Storebrand ASA

OSE:STB

Earnings Call Transcript 2022-Q2

[Daniel Sundahl, executive]

Good morning, ladies and gentlemen, and welcome to Storebrand's second quarter results presentation. As always, we will start today's presentation with the presentation of the key highlights of the quarter given to you by our CEO, Odd Arild Grefstad. And afterwards, CFO, Lars Loddesol, will dive deeper into the numbers. At the end of the presentation, participants in the Teams' webinar will have a chance to ask questions. [Operator Instructions] Now without further ado, I give the word to CEO, Odd Arild Grefstad.

[Odd Arild Grefstad, executive]

Thank you, Daniel, and good morning, everyone.

By the conclusion of first half of 2022, the world is still facing geopolitical and financial turmoil. Inflation is rising and markets are volatile. The economic activity in Norway and Sweden is high, and interest rates are increasing.

Storebrand's business model is diversified and has proven to be robust in these turbulent markets. Looking through the noise, higher interest rates give better reinvestment rates for pension portfolios and will over time lead to higher pensions for customers and profit sharing for shareholders. Rising inflation, demographic development and new regulations will also increase pension savings over time. Storebrand is well positioned for this development.

The short-term outlook can seem volatile for financial markets and the economy, but Storebrand has shown resilience in various scenarios. With the number we present today, I feel very confident that the strategy and execution is taking the group in the right direction.

Now let's move over to this quarter's highlights. The Storebrand group delivers a group profit of NOK 577 million in the second quarter, with a satisfactory operating profit of NOK 705 million. Underlying growth continues to be strong across the businesses, led by 14% annual growth in insurance portfolio premiums and 15% in bank lending. We also see a net inflow of savings during the first half of the year, both in asset management and in unit linked.

The 1st of July, Storebrand completed the acquisition of Danica in Norway. The transaction had then received the necessary regulatory approvals. We look forward to welcoming new customers and employees and to work closely with distributors in the following months. I will revert to Danica later in the presentation.

During the second quarter, S&P Global Ratings upgraded their ratings on Storebrand based on profitable growth and improved financial strength. The rating of Storebrand Livsforsikring was upgraded from an A- to A, with a stable outlook. S&P expect that Storebrand will continue to maintain its capital and balance sheet strength and profitable growth in a diversified business model.

The solvency ratio was 195% at the end of the second quarter, an increase of 11 percent points from the previous quarter. Financial market movements and capital set aside for dividends and share buybacks reduced the solvency ratio. But countercyclical regulatory factors, risk management actions and group profit contributed to improving the solvency ratio.

Mark-to-market effects from rising rates and wider credit spreads have led to negative financial results in the quarter and the first half of the year. These mark-to-market effects will be more than offset going forward from a higher running yield in the portfolios.

Storebrand's dividend policy states that if the solvency ratio is above 180%, the Board of Directors intends to propose special dividends or share buybacks. The group has now received approval from the Norwegian FSA to initiate a share buyback program. We plan to launch the program shortly.

The Board expects that Storebrand will continue to generate solvency under normal market condition as the business continues to transform to a more capital-light model. The group is now at a level of capitalization where it's natural for Storebrand to apply for a new buyback program during the autumn. The intention is to more or less continue the buybacks after the completion of the initial program.

The 1st of July, Storebrand closed acquisition of Danica in Norway. Danica holds a market share of 5 percentage points in defined contribution pension. In addition, the company has a profitable retail insurance business that will add premiums in the insurance segment. This will strengthen Storebrand's presence in the market for small- and medium-sized businesses. It will also increase Storebrand's distribution capacity of defined contribution pension and personal risk products in the Norwegian market. We look forward to welcoming new customers and employees and working closely with distributors in the following months.

In numbers, it means that our Norwegian occupational pension premiums will increase by 20% and retail insurance premiums will increase with around 8%. We are looking forward to combining Storebrand's strong expertise and digital services with Danica's professional distribution channels, partners and customer services. The process of merging the 2 companies is expected to take up to 18 months. We expect to realize significant cost and capital synergies. And we will revert with more on synergies and integration in the third quarter.

As you are very well familiar with, Storebrand follows a twofold strategy that gives a compelling combination of self-funded savings and insurance growth in the front book and capital return from a maturing back book of guaranteed pensions. Storebrand aims to be the leading provider of occupational pension in both Norway and Sweden and to build a Nordic powerhouse in asset management and continue 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 the back book towards capital release, which now formalize into share buyback programs, as mentioned earlier.

Let me dive a little deeper into the development of our 3 key strategic growth areas.

First, let's look at the occupational pension business. Due to the weak financial markets, total asset under management in unit-linked decreased by NOK 18.9 billion, equal to minus 6% compared to the same quarter last year. Unit-linked premiums were stable and amounted to NOK 5.3 billion in the quarter. Net inflow amounted to NOK 1.6 billion in the second quarter and NOK 1.8 billion year-to-date. This shows that the top line income is resilient in volatile markets.

New legislation entered into force in Norway from 1st of July. It will increase mandatory pension savings for low salaried workers and part-time workers. Premium income is expected to increase with around NOK 800 million annually for Storebrand as a result of the changed legislation. The structural growth in Norwegian occupational pension is expected to be further strengthened by regulatory impulses. A government-appointed committee recently concluded that retirement age needs to increase. In addition, the labor unions have stated that the minimum mandatory savings rates for pensions needs to be doubled to 4%. More long-term savings will become increasingly important.

Let me then turn to asset management. Total asset under management amounted to NOK 1,009 billion, down 3% year-on-year, again due to weak financial markets. Net flow was NOK 9 billion year-to-year, but negative NOK 2 billion in the quarter due to dividend paid and payment of Danica acquisition from the company portfolios. Adjusted for this, the flow was positive also in the quarter.

The Swedish family of funds, SPP Fonder, was rebranded to Storebrand Fonder in the quarter. We now offer a wide range of funds across multiple markets under the Storebrand brand name. This is an important step in positioning Storebrand as a substantial asset manager in the Nordics. Storebrand Fonder has been the Swedish market leader in flows year-to-date, with SEK 5.6 billion in net inflow.

And lastly, let's look at the development in the retail market. Within P&C and Individual Life, strong growth continued with premium growing 15% year-to-date compared to the last year. The overall combined ratio improved to 85% and is better than the targeted combined ratio of 90% to 92%.

Overall, I'm very pleased with the commercial development in the first half.

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

[Daniel Sundahl, executive]

Thank you very much for that, Odd Arild.

Let's have a closer look at the numbers. Please go ahead, Lars.

[Lars Aasulv Løddesøl, executive]

Good morning, everyone.

The operating result of NOK 714 million is satisfactory in light of turbulent financial markets and a market-driven fall in assets under management. The solvency ratio has significantly improved, primarily as a result of lower capital requirements. More on this in a moment. Customer buffers are around 10% of customer funds in the guaranteed portfolios. With higher rates, we need less customer buffers than what we needed when rates were lower. In fact, we could see another 200 basis points rise in rates this year, all else equal, without having to contribute shareholders' equity to meet the annual interest rate guarantee.

The 10 years [ FOB ] rate in Norway is up by 51 basis points to 3.27% in the quarter and by 88 basis points to 2.78% in Sweden. This improves the solvency by 2 percentage points. Market returns, primarily equity markets and credit spread widening, reduced the solvency margin by 9 percentage points. The volatility reducing elements in the Solvency II framework, the volatility adjustment and the symmetric equity stress, overcompensate the quarter in -- and contributes 15 percentage points of solvency. Risk management from changes in the asset mix and duration contributes 7 percentage points. Increased CRD IV capital requirements from growth and some smaller changes in the group capital structure requires 3 percentage points of solvency, while the quarterly results contribute 2 percentage points. Lastly, we set aside 2 percentage points of solvency for ordinary dividends and another 2% for share buybacks -- the share buyback scheme, which will start soon. The Danica transaction was closed as of July 1 and will contribute with another negative 5 percentage points in the third quarter.

The final solvency of 195% for the quarter is the best in the group's history and gives additional confidence with respect to the announced capital return plans. The solvency is now at a strong level, and the sensitivities indicate a robust solvency level going forward. As we saw in the second quarter, when there are many moving factors and large movements in the quarter, combined with risk management, the solvency may move outside the indicated sensitivities. We do however feel increasingly comfortable with a solid capital situation and growing capital creation in the years ahead.

The group fee and admin result is slightly down following the fall in assets under management since the start of the year. The insurance result is improving. Strong and profitable growth in retail insurance, driven by market share growth in P&C, has strengthened the results. We also see somewhat better life and disability results, that give an overall profitability better than the targeted 90% to 92% combined ratio. Overall, we see seasonally lower mortality, a stable development in disability claims, and increasing reactivation, i.e., people returning from disability to the workforce as a consequence of a strong employment market.

The operational cost level is still below the guided level. We do expect higher cost in the second half of the year. But adjusted for acquired business and performance fees, the cost savings in the first half will contribute positively to the continued cost discipline.

The financial results are down, primarily from credit spread widening, something which will be reversed with higher yields on the company portfolios going forward. The tax charge in the quarter is low, primarily due to currency effects. We continue to guide on a normalized tax charge of 19% to 22%.

Here are the same numbers, broken into savings, insurance and guaranteed. The results in all 3 are satisfactory. The strong results under Other last year is due to the profit from the sale of Vaerdalsbruket in the second quarter of last year.

In the following slides, I will go through the different areas in more detail. The unit-linked businesses in Norway and Sweden are hurt by lower assets under management following the fall in equity markets and bond values. Furthermore, there is the previously guided margin contraction from the Norwegian individual pension account market.

The asset management business and bank show satisfactory development.

We see the fall in assets under management in unit linked and asset management here. However, as Odd Arild has already mentioned, the underlying structural growth continues. The transfer balance is improving. And our sales pipeline is promising. Furthermore, the inclusion of Danica as of July 1 will contribute positively. The bank growth is strong. The margins are holding up well in light of the rise in interest rates. It is easier to operate a profitable bank in a higher interest rate environment. But there is a delay in when we can raise mortgage rates, which is a drag on profitability in a rising interest rate environment. The asset management business shows a positive flow in the first half and has realized satisfactory transaction fees in the quarter.

As I mentioned previously, the individual P&C and risk business continues its profitable growth. Inclusion of Danica Personal Risk products will increase premiums further. The claims ratio is down in the quarter, partly from seasonal effects and partly from price increases. The growth in life and pension-related premiums stems primarily from price increases, whilst the growth in the P&C business is primarily volume-driven.

In guaranteed, we see a strong development in Defined Benefit Norway, driven by better risk results. Paid-up policies year-to-date is flat. We expect less profit sharing this year. But with higher investment rates and individualized buffers, we could see a significant upside in a couple of years.

The Swedish guaranteed business suffers from weak financial markets, especially credit spreads. This may be reversed when markets calm down and should be recouped if credit spreads contract.

In the upper left-hand corner, you can see how the runoff guaranteed business is now shrinking. Customer buffers are maintained at around 10% of reserves. The fall in buffer capital of NOK 8.8 billion may seem dramatic. But the reduction in technical provisions, i.e., the liabilities, have fallen by 50% more or around NOK 13 billion in the quarter. All else equal, we need lower buffers when interest rates rise. It is not a goal to have as much buffer capital as possible, but to have the right level in the context of maximizing return on regulatory capital over time. The need for buffer capital will be lower on liabilities with lower interest rate guarantees and shorter duration.

From 2022, a change in the legislation allows us to build buffer capital individually. This will lead to increased profit sharing in some parts of the portfolio even if we are building buffer capital in other parts. However, you should expect us in general to focus on rebuilding buffers over the next couple of years.

Guaranteed reserves as a percentage of total pension reserves is decreasing on average by 1 percentage point per quarter. When the equity markets fall, the higher proportion of equity investments in these portfolios lead to temporary reversal of the trend. The underlying trend however continues.

The main element under Other is the negative return on company capital from credit spread widening and interest rate increases. This leads to higher running yields from here on and does not hurt long-term returns. On the other hand, we now reinvest at significantly higher levels and expect increasing results over time. The net investment portfolio is between NOK 20 billion and NOK 25 billion. And a 1 percentage point rise in short-term rates correspondingly contributes in excess of NOK 200 million when the short-term bond portfolio has rolled over. The lag is between 12 and 15 months. Last year's financial results include the one-off of NOK 550 million gain from the sale of Vaerdalsbruket and is not a relevant comparison.

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

[Daniel Sundahl, executive]

Thank you, Lars. We will now move over to Q&A and are happy to take your questions. [Operator Instructions] And it looks like we already have some questions waiting. The first question comes from Peter Eliot of Kepler Cheuvreux.

[Peter Eliot, analyst]

I'll get myself to 2, as you said. The first one, I was wondering if we could have a bit more detail on what you're intending in terms of the buybacks. So what time frame you're planning for the first NOK 500 million? And how much you're planning to ask for the second program?

And then the second question, I was wondering if you could -- obviously said you're very comfortable with the solvency ratio. But I'm just wondering if you could give us a bit more detail on how you think about it in terms of the sort of various elements of support. I mean, as you said, I guess it goes from 195% to 190% pro forma of Danica. Equity stress, if that was to normalize to 0, that will probably take off another 5 points. I don't know if you think of the sort of VA as sustainable at this level or just kind of sort of feel of how you sort of think about it on a sort of normalized basis would be very helpful.

[Odd Arild Grefstad, executive]

Thank you, Peter. And to start with share buybacks. As we said, we will start now shortly with the program. It depends, of course, of the liquidity in the market, how long it takes to do the program of NOK 500 million. But we expect to do 2 to 3 months to take out this program. And that's why we also -- the Board said that they will during the autumn, also ask for a new program. And I think you should think of it as in the same magnitude as the program we are starting now.

[Lars Aasulv Løddesøl, executive]

With respect to the question on solvency, you are correct that Danica will shave off around 5 percentage points. And then as we said, the VA and the SA probably is a little bit of an overshoot this quarter. But directly relating to your question, what happens if the SA goes back to neutral, well, that happens probably in the context where equity markets rise and where you will have positive benefits as well. So there are a number of different moving parts here. And as we said, there's probably a little bit of overshoot on the volatility reducing measures in the framework, which may then go back somewhat in the next quarter. But also, I would like to reiterate that we're quite happy with the solvency situation now, the solidity, and the capital generation from here on.

[Daniel Sundahl, executive]

And I think to add on that, we also have the possibility to do more reinsurance, more subordinated debt, and of course, look at risk levels in the portfolio if need be.

The next question comes from Hakon Astrup of DNB Markets.

[Håkon Astrup, analyst]

Two questions from me, the first one also on solvency and capital. You have a very strong solvency position. But given the current regulatory landscape in Norway, do you think it's possible over the next 3 years to have a payout ratio, including buybacks, of above 100%. And the next question, on unit linked in Sweden. The margin is coming a bit down. Is it something special there? Or is it just underlying margin pressure? .

[Odd Arild Grefstad, executive]

Yes, on solvency. We have a very strong solvency generation with higher rates. And we also have stated a very clear dividend policy, and that is growing nominal dividend, and to utilize share buybacks or special dividends when the solvency ratio are above 180%. And of course, in some elements, that can lead to a situation where you have payouts above 100% annual returns. I think when you look at the solvency regulations, it's all about the solvency level, not on the annual results. So we believe that it will be possible to do if that situation occur.

[Lars Aasulv Løddesøl, executive]

With respect to unit-linked Sweden, we've had quite a high success in the unionized part of the market with lower margins. So it's primarily growth from the lower margin part of the products that will -- that has eroded margins somewhat on average.

[Daniel Sundahl, executive]

Thank you, Hakon. The next question comes from Jan Erik Gjerland of ABG Sundal Collier.

[Jan Gjerland, analyst]

Also from my side, 2 questions. The first one, on solvency. Have you, in your risk management and asset allocation, 7 percentage points increase, taken any effects from this year's changes in the below 1G pensions for paid-ups? Is there anything or any laps or change or transfer taking into the account into your current solvency? And if not, what kind of level do you think that could contribute going forward?

Second question is about costs. You got higher cost. And it seems like it's a little bit of cost pressure in all areas. Is this sort of the level we should continue to look at, plus NOK 100 million you expect for the next first half year?

[Lars Aasulv Løddesøl, executive]

On the solvency, we have included the compression of smaller paid-up policies that gives a contribution of approximately one percentage point. With respect to the cost level, as I said, we've previously guided for NOK 4.9 billion or below NOK 4.9 billion. But the cost level in the first half of the year has been significantly lower than half of that. We should be able to carry some of these savings in the first quarter -- no, in the first half with us into the whole year numbers. But we will avoid guiding on cost on a quarterly level. That we'll do that on an annual level.

[Daniel Sundahl, executive]

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

[Blair Stewart, analyst]

A couple of [indiscernible] questions from me. Just firstly, on Danica, where should we expect the profits contributions to come through? Would that mostly come through the DC Norway line in the coming quarters? Second question is really just that if you have any further thoughts on how the guaranteed book behaves in a higher interest rate world, aspects like the speed of the runoff, the capital generation impacts of that book as we move into a much higher yield environment. And the final question would be -- I've got a few, so I'll pick the best one. The -- would it be reasonable to expect the yield on the company portfolio to go up by about 200 basis points over time?

[Odd Arild Grefstad, executive]

I can start on the Danica. From the start, I think the most significant profit contribution will be in the insurance segment, in retail insurance. And then over time, as we take out synergies on the occupational pension, more of the earnings impact will also come in the unit-linked Norway product line.

[Lars Aasulv Løddesøl, executive]

With respect to the guaranteed development in a higher interest rate environment, the runoff profile in nominal terms will go pretty much as planned. These are paid out as long as people live and it doesn't really change the life pattern of people. But in terms of the net present value, obviously, it falls with higher interest rates. And in terms of returns on the corresponding assets, they will expectedly increase, which means that we will move into profit split territory over time. So yes, I think that probably answers the guaranteed question. And the yield on the company portfolio, you ask if it's expected to -- or we can reasonably expect a 2% higher return, well, that obviously depends on the further development in the interest rate hikes from the Norwegian and Swedish authorities. But everything looks like in a rising interest rate environment these days.

[Odd Arild Grefstad, executive]

And just on the normalized risk premiums going forward, we expect around [ 2.8 ] in the Norwegian portfolio and [ 2.5 ] in the Swedish portfolio. And then, as Lars said, over time, if the interest rate curve materializes, this will go up even further as we have a proportion of bond [indiscernible] amortized cost in that portfolio that will be rotated out.

[Daniel Sundahl, executive]

The next question comes from Ulrik Zurcher of Nordea.

[Ulrik Zürcher, analyst]

I was just wondering if it would be possible to split out the effect equities and the symmetric adjustment had on the solvency margin in the quarter, so separated from the VA and credit spreads. Secondly, it's -- I was wondering if you could indicate -- you said at your Capital Markets Day, on a gross level, you generated around 13 percentage points of solvency each year, but now your SCR is 10% lower. And we'd talked about higher rates, profit sharing, possible to indicate like roughly how much capital you expect to generate going forward per year before dividends and buybacks.

[Lars Aasulv Løddesøl, executive]

In terms of the contribution from the fall in equities and the SA, I think the numbers are 3%, 4% on the equity fall and 7% to 8% on the SA. So it's an overshoot on the SA there. With respect to solvency generation, you are correct that we should expect somewhat higher capital generation going forward. And we will revert with more details on that in our upcoming CMD or capital analyst presentation that we will have probably within 6 months.

[Daniel Sundahl, executive]

The next question comes from Vegard Toverud of Pareto Securities.

[Vegard Toverud, analyst]

You took some management action which supported the solvency in the quarter. With other positive items coming in, are you looking at reversing some of those management actions? And also, just to check on the asset management side. With Danica, is it only retail volumes that are coming in or are there also any corporate pension volumes coming in, in Q3?

[Lars Aasulv Løddesøl, executive]

With respect to solvency actions, there has been a reduction in the equity allocation in some portfolios. And we use like a CPPI strategy in terms of equities, i.e., where there is risk capacity, we increase the equity proportion. But now we're probably going to have to build some buffer before that is relevant in the short term. In terms of -- on the interest rate side, we have extended the duration and made some reallocations in terms of long-term bonds. And those are likely to be maintained and continue that development.

[Odd Arild Grefstad, executive]

On the Danica side, roughly half of the NOK 30 billion will be managed by Storebrand and the other half is managed by external asset managers. So I think that's a good guidance. But we will -- as Daniel said, we work with a spreadsheet on the IR website, so it would be easier for you to get the correct numbers into the models before Q3.

[Daniel Sundahl, executive]

Thank you very much. We'll take the next question from Thomas Svendsen of SEB.

[Thomas Svendsen, analyst]

Yes. A question to this change in duration and change in asset types on the asset management side. Do you think you are done now with doing this assets allocations -- reallocations? And second question, on this share buyback. Could you give an update on your expected time frame for buying back or returning that at NOK 10 billion, you have talked about? How many years you think you will use there? And finally, just you show the picture there on the buffer capital, on a steep dive, and pointed out the solvency issue on that. But on the P&L, is there anything we should think about going forward in volatile markets when this buffer capital has decreased as much as it has?

[Lars Aasulv Løddesøl, executive]

We will start with the risk management who will never stop with risk management. That's an ongoing part of running our business but we have to risk manage according to the markets that we see. So we'll continue with that.

[Odd Arild Grefstad, executive]

Yes. And just to add on it. Of course, with higher rates, there is less need for risk premiums to both keep the guarantees, but also to reach points for profit sharing. So that's also an element in that risk management. When it comes to the NOK 10 billion, of course, what we already have talked about is that the increased interest rates increases capital generation. The NOK 10 billion was given on our last Capital Markets Day. It's natural for us to update the numbers and the speed when we come to an update on that. But we feel very confident about when it comes to the total number and also the speed of releasing that capital compared to what we said in our Capital Markets Day. .

[Lars Aasulv Løddesøl, executive]

And in terms of the buffer capital impact on the P&L, you can obviously see the P&L that we published this morning from what has happened so far. But it's important to understand that the risk management in the guaranteed portfolios is very much what you do into the year-end is more important than when you do in any other quarter.

[Odd Arild Grefstad, executive]

And I think also, as Lars said during his presentation, is that we can still withstand at least 200 basis points higher interest rates without digging into the P&L on the annual guarantee here in Norway.

[Daniel Sundahl, executive]

And we have another question coming from Peter Eliot of Kepler Cheuvreux.

[Peter Eliot, analyst]

A couple more. Swedish consolidation ratio, quite high at 111%. I had to admit I was expecting it to drop a little bit more. I'm just wondering if you could update us on the sort of prospect for indexation fees because I was sort of thinking that might be much lower after the market turbulence. But yes, we could still hope for those. So any thought, that would be great. Secondly, on the bank, the bank balance sheet grew 15% in the quarter. Just [indiscernible], I'm just wondering, can you give us some comfort that you're not taking on undue risk there or yes, it just seems a very, very fast growth. And if I -- if I'm not Squeeze in another one. Unit linked margins, I'm just wondering how comfortable you are with the guidance that you gave before of above 60 basis points going forward just given where we are now, top line pressure from markets, inflationary pressures and so on.

[Lars Aasulv Løddesøl, executive]

On Swedish consolidation, the consolidation is obviously the development of liabilities versus assets. So even if assets fall, when liabilities fall more, you increase consolidation. What is important when we do indexation in the fourth quarter is how much inflation you have. That is -- depends on how much you index these underlying customer contracts. And with higher inflation, you have to do more indexation, which will erode the consolidation again. But the current consolidation levels are solid. And we will continue to harvest risk premiums in the credit portfolios, in real estates and other parts in order to generate a return higher than the liability development.

In terms of bank growth and risk, we continue to only lend very low or very solid mortgages in the Norwegian market. And you should not be concerned about the credit portfolio. That's -- this is a very low risk portfolio.

[Odd Arild Grefstad, executive]

Still LTV is overall 55%, I think.

[Lars Aasulv Løddesøl, executive]

Yes. And on the unit-linked margins, we have seen the significant pressure from the introduction of IPA, individual pension account, in Norway coming through last year. And we should see a stabilization around these levels going forward.

[Peter Eliot, analyst]

Just on the first point, on the inflation impact on the consolidation ratio. Do you have any feel of what sort of magnitude we're talking about? I mean, at current levels of inflation, should we see sort of 1 or 2 points? Or just wondering, can we -- do you have any feel for the magnitude?

[Lars Aasulv Løddesøl, executive]

Sorry. 1 or 2 points of what?

[Peter Eliot, analyst]

Sorry. Consolidation ratio.

[Lars Aasulv Løddesøl, executive]

Well, if inflation is 5%, the impact is higher than that. It would be more 5%, I think.

[Odd Arild Grefstad, executive]

Yes. Well, I think, all in all, what we see is, I mean, previously, we've said that we expect some NOK 30 million to NOK 40 million a quarter in indexation fees based on the consolidation we have. And given the current inflationary environment, we're more looking at a partial indexation, which has led to NOK 13 million instead of around the NOK 30 million in the quarter. So somewhat lower indexation fees. But on the other hand, the current environment has also led to a lower cost of the UFR carry of around NOK 50 million a quarter. So all in all, the current environment looks like it's leading to higher running yield or running a financial result on a running basis in SPP.

[Daniel Sundahl, executive]

The next question is from Jan Erik of ABG Sundal Collier.

[Jan Gjerland, analyst]

Just a follow-up on the margin side. You mentioned they're a little bit weak in Norwegian market. Margin now at 0.62, and it's dropped another 2.2 basis points in the quarter. So is it this sort of a level we should expect going forward? Or is it just a continuous increase in churn on that book? Is there any asset mix that you should be aware of as well? Or is this just purely the change in the PKK's earnings really? Or is it also for the underlying margin that has changed?

Secondly, on the asset management side, it looks like you have an increase in margins in Q-on-Q. What -- is that asset mix? Or is it that you have solved or other than the business that have higher margins? And risk results is still strong in the defined benefit in Norway. What should we expect there going forward? A normalization or more of the same?

[Lars Aasulv Løddesøl, executive]

On the margins in Unit Linked Norway, as we already said, we expect normalization -- or a stabilization around these levels after the significant contraction last year, driven by the IPA market. On asset management margins, as I mentioned, we had satisfactory transaction fees in the quarter. They will vary a little bit from quarter-to-quarter. But this is like a normalized level and may have lifted it somewhat from last quarter. And in terms of risk result for defined benefit, that we had weaker results during the pandemic and they seem to somewhat stabilize on a higher level after the pandemic is now behind us hopefully.

[Jan Gjerland, analyst]

So we should expect more normalization after sort of 3 quarters now with a better risk results?

[Odd Arild Grefstad, executive]

I think when you look at the risk results in the defined benefit, you see that you have had a kind of rising trend over the last 3 quarters. And I think as you see, there is some volatility here. So I think doing kind of the average of the year-to-date is probably a better guidance than you using only Q1. That would be my -- sorry, Q2. That would be my guess. But again, there's some volatility here as well.

[Daniel Sundahl, executive]

We'll take the next question from Vegard Toverud of Pareto Securities.

[Vegard Toverud, analyst]

On the DC book in Norway, could you give us a sense of how much is currently at the 2% level?

[Odd Arild Grefstad, executive]

In terms of the savings, how much is at the minimum level?

[Vegard Toverud, analyst]

Yes. Referring back to Odd Arild's, I believe, comment about the unions intention or hope to get the minimum up to 4%. It would be interesting to know how much of your current premiums are at 2%.

[Odd Arild Grefstad, executive]

I don't think we have that top of mind, but -- and we can revert to you with that number. But it's a significant part of the portfolio. Because when we started with the mandatory pension schemes, almost half of the workforce in Norway were without any occupational pension. All the grocery stores, hotels and so on came in, in the schemes without any corporate pension at all. And they came in on the 2% level. So I don't know if it's half of the portfolio today, but it's a significant part of the portfolio. That is still on the minimum level of 2%. And of course, an increase in that level is the right way to go. And it was -- is now also quite a good discussion about in the society.

[Vegard Toverud, analyst]

Yes. I remember that well. I was there. And if you have the number, please, it would be nice to have it.

[Daniel Sundahl, executive]

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

[Blair Stewart, analyst]

Just a couple of follow-ups. Lars, I think I heard you say that most of the growth in premiums in P&C is volume driven. I may have picked that up wrongly. But I was quite surprised by that given the rate of inflation. We thought you'd be getting a fair degree of price through there as well.

And secondly, you talked a few times about there being less need to hold buffers in a higher rate environment. But at the same time, you're saying you want to continue to build buffers. I just wondered if you could maybe provide a little bit more color around that. I think the buffers are around 10% of the guaranteed book, which is only down one point quarter-on-quarter. It still seems like a reasonably high number if we are in a higher rate environment. So I just wonder if you can give some color as to why we're still building buffers and what -- how to scale that.

[Lars Aasulv Løddesøl, executive]

Thank you, Blair. No, as I said, the bulk of the life products in terms of risk, the growth there is driven primarily by price increases. And that should be seen also in the context of weaker results in the last couple of years. There is also an automatic inflation hedge in these products in terms of inflation-linked premium growth that comes through automatically.

In terms of the P&C products, there is a combination of pricing and volumes. But as I said, the bulk of the increase is explained by volumes. At the same time, we're obviously looking at the inflation development and repricing the products accordingly in terms of the expected inflation development going forward.

In terms of buffers, you could split that between Norway and Sweden. In Sweden, the buffers are still at a very healthy 17.5%, whilst at Norway, they have been reduced from 11.3% a year ago to 6.9% now. So in some portfolios, we want to increase the buffers in the Norwegian part of the book whilst they are on a comfortable level in Sweden. As I also said, with a more individualized buffer building, we may see profit split in certain portfolios, and at the same time, have buffer building in other parts of the book. But we have previously gotten a lot of questions from you guys, what is the appropriate level of customer buffers. And I think we've answered in the area of 10% to 12% may be an appropriate level. I would say that, on average, the appropriate level is lower now with higher rates and also continuously shorter duration in the portfolios.

[Daniel Sundahl, executive]

Okay. Thank you very much. So the next question is from Jan Erik Gjerland. Do you have another question for us?

[Jan Gjerland, analyst]

Yes. Just some more follow-ups. Firstly, could you please remind us how the profit sharing in the Swedish book is working on top of the indexation? Is it so that we should expect more profit sharing on top of the indexation in Sweden with the higher rates at all? Or is this the level we should expect?

Then, in the P&C and the insurance operation, the combined ratio is also very strong. Is there any runoff gains or any particular things that have moved in your way? Or is it just that we've seen a very, very good insurance quarter this time around, and that should, of course, benefit all of the insurance players?

[Odd Arild Grefstad, executive]

Yes. Should we start on the Swedish guaranteed business? As we've been -- we've touched upon the defined contribution business in Sweden with indexation fee. That's around half of the portfolio. The other half of the portfolio is defined contribution with guarantees. And a subset of that, I would say, 2/3 or something in that direction has a profit-sharing mechanism where you get 90% of the -- or a 90-10 profit split of return above the interest rate guarantee. So with higher expected return in that portfolio, we increase the likelihood of having some profit sharing there now in 2023 and '24 onwards.

[Lars Aasulv Løddesøl, executive]

Jan Erik, which risk product were you referring to?

[Jan Gjerland, analyst]

No. Just in general, on the insurance side and maybe especially on the P&C side, you have a claims ratio of 70.3, down 3.7 percentage points year-on-year. So I just wondered if there were some runoff gains inside that part of the book and maybe some of the others as well.

[Lars Aasulv Løddesøl, executive]

No significant runoff gains in this quarter outside the normal. And so it's basically a combination of seasonal factors as well as somewhat lower disability claims, more reactivation, i.e. people returning to the workforce, and lower mortality in the quarter.

[Daniel Sundahl, executive]

And just to actually return to Vegard, your question on how many are on minimum savings of 2%, I can confirm, based on the numbers that I have here, it's just under the 50% that Odd Arild mentioned. So there's the number for you.

But ladies and gentlemen, with that, we have reached the end of today's presentation. We look forward to seeing you back here no later than the 26th October when our third quarter results are due. Thank you all for tuning in, and enjoy the rest of the summer. Goodbye.