Storebrand ASA

OSE:STB

Earnings Call Transcript 2018-Q2

[Operator]

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

[Kjetil Ramberg Krøkje, Head of Investor Relations]

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

[Odd Arild Grefstad, CEO & MD]

Thanks, Kjetil. I'm very pleased to announce second quarter results of NOK 812 million. The operating result for the quarter is strong at NOK 645 million. This is a 16% increase from the corresponding period last year. Good growth in savings combined with strong insurance results and continued good cost control contributed to the strong results for the quarter. The underlying solvency margin is strengthened with 3 percentage points in the quarter to 163%. Including transitional rules, the solvency margin is 167%. If you move to Slide #3, you see that in our Capital Markets Day in May, we introduced this picture to illustrate our twofold strategy in relation to active management of our guaranteed products as well as our growth in Savings and Insurance. This is a continuation of our strategy for the last 5 years, but reflects that we are now in a strong -- that we now have a strong balance sheet and are in a long-life solvency position. This means that we have the flexibility to use the balance more actively and that the use of capital of cost going forward will be led by what creates shareholder value and not only by reducing risk. In our front book, we will further develop our leading position within occupational pension and use this position to grow within private savings. Growth within occupational pension and private savings drives the growth within asset management. In addition, the asset management area grows by winning external mandates that is due to strong performance in administration and also our strong position as a leading asset manager on sustainability. Meanwhile, we continue to aim for at least 150% solvency ratio and manage for gradual capital release as the capital needs for our guaranteed business now have peaked. If we then move to Slide #5 to let's take a closer look into this quarter's 3% -- 3 points movement in the solvency position. This movement can be divided into 3 main components. The first is the model changes and improvements we have done in addition to assumption changes from EIOPA. Our internal improvements have given us 1% negative movement in relation to most -- in relation to changes in cost allocation. The assumptions from EIOPA have given 0.6% positive movement. The main effect comes from increased volatility adjustment, which has a, of course, positive effect. This is contracted by some increase in the equity stress. The second main element is due to market and business mix development. In Norway and Sweden, long interest rates have fallen by 9 basis points in the quarter. And this has, of course, led to a negative effect on solvency. On the other hand, returns have been strong and this has led to increased investor capital. And on top of this, the conversion from defined benefit to paid-up policies has been very low in the quarter. In sum, this has led to a 1% point increase in the solvency margin. Thirdly, a good result for the quarter has built 3% in solvency margin, of which half is allocated to dividend. So we'll book a 1.5% increase from this element. Then let's move to Slide #5. As a summer talk, we also see a strong reserve growth and building up of our capital that has decreased the solvency margin in the quarter. Equally important, we see that the sensitivities for longer interest rates and falling equity market is considerably reduced in the quarter. Now we see that the 15 basis point fall in the interest rate from today's level will reduce the underlying solvency margin with only 6 percentage points. Again, increase in buffers and increased asset duration has led to these reduced sensitivities. In sum, we now have a strong solvency position and are robust towards potential market stress going forward. Then let's move to Slide #6. We see that the strong growth in Savings segment continues. Unit Linked reserves grew by 18% compared to second quarter in 2017. Asset under management grew by 14% since second quarter in 2017. During this quarter, we have seen a less development in asset under management, and this is partly due to some asset under management reduction in SKAGEN related to negative returns on emerging markets as well as some outflow of customer costs. Our bank has had a positive development with 12% volume growth in retail loans during the past year. Growth within insurance has been low, but we see now signs of growth picking up towards the end of the quarter, and the profitability is very good in this segment.If you then move to Slide #7, part of the growth within Unit Linked stems from the Swedish occupational pension business in SPP. We now see impressive growth in our Swedish business and premium income has increased by 22% since the same period last year. The positive development is a result of good sales and very positive development in net transfers. SPP has been through a substantial digital transformation. It is now perceived to being a customer friendly and a very strong positioned occupational pension company in the Swedish markets.Slide #8. We are actively working with the digitalization of our front end and our value chains in Storebrand, both through our own digital innovations as well as through partnerships. In this respect, Storebrand Bank has partnered up with the Swedish savings app Dreams. The savings app has introduced -- was introduced on a small scale in January and after full launch in June, the number of users has grown to over 30,000 individuals. The app has also received top rating among savings apps in Norway. With Dreams, we are reaching a new customer segment. A typical Dreams customer is a female under the age of 30.Slide 9. In Storebrand, we are also investing in more long-term saving solutions for our customers and are firmly committed to our focus on sustainable investments. It is therefore a pleasure to present to you another exciting new savings concept that we just launched called bølge or wave in English, where we give customers the opportunity to invest directly into the 17 sustainable development goals. In other words, you can invest directly in the development goal that is closest to your heart. For example, we just launched a portfolio where you can invest in gender equality based on the analysis of what companies scored the highest based on their commitment to solving this important issue. Each portfolio consists of the top 4,200 companies contributing solving each SDG. This is the concept we are looking forward to further develop in the near future. And with that, I give the word to Lars.

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

Thank you. And then we can turn to Page 10 key figures. As Mr. Grefstad has presented, we are happy with the group result of NOK 812 million in the quarter. The operating result of NOK 645 million is somewhat better than what we expect going forward, driven by satisfactory growth and good insurance results. The solvency capital has been strengthened in the quarter and the capital requirements have gone down. This leads to an improved solvency margin. The calculated tax charge has gone up in the quarter, explaining the lower EPS after tax and adjusted for amortization in the quarter. Turning over to Page 11, Storebrand Group. We see satisfactory growth in fee and administration income. Partly this is explained by the acquisition of SKAGEN, but adjusted for SKAGEN and currency effect, we still see a 6.5% growth year-to-date. The Insurance results are good in the quarter. The main reason is improving disability development, with an improved cycle in the jobs market let people seek disability cover and some of the previous disability retired workers reentered the workforce. Operating costs are under good control. In the second quarter, we have exercised a share purchase program for employees. The program had a very good uptake this year, and the costs ended at NOK 25 million. The cost is taken in full in the quarter. While the cost level overall is flat, we continue to reallocate the cost from back book to selected growth areas.Taxes are estimated at 18% in the quarter and 17% year-to-date. Taxes payable stayed close to 0 due to historic tax losses on the balance sheet.Turning over to Page 12. This picture shows the same figures as the ones we saw on the previous page, here broken down into the result areas, Savings, Insurance and Guaranteed. Just to remind you, savings include nonguaranteed savings in Norway and Sweden, including unit linked, asset management and retail banking. Insurance is short tail insurance risk, both P&C and life, which can be measured on combined ratio. And Guaranteed is the defined benefit plans in Norway and Sweden, including long tail embedded insurance risk like longevity. Savings experienced good growth in line with our strategy. The operating costs in this area are increasing as a consequence of SKAGEN, investments in digital solutions and other growth initiatives.Insurance showed good progress from following implemented pricing measures, cost curtail and a general decline in disability. Guaranteed has increased profitability despite being in long-term run-off. A conversion of defined benefit plans to paid-up policies is declining. The cost measures come through as planned, and we have been able to increase prices in certain areas.The percentage of guaranteed reserves as a percentage of overall pension reserves continued to decline and is now less than 60% of the total. More detail can be found on the following pages. But I will wrap it up here so that we can open up for questions.

[Odd Arild Grefstad, CEO & MD]

Thank you, Lars. Operator, we will now open up for questions.

[Operator]

[Operator Instructions] The first one comes from Peter Eliot from Kepler Cheuvreux.

[Peter Eliot, Head of Insurance Sector Research]

I had 3 questions, please. I was wondering, first of all, if just sort of understand your view of the underlying result in the quarter. I guess, if I try and quantify the one-offs, I think, as I understand it, we got sort of probably NOK 120 million from reserve releases, NOK 53 million from risk results in paid-up and NOK 41 million may be in the other. So that if I take all of those, that would get me to sort of around about NOK 600 million. I just want to check whether that was sort of in line with what your thinking was. The second thing, I may be just a little bit more on these reserve releases, I know you gave us some of the drivers, but I guess, it's the second quarter, where we've seen quite significant and I'm just wondering if you could comment on what we should expect going forward. And then final question, a very good development of the fee and administration result. But I guess, if I looked at Swedish Unit Linked in particular, the reserves are up, but the income is down. And I'm just wondering if there is any sort of one-offs in there? Or whether that's natural margin sort of pressure or perhaps if you could just comment on the outlook there?

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

Thanks, Peter. You mentioned a couple of gains initially in your first question. I would say that some of the reserve release is in excess of what we expect on a normalized basis. I will measure that at approximately NOK 50 million, all the other things are basically things that are within normal variations and should not be accounted for as anything special. So net-net, we're talking less than NOK 50 million in things that are of an extraordinary nature here. In terms of reserve releases going forward, for example, this basis is probably a long-term cycle effect, and we should probably not expect quarterly changes on that. So we -- I would guess that we will continue to see low disability in the coming quarters with a very sound jobs market in Norway these days. And on fee and administration income and the margins in Unit Linked Sweden, we had a particularly strong growth in Sweden in -- take the box market, which is a low-margin market, but that comes on top of high-margin business that we have in the core business. And furthermore, it may be some kind of periodic effect here. We don't see a general market pressure in the Swedish Unit Linked business, which is called Other Occupational Pension, which is the core pension product that we sell. So all in all, we feel pretty confident both with the Swedish Unit Linked business as well as the results that we presented this quarter.

[Operator]

And the next question comes from Jonny Urwin from UBS.

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

Just 2 for me. Firstly, the EIOPA stress tests are ongoing. I wondered if you had any initial observations or color that you could share with us at this early stage, please. And secondly, some of the -- on the model change, it seems like the direction of travel on model changes over the last few quarters is now negative. I just wonder, are you now taking the opportunity to strengthen the model's conservatism now the ratio is in a bit better shape just trying to tighten things up?

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

Thank you, Jonathan. If I may start on EIOPA stress tests, yes, we are conducting the EIOPA stress tests. One of the stresses is on increased interest rates, for me, it's very unlikely to view increase interest rates, that's a risk factor again. We have not completed survey and I will not comment on it now. I think I have urged the companies to make -- publish statements around this Q1 next year, and we will prepare to do so. When it comes to the model changes, it [indiscernible] suspicion is based on different assumptions that we will change from one book to another. It is within what I would say is natural variance from [ one quarter to another ].

[Operator]

[Operator Instructions] And we have one more question, and that's from Matti Ahokas from Danske Bank.

[Matti Ahokas, Head of Equity Research of Finland]

Question on the Insurance segment. First of all, Lars, you mentioned there was NOK 50 million of reserve release. It's kind of out of the ordinary. In which parts of the Insurance segment were these or if the other reserve releases, if you could shed a bit more light on whether it was P&C or disability, et cetera? Then the second question is, we heard today from one of your non-life competitors that a very bearish outlook -- or actually from 2 of your non-life competitors, a very bearish outlook on the Norwegian motor insurance market. If I look at your figures, it doesn't seem to me that, that has had a big impact. And I'm just wondering, are you seeing the same negative trends as your competitors in Norwegian motor insurance?

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

If I take the first on the insurance release, it's primarily related to disability. And disability comes primarily through on Page 15, where you have the last line called pension related disability insurance Nordic, that is Norway and Sweden, but it's primarily from the Norwegian business, where we have this release related to lower disability. Peter mentioned also that we have a good risk result in paid-up policies of NOK 53 million. A part of that is also related to less disability frequency, a component in that market.

[Odd Arild Grefstad, CEO & MD]

When it comes to motor insurance, you know that while P&C is quite a limited part of our total insurance offering and Storebrand is much more life insurance than disability insurance and so on. So I think the composition is very different than you see us towards other P&C companies. So in that respect, you don't see as much impact within our portfolio, and I don't have any more information actually about the motor insurance impact as such in our results. It's quite limited.

[Matti Ahokas, Head of Equity Research of Finland]

How much is, by the way, motor from P&C premiums roughly?

[Odd Arild Grefstad, CEO & MD]

I mean, if you look at the premium composition in the presentation, you see that the personal lines is 1/3, more or less, and then again, you have a pure P&C, which is probably a half of that. And of the pure P&C, that's mainly motor, but also some housing, so they are like 1/12 of the total premiums.

[Operator]

And we do have a follow-up question from Jonny Urwin from UBS.

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

Sorry, just a quick follow-up. And consolidation in the Norwegian market has picked up a bit recently. I just wondered what you guys thought about that. And do you expect it to continue? Would you be open to be sort of involved in that?

[Odd Arild Grefstad, CEO & MD]

Well, of course, we follow very closely what happens in the Norwegian market. It comes to consolidation. We're about seeing now DNB and SpareBank1 joining forces together when it comes to the P&C market, and also Nordea buying Gjensidige banking operations. We, of course, follow this market very closely. We also see that this gives us a great opportunity in the markets, meaning that we will be a provider -- a direct provider, where we have a consolidation where you, well, take out some body of players in the market. So we think it's a quite good space for us going forward when it comes to our operations and in combination with the customer base, we have the opportunities to do our B2B2C strategy with a full strength or retail offering.

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

Do you think it hinders you that you don't have a massive P&C offering?

[Odd Arild Grefstad, CEO & MD]

Once again.

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

Do you think it hinders the Storebrand's proposition, given you don't have P&C, like would it be helpful if you had more of the P&C offering than you do?

[Odd Arild Grefstad, CEO & MD]

No. I think what you're seeing now from Storebrand, we are very much a savings company, it's pensional savings, and it's a very strong position on corporate savings. We're building the retail savings also, that we did support it by insurance, but very much mainly on the personal lines that has allocation towards savings. And to have a proof, let's for one-stop buyers in the market, we also offer banking operations and P&C business, but I don't see that as a main element, that we don't have more P&C, so to say. And also, I think it's important to note that for the individuals, we have a full scale of P&C offer, but for corporates, we don't insure large claims or anything like that for corporates, but that's another investment, of course.

[Operator]

And we have Peter Eliot again from Kepler Cheuvreux.

[Peter Eliot, Head of Insurance Sector Research]

I just want to come back firstly actually on the point about the reserve releases and you mentioned sort of positive stress on NOK 50 million is one-off. I guess, if I -- I think just off the top of my head that would imply an underlying combined ratio, it's more in the sort of 85% or low 80s, but you still seem to be guiding to 90% to 92% as being appropriate. Could you just square that for me? And secondly, perhaps I could also -- you mentioned SKAGEN briefly, but could you just say again what your -- the current sort of flow situation there is? And what your outlook is?

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

Yes, on the combined ratio, you are right, but the combined ratio figure that you reached there is also a result of actually very good underlying results currently due to the fall in, in particular in disability, but also low motor claims and low other claims that we've had in the quarter. So there -- it's not going to be stable 90% to 92% in every quarter. We've had a couple of quarters that are better. It's partly explained by reserve releases, but also partly explained by simply low claims in these -- in the last couple of quarters. Furthermore, regarding cost-cutting program within the Insurance business, which are giving the necessary results, so that we have a competitive offering, we can use that competitive offering in increasing distribution spend, marketing spend and other things in order to reestablish the growth that we have mentioned -- or we told you during Capital Markets Day that we will and this is a growth of 5% per annum and we are using our measures to get back in growth.

[Odd Arild Grefstad, CEO & MD]

When it comes to SKAGEN, well, it's both some outflow of assets, but it's very much according to the plan we have put forward when we acquired the SKAGEN. On top of this, this quarter, as I mentioned, we have also -- some of the SKAGEN fund has very much an emerging markets team. And based on that, we also have seen the emerging market perhaps had a negative return. So that also contributes to a negative development into that -- in the management of SKAGEN in this quarter. But altogether, very much in line with the plan we put forward when we put -- when we did acquire SKAGEN last year.

[Operator]

We have one more question. [Operator Instructions] The next person would like to ask the question is Matti Ahokas from Danske Bank.

[Matti Ahokas, Head of Equity Research of Finland]

If I may continue on the market consolidation, obviously with the moves of Gjensidige in terms of selling the bank, has that created more kind of questions also as to the strategic rationale of Storebrand Bank for you? Obviously, you have a much bigger life offering, whereas Gjensidige is focused more on the P&C side. But what's -- does it raise questions also from your point of view that you should definitely own the bank? And on that same note, have you considered external bank distribution of P&C products more nowadays as another distribution channel?

[Odd Arild Grefstad, CEO & MD]

Well, we are always looking at the different opportunities in the market. But I will say that having a large pension and savings operations, especially when it comes to the payout life of these products, it's important to have good solution when it comes to banking to support that. So I would not say that it has changed our view of it, but as I said, we are, of course, looking at different modes in the market, both when it comes to production and also distribution of both P&C and banking operations.

[Matti Ahokas, Head of Equity Research of Finland]

Gjensidige said last week that they have had -- they had a number of parties interested in their bank. Have you been approached by potential buyers of the banking operations?

[Odd Arild Grefstad, CEO & MD]

Well, it's a small market, and we now hold a different place in this market. And I think, as I said, after -- you know that in this market, it was very much Gjensidige Bank, Storebrand Bank and the former Skandiabanken that was operating as direct banks. Now there is only 2, Skandiabanken and Storebrand Bank, and I think this also creates a great opportunity for us going forward on the banking side.

[Matti Ahokas, Head of Equity Research of Finland]

What about the banking -- external bank distribution for P&C products? Have you considered that?

[Odd Arild Grefstad, CEO & MD]

Us being a producer for other banks, you mean?

[Matti Ahokas, Head of Equity Research of Finland]

Yes.

[Odd Arild Grefstad, CEO & MD]

Yes. Well, we have small P&C operations that we just talked about. Our main insurance operation has a scale towards our savings and pension products. And when we look upon our P&C business, it's more like an add-on to show that we provide a [indiscernible] of retail products for our customers or large customer base. And we don't see us as a more natural, well, producer for others when it comes to our Insurance business. We have some contracts, and we are quite active when it comes to, well, agreements like -- well, different agreements in Norway with [Foreign Language], what it's called?

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

White-collar union.

[Odd Arild Grefstad, CEO & MD]

Yes, white-collar union. And we also provide insurance for the Rema, which is one of the largest grocery stores chains in Norway. So we do produce for all the players, so it is possible, but that has not been our main focus.

[Operator]

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

[Kjetil Ramberg Krøkje, Head of Investor Relations]

I just want to thank everyone for joining the call and also remind you that we will be presenting in London on Monday, and we hope to see several of you there. So have a very good afternoon from our side.