Good afternoon. Welcome to Storebrand's first quarter 2013 conference call. My name is Tom Erikson, Head of Investor Relations at Storebrand. Together with me, I have Group CEO, Odd Arild Grefstad, Group CFO, Lars Aasulv Løddesøl, and Finance Director, Sigbjørn Birkeland. As we have notified, the slide presentation will be running on the webcast available on storebrand.no/ir. In the presentation today, Odd Arild will first give an overall view of the development in Q1. Lars will take us through the numbers before Odd Arild will wrap it up. 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. We should start the slide presentation on slide number 2.
Hi, and good afternoon, everyone. I'd like to start by looking at the highlights from the quarter on slide number 2. Over the past 6 months, we have talked a great deal about our measures to meet the new regulatory changes, a low interest rate environment, and a pension market in transition. We have focused our measures around cost programs, increased price increases, and conversion from guaranteed to non-guaranteed products. In this quarter, we see a concrete proof that the measures have delivered effects, both on the result and on the balance sheets. Income has increased. We have delivered a nominal cost reduction from last quarter, and an increased premiums on non-guaranteed products by 17% compared to first quarter 2012. If you look closer on the results, we see a group result of NOK 552 million.
The income is strengthened by increased administration income, price increases on interest rate guarantee, and growth within DC and linked products, and the cost program proceeds on schedule. Within operations, we have completed several actions in the quarter. Among others, we have sold the NOK 1.2 billion guaranteed municipality portfolio in Sweden. In this quarter, we also had the new mortality tables from the Financial Supervisory Authority in Norway. In March, we have estimated a total reservation requirement of NOK 11.5 billion, of which NOK 4.3 billion already was reserved in 2011 and 2012. The reservation has to be completed within six years, including this present year.
Looking at the balance sheet, we see a strong growth in asset management, NOK 12 billion in the quarter, and that is despite a 6 billion transfer from public sector DB, as announced earlier. A strong growth in the balance sheet, but an even stronger growth in the solvency ratio, which has grown from 162 to 165% in the quarter. There's also an increase in the buffer capital of NOK 1.5 billion in the quarter, of which 0.7 billion is available for longevity reservation, leading us up to a sum of NOK 5 billion in reservation for longevity at the end of the quarter. If we then move to slide number 3, looking at the result from the different business segments, we see that the underlying results are strengthened.
In the first quarter in 2012, there was a strong financial market, which results in a very positive result for SPP. The SPP result in the first quarter of 2013 is also influenced by a strong financial result, but not at the same degree as we saw last year. In this quarter, we see improved administration results in Norway and in Swedish life business, combined with an increase of fee for interest rate guarantees, which is the main driver for the positive improvement in the business. It seems like this element is the explanation why the result is approximately 10% or NOK 50 million higher than the consensus analyst estimates. With that said, I will now give the word to CFO, Lars Aasulv Løddesøl, who will give a bit more insight into the numbers.
Thank you, Odd Arild Grefstad. We show solid results from the Storebrand Life Insurance Group, with revenue growth from increased administration reserves and reserve growth, as well as a stabilization of the cost level and indeed, a cost reduction over the last couple of quarters. This improves the administration result to 55, as compared to 20 last year. The risk result is weakened in the quarter by the disability insurance related to defined contribution coverage. What is happening here is that people become disabled pretty much as expected. However, we have an estimate and an expectation as to how many people that have left the working life, comes back into working life after a period of time, called reactivation.
That assumption has been changed, and we have strengthened reserves accordingly in the order of, in the magnitude of about NOK 40 million. The financial result is fairly as strong as a result of good financial result in the company portfolio. And I'd like to emphasize the profits from risk and interest rate guarantee at 178 is a significant improvement from last year and shows that the pricing we did last year, both in the public sector and the private sector, guaranteed portfolios have come through and improves profitability of this business.
Through sufficient returns in the different portfolios, we have managed to build buffers, of which about NOK 0.7 billion or NOK 700 million is going to be available for longevity reserves at the end of the year. This comes in addition to the NOK 4.3 billion we have already. Moving over to SPP, the administration result is stable compared to first quarter last year, but a significant improvement over the third and fourth quarter as a result of income measures and cost program. Risk result is more at a normalized level after a number of good years in the past, and the financial result is deemed to be strong, although weaker than the first quarter last year, as Odd Arild already alluded to.
It seems like the financial result is also somewhat stronger than expected by analysts in their previews. The explanation for that is, first and foremost, credit contraction, where it's difficult to assess from the outside the exact nature of our portfolio. We've had a good development in terms of both duration and picking of papers, which has given a result which is somewhat better than you could have seen from the outside during the quarter. However, this will fluctuate during the year, so some of it may be reversed at a later stage. Worth to notice also is that the indexation fee has been brought to the income statement by NOK 20 million.
As you are familiar with, this is a binary situation that where if we have sufficient consolidation in the end of the third quarter, we can index the portfolios and take out an indexation fee, and if the consolidation is insufficient, we cannot do it. So far, the consolidation is more than sufficient to take out the indexation fee, and we're therefore taking out a quarter of the total full year indexation fee. Solvency ratio at 250%, we deem to be strong, has been strengthened during the quarter by the results in the quarter, as well as a somewhat higher interest rate level in three months. Moving over to asset management, the cost program is on plan.
The cost, while equal to what it was in the first quarter of 2012, is significantly below the last quarters in 2012, and the operating revenue is strengthened, both by strong sales and by transaction charges or income. The sales has been good, especially in Sweden, where SPP funds have sold funds through other third-party channels and to customers in Sweden, and we've had a good development there. The net performance fees are negative in the quarter. That's due to periodic effects from last year. However, there has been a good return in excess of benchmarks, which lays the foundation for taking out performance fees that we usually do, or that we do in the fourth quarter.
There has also been a good volume growth, with assets under management increasing by NOK 12 billion to NOK 454 billion. You will remember that we've moved NOK 6 billion in public sector funds out in Norway during the quarter. Despite that, we still have NOK 12 billion in increase in assets under management. However, it should be said that NOK 8 billion of the 12 is related to a translation effect, since the Swedish krona has strengthened during the quarter. Moving over to the bank on page number seven, we see an improved net interest margin to 1.28%. We see a reduced cost level.
We have one effect that is, is slightly strange, which is a mark-to-market effect from fixed interest rate loans, which gives a negative effect in the quarter of NOK 12 million. When we issue mortgages with a fixed rate, we hedge them with a swap. Since the swap is, from an accounting point of view, valued at real value, we also have to value the loans at real value to get the accounting hedging effect. When we have increased our spreads, our, our profitability on these loans by increasing, the fixed rate, indirectly, we have, lowered the value of the existing loans on the balance sheet. And the net, the, the NOK 12 million is a net present value of, of, the net value of existing loans.
In effect, that means that we will be able to book these NOK 12 million back again in terms of a higher margin in the quarters and years ahead. Other operating income is also weakened by a reduced activity within corporate loans and corporate lending, which is according to plan and according to the strategy of reducing this area. Moving over to insurance, we have a 9% premium growth within the insurance unit. We have a stable cost level at 19%. And despite the fact that the first quarter is usually a weak one in Norway, it's pretty cold and slippery here, we have had a pretty strong seasonal claims ratio of 68%. Moving over to page number 9, Storebrand Group Operational Reporting.
I'm not going to take you through all of these numbers, but I want to give you a heads up that this is the reporting format that we will use from the second quarter onwards, and we presented this briefly during our investor and analyst update in March. You see that we split in columns, the non-guaranteed savings, the insurance and risk business, and the guaranteed savings. This way, you can see what kind of nature income and costs relate to, and how we manage the business in order to create values going forward. If you look at on the right-hand side, fee and administration income, up from NOK 978 to NOK 2,050, that's an increase of 7.4%.
If you look a little bit further down here at the operational cost level, from 841 to 844, it's basically delivers on the promise that we've given you in the past, that the fee and administration income is going to grow by 2-3 times GDP, and we will manage the operational cost line, where the nominal cost will stay flat. We will revert with more details on this interim reporting format in one-to-one meetings before the second quarter, and this will be, as I said, the way we report in the second quarter. Finally, the key figures on page 10. You will see that the result development continues with result before profit sharing and loan losses being the main value contributor and slowly growing.
Earnings per share at 1.03 NOK in the quarter. Here we have a 19% tax charge. However, the taxes will not be paid payable, as we still have a large tax loss carry forwards. Solvency ratio and solvency capital have been built in the quarter, as well as customer buffers, both in Norway and Sweden. With that, I give the word back to Odd Arild Grefstad.
Thank you, Lars. And I'd just like to sum up the quarter from our perspective. First of all, we have been able to build buffers in the quarter, NOK 1.5 billion. And the result and the buffers altogether has led the situation where we're able to increase the reservation for longevity with seven hundred million in the quarter. Second, there is a good revenue growth in the quarter, both through increased administration income, increased prices for interest rate guarantees, and a strong premium growth within non-guaranteed products. Third, the measures in the cost program are starting to show also in the IFRS accounts, with a nominal cost reduction from the fourth quarter of 2012. And finally, management actions to shift the balance sheet from guaranteed to non-guaranteed products have yielded substantial results over the last six months.
We have been able to move NOK 6 billion of reserves from Norwegian public sector DB. We have converted NOK 2.6 billion by contacting individual customers in, contacting, individual customers in Norway and Sweden. And finally, we have sold a NOK 1.2 billion, public sector, DB portfolio in Sweden. And altogether, that means that we have shifted the balance sheet with NOK 10 billion out of our guaranteed business over the last six months. Thank you.
Thank you. Now the operator will open up for questions. To queue up for questions, please press * one. First?
Peter Elliott, Berenberg Bank.
Go ahead, please.
Thanks a lot. I had three questions, mostly around sort of flows, actually. The first one was. I mean, I note your comment that you hadn't sort of sold any new guaranteed products, but I know it was a very large AP number of NOK 358 million into guaranteed products. And I wasn't fully. I didn't fully understand exactly what it, what it caused that, so I was wondering if you could touch on that. Secondly, in terms of the net transfers that you're achieving out of individual portfolios, again, you made good progress. But just looking at the last sort of three months or so, maybe the rate of transfer has slowed a little bit.
I'm just wondering if you'd comment on sort of whether you've achieved low-hanging fruit, or, you know, how much more there is to go there. And then thirdly, on the insurance business, again, very good growth in premiums, sort of looking year on year. If you look at Q1 on Q4 last year, though, it's sort of down slightly. I was just wondering if there was any reason for that and what your outlook for that business is still going forward? Thank you very much.
Okay. I start with the first two, I can maybe take the insurance afterwards.
First of all, when it comes to guaranteed business, there is an inflow of some guaranteed business in the first quarter sold in the fourth quarter. It's important to say that we have been able to price up when we do this, and there are some elements when we do a combined DC DB transfer to Storebrand. We also have taken on some new guaranteed products. That is with our other type of pricing compared to what we have used to see. I'll also add that after we have seen the new tables for longevity with also the equity portion that needs to be supported into that, that increase in buffers, we have restricted it even further.
So you would not see very much inflow of these kind of guarantees going forward. When it come to the net transfer, it's, I would say that the situation in Norway and Sweden are a bit different. In Norway, we have been taking, as you said, some of the low-hanging fruits in the portfolio, and there will be a lower increase in that number for the months to come. Before, I would say, we are truly open for converting paid-up policies into paid-up policies with the investment choice. That is the large market and the large opportunity going forward. That is important for both our customers and, of course, for us to transfer.
There, the law is passed, but there is still waiting for the final go from the Minister of Finance before we are open to do that transfer. In Sweden, there is another situation, that most of the portfolio already are open for full transfer, and we expect to see strong transfer numbers in Sweden also going forward.
Insurance.
Yes, you are right that there has been a slight lowering of premiums earned in the first quarter on insurance. But the trend is quite clear and continued strong, continued growth, and we expect a continued growth throughout this year. We see, so there will be obviously not a totally straight line, but it should, the trend should be clear.
Great. Thank you very much. Next?
Matti Ahokas, Handelsbanken.
Please go ahead.
Yes, good afternoon, Matti Ahokas, Handelsbanken here. Three questions from my side as well, please. Firstly, on the tax rate, you previously got it on 20%-25%, tax rate, and now Q1 was 20%. Is this the kind of expected run rate we should forecast going forward, or was there something special and it still should be somewhere higher than 20%? The second question is regarding the movement on the DB and paid-up policies during the quarter. How much of the NOK 4.2 billion decrease in the DB was from the public sector side? And why was the paid-up policies up by almost NOK 3.2 billion on that side? And then the last question is regarding the admin result in Norway was the highest ever.
Obviously, you've talked about some of the initiatives, but is this a kind of run rate, or was this just an exceptionally high in the first quarter at NOK 55 million? Thanks.
If I start on the tax rate, we have guided previously on 20-25%. As you are aware of, the tax rate in Sweden was lowered last year, and that should mean that we should end up in the lower end of that range rather than in the upper part of that range. At the same time, we will continue to do our utmost to optimize the tax situation, and if we can continue to stay below 20%, we will. But I don't think we should change the guiding as such.
When it comes to the movement on defined benefit, yes, you're right that what you see there as I guess you just got the numbers from a table on page 16 in the supplementary information, Matti.
Exactly.
And, what you see there as a paid up on the line called Other, is movements from the DB schemes into paid up. And, also what you see on the Other on the DB is, or is mainly the transfer out of the public sector. And, you will also see there on some of what we call insurance claims are the movement from the DB to the paid up. But it's difficult to see the exact one-to-one relationship, if you like.
Okay. And then the admin result in Norway?
The admin result in Norway, what we have said is that, we will continue to grow the top line, and, we have a cost program, in order to reduce the cost level, and you will see the full effect of the cost program during 2014, and you will see successively quarter by quarter, effects, in the rest of the business, but with a full effect 2014. So, while the number is going to, again, not be a straight line, but fluctuate somewhat, I expect this number to, grow rather than decrease, as we, look forward.
Great. Thanks.
Next? David Andrich from Morgan Stanley. Please go ahead. Hi, thank you. I was just wondering, I noticed that, you were giving some guidance for the, sorry, in Norway, some guidance on the price of interest rate guarantee and profit risk, on that line, coming down, going forward from the NOK 178 number. And I was just wondering if you'd give a bit of color on what's going to be the driver there. I guess it's, it's mainly going to be the fact that, you know, you're having these public plans leaving, and I guess people reacting to the price increases that have been coming through.
I was just wondering if we'd see kind of further increases cycle through and offset that volume somewhat, or whether it be purely the volume driving that down. In asset management, I was wondering if the trend that we've been seeing the past several quarters towards lower margin products, if that starts to reverse at all, or whether that's been continuing? Finally, in terms of the bank, the other lending, the corporate lending, and the other operating income, which came out as negative 16. I was just wondering, is that something—is that a trend that we can see continuing as you guys shift away from the corporate lending? Thank you.
When it comes to the price for the interest rate guarantee on 178 this quarter, it's higher than what we expect next quarter and the following quarters. One of the reasons for that is that we in the first quarter had the larger reserves than what we expect going forward, as some of these funds will have moved out during the following quarters. Most of the NOK 6 billion in the municipality sector.
It's difficult to be very precise, but we expect this element on a yearly basis to be up between NOK 80 million and NOK 100 million compared to last year, which means you should see this figure coming down maybe NOK 10 million-NOK 15 million over the next 2-3 quarters.
Thank you.
And in terms of the pricing, obviously, we will look at, we price this element during the late summer, and the price is implemented at the year-end. So you should see us continue to optimize prices depending on market conditions, interest rate level, and other issues during the fall and with an implementation as of year-end, and then that will set a new level for next year. And our ambition is obviously to continue to make some money on this element.
Great, thank you.
When it comes to the other result in the bank, of minus 16 in this quarter, several of those was the mark-to-market effect from fixed interest rate loans. There was also a small element there from some other mark-to-market effects. Generally, you are right, that as we are building down the corporate book in the bank, some of the revenues attached to swaps and issuing new loans will go away. Hence, we expect lower operating income in the bank going forward than what you have seen in the previous quarters, but not minus 16 going forward, more in the range of zero.
Right. Yeah, that makes sense.
You had one more question on the asset management?
Yeah, on asset management, the trend towards lower margin products that we've seen in the past several quarters. I was just wondering if that started to settle or reverse itself at all, given that recent market experience?
No, we continue to see that people are switching out of equity mandate into fixed income mandate and de-risking their portfolios. However, on the other side of the coin, so to say, we see volume growth, and we see effects from the cost program. So, we are adapting the business to those changes, and we therefore expect to be making a lot more money in the asset management business this year than we did last year.
Great. Thank you very much.
We also see a very strong growth when it comes to fund structures, and sales of mutual funds, especially in the Swedish markets, have been a very good market for that so far this quarter.
Great. Thank you very much.
Next?
Blair Stewart, Bank of America Merrill Lynch.
Please go ahead.
Thanks. Thanks very much. Can you hear me okay?
Yeah, absolutely.
Okay, good afternoon. I've got three questions. Firstly, on the longevity provisioning, I think you said that you had 700 million potential to add to the 4.3 that was already done, so you were up at 5 billion. I just wondered how you think about that 700 million. Where is that coming from? Because when I look at your buffers, they're significantly more than that. So you just explain how you get to the 700 million. And as well as that, you know, if the markets continue to be healthy and you're able to build these buffers up more quickly, is there any impact on the 20% that we expect the shareholder cost to be charged?
Or should we just think of that cost to shareholders as a hard number that won't change? That's the first question. The second one is on the disability reserve strengthening, a small number, I think NOK 40 million. I just wondered, how confident are you that that's done, and there won't be any more additions required? And thirdly, you talked about the opportunity for paid up transfers as we go through the year, and as the rules get clarified. I just wondered if there was any more thinking on what the situation needs to be for those paid up contracts in terms of the longevity provisioning. Do the longevity provisions need to be fully up to speed before any transfer can exist or can be transacted, rather? Thank you.
I start with the longevity reservation. You are absolutely right. We have higher building of buffers in this quarter compared to this 0.7 number. The way we are thinking about it is that there is a surplus in the book return that gives approximately NOK 100 million in the reservation in the first place. Then we have an increase in market value adjustment reserve of NOK 0.7 billion, but that is for the whole portfolio. So we estimate that around NOK 500 million of that is available for using for the DB portfolio and the paid-up policy portfolio. And on top of that, there is an unallocated result, around NOK 200 million. That also part of that will be used for longevity reservation.
The combination of these three elements will then give you approximately NOK 0.7 billion in total. And Blair, you're familiar with the fact that these things happen at the year end, so we only make some indications, and we don't book all the, all the return in the, on a quarterly basis, that is done towards the end of the year, so that you can do the year-end allocations in the optimal way.
But how should we think? That's the NOK 700 million that was increased to the Market value adjustment reserve, but how should we think about the NOK 1 billion that was there before we started this year?
Yeah, well, of course, all of these buffers, as we also said when we was on this update day, these buffers will be available. So if we do realize these buffers over the PNL, then that will increase the booked return and will be available to use for buffer building. But this was more to give an insight of the creation of values during this quarter that will and can-
Yes
... be available for building, longevity and reservation.
Okay. And the guidance on the shareholder cost, then? Still the same.
Well, on the shareholder cost, what is important is, of course, what kind of portion of the reservation that will be taken from the paid-up policy portfolio versus the DB portfolio. If we are able to create a surplus return here in the paid-up policy portfolio, then it will be very much a profit sharing that is not booked. That will be a large part of this 20%. But if we have to use really the surplus in the DB portfolio, then it will be more tangible to show as a reduction in the price for interest rate and in the quarter by quarter this is done.
I would say this, fluctuation or elements between DB and the paid-up policies will be important to see how the final outcome compared to estimates and expected return will be, is important.
So, so sorry to come back on that again. You said, I think, earlier, that you would expect roughly half of the shareholder cost to be met by the paid up book, so lack of profit sharing and half would be attributed to the DB through lower fee income. Are you still guiding towards that 50/50 split?
I think that is a fair estimate, but we are seeing that the DB portfolio is higher than the D... The paid-up policy portfolio is higher than the DB portfolio, especially with the move out of the public sector. So in that respect, as we are creating the surplus return in the paid-up policy, there might be somewhat higher contribution from the paid-up policies. But-
Okay
... I would say the estimate of 50/50 is a good state, estimate to start with.
Okay. Yeah, yeah.
We won't know more before we get the final regulations on this. There are still a number of things that are uncertain there that could improve the outcome somewhat. On disability, we are certain that the current statistics that we have have been reflected in the numbers that we've now set aside. However, every quarter, we do a new assessment of what we experience in terms of death, disability, and long life. Every quarter, we update the reserves to reflect our best view of the world.
So I cannot say exactly what we are if that's going to change in the future, but the NOK 40 million is a one-off set aside for disability in the, in the defined contribution portfolios in Norway, and that's that has been fully set aside now, so there are, we don't expect to take anything in addition on that, for that reserve element in the next quarter.
Okay. And on the paid-up transfers?
Yeah, on the paid-up transfers, it's still we have to wait to see what the regulator gives in regulations around transfers. Building buffers and are in a process where we, of course, are willing to use some of this buffer building and increase the results as a part of the surplus that we fill up, the pay the policies in a transfer, and to make a transfer even more value creating for our customers. But our ability to do that and how these regulations for transfers and the transfer values that will be finalized is dependent on the final rulings from the regulator. And that is-
Understood.
Yeah.
Yeah. Thank you very much.
Next?
Gianandrea Roberti, Carnegie.
Please go ahead.
Yes, good afternoon from me as well. I have actually two very simple questions. One is referred to the DC book in Norway. Risk result was -NOK 47 million, but you actually spoke about it in your presentation about the need for the, for the service reentering. I'm just trying to figure out what we should expect from that numbers going forward. The second question is just still in Norway, it's referred to the DB book. You are letting go around NOK 6 billion of business this year, mostly municipalities. I've understood that there's another NOK 14 billion to go in 2014. I just want to double check that information. Thanks.
On the DC, we expect the -47 in the quarter. We expect that to be a slightly positive number for the rest of the year. However, as we've said, in Norway here, we see that over the last couple of years, we've seen a profitability which has been too weak within this product, and we are implementing price measures in order to improve profitability from this particular element. You won't see that in the next first couple of quarters, but you should see that coming through in the pricing that we do for the future and, therefore, in the quarters ahead.
I should also mention that, the way disability, the public disability insurance is written in Norway is going to change with effect from January 1, 2014. So these products will be changed, so that the occupational additional disability reserves will reflect and fill up the needs over and above what you get from the public, or the social security scheme, and that is going to change from 2015, as I said. So there will be changes in this product, a year and a half from now. When it comes to the DB book and the public sector, you are absolutely right.
There is a NOK 6 billion transfer out of the balance sheet first quarter this year, and there will be another expected NOK 14 billion over the next couple of years. I don't know, Torfinn, if we are given a guidance on how much on 2013 and how much in 2014.
You know, but we expect a larger portion to be on tendering this autumn. So, of the remaining 14, I guess, it's fair to say that we expect the most, the major part of that to move out during first half, 2014.
I think we just said in the, in the call today or in the presentation today, that, just 25% of the portfolio is expected to be, still on the, on the balance sheet in 2014.
Thanks a lot. I appreciate that.
If further questions, please press * one. At this time, no further questions.
Thank you. Then I'd like to thank you for joining the call. I'd also like to remind you of the analyst meeting in London tomorrow. Please note that the location for this event is at the Berenberg Bank and not the usual insurance hall. So I hope to see some of you there, and have a good afternoon. Goodbye. Bye.