Storebrand ASA

OSE:STB

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Storebrand's quarter 1 2018. My name is Anna, and I will be your coordinator for today's conference. [Operator Instructions] I will now hand you over to Head of Investor Relations, Kjetil Krøkje, to begin today's conference. Thank you.

[Kjetil Ramberg Krøkje, Head of Investor Relations]

Good afternoon, ladies and gentlemen. Welcome to Storebrand's First Quarter 2018 Conference Call. My name is Kjetil Ramberg Krøkje and I'm Head of Investor Relations at Storebrand. Together with me today, I have group CEO, Odd Arild Grefstad; CFO, Lars Løddesøl; and Head of Economic Capital Trond, Finn Eriksen. In the presentation today, Odd Arild will give an update on developments in Q1 whilst the CFO, Lars Løddesøl, will give some more detail on the financial development in the quarter. The slides will be similar to the analyst presentation released this morning and are available on our web page. After the presentation, the operator will open up for questions. [Operator Instructions]So with that, I will leave the word to Storebrand's CEO, Odd Arild Grefstad, who will start the presentation on Slide 2.

[Odd Arild Grefstad, Chief Executive Officer and Managing Director]

Thank you, Kjetil. First, let me lead your attention to the forthcoming Capital Markets Day. We will be in London and host presentations from 9:00 to 12:00 on Thursday, May 31. Go to storebrand.com/ir to register your attendance or save the date for [ sole ] webcasting in your calendar.Let's move to Slide #3. I'm very pleased to present group results before amortization and write-downs of NOK 931 million for the first quarter. Savings volume growth combined with strong insurance results contributes to the strong result in the quarter. One special effect this quarter is a positive nonrecurring reserve release of NOK 149 million due to the completion of the scheme for longevity reservation.Operating profits in the first quarter was NOK 635 million, an increase of 37% compared to the same period last year. A 17% unit linked growth and a strong result insurance reserves, 14% growth in retail bank with improved margins drive the strong operating profits. The underlying Solvency position improved by 5 percentage points to 160% in the first quarter before transitionals. Including transitionals, the solvency ratio was 165%.And let's move to Slide #4. This is a very familiar slide illustrating our twofold strategy which we have been implementing through the past 5 years. It is pleasing to see that we are really delivering on both sides of the strategy in the first quarter with strengthened capital position and growth-driven savings.Let's move to Slide #5. In the movements of the underlying Solvency position, I want to highlight 3 main elements. Firstly, the market movements and especially the increase in the Norwegian 10 years rate of 31 basis points resulted in a increase of 5 percentage points in the first quarter. Second, [indiscernible] provides quarterly update on VA and equity stress as well as implementation of our new UFR of 4.05% in this quarter. In some, this [ tranches ] gave a 3.5% increase in the solvency.Lastly operational performance. This result generation this quarter gives a 3 percent points increase of which half is reserved for expected dividends. In addition, the acquisition of Silver and the net reduction in subordinated debt reduces the Solvency by 3.5 percentage points. And this then will serve up to a solvency position of 160%.The effect of the transitionals are reduced from 16 percentage points to 4 percentage points during this quarter. Increased interest rates and increased VA reduces the solvency to liability and that also then reduces the value of the transitional rules. The effect is in line with the reported sensitivities from the last quarter.Moving to Slide #6, talking about the development in the sensitivities, we see that the sensitivity for increased solvency due to an increase in interest rate is reduced. The reason for this is that they now are at a point of time when paid up policies are becoming more profitable. And this will increase the lapse risk under Solvency II. Regardless limited in [ VA ], Solvency effect increased interest rates are very positive for Storebrand. And that is because increased interest rates gives reduced investment risk and increase in results and solvency overtime to customers and owners.Then let's move to Slide #6. With that -- #7 actually. With the acquisition of SKAGEN, the group is well positioned for a strong growth in the Norwegian individual savings markets. In Q1, the group acquired the remaining 9% of the shares and this was financed with liquidity from SKAGEN AS. As for the integration update, we have decided to converge into one common operational platform using technology solutions from both SKAGEN and Storebrand. We have also decided to establish a common institutional distribution platform. Lastly, on the onboarding of Silver customers, this has been a very successful onboarding and there are now all being [ mutually ] served on steel grounds platform.Turning to Slide #8. I also want to comment on development of the Swedish business SPP this quarter. The development has been an impressive turnaround. From a situation a few years back with a very weak administration result and volatile results due to ALM mismatch, we now see solid result contribution. And on top of this, we see a growth within the Swedish business with 22% premium growth from the same period last year due to strong sales and positive net transfers.Moving to Slide #9. The strong growth in savings continues with a growth in unit linked reserves of 17% and in asset management of 18%. On a quarterly basis, growth is dampened due to weak financial markets both [indiscernible] bonds as well as a weaker Swedish krona. Retail earning has grown with 14% with margin improvements. And growth in insurance is weak but reserves are strong, and we are in a process of implementing new growth initiatives that we expect to give positive effects going forward.And with that, I give the word to Lars.

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

Thank you, Arild. And asking you to turn to Page #10 key figures. The group result is good at NOK 931 million. The operating result at NOK 635 million is somewhat above the normalized level that we have previously communicated around NOK 550 million per quarter. This is primarily driven by good results and firm cost control. As a reminder, we record performance fees in the fourth quarter. And this quarter, i.e. the fourth quarter, will normally be a lot better than the first 3 quarters as you can also see from the graph.Financial return in the first quarter was quite satisfactory despite turbulent equity and bond markets. Good returns and [indiscernible] and credit markets get to profit split in Sweden and acceptable returns in company portfolios. The special item in the quarter of NOK 149 million relates as [indiscernible] to reserves for longevity. Just to remind you of the history here, in 2013, Storebrand started a brand to strengthen longevity reserves by NOK 12.4 billion. In the fourth quarter of 2015, we set aside NOK 1.4 billion in one-off charge to cover the Storebrand part of the bill.In the fourth quarter of 2017, Storebrand finished the reserve strengthening well ahead of plan. In the final allocation of reserves down on each individual contract which happened in March this year, it became clear that we had set aside too much on the capital for this purpose. As a consequence of good risk management and buffer building throughout last year, in the last few years, we were able to return a total of NOK 149 million to company profits. As Arild has commented on, the underlying solvency margin improved in the quarter. As you can see from this graph, the capital requirements tailored with higher interest rates and lower equity stress with solvency capital increased due to operating performance. Customer buffers in Norway fell with equity markets and bond markets, and we now benefit from the risk management and buffer building done last year. Cash earnings per share ended at a strong NOK 1.69 in the quarter.Turning over to the next Page 11, fee and administration income is NOK 1,220 million in the quarter of which NOK 107 million comes from SKAGEN. The insurance result is strong, primarily driven by one-off gains from previous years. The operational cost line includes NOK 110 million from SKAGEN, which means the SKAGEN contribution is a negative NOK 3 million in the quarter. In the first quarter in this year, relative performance in SKAGEN has been weak and were not hard to set off too much for fund manager bonuses.Thus far in April, performance has picked up significantly and we may have to settle for bonuses in the second quarter. However, we are not allowed under IFRS to take corresponding profits into income before at the end of the year. So far this year, we have earned but not booked NOK 55 million in performance fees from SKAGEN and Delphi. Adjusting for this current cost, the Storebrand cost level is well under control and we confirm our cost targets for the year.Financial results and risk result life includes NOK 149 million reserve release from longevity. Amortization is positively impacted by a technical accounting effect relating to the acquisition of Silver. In normal, amortization charge will be NOK 105 million per quarter. Tax has been estimated to 16% in the quarter and normalized tax charge will be around 20%.Turning over to Page 12. This picture shows the same results fit into the business areas; savings, insurance, and guaranteed. Savings profits continue to grow according to plan. Insurance results are strong in the quarter and somewhat stronger than we expect going forward. Guaranteed include the NOK 149 million longevity profit, which show underlying resilient profitability despite being in long-term runoff.And that concludes our initial remarks and we open up for Q&A.

[Operator]

[Operator Instructions] And the first one is from Matti Ahokas from Danske Bank.

[Matti Ahokas, Head of Equity Research of Finland]

It's Matti Ahokas from Danske. Two questions, please. Firstly, regarding the development of the assets under management, they were down quite a lot from NOK 721 billion to NOK 707 billion. So is this a function of -- were there any outflows or is just a function of the market movements altogether? And then a small clarification on Slide #13 where you say about the fees earned not booked NOK 55 million. So if everything would continue as is, it would be NOK 210 million booked in the fourth quarter with no impact on cost, did I understand this correctly?

[Odd Arild Grefstad, Chief Executive Officer and Managing Director]

Yes. On the AUM, that's a consequence of a positive contribution from the Silver funds and a negative translation effect of a similar size coming from the exchange rates, the change from Norwegian to Swedish kroner, so which has been 6% in the quarter, i.e., all of the funds we have in Sweden translated into Norwegian kroner are 6% -- were 6% less than Norwegian kroner. In addition from this turbulence in financial markets where both the bond market and the equity market as well. There is also a limited continued outflow in Silver -- sorry, in SKAGEN, which is expected with normal share. But as I said, the performance in SKAGEN is picking up nicely and also that may be reversed later on. So that's the main components of the AUM change.

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

On the fees earned but not booked, that is the performance fees that I mentioned in my comments earlier that where we are not allowed to book performance fees before they are sure or secured at the end of the year. However, as I mentioned, we have to book the estimated performance bonuses to the portfolio managers on the running basis. Therefore, if performance is greater on quarter, we have to set up for bonuses to portfolio managers, while we cannot take into account the fees earned but not booked before the end of the fourth quarter. So that creates some volatility in the recorded results. The NOK 55 million consist of NOK 16 million from the Delphi and NOK 39 million from SKAGEN. And there's -- you cannot just time set [ before ] to get the final number because that would be typically volatile through the year. Hopefully, it will go up to a larger number than you have mentioned, but it can also fall to a lower number.

[Operator]

And the next question comes from Peter Eliot from Kepler Cheuvreux.

[Peter Eliot, Head of Insurance Sector Research]

First, I'd like to just follow-up on that question from Matti first of all. And I was just wondering if you can quantify the SKAGEN outflows at all. And then I had some questions of my own. The main area issue was on the insurance operations. Obviously a very impressive cost ratio, 3 percentage points below last year. I wonder if you can just comment on how sustainable that is and also on the composition of the reserve releases which seem to have come from all 3 divisions. And finally on the insurance, the premium -- the quarterly disclosure shows disability premiums up 20% on quarter 1 last year, but overall, you're showing simply sort of talking about flat. So I'm just wondering if you could square that number. And then if I am allowed to add one more. I was just a little bit confused by the sensitivities you showed on the Solvency on Slide 6. Specifically on the equity sensitivity which has gone up a lot, although you don't seem to have increased your exposure -- increased your exposure little bit in Sweden, but doesn't really account for the increase. And also on the UFR, I mean I would just thought you already accounting for 4.05%, so I'm surprised that there's a sensitivity to that and I'm surprised it doesn't get worse under 3.65%. I'm sorry, lot of questions there.

[Odd Arild Grefstad, Chief Executive Officer and Managing Director]

Just I may start with clarifying on the sensitivity slide for solvency, Peter. When it comes to the UFR, it's upside book. It's just around 3.9% in charts, sorry about that. And I think that should clarify the question. On the equity sensitivity, actually last quarter [indiscernible] was quite long because we had the [indiscernible] cash flow during the year. So we could actually -- [ most really think how long actual ] equity stress still have and offset that purchase done, and that's add to equity stress once more. Now we have a handful in use some of the cash flow. And now one more the equity stress will actually starts to [indiscernible] also of the element down their [ monthly average ] results. So that's the reason to this risk with [indiscernible]. And if you go to the bottom of the questions on the insurance slide and growth, we see fee rents for all own account increased in the visibility line. And this is due to the sudden move for that last year on a lower level and which has now come up, that's more or less normal run rate with all the times coming in. This will be different for already when you look at the [indiscernible] accounted for individual revenues during the year and last year. And that's the difference between the 2 metrics being from account under the listed payments or just on more forward looking nature. On the cost ratio and reserve, this [indiscernible].

[Peter Eliot, Head of Insurance Sector Research]

Can I say? Sorry, it's quite a bad line. I'm not sure if it's only me, but I'm struggling to understand. And if it's me or saying, apologies, or is it just me? I can follow up offline if that's the case, but sorry.

[Odd Arild Grefstad, Chief Executive Officer and Managing Director]

Yes.

[Operator]

Sorry, this is the phone operator. It is when the second person is talking, there is -- I think you're sitting little bit far away from the microphone. If you just close move a little bit closer, we can see how it sounds. Otherwise, I think it comes through clear. Thank you.

[Odd Arild Grefstad, Chief Executive Officer and Managing Director]

And Peter, the SKAGEN also was NOK 2.3 billion in the quarter. And on insurance cost, we have -- we constantly managed the cost level. We will continue to do so. I'm not able to give you any concrete guiding on further development, although I think we need to maintain it in the area of 15 basis points in order to be competitive, if that answered your question.

[Peter Eliot, Head of Insurance Sector Research]

Yes. And just maybe just a quick follow up on that. I mean obviously that the improvements have been quite significant from sort of 18 to 15. So I'm just wondering are there one-offs in there or I mean is there any reason that we should have sort of expect that sort of revert to the previous level or to stay on the current? I mean I just wonder if there are any one-offs basically in either number.

[Unknown Executive]

On the costs in the insurance area?

[Peter Eliot, Head of Insurance Sector Research]

Yes, not…

[Unknown Executive]

I think what is mainly see there is the allocations in the savings from insurance and it reflects the actual investments and money is used in the business, so it's not a one-off [indiscernible] the allocation of all costs compared to [indiscernible].

[Unknown Executive]

You see that we have somewhat lower cost on both the guaranteed business and on Insurance and somewhat higher cost on the savings area. And due to the fact that they using more of our resources on the savings area as we speak. I also want to just add on to this SKAGEN because the net outflow is NOK 2.4 billion. But a good thing is that we see quarterly inflow in SKAGEN that is still on a high level on the NOK 3 billion on a quarterly basis here. So that is of course very important also going forward.

[Unknown Executive]

And if I may add an additional comment on insurance and growth. We work as you are very familiar with, there are a number of different product lines here and we work quite hard to strengthen growth in all of the different product lines. So there is a sales within SMEs, small and medium sized enterprises on good profits and similar products is growing stronger this year, which will come into the effect in the next few quarters. There is also initiatives on EMC and on health insurance that will gradually pick up growth in this area throughout the year and even with a higher effect next year.

[Operator]

The next question comes from Blair Stewart from Bank of America.

[Blair Thomson Stewart, Head of the UK and European Insurance]

Couple of questions. Firstly just on the unit linked savings segment in Norway. I noticed that just looking at the fee line was unchanged despite the addition of Silver, which slightly surprised me. I think you had previously indicated that the Silver would add I think NOK 60 million, 6-0, on full year basis to maybe NOK 15 million a quarter. So slightly surprised that the fee line wasn't higher and the cost line went up. I just wonder if you can explain. You did mention some margin pressure, but is there anything else going on there? Secondly, just relating to the higher interest rates and one comment Ode Arild made in his introductory remarks. Is there any likelihood of profit sharing reemerging in the paid up books in any significant way? And finally again on the higher interest rates fee, is there any difference or any changes to your asset allocation over the last quarter and how is the expected investment return evolving? You use to show a slide giving the expected investment return over the next few years. You stopped giving that. There's possibly something that return to the Capital Markets Day, but just wondered generally how that was evolving?

[Unknown Executive]

Blair, if I start with the unit linked savings in Norway, the funds from Silver came in during February. So therefore, you have -- the balance is off by the whole amount, but the income is only up by one month of income. So that will gradually improve both the margin and the absolute income in the coming quarters. On the cost side, there has been a reallocation of cost to the areas that are where we used more manpower these days which is in the savings area. It started with ASK and I guess last year. And we'll continue to focus more on savings and pension, and therefore allocated cost to this area is somewhat higher. And I should mention in the same context that we do not have deferred acquisition cost on this the way we come account for cost in Norway. So we take all of the cost upfront while the revenues will come in later. So therefore you will see some -- yes, some cost flow in frontend on these initiatives.

[Unknown Executive]

When it comes to increased interest rates and profit sharing, it's of course, we can expect earlier profit sharing; 1, you will see a pickup in interest rates. And there is also different portfolios when it comes to paid-up policies. Some of the portfolios starts to have high buffer capital. But there is always of course [indiscernible] in the risk management area versus building buffers or starting taking out profit share. Also, I'd like to mention that there is a discussion [indiscernible] in Norway now, also with the regulator and Minister for Finance to lift up some of the elements of the paid-up policies to make it a better product both for customers and the companies. And it is possible to do some changes when it comes to the hard annual interest rate currencies and also the flexibility of building up buffers and use the buffers. So hopefully, that also will have a positive impact that increase that -- the opportunity to start profit sharing somewhat earlier.

[Unknown Executive]

When it comes to asset allocation, [indiscernible] major changes with asset allocation during Q1. In the supplementary information package payable [indiscernible] on expected in the turn of next 12 months, as I can also assure that [indiscernible] from Capital Markets Day [ where we did ] slides on this.

[Blair Thomson Stewart, Head of the UK and European Insurance]

Thank you. I thought I would just come back to the discussions that are happening at the government level on the paid-up books. Is it just the removal of the annual guarantee, that was something that was been talked about for years? Is there anything else in discussion?

[Unknown Executive]

There are lot of elements in discussion actually, and some of them from the labor organization is more about also the stake to take more of the risks when it comes to paid-up policies to ensure that you have overtime a better -- well, better outcomes when it comes to pensions for people because you see a post with allocation, we have far better polices today, as [ there will ] be loss for the pensioners going forward. And that is being obvious for money in our way as we now seeing these paid-up policies for the quarter is growing. But I think the most realistic element is about proper building. It's about the interest rate guarantees and that will also be very helpful.

[Operator]

[Operator Instructions] The next question comes from Jona Urwin from UBS.

[Jonathan Peter Phillip Urwin, Director and Equity Research Insurance Analyst]

Just 2 from me. So firstly looking at the [indiscernible] of the sort of 2 ratio [indiscernible] there was limited improvement in own funds and this costs despite a decent level of profitability. So could you help us bridge that gap how to see that the accrued dividend will take up part? But just wondered what the other driver was? And then secondly we could see from [ Insevica ] today that the regulator in noise become a little more active on capital models. Are there any risks to your model from potential changes from here? Or is it a company specific issue to -- [indiscernible] I know at least part of it.

[Unknown Executive]

[ Although late to ] [indiscernible], we have not seen anything around the [ NCDS ] report today. We have been with our own, but there is no news around our remodeling. It's been of course now out, and for a while, we have had discussions about it with the regulator and there is now as we can see outstanding issues when it comes to remodeling way of reporting.

[Unknown Executive]

When it comes to changes in [indiscernible] a bit more complicated now. Of course, it might sound like in the first place. First of all, decreased equity markets and increase on prices have a access on the [indiscernible] course from the non-guaranteed business process, then in the [indiscernible]. Then on also since on the [indiscernible] is surplus value of [indiscernible] high costs, and those are [indiscernible] during the quarter as these interest rates again. I guess that's it to me an explanation for any additional or effects from [indiscernible] good part this quarter. But we really see the same effect on the [ the third quarter ] [indiscernible].

[Operator]

[Operator Instructions] There are no questions coming through. So I will hand the call back to you. Thank you.

[Kjetil Ramberg Krøkje, Head of Investor Relations]

Perfect. Then I would like to thank you all for joining this call. I would like to remind you we will be present in London tomorrow for our Analyst Meeting and we hope to see you there. And lastly reminder to register for our Capital Markets Day on May the 31 on the IR webpage. Have a good afternoon.

[Operator]

Thank you for joining today's conference. You may now replace your handset to end this call. Thank you.