Storebrand ASA

OSE:STB

Earnings Call Transcript 2020-Q3

[Daniel Sundahl, IR Officer]

Good morning, ladies and gentlemen. Welcome to Storebrand's Third quarter Results Presentation. My name is Daniel Sundahl, I'm Head of Investor Relations at Storebrand. Today, CEO, Odd Arild Grefstad, will start by taking you through the highlights of the quarter, and afterwards, CFO, Lars Løddesøl, will take you deeper into the numbers. At the end of the presentation, we will open up for Q&A. And let me remind you to ask questions, you need to be dialed in to the conference call. But without further ado, I give the word to CEO, Odd Arild Grefstad.

[Odd Arild Grefstad, Group Chief Executive Officer]

Thank you, Daniel. First, a quick update on COVID-19. In the third quarter, the situation in the Norwegian and Swedish society following the COVID-19 pandemic have continued to normalize. As an impact of the pandemic, the corresponding and the corresponding economic downturn, Storebrand's results were negatively affected in the first quarter. But the financially loss -- financial losses have, to a large extent, been reversed over the last 2 quarters. Storebrand has remained fully operational with close to normal productivity and has experienced strong underlying growth this year despite the pandemic.Today, we present the best third quarter operating profit in Storebrand's history. Growth within savings and insurance segment, combined with rebounding financial markets and a strong cost control are the main drivers for the profit development. Storebrand's group profit for the third quarter was NOK 1.12 billion.Unit Linked premiums grew by 22%, and the Insurance growth was 15% compared to third quarter 2019. Assets under management increased to a record high level of NOK 921 billion, and this solidifies Storebrand's position as a leading Norwegian asset manager.The solvency ratio was 179% at the end of the third quarter, an increase of 16 percentage points from last quarter. The solvency ratio without transitionals increased by 13 percent points to 150%. The increase is due to positive returns on credit bonds and equities as well as pricing measures in parts of our guaranteed book of business.The Board remains committed to pay a normal dividend in 2021. To start the share buyback program, the Board will make a forward-looking assessment, including the view on the runoff of the transitionals. With today's interest rate level, the Board do not expect to start this program during 2021. We will, of course, revert to more details around capital management in our Capital Markets Day in December.Storebrand continued to follow our two-folded strategy. We actively manage our balance sheet and risk in the guaranteed book of business that are in long-term runoff. Solvency is at 179% at the end of third quarter, and our operational costs is developing according to plan. Actually, we report lower nominal costs this year compared to 8 years ago, adjusted for acquired businesses.In the front book, we harvest capital-light growth through our leading position in occupational pension in Norway and Sweden as well as the individual market for savings and insurance in Norway. We recognized strong growth in asset management based on our leading position in sustainable investments.This picture illustrates the growth in our front book. Unit Linked reserves grew by NOK 45 billion compared to third quarter of 2019. This represents a 22% growth. Total net transfer so far this year is NOK 6.2 billion. Assets under management increased by NOK 134 billion, to record high NOK 921 billion. This is a 17% growth. Market returns and net flows of NOK 35 billion year-to-date is the main drivers for this growth.Within Insurance, the annual portfolio premium grew by 15% compared to the same period last year. This is in line with our double-digit growth ambitions. Profitability is good. The reported combined ratio is 88% in the third quarter. Lending volumes in the Storebrand Bank amounted to NOK 48 billion, an increase of 2% compared to the same period last year. The growth in lending has slowed since we now approach the targeted level of NOK 50 billion in mortgages.On the next 2 slides, I will give you some examples of how we, in the third quarter, have seen important breakthrough within targeted growth areas, such as the new offering in public pension in our segment of Insurance and a breakthrough within international sustainable asset management. In the market for public pension, Storebrand has been elected to be the new provider of public occupational pension for Vestland County. That is one of the largest public pension accounts in the market.This contract includes more than 11,000 current and former employees and a transfer of NOK 3.7 billion. When it comes to Insurance, Storebrand has, in this quarter, successfully entered into an agreement with Insr Insurance Group to acquire their insurance portfolio. That will add up to 2% market share within our P&C business.Storebrand has continued to hold the position as a leading provider of sustainable investment solutions. In the quarter, a new wide ranging climate policy for investment was launched to increase action on climate and accelerate the green transition. With this investment policy, we strengthened our role as a sustainable asset manager, contributing to reduced carbon emissions, leading to reduced climate risk and secure long-term returns. The policy utilize all our investment tools, including increased investments in solutions, active ownership and divestments.In this, it is, therefore, with great pride, I announce that our broad family of sustainable funds also is recognized by the international audience, result in winning international mandates. And in the third quarter, we have won a large sustainable mandate in the U.K.And with that, I give the word to our CFO, Lars Løddesøl.

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

Thank you, Odd Arild. So the third quarter of 2020 was a good quarter for Storebrand. Operating results are back on track after a bumpy first half of the year. The operating result of NOK 703 million is, as far as I can recall, the best in the history of the company. In addition, the financial result was strong at NOK 340 million, leading to a result before amortization and tax of NOK 1.12 billion.In addition, we have accrued NOK 49 million in performance fees in the quarter. The accumulated accrued performance fees year-to-date totaled NOK 137 million, which will be booked in the fourth quarter.Earnings per share after-tax adjusted for amortization is strong at NOK 1.9 per share. There is a rebound in the solvency from both lower SCR and higher own funds. I will revert to this shortly.Customer buffers have been rebuilt and are at historical highs, securing returns to policyholders and protecting shareholders' capital.The solvency movement in the third quarter has been strong. There is an overview -- here is an overview of the most important steps in that movement. Every year, in the third quarter, we performed a thorough review of all model and assumptions. Net-net, the biometric factors have a neutral effect on solvency. The most important factor in the 2 percentage point improvement is related to lower cost and the introduction of individual pension accounts from next year.Updated pricing and derisk strategy includes pricing increases in the defined benefit portfolio in Norway as a consequence of lower market rates, including a improved modeling of future pricing flexibility. Derisk strategy is related to how we act in times of market corrections, like the one we saw in February, March this year, and how this has been incorporated in the modeling. The correction in the spring gave valuable knowledge on risk mitigation and tested our strategy implementation. In combination, this gives a positive contribution of 5 percentage points.The negative movement of 3 percentage points in updated volatility adjustment and symmetric equity adjustment is primarily related to a lower volatility adjustment, which have gone down by 6 bps in Norway to 30 basis points and by 2 bps to 15 basis points in Sweden.The equity stress is up by only 0.3% despite strong equity markets in the third quarter. This is due to EIOPA calculating the equity stress based on relatively weak European equity markets in the quarter. Our investments are closer to the MSCI World, which have contributed to good returns without a parallel negative contribution from the stress factor. This means that we have benefited from good equity returns without the corresponding increase in the equity stress.Asset return and allocation have been positive by 8 percentage points. 10 percentage points is primarily related to good credit markets, but also supportive equity markets. With the increased risk capacity, we have increased our equity exposure sum during the quarter. The increase in equity exposure increases expected returns going forward, but reduce the solvency by 2 percentage points for a total movement of 8 percentage points.The result after tax with amortization added back is NOK 889 million, which contributes 3 percentage points to the solvency before we set aside NOK 350 million for dividends. The transitional capital increases by 3 percentage points in the quarter.This picture shows, again, the movement in the solvency margin as well as sensitivities in different scenarios. The sensitivities show an overall resilience to different market movements. Despite this, we know from the solvency movement earlier this year, that we can experience basis risk between volatility adjustment and credit spreads, a disconnect between equity returns and equity stress and twists in the interest rate curves that can cause cost effects not fully captured by the sensitivities on a quarterly basis.Fee and administration income is up 7% year-to-date. Insurance results are strong pretty much across all products. There is still strong cost control, and the fixed cost base has been reduced. The operating cost line includes both performance-related expenses relating to investment products as well as increased sales commissions to external agents.Financial return has been strong with contracting credit spreads and positive equity markets. Tax is lower than normal due to the composition of the results, where the good financial return in SPP reduces the average group tax rate in the quarter. The normal tax rate remains at 20% to 23%.The profit after tax at NOK 1.483 billion year-to-date is actually better than last year despite of the pandemic. This is partly explained by the tax gains in the first quarter and partly by the good results in the third quarter.Splitting up the results in the 3 profit areas, Savings, Insurance and Guaranteed. We see Savings contributing with strong growth in assets under management, Insurance returning to good profitability from portfolio growth and lower claims. And Guaranteed, especially from Sweden, recuperating some of the losses from the first half of the year. Other shows good returns in the company portfolios, especially from contraction in credit spreads.Despite some margin pressure, the Savings area shows good growth, good cost control and improving results in line with our ambition and strategy. All of the business lines show improvement with the exception of the bank, which is hurt by the low interest rate level. The bank has refinanced debt with a negative one-off effect in the quarter of NOK 11 million, which will reduce future borrowing costs.The asset management company shows the strongest ever fixed result in the quarter and fixed result is the result with our adjusted for performance fees.This picture illustrates the strong growth in reserves and assets under management. The slight fall in premiums from the first and second quarter is primarily a result of extraordinary good sales of one-off premiums in Sweden in the first half of the year. 22% growth in Unit Linked reserves and total assets under management approaching a cool NOK 1 trillion show that our growth strategy works well.The Insurance area is back on track after 3 weak quarters. All business lines performed satisfactory in the third quarter. A combined ratio of 88% is better than planned after quarter with very few large claims. We have strong growth in all business lines. The growth is partly driven by price increases and partly by good sales.New partnerships in distribution show promising results. The Insr portfolio transfer will start December 1 and should ensure continued strong growth throughout next year.The Guaranteed area is in long-term runoff. Overall, the results are satisfactory, but underlying, there are weak results in defined benefit Norway with a negative disability result from less reactivation, i.e. people on sick leave that will -- are not returning to work through this COVID period. The results from Sweden are up where SPP now has a consolidation, which allow indexation of pensions with the corresponding indexation fee to SPP. Furthermore, good financial return has allowed SPP to reverse deferred capital contributions from the first half of the year.The level of guaranteed AUM as a percentage of total pension AUM or assets under management continues to decline and is now 52.4%. The buffer levels are at all times high and secure future customer returns as well as protecting shareholders' capital.As we said at the second quarter, despite the low interest rate level we can, subject to normal risk premiums in the market, deliver guaranteed rates of return and not dip into the buffers on the balance sheet for the next decennium, the next 10 years. And if market returns in any specific year are lower, the buffers are an efficient risk management tool to deal with that kind of market volatility. We will obviously dig deeper into this on our upcoming Capital Markets Day.In this segment, we see that most of the mark-to-market losses in the company portfolios from the first quarter has been recuperated.And with that, we move over to a Q&A. I don't know if you want to say something about the Capital Market Day first Daniel?

[Daniel Sundahl, IR Officer]

Yes. Thank you, Lars. Let me just remind you, we will be hosting our Capital Markets Day on the 10th of December at 2:00 p.m. It will be hosted virtually, and we will send invitation and registration details and more information in due course.With that, I will open -- we will open up for Q&A. And just to remind you, to ask a question, you need to be dialed into the conference call. So let's open up for Q&A. I give the word to the operator.

[Operator]

[Operator Instructions] And the first one is from Peter Eliot from Kepler Cheuvreux.

[Peter Eliot, Head of Insurance Sector Research]

First of all, congratulations on a great result. I guess, probably not be surprised if my first question is on the solvency. And I guess that parts of the beat comes from dynamic modeling of pricing and asset allocation. And I know you did a lot of work over the summer, as you indicated and help by your experience year-to-date, but it still came as a bit of a surprise to me that you were able to find these big levers to pull 5 years after Solvency II first came in.So I was just wondering, could you confirm how much the dynamic modeling added itself? And also, are there any specific reasons why you were able to model them now but couldn't before? What particularly has happened there?And then maybe separately on the solvency. I was a bit surprised that the individual accounts add solvency. Perhaps you could just explain what's happening there?And second area was on the disability reserves that you set up in Q1. You commented briefly on those, I think, but I was just wondering if you could say where you are on the review of that or what the risk is upside or downside to revisiting those? And also maybe if the news flow on the virus continues to deteriorate? I'll leave it there actually because it will be too long otherwise.

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

Thanks, Peter, for your questions. On the dynamic modeling, it's -- there was a very significant interest rate fall in Norway in the first quarter. And as a consequence, we -- as you know from before, we have an annual rate of return guarantee on the defined benefit portfolio. And when rates fell significantly, we were able to, according to the models that we use, to raise the prices in defined benefit with approximately NOK 40 million to NOK 50 million per annum next year.And that dynamic that has been built into the pricing of defined benefit is captured by the solvency model. And when we model these things, we need to have it documented and proven and demonstrated in order to be able to capture the solvency effect. So that the interest rate fall made it possible for us to do all of those things and therefore, model it correctly.On the IPA. The -- it's correct that, that has had a positive contribution. But that is like second and third order effects in terms of how you calculate the overall own funds contribution as well as SCR in the stressed scenarios on these IPAs and the dynamics in the market.

[Kjetil Ramberg Krøkje, Head of Investor Relations]

In general, I think you can say that the lapse risk becomes a little bit smaller when you model the individual pension accounts compared to the modeling earlier.

[Odd Arild Grefstad, Group Chief Executive Officer]

And the third element on your disability reserves. It's related to, as I mentioned, defined in all of our portfolios, in this particular case, the defined benefit portfolio. There is an expectation that some of the people on sick leave will return to the workforce. That has been much more difficult throughout the summer with a much weaker work market in this COVID situation. And therefore, we have seen less reactivation, i.e. less people returning to the workforce than we would expect on a normal basis, and we have had a minor -- or we had a weak result in the quarter and a minor reserve strengthening for the remaining of the year.

[Kjetil Ramberg Krøkje, Head of Investor Relations]

When it comes to reserve strengthening within the first quarter and the development of disability or lower, we see -- we don't see the effect that we really take into account during the first quarter, where we expected higher disability due to the fact that there was a lot of people on leave from the work.But it's still early days. So we don't take that into account. We are very satisfied with our reservation and follow the situation, of course, thoroughly going forward.

[Operator]

The next question comes from Håkon Astrup from DNB.

[Håkon Astrup, Analyst]

Two questions from me. The first one on the individual pension account. Can you provide an update there on how you see that will impact fees going forward? And also what do you have for mitigating measures? That was the first question.And the second question is also on solvency, you're closing in now on 190%. Based on the information that you have today, when do you expect to start to pay off the capital, which is tied up in the back book?

[Odd Arild Grefstad, Group Chief Executive Officer]

Let me start with the individual pension account. We expect that now to go live during the first quarter of 2021. As you know, there will be the harmonized price for the pension, the active account of defined contribution and the pension certificates. And the estimate that was done early days from a regulator was that it will reduce the fees for the life insurance industry altogether in Norway with around NOK 800 million.And of course, Storebrand being the main provider, we have 30% market share, you can then see what will be the effect approximately when it comes to income. Then, of course, the tools to mitigate that is of course, some pricing effects, it is a reduced cost, and we work very thorough with our cost base. And the third in itself is that you see strong growth in this portfolio that over time will, of course, take into account their reduced fees, but we have a strong growth in volumes.The second question was about solvency and approaching 179%. As I said, the Board have the view, of course, about the solvency without transitionals and solvency with transitionals and the view of the runoff of the transitional capital when they make the decision about our capitalization. They make the statement now that they don't expect to start this share buyback program during 2021. And as I said, we will revert to both the runoff profile of the transitionals and more comments around timing of share buyback programs in our Capital Markets Day at the 10th of December.

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

And Håkon, as you know, both some of the transitionals will go away January 1 as well as the lower UFR will be introduced according to the rules at January 1. So we know that some of this capital -- the transitional capital and the UFR based capital will be reduced in January 1.

[Operator]

The next question comes from Ashik Musaddi from JPMorgan.

[Ashik Musaddi, Executive Director and Co]

Very strong results today, so congratulations. I have a few questions, if you can help me. So first of all, is it possible to get like a cost number for 2020? What you're expecting? Because it's still hard for us to think about what is the normalized number because you have done M&A, et cetera. So your cost target is very clear that adjusting for M&A, et cetera, you want to maintain a flat cost base, but is it possible to get a hard number for 2020, what you're looking for? Or what is the normalized flat cost number that should be there?Second thing on individual pension account. I mean, I agree that you have given some clarity that NOK 800 million is the forecast by the regulator that was done long back, I think, 2, 3 years back. But we are just 1 quarter away from this to start getting effect into your portfolio. So would you give us some clarity as to what sort of revenue net of cost you're expecting to be impacted in 2021? So this is just like next year, how much do you think the revenue or piece will come down on this basis?And the third one is, can you just give some clarity on this Solvency II? You mentioned some transitional and UFR will reduce the solvency ratio on 1st of January, what would be that number on 1st of January? So that would be great.

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

Okay. Cost for the full year. You can expect the cost in the fourth quarter to be somewhat higher than what it was this quarter as there is more activity in the fourth quarter. We don't have the exact figure, but as we said, if you remove the performance-related fees as well as acquired business, the cost levels should be, and we will demonstrate this when we come this far, will be lower in 2020 than it was in 2012 and in the years '15 and '18 in between.On the IPA and income effect, as we have said, we are doing some different measures in order to maintain revenue. For competitive reasons, we cannot go into details about these measures. And furthermore, it's difficult for us to assess the exact impact as of this stage. So we will shed some more light on that on Capital Markets Day, but I think actually, the market has to find a new balance in order for us to come with a correct answer on that question.And on Solvency II and the transitional measures going away, it's [ 1/16th ] every year. However, there is slightly more under Norwegian regulations due to some cutoffs between the Solvency I requirements and Solvency II requirements.On the UFR, remind me, is it 5 basis points we expect next quarter? Or is it another 15?

[Kjetil Ramberg Krøkje, Head of Investor Relations]

I think it's another 15 basis points that the UFR is reduced with -- in the first quarter of 2021.

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

Yes.

[Kjetil Ramberg Krøkje, Head of Investor Relations]

And the sensitivity on that...

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

We showed it in the second quarter. I don't think it's in the package this time, but we showed it last time, so you can find the numbers there.

[Kjetil Ramberg Krøkje, Head of Investor Relations]

Yes. Just to comment on it quickly. I think it's a couple of percentage points on the solvency when you look back on the sensitivities.

[Operator]

The next question comes from Vegard Toverud from Pareto Securities.

[Vegard Toverud, Analyst]

I just have a couple of questions on the repricing of the DB portfolio in Norway, if it could be some -- give us some numbers or be a little more specific on what this repricing means for the P&L? And also on the DC side, as I understood the report, both income and costs were somewhat lower in the quarter due to lower activity. Is it possible also to quantify the impact on income and costs for the DC products in Norway and Sweden?

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

So on the repricing of defined benefit, as I said, the annual interest rate guarantee is more expensive when rates -- market rates go down. And I think I mentioned that we expect a positive impact on revenue in the DB portfolio of NOK 40 million to NOK 50 million above what it would otherwise be. But then again, if you compare to -- we still have closures of DB schemes. So it's not necessarily -- it's not NOK 50 million higher than last year because we had more DB clients last year.And also in the defined benefit, I think we have previously seen that the risk results are going to contribute NOK 40 million to NOK 50 million a quarter. That's probably a slightly lower number. So -- but there will be a positive contribution of some NOK 20 million or something on the DB portfolio, net-net.On DC, there is -- as we've seen in papers and in the Norwegian market, it's been very tough competition in the DC market this year. And there is some margin erosion that you can see in the numbers and illustrated with more details in the supplementary information. So I guess that is going to continue into next year with IPA.

[Kjetil Ramberg Krøkje, Head of Investor Relations]

And as for concrete guidance on kind of effects from costs in the line, I think it's more the general comment that Lars gave that Q3 costs are normally a little bit lower than what we expect to see in Q4.

[Vegard Toverud, Analyst]

Okay. So I'm just referring to the text in the report, which says that the public margins decreased due to lower activity based fees from pension administrative services.

[Odd Arild Grefstad, Group Chief Executive Officer]

That is -- yes, we can...

[Kjetil Ramberg Krøkje, Head of Investor Relations]

It's roughly NOK 10 million compared to earlier quarters or normal quarters. But there's always some seasonality in those fees.

[Vegard Toverud, Analyst]

Sorry, is it possible to repeat that number? And where do you expect that number to be the same next quarter or go back to a normal level?

[Kjetil Ramberg Krøkje, Head of Investor Relations]

There's always variation in those types of fees, depending on the activities we have in these types of services. So it's impossible to say what's going to be next quarter, but compared to earlier quarter this year -- or earlier quarters this year, it's approximately NOK 10 million lower.

[Vegard Toverud, Analyst]

Okay. And just to follow-up on Lars reply there earlier. The repricing is done only on the guaranteed element, there's no repricing of the administrative fee elements for the DB portfolio?

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

No, it's primarily the annual interest rate guarantee.

[Operator]

[Operator Instructions] The next question comes from Blair Stewart from Bank of America.

[Blair Thomson Stewart, Head of the UK and European Insurance]

I've got a couple of questions left. Interesting that you've moved back into the public pensions market. Could you just remind us of the characteristics of these types of schemes that are coming in? Are they similar to what's on the books already? Or has it got -- do you expect different types of profitability characteristics?Secondly, just again a reminder that I see the SPP consolidation ratio has gone through 108%. Could you just update us on the impact that should have on ongoing profits into next year, assuming that stays above the key levels?And thirdly, I noticed in the Insurance segment, a combined ratio of 88%, obviously, above -- sorry, well, better than your target, let's say. Is there anything going on there specifically in quarter that's exceptional? Or -- yes, just any explanation on that very good combined ratio.

[Odd Arild Grefstad, Group Chief Executive Officer]

Thank you, Blair. Let's start with the public sector market and the municipality market. As you know, it's dominated by one player today, the KLP. Storebrand is now entering into this market. It's a healthy profitability in this market. The product is, I will say, similar to the defined benefit product in Norway, but there is now paid up policies as a part of that product. It's rights that they have to be covered from the municipality in itself.So it's -- it's some guarantee elements in it, but it's price guarantees and it's hedged risk compared to the paid up policies, and it's a healthy product when it comes to pricing.

[Blair Thomson Stewart, Head of the UK and European Insurance]

Is it quite capital-light on a solvency basis?

[Odd Arild Grefstad, Group Chief Executive Officer]

Yes. Yes, absolutely. It's a capital-light product. It is.

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

On SPP consolidation, you are correct, it's now above 107%, at which time we can take an indexation, which means that we write off the pensions to the customers and we take an indexation fee. With the largest portfolio being where it is now we can expect to take approximately NOK 120 million a year, which means NOK 30 million a quarter. For some reason, this is set as of September 30, which means that it has already been -- we already have the numbers that make this available to take now for this year. And we can, therefore, say with a very high degree of probability that we will get another NOK 30 million in the fourth quarter.And then into next year, with -- if we have normal returns in Sweden, we will continue to book NOK 30 million per quarter. If consolidation goes even higher in some of the portfolios, there is an opportunity to increase that somewhat, but not a lot more. But it's -- it will be approximately NOK 120 million a year going forward.And on combined ratio of 88%, as I mentioned, we had very few large claims in the third quarter, a few fires, few very expensive car crashes, et cetera, which therefore made it a good quarter. And I think Gjensidige experienced similar results in their portfolio from the results that they gave out on Tuesday.

[Odd Arild Grefstad, Group Chief Executive Officer]

But there is also -- and our insurance portfolio is, of course, growing very fast with double-digit growth. In Norway, we don't use any deferred acquisition costs. So all the costs are taken for that growth upfront. So that also is a very important element to understand when you look at these numbers and these strong results.

[Operator]

Next questions come from Jan Erik Gjerland from ABG Sundal Collier.

[Jan Erik Gjerland, Research Analyst]

I have 3 sort of questions. The first one is to this PKB, the pension capital certificates. Could you give us the AUM you have for the PKB as of today? And as well, what kind of margin you really see on the new book you're writing currently? Just so we understand maybe the mathematics behind it.Secondly on the solvency side, is any of your sort of disability changes inside the solvency? Or is it just purely all of the things you have mentioned so far? Or is there any sort of GDP or unemployment inspired stuff into the solvency that we should be aware of? And then on solvency, would you consider hybrids to boost it so that you will be above 180% at any time?And finally, on the cost, you mentioned some NOK 43 million reversed cost in the Other segment. Is that actually booked as a cost? Or is it as a reduced financial element or increased financial element?

[Kjetil Ramberg Krøkje, Head of Investor Relations]

Just start with the pension capital certificates. We have about NOK 35 billion in pensions capital certificates in AUM, the pricing is public. These are -- we charge a fee of maximum NOK 400 for capital certificate and maximum 2% if it's a small pension capital certificate.

[Odd Arild Grefstad, Group Chief Executive Officer]

The average is substantially lower.

[Kjetil Ramberg Krøkje, Head of Investor Relations]

Average is substantially lower, yes, of course.

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

On solvency, I think I mentioned that we've gone through all the biometric factors in the solvency model. And net-net, they are neutral. And there are no big effects. So we've also gone through disability and longevity and all of those things as part of that. So there's a thorough review every third quarter. And this review this year did not lead to any significant changes either way.

[Odd Arild Grefstad, Group Chief Executive Officer]

When it comes to boost the solvency, as you see, we are working very hard with the solvency numbers on a quarterly basis. The most important is the profitability of the business. To increase that, we look very thorough on lifting our underlying solvency ratio.And of course, that is a part of the toolbox for using for increasing solvency going forward. And the management and the Board is very eager to reach to the levels we have pointed to be really lower capitalized and start, of course, doing share buybacks as soon as possible.

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

And the hybrid in itself, the current numbers are too small to impact the solvency overall. But if we create a new profitable business area and growth, that will obviously impact the capital generation going forward.

[Jan Erik Gjerland, Research Analyst]

Okay. On the cost side, in other, this small NOK 43 million you mentioned in the text. Is it a cost element? Or is it a increased financial return element?

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

Increased financial return element.

[Jan Erik Gjerland, Research Analyst]

Okay. So it's nothing to do with the lower cost you reported in this quarter?

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

No.

[Jan Erik Gjerland, Research Analyst]

Have you done any calculation on the cost side? How much is sort of lower activity driven or COVID-19 driven related lower cost in this fantastic cost number?

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

We work hard with the cost. We've promised the market that the cost level in 2020 should be below 2018, '15 and '12, and we are going to deliver on that. We spend a lot of time making sure that we have good cost control.And in terms of forward-looking statements on cost, we'll revert to that on Capital Markets Day on December 1 -- December 10, I'm sorry. But we -- I'm not going to go into the breakdown of exactly where the cost cuts or how the cost -- the different cost elements, I don't think that makes sense.

[Odd Arild Grefstad, Group Chief Executive Officer]

I think it is very fair to say that it's quite a limited impact on the cost levels from the pandemic. Of course, there has been less traveling as for everyone. And there has been somewhat lower spending, especially in the third quarter when it comes to marketing. But above that, I think it's a very limited impact on our cost numbers.

[Operator]

[Operator Instructions] The next question comes from Thomas Benton from SEB.

[Unknown Analyst]

Two questions. Could you just remind us about the market size and the revenue pool you see in this public market and also what market share you are targeting there?And question number two, you have earlier guided for in the Unit Linked operations, you have guided for 12% to 15% AUM growth per year. Should we still consider this valid? Or should -- you expect the growth to be lower now, now that most of the Norwegian corporations has converted from the DB schemes into Unit Linked schemes?

[Odd Arild Grefstad, Group Chief Executive Officer]

Yes. Just quick on the profit pool in public sector is, of course, a bit difficult to talk about because there is a municipality company having almost a monopole position in that business today. But what you see is that the annual premiums in public sector is estimated to be around NOK 52 billion versus the premiums in defined contribution in the private sector is NOK 29 billion.So it's a market double the size of what we see in private sector. It's a profitable market. And of course, we are new entrants in this market. Very happy to see that we are able to win one of the largest and most complex account available in the market. And we see this as a real opening of the market. With this NOK 4 billion, NOK 5 billion that we expect to, well, dig into the public sector this year, this is a real opening of the market, and we expect to see at least the same numbers in the years to come as inflow into our business. Then the market share will be what it is going forward.

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

And in terms of Unit Linked and the growth, it's correct that most corporations have now close to defined benefit schemes and going to define contribution schemes. However, there is still an increase in the workforce. There is an increase in the savings level on the Unit Linked contracts. And most importantly, very few people with the defined contribution scheme has reached retirement. So the payouts are very small compared to the pay ins. So yes, we do expect more than double-digit growth in AUM on a normalized basis within Unit Linked in the years to come.

[Operator]

And we have one more question, the last one in the queue, and it's from Peter Eliot from Kepler Cheuvreux.

[Peter Eliot, Head of Insurance Sector Research]

Just one very small follow-up actually on the municipality business. I mean, obviously, congratulations on winning that contract. I mean, I understand that the activity has been much, much lower than we might have expected. Might we still get more good news this year? Or is that pretty much it?And could you think -- I guess, how confident can we be that there'll be more tenders next year? Just maybe a few words about sort of the potential short-term pipeline would be great.

[Kjetil Ramberg Krøkje, Head of Investor Relations]

Peter, just one quick comment on the public sector first. We have also won more than the one contract with Vestland, which we highlight here, but those are of smaller size. And I guess, Odd Arild can maybe also comment a little bit on the pipeline and how we think going forward.

[Odd Arild Grefstad, Group Chief Executive Officer]

Yes. I think first of all, when we talk about public sector, we are used to talk and think about the municipality market. But there's a lot of also public companies that these days look into a situation when they convert from the old public pension schemes into more hybrid or defined contribution type of schemes. We have had around, well, NOK 500 million to NOK 700 million in inflow from these kind of companies also so far this year. And there is also some very interesting tendering offering out in the market in the fourth quarter especially for these kind of public companies or half public companies.So yes, there is a pipeline also this year. And of course, we expect a lot of municipalities to go out for tender offering during 2021. There was expected quite a pipeline in 2020 that was heavily changed due to the COVID-19 situation. But we expect that to come back, especially when you also see the opportunities to have reduced price and better solution for the municipalities that comes from this competition.

[Lars Aasulv Løddesøl, Group Chief Financial Officer]

So I think we guided previously on 20 to 25 municipalities tendering this year. That has been closed due to the COVID situation, but that is basically a delay, not -- or a postponement and not that they are not going to tender. So there should be quite a good pipeline in the coming years.

[Operator]

That was the last question in the queue. So I will hand the call back to you. Thank you.

[Daniel Sundahl, IR Officer]

Thank you very much. Thank you, everyone, for listening in today and joining us. And again, save the date for 10th of December. You're all welcome to tune into our Capital Markets Day and as I said, the registration details and so on will be posted in due course. Thank you very much. Have a nice day.