Storebrand ASA

OSE:STB

Earnings Call Analysis

Strong Earnings and Strategic Growth

In the second quarter, Storebrand Group reported record cash-based earnings of NOK 2,249 million, with a 38% increase in the operating result to NOK 819 million. Driven by robust growth in all business lines and efficient cost management, the company's solvency ratio remained strong at 191%. Key highlights included a 19% growth in unit-linked volumes and a 16% rise in insurance premiums. Storebrand also announced two strategic acquisitions and continued its aggressive share buyback program, aiming to repurchase NOK 1.5 billion worth of shares by year-end.

Strong Financial Performance

In the second quarter, Storebrand Group showcased its strong financial performance with cash-based earnings reaching NOK 2,249 million, significantly backed by the operating result of NOK 819 million, which saw a year-on-year increase of 38%. A substantial portion of the financial result of NOK 1,431 million came from the sale of the health insurance business, contributing NOK 1,047 million. The robust performance across the business lines and effective cost management were the key drivers behind these impressive figures【6:0†source】.

Capital Management and Share Buyback

Storebrand is actively managing its capital through a NOK 1.5 billion buyback program, of which NOK 800 million was completed in the first half of the year. The remaining NOK 700 million is scheduled for the next two quarters. This buyback plan is fully integrated into the company's solvency ratio, which stands strong at 191%【6:0†source】.

Growth Across Business Lines

Storebrand is achieving double-digit growth across all business lines. Unit-linked volumes grew by 19% year-over-year, resulting in a reserve increase of NOK 68 billion. Asset management also saw a robust growth of 14% in total assets under management compared to the previous year, with a net flow of NOK 7 billion for the quarter. Insurance premium volumes grew by 16% due to increased prices, and there was a 13% annual growth in the retail banking loan balance【6:0†source】【6:1†source】.

Sustainability and Recognitions

Storebrand's commitment to sustainability was highlighted by being recognized by Time Magazine as the most sustainable company in Norway and among the top 50 globally. This recognition underscores the company's robust sustainability reporting and achievements across various ESG metrics【6:0†source】.

Internal Solvency Model and Risk Management

The quarter marked a significant milestone with the submission of Storebrand's Internal Solvency Model application to the Norwegian FSA. The internal model is designed to enhance the company's understanding of its business risks and to optimize capital allocation effectively【6:0†source】.

Key Acquisitions

Storebrand made notable progress on the acquisition front. It acquired an additional 50% of Danish infrastructure fund manager AIP Management, bringing its total ownership to 60%. This acquisition significantly expands Storebrand's asset management capabilities, especially in infrastructure investments, with assets under management expected to grow approximately tenfold in Storebrand Infrastructure and by 50% in Storebrand Alternatives【6:2†source】【6:5†source】.

Insurance Segment Performance

Insurance results showed improvement but continued to face profitability challenges. The company is on track to achieve a combined ratio below 92% by 2025, with premium growth largely driven by price increases. Claims frequency and claims inflation remained areas of concern, but the company is implementing strategies to address these issues【6:3†source】【6:4†source】.

Banking Segment

The retail banking segment reported an increase in return on equity to over 12%, with a cost-income ratio of 38%. The bank saw solid growth in deposits and maintained an interest rate margin of 1.6% for the quarter. Despite some drag from the integration of the Kron platform, customer satisfaction and growth momentum remained strong【6:1†source】【6:17†source】.

Public Procurement Case

The Norwegian government's response to ESA's preliminary views on public sector Occupational Pension contracts suggests potential infringement proceedings. Storebrand expects gradual market opening and continues to prepare for increased assets under management in this area, aligning with its long-term growth strategy【6:19†source】.

Outlook and Future Ambitions

Storebrand is on a promising path to realize its profit ambition of NOK 5 billion by next year and aims for a return on equity target by 2025. The company remains committed to delivering growing dividends and continuing its share buyback program. Storebrand's sustained growth, strategic initiatives, and financial resilience position it well for future success【6:7†source】【6:17†source】.

Earnings Call Transcript 2024-Q2

[Johannes Narum, executive]

Good morning, ladies and gentlemen, and welcome to Storebrand's second quarter result presentation. As usual, our CEO, Odd Arild Grefstad, will present the key highlights of the quarter; followed by CFO, Lars Loddesol, who will dive deeper into the numbers. At the end of the presentation, participants in the Teams webinar will have a chance to ask questions. 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. Let's look at the second quarter's highlights. Storebrand Group's cash-based earnings amounted to NOK 2,249 million in the quarter, while the operating result was NOK 819 million, up by 38% year-on-year.

Even with insurance results still on the soft side, we deliver a very strong overall operating result, which was driven by continued robust growth across the business and a strong cost development. The financial result of NOK 1,431 million was made up of NOK 1,047 million from the sale of the health insurance businesses and an improved financial result from increased return on net financial assets. Furthermore, we continue to deliver a robust solvency ratio of 191% in the second quarter.

On the capital management side, we are, this year, executing a NOK 1.5 billion buyback program and have completed NOK 800 million in share buybacks during the first half. In the next 2 quarters, shares worth NOK 700 million will be bought back as we continue our program. The planned full year amount of NOK 1.5 billion is fully reflected in the solvency ratio we report today.

As some of you are well familiar with, Storebrand aims to take 3 commercial positions in the market we operate in: a), to be the leading provider of Occupational Pensions in both Norway and Sweden; b), to be a Nordic powerhouse in asset management; and c), to be a fast-growing challenger in the Norwegian retail market for financial services. These positions are strengthened by our strategic enablers, people, sustainability and digital frontrunner together unlocking additional growth.

Let me now turn to how we have succeeded in developing our commercial positions in the quarter. I am very pleased to say that we still deliver strong double-digit growth across all business lines. We see structural growth within unit-linked, where volumes have grown by 19% year-over-year, corresponding to absolute growth of NOK 68 billion in reserves.

We also see that the strong long-term growth in asset management continues. In this segment, total asset under management grew by 14% compared to second quarter 2023, while net flow during the quarter stood at NOK 7 billion.

Within Insurance, we continue to gain market share. In addition, we see the effect of increased prices in premium volumes with a total growth rate of 16%. We are still not pleased with overall profitability, but we are on the right path to achieve our combined ratio below 92% in 2025.

Lastly, the loan balance in retail banking is increasing at an annual growth rate of 13% and Storebrand is gaining market share. This shows that we are succeeding in being a fast-growing challenger in the Norwegian retail market.

Now let me give you an update on some other key developments that affect our business in the quarter. I'll start with an update on 3 important themes for the business before moving on to 2 acquisitions announced in the quarter.

Within sustainability, we are pleased to see that our efforts are recognized. During the quarter, Storebrand was recognized by Time Magazine as the most sustainable company in Norway and among the top 50 in the world across all industries. The assessment was based on our sustainability reporting, detailing Storebrand's goals and results across various ESG metrics.

Within risk and capital management, we reached an important milestone this quarter when we submitted our Internal Solvency Model application to the Norwegian FSA. This has been a thorough process and we have already used the model for a long time in our own solvency and risk assessment. The main reason for having an internal model is to better understand the risk in the business and make the right decisions for capital allocation.

Let me lastly give you a quick update on the public sector. As some of you may remember, ESA gave preliminary views on the issues raised in the public procurement case in a letter to Norwegian authorities during the first quarter. ESA's view was that public sector Occupational Pension contracts fall within the scope of public procurement law and that the lack of tender processes in this market constitutes a failure to meet relevant EEA laws.

During the second quarter, the Norwegian government responded to ESA's preliminary view. The government's letter to ESA did not represent new argument or views compared to previous submissions. Storebrand, therefore, expects ESA to initiate infringement proceedings in the public procurement case.

The quarter was also eventful on the M&A side. Storebrand announced 2 acquisitions in addition to concluding the divestment of the health business. I will now spend a little more time on the 2 acquisitions.

On June 26, Storebrand entered into an agreement to acquire an additional 50% of the shares in the Danish infrastructure fund manager AIP Management to reach an ownership of 60%. Founded by PKA, a Danish pension company and headquarter in Copenhagen, AIP has an experienced management team and has total commitments from investors of EUR 8 billion. AIP specializes in energy and infrastructure investment that facilitates the green transition in Europe and North America.

AIP operates in an attractive market with strong growth prospects. At the macro level, there is a substantial need for infrastructure investments. As the world accelerates its green transition, investments required by private investors between now and 2040 is estimated to $15 trillion. As an asset class, infrastructure offers stable returns, a long duration on the client relationship and low market correlation. AIP has a strong position in this space that would have been both capital and time-consuming to build in-house.

The acquisition demonstrates how Storebrand builds a truly Nordic powerhouse in asset management and significantly expands its -- our strong offering across the alternative spectrum, consisting of infrastructure, private equity, real estate and private debt. I now believe that we have the right capabilities within the alternative space, broadening our presence in the Nordics.

The acquisition will strengthen assets under management in Storebrand infrastructure by 10x, in Storebrand alternatives by 50% and the total Storebrand Group assets under management to approximately NOK 1,400 billion. The acquisition provides an opportunity to realize earnings growth by further growing and commercializing AIP together with a dedicated management team and existing owners.

Storebrand also acquired its own headquarters, Storebrand Lysaker Park in the quarter at a gross property value of just below NOK 1.7 billion. I'm very pleased to see that this is now closed and that we have found a long-term headquarter solution for the company that is beneficial for shareholders and the organization.

A wide market search has been conducted, but options were considered not to fulfill Storebrand's needs for the future. Compared to other options, we estimate to save up to NOK 100 million annually in operational costs and we also see opportunities to develop the building to further increase value for shareholders.

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, and good morning to you all. Let me start by emphasizing that the numbers I present here are the cash equivalent earnings as defined by our APM.

The quarterly result ended at a record NOK 2,249 million, including the NOK 1,047 million profit from the sale of Storebrand Health Insurance, as communicated earlier. Excluding this amount, the underlying group result of NOK 1,203 million is a significant improvement on the previous quarters and show that we are on the path to realizing our profit ambition of NOK 5 billion next year.

The result improvement is explained by strong growth, cost control and improving insurance results. The P&C results are still weak, but price increases will continue to be implemented until targeted profitability has been restored. The solvency position stays strong at 191%. The cash earnings per share after tax is at a record NOK 4.59 in the quarter.

The solvency position is unchanged in the quarter. The main elements impacting the solvency are the sale of Storebrand Health Insurance and the new tranche in our share buyback program announced back in April, largely neutralizing each other. On the regulatory side, both volatility adjustment and symmetrical equity stress are down, also roughly neutralizing each other. The sensitivities show robustness in all scenarios.

Fee and administration income is up 13% from the second quarter last year. The insurance results have improved from the previous quarters, but are still below what they should be. Cost is flat and better than market expectations. First and foremost, this is due to continued synergy effects from recent acquisitions and general cost control, but also helped by somewhat lower market activity through Easter and the May holidays as well as some positive [indiscernible] effects between quarters. We maintain our cost guiding for the full year of NOK 5.9 billion, excluding performance cost currency effects and one-offs.

The operating result is up 38% compared to last year, showing the growth and scalability of the business. Financial results include the gain from the sale of Storebrand Health Insurance. Excluding this element, the results are still strong and in line with guiding following the higher interest rate level.

The tax charge was 10% in the quarter as the profit from the sale of Storebrand Health Insurance is not taxed. The normalized tax rate remains at 19% to 22%.

The same numbers split into savings, insurance and guaranteed show a 33% improvement in savings, a doubling for insurance, albeit still weak, stable results in guaranteed and strong development in other as compared to the second quarter last year. Overall, cash equivalent earnings are up by 40% in the quarter and 36% year-to-date, excluding the profit from the sale of Storebrand Health Insurance.

As Odd Arild has already illustrated, the front book savings business in Storebrand continues to grow double-digit within unit-linked, asset management and banking. Cost control is strong and the scalability in the business comes through as shown in the significant profit improvements in all sub-segments.

The bank delivers more than 12% return on equity and a cost income of 38% in the quarter. Despite -- sorry, deposits show solid growth year-to-date and the interest rate margin was 1.6% in the quarter. Kron is still in an integration phase with negative results, but customer satisfaction is high and growth is strong, having grown from about NOK 8 billion in assets under management at the time of the acquisition last year to around NOK 18 billion now. We expect significantly better results when the integration has been concluded.

The insurance results are still weak. Price increases are coming through and is the main explanation behind the premium growth. In the second quarter, the disability level seems to have flattened out at a higher level -- or at the same higher level as seen over the past 18 months. With implemented price increases, the results are now normalizing, but we are still closely monitoring the development in the Norwegian society and in our portfolio.

In P&C, the claims frequency has also flattened out, but the results are still impacted by strong claims inflation, especially within spare parts, all priced in euro or dollars. Large losses also contributed to higher claims in the quarter.

The combined insurance premiums are up 16% year-on-year, largely due to price increases. The renewal churn is within normal variation. In P&C, we continue to increase our market share in the retail market. Our clear ambition is to be back at the targeted combined ratio of 90% to 92% for the full year 2025.

The guaranteed business continues to fall as a percentage of total pension reserves and is now down at 40% for the group. Margins and pension liabilities are largely unchanged in the quarter. The Swedish business shows some improvement in profit sharing, whilst the Norwegian profit sharing will mainly come through in the fourth quarter. We maintain our expectations for profit sharing as communicated at the last Capital Markets Day in December last year.

Other is up primarily from the sale of Storebrand Health Insurance, but also from lower integration costs after the completion of the integration with Danica and good returns driven by tighter credit spreads in the company portfolios.

Finally, I leave you with our financial ambitions towards 2025. The results we present today show that we are on a path to deliver on the NOK 5 billion result ambition and a return on equity target for 2025. Furthermore, we deliver on gradually growing dividends and NOK 1.5 billion in annual share buybacks.

We also show progress on nonfinancial targets and I encourage you to study our annual report for 2023, which was published back in March. It has been built on the CSRD framework, 1 year ahead of the regulatory requirements. Please investigate this for a comprehensive review of our targets and progress on a wide range of issues.

Storebrand's ambition is to be in the forefront of sustainable finance through our commitment to society through our own operations and through our products and services, the acquisition of AIP being the most recent example.

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. Please use the raise hand function in the Teams webinar to be placed in line to ask your question. To give everyone an opportunity to ask questions, we kindly ask you to limit yourself to 2 questions at a time.

[Johannes Narum, executive]

It seems like we have a first question here from Peter Eliot in Kepler.

[Peter Eliot, analyst]

Yes. So if I stick to 2 questions initially. The first one, I guess, was on your Norway unit-linked cost base. I mean, at Q1, we were told that the normal quarterly run rate was sort of NOK 180 million per quarter and NOK 11 million was delayed to Q2. So we were expecting over NOK 190 million. But obviously, we've got NOK 32 million less than this. So I'm just wondering if you can just go a little bit more into the drivers and what has changed? And maybe more broadly, if you can just explain what items it is that caused the volatility in these numbers?

The second question on the internal model, given that you've now applied for that, just wondering if you can give us any more insights into the benefit that you might see from that in terms of solvency points.

[Lars Aasulv Løddesøl, executive]

Thank you, Peter. On Norwegian unit-linked cost base, we continue to take out synergies as explained earlier when we integrated Danica. We have strict cost control and there may be some periodic effects between quarters here. But clearly, the way to maintain reasonable profitability in these products is through scale and through cost control in order to achieve satisfactory scalability of the business and profitability when there are -- when there is some pressure on margins as we've seen over time.

In terms of the partial internal model that we have applied for, we already used this in our internal risk management in order to have the right investment portfolios and right investments, the right financing subordinated done, et cetera, and capital within both the group and subsidiaries. And this is gradually -- and when we get the model also approved by the authorities, it will enable us to align the internal risk management better with the capital requirements of the business.

The process with the regulator is expected to go well into next year. So it's too early to comment on any specific effects coming out of the application.

[Johannes Narum, executive]

Thank you, Peter. We have a next question here from Tryf in Berenberg.

[Tryfonas Spyrou, analyst]

I've got 2 questions, if I may. I guess the first one is on the public pension opportunity. And I guess I just wanted to understand your thinking about the latest development, the response from the Norwegian State. And how does that change your assessing of the likelihood of the market opening up? And also with regards to the time, I understand it could be legal proceedings, et cetera. So any thoughts around the opportunity and how the development has changed your thinking?

And second one is on P&C on insurance. And I guess on P&C, it looks like -- I just want to get a little bit more understanding on how far we are from seeing those price increases early through the P&L. It looks like it's tracking a little bit behind the P&C. On the other hand, visibility, it looks like it's a little bit better. So I guess, any comments around that? And on the likelihood of you're still happy with that sort of 96%, 97% combined ratio for the full year? And how is that tracking along?

[Odd Arild Grefstad, executive]

Thank you. Starting with public pension, I would say that the development we have seen this quarter is absolutely in line with what we expected and what we also communicated in the first quarter. Now this will continue in EU. We expect ESA to take up this case early after the summer and expect development during the second half in this case.

But anyway, what we see is that this market is opening, both with or without the rulings from ESA. We see more municipalities now are either saying that they are going into tender offering or are looking into going into tender offering. So we feel very comfortable that this market will gradually open up, not one big bang, but will gradually open up. And that is also what we have communicated in our goals for increased assets under management this year and going forward. So it's really as expected and the development goes as we have planned for in this area.

P&C, well, should you start on that, Lars?

[Lars Aasulv Løddesøl, executive]

Sure. So as you are familiar with, Tryf, prices have been increasing both within disability as well as in P&C over some time. And as I mentioned in the presentation a few minutes ago, the price increases that we've had in disability now meets a flattening out in the disability development. So this is still an area that we follow very closely, but the result seems better within disability.

On P&C, there has also been a significant increase in prices to meet the higher claims inflation and higher frequency in these product lines, but we see that we need to do more there in order to actually meet the development. It should also be said that in the second quarter, we had a large amount of large losses, which negatively influenced the overall combined ratio by approximately a couple of percentage points.

So if we can avoid those -- so like I think [indiscernible] had the same thing, quite a lot of fires during May month, which was a very dry month, which gave an impact of maybe NOK 30 million, NOK 40 million in additional losses outside the normalized losses in the quarter.

So -- but with the continued price increases that we see and hopefully, no more of these large losses in the quarters, we should be able to see that the trend for the combined ratio continues to gradually go down towards the targeted 90% to 92% that we have guided on and targeted for next year.

[Odd Arild Grefstad, executive]

And just to add on that also, Lars, we have now a 97% combined ratio at the end of the first half. That is actually in line with what we have communicated going from last year's 103% to next year's below 92%. And I must say I'm very confident that we will move towards these targets. And I'm also very pleased to see that we are gaining market share in this market that I view as a very profitable market over the cycles. And we are now actually at around 7% market share in the Norwegian P&C private sector market. And I'm very pleased to see that development.

[Johannes Narum, executive]

Thank you, Tryf. We have a next question from Vegard Toverud in Pareto.

[Vegard Toverud, analyst]

I also have 2 questions. The first is returning to the internal model. Is it possible to say what the impact would have been to the Q2 2024 solvency if the full application was approved as it stands? And also if the application is based on parts, i.e., that the FSA could approve different parts of the application or if it's approved as one package or not? So that's the first question.

And the last one is on interest costs. It seems to have gone down to NOK 143 million from NOK 160 million last quarter, while one could expect it to have increased. So if you could comment on the interest cost in the quarter and what we should expect going forward here?

[Lars Aasulv Løddesøl, executive]

Thank you, Vegard. We have calculated what capital requirement would have been under the partial internal model, but we are going to discuss this with the regulator for the next 18 months or so. So I'm not going to give you a number.

And in terms of the way the internal model process is, we are not allowed to cherry pick, i.e., only pick the elements that would give us a lower capital requirements. But similarly, when we apply, we apply for a whole package so the regulator cannot cherry pick on the -- with the opposite sign either.

So it's all or nothing, but we probably need to discuss with the regulator some of the assumptions behind the capital requirements on different asset classes and different risks and we have to prove that we have the right numbers behind it, the right statistics, et cetera, behind it in order to get it approved. So we'll get back to you as soon as we have some firm numbers that we can share.

[Odd Arild Grefstad, executive]

And lastly, on the interest rate cost of NOK 140 million. We have repaid one loan in the quarter, so that in isolation takes down the interest rate cost. It's also fair to say that the NOK 140 million should be supplemented with some hedging and soft cost that takes it up to more like NOK 160 million to NOK 170 million a quarter in reality that comes outside of the pure interest rate cost.

[Johannes Narum, executive]

Thank you, Vegard. We are aware that this is your last quarter as a Storebrand analyst after many years of close coverage. So thanks a lot for your effort and best of luck in your new job.

We have a next question from Hakon Astrup in DNB. Seems like we have an issue on the line. Are you able to unmute yourself, Hakon? I think we will then progress on to the next question from Johan in Carnegie and then we will revert to you later, Hakon. Please go ahead, Johan. We'll take your questions first.

[Johan Ström, analyst]

Two questions from my side. I'd like to start with public pension market. And just on the situation where we are right now because with ESA and the Norwegian government, do you think the number of tenders that come to the market while we're still in this situation could change? It seems like the monopoly-like situation with [ KRP ] has received a lot more attention in general. So just curious if you see more -- or if you see signs of more movements on the back of this?

And then my second question is on unit-linked in Norway. I noted that the fee margin is down 4 basis points quarter-over-quarter, which looks a bit high. So just curious to hear if there's anything special on this?

[Odd Arild Grefstad, executive]

Thank you. Yes, you are absolutely right. There is a lot of discussion and focus around public pensions these days. And I truly believe and feels that a lot of municipalities are having the discussions with themselves around these issues. And that helps, of course.

It's a bit early days still to see what the volumes will be. It's a typical autumn type of process, but we already see more municipalities coming out this year compared to last year. So it looks like it's gradually a market that opens up.

[Lars Aasulv Løddesøl, executive]

On the unit-linked and fee margins, I'm sure you're familiar with that, Johan, that we have a fixed element in administration fee and then we have a fee for the funds that we have under management. So when our portfolio grows as much as it does, the fixed element becomes smaller part of the total, so you get the dilution through growth. So that's a part explanation. And then there is also this is a competitive market. So there is a constant margin pressure in this market as it is in every other competitive market.

Third element is that there will be some fluctuation from quarter-to-quarter, and it may have fallen a little more this quarter than you will see over time. But if you look in the supplementary and follow this quarter-by-quarter, you see there's a gradual decline partly as this dilution effect from the growth and partly as normal margin pressure in any market.

[Odd Arild Grefstad, executive]

And therefore, also, of course, the cost focus is very important here to ensure that the bottom line margin is actually intact as we have seen it has been over the last quarter compared to the quarter before and also over a longer period.

[Johannes Narum, executive]

Thank you, Johan. We will then try again with Hakon Astrup in DNB Markets.

[Håkon Astrup, analyst]

Two questions from me, the first one on a follow-up on insurance. So in order to reach the 90% to 92%, do you need to carry out additional price increases above claims inflation? Or is it sufficient that price increases already implemented take full effect?

And then the second question on the bank. So we are closing in on new capital requirements for banks that is beneficial for smaller standard banks such as you. What is the impact for Storebrand and may this change also, say, change your strategy? Maybe it can be a bit more aggressive on the growth side. That was my 2 questions.

[Lars Aasulv Løddesøl, executive]

Okay. Let me start with the insurance part and price increases first. The pricing is dynamic, i.e., we follow -- we collect all the information that we have on price inflation, on customer groups, on frequency, et cetera. And then we try to have the correct pricing in a market where there is competition. And we will constantly adjust prices to get the right risks at the right price to achieve our targeted combined ratios.

As you are familiar with, our targeted combined ratio is 90% to 92%. Most of our competitors have a targeted combined ratio in the mid- to low-80s%, which means that we can have a somewhat lower price and still be very competitive and grow like Odd Arild has commented on in order to -- and still have very good return on equity due to the diversification benefits in the capital requirements for that kind of risk compared to the other kind of risks we have in the business.

So yes, we will have dynamic prices. We will continue to look to have the right prices and we expect to continue to be competitive in terms of getting market shares because of our capital synergies.

[Johannes Narum, executive]

Yes. And then lastly on banking capital requirement. We do believe that having the same or similar capital requirements for low-risk residential mortgages is good for the competition in the market. Storebrand Bank is mainly a bank with low-risk residential mortgages. It implies that somewhere between NOK 500 million and NOK 750 million as the rule stands now, of course, we have to wait for the implementation and see if there's any other things that comes with the implementation package than what lies in the European rules should be expected as a capital release from the bank that could either be used to fund further growth or it can be used to free up capital up to the holdco.

So -- and I think as a general comment, we will still use the bank to attract retail customers through both the pension side and through the broader public using the same expectations for return on equity that we have done earlier.

Thank you, Hakon. We have a next question from David Barma in Bank of America.

[David Barma, analyst]

The first one is on the risk result. You mentioned that a little bit in your introductory remarks, but can you come back a little bit on the developments in disability, both in your more mature book with guaranteed products, which deteriorated a bit this quarter, but also for the DC book?

And my second question is on investment returns. So with the Norwegian short-term rates expected to start coming down later in the year on Q4, can you remind us how sensitive the holding investment result is for that?

[Odd Arild Grefstad, executive]

Yes. If I start on the insurance side -- well, first of all, I'd like to start is, of course, a lot of focus on the development on insurance. I must say, I'm very pleased to see that we deliver operational results above NOK 800 million when still we are on the soft side on insurance. It shows the development and the growth that really comes through in the bottom line in Storebrand.

When we then move into Insurance segment, well, development now down to 97% in combined. That is on track from last year, as I already mentioned, down to the 92% for the full year next year. And also, with the basis on these large claims in the second half that have a negative impact on 2 percent points, we are absolutely, in my view, in the right path.

Disability in the Norwegian society is still at very high levels. Actually, 20% of the workforce in Norway today are at some kind of sick leaves, either disability or sick leaves and that's a very high number. For us, that is, of course, priced in to our models, but it is something that the whole society really works with. And especially when we see that it's younger people that typically today goes out and almost immediately goes into disability or sick leaves based on mental illness and so on.

So this has also gained much more attention in the Norwegian society. And we see that the parts in the workforce now opens up to make changes also in the regulations around this issue that makes actually Norway have almost double the levels of sick leaves and disability compared to others.

So I believe there will be, over time, also structural changes that will address this. It must be for the welfare system altogether. For us, we follow this very closely. It's not like we say that everything is now fixed. There will be -- might be a volatility going forward in this area. But so far, we have been able to price up for the risk we see in the portfolio that really also mirrors the society we are a part of.

[Lars Aasulv Løddesøl, executive]

And I believe you also mentioned, David, in the guaranteed products. So there is mortality risk and longevity risk in the guaranteed products. And the results were on the weak side this quarter, but within normal variations. So it's nothing in particular that worth mentioning in that context.

With respect to the holding company investments and sensitivity to interest rates, the duration is approximately 1.5 years. So then you can make your calculations based on that. And we typically invest in good credit bonds in general.

[David Barma, analyst]

Can I just follow up on the first question on pension-related disability? I think you had some runoff gains in the quarter. How much were those?

[Johannes Narum, executive]

It's -- David, I think it's -- we have commented on a smaller enough gain there in the Swedish portfolio, but it's a low amount and nothing we have put a number in externally.

It seems like we have a next question from Hans Rettedal Christiansen in Danske Bank.

[Hans Rettedal Christiansen, analyst]

So I have 2 questions. The first one is on the Norwegian paid-up policies and the -- there was some sort of criticism in the media during Q2 on not allowing your policyholders to convert, which was an option that you previously did. So I was wondering will you allow it going forward, do you think? And the other one then is, is it then kind of a net-net positive on your capital side, if this accelerates the decline in that portfolio?

And then the second question is just probing a little bit further in on the P&C result where loss, you mentioned that you had NOK 30 million to NOK 40 million in large losses this quarter. So my question is, what is the kind of normalized large losses that we should be expecting each quarter because if you take out those -- I mean, you're down at 87% combined ratio already, which would sort of imply that your pricing well above the inflation level even in Q2?

[Odd Arild Grefstad, executive]

Yes. I'll start with the paid-up policies. I think this is a part of a bit of a misunderstanding actually. If you look at the portfolios for paid-up policies with the investment choice, I think Storebrand has 98% of the total volumes here. So we are the absolutely main provider of this product. And of course, converting the silver back in the days into paid-up policies with the investment choice was a big fuel for this profitable portfolio that we have in the books.

Then we have worked with our digital solutions to convert from paid-up policies to pay the policies with the investment choice. And of course, it's a thorough process with a lot of regulatory boundaries around to make this proof for the -- well, the regulatory framework that we see. So we have been working with that and we've introduced that new digital solution again just after the summer, I expect in August when we will have fully bought, of course, advice, but also a fully digital solution where you can go and convert your paid-up policies into paid-up policies with the investment choice.

And with the interest rates level we have today, of course, paid-up policies also have moved in to be attractive product for us with profit-sharing expected going forward. But of course, also I think for the policyholders moving in to pay the policies with the investment choice is for many people a very good advice these days. And we have also a very good solution and a profitable product in this area.

[Lars Aasulv Løddesøl, executive]

With respect to large losses, I think different companies maybe define large losses a little differently depending on their portfolios. So -- and I'm not sure it's meaningful to give you a number as of what we expect on a normalized basis. And I think your calculation might not be entirely correct in terms of the impact that you mentioned on the P&C market.

But nevertheless, it's -- if you look at the year as a whole, the large losses in Storebrand were pretty much on a normalized level. They were a little lower in the first quarter, a little higher in the second quarter, which means that the first quarter number looked maybe a little bit too good, the second quarter worse than it is underlying. But if you make that adjustment, you see that the combined ratio is gradually going down as the price increases come through in the portfolio. So that's not very explicit, but I hope it's still meaningful.

[Johannes Narum, executive]

Thank you, Hans. We have a next question from Jan Erik Gjerland in ABG.

[Jan Gjerland, analyst]

The first one is on the net inflow. It seems like you have a very good inflow this quarter from a little bit weak last one at NOK 7 billion, if I did the calculation correctly. How -- where is it coming from? Is Kron being helpful? Is Delphi, [ Cargen ], the Storebrand, the funds being the development? Or where should we really put our efforts when it comes to the net inflow and see what is your beneficial here? And on top of that, what is the Kron drag when it comes to costs, as you [indiscernible] a little bit above NOK 30 million, but you said it should be improved going forward. So what to expect when it comes to Kron drag taken down?

Secondly, a follow-up on the cost side. Could you shed some more light into the benefit this quarter versus previously? And you mentioned some sort of privatization effects, et cetera. So maybe we could get a little bit better sense what to add on to the recurring items this quarter versus previously quarters, so we get a good run rate to work with?

[Lars Aasulv Løddesøl, executive]

On the inflow, in sum, we had inflow from the captive business from unit-linked business and Kron business, savings business in general. And we also had sales within the institutional mandates in both normal investment classes as well as in alternative investment classes. So quite a broad range of growth here, some captive and some non-captive.

And as I mentioned, Kron has grown quite significantly since we took it over by almost NOK 1 billion a month in the last few months. I believe you ask about Kron cost, is that correct? Yes? So the Kron cost level is going down as the implementation is integrating into Storebrand. We're now on a common fence platform and the deposits are going into Storebrand Bank benefiting the bank. The number of Storebrand funds in the portfolio is increasing and there are a number of integrations that will still happen throughout the rest of the year.

So the cost level is going down in Kron and the income with the growth is going up. So we expect to still show some losses in the next 2 quarters. But from the end of the year, it should be fully integrated with the rest of the business and will not have a separate reporting line on Kron.

And the third question, I'm not sure.

[Kjetil R. Krokje, executive]

Yes. And the last thing was on the cost side with what could be the expected run rate going forward? And I guess what you said here is that we still keep the NOK 5.9 billion guiding. It makes sense to look at year-to-date cost and look at that as a good guide for the annual cost base. I don't know, Lars, if you have anything more to add on that.

[Lars Aasulv Løddesøl, executive]

No, absolutely. So it's -- there were some additional costs in the first quarter, which is somewhat on the low side in the second quarter. Look at the first half year, if you want to model from that perspective or start with our guiding and model from that perspective.

[Odd Arild Grefstad, executive]

I mean, this is very important. We focus a lot on cost and in the whole organization. And I'm very pleased to see that the double cost we had last year on the integration of Danica now has been coming out of the cost base and that's what we see full effect in the second quarter.

[Johannes Narum, executive]

Thank you, Jan Erik. We have another question from Thomas Svendsen in SEB. We cannot hear you, Thomas.

[Thomas Svendsen, analyst]

So 2 questions. On this AIP acquisition, would it be possible to sort of indicate your estimated return on the investments since it's not that small investments?

[Kjetil R. Krokje, executive]

Yes. I can start. We pay DKK 250 million for the business. It has had a result of ranging between, I think, DKK 8 billion to DKK 40 million over the last years. It's in a phase of commercialization now. And I think looking at this from a pure return standpoint with the current results, hopefully, it will be accretive in, I would say, 12 to 18 months time.

But what we hope to do is to commercialize it further and build on that platform and scale it together with our partners and the strong management team at AIP. So I think the downside here is very limited, NOK 250 million for a well-established infrastructure platform and the upside is significant if we succeed in commercializing the platform.

[Thomas Svendsen, analyst]

And the second question, if you look beyond the ongoing buyback program that ends no later than December and we are in a situation with overcapitalization, would you prefer to calibrate the solvency by increasing their buybacks? Or should we expect the NOK 1.5 billion to be fixed or the calibration will be via extraordinary dividends or raising the ordinary dividend?

[Odd Arild Grefstad, executive]

This is a discussion we have with the Board, of course, on an ongoing basis. It's also a discussion that we have with our main shareholders or all the shareholders we meet. We are quite indifferent if we use share buyback or dividends. What we hear so far is that a mix between share buybacks and dividends is the best way of handling this with different kind of tax structures and so in different countries.

But we are very focused on listening to our shareholders, what they want and expect us to do in this respect in the combination. But my expectation is that we will continue with the NOK 1.5 billion in share buyback programs and then gradually increase dividends as we increase the results in the business.

[Thomas Svendsen, analyst]

And just is it -- is it logical to think that you will do this dividend consideration sort of in Q4 when the -- in connection with the annual reports and not during the quarters?

[Odd Arild Grefstad, executive]

Absolutely. That will be a discussion at the year-end based on the full year results. We will have the dialog with the Board with the dividend for 2024, of course.

[Johannes Narum, executive]

Thank you, Thomas. It seems like we have some follow-up questions from Peter Eliot in Kepler.

[Peter Eliot, analyst]

Firstly, on the public sector product, I guess at Q1, I think you need to do a little bit more work maybe to understand the financials of that product. I'm just wondering if you've got any more insights now or if you can update us on your views of, yes, the profitability that we might expect from that product?

Secondly, you've talked a lot about increasing the market share in P&C. I appreciate it's an attractive market and certainly long term, it makes sense. I'm just wondering if you could talk a bit more about the decision or the aim to sort of increase market share at this time when the profitability isn't as high as it could be. I guess just playing devil's advocate, one might think maybe restore profitability first and then increase market share. But yes, just interested on your views on that.

And final one, solvency. I notice the solvency sensitivities have been reduced. I mean, in particular, the sensitivity to interest rates has halved. I know the health maturity portfolio has gone up a little bit, but just wondering if anything else has gone on behind the scenes there.

[Lars Aasulv Løddesøl, executive]

On public sector profitability, I think we've already communicated that it meets our return on equity requirements that the profitability is similar to unit-linked business. And I guess, in a Capital Markets Day kind of update you could go into that deeper. But I don't know, Kjetil, if you want to add anything.

[Kjetil R. Krokje, executive]

No, I think that's a very fair way to characterize it. We have roughly the same top line. Cost base is now higher, of course, because we are not having scaled it yet. Capital charges are also higher than unlinked, meaning that we don't get the kind of 20% to 30% ROE on it, but more the ROE requirement that we have communicated.

[Odd Arild Grefstad, executive]

If I should comment on profitability versus growth in P&C, let me be clear, meeting the targeted 90% to 92% in combined ratio in 2025 is the main focus. And we will get back to profitability as soon as possible. That is our focus. But we see that we have been able to increase prices quite significantly. We follow the price increases versus the market altogether and we also follow our churn rates. And we have been able to increase prices quite significantly and still have the churn rates on a very low level. And I believe that will be possible in this market also going forward.

[Lars Aasulv Løddesøl, executive]

With respect to the solvency sensitivities, we have built this hold-to-maturity bond portfolio that you know about, but we also build significant buffers and the buffers withstand changes in interest rates. So as long as we maintain the higher interest rate level and we continue to increase our buffers, then we should be good in terms of the sensitivities here.

Also, as you know, we're not adding new liabilities to this portfolio. So every quarter, every year, we're closer to the final maturity, which means that also the capital requirements will go down gradually.

[Johannes Narum, executive]

Thank you, Peter. I think we will need to conclude soon. So we will take a last question from Tryfonas in Berenberg.

[Tryfonas Spyrou, analyst]

I promise to be quick. And apologies if I missed this, I think you commented briefly on the retail bank, is quite a step-up in the result quarter-on-quarter. I guess there might be some effect on Kron there, but I was wondering whether you can give us sort of an outlook for the full year sort of NIM run rate we should expect? And how does the outlook for the bank look like? I was under the impression that the NIM sort of will stabilize. So we should really expect a step-up in profitability from here.

[Lars Aasulv Løddesøl, executive]

So the profitability in retail banking increases when rates are higher due to the deposit margin as well as the lending margin. But when rates are on the rise, the funding cost goes up immediately, but you cannot increase the lending rate as soon as you can or as you get it on the funding rate.

So therefore, in a rising interest rate environment, there is a negative drag on profitability. But in a high interest rate environment, profitability is better. We do expect that the market rates will gradually go down from this area, which will be positive for profitability, but we do not have 1.6% in interest rate margin as we had in the second quarter in our long-term plans. We do expect that to be somewhat lower.

So the bank will continue to grow gradually. We continue to manage margins. We've had a very good quarter behind us in terms of the growth will continue, but the margins are probably going to go down somewhat from here.

[Kjetil R. Krokje, executive]

And I think one -- just one thing to add on that is it's also very pleasing to see that more and more customers are choosing Storebrand for the deposits that we have now increased the deposit rate in the bank and also delivering a strong cost income of 38%.

[Johannes Narum, executive]

Thank you, Tryf. That concludes today's presentation. Our next set of results are due on 23rd of October and we look forward to seeing you again then. Meanwhile, we wish everyone a good summer. So -- and thank you and goodbye.