Storebrand ASA

OSE:STB

Earnings Call Transcript 2018-Q3

[Operator]

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

[Kjetil Ramberg Krøkje, Head of Investor Relations]

Thank you. Good afternoon, ladies and gentlemen. Welcome to Storebrand's Third Quarter 2018 Conference Call. My name is Kjetil Ramberg Krøkje, and I'm head of Investor Relations at Storebrand. Together with me, I have group CEO, Odd Arild Grefstad; CFO, Lars Løddesøl; and Head of Economic Capital, Trond Finn Eriksen.In the presentation today, Odd Arild will give you update on the developments in Q3. CFO Lars Løddesøl, will give you an overview of the financial development and dig into some of the more technical elements in the quarter. The slides will be similar to the analyst presentation released this morning and are available on our web page. After the presentation, the operator will open up for questions. [Operator Instructions]I will now leave the word to Storebrand's CEO, Odd Arild Grefstad, who will start the presentation on Slide 2.

[Odd Arild Grefstad, CEO & MD]

Thanks, Kjetil. A warm welcome to our third quarter presentation, which happens to be on the same day as the United Nations Day. The United Nations' 17 sustainability development goals provide a clear direction as to what future society we want to move towards. We think these goals will demand massive investments in the years to come. In Storebrand, we firmly believe that there is good money in sustainable investment. That's why we invest in the companies that best meet these criteria and are best positioned to create value going forward. Storebrand Global Solutions is an investment firm that exclusively invests in companies contributing to the UN sustainability development goals. The firm has performed well and manages NOK 2.6 billion today.Let's move to number -- Slide #3 and headlines from our third quarter. It is with great satisfaction that I can announce result of NOK 853 million, and an operating profit of NOK 685 million. This is a 15% increase from the corresponding period last year, and is a year-to-date result of NOK 2.6 billion. The result is primarily driven by solid growth in savings, combined with strong risk and insurance results and low operating costs. The underlying solvency margin is straightened with 3 percentage points in the quarter to 166%. Including transitional rules, the solvency margin is 169%. Following our improved capitalization and earnings generation, we are also pleased to see a rating upgrade of Storebrand Life to A- in the third quarter.Then let's move to Slide 4. At our Capital Markets Day in May, we introduced this picture to illustrate our strategy. This is a continuation of our strategy for the last 5 years that reflects that we now have a strong balance sheet, and our position for capital release from the back book in the coming years. Growth within Occupational Pension and product savings drives the growth within asset management. In addition, asset management growth is written by winning external mandates based on our good performance and administration and our position as a leading asset manager on sustainability.Then let's move to Slide 5. With our strategy in mind, let me start by addressing our guaranteed sector and its largest product, paid-up policies. It is a fact that the regulation in place today for managing paid-up policies only leads to low risk-taking and low recurrence of these contracts. On behalf of the Ministry of Finance, our working group recently proposed a set of changes to these regulations in the report -- in our report that thoroughly explores several possible regulatory improvements. We are very pleased with the proposal allowing for individual buffer building per contract and the proposal allowing for more flexibility in the buffers to cover negative returns. This may enable higher pensions for contracts already on the payment and increase risk capacity for some contracts. These are good proposals by the working group, but our stance is that there are good reasons to go even further, in the regulatory senses, to ensure better pension for all policyholders.Let's move to Slide 6. We see that the strong growth in the Savings segment continues. Our core product, Unit Linked, which includes occupational-defined contribution pension in both Norway and Sweden, grew by 18% compared to the third quarter in 2017. We also see good results in this segment, relative to our competitors, and sales are good. Asset management continues to grow by 16% since the third quarter last year. Growth within insurance continues to be low, but the profitability is very good. Steps have been taken to increase sales going forward. Our bank has had a positive development with 11% volume growth in retail loans during the past year. These loans have been booked on the life insurance balance sheet.Moving to Slide 7. The pace of business development in SKAGEN is good. SKAGEN are launching an extended version of their equity savings account platform, ASK, with the widest fund offering in the Norwegian market with a total of 600 funds. The offer is strengthened by recommending a shortlist of 20 to 30 funds, selected by our award-winning selection team. With this, SKAGEN is, perhaps, providing the strongest and most customer-friendly ASK platform in the market.Moving to Slide 8, one of the best funds in this platform is our very own Storebrand Multifactor, our factor fund that systematically tracks for well-known documented factors. The fund's assets under management have grown to over NOK 20 billion, and have shown to a yearly outperformance of 1.3%. In 2017, MorningStar named it the best Norwegian global equity funds.And finally, Slide 9. Our digitalization is continuing with undiminished strength. A good example of this is the newly launched chatbot in SPP, Gajda. Gajda is a chatbot that provides businesses with a tool to communicate pension in a charming and engaging manner to their employees. Recently, the Swedish pension authority awarded Gajda with their award for the most innovative solution for providing information on pension.And with that, I give the word to Lars.

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

Thank you, Arild. Starting on Page 10, key figures. The group result of NOK 853 million and operating result of NOK 685 million, reflects a good quarter for Storebrand. The results include 2 items that reduced the reported cost by a total NOK 40 million. The first item is linked to reversed performance balances caused by a weak credit performance in some of our largest funds. I do have to point out, however, that the fourth quarter looks far better so far, and the final performances to the group and to the portfolio managers will be concluded at year-end. The other items that reduced the cost in the quarter is disruption compensation that -- the distribution compensation that reduced the cost within P&C insurance. This is a one-off item. The 2 elements are classified as special items and sum up to NOK 40 million. The financial items and risk result life are good and are supported by satisfactory returns in the company portfolios and a good risk result from paid-up policies. Earnings per share are down, primarily as a consequence of higher tax charge in the quarter. I will revert to this in a moment. Solvency has been further strengthened, and we have continued to build buffers to be able to handle potential market volatility. Moving over to Page 11. Three main factors explaining development in the solvency ratio in Q3. Every year in the third quarter, we have a true revision of our assumptions, both operational, financial and actuarial. There are a number of smaller assumption changes that sums up to the negative 1.4 percentage point. The main contributor to the change is a downward revision of the assumptions for paid-up policies to convert to paid-up policies with investment charges. Second, interest rates are approximately -- are increased interest rates of approximately 15 basis points in Norway and Sweden, is the main contributor behind the 3.2 percentage point increase from market movements, decreasing the value of liabilities more than the value of the assets. In addition, strong equity markets have increased the buffer capital. And third, the results for the third quarter have been good and contributes with another 2.8 percentage points to the solvency position before deduction of 50% of the result in future dividends. So that means 1.4% in that table.Moving over to the following page. The most significant change from the last quarter is that we no longer have any effects from the transitional rules on technical provisions. This is due to increased interest rates and decreased value of liabilities in the Solvency II balance sheet. It is important to remember that if interest rates were to go lower again, Storebrand will automatically fit into the transitional arrangement for technical provisions. Hence, the solvency position including transitionals for the interest rate sensitivity on the 50 basis points interest rate growth is largely unchanged. For all other sensitivities reported here, we do not expect sufficiently large effects to trigger the transitional arrangement for technical provisions again. The sensitivities are more or less of the same magnitude, as reported last quarter.And then over to Page 13. The growth in fee and administration income was 5.8% year-to-date, adjusted for the acquisition of SKAGEN and currency rules. As you're well aware, the guaranteed products are in long-term run-up. Therefore, the growth in the actively sold products must make up both for margin pressure and run-off products. The growth in actively sold products from the current list was 9.3% year-to-date on a comparable basis. There were somewhat lower trading revenues from asset management in the third quarter, partly explaining the flattish development in revenues between the second quarter and the third quarter. We expect these revenues to pick up towards the end of the year. The insurance results are still good with a combined ratio of 81%. We see overall low claims and some run-off gains, primarily from improvements in disability. I mentioned in the key figures that we have reversal of cost amounting to NOK 40 million in the quarter. Furthermore, the third quarter has seasonally lower cost due to the summer and lower marketing. Nevertheless, we think the strong underlying cost control that will ensure delivery on our ambitious cost targets. The finance items and risk result life are strong. This is hit by an unusually strong disability result from paid-up policies at NOK 91 million in the quarter. Going forward, we expect the contribution from paid-up policy risk results to be in the order of NOK 50 million per quarter, up from 0, historically.For the third quarter, we have a calculated tax charge of 30%. Year-to-date, the tax charge is estimated at 21%, in line with our previous guiding. The higher tax rate in the third quarter is caused by periodic effects and technical factors. We continue to expect the tax rate of around 20%. The taxes are non-payable due to large tax loss carryforwards.And with that, I conclude my part of the presentation. And leave the word back to you, Kjetil.

[Kjetil Ramberg Krøkje, Head of Investor Relations]

Thank you. The operator will now open up for Q&A, please.

[Operator]

[Operator Instructions] We do have one question coming through already, and that's from Peter Eliot from Kepler Cheuvreux.

[Peter Eliot, Head of Insurance Sector Research]

Three questions please, for me. First one is on insurance. You commented that the result benefited from some runoff gains. Just wondering if you can quantify those and say where they came from? And the second thing was on solvency sensitivities. I mean, as you say, they're not very different quarter-on-quarter, but compared to last quarter, they do seem less symmetric and the upside on the width ratio, it disappears, especially on the sort of interest rate sensitivity. So even if I look at that sensitivity, the upside on the width seems to disappear, whereas without -- now [ full, 9 points drop and 6 points ]. Just wondering if you can explain what was happening there. And maybe thirdly, I was interested in, Grefstad, your comments there. Is that chatbot now sort of fully up and running? And I'm just wondering whether you can share whether there's any sort of financial implication. I know it's probably maybe too soon, too early, but any comments would be useful.

[Odd Arild Grefstad, CEO & MD]

Okay, let me start with insurance. On the runoff gain, we are -- typically, don't give you an exact number on this because this is a number of different product lines. And we have certain runoff gains and we also have certain runoff costs within other lines. As I said broadly, the development in disability has been positive. And when we have a positive development in disability, you have 3 basic effects. You have one effect that the number of disabled person in the quarter is less than you expected previously, so you have a gain from that. Secondly, when you have an improvement in the economy like we have in Norway now, people that were disabled in the past are getting well again and get back into the workforce. So you can release some of the reserves set aside for their disability. That's called reactivation. And thirdly, when you look forward, you expect somewhat less disability and put aside less resource for the future because you see this positive trend. So these 3 elements give a positive impact in the quarter and in the year-to-date. But it's difficult to quantify exactly what is unusual and what is the normal variation.

[Kjetil Ramberg Krøkje, Head of Investor Relations]

Okay. So when it comes to the sensitivities, I think, most of the sensitives with exceptional interest rates going down if it's on more or less the same level as the previous quarters. What we have seen is that the sensitivities, the interest rates is without transitional rules have changed a bit over time. The reason this quarter is somewhat technical are attached to risk margin. Not going in details on that. The other element is what Lars has said also, assumption change that we have had revision of how many are converting from paid-up policies to better policies with investment choice. I'm taking that assumption down. That leaves us with some of deduction, so the interest rates are going down again.

[Odd Arild Grefstad, CEO & MD]

Okay, talking about the [indiscernible] multiple highlights that we chose that [ store values in the -- constantly stays ] in the market. And you can also see that as we have an effect in the Swedish market, whereas we are gaining market share right from growth in sales and funds from balances compared to the last year. Saying that evaluating itself is now taken up by very short time by more than 16 quite large customers. There is a -- well, some more payments for using this because it's employer that chose this to their employees. So they're using this as a tool of making pension being more transparent. But I don't think we will expect to see these numbers coming very much true in the results. But we're more about and hopeful competition in the market, whereas [indiscernible] are important when [ it comes to realization and to the dollars ].

[Peter Eliot, Head of Insurance Sector Research]

Could I come back quickly just on the solvency. I mean, I guess -- I mean, it's been commented before on calls, but we've seen a bit of a trend of negative modeling, and if it features sensitivities throughout, just wondering, are you able to give us any numbers about what your assumptions are on the conversion of the paid ups?

[Odd Arild Grefstad, CEO & MD]

Yes. The assumption also invites downwards from 1% of the reserves annually through 0.5 percentage point -- or 0.5 percentage annually in conversion.

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

Just remember, Peter, that we have the revision of all the different assumptions in the model. So this was just one of them. So we can hardly go through all of the different assumptions in the model. But this was the most important one in making the difference in this quarter.

[Operator]

The next question comes from Matti Ahokas from Danske Bank.

[Matti Ahokas, Head of Equity Research of Finland]

Two questions, please. Firstly, on the cost side, the nominal flat cost target towards 2020. Should we assume this would be kind of the cost in the different business segments would be at the same levels or how will this move, in your opinion, towards 2020? Are we going to see cost increases in some segments and decreases in others? And then the other question is regarding, Lars mentioned, that Q4 looks better, the markets have been super turbulent in Q4. So I was bit wondering in how come that looks better. And also, as an outsider, is there any way of kind of tracking some of the funds? Or how could we kind of assume that if you can -- if you will be able to book the profit share in the fourth quarter, what are the sensitivities there?

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

I'll start quickly on the cost side. We guided on roughly [ 950 ] a quarter as the nominal interest cost for the group. That is excluding any large elements from profit sharing, if there is superior return in [ coronary ] management that leads to bonuses. And then when it comes to if it's on the segment base level, there -- it's not on the segment level. We will probably still would see cost in the guaranteed business go down over time and then somewhat more positively allocated to other areas. I think it's important to just like emphasize that how do you fix ability in cost allocation and redistribution of resources in a company like ours and any other company as well, is a key competitive factor. I mean, if you want to stay competitive, you need to develop with the market and you need to reallocate resources to where you have profitability and growth or where you want to create growth. So it's very important, because this is not static, but we work within total limitations set by the objectives set out at the Capital Markets Day. Second, on performance in the fourth quarter. I did not say that the fourth quarter markets are such more better, because there are certain [ in, certain out ]. I said that performance in the main funds was better so far in the fourth quarter. And if you go into SKAGEN fund stocks now, you can follow the performance on each one of the funds on a daily basis, but it's on absolute terms and relative terms. And that will give you an indication as to the development.

[Matti Ahokas, Head of Equity Research of Finland]

So basically, you're saying, Lars, that the SKAGEN funds, the absolute performance hasn't been great, but the relative performance has been better in Q4.

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

That's correct.

[Operator]

[Operator Instructions] Next question comes from Ashik Musaddi from JPMorgan.

[Ashik Musaddi, Executive Director and Co]

Just one question on SKAGEN again. I mean, you mentioned the fourth quarter relative performance looks okay, and in first 3 quarters, I think, you mentioned outperformance of 1.5% or something. So I mean, altogether, how should we think about the fee revenue that -- additional fee revenue that you'd be booking at one go in fourth quarter? So any thoughts on that would be great. And secondly, if I look at your capital generation, it used to be around, say, 1.5% in past net of dividend, and in this quarter, it was 1.4%. So how much of this is just rounding error and how much of that is some drop quarter-on-quarter?

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

Well, maybe I should start on SKAGEN. And I think, first of all, last year, you saw that SKAGEN has a performance quite close to the relative indexes. And that gave a great result of around NOK 200 million in the last quarter. This year, it's been underperformance in the main funds so far, and quite significant underperformance in the third quarter leading to situations where we used that cost for the [ diem ] in the third quarter. And if we have to close the CapEx third quarter, there would be a total of NOK 53 million in performance fees. So that gives you some direct share, I must say, that quarter will count [ for value ] so far with cost of performance of NOK 50 million in the performance fees will be good. And then you have the range up to -- well, quite a normal situation then you have performance like in indexes then you will have NOK 200 million. And of course, if you can really perform as we intend to do [ alpha ] on top of that going forward, you will have absolutely also -- and actually from that level. Not what we expect for the fourth quarter. On solvency generation, we have said that we expect to create 10 percentage points from operational earnings each year before dividends, with 1.4 after dividends. We are a little bit higher than that level with approximately 12 percentage points run rate a year. So I guess we are broadly in line with the guidance given.

[Operator]

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

[Kjetil Ramberg Krøkje, Head of Investor Relations]

We just want to say thank you for everyone for joining the call. And also, please feel free to reach out to us if you have any further questions. So with that, we would like to wish you all very nice afternoon. Thank you.

[Operator]

Thank you for joining today's conference. You may now replace your handsets to end this call. Thank you.