Storebrand ASA

OSE:STB

Earnings Call Transcript 2022-Q4

[Daniel Sundahl, executive]

Good morning, ladies and gentlemen, and welcome to Storebrand's Fourth Quarter Results Presentation for 2022. As always, we will start today's presentation with a presentation of the key highlights of the quarter and the year given to you by our CEO, Odd Arild Grefstad. And afterwards CFO, Lars Loddesol will dive deeper into the numbers.

At the end of the presentation, participants in the team's webinar will have a chance to ask questions. Details on how to join the webinar are found on our Investor Relations website. But without further ado, I give the word to our CEO, Odd Arild Grefstad.

[Odd Arild Grefstad, executive]

Thank you, Daniel, and good morning, everyone. During the past year Storebrand has once again demonstrated a strong ability to navigate through market turbulence and manage risk. We have delivered competitive returns to our customers in challenging markets. And we have seen strong growth in the customer base throughout the year. Let's look at the fourth quarter highlights.

The Storebrand group delivers a group profit of NOK 841 million in the fourth quarter. The operating profit amounted to NOK 624 million in the quarter. It's a decline compared to last year, but as Lars will show, most of the decline is due to less performance-related fees in 2022. Adjusted for performance-related fees and one-off items, the operating profit was NOK 571 million in the quarter compared to NOK 589 million last year.

Growth continues to be strong across the business, especially within our retail offering, led by 21% annual growth in insurance portfolio premiums and 18% growth in the bank's lending volume during 2022. Weak financial markets in 2022 have given a close to 0 financial results for the full year. Higher yields on fixed income investments and improved financial markets towards the end of the year generated a financial result of NOK 217 million in the fourth quarter.

Looking into 2023, higher running yields are expected to give materially higher financial results compared to 2022. Despite challenging markets, our assets under management are still about NOK 1,000 billion, and we see continued strong inflow. We end the year with a solid solvency ratio of 184%. While market movements and regulatory factors mostly offset each other's, earnings and action taken during the quarter lifted the solvency ratio with more than 10 percentage points.

Let me continue with a couple of comments on capital distribution. The Board proposes an ordinary dividend of NOK 3.70 per share for 2022, which represents a 5.7% nominal increase compared to the dividend paid last year. As communicated in our capital market update, the threshold for extraordinary capital deployment is now 175%. Given our solvency ratio of 184%, the Board intends to continue with share buybacks starting with a tranche amounting to NOK 500 million, pending approval from the NFSA.

As you are well familiar with, Storebrand aims to take 3 commercial positions in the market we operate in. One, to be the leading provider of occupational pension in both Norway and Sweden; two, to be the Nordic powerhouse in asset management; and lastly, to be the fast-growing challenger in the Norwegian retail market for financial services.

At our capital update in December, we gave additional details and clarification on what can be expected of capital generation and return to shareholders in light of higher interest rates and changes in our business mix. Our focus will be on total capital generation in the business and we aim to deliver growing ordinary dividends and NOK 10 billion in share buybacks by 2030. On top of this, we expect to generate excess capital available for growth or returns to shareholders.

Strong double-digit growth continues across the business, with particularly strong growth in insurance and the bank. The growth has naturally paused in our AUM-driven business in 2022 due to weak financial market development during the year. Underlying growth continues to be strong.

Let me go a little deeper into the progress within each commercial area during the quarter and the year. We see strong growth in new sales and pension premiums within occupational pension. Storebrand has delivered higher returns compared to peers both last year, last 3 years and last 5 years. This is core. And one of the most important contribution we make to our customers, financially freedom and security. I am also very pleased to see strong new sales and the turnaround in Swedish transfer balance from previous year.

Despite challenging markets, asset management continues its strong net flow and strengthened its relative market position in the Nordics. Our position as a sustainability-focused asset manager, which aims to be the best local partner as well as a gateway to the Nordics for customers outside the region is strengthened. And we are now the fourth largest asset manager in the Nordics. As the chart to the right shows, the AUM in Storebrand has held up well in challenging markets compared to Nordic peers because of positive flows.

Our retail engine continued its growth with 22% increase in insurance premiums and 18% growth in lending volume. Storebrand's retail franchise added 24% in number of customers over the last 2 years, giving us a better position for cross-sales going into 2023. We continue the strategy of providing the customers a complete range of financial products and services digitally with a personal touch moving to even more customer growth for Storebrand in the retail market.

In January 2023, Storebrand strengthened its retail savings offering by acquiring the fast-growing Norwegian fintech company, Kron. The acquisition will combine Kron's user experience with Storebrand's product platform and distribution. Kron offer its client a wide range of funds through engaging digital tools and digital advisory services. Together, this will fast-track Storebrand's development of future products and services. The transaction adds more than 70,000 customers and NOK 7 billion in asset under management. The acquisition of Danica and a new agreement with Danske Bank has also given us a opportunity to scale distribution of personal risk products.

Lastly, let me move to one of our differentiators, sustainability. I'm proud to see that Storebrand's group strategy of integrating sustainability into everything we do continues to be one of the core determinants for choice among both customers and employees. Among many of the sustainability rankings, Storebrand continues to be ranked as one of the most sustainable companies in the world.

I want to highlight the Dow Jones Sustainability Index, where Storebrand is among world's 10% most sustainable listed companies. This and other rankings confirm that we deliver on our sustainability strategy also when we're measured against other peers.

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

[Daniel Sundahl, executive]

Thank you very much for that, Odd Arild. Let's have a closer look at the numbers. Please go ahead, Lars.

[Lars Aasulv Løddesøl, executive]

Storebrand issues an integrated financial report, which will be published on March 21st. We report according to the principle of double materiality, i.e., how external ESG factors impact the group as well as on how Storebrand impacts society around us.

Some key metrics are addressed in the slide behind me. Climate and equality are 2 prioritized areas, but we will report on close to 350 metrics altogether. Our commitment to sustainability is integrated in our strategy since 1995 and we continue to receive international awards for our work in this area.

The result -- the quarterly result for Q4 was the best in 2022, helped by positive financial result and booking of performance fees for the full year. The operating result was weak at NOK 571 million when adjusted for performance fees and special items. This follows higher cost in the quarter and seasonal weakness in insurance results. Nonetheless, with improved financial markets, a higher interest rate environment and strong sales last year, the momentum into 2023 is good.

The solvency margin is up at 184%, following a reduction in solvency capital requirements and higher own funds. I will revert to this in a moment. Customer buffers have improved in the quarter. Our solvency position has strengthened to 184%. It has been a particularly difficult quarter to predict from the outside with volatile financial markets from interest rates in particular and changes in the regulatory factors called volatility adjustment and symmetrical equity adjustment from now on called VA and SA.

Let's look at the different steps in the movement. Model and assumption changes gave a positive contribution of 2 percentage points, primarily as a consequence of more granular modeling following preparations for IFRS 17 reporting. Updated regulatory factors gave a negative contribution from lower VA and higher SA. As in the third quarter, the VA fell significantly more than credit spreads contracted. Had we used the European VA of 19 bps, which better reflects actual credit spreads, the solvency margin would have been 7 to 8 percentage points higher.

Market returns and business mix contribute 11 percentage points from higher rates, positive equity markets and year-end access to more buffer capital, the latter with a 4 percentage points effect. On the negative side, we saw negative returns from real estate and higher CRD4 capital requirements in the bank.

The contribution from risk and capital management may have surprised on the upside. We have increased our currency hedging, reestablished lapsed reinsurance in Norway and refinanced a subordinated euro loan with Norwegian kroner, which, in combination, contribute 9 percentage points. Cash earnings gave another 3 percentage points, enough for ordinary dividends and additional solvency strengthening.

For the annual movement, I want to highlight 4 things. Market returns are negative due to fall in equities, increasing credit spreads, higher volatility and lower real estate prices. In 2022, the regulatory factor VA moved in parallel with the credit market. This resulted in increased cyclicality in solvency, the opposite of what it is intended to do. With the VA now close to 0, we do not expect a repetition of this.

3, the risk and capital management has once again proven its efficiency in turbulent markets contributing positively to the solvency margin in a year of unprecedented swings in interest rates, equities and volatility. Fourthly, even a tough year like 2022, we create 11 percentage points in cash earnings, showing the robustness of the core business. With higher buffers into a new year, we are less sensitive to equity and credit market movements compared to last quarter and the solvency remained robust in all the different stresses. We know that there has been a lot of focus on real estate risk and have, therefore, included the sensitivity to property valuations this quarter.

The fee and administration income is down due to lower assets under management and lower performance fees than the previous year. On the other side, the fourth quarter numbers include Danica. The insurance results are up from NOK 1.2 billion to almost NOK 1.7 billion year-on-year. The cost figure in the fourth quarter includes Danica as well as integration expenses. For the full year, excluding performance cost and Danica, the cost level is NOK 110 million below the guided number of NOK 4.9 billion.

Financial items picked up again in the fourth quarter after a weak start to the year. As guided on the capital update in December, we expect a significant improvement in 2023. The tax came in as a tax revenue for the full year of NOK 270 million after tax income of NOK 770 million was booked following 2 positive clarifications on the tax disputes we have outstanding. There are no news on the timing for a final resolution of the remaining issues. In order to create additional transparency on the results, we have included in the appendix a picture where the performance-related expenses and revenues have been carved out.

Here, we see the results broken down by business line. I will comment on each one of these in the following slides. But before that, let me comment on fungibility of capital and costs for the group. This picture shows net remittances in the group. Of the NOK 2.390 billion group profit after tax, a net amount of NOK 2.185 billion is remitted to our holding company, Storebrand ASA, after funding growth in subsidiaries. This shows how close to cash our current IFRS earnings are and how this cash funds dividends to shareholders.

The cost base for 2022 adjusted for performance cost and acquired businesses ended somewhat below NOK 4.8 billion, NOK 110 million below the guided level. The cost base in 2023 will add around NOK 300 million in cost related to funding the growth, primarily within insurance and bank, including normalized inflation at around 3% for the group as a whole.

Excess inflation will be neutralized by efficiency gains and cost measures. In addition, we expect around NOK 400 million in expenses related to the acquired businesses, including integration expenses. Half of this expense shall be realized as synergies by the end of the year for a running cost base of around NOK 5.3 billion.

As communicated on our capital update in December, we confirm our NOK 4 billion profit ambition for 2023. We manage the business units for profit and allow for profitable growth investments. However, and as previously stated, if the growth does not materialize, we have concrete plans to stop investments or cut cost as applicable.

Within the Savings segment, we see reduced profits in unit-linked Norway, primarily from the introduction of individual pension account with full effect from 2022. In unit-linked Sweden, the main explanation for the reduced profit is lower assets under management following weak financial markets. Asset Management is down due to lower assets under management and lower performance fees than in 2021. The banking business gives stable profitability and the profitability will increase as volumes and rates stabilize at a higher level.

In this picture, I would like to highlight the renewed growth from unit-linked following improved financial markets, strong sales and the inclusion of Danica, and the positive flow in Asset Management. The insurance premiums are up 18% year-on-year, and the operating profit up by more than 70%.

The P&C result in the quarter are negatively impacted by seasonal factors like slippery roads and frozen water pipes. Within group life, we have made an anticipated inflation adjustment on claims, leading to a NOK 25 million reserve strengthening in the fourth quarter.

We still see the aftermath of the pandemic in the disability results, but expect a gradual improvement from here. The improved results in pension-related disability insurance last year comes from good insurance results in Sweden and price adjustments in Norway. Whilst the combined ratio ended at 95% for the quarter, the full year combined ratio ended at 91% within the guided and targeted 90% to 92% range. The strong premium growth continues and can be roughly split into 40% volume growth, 20% price increases and 40% from the inclusion of Danica.

The guaranteed business delivered stable results -- sorry, stable revenues and continues to cut cost for improved underlying profitability. With more positive financial markets towards the end of the year, the net profit sharing was positive in the quarter, but is negative for the year. This is a result of lower VA in Sweden and widening of credit spreads, both of which are mark-to-market losses, which may be reversed. With a higher interest rate environment, the capital tied up in this business goes down and reinvestments are done at higher yields. I refer you to the material from our capital update in December for more information on this.

Here, you can see how the reserves run off in absolute terms as well as a percentage of total pension reserves. Buffers are up in the quarter. The results from the other segment stems from operating cost at the holding company level and return on company portfolios less cost of subordinated loans.

Coming into 2022, rates were low. Through 2022, we saw rates and credit spreads increase, leading to weak fixed income returns. Coming into 2023, on the other hand, we expect significantly higher returns in this segment. Once again, I ask you to look at the capital update in December for more details.

And with that, back to you, Daniel.

[Daniel Sundahl, executive]

Thank you for that, Lars. We're now ready to move over to Q&A. [Operator Instructions] And I see the first question is already coming in from Peter Eliot of Kepler Cheuvreux.

[Peter Eliot, analyst]

I'll go for the 2 questions option please. Firstly, thinking about the reinsurance deal or anything else that you've done to boost solvency, can you share what that will cost you on earnings going forward? And maybe just on that, Lars, I know you said in the presentation, reestablish the reinsurance deal. Does that mean that the old one had expired? Perhaps you could just update us on how much you're not covering.

And then the second one was on the Savings segment specifically. If I back out the performance-related fees and costs, then I guess the Q4 result was -- seems to be quite a lot lower than the other quarters this year. I'm just wondering, should we think about that as a sustainable level or is there some seasonality in there? Or is it a dip from the AUM that should recover quickly? Just any help there would be very helpful.

[Lars Aasulv Løddesøl, executive]

Thank you, Peter. With respect to the reinsurance transaction or reinsurance hedge we had on, we do reinsurance for lapse risk, which is overstated in the Solvency II framework. We did have that in Norway in the past. We closed it a couple of years ago and reestablished it this year. We also have lapse risk reinsurance in the Swedish market. The cost is very competitive compared to, for example, subordinated loans in terms of the cost per solvency. I don't have the exact figure as to the [indiscernible] cost.

With respect to savings, you are correct in saying that the AUM grew through the quarter, which means that when you calculate the income divided on the final AUM, then you will get a little bit of lag on the percentage in terms of return on the AUM. Also, there were certain write-downs in different areas during the quarter. So I think if you look in the supplemental, you will see that the margin, both on unit-linked Norway, unit-linked Sweden and Asset Management is stable throughout the year and we expect it to continue to be around these levels.

[Unknown Executive]

And I think just to add very shortly on the solvency point, I think, in general, the measures we've done in the quarter does not give a material impact on the earnings for 2023. Reinsurance has a small cost, as Lars said, but there's no material impact from the 10% increase.

[Daniel Sundahl, executive]

Thank you, Peter. And the next question comes from Håkon Astrup of DNB Markets.

[Håkon Astrup, analyst]

Two questions from me as well. The first one on the cost side. Thanks for your updated cost guidance. I was just wondering what kind of underlying wage inflation do you have in your current estimate? That was the first question. The second question is on insurance. You have a very strong premium growth. I was wondering what kind of outlook do you have there for 2023 given that you have lost your distribution agreement with [ Acona ], for instance?

[Lars Aasulv Løddesøl, executive]

With respect to wage inflation, we -- as I said, we will neutralize excess inflation by cost measures and efficiency gains. So I guess the expectations about salary inflation in Norway is around 5% this year. But as I said, we will make the impact smaller for Storebrand about half of that being like a normalized kind of an inflation -- salary inflation.

With respect to the insurance premium growth, we do get some distribution agreements and we lose some from time to time. You are correct in saying that we lose Acona. But this year, we have strengthened the other kind of distribution agreements, so it should not impact our ambitions for further growth within insurance.

[Daniel Sundahl, executive]

Thank you, Håkon. And the next question comes from Ulrik Zürcher at Nordea. Sorry, I think we have -- just one second, if we can get Ulrik on the line. Or did Ulrik not -- okay. Let's take the next question instead. The next question comes from Tryfonas at Berenberg.

[Tryfonas Spyrou, analyst]

Two questions, please. One is on the interest rate sensitivity on your solvency. It looks like, I think this is somewhat higher than Q3. And given that you said the buffers are now higher, you would expect less volatility, so maybe help us square the 2. And the second one is on insurance. You do flag the higher motor claims in Q4. I just wanted to ask how much of this is due to seasonality and how much could it be due to inflation? And also on the other sort of health, life and disability segments, the trends there are sort of somewhat worse than we had anticipated. How much can we extrapolate from this going forward?

[Unknown Executive]

Perfect. I can start on the interest rate sensitivity. There are, of course, several factors, but one of the factors affecting the sensitivity is that the absolute level of SCR is lower now than it has been before. So you will then just mathematically have a somewhat larger sensitivity than you had in previous quarters.

[Lars Aasulv Løddesøl, executive]

Swapping to your other question on inflation. We have an ambition to maintain our combined ratio during the year at 90% to 92%. And as I reported, it was 91% last year. So there will be some seasonal swings. And when it comes to inflationary claims that is -- we try to address that in the pricing on an ongoing basis. So that does not change our ambitions for 2023 in terms of neither growth nor combined ratio.

[Daniel Sundahl, executive]

And the next question comes from Jan Erik Gjerland of ABG Sundal Collier.

[Jan Gjerland, analyst]

The first one is the time line on the buybacks. What can you tell us about your sort of the dialogue with the FSA of Norway and when that should be expected? The second one is on this financial return, Lars, which you mentioned, we should go back to the capital update and have a look. But could you shed some more light into both the insurance financial, which looks a little bit weak, is the same story there as its credit spread and stuff that have hampered that return in the quarter? And what kind of profit sharing should we expect into '23 and '24 with your current buffer levels?

[Odd Arild Grefstad, executive]

Well, thank you, Jan Erik. To start with the time line when it comes to share buybacks, we have updated our request to the regulator. As you know, we had one in before the third quarter that was paused. So we have now updated that one. Last time, we had around 4 weeks, I think, before we were able to start the program. It's always hard to give exact dates when it comes to regulatory processes, but I think that is the best estimate we can give based on what we saw last time.

[Lars Aasulv Løddesøl, executive]

With respect to the financial returns, all of our company portfolios and short-term reserves are invested similarly in fixed income instruments with a relative short duration, which means that they will all be affected by the same market factors. And in terms of profit sharing, as we have previously guided latest in December on the capital update, we don't expect much profit sharing in 2023. It should start coming up in 2024 and '25, '26 onwards. We should be able to see maybe a couple of hundred million in profit sharing on an ongoing basis with today's interest rate level, if that is maintained in the next couple of years.

[Daniel Sundahl, executive]

Thank you, Jan Erik. I believe the next question will come from Ulrik Zürcher at Nordea. I hope that the microphone is with us now. Please go ahead, Ulrik.

[Ulrik Zürcher, analyst]

Just I was wondering with the integration cost or you raised the costs with around NOK 200 million. Is that included in the NOK 4 billion profit target? And then second question, I was wondering if you can share how much you've written down your directly held real estate? I think you said you had some losses there.

[Odd Arild Grefstad, executive]

Thank you, Ulrik. The integration cost, we hope to be able to cover that as well in the NOK 4 billion, but that may reduce the final number. With respect to real estate, we've written down real estate by approximately 3.5% in Norway which pretty much quite -- is similar to the running yield on the portfolio, which means that the real estate return in Norway has been pretty close to 0 for the full year.

[Ulrik Zürcher, analyst]

How often do you write down your real estate or we look at that?

[Odd Arild Grefstad, executive]

We report real values every quarter, which means that every quarter, there is a full assessment of real estate values in all of our holdings and investments. These are prime real estate centrally in Oslo, most of it. It's -- they -- we have very high rates. We have CPI inflation factors in the rent so that when inflation increases, also the rate automatically increases and everything is pretty much fully let out. So we have a very high-quality real estate portfolio with -- which is doing quite well even in turbulent markets.

[Daniel Sundahl, executive]

Thank you, Ulrik. The next question comes from Hans Rettedal Christiansen of Danske Bank.

[Hans Rettedal Christiansen, analyst]

Could you -- it's very good to see the turnaround and the transfer balance in the Swedish business. What should we expect here going forward? And also, how should we view this together with the decline in the fee margins in Sweden? That's my first question. And then secondly, in the Asset Management Division, is there anything sort of underlying that's driving the increase in the fee margin this quarter from 0.18% to 0.19%.

[Odd Arild Grefstad, executive]

Thank you. If I start with the Swedish business, we are very pleased to see both the change now in the transfer balance in Sweden. It's also a very strong year when it comes to sales in Sweden with increased premiums coming in. So the development is strong in our Swedish business. When it comes to the fee margins, it's actually a part of the market is the tick the box market in Sweden where we also have quite a good inflow. It comes with a very low margin and water shows the total margin, but it's on top of everything we do in a normal market. So it's more like something that is an add-on, but it has an effect on the total margins. But it comes with a positive profit as well.

[Lars Aasulv Løddesøl, executive]

When it comes to the fee margin on reserves in the Asset Management business, you can follow this very closely from a quarter-to-quarter in our supplementary information and you will see that the quarterly margin as reported in the first, second and third quarter has been 18 to 20 basis points over a long period of time. And then you have performance fees coming in, in the fourth quarter, lifting the fourth quarter. So we had a very, very strong year in 2021, which made the margin for the -- or the fee margin, including performance fees for the full year, 24 basis points. For 2022, the performance fees were lower and the average for the year then came down to 19 basis points.

We hope to be able to maintain the underlying margin on a quarterly basis between 18 and 20 basis points and then have a uplift, which makes it 20 basis points or more for the full year in the coming years.

[Daniel Sundahl, executive]

Thank you, Hans. And the next question comes from Vegard Toverud of Pareto Securities.

[Vegard Toverud, analyst]

I think the management actions you did on solvency there was impressive and also striking that the costs were so little. Is it possible to say what the cost would have been if you were to increase your solvency with another 10 percentage points?

[Odd Arild Grefstad, executive]

Sure. We already have now lapse risk reinsurance in Norway and Sweden, so it's not possible to do a lot more there. We also have subordinated debt at a level which we are comfortable with. And as you may know, there would be limitations in issuing more Tier 2 debt because of the limitations in what you can count in the solvency. So it's not an easy -- it's not an automatic thing that you can just invest NOK 10 million or NOK 20 million and then increase the solvency from here.

[Lars Aasulv Løddesøl, executive]

I think the best way of increase the solvency going forward is to create results going forward and also see the runoff of the guaranteed portfolios as we are seeing in the numbers today.

[Vegard Toverud, analyst]

On the cost guiding there, as I understand it, it's 5.3% plus performance costs and integration costs. Is it possible to give us an idea of what you expect in integration costs? And also if you could remind us what corresponding performance costs were in 2022?

[Odd Arild Grefstad, executive]

The -- yes, on the cost guiding, we have indicated from the picture that I showed that it would be approximately NOK 200 million in integration cost, known integration costs at this time. In terms of your second question, could you repeat it?

[Vegard Toverud, analyst]

Just for -- to see what kind of performance fees. Is it possible to just remind us of what it was in 2022 in corresponding number?

[Lars Aasulv Løddesøl, executive]

We booked NOK 105 million in performance -- net performance fees in the fourth quarter, and then we had negative performance fees in terms of the cost in the previous quarter. For the full year, it was NOK 69 million, so NOK 105 million less the cost in the fourth quarter, yes. You can -- it's illustrated in the key figures picture. The purely related performance cost in 2022 was NOK 53 million.

[Vegard Toverud, analyst]

And these are referring to the asset management performance-related fees?

[Odd Arild Grefstad, executive]

Yes. That's correct.

[Lars Aasulv Løddesøl, executive]

So there are -- just to understand the cost guiding, there are no other bonus elements for other divisions in Storebrand that's included in that cost-cutting.

[Daniel Sundahl, executive]

Thank you, Vegard. And let's see, the next question comes from Blair Stewart at Bank of America.

[Blair Stewart, analyst]

2 questions left for me. Odd Arild, you talked about this NOK 500 million buyback being the first tranche. I just wonder, all being well and with solvency remaining above 175%, what you feel you're capable of doing then in terms of buybacks in 2023? And secondly, just on solvency, again, I just wonder, is there anything that can be done to reduce the volatility coming from the VA and the SA perhaps through management actions and perhaps through getting your own model approved at some point in the future?

[Odd Arild Grefstad, executive]

Yes. Well, if I start with share buybacks, what we guided on, on our capital update is a NOK 10 billion of share buybacks by 2030. So that is the clear goal we are working with. This is the first tranche. It's natural to believe that we should another tranche during this year based on solvency ratio above 175%. So I think that's the best guiding I can give.

[Blair Stewart, analyst]

Is there any more you can say on the phasing of that NOK 10 billion, should we just take the NOK 10 billion and divide it by NOK 7 billion? Is that the best guess at this stage?

[Odd Arild Grefstad, executive]

Well, yes, we will start now with what I assume will be 2 tranches this year, and then gradually, we should have somewhat increased levels of share buybacks as we grow our results going forward.

[Lars Aasulv Løddesøl, executive]

And it's divided by 8 by the end 2030.

[Odd Arild Grefstad, executive]

And with respect to VA volatility, we are looking at different ways of seeing how we can deal with that. It's unintended and unwanted volatility. I guess it's comforting that it's now close to 0, which means that it seems to be much less downside from this from where we are now. One can select not to use the VA in the Solvency II framework. So we are looking at different ways of how we can optimize the use of VA.

In terms of internal model, you're correct. We are working on an internal model. We hope to be able to send in an application by the end of the year, and then sometime next year, be able to get an approval for a partial internal model, which will enable us to have a risk management framework that is better fitted to the actual risk of Storebrand.

[Unknown Executive]

Yes. So I think the impact now on our numbers is just 2 percent points from VA. And back in the second quarter, it was more than 25%. So it says something about really the strengthening of the solvency -- underlying solvency ratio of Storebrand. I think we are one of the, well, European insurers today with less impact from VA. And that should give some comfort also for us going forward with this base and growing the solvency ratio going forward.

[Blair Stewart, analyst]

And with your own model that you've been working with buying machines, does that show materially different levels of solvency or just less volatility? Would that be the main benefit?

[Odd Arild Grefstad, executive]

Sorry, just one point on that. I think what we will do on the VA side is that we will use a dynamic VA in the internal model. So we will then get the benefit of recalculating the VA as stress occurs on levels. I don't know, Lars, if you want to comment anything there.

[Lars Aasulv Løddesøl, executive]

No, that's fine.

[Daniel Sundahl, executive]

Thank you, Blair. The next question comes from Thomas Svendsen of SEB.

[Thomas Svendsen, analyst]

Yes. On costs, especially on unit-linked Sweden and on retail banking, there was a quite sharp drop Q-over-Q. So how much of this -- or increase -- excuse me, how much of this increase is purely seasonal? And how much is sort of underlying?

[Odd Arild Grefstad, executive]

On unit-linked Sweden, it's a write-down of some IT investments. So you should not look at any -- you should more look at the average number for the year.

[Thomas Svendsen, analyst]

In the bank...

[Odd Arild Grefstad, executive]

In the bank is -- was similar thing. So again, the bank is growing, the efficiency in the bank is improving, and we should see improved cost ratio in the bank going forward with the increased amounts or the increased size of the bank.

[Thomas Svendsen, analyst]

And just a second question on your NOK 4 billion profit guidance. I guess, given your bullishness on the positive effect from higher rates, I guess it will be logical to lift that guidance when we move into 2024? Or is it so that your pace of investments is sort of eating up the positive effects from rates into 2024?

[Odd Arild Grefstad, executive]

No, I think, first of all, we have very clear aim to reach the NOK 4 billion now in 2023. And the development in the fourth quarter and the start of the year has been positive in all the areas when it comes to deliver on that. Of course, we are a growing business. We have strong growth in the business. It's a capital-light growth we are seeing. And on top of that, we have also positive effect from higher rates, both in the guaranteed business and also when it comes to our company portfolio. So we expect higher results in '24 compared to '23, of course.

[Daniel Sundahl, executive]

Thank you, Thomas. And I do believe we have another question coming up from Tryfonas Spyrou of Berenberg.

[Tryfonas Spyrou, analyst]

Just one quick follow-up on the buyback. You mentioned you can do 2 tranches this year. I mean, is there any reason why you couldn't do more, assuming solvency stays above the 175% level, given that thing it takes about a quarter to do one chance?

[Odd Arild Grefstad, executive]

I think we'll revert to that. Now we start with a tranche of NOK 500 million. We have to look at the size and the timing of these tranches going forward. If we are going to start doing well, one program from the whole year and do apply for that or if we are going to do different tranches throughout the year. So we will look more deeply into that after -- during the year and come back to you about how we will work out the tranches and the levels going forward.

[Daniel Sundahl, executive]

Thank you, Tryf. And we have another question coming up from Jan Gjerland of ABG.

[Jan Gjerland, analyst]

Yes. Just a follow-up on the solvency movement. Last year, we went quickly through it. So it was hard to get all of the details there. But could you give us a further split into the VA versus the SA of the minus 14%, is so that it's a combination of the 2? Or is the one positive and the one negative? And also on the market returns and business mix, where is -- was it in that portion, you sort of added the 4 percentage point from the higher buffer levels? And how was that treated? Was it a residual of the remaining part, which you didn't use in Q4? Sort of it was 3.5%-ish rather than 4 percentage points? Or how should you read that portion into a future year, so to speak?

[Odd Arild Grefstad, executive]

That was a lot of things. So the SA when equity markets went up, the stress for equities increased as well. So the SA was negative, but it was countercyclical because you had a high return on equities and then you have to stress the equities you have with a higher number. So therefore, that was -- and that was approximately 5 percentage points. And the rest is the VA, which did not work in the intended way. Sort of we should have been positive in a normal situation, but was down 9% point negative actually.

[Lars Aasulv Løddesøl, executive]

I can try the second one on the buffers, just very quickly, 4% of that was buffers. And then the mechanics here is that you can use the ASR to cover 1 year of results. And then last year, we had the rare situation with historical movements in interest rate markets that you have had lower returns than the guarantee. So we used a little bit of the ASR during the year. And that's why when we now moved into a new year, we can put the ASR -- 1-year ASR back into the calculation and got a positive uplift from that. That is not something that we will expect happen every year. That is the exception that we will get a positive uplift from that in year-end. But this year, it worked this way.

[Odd Arild Grefstad, executive]

In normal years, we will have booked return above the guaranteed level and then we have now of these effects by year-end.

[Jan Gjerland, analyst]

And the remaining sort of 7 percentage points are what you call business mix or market returns. What should be a readout on that?

[Odd Arild Grefstad, executive]

So let me just find the exact figures. So market returns and business mix, 11 percentage points. That's partly higher rates, partly positive equity markets and the year-end access to more buffer capital, which is 4 percentage points. Then on the negative side, we saw negative returns from real estate that was written down in the fourth quarter and higher CRD4 capital requirements in the bank. And Jan Erik, this movie that we -- that -- or the streaming, if you are lucky, it's going to be online for a while so you can see it many times if you want.

[Daniel Sundahl, executive]

Thank you, Jan Erik. And we have another question coming up from Ulrik Zurcher at Nordea.

[Ulrik Zürcher, analyst]

Yes. At least on my estimates, I think you will agree, you will end up with almost a ridiculous amount of capital compared to your 175% targets, and you want to be getting this capital out unless you have a payout ratio on your cash earnings above 100%. Like what level are you willing to -- or can the capital go to before you apply the FSA for a payout ratio above 100%?

[Odd Arild Grefstad, executive]

Well, let's start by saying we have no intention of keeping capital buffers out of what we need for growing the business in Storebrand. As we have seen, we will do share buybacks. We will do dividends and that's the way we will handle that. Then again, now we are in a position where we can do increasing nominal dividends. And on top of that, we start doing share buybacks. We'll cross that bridge when we come to it, but you should be certain that we will not build war chest in Storebrand. We will use the capital in an effective way and also be able to share it with our shareholders, of course.

[Daniel Sundahl, executive]

Thank you, Ulrik. It doesn't look like we have any more questions at the time. So I think that concludes the presentation for today. For sell-side analysts who are in London, let me remind you that we will be hosting a breakfast meeting with our CEO, with Odd Grefstad, and our Chief Investment Officer, Trond Finn Eriksen, tomorrow morning. So if you wish to attend, please let me know. And our next set of results are due on May 10, and we look forward to seeing you then. Thank you and goodbye.