Storebrand ASA

OSE:STB

Earnings Call Transcript 2023-Q1

[Johannes Narum, executive]

Good morning ladies and gentlemen, and welcome to Storebrand's first quarter result presentation. As usual our CEO, Odd Arild Grefstad will present the key highlights of the quarter followed by CFO, Lars Aasulv Loddesol who will dive deeper into the numbers and explain reporting under IFRS 17. At the end of the presentation, participants in the Teams' Webinar will have a chance to ask questions. The details on how to join the webinar are found on the Investor Relations website. But without further ado, I give the word to our CEO Odd Arild Grefstad.

[Odd Arild Grefstad, executive]

Thank you, Johannes and good morning everyone. Storebrand continues to deliver strong growth in all business areas; Occupational Pension, Asset Management and the Norwegian Retail Market. Let's look at the first quarter's highlights. This is the first quarter in which we officially report in accordance with IFRS 17 and IFRS 9 and our reported IFRS profit before amortization and tax was NOK 1,157 million in the quarter. Lars will revert with some more details on the impact of the new IFRS standards later in the presentation.As previously communicated, our primary focus will continue to be on our alternative income statement, which you all are very familiar with. The results are fundamentally different and cannot be reconciled with the official IFRS results. What's important to know is that the alternative income statement is close approximation of the cash generated in the period and hence we have renamed it to cash earnings for clarification.As shown next to the IFRS result on this picture, Storebrand's cash earnings from operations amounted to NOK 518 million and the financial and risk result amounted to NOK 255 million. The operating result is negatively impacted by integration costs related to acquired businesses and weak insurance result due to seasonally high claims and increased disability.Looking at the growth, I am very proud that we have reached an all-time high level of assets under management of NOK 1,111 billion, supported by NOK 18 billion in positive net inflow in the quarter. Furthermore, our insurance business has grown 19%, our bank by 18% and unit-linked premiums have grown by 30% since the first quarter last year. The solvency ratio remained solid at 179% in the quarter and continues to be above the threshold for our capitalization of 175%. We will apply for additional share buybacks after the current tranche of NOK 500 million is completed.During the quarter, we have continued to see turbulent financial markets with international banks struggling and the credit market being volatile. It is satisfactory to see that our high-quality investments are able to shield customer funds. And at the same time, we continue to create value for shareholders. We have seen continued increased interest rates driven by high inflation. This is benefiting the guaranteed book and the company portfolios as communicated at our capital update. At the same time, it will drive growth in the unit-linked and risk premium products.Weakened domestic currency and high inflation put pressure on costs, but we are prepared to maintain strict cost control and increase profit also in such an environment.Now let me turn to the development in disability that we observed in the society. Since the pandemic, there has been a significant increase in disability levels in Norway. 10.5% of the workforce is currently unfit to work and receive disability benefits from the states. Our expectations have been that disability rates should decline after the pandemic towards previous levels. Last year, we saw lower numbers receiving work assessment allowance, meaning fewer people going into long-term disability. Unfortunately, we now see this trend reversing as -- so far this year. And we will follow this development very close the coming months. For Storebrand, disability levels are high, both in group life and pension-related disability insurance in Norway. Further price increases will be implemented with full effect from 2024.Storebrand also seeks to be a part of the solution through both reactivation and preventive measures. And we will actively use our toolbox in collaboration with customers to help more people back to work. And we encourage government, businesses and society to collaborate and curb this growing trend to secure a sustainable welfare system. As you are well familiar with, Storebrand aims to take 3 commercial positions in the market we operate in, to be the leading provider of occupational pension in both Norway and Sweden, to be a Nordic powerhouse in asset management, and to be a fast-growing challenger in the Norwegian retail market for financial services. And despite the increased uncertainty around external factors such as persistent high inflation and an increased disability the NOK 4 billion profit ambition for 2023 is maintained.Our focus is on total capital generation in the business, and we aim to deliver growing ordinary dividends and NOK 10 billion in share buybacks by 2030. On top of this, we expect to generate excess capital available for growth or returns to shareholders.Unit-linked premiums grew 30% year-on-year and synergies from the Danica acquisition will gradually be realized according to plan. Furthermore, we generate positive new sales and the strong trend of positive inflow continues in both Norway and Sweden. An important achievement worth mentioning this quarter is that SPP's products now will become selectable in both segments of the unionized pension market in Sweden, both within unit linked and with capital-light guarantees.Storebrand delivers all-time high assets under management in the quarter. The group synergies between pension and asset management are evident and continue to be a growth enabler. Storebrand Asset Management is especially well positioned within sustainability and alternative asset classes. We have a strategy to grow external mandates, and we have succeeded in growing the external share while growing our total assets under management. This shows that we have attractive solutions for investors, and we have had consecutive years with positive inflow despite turbulent financial markets.Moving to our Retail operations. Storebrand continues to grow in the retail market. The bank has reached a mortgage balance of NOK 70 billion this quarter and has more than doubled its quarterly cash earnings year-on-year to NOK 96 billion in the quarter. The bank is a catalyst for our retail market offering, and we see very strong synergies between the bank and our savings and insurance offering. As an example, 40% of our mortgage customers have now also bought an insurance policy in Storebrand. In Storebrand, we continue our digital journey by migrating fully to the cloud, investing significantly in renewable of our core back-end platform and developing our digital business.We have been applying advanced machine learning to optimize risk pricing, effectively detect insurance fraud and as a powerful tool into our customer development. Now we are accelerating our adoption of the next generation of artificial intelligence by building on our in-house experience and competence. Generative AI runs on the cloud, where we have built strong cloud competency in the group and have solid experience of applying technology with privacy, ethical and legal measures. Storebrand is built on trust and our customers and owners should always feel confident that we will use this technology in a safe and responsible manner.And with that, I give the word back to you, Johannes.

[Johannes Narum, executive]

Thank you, Odd Arild. Now let's take a closer look at the numbers. Lars, please go ahead.

[Lars Aasulv Løddesøl, executive]

Thank you, Johannes. I will briefly go through our first quarter results and the traditional setup before I run you through the group statutory IFRS results, which are now significantly changed with the new accounting standard for insurance and guaranteed products, IFRS 17. Let me start with a short explanation. For the benefit of analysts and investors that have been accustomed to our alternative presentation of our financials, we will continue with the alternative reporting for the time being. This reporting is a better approximation of the cash generation in the business, which in turn is the basis for dividends and share buybacks. We have renamed the profit lines to cash equivalent earnings as they can no longer be reconciled with the group's statutory IFRS reporting due to the backward-looking characteristics of the cash reporting and the forward-looking nature of IFRS 17. The only significant change to historic reporting is that amortizations are reduced. The alternative presentation is based on the consolidated statutory accounts of the legal entities in the group, where group effects related to amortization on acquired businesses are excluded.The Storebrand Q1 results are relatively soft, primarily following weak disability results. The underlying growth, however, continues, and our ambition to reach a group result of NOK 4 billion is upheld, fueled by one, structural and market growth in assets under management, driving fee income; and two, seasonal improvements in growth in insurance; and three, an increase in return on net financial assets.The solvency has strengthened in the quarter, and we have built 2 percentage points of solvency despite increasing our equity exposure with a negative impact of more than 5%. Furthermore, we have had headwind from lower long-term rates and from regulatory factors, where an increase in the symmetric equity stress is the largest contributor. This has allowed capital allocations to ordinary dividends to share buyback program, repayment of outstanding loans and the acquisition of Kron. After capital allocations, the solvency remains strong at 179%.The solvency sensitivities are pretty much unchanged in the quarter. The fee and administration income is up from last year following the acquisition of Danica, but still hurt by lower assets under management from weak financial markets through 2022. With the rise in assets under management in the first quarter, the fee and administration income should rise in the coming quarters. The insurance result is roughly at the same level we saw last year, but below the targeted level due to weak disability results. The operational cost is up and in line with the plan and includes the cost from both the acquired -- or the acquired businesses, Danica and Kron. The cost and income synergies from these transactions will be realized throughout the year for full effect next year. The financial results are improving as a consequence of higher interest rate level as previously guided. You will note that the amortization line has been restated. The amortization is including group effects on acquired business due to the changes in the alternative reporting, as mentioned in my introduction.In this quarter, we recorded tax income generated by the tax treatment of currency hedges and the strengthened Swedish Norwegian exchange rate. The normalized tax rate remains at 19% to 22%. The soft results show through in all result areas in savings caused by one-offs and low assets under management into the quarter, in insurance from seasonal factors and rising disability, and in guaranteed from less profit sharing. Other is lifted by better returns on net financial assets.Unit-Linked Norway shows good growth from the Danica acquisition and strong growth in reserves, combined with a stable margin. Unit-Linked Sweden is down following margin pressure. First quarter last year included a 1-year -- a one-off gain in SPP. Asset management is significantly down. Transaction fees were lower by NOK 20 million in the quarter compared to last year, and the results are hit by periodic effects and other one-offs with a total of NOK 23 million. Costs are up following strong performance and corresponding bonus accruals, a continued ramp-up of the business and negative currency effects.Asset Management has significant cost in foreign currency from a range of items like Bloomberg terminals to foreign offices. With a record assets under management of NOK 1.1 trillion coming out of the first quarter, the momentum into the rest of the year is good. In addition, performance fees has been good and performance fees as of the end of the first quarter were NOK 47 million. As you may recall, the performance fees are only booked at the end of the year.Retail Banking shows the best result in the history of the bank from continued growth and improved margins. This picture shows significant underlying improvements in all the businesses under savings. Going forward, the assets under management growth will lead to higher earnings. As Odd Arild mentioned, the net positive flow in asset management continues.Under insurance, we put behind us a cold and wet quarter with slippery roads and freezing water pipes. Seasonal swings are normal this year was worse than a first quarter normal. The increase in disability hits both disability insurance, health insurance and group life products. Fortunately, the reported disability numbers in April show an improvement, and this will be a key area to follow in the coming months.The combined ratio in the quarter is 97% higher than our stated goal. For the last 12 months, the average is still 92%, in line with the targeted 90% to 92%. With the inclusion of Danica, volume growth in all areas, combined with price adjustments of 6% to 10% across different products, we still see premium growth in all segments.Our market share in Retail P&C has grown to 6.4% according to the latest statistics. The cash equivalent earnings from the guaranteed business are generally okay, although profit sharing in Sweden is somewhat below plan. With a higher interest rate level, we prioritized buffer building in the short term and expect an increase in profit sharing in a few years' time. The reserves and guaranteed are up following a currency translation effect from a stronger Swedish kronor to Norwegian kroner. But the long-term nature of the guaranteed book continues -- sorry, the long-term runoff nature of the guaranteed service continue with guaranteed reserves as a percentage of total pension reserves declining and now at 45%. Buffers have been strengthened by approximately NOK 2 billion in the first quarter.Under Other, we record the financial results from the net company capital. With a higher interest rate level, we expect continued strong results from this area.And now saving the best for the last over to IFRS 17 reporting. Starting this quarter, our statutory accounts will be according to the new IFRS standards, including IFRS 17 and IFRS 9. We published comparable numbers from last year. And in the appendix, we have included additional information about transition, sensitivities and vocabulary. We intend to add CSM movements also next quarter. In our quarterly report, we have included detailed notes on the new accounting rules.As a help to the readers, let me give you a short explanation on how to read the interim report published this morning. The first section will be familiar to you and broadly follow the usual alternative reporting in the results segments, Savings, Insurance and Guaranteed. The second section contains the new statutory financial statements under IFRS for the group. This will deviate from the numbers in the first section due to the forward-looking nature of IFRS 17 on insurance products, including the guaranteed pension products. The third section shows the financial statements for Storebrand ASA under Norwegian GAAP. Norwegian GAAP does not incorporate IFRS 17 and is unchanged from before.Here, you see the group financial statements under IFRS. I would like to point out the following: one, the first section can be reconciled with income from unit linked and derived from gross income in asset management and bank income. The only change from the Savings segment is that paid up policies with investment choice are included under insurance due to the embedded insurance elements in this product. Two, operating income, excluding insurance, shows the gross income from products outside IFRS 17. Three, insurance revenue and expenses covers all insurance products, including guaranteed pensions because they include insurance elements. In the interim report, you will find a detailed breakdown by product category, including CSM and loss component information. Four, the insurance service result gives you the result from the products subject to IFRS 17. And five, the net financial result includes both return on customer funds and owner funds and equals the investment income and financing expenses for the group.Here are the same figures, but now with what I consider to be the main takeaways. One, the group profit before amortization and tax was NOK 1.157 billion in the quarter compared to NOK 719 million in 2022. The difference in group profit after tax expenses under IFRS compared to cash equivalent earnings, stems from a whole different way to look at result generation, including a release of CSM created by equity on transition, release of risk adjustment and discounting effects on claims.Two, insurance service result under IFRS was NOK 637 million in the first quarter. The reduction in insurance services result compared to last year is due to higher claims in the P&C business and disability. Three, under insurance revenue, the CSM release was NOK 513 million in the quarter, and the release of risk adjustment was NOK 84 million. You can find these numbers in the interim report. The release of CSM and risk adjustment is determined by the coverage unit, which represents the expected duration of the insurance contracts. More details on CSM sensitivities and the IFRS balance sheet are shown in the appendix and in the interim report.As a consequence of the new accounting standard, we will update our dividend policy. With possibly more volatile group results according to IFRS, we removed the part about dividends being more than 50% of group result after tax. However, we maintain the important remaining part of the statement, paying at least the same nominal amount as the previous year.And with that, I pass the word back to you, Johannes.

[Johannes Narum, executive]

Thank you, Lars. We are now happy to take questions from our audience. [Operator Instructions] And the first question comes from Peter Eliot of Kepler Chevreux.

[Peter Eliot, analyst]

The main question really was how we should think about the drag from the disability going forward? I mean, I guess, if the same disability rates that you're currently seeing persistent in the upcoming quarters, should we expect the same drag on your results we're seeing today? And I mean, if it keeps getting worse, should we expect the results to deteriorate. I appreciate you're going to be compensated with higher prices, but just wondering how long that would take. And if they don't come through immediately, we know whether it will play out as I've just described. And I guess related to that, you've reiterated your NOK 4 billion target. So I guess that means you're not thinking the results will be too long lasting? Or is it a case of maybe you can find compensation elsewhere? Or was it just that there was some conservatism originally? Just, if you could help us think about those moving parts and how you're thinking about it. I think that's probably my fair share of questions. And I wanted to go on with a second one. We love the part, I'll leave it there.

[Odd Arild Grefstad, executive]

There has been some uncertainty around the disability situation through the COVID period. And after the COVID period as we put that behind us, we saw that disability figures were improving. Unfortunately, we've seen in the first quarter that disability was once again picking up, which is an above our expectations. So this is something we follow very closely. We're obviously fully reserved for the situation right now. And we have, as I mentioned, also seen better figures in April. But this is an area of concern, not only for us but for society as a whole. If we can't get disability pensions out or down in society, we want people to come back to work. That's good for people. It's good for society and obviously good for our results.

[Lars Aasulv Løddesøl, executive]

And if I might add, there is seasonal elements also in disability. Typically, we see that the first quarter used to be somewhat worse compared to the other quarters. And we have already seen that effect into the second quarter. And when it comes to repricing, the main repricing is by year-end. So we have the opportunity now to make changes in the prices effective from first quarter 2024.

[Peter Eliot, analyst]

So sorry, just to clarify that. So it sounds like any price increases won't come into effect before the end of this year. So if -- I appreciate the seasonality and all that, but just [indiscernible] worst-case scenario, if you were to see the same experience that you saw in Q1 repeated across the following quarters, then we should expect a similar result. Would that be a fair assessment?

[Odd Arild Grefstad, executive]

You saw that the insurance results were similar to what they were last year. We hadn't expected an improvement with lower disability now. We've not seen that lower disability. Insurance results are weaker than we had expected. But it's not like it's a loss or anything. It's like weak results, and hopefully, they will improve going forward with seasonality and with price increases that has been implemented already in the beginning of the year as we come into a larger and better season in Norway. And as I said, so far in the second quarter, it looks promising with the figures that we've gotten for April. So it's impossible to give you a number on the uncertainty as this is very much a society problem and not a Storebrand as such and not something that we can control.

[Johannes Narum, executive]

The next question comes from Hakon Astrup of DNB Markets.

[Håkon Astrup, analyst]

Two questions from me and the first one, a follow-up on the insurance and disability side, just given the headwinds that you are facing at the moment, do you think that it will be difficult to reach the 90% to 92% combined ratio target for the year? That was the first question. And the second question is regarding dividends and payouts and your updated dividend policy. And my question is, have you say, been in dialogue with the Norwegian FSA regarding the volatility in IFRS 17 earnings and how that should be taken into account with regards to dividend policy and that you may have to send more applications, if you were to say, come above the 100% threshold with total distributions.

[Lars Aasulv Løddesøl, executive]

On the first question, insurance and disability. I can confirm that we maintain the objective or the goal of 90% to 92% for the full year. When it comes to the dividend policy, this is very technically based on the IFRS 17 and the volatility we see in those kind of numbers. When it comes to cash flow, solvency ratios, everything is calculated in the way we always has used to do. And we have not been in contact with the regulator around this issue. This is just a change in the policy that is then aligned to the IFRS 17 framework.

[Odd Arild Grefstad, executive]

And if I may add the results from all of the subsidiaries will be according to SGAAP and NGAAP and therefore not impacted by the changes in IFRS, which is why we say that this is not going to impact the upstream of dividends to the holding company. So it's only on the group accounting that the IFRS will come into -- or will show up in the numbers and with possibly some more volatility.

[Håkon Astrup, analyst]

But could it lead to more, say, dialogue in applications to the FSA than you have been used to, due to the earnings volatility on the group level?

[Lars Aasulv Løddesøl, executive]

No, we don't expect that to be the case. We have the reporting we have. And of course, all our dividends and share buybacks is based on our solvency position.

[Johannes Narum, executive]

Thank you, Hakon. The next question comes from Tryfonas Spyrou of Berenberg.

[Tryfonas Spyrou, analyst]

I have 2 questions, please. So the first one is that on buybacks, you said you tend to tie for another buyback once this tranche ends? And should we take that as a signal that you are quite confident on the trajectory of the solvency in the near term? I guess there a number of scenarios, solvency sensitivity side that could bring you below that level 175%. So any comments on the visibility of solvency in the near term would be very helpful. And the second one is on the buffer capital, particularly in Norway, I think it's up only to sort of 20 bps despite no profit sharing and building up the buffer. So I would have expected this to rise a bit more. So I was wondering there's a specific reason for this small movement there. And similar to this, how much has the buffer build contributed to solvency capital in Q1?

[Lars Aasulv Løddesøl, executive]

Yes. If we start with the share buybacks. We have -- will continue with the share buyback program we are into now as soon as we get the permit from the regulator that was paused due to the [ AMG ] and the need for a new permit based on the new -- well decision in the AMG. So that's more technical, I expect to be up and running with that program as soon as possible. Then we intend to put forward a new application, so we can continue more or less doing share buybacks when this program ends. So that is the plan. And when it comes to solvency situation and solvency generation, I think we used a lot of insight into that question in our capital update. And as you see, we have a very strong expected increase in solvency. We are in a real run of position of our back book now, and we create good result, increasing results in our front book. And based on that, of course, we expect to be about 175% and can continue doing share buybacks throughout the year.

[Tryfonas Spyrou, analyst]

So just to follow up on that one. The application for the second tranche, is that expected to be a similar magnitude NOK 500 million? Or do you expect to get authorization for a bigger buyback amount given that it takes time for this application to go through?

[Lars Aasulv Løddesøl, executive]

Yes, we have the opportunity to do the application now based on our Q2 numbers and then be able to -- even if there is some time lag here to start doing the next share buyback even with the NOK 500 million tranche just after we end this tranche. So we look into this because now we have a new AMG permit, and we -- I think we have to come back with the size and the magnitude of the programs. We have started with NOK 500 million programs, but we have to look closer into that going forward.

[Odd Arild Grefstad, executive]

With respect to the buffer capital, you see that the composition of the buffer capital on Page 21 in the analyst presentation is such that especially market adjustment or market value adjustment reserves that are up, which is the most flexible and good buffer that we have. So there has been some change in the composition of the buffers, which are positive. The exact impact on solvency for that element alone, I don't have. I don't know [ John ], if you have it.

[Johannes Narum, executive]

I don't have that as a precise number either. It's also important to remember that IFRS 9 has been introduced and has also allowed us to do a better duration matching down on the different customer portfolios, which also then have a positive solvency impact this quarter and also reduce the risk going forward.

[Lars Aasulv Løddesøl, executive]

And I suppose you can see that on the allocation also because we have increased long bonds this quarter, leaving to a situation where they use the higher interest rate level to better match asset and liabilities compared to before.

[Odd Arild Grefstad, executive]

If I may add one additional comment. I see that some of you have commented on the solvency being somewhat weaker than was expected. But keep in mind that we've spent -- we've used the chance that we have a strengthened solvency position, we're used to increase equity investments in order to generate a higher expected return and that alone is in excess of a negative impact on the solvency of 5 percentage points. So it's not that we haven't built solvency. We'll build solvency, but we use some of the risk capacity to increase the risk in our investments in order to achieve higher expected return going forward. We can immediately reduce the equity exposure again to get back that same 5 percentage points of solvency.

[Johannes Narum, executive]

The next question comes from Thomas Svendsen of SEB.

[Thomas Svendsen, analyst]

So a question on costs. Looking at your number of employees, it has steady increase in the past years and of course, due to acquisitions, but could you comment on sort of the underlying increase in number of employees over the last years? And also, what do you expect in terms of underlying development in underlying number of employees throughout 2023 and also into 2024?

[Lars Aasulv Løddesøl, executive]

Thank you, Thomas. We have a strongly growing business in terms of AUM, in terms of the banking lending, in terms of the insurance business. So we need people to do customer service, claims handling, et cetera, et cetera. So there is an increase in the number of employees. At the same time, we aim to improve the efficiency of the organization on an ongoing basis, which means that we should have a smaller increase of employees compared to the increase in the business. And as you say, we've also taken on board Danica and Kron with the employees from these 2 organizations. When we acquire a business, it's obviously an important objective to take out cost synergies as part of those acquisitions, which means that they will increase the efficiency of the company going forward. So yes, there has been an increase of employees that has been smaller than the growth of the business when adjusted for market volatility in the equity markets. But -- and going forward, we will continue to improve the efficiency of the organization. And I think, Odd Arild did mention one very exciting example of that in his presentation half an hour ago in terms of what we are now doing and experimenting with AI.

[Thomas Svendsen, analyst]

Okay. And question #2 on the disability insurance. Could you tell how much you expect to increase prices by from 2024? And how do you see competition acting here?

[Lars Aasulv Løddesøl, executive]

No, I don't think we should be precise around price increases in the market. That is something for also competition that we need to come back to. But of course, we need to ensure profitability in these products, going forward. And we'll look at the numbers that we have in hand and use that as a background for repricing of different contracts into 2024.

[Odd Arild Grefstad, executive]

What I could add on that is that the inflation in Norway just came out half an hour ago, and it came in at 6.4%. So that will influence the [ G ], the base amount in Norwegian or in Norway, which will automatically increase the prices by a similar amount and also the claims on a similar amount. So there's a 1-year lag in terms of when the price increases come and when you have the claims increasing and that has been taken account for in the accounting, obviously, but that is -- that will give you an idea of what the price increases will be in some of these products, where they are based on this G factor.

[Johannes Narum, executive]

Thank you, Thomas. We have a next question here from Ulrik Zurcher of Nordea. Please go ahead, Ulrik.

[Ulrik Zürcher, analyst]

Two from my side. One, has there been any underlying changes on the fee margins. I thought a little bit soft in Asset Management segment, defined benefit and paid up Norway. Is that just a coincidence? Or is there something we should be aware of going forward? And #2, can you elaborate a bit on why you increased your equity exposure because I can't really see that benefiting shareholders, which rather we have a lot of solvencies, you can pay out a lot, but I guess, impact there as well.

[Lars Aasulv Løddesøl, executive]

I'll start with the last question, why increasing equity in the customer portfolio. First of all, it's to increase expected return. And expected return will create a better pension for our customers. It will create a profit split for our shareholders, and it will improve solvency position over time. So -- and then we are doing these calculations. We are looking at a return on the solvency capital that this investment requires and this is a clear positive than return on these investments.

[Odd Arild Grefstad, executive]

With respect to fee margin in Asset Management, we had less transaction fees in the quarter due to less transactions happening in the real estate markets in Scandinavia as well as somewhat lower in the PE that will swing from quarter-to-quarter. So the amount compared to the first quarter last year was NOK 20 million in that element. So if you were to add on those NOK 20 million, then the fee margin would be the same as it was last year. If in addition, you were to add on the better performance fees earned in this quarter compared to last year, it would actually be better. So there's normal fee pressure and nothing outside the ordinary within the Asset Management business. On the paid up policy side, there has been some -- the fee structure includes several fee elements that are linked to the size of the contract, the base amount of national security system, et cetera. And it's some elements within this that has changed. And the amount that we now present this quarter is on the expected similar level for the rest of the year.

[Johannes Narum, executive]

The next question comes from Vegard Toverud of Pareto Securities. Vegard, please go ahead.

[Vegard Toverud, analyst]

You have repeated the estimated cost base for this year of NOK 5.2 billion, excluding all integration costs and the FX with the current integration outlook and the FX that you see, is it possible to give us an estimate including these effects?

[Lars Aasulv Løddesøl, executive]

Not really, no. There are several reasons for this, but integration costs and also to the extent that there are layoffs or similar things that will have to happen in the right order, and it's not something that we can communicate on an expected basis before we have had the necessary discussions with the different parties involved.

[Odd Arild Grefstad, executive]

But what I can say is that the integration of Danica is going very well with us. We see that we are able to take into account the different products into our systems in a very smooth and good way. There is a good development in transition of both people and the integration of systems and operations and also the distribution channels is working very well. So I think integration is ahead of plan and going very well with Danica.

[Vegard Toverud, analyst]

And sorry if it's a repeat of Peter's earlier question. But are you now modeling still for a reduced disability level from the 10.5% in Norway, but at a later stage? Or are you assuming that it will stay at this level or even have some buffers for potential increase?

[Lars Aasulv Løddesøl, executive]

I guess we are expecting some seasonal improvements because that's something we see all the time. And we are working hard with our customers and with society at large in order to find ways to improve the long-term disability development.

[Vegard Toverud, analyst]

But very specifically, if it stays at this level, 10.5%, will you then have to strengthen your reserves further in the following quarters?

[Lars Aasulv Løddesøl, executive]

If it stays at these levels that we saw in the first quarter for the rest of the year, then we will have an impact on the 3 next quarters that is negative compared to the expectation we had for the start of this quarter because the main timing for repricing, there is some contracts that is repriced also during the year, but the main repricing is by year-end. So if you hypothetically think that you will keep the same levels without any seasonal elements, then you will have a negative impact on the results of the 3 next quarters.

[Johannes Narum, executive]

We have a next question here from Blair Stewart from Bank of America.

[Blair Stewart, analyst]

A couple of follow-up questions on the disability side, and apologies for coming back to it, but just on the risk of a reserve increase would that happen if the experience persisted at the current level, presumably pricing will only adjust for the current and future business without necessarily addressing the reserve in position that you have. So what would it take to have a reserve addition in disability. And then moving on to something completely different. On real estate, there's been some market concerns over the real estate markets, not so much in Norway, but particularly Sweden. So what is your experience? What are you seeing on the ground with your real estate portfolio in Sweden? And how do you assess the risk of having to take negative marks on that book.

[Odd Arild Grefstad, executive]

I don't know if we can add a whole lot more on disability that we already have. We -- most of the risk is in 1 year risk. So we can reprice on an annual basis, which means that there is a short tail on most of the disability risk that we have. Some products are very strongly capitalized or strongly reserved, and we have strong margins and some have less margins and are more sensitive to swings in disability. And we have made an assessment after the first quarter what is our best assessment of the actual situation right now, and that has been built into the numbers and given us weaker numbers than we were expecting and planning for the first quarter. What will happen in the future, unfortunately, I can say little about, but we have raised a concern about this, and we've said that we will follow this very closely. So I'm not sure I can give you any more tangible impact or results on that.

[Lars Aasulv Løddesøl, executive]

Should I say something about the real estate portfolio in Sweden. First of all, the real estate portfolio in Sweden is a very well diversified portfolio. It's well diversified both on geography and within different sectors also when it comes to rentals. So it's almost no vacancy in the buildings that we own. And we feel very kind of confident in that portfolio. We had a small write-down of approximately 0.5 percentage points in the first quarter, but that was really due to specific elements within the different buildings. So -- but of course, we see the same kind of worrying about Swedish real estate that are being discussed in the market. But also, you have to remember, our real estate is 100% equity owned. It's no gearing, which is kind of, I think, there are some of the worries are in the Swedish markets.

[Odd Arild Grefstad, executive]

I think that's very important about the gearing effect that is the concern in the Swedish market. And also that this mostly in the housing part of the market, you see this disturbance, and we have very little exposure to that. Typically, we have long leases and also a lot towards more state-owned properties, rented properties. So we feel quite confident when it comes to our real estate portfolio in comparable to other players in the Swedish market.

[Blair Stewart, analyst]

Can I just ask one more, if I can. Why is the Norwegian FSA taking so long to reapprove your share buyback given they had already approved it and it was a technical delay, your AGM was weeks ago. Now what's going on there? Are they short-staffed or something? What's the problem?

[Odd Arild Grefstad, executive]

It's a very good question. Now there is no reason why I think it's just they have a lot of to do, and they have just don't been able to process this. It's nothing else in it. So it should be easy to do actually, but we hope to get it as soon as possible now and start doing share buybacks again.

[Johannes Narum, executive]

The next question comes from Hans Rettedal, Christiansen of Danske Bank.

[Hans Rettedal Christiansen, analyst]

I just have 2 follow-up questions. The first one is on the cost guidance of NOK 5.2 billion. And then you mentioned there's no integration costs there. But in the report, you also mentioned the Kron acquisition has NOK 23 million in negative integration costs this quarter. Could you just say anything about sort of how long those costs are expected to continue? And the second one is on Danica. How much is the integration cost there, if there's currently any; ongoing?

[Lars Aasulv Løddesøl, executive]

On the cost guidance, we maintain the cost guidance. The Kron result, Kron is a separate legal entity, and they had negative results in the first quarter. We aim to integrate that throughout this year and should be fully integrated early next year. But in terms of the cost of running Kron, that's part of the NOK 5.2 billion cost guidance, it doesn't come -- it's not an integration cost on top of the cost guidance. And in terms of the Danica costs, do you have that number? The integration costs are down again in Q1 was approximately NOK 37 million.

[Odd Arild Grefstad, executive]

And you should expect to see some integration costs throughout the year. I think we will have double systems because we have to lease the systems from Danske Bank in the period where we are transforming the products into our own system. That is done gradually. And as I said, it's ahead of plan. But anyway, we have double cost for systems throughout the year. And we, of course, have also the change in staffing and so on that goes on throughout the year.

[Hans Rettedal Christiansen, analyst]

And then the second question I had was just on the transaction fees. And you mentioned there is -- part of it is because there's lower transactions in the real estate part. And I was wondering just on the valuation methodology, how much is that sort of -- at some point, I'm guessing the transactions are going to pick up again. I'm real interested in how much that can lead to sort of a lag effect on valuations if when the market picks up, it does pick up at a different level.

[Odd Arild Grefstad, executive]

I'm not sure I understand what you mean with the impact on valuation.

[Hans Rettedal Christiansen, analyst]

On your property portfolio.

[Odd Arild Grefstad, executive]

Well, our property portfolio is constantly valued at market values and real values, and we use both our own internal models with all the different impact factors that are updated monthly as well as external views on the same. And we measure that against the transactions that do take place in the market. So all of our properties should be correctly valued at all times. But transaction fees does not come from necessarily selling or buying our own properties, but it's part of like the capital investment subsidiary in Denmark you get a lot of transactions on their own. And also, there are some fees in some of the funds that we have in real estate when we sell them by properties. So this is part of the nature of the business that we run, and there is currently less transactions taking place in the market impacting our fees, but it does not mean that it has an impact on valuations as such.

[Johannes Narum, executive]

We have a next question here from Jan Erik Gjerland of ABG.

[Jan Gjerland, analyst]

First one is on the return expectations, both in bonds and this renewed ones in the equity portion where you have increased your sort of level. Could you give us some insight to what kind of running yield you have today on the bond side and also this hold to maturity bonds, which seems to have sort of been able to increase the size of duration. So we can get a further insight to that. And secondly then, how much pick up do you expect from expected return in the increase in the equity portion. That will be my sort of first question.

[Lars Aasulv Løddesøl, executive]

It was a lot of questions as usual Jan Erik. Let me start here with -- first of all, the investments in the bonds at amortized cost portfolio. First of all, as we mentioned, there was IFRS 9 coming into play this quarter. That has made us do some reallocation of some credit bonds so that we mainly bought during the COVID crisis in the spring of 2020 that wasn't any longer capital efficient. So they were kind of replaced in the market, mainly in government bonds in Norway and U.S. So then you can find a run yield on the average of the interest rate market over the last quarter. The running yield on what is the mark-to-market is obviously following the interest rate curve. So they have gone up. When it comes to increase in expected return from equity investments, that's putting a normal risk premiums on top of the risk free rate and 6% on approximately an increased equity exposure, and you can do the math.

[Odd Arild Grefstad, executive]

And on Page 21 in the supplementary, you will find the expected return on assets in the different products. Just to mention also, I suppose you have also seen the proposal from the minister of finance with the change -- proposed change in the regulations for guaranteed and paid-up policies coming hopefully into effect from next year where you can do the same as we have already did on the public sector to combine the buffers and also use it for negative return. And of course, we believe that will, over time, build more risk capacity, giving better pensions for our policyholders and also opportunities to go to profit sharing in a -- faster and better.

[Jan Gjerland, analyst]

The second question is about the technicality around the buyback, you say will end on the 30th of June. So you have sort of from today until 30th of June, if you get applications through today. So is it possible to do the NOK 500 million in such a short term without violating any rules on the buyback side? Or will we actually have a lower level at the end of the day, given what you know today?

[Odd Arild Grefstad, executive]

Well, we obviously have to follow all the rules on how much we can buy back, but we intend to be able -- or the current share buyback program is expected to go up until the 30th of June. And we do expect to be able to fulfill it within that period, but it will depend on the trading volumes in the market.

[Jan Gjerland, analyst]

Okay. And technically, then the third program can also restart after your second quarter results, that’s the plan?

[Odd Arild Grefstad, executive]

That's the plan.

[Johannes Narum, executive]

I think we have no further questions. So that concludes today's presentation. Our next set of results are due on July 14, and we look forward to seeing you then. Thank you, and goodbye.