Storebrand ASA

OSE:STB

Earnings Call Transcript 2022-Q1

[Daniel Sundahl, executive]

Good morning, ladies and gentlemen, and welcome to Storebrand's First Quarter Results Presentation. As always, CEO, Odd Arild Grefstad, will start today presentation by giving you the key highlights of the quarter. And afterwards, CFO, Lars Loddesol, will take you deeper into the numbers.

At the end of the presentation, we will open up for Q&A for participate in the Teams webinar. To join the webinar, you can find the details on our Investor Relations website. And in order to ask a question, please use the Raise Hand function in Teams and you will be placed in the queue. To give everyone enough time to ask their questions, we kindly ask you to limit yourself to 1 or 2 questions and then you can raise your hand again to be placed at the back of the queue.

Without further ado, I will now give the word to our CEO, Odd Arild Grefstad.

[Odd Arild Grefstad, executive]

Thank you, Daniel, and Good morning, everyone. When we summarized the first quarter of 2022, the first thing that comes to mind is the horrible war that is unfolding in Ukraine. The war causes unmeasurable human suffering, turmoil in the world economy and focus away from the green transition.

We see a world economy with value chain disruptions and real geopolitical risk that could alter the economic landscape and trading patterns. Together with continued central bank stimulus, this has led to increased interest rates and inflation.

After a decade of low and stable inflation, we see increasing prices in much of the world. As consumers, we all feel the increase in food and energy prices. As a consequence, interest rates are increasing.

Rising inflation rates will increase cost and insurance claims in Storebrand. We'll continue to demonstrate strict cost discipline and maintain our cost ambition of NOK 4.9 billion for 2022. This will allow us to pursue the growth opportunities we see, while also taking into account higher inflation.

In our business, pension premiums and insurance premium are directly linked to wage inflation, which will automatically result in premium growth for Storebrand. In products like P&C insurance, we build increased prices to mitigate the potential increase in claims.

The flipside of higher inflation is higher interest rates. Higher rates are positive for Storebrand's customers and shareholders. Higher rates make it easier to achieve the promised returns for guaranteed pension products with prospect of higher profit sharing. This increases pension payments as well as our profits.

Our company capital, which amounts to over NOK 30 billion will also yield better returns. Higher rates also improved our solvency ratio and reduces solvency risk. In the quarter, rising interest rates have a somewhat dampening effect on our results. As mark-to-market values of fixed income investments fall with rising rates and credit spread widening. Our risk management framework with a robust portfolio of bonds at amortized cost and a solid buffer capital level, limits the financial risk.

Now let's move over to this quarter's highlights. The Storebrand Group delivers a group profit of NOK 628 million in the first quarter with a stable operating profit of NOK 678 million.

We continue to see net inflows of capital in our savings segment, totaling NOK 11 billion in Asset Management in the quarter. However, weak financial markets and a stronger Norwegian krone reduces asset under management compared to last quarter.

Annual written premiums grew 19% in the Insurance segment, and the bank's lending portfolio increased by 15% from the same quarter last year.

The solvency ratio was 184% at the end of the first quarter, an increase of 9 percentage points from the previous quarter and 4 percentage points above the targeted range of 150% to 180%. Based on this, the Board will initiate a process to start a share buyback program.

As you are well familiar with, Storebrand follows a twofold strategy that gives a compelling combination of self-funded growth in the front book and capital return from a maturing back book of guaranteed pensions.

Storebrand's aims to be the leading provider of occupational pension in both Norway and Sweden and to build a Nordic powerhouse in Asset Management and continued fast growth as a challenger in the Norwegian retail market for financial services. The combined synergies stemming from capital, customer base, cost and data across the group provide a solid platform for profitable growth and value creation.

We have truly delivered on growth in the front book over the last years. At the same time, we have continuously worked with a back book towards a capital release. I, therefore, take great pride in announcing that the Board intends to initiate a share buyback program. This is the first step to deliver capital back to shareholders in addition to ordinary dividends.

We have a clear dividend policy, which states that if the solvency ratio is above 180%, the Board of Directors intend to propose special dividends or share buybacks. With a solvency ratio of 184%, the Board has conducted a forward-looking assessment, including a consideration of future events and risks.

The Board expects that Storebrand will continue to generate solvency under normal market conditions as the business transforms into a more capital-light model. We now intend to initiate a share buyback program of NOK 500 million. The Board will seek the approval from the FSA. And given their approval, we expect to execute the program in the third quarter this year.

The front book has strong underlying growth drivers. Premiums are driven by increased wage inflation and Unit Linked is still a young product in the Norwegian market. Overall, asset under management was negatively affected by mark-to-market effect from rising interest rates and currency, but I'm very confident that the group is on the right growth path.

Unit Linked premiums are higher than claims and expected returns adds to the growth. Asset Management has positive net flow of NOK 11 billion in the quarter through strong sales and leveraging our position as a Nordic sustainable pioneer and also new public sector mandates. The growth in the retail market continues with our digital-first strategy.

P&C Insurance is a core part of Storebrand's strategy. Annual market data for 2021 shows that Storebrand is Norway's fastest-growing retail P&C insurer in terms of total written premiums and market share. The ambition is to continue to grow P&C, utilizing group capital synergies.

Our strong and trusted brand drives cross sales with other lines of business and has proven to be a strong base for organic revenue growth. Growth in 2021 is accelerated by the acquisition of the insurance portfolios.

We work to move the world in a more sustainable direction. We report on various measures and nonfinancial metrics to the market. We will use these tools and metrics to address and demonstrate the importance of sustainable value creation and impacts.

A month ago, we released our Annual Report with integrated sustainability reporting, where you can read more about our daily work with sustainability impacts and figures. Some of the most important figures we report on relate to Storebrand's ambitious target to achieve our net-zero emission by 2050.

Over the past couple of years, our investments in equities have grown 38% while managing to reduce Scope 1 and 2 carbon emission by 9% in the absolute terms from the portfolio. We have also managed to reduce the carbon emission per square meter by 35% in our direct real estate investment during this period.

Another important part of our ESG strategy is to increase our investment in what we call solution companies. These are investments in companies that we believe are well positioned to solve challenges related to the UN's sustainable development goals. Over the last couple of years, investment in solution companies have more than doubled and now make up more than 11% of our total asset under management.

With that, I give the word back to you, Daniel.

[Daniel Sundahl, executive]

Thank you very much for that at Odd Arild. The Annual Report mentioned can, of course, be found on the Investor Relations website. It was an eventful quarter indeed, ending with a record strong solvency ratio. So let's have a closer look at the numbers. Please go ahead, Lars.

[Lars Aasulv Løddesøl, executive]

Thank you, Daniel, and Good morning. The operating profit of NOK 693 million is satisfactory in light of the markets we have seen in the first quarter and better than consensus. The financial result of negative NOK 50 million is also acceptable in volatile markets, but it will usually be a positive contribution to the group result. The solvency ended the quarter at 184%, on which I will revert with more details in a moment.

The earnings per share comes in at NOK 2.18. The buffer level in Sweden has been kept at a record level of 17.9% of customer funds. In Norway, customer buffer levels have cushioned the increase in rates and the fall in the equity markets just as intended.

The solvency level in the beginning of the year was 175%. The effect from model and assumption changes has been negligible, and this column has therefore been omitted from the picture. Included in the first column is a lower UFR volatility adjustment changes of 2 basis points in Norway and 3 basis points down in Sweden and the significant reduction in the symmetric equity stress to 40.4%. The total effect is an improvement of 7 percentage points.

The next column shows the negative 7 percentage points impact of the market returns, which consists of credit spread widening, falling equity markets, and increased volatility. These 2 columns will usually move opposite to each other as the regulatory framework seeks to smooth short-term market volatility.

The third column shows the solvency impact of higher rates. The 10-year swap rate was 82 basis points up in Norway and 90 basis points up in Sweden. The yield curve is steeper than before, and the solvency sensitivity to higher rates is decreasing with the interest rate level. The solvency impact, as shown, is 3 percentage points.

The main explanation of the 5 percentage points improvement from asset allocation is reduced equity exposure. The after-tax results in the quarter contributed 4 percentage points to the solvency and a little more than 1 percentage point has been set aside for ordinary dividends to be paid next year.

Importantly, in this picture, we see that the solvency is increasingly stable and robust for any market movements. 50 basis points interest rate moves in either direction now has limited effect on solvency.

Sensitivities to equity movements and credit spreads have increased somewhat. This is due to lower protection from buffer capital in the short term. With lower equity investments and the equity adjustment smoothing element, a further fall in the equity markets would have limited impact. Similar with credit spreads that will be countered by changes in the volatility adjustment.

We are out of the transitional capital in all cases. With higher rates, the solvency has strengthened, the solvency sensitivity has gone down. This should give comfort on gradually improving solvency through positive result generation in the quarters and years ahead.

On our Capital Markets Day, back in December 2020, we showed expected return above the Solvency II discount curve. The expected spread has almost doubled since then. At the same time, the duration of both liabilities and assets have gone down with higher rates and the asset liability gap has been reduced. This bodes well for increased capital generation going forward.

Now over to the numbers. The fee and administration income is down from last year, primarily due to 2 things: lower margins in Unit Linked following the introduction of individual pension accounts in Norway, as previously guided, and a stronger Norwegian krone. The currency effect alone is around NOK 25 million. Adjusted for FX, the development is flat from last year.

The insurance results are satisfactory with good underlying growth and normalized combined ratio. Operational costs are down from last quarter and below the guided NOK 4.9 billion for the year. This follows delayed hiring and lower market activity after the outbreak of the war in the Ukraine. Also, there is a positive effect from the strengthening Norwegian krone, contributing approximately NOK 17 million.

We expect somewhat higher expenses in the coming quarters, but clearly within the guiding for the year. The financial items and risk result life contributed negative NOK 50 million for a group result of NOK 628 million. The tax expense in the quarter is underlying 19%, but benefits from the NOK 550 million tax income from a clarification in our outstanding tax dispute as per the stock exchange notice 7th of April. The profit after tax and amortization ended at NOK 887 million.

This picture has the same figures as the previous page, but broken into the 3 result areas: savings, insurance and guaranteed. You will recall that we have made the split in order for you to easier understand the result generation and to better be able to compare our numbers with peers.

The savings segment is down from last year, primarily as a result of the introduction of individual pension accounts in Norway as well as a nonrecurring one-off gain last year. Insurance results are improving after a period of some volatility. Guaranteed is satisfactory in light of the recent market turbulence. More details on the following pages.

In savings, we see the impact of the IP of the individual pension account market on Unit Linked Norway. In Sweden, Unit Linked, there was a nonrecurring gain of NOK 37 million last year and a currency translation effect between last year and now of NOK 17 million. These 2 elements explain the bulk of the difference in addition to some margin pressure.

In the Asset Management business, we have seen a delay of some transaction fees into the second quarter, but overall satisfactory results. In the retail bank, the lower results are a consequence of a mark-to-market effect from higher interest rates on the fixed rate mortgage book. We have improved the hedging of this risk in order to avoid similar effects in the future.

Looking at the savings results more graphically, we see the impact of financial market turbulence on assets under management in Unit Linked and Asset Management. Premiums in Unit Linked remains flat as higher volumes are making up for lower individual pension account margins.

The retail bank has managed to maintain margins despite the interest rate increase. As you know, it's easier to operate a profitable bank with higher rates, but there is a delay in interest rate income in a rising interest rate environment.

In Asset Management, we have a positive flow of NOK 11 billion. The strengthening of the Norwegian krone shaves NOK 54 billion of the total AUM. The insurance area has been impacted by the pandemic in the last couple of years. With 12 months delay in disability claims until the social security authorities accept disability, we still see increases in recorded disability from last year.

However, and as guided in the past, with an improving Jose market, more people return to the workforce, what we call reactivation. In the different insurance products groups, we see satisfactory P&C results, weaker health insurance results and improvements in pension-related disability results.

Here, we see that the combined ratio is at the targeted level despite the winter season traditionally being on the weak side. Furthermore, we see good growth in all product groups. In P&C, the growth is primarily driven by volume, whilst in the other product areas, we see growth primarily driven from price adjustments.

I mentioned disability and reactivation on the previous slides. The third large life insurance risk is longevity. During the pandemic, social distancing and other restrictions protected people from the flu, coals, and other endemic diseases. We now see an increase in mortality from these kind of bills, positively impacting the longevity results in the guaranteed products.

As I already mentioned, the buffer level in Sweden has been kept at a record level of 17.9% of customer funds, partly because rising interest rates have offset some of the negative effects of falling equity markets and increased credit spreads. For contracts with deferred capital contribution, SPP tried to hedge out all of the interest rate risk and the rise in interest rates has hence not had the same offsetting effect on these contracts. The long-term effect of rising interest rates is, however, positive for recovery of deferred capital contribution as it reduces the negative carry that stems from the difference between the discount rate and the risk-free market rates.

During the period, defined capital contribution has increased mainly due to increased credit spreads and a decreased volatility adjustment. We have a very strong asset liability hedge but have some basis risk related to volatility adjustment and credit spreads that normally will revert towards mean. There is no profit sharing in the quarter, and we will prioritize rebuilding buffers in Norway this year and into 2023. From then onwards, higher rates will lead to an increase in expected profit sharing in the coming years.

Here, we see that the guaranteed reserves are shrinking. This is partly due to a weaker Swedish krone and the fact that Swedish liabilities are discounted by the market rates. On the other hand, we see a positive transfer in the public sector pension market where we won several contracts last year and where NOK 4.2 billion have been transferred to store brand in the first quarter. These contracts have lower guarantees, lower capital requirements and are actively sold. The buffer level has decreased with higher rates, but mind you, the liabilities have decreased more as reflected in the improved solvency.

Under Other, we have approximately NOK 35 billion on company portfolios as well as subordinated debt expenses. Higher rates and credit spreads give a mark-to-market credit loss and a correspondingly higher running yield, which means we expect to be able to win back the mark-to-market loss in the coming quarters. Higher short-term rates will lead to higher returns on the company portfolios over time.

Net funds of approximately NOK 25 billion should yield an additional NOK 250 million per year, if rates go up by 1% as the portfolio is reinvested in higher-yielding bonds. The investments take about 2 years for a full rollover.

And with that, I give the word back to you, Daniel. Thank you.

[Daniel Sundahl, executive]

Thank you for that insight, Lars. We will now move over to questions and answers and are happy to take your questions. [Operator Instructions] And I can see that we already have a few questions coming in. The first question comes from Peter Eliot of Kepler Chevreaux. Okay. Hakon Astrup, Please go ahead. We will take Peter afterwards. Apologies for that. Hakon Astrup, Please go ahead of DNB Markets.

[Håkon Astrup, analyst]

First question on guaranteed. You mentioned that the higher interest rate level is positive for profit sharing. But this quarter due to, say, lower buffers, profit sharing is a bit lower. Can you talk a little bit about the timing effect here and when we can expect to see higher profit sharing from positive effects from higher rates?

And the second question on buybacks and solvency. Can we -- timing of a further buyback program? Is it a possibility that we can see an additional buyback program for 2022 as well? Or is it just going to be the NOK 500 million that you will apply for now?

[Lars Aasulv Løddesøl, executive]

Thank you, Hakon. If I start on the profit sharing. As you've seen the buffers that we have gone down somewhat in the first quarter following the turbulence in the market. So we will prioritize rebuilding buffers. Then I've also shown you a picture how expected return is now well above the discount curve for Solvency II, which means that we will create solvency capital and excess returns on an expected basis in the coming years. So I would expect this year and into next year, we will prioritize rebuilding buffers subject to normal markets. And then onwards, we will be able to increase profit sharing.

Then at the same time, the different -- there are different kind of buckets of customers in payer policies in Norway and also in the Swedish market that will receive -- so some may receive profit sharing. At the same time, you're rebuilding buffers on other. But the bulk of profit sharing is expected to be a couple of years down the road.

[Odd Arild Grefstad, executive]

Okay. If we then move to share buybacks. Now we submit the application and expect an answer, of course, from the FSA. But due to the timing, we expect to then be in a red zone period for starting share buybacks. And that's why I also said that we expect to start the share buyback program late summer this year. Then we will come back the program. But of course, as soon as we have been doing that program and still the solvency ratio is at a level above 180%, then we can start a new share buyback program. We want to use this opportunity to fine-tune our capital position on an ongoing basis. So theoretically, anyway, you can -- it's possible to also start based on the numbers in the third quarter, or the fourth quarter.

[Håkon Astrup, analyst]

Just a technical follow-up question. Can you then say, continue to do buybacks for 2022 until the AGM next year?

[Daniel Sundahl, executive]

We have the option to -- or possibility to do share buybacks up until 10% of the share capital.

[Odd Arild Grefstad, executive]

Yes.

[Daniel Sundahl, executive]

Thank you for that, Hakon. The next question comes from Peter Eliot of Kepler Cheuvreux. Please go ahead, Peter. You are on the mute, one second.

[Peter Eliot, analyst]

Sorry. There you go. Hopefully, you can hear me now.

[Daniel Sundahl, executive]

Please, go ahead.

[Peter Eliot, analyst]

Great. Okay. Just on the cost base, I mean you basically seem to be confirming the sort of higher cost base that you signaled before despite maybe lower activity initially in Q1. I'm just wondering, did you consider sort of revisiting your growth investment plans in light of the market volatility and might you a slightly lower AUM and might you do that if things were to sort of take a turn for the worse again? Or are you -- are those plans pretty much sort of locked in? How would you say? That would be the first question.

And then the second question, just on the asset management flows. I mean you're highlighting positive flows in Q1. I was wondering if you could just give a little bit more granularity on what's happening there. I mean if I look at SKAGEN funds, then focus seem to benefit from a large new mandate, but otherwise, most funds seem to experience some outflows. So yes, just wondering if you could give us a little bit more granularity and how you see that developing?

[Lars Aasulv Løddesøl, executive]

Well, if I start with the cost base, Peter, we've said that we have a cost plan or a guiding, but that we very much combined with some growth targets. So if we see that the growth does not happen, then obviously, we will also tighten in on the cost base. Normal swings in the financial market should not impact our cost base and long-term investments. So, but we do follow this very closely.

We have, as I mentioned, reduced some marketing and market activity in the first quarter. We have also delayed some hiring. And therefore, there is also -- there is already some cost saving according to the plan within the first quarter, but it doesn't change in materially any of the plans that we have for the rest of the year so far. But we monitor this very, very closely, and we will implement cost measures if necessary.

[Kjetil Krokje;Head of Finance, Strategy and M&A, executive]

When it comes to the flows, around NOK 4 billion comes from occupational pension in Norway and especially from the public sector, where we've won some clients during last year. The second part comes from institutional clients and asset management with around NOK 8 billion, which includes several of our dispersed customer flow from our institutional clients.

[Odd Arild Grefstad, executive]

Yes. And I will add to that, we see a very strong flow into our private equity operations in Cubera and also for infrastructure, we see positive flows. When it comes to the active fund structure. So we have very strong numbers from store brand value and from store brand focus. Overall, the active funds has a quite flat development flow wise in the first quarter. But strong positions on some of them.

[Daniel Sundahl, executive]

I think that answered your question. Great. Thank you, Peter. The next question comes from Jan Erik Gjerland of ABG Sundal Collier.

[Jan Gjerland, analyst]

I have 2, first one to solvency and the second one to solve as well. If you look at the Page 11 on your solvency movement, how is Danica reflected in this picture? And secondly, how is the change to asset allocation after the business mix? Could you have more generality into the level of the 5% change? How much is equity and how much is actually changed in your back book and business mix? That's my first question.

And then in Sweden, we have seen that you have some annoying competitors paying for flows -- net flows in the Unit Linked market. How has that developed now in the first quarter? If you could share some back to that?

[Lars Aasulv Løddesøl, executive]

If I start with the solvency, Jan Erik, Danica is not reflected in these numbers as the transaction has not yet been accepted by the authorities. So that will come into the numbers when we have a formal acceptance to do the transaction.

In terms of a reduction in equity investments, that's a bulk of the 5 percentage points in the business mix and investments. The exact figures depend on the calculation when you do -- how, they are interlinked. So when the [Foreign Language] the order of where you do -- how you do the calculation gives you or will impact the final numbers. But the best picture that we can give is that this is 5 percentage points. And as I mentioned already, the reduction in equity investments is the main explanation.

[Jan Gjerland, analyst]

And I just have a follow-up on the equity. So if you then return back on more equities in your portfolios, that would then, of course, shave off some solvency capital, if I understand it correctly? Or is that not going to happen?

[Lars Aasulv Løddesøl, executive]

Well, obviously, the investments that we have will impact the solvency and we do allocate or we make changes to the asset allocation from time to time, both in terms of credit risk versus government bonds or investment grade -- it's all investment grade, sorry, government bonds versus credit bonds, equities, infrastructure, private equity, all of these asset classes are classes that are used in the risk management of the group in order to optimize the solvency generation based on the solvency capital requirements.

[Kjetil Krokje;Head of Finance, Strategy and M&A, executive]

And all that's equal, I guess, with risk-free rates going higher and a nominal interest rate guarantee on the liability side, you can take out more of the interest rate risk using or more of the guarantee risk using interest rate papers.

[Jan Gjerland, analyst]

Yes, rather than equity. On the flow?

[Kjetil Krokje;Head of Finance, Strategy and M&A, executive]

Yes. On flows in Sweden, my understanding, and correct me if I got this wrong, is that there are less bonuses to move pensions in Sweden now than it was before Christmas. So that is at least my impression that, that has now stopped. But please correct me if I'm wrong here.

[Odd Arild Grefstad, executive]

No, but you are absolutely right. There is more a normal market back in Sweden now, you don't see these bonuses in the market anymore. There is some overlap into the first quarter based on transfers that was done in the fourth quarter, but we expect this to be much more normal transfer market this year compared to last year.

[Lars Aasulv Løddesøl, executive]

So just to emphasize, most of the transfers you see now is a consequence of transfers made in the -- made last year, which are now in the books for the first quarter.

[Jan Gjerland, analyst]

So improving into the second quarter now?

[Odd Arild Grefstad, executive]

Absolutely.

[Daniel Sundahl, executive]

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

[Blair Stewart, analyst]

Few questions, please. First one is on solvency but both in terms of operational capital generation and the runoff effect with higher interest rates going forward and notwithstanding the very short-term impact of rebuilding buffers. How does the higher rate environment impact your view of the normal level of solvency build going forward and therefore, just allow us to assess what the ongoing share buyback capabilities of the company might be? That's my first question.

The second question is quite simple. Just on the fee margin in the Unit-Linked Norway business. So I noticed that was 69 basis points, slightly higher than expected. Perhaps I just wondered if you could comment on whether you're seeing a leveling out there? Or is that just normal quarterly volatility?

[Lars Aasulv Løddesøl, executive]

Yes, we haven't got an updated number for you in terms of solvency generation. But as I said in my presentation, solvency generation will go up with higher rates. So I guess we will revert on Capital Markets Day at the beginning of next year with more details on that. But as rates increase, that will -- the solvency generation will go up in the coming years.

In terms of the fee margin for Unit Linked Norway, you are correct that it is 69, but 69 basis points, but there is a one-off effect of transfer between the asset manager and the life company in Norway, which explains NOK 17 million, which means that the underlying is NOK 64 million, slightly down from last quarter, but very much in line with the previous guiding on the effect of the individual pension account on the Norwegian Unit-Linked market.

[Daniel Sundahl, executive]

I think that answers your question, Blair, unless you have a --

[Blair Stewart, analyst]

Okay. Yes, great. I think it would be useful to come back with a view of what the organic build might be given that we're in a higher -- materially higher interest rate environment, I think that would be really useful. But I appreciate that's not available at the moment.

[Daniel Sundahl, executive]

Excellent. The next question comes from Vegard Toverud of Pareto Securities.

[Vegard Toverud, analyst]

I also have a couple of questions there. If I understood you correctly, you said that you aim for continued market share gains in the P&C market. Will you do this by acquiring more portfolios? Or if you're aiming to do this organically, which levers will you pull as the first.

Secondly, on the transfer balance. Again, if you look at the DC transfers, they've been negatively since the beginning of 2020. Is there any reason that this will change? And then specifically on Norway, which where we've seen the same development? Or should we expect this trend to continue going forward?

[Odd Arild Grefstad, executive]

If I may start, when you look at the P&C, we mainly believe that it will be organic growth in the Norwegian market. If there is portfolios available, of course, we look into that because we have this very strong capital position that makes it very profitable for us to grow in the P&C business. But we have a very strong brand name, as you know. We have now also increased our sales capabilities in the market quite substantially. So that's why we believe and feel very sure that we will continue strong growth within our P&C operations.

When it comes to the transfer balance in Norway, of course, last year was a very special year with all the changes due to the own pension account. And with a somewhat higher market share within the defined -- help me -- the active schemes compared to the individual policies, we had a transfer out that was quite technical during 2021.

Now we are into a more normal market, and we don't expect to see transfer out going forward. We expect to see this as much more normalized than we feel we have a quite very good competitive position in the market and has seen strong sales, especially in the SME market during the first quarter and into the second quarter.

[Vegard Toverud, analyst]

Just then on P&C. When you are repricing, and you mentioned this in the discussion around inflation, do you price in the same way as the market at the same level? Or do you price slightly below the gain market shares?

[Lars Aasulv Løddesøl, executive]

I think you could look at our combined ratio target, which is slightly higher than some of the competitors. And we are able to operate in a very profitable way with a higher combined ratio target due to the fact that we -- it requires less capital for us to take on more P&C risk due to the diversification benefits under Solvency II.

[Daniel Sundahl, executive]

The next question comes from Thomas Svendsen of SEB.

[Thomas Svendsen, analyst]

I have 2 questions as well. First, on your Slide 13, there showing the much better environment for your solvency or capital return outlook. Can you sort of quantify how much quicker you could return the capital tied up to the paid-ups due to this change in environment? That's question one.

And question 2, on the Danica. Previously, we've talked about mitigating factors for the solvency to get from Danica. Could you give an update on that, how we will mitigate the solvency hit?

[Kjetil Krokje;Head of Finance, Strategy and M&A, executive]

I think on the first question, Thomas, on if the increased spread on investment will enable us to return capital faster, I think we -- as Lars previously said, all else equal, capital generation increases when we have higher rate environment. But we don't make any kind of changes to your communication on the amount or kind of guidance on the pace of capital return as such. We'll keep you updated and see how the interest rate environment develops. I think is an overall comment on that.

[Lars Aasulv Løddesøl, executive]

It's quite a volatile interest rate market still. And I think in order to give you meaningful guidance, we should probably see where the short-term rates end up in the medium term here.

[Odd Arild Grefstad, executive]

And then we had a second question on the mitigating factors of the Danica acquisition on the solvency?

[Lars Aasulv Løddesøl, executive]

We want to finalize the acquisition and actually get the permission to do that before we start -- or before we can start doing other things. But as soon as we are allowed to start the implementation of this acquisition, we will also give you more guiding on how we can mitigate some of the solvency -- the negative solvency effects.

[Daniel Sundahl, executive]

Good. Does that answer your question, Tomas?

[Thomas Svendsen, analyst]

Yes.

[Daniel Sundahl, executive]

I believe we have another question from Hakon Astrup of DNB Markets. Is that correct?

[Håkon Astrup, analyst]

Yes. But Thomas asked the question, and I've already got an answer. So, thanks for that.

[Daniel Sundahl, executive]

Okay. No problem. We have another question coming up from Vegard Toverud of Pareto Securities.

[Vegard Toverud, analyst]

A couple more questions, if I may. If you look at the DC margin in Sweden, it seems to be dropping somewhat Q-on-Q. Is there just volatility that we should expect in that? Or is there something special happening in the quarter? And if so, does it change your outlook on margins there going forward? That's the first one.

And second one on the bank with the repricing that you now have announced, which kind of impact do you expect for the fee part of the bank?

[Daniel Sundahl, executive]

I think will start trying to answer your questions on the margins in Sweden Vegard. There's some mixed effects here, some volatility due to the market movements in the quarter. And that's -- when we calculate the fees, it's an average through the quarter on the AUM base, which was lower mid-quarter than it was on the opening balance and based on the ending balance. So an average lower fee income on a balance, which was higher when you calculate the margin at the beginning and end of the quarter, give some quarterly volatility.

Overall, there are a few underlying drivers that decrease the margins over time. We do take on lower margin business when we transfer large portfolios to SPP, but at almost no marginal cost. When we succeed in the market for unionized pensions, these are very low margin contracts, but they are not associated with any sales or marketing costs. It's also at the low marginal cost. So those things are gradually reducing the margins.

But I think on the -- as we've said for the unities a whole, we expect margins to be in the area of 60 basis points going into 2023. We're close to 60 basis points in Norway, a little bit above. And Sweden, we expect it to be slightly higher for now around 70 basis points.

[Vegard Toverud, analyst]

And no change to that view?

[Daniel Sundahl, executive]

No, no change to that view. The impact from repricing in the bank.

[Lars Aasulv Løddesøl, executive]

I don't know if there is any specific repricing in the bank. We basically have continued the growth pattern in the bank, and we have succeeded well with maintaining margins and growing quite strongly in the bank market.

[Daniel Sundahl, executive]

We have another question coming up from Peter Eliot of Kepler Cheuvreux.

[Peter Eliot, analyst]

2, if I may. The first one, I mean, when you originally announced your thinking about freeing up capital and returning money and we had the NOK 10 billion figure. That was to be used sort of partly for share buybacks and possibly partly for reinvesting in the business. Now that we're at the stage of starting share buybacks.

I'm wondering, are you able to give us sort of any view or guidance at this stage on the balance sort of between the 2? I guess it will depend on opportunities as they arise over time. But it would be useful to get your current view on sort of what proportion of any capital freed up might go to the various sources, that would be great.

The second question, on the tax cases, just wondering the probably the answer is probably no, but just to check. Is there any chance of any more news on this in the short term, anything potentially coming up? Or is it now just a case of waiting a few years for the various court cases to unfold?

[Odd Arild Grefstad, executive]

If we start with the capital release, I must say, it feels very good now starting to do share buybacks. And with the higher rates, I feel very comfortable that there is, of course, a lot of capital to free over the couple -- over the next years. The NOK 10 billion that we announced before 2030 was, of course, a cutoff. There is even more capital to be freed from Storebrand over time. So I feel comfortable that we will both be able to do share buybacks and dividends that will meet the expectation of the shareholders. And on top of that, of course, we look for opportunities when we see one that we mean can create shareholder value. We also feel that we have the opportunity to follow that. So I think we absolutely feel that we are in a position to follow both these parts going forward.

[Lars Aasulv Løddesøl, executive]

And with respect to the tax issues, Peter, we are awaiting -- you should not expect any news in the short term. There is -- the process is going on in the tax -- with the tax authorities, and we have not yet reached a time where we will go to the courts, but that could happen most likely sometime next year, and then you have probably a legal process that's going to take 2 or 3 years. So we're talking about a relatively long time of uncertainty.

But I would like to comment that the clarification we got in the letter on April 7, reduced the negative outcome from our uncertainty, and that's why we could take into account these NOK 68 million to be exact tax income in this quarter. And in addition, the further downside from the remaining downside has been reduced by approximately NOK 130 million. So this is explained in the notes in the quarterly accounts. But so some of the upside has gone down with actually being confirmed at this stage and the downside has been reduced.

[Daniel Sundahl, executive]

We have questions coming in from 2 more analysts before we have to break off. The next question is from Jan Erik Gjerland of ABG Sundal Collier.

[Jan Gjerland, analyst]

Just on the solvency ratio of 184, what do you think is the risk for you coming down to below 180 again? Because I remember you said that you should sort of give this 180 threshold at the year-end and the semiannual accounts. And now you're starting at it in the Q1 numbers. And of course, you have to apply for the buybacks permission at the FSA level. So that's going to take some time.

But how certain are you that you're not coming down below 180 and not seeing a sort of a sustainable level above 180 going forward. What's the risk, as you can see, how much Danica take down? And the business mix, as you said, you will now invest into bonds rather than negative which might keep it up. So it's more about how sustainable is this level above 180 as you see it today. That's my first question.

And the second was, on the risk result you talked about a little bit on the morality in -- for the elder people. Is it both Norway as well as Sweden? And should we expect anything more from each of these countries going forward depending on the longevity of the population?

[Odd Arild Grefstad, executive]

Well, first of all, I think the direction of the solvency ratio is quite clear and the pace of our value creation solvency equation is also stronger as we have already mentioned here. Of course, based on the sensitivities that Lars has showed, it is possible to see how comps that bring us below 180% again. But then again, we now start a share buyback program based on the solvency position this quarter. And we will conduct that program as long as we are in the targeted level of 150% to 180%. Then again, of course, we have to look at as always number. Are we still overcapitalized and then we start a new share back, buyback program. That's the way we look at this. And over time, of course, the direction is very clear. We will create quite strong solvency positions going forward.

[Lars Aasulv Løddesøl, executive]

On mortality, basically, if you see the long-term trend in Norway and Sweden, it hasn't materially changed. But as you're well aware from all you read in the papers and so on, there was an increase in mortality in Sweden in 2020 and then a little lower in '21. In Norway, we had the opposite. It was lower in 2020 and also into the first half of 2021 and then higher again towards the end of 2021 and into 2022. So we don't see any material changes in the overall curve, but there is a clear blip on the curve that goes a little -- it's a little different in Sweden and Norway, but can be explained by the different measures implemented in the 2 countries in order to counter the pandemic.

[Daniel Sundahl, executive]

The last question comes from Ulrik Ardal Zurcher of Nordea.

[Ulrik Zürcher, analyst]

Just with higher rates and lower duration gap, can we be in an area where you would actually consider it beneficial to just hedge the interest rate risk in Norway fully?

[Lars Aasulv Løddesøl, executive]

We constantly look at the -- creating as much pension as we can for policyholders and protecting shareholders' equity. So it's a trade-off between a couple of different goals. And we will hedge in some of the outstanding duration risk as we have shown on Picture 13 in the presentation. There is still some outstanding. And there, we try to -- we try to maximize pensions within the regulatory capital requirements.

[Odd Arild Grefstad, executive]

Yes. And I'll add to that. I think we feel very comfortable about our risk management in this part. We have different sub-portfolios with different buffer capital situations. Of course, in some of these portfolios, we use the opportunity now to hedge out most of the risk. But in some portfolios, there's still very strong buffer capital situation where we can take on risk and also create better pension and also better potential profit chain going forward. And this is managed on a daily basis with our risk management.

[Ulrik Zürcher, analyst]

Okay. So not likely that will we get a message that you sold the risk yet?

[Odd Arild Grefstad, executive]

Well, we feel that we have very much solved the risk and measure the risk in a very good way, but that is done to create maximum value both for shareholders and policyholders.

[Daniel Sundahl, executive]

Ladies and gentlemen, we have now reached the end of today's presentation. Our next quarterly results are due on the 14th of July, and we look forward to seeing you then. Thank you all for your questions and for tuning in to our presentation today. Have a nice day. Goodbye