Good morning, ladies and gentlemen. Welcome to Storebrand's second quarter 2013 conference call. My name is Trond Finn Eriksen, and I'm Head of Investor Relations at Storebrand. Together with me, I have Group CEO, Odd Arild Grefstad. As we have notified, the slide presentation will be running on the webcast available on storebrand.no/ir. The slides are similar to the analyst presentation released this morning. In the presentation today, Odd Arild Grefstad will be given an overall view of the development in the second quarter and first half, 2013. 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 CEO, Odd Arild Grefstad. Mr. Grefstad will present starting on the slide.
Thank you, Trond, and hi, and good afternoon, everyone. I'd like to start by slide number two, use the slides two to seven for giving an overall view of the results in the second quarter. First of all, there's a result of NOK 518 million this quarter. It's NOK 1,070 million altogether in the first half of 2013. The result develops according to plan. Fee and administration income has increased with more than 8% compared with the same period last year, and the cost program contributes to a nominal cost reduction compared to last year. The conversion from guaranteed to non-guaranteed products continues with full force, and NOK 8.3 billion has been converted out of the guaranteed products so far in 2013.
In the same period, we see a strong growth in unit-linked reserves of actually 27%. It's increased from NOK 58 billion to NOK 74 billion in one year. We also strengthened the balance sheet, and the solvency ratio is increased by 9 percentage points to 174% over this quarter. I have also made a structural change in our organization to strengthen the implementation of our strategy this quarter. In addition, as you see, and have noticed from the presentation, we have adjusted the reporting structure accordingly. The reporting structure now focuses on results and value drivers within the segment savings, that is, non-guaranteed products, in insurance and in guaranteed pension and in other.
If we then move from to slide number three, then you will recognize the illustration that we have been used the last quarters. This illustration shows the measures we are taking to manage the balance sheet on the one hand side, and especially the guaranteed portfolios. And on the other side, developing the business with profitable growth within non-guaranteed savings and insurance. This includes both, sustaining our leading market position within occupational pension, and especially non-guaranteed products, and increasing our retail sales to employers and former employers through worksite marketing and distribution, and developing a market to consumer concepts. If we then move to slide number four, we have an update on the development on the left-hand side, how to manage the balance sheet.
If you start by looking at the box at the left corner, we see that we have been able to move NOK 8.3 billion transferred out of guaranteed portfolio by the first half of 2013. In the first quarter, we saw a positive effect from the closure of the public DB book, where we were able to move NOK 6 billion transferred out in that quarter. There's still NOK 14 billion that is waiting to be transferred out of the balance sheet in the coming couple of years from the public sector balance sheet. But also this quarter, we have been able to move NOK 1 billion from the guaranteed products into non-guaranteed products. Within the risk reduction area, we continue to build our portfolio on bonds held at amortized costs.
This quarter, we have been carrying out the transaction that we announced in the first quarter, and have been selling seven shopping centers. That is the same as 13% of the real estate portfolio altogether. If you then turn to the cost program on the right-hand side, the bottom of the slide, we see that we are proceeding according to plan when it comes to a run rate so far of NOK 174 million in cost reduction. Most important measures that has been taken in the second quarter has been a reduction in the workforce, a continued movement of employees from Norway and Sweden into our operations for back office in Storebrand Baltic, and also an optimization of the regular distribution network in Norway.
If we then move to slide number five, I would like to give some comments on the reason for our new organizational structure. First of all, I want to make a clear distinction between business and growth, and business with guarantees. And the new structure effectively marks this distinction. Secondly, the new organizational structure clearly establishes an aim of one bottom line for the group, one Storebrand. It also is designed to reduce complexity by reducing the number of reporting lines, as such, and furthermore, we strengthen our customer orientation, with clear responsibility for product and concept development within the commercial areas in Norway and Sweden. Lastly, Nordic synergies and further cost reductions are important. In this model, only the commercial areas are national, and all the other units have Nordic mandates.
It's also very pleased to introduce Staffan Hansén and Heidi Skaaret as new members of the executive team. They are both experienced leaders within the group and have excellent track record of implementing changes. Staffan Hansén's responsibility within savings has both asset management business and retail banking responsibility within it. If I then turn to page six and take a closer look at the results for the quarter, you will find the top part of the slide as a well-known structure that has been used for a couple of years now. So that is a well-known format.
If you look at the figures, you will see that the fee and administration income on life insurance, bank, and asset management amounts to NOK 2.1 billion for the first half of 2013. That is the number that is 8% increased from the corresponding period last year. We also see that nominal costs of NOK 1,671 million is nominal reduced compared to the same period last year. If we then turn to the bottom part of the table, we see the group result in the different business lines that we like to report on going forward. First of all, savings, which consists of defined contribution, unit-linked, asset management, and retail banking. It shows a strong growth of 62% from the corresponding period last year.
This is the main growth area for us, both when it comes to top line and bottom line, also going forward, and we expect to see top line and bottom line growth quarter by quarter. Insurance is also up in the quarter, shows strong results. As for guaranteed pension, price increases on price on the interest rate guarantee has come through with NOK 172 million for this quarter. Combined with cost reduction, the results is strong on a quarterly basis when it comes to guaranteed pension. I also like to give some comments on other here. Other is negative NOK 64 million. This number is negatively affected by the fact that we have been seeing double interest payments on subordinated loan this quarter.
A new subordinated loan was taken up early in the quarter, while the old one was repaid at the end of the quarter. This has led to a situation with NOK 30 million in costs for a subordinated loan that you should not expect to see in the next quarter. There's also restructuring costs in this number when it comes to the corporate banking activities. The corporate banking activities are in runoff in Storebrand, and we have made a provision for restructuring on something about NOK 20 million in this number. So you should not expect us to have a NOK 64 million negative on others going forward. It should be more like a NOK 20 million-NOK 25 million negative going forward.
If I then turn to page seven and wrap up this introduction by looking at the key figures on the overall level. We continue to see a strong improvement on the quality of earnings. It's now at NOK 463 million in the result before profit sharing and loan losses. If we then add on the one-off elements with the interest rates, we see that we have a run rate as we speak of about NOK 500 million in the result before profit sharing and loan losses. Earnings per share is reported to be NOK 1.43 this quarter. The reason why this high number is that we have seen due to the fact that we have sold real estate in the quarter.
We have sold real estate, as a part of companies, and not real estate in itself, and this has led to a positive tax effect. The temporary tax differences has been taken into account and given a positive tax effect in itself by NOK 245 million in the quarter. And that, of course, adds to a very positive earnings per share in the quarter. It also adds, together with, a good result altogether, and also an increased interest rate level in Sweden, to, increase in the solvency ratio of 9 percentage points to 174% for the quarter. So that is very much what I like to dig into the numbers as a starting point.
Then on the coming slides, we have drilled down in both the savings, insurance, and the guaranteed portfolio, as also for others. But I'd like to sum this session up by stating that the top line growth is strong, it's 8.2% year to date. That is combined with a nominal flat, actually, somewhat lower cost levels compared to last year, and the cost program are performing according to plan. As we are able to transfer our guarantees into non-guaranteed products, has been doing that with NOK 8.3 billion so far this year, and that is even before we have the opportunity to work with our paid-up policies and move them now over to paid-up policy with the investment choice.
We also see that the solvency ratio has picked up to 174%. Thank you.
Thank you very much. The operator will now open up the session. To be able to, to ask questions, you now need to,
To queue up for questions, please press star, then one, followed by a one. I repeat, star one for questions. First?
Matti Ahokas, Handelsbanken.
Please go ahead.
Yes, good afternoon. It's Matti here from Handelsbanken. Two questions on the new reporting structure, if I may. Firstly, when looking at the savings division or business area in isolation, I think it's very good that you've split it up this way. But when we look at the kind of growth and targets you would have on this area, what should we be looking for? Is the 141 a figure which is okay or not? And also, I was wondering, in terms of capital allocation in the new reporting structure, obviously, previously, you didn't report the capital by business area either. But I was wondering of what kind of thoughts and what kind of capital allocation in the new reporting structure should one be looking at? Thanks.
I mean, I start with the capital allocation. I said that at this stage, we don't put down to start reporting the capital assumption for different lines of business. You could, to some extent, do that by taking the Solvency I, the Solvency I capital requirements on their savings for the unit link business, takes the capital requirements for the retail banking. So it's you could do it quite easily on an overall level. Then the second question would be, what is the true economic capital distribution? Which is somewhat more complicated question.
But, it's quite easy to do it on an overall level based on today's capital requirements. But, we have no intentions of starting to report it that way.
If I then comment on, on, result and, expectations for results on savings going forward. Of course, if you look at the total setup that we have, is NOK 310 million out of NOK 518 million from the guaranteed business. A lot of our guaranteed business will continue with us, especially in Sweden going forward, so we will expect to see results on the guaranteed business for years to come. But you also know that there will be a transfer from, the DB portfolio in Norway due to new regulations into new products, hybrid products and DC products. And also, as I have alluded to, seen, quite a stunning growth, actually, when it comes to DC, and, unit-linked type of products, both in Norway and Sweden.
So, I expect, of course, to see strong growth in this area going forward, and I also expect to see strong return results generation from this area. NOK 141 million, that is a strong growth compared to last year, but that should also be the case going forward. And this is the area where we have to make sure that we have a result, the generation that will, over time, take over from the guaranteed business result generation. So this is a very important area for us, both when it comes to growth, but also very much when it comes to taking out the results on the bottom line.
When you talk about those growth year-over-year in the second quarter, do you mean percentage growth or absolute NOK millions when comparing the Q2 result this year to last year, the NOK 141 million to NOK 81 million? Is that the trend we should be looking at or what?
Well, it's hard to guide on 62% growth on an annual basis, of course. That is a tough call, but then again, we have now structured our business very clear into non-guaranteed and guaranteed business. We have done the right cost allocation as we view it, and that has actually reduced some of the results, because we have allocated more sales costs into, especially the Swedish business, in this quarter compared to last year. So that masks actually out some of the result generation from these products. We have the setup now, where it's very clear about the value drivers, where we should reduce the cost in the guaranteed business, and where growth and profitability is the drivers on the savings area and insurance area.
I am careful giving you a very strict quarterly basis, but this is really where we like to see that our results in 3-4 years' time is the dominant result generation area for Storebrand.
Great, thanks.
If further questions, please press star one. Next?
Peter Eliot, Berenberg.
Please go ahead.
Thank you very much. I have a couple of questions. First of all, just on the old reporting format, and I've sort of referred back to your supplementary information for that. On reflection, I'm wondering whether it's a typo, but perhaps you could confirm. You're showing NOK 665 million of net earned premiums for the insurance business for this quarter. And that's both on my figures and what you're showing on page 36 of the supplementary information from NOK 513. So a huge increase. I'm just wondering if that's the right number, if you could explain what's driving that? The second question was on the bank, where the net interest margin has gone up a lot. I was wondering if you could just perhaps talk about the drivers behind that.
And then perhaps just to follow up on the last question, now that we've sort of changed the reporting structure. On the old structure, I know some of your guidance and targets were a little bit out of date with the changes that have gone on, but nevertheless, we had sort of some sort of idea as to what we were sort of going to over the next year or two in administration results. And I guess now that we've changed that, it's less clear how that translates. I'm just wondering whether you can give any.
I mean, I know we can sort of back out the savings that you're going to make on the cost side, and hopefully that should all translate through into or largely translate through into earnings. But I'm just wondering whether you can give us any guidance on where you would hope some of those items might move to over the next year or two? Thank you.
If I may start with your first question, Peter. Yes, you're right. The premiums shown on page 36 of the supplementary information show quite a large pickup from Q1. The reason for that is because it's not comparable figures. As we have stated above the table, we moved the Bonnier disability insurance products from the life company to under the reporting to the insurance. We're not able to at this point also give updated historical figures. You will get that in due course. Those figures are not comparable.
You need to look at what we report under insurance to get under the new reporting segment, to get actually comparable comparable figures. So that's for that.
Okay.
Yeah.
If I start commenting on the retail banking, you're absolutely right. You have seen, and we have it on slide number 9 on the package also, how the interest margin on retail banking have picked up during the second quarter. It's been on around 1 percentage point in interest margins, picked up to 1.23% this quarter. And that is what we have seen in Norway is that the market leader, DNB, has really been pricing up retail banking products. It's due to the fact that there will and are stronger expectations for capital when it comes to regulations going forward. And that is already implemented to take higher margins on these products in the market.
Most of the bank has followed that to make sure that we have a margin taking out these results as we speak. That is, retail banking in Norway these days is earning quite a lot of money, actually.
Mm-hmm.
When it comes to guiding on administration result, I would say that our guiding as and the focus from our cost programs is still the same. So the guidings we have talked about in the increase in administration results, both in Sweden and in Norway, is very much the same. And we see that we are developing according to plan and have a strong increase, especially in the Norwegian administration result this quarter. The Swedish administration result was NOK 10 million down from last quarter. Of course, we are working to make sure that we also have a further pickup in administration results in the Swedish business. And so altogether, we are moving towards the goals we have already set forward to you.
Okay. Thank you.
Next?
David Andrich from Morgan Stanley.
Please go ahead. Hello, we can't hear you. You must be muted.
Apologies. Good morning. Yeah, my question is on the disability insurance experience for SPP. I was just wondering, in terms of you stated that it's weaker than in previous years, and that reserve releases have been lower. I was just wondering what kind of corrective actions you've taken, whether you see this coming back?
O r whether you think this will be kind of a continuing issue going forward, and if maybe we should expect some additional or increases in reserves like we saw in Q1 in Norway?
What was your question about the risk, part of the SPP, or?
I think when we acquired SPP back in 2007, we had a number of years with very good risk results due to low visibility in the Swedish market, and we had quite a lot of releases of reserves. Then we have actually been guiding at the levels that we are on now, around the SEK 30 million on a quarterly basis. And from what we see in the Swedish market now, that seems to be quite correct, to put it that way. And as such, we don't foresee any need for either re-releasing or strengthening those kinds of reserves.
Saying that, they are, the reserves will always be adjusted to what you observe in the market. So-
I agree. It's on a normalized level, what you see this quarter. And I don't see in the foreseeable future any risk of a negative effect in this risk result. So that should be a quite stable situation as we see it today.
Okay, great. Thank you very much.
If further questions, please press star one. At this time, no further questions.
I'd like to thank you everyone for joining the call today, and wish you all a pleasant summer.
Goodbye.
Bye. Good summer.