to Storebrand in the second half and the first quarter of next year.
It's also worth noting that the runoff of Storebrand Corporate Bank is being implemented in a good and effective manner. The loan book has been reduced by 36% last year. Within risk reduction, I would like to spend time on the segmentation of the paid up policy portfolio. We implemented the segmentation at the beginning of the year. This segmentation is important to reduce the shareholders' direct contribution to the longevity reserve strengthening. It will be further refined going forward to implement the conversion to non-guaranteed paid up policies with investment choice. Then we skip slide six and move into slide seven. The regulations for longevity reserve strengthening was clarified this spring. Storebrand will strengthen the reserves by NOK 12.4 billion over a period of seven years.
We have managed to increase longevity reserves with NOK 2.1 billion, the first half of 2014, and that is without assuming the so-called solidarity. In the graph, this NOK 2.1 billion is grouped together with the NOK 4.2 billion set aside by year-end. The NOK 4.2 billion will be recalculated during the third quarter, as previously communicated, and we expect the number to be reduced by about NOK 400-NOK 500 million when it is adjusted for solidarity. Other buffer capital is strengthened, and our most flexible buffer, the market value adjustment reserve, is now on NOK 3.7 billion. On top of this, we have NOK 8.9 billion in our value in bonds held at amortized cost.
We have not changed this quarter the assumptions about owners' share to longevity reserve strengthening, and have charged NOK 90 million directly on the results also this quarter. Moving down to slide number eight, the Ministry of Finance released regulations regarding paid up policies with investment choice on the 27th of June. The content was as expected. That means paid up policies need to be fully reserved for longevity. A technical 3% rate in the payout phase to even out the payments is allowed, and there is rules for customer advice. We strongly feel this is good news for the paid up policies customers, which get more options and a possibility to increase the pension by moving to a more long-term asset allocation. Storebrand is well prepared and ready to deliver the product during the autumn.
We will assess the cost of topping up the contracts with equity to make it fully reserved for longevity against the positive effect this will have for our customers, for capital release and the solvency too, and increased sales on non-guaranteed products. Then I hand over to you, Lars, to give some comments on the results.
Then I would like you to move to page 11 with the heading, Storebrand Group Strong Investment Reserve Returns, and I will only comment on this page. Mr. Grefstad has already commented on the results overall, and I would like to comment a little bit more on the result per line of business on the same picture. Under savings non-guaranteed, you will see that there is a 63% improvement in results year-on-year from last year. There has been a 26% increase in non-guaranteed reserves within the pension business, Unit Linked business, driven by good customer returns and large payments into these reserves, and very few payments out of these reserves as a consequence of this being a young portfolio. Furthermore, I would like to comment on premiums.
Premiums have gone down from the second quarter last year. That is a result of lower one-off premiums due to us leaving the public sector in the Swedish market, and because of the transition in the way we sell more savings-based unit-linked solutions rather than one single payment single payments. The underlying development in the defined contribution rates in Norway is 14% and 18% in Sweden. So the underlying savings continue to grow, but single premiums have gone down and therefore reduced the overall premium quarter on quarter. Under the insurance business, the results are more normalized after a very strong first quarter, and we commented on certain one-off effects in the first quarter.
The results for the second quarter are strengthened by good financial return, but weakened by reserve strengthening in certain business lines as a result of somewhat higher disability and deaths, but we have increased provisions by NOK 45 million altogether. The combined ratio is at 90% on an overall basis, but in the P&C business, the pure P&C business, the combined ratio is 83%, and the growth in the P&C business is 11%. In the guaranteed pension business, the results seems quite stable. However, there is a weakening of the defined benefit profitability in Norway due to the reduction in municipalities and the longevity reserve strengthening.
That is compensated for by very strong profit sharing in the Swedish market due to high booked return in the guaranteed portfolio in Sweden at the level of 7% year to date. That has given good profit split, and NOK 188 million in the quarter standalone. The level of reserves in the guaranteed portfolio has gone up by 2% in the quarter. That is a consequence of higher liabilities measured in Sweden when you discount by a market rate. So even if this guaranteed portfolio is in decline with a lower interest rate discounting factor in Sweden, the liabilities increase. Within other, the good results are due to a good financial return on company portfolios, as well as lower cost in the holding company.
So that basically sums up a somewhat more detailed discussion of the different business areas. I give the word back to Mr. Grefstad.
Who leaves the word next? Back to Mr. Eriksen.
Thank you, Lars. Then, the operator will open up for questions. To be able to ask questions, you need to dial into the conference call.
Yes. 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, and you will be advised when to ask your question. The first question comes from the name of Peter Eliot from Berenberg. Please go ahead.
Thank you very much. I had three questions, please, if I may. First one was, we heard from your main competitor recently that it was increasing some of the risk in its asset portfolios, that policies that still needed longevity reserving, because they felt that the risk/reward profile of doing that was very attractive. It doesn't look like you're going down that route at the moment. I was wondering whether you know, that was something that you might consider, and if not, then perhaps what the... You know, why you might not consider doing that?
The second question was, given that your returns have been very good, the NOK 90 million per quarter charge, I appreciate it's very early to revisit that, but, I'm just wondering, you know, whether the, at what point there, there might be some scope to reduce that quarterly charge in the future. Then perhaps a third thing was, on Solvency II . I mean, I appreciate it's very difficult to be scientific, but you referenced a reduction, which obviously isn't a surprise at all, given the, the drop in interest rates.
But, I'm just wondering whether you can give any sort of qualitative feeling about, you know, at what level you still, you know, remain very comfortable of not needing or, you know, at what level you might sort of start to think about transition rules, or just whether there's any comment you can give in that sort of area. Thank you very much.
Okay, thank you. If I start answering the first question about the risk profile. If you look at slide number five, you will see that we have done actually already by the start of the year a segmentation of the head of policy portfolio. And that is very much to make sure that we have the right risk profile in the different areas, and especially based on the longevity reserves in the different sub-portfolios. We have also looked very closely into, of course, our competitors' asset mix. We see that we have a very comparable asset mix to our competitors. There might be some changes or differences in expected return on the different asset classes.
But overall, I think you can see that the strategy of DNB and Storebrand anyway is very much the same on this area. And we do, as we always have, look forward to have as good and even better return than DNB going forward.
Could I just come back on that very quickly, actually? It's just my understanding of the slide five that you showed there, is that it's the business with the lower buffers that has the lower equity proportion, whereas they seem to be doing something a bit the opposite. Maybe I've misunderstood that, but...
No, this is based on very much as we did. By the start of the year, we saw that the increased life length would come in place, and based on that WE actually made these portfolios and also focused on having more risk capacity on the portfolios with the need for the highest reservation, based on the fact that we have a best risk reward for shareholders in that portfolio.
Okay.
That is an ongoing process, and it'll be refined also now for getting as much speed as possible into the market of investment choice products going forward. On the second question, Peter, whether we will revisit the NOK 90 million. At the end of the year, we will know how much we've set aside this year. We will know how the paid policy with investment choice market has started, and we will know the expected return next year. At that time, it makes sense to revisit whether the NOK 90 million should continue. I don't envisage that we will change it on a quarterly basis, if nothing very large happen in between. So, if that's okay, does that answer your question?
Yes. Thank you.
With respect to the Solvency II sensitivity, we can only refer to the Embedded Value reports and so on, where you will see some of the economic value sensitivities to interest rates. We are not changing any of our plans in terms of being able to go into the Solvency II regime without having to raise new equity as a result of the lower interest rate at this stage.
Great. Thanks very much.
Thank you. The next question comes from the line of David Andrich from Morgan Stanley. Please go ahead.
Hi, good afternoon. I have two questions on my side. First, I was just wondering if you could maybe comment on the competitive environment in the DC market in Norway, in particular, when it comes to the risk products and the disability embedded within it, whether you're able to charge adequate amounts to cover that risk. And then second of all, just in terms of, you know, it sounds like there's about NOK 29 billion or so in the paid up portfolios, where you think, you know, there's a reasonable likelihood that a, you know, portion of that would switch over.
I was just wondering, what kind of timeline do you see that happening over, particularly with the longevity reserving that would have to be done, whether you would try and push that a little bit faster or take it more evenly, or, if you could just comment on that? Thank you.
Yeah, if I start with the environment for business in Norway, we don't see any large changes in the competitive environment, I would say. It's quite stable. It's been, of course, as you know, quite a concentrated market, especially for large corporates in Norway. We have over 30%-31% market share in defined contribution in Norway. Then it's, of course, other areas for some of the risk products, where there are much more competition and more players in the market. And that, of course, has also been the situation for quite a long time.
So the basic question is that there is no change in that environment compared to what we have commented on the last quarters, and then I will also say years, actually.
Okay.
When it comes to the paid up policy market, of course, it's—I think we are all very eager to see how that develops. It's a new market. It's a lot of individual choices by individual customers. Only Storebrand has around 500,000 customers in this area. And we are very much prepared, and we feel that when you look at the media that is quite concerned about this in Norway these days, and also the expert that is talking about this is a positive expectation around the product.
I think everyone now understands that it is not a very good way of doing long-term managing of long-term assets by having it in a portfolio that is focused on having short one-year goals. And it leads to a situation where long-term very much our customers will have a much higher pension by moving into investment choice. And on your direct question, it's very hard to say how fast and how much of this market as we speak we will have... be able to move.
On your question, I will say that we are prepared to use equity to make sure that some of the customers that want to move from today's paid up policies into investment choice have the opportunity to move into investment choice even if they are not fully reserved for longevity.
Okay. Thank you.
Thank you. The next question comes from the line of Matti Ahokas from Danske Bank. Please go ahead.
Yes, good afternoon. It's Matti here from Danske. Three questions, if I may. Firstly, Lars, you mentioned that 45 million was increased, the reserves were increased by NOK 45 million in the insurance business area in the second quarter. Can we expect that these reserve increases will continue, or was this more of a one-off effect so that kind of the normal run rate would be NOK 45 million higher than we saw during the quarter? The second question is on the SPP unit link margins. We saw a fairly significant increase, but on the reserves, but the margins were down. If you could comment what was the reason for that?
And then on this page eight, on the paid up policies, the NOK 29 billion that you discussed, how much of the NOK 29 billion is currently fully reserved for, for longevity? Thanks.
On the first question on insurance reserves, we've basically done three minor reserve strengthening as a consequence of adjustments in three different portfolios. We are not planning, as a consequence of the results we've seen so far in the second quarter, to do anything further in any of the business lines. These are only regular adjustments in three different portfolios, and there is no expectation to do anything more to start at this stage.
Yeah, I think the second post, the question of Paul, was about the margin in SPP. I think, the answer on that is it's more about cost allocation, internally. It's not about, really the price we are able to take to our customers. That is stable, from quarter to quarter.
On your last question, out of those NOK 29 billion, which we have said we have a good value proposition to transfer into investment choice, NOK 3 billion is currently fully reserved.
Great. Thanks a lot.
Thank you. And we currently have one final question from the line of Daniel Gurtovy from JP Morgan. Please go ahead.
Hi, good afternoon, Daniel Gurtovy from JP Morgan. I have two questions. The first one is on defined benefit and the decline in the fee income margin here. I mean, I appreciate that some of the margin contraction is purely due to mix effect with public and tech pensions being transferred out, but the decline, nevertheless, seems to be a bit higher than I anticipated. So, I mean, if you could just comment on whether there are any other factors here. And secondly, you've mentioned the NOK 7 billion in closed pension fund solutions from municipalities. I was just wondering if you could talk about perhaps the business opportunity from taking on additional closed funds going forward. H ow big is the market here?
Also, what is the potential impact on your financials? Thank you.
If I answer the first question on defined benefit margins in Norway, they are stable and, if you, the fall in revenues is generated as a consequence of the fact that the municipalities have moved, as you said, and also as a factor of companies closing their defined benefit plans. In addition, there is a periodic effect where we had slightly too much revenue generated from the accounting point of view in the first quarter and slightly less in the second quarter, but the year-to-date numbers are more accurate than the quarterly numbers in this context.
Okay.
Okay, when it comes to closed pension funds, I would say the market is, it's a large market actually. And we see it's more in a starting point for the large municipalities to start to open up closed pension funds. And especially in this situation, where both Storebrand and DNB, who was the only competitors to KLP, in the public sector markets. We see that now a lot of public sector clients only have one solution if they like to have a guaranteed business with an insurance company as such, and that is moving into KLP. And that also opens up for the opportunity to both reduce cost and more flexibility and move into closed pension funds so I would say that this is a growing market.
It's a very interesting market, and we also see that there will be, and we are in tender offerings with large municipalities, as we speak, that will be closed during this autumn. So it's an interesting market for us. When it comes to the margin, of course, it's a... Well, first of all, we have the results directly by managing this, but on top of that, we also have margin in asset managed by managing these assets. It's of course margin that you see in the market today when it comes to this kind of levels of assets under management. But then again, it is almost zero cost by taking on additional assets in asset management. So this in that respect gives very good results.
Okay, but for example, if I were to look at, for example, revenue margins in isolation, would it be a fair assumption, for example, to take the NOK 7 billion, and assume your current average revenue margin of something like 15, 16 basis points within the asset management business o r would it be considerably higher or lower than that?
I think that a lot of this, of course, will be interest rate instruments, but it's around the 15 basis points, should be ballpark.
Okay, thanks. Can I just follow up on a previous question that was asked? That was on the paid up policy transfers, the NOK 3 billion of the NOK 29 billion being fully reserved at present. What of the remaining NOK 26 billion then, what proportion of that is close enough to being fully reserved, that you would be happy to facilitate a conversion by contributing shareholder funds?
Well, this has all to do with also the segmentation we're doing in the portfolios these days. And we prepare for making a portfolio that is sustainable to start working with. And of course, we will use our sales force, we will use our marketing effort directly on the customers that has the what we call the greenest value proposition. That means that they have most to gain from moving into investment choice, in combination with also limited use of equity to move into investment choice. And what we have been working with is a portfolio of around NOK 10 billion that could be available in first go to be able to move into that kind of portfolio.
Of course, going forward, as we increase our reservation, and as we have been through the first portfolio, it will be filled up with new customers and values, of course. That is our sales direct. We also expect of course some clients, even if we are not doing direct marketing to them, to contact us to move from today's paid up policies into investment choice. We are prepared to let also these people move into investment choice, but of course, with some limits on the use of equity going forward.
Okay, great. Thank you.
Thank you. We have now another question from the line of Paris Hadjiantonis from KBW. Please go ahead.
Yes, hi. Thank you for taking my questions. I have two today. The first one will be on debt. From what I can see, you have one instrument maturing pretty soon. Are you planning to refinance this? And also, if you do, to what extent you are able to use additional debt to better your current solvency position? And the other one would be on MCV and sensitivities. Can you give us an idea of how your sensitivities have moved post the solidarity announcement? I would expect that actually, your sensitivity to a downwards move to interest rates would have increased. Am I correct in this assumption? Thank you.
If I start with the last question, Paris, yes, you're right. Declining interest rates usually also increase the interest rate sensitivity.
Okay. And, do you, do you have an idea of how much that is, or can you tell us how much that is, in broad terms?
I haven't, I don't have any updated, Embedded Value calculations in front of me, so, I don't think, I should go in, down that pretty nice to move into without doing a proper, calculation, but I think that it's fair to say that, it has probably increased, by how much, I don't think I should answer.
Okay, thank you.
Or I can't answer.
Mm-hmm.
When it comes to the debt refinancing, we have refinanced all of the subordinate debt for this year, this summer. There are some debt of the holding company, a small amount due in late autumn, that will be refinanced. And then there is another NOK 1 billion of subordinate debt in the life company next summer, which we are, of course, planning and in the process of replacing with another subordinate debt when the market and timing is right. When it comes to the capacity under solvency, I mean, we do have room for more capacity under Solvency I, and we will have even more room for more subordinate debt under Solvency II.
During the last three to five years, the equity of the group has been growing, so the relative portion of the debt is lower. The solvency, the optimization towards Solvency II will also include considerations of what the right debt makes.
Okay, thank you.
Thank you. We currently have no questions coming through. As a reminder ladies and gentlemen, please press star one if you would like to ask a question.
If no further questions, I would like to thank you, all of you, for joining the call this afternoon. I would also like to remind you that we will be present in London tomorrow, and we will hold a presentation at the Chartered Insurance Institute at 2:00 P.M. U.K. Time tomorrow. So, hope to see some of you there. Have a nice evening.
Ladies and gentlemen, thank you for joining this call. You may now disconnect your line.