Storebrand ASA

OSE:STB

Earnings Call Analysis

Storebrand Delivers Robust Growth in 2023

Storebrand achieved a considerable uptick in 2023, with an annual group profit soaring by 27% to NOK 3.5 billion, underpinned by strong commercial advancement and substantial value creation for shareholders. The fourth-quarter group profit climbed 13% year-over-year to NOK 947 million, driven by a robust financial outcome, although operating profits lagged behind expectations. The firm attained a solvency ratio of 192%, facilitating increased dividends to NOK 4.1 per share and ongoing share buybacks of NOK 1.5 billion. Notably, Storebrand experienced a challenging insurance year, delivering a combined ratio of 102%, yet achieved a 32% increase in earnings per share and positioned itself as the fourth-largest asset manager in the Nordics with NOK 70 billion in net inflows.

Strategic Growth and Increased Shareholder Value in 2023

Storebrand experienced a year of significant growth and wealth creation, enhancing its sustainable financial services platform by acquiring Kron and divesting Storebrand Helseforsikring. Acknowledged for its sustainability efforts, the company was listed among the world's leaders by the Dow Jones Sustainability Index for the fourth consecutive year. Storebrand's commitment to financial security for customers, particularly in a difficult insurance market, was apparent. Additionally, the company increased dividends and shared plans to achieve a NOK 5 billion result before amortization and tax by 2025.

Strong Quarter and Full Year Financial Results

The fourth quarter marked strong financial performance, with a 13% increase in group profit from the previous year, reaching NOK 947 million. Despite market and regulatory factors reducing the solvency ratio from the previous quarter, the annual solvency closed at a solid 192%. Storebrand continued to return value to shareholders with an 11% increased dividend proposal of NOK 4.1 per share and a robust share buyback program totaling NOK 1.5 billion, representing 4% of the outstanding shares. The company is poised for future buybacks with an aim to reach NOK 12 billion by 2030.

Commitment to Sustainability and Commercial Objectives

Storebrand has solidified its commercial positions, aiming to be the top occupational pension provider in Norway and Sweden, a Nordic leader in asset management, and a rapidly growing contender in Norway's retail financial services sector. The asset management arm enjoyed a 19% surge in year-over-year growth, with net inflows of NOK 70 billion and highly successful fundraising for its private equity brand, Cubera, that generated EUR 700 million. These achievements reflect the company's success in attracting non-captive capital, with 49% of assets under management now coming from external investors, a 6 percentage point increase since 2020.

Full-Year Earnings and Operational Efficiency

Storebrand reported a 27% increase in group profit for the full year to NOK 3.5 billion, and NOK 3.7 billion adjusted for acquisition integration costs, despite not meeting the NOK 4 billion ambition cited at the 2020 Capital Markets Day. The insurance segment faced challenges, with a combined ratio of 102%, indicating a loss of NOK 700 million in profits. The company has taken aggressive measures to improve profitability, including repricing products, enhancing risk selection, starting a cost-saving program aimed at reducing claim handling expenses by NOK 150 million by 2026, and deploying preventive disability measures. These efforts have contributed to a 32% increase in earnings per share, demonstrating underlying growth and profitability despite insurance sector headwinds.

Strong Capital Position and Prospects for the Future

Increase in the solvency margin to 192% illustrates Storebrand's robust capital generation, strengthened by 26%, and effective long-term risk management strategies. Significant deployments of capital to shareholders through dividends and share repurchases occurred in 2023, yet they anticipate producing around 18 percentage points of solvency margin annually from operations before accounting for growth and dividends, maintaining a strong financial foundation for future initiatives.

Earnings Call Transcript 2023-Q4

[Johannes Narum, executive]

Good morning, ladies and gentlemen, and welcome to Storebrand's Fourth Quarter Results Presentation. As usual, our CEO, Odd Arild Grefstad, will present the key highlights of the quarter, followed by CFO, Lars Loddesol, who will dive deeper into the numbers. At the end of the presentation, participants in the Teams webinar will have a chance to ask questions. Details on how to join the webinar are found on the Investor Relations website.So without further ado, I give the word to our CEO, Odd Arild Grefstad.

[Odd Arild Grefstad, executive]

Thank you, Johannes, and good morning, everyone. 2023 has been a year with strong growth and value creation. We have moved forward commercially and increased capital distribution to our shareholders. Our core mission is to provide financial security and freedom to our customers. And in a challenging insurance year, we have provided both businesses and individuals with support and customer service.We continued to strengthen our position as a true sustainable financial group. Among other recognitions, we have for the fourth year been recognized by Dow Jones Sustainability Index as one of the World's Leading Listed Companies within Sustainability. And we have strengthened our savings platform by adding Kron and divested Storebrand Helseforsikring in line with the strategic direction of the business. We have increased dividends and buybacks on the back of increased results and a strengthened solvency position. And as communicated at our Capital Markets Day in December 2023, we target a NOK 5 billion result before amortization and tax in 2025.Now let me look at the highlights for the fourth quarter. The Storebrand Group delivers a Group profit of NOK 947 million in the fourth quarter. The operating profit was NOK 481 million and the financial result was NOK 465 million. The quarterly Group profit has increased by 13% compared to last year, driven by the strong financial results. The operating profit was disappointing in the quarter due to weak insurance results. But I am very proud to see strong double-digit growth in all areas and continued strong structural growth going forward.Turning to the balance sheet. We end the year with a solvency ratio of 192%. This is a decrease of 12 percentage points from Q3, mainly due to market movements and regulatory factors. Lars will revert more on solvency later in the presentation.Let me continue with a couple of comments on capital distribution. The Board proposes an ordinary dividend of NOK 4.1 per share for 2023, which represents 11% increase per share compared to the dividend paid last year. The strong solvency position has enabled Storebrand to continue the share buyback program in 2023. In total, Storebrand completed NOK 1.5 billion in buybacks in 2023, which equals to 4% of the outstanding shares. The threshold for extraordinary capital deployment is 175% solvency. Given our solvency ratio of 192%, the Board intends to continue with share buybacks in 2024 with a target of NOK 1.5 billion, starting today with a tranche of NOK 400 million lasting until our AGM in April. Longer term, the ambition is to buy back shares amounting to NOK 12 billion within 2030.Let me turn to how we deliver on our strategy. As some of you are well familiar with, Storeband aims to take 3 commercial positions in the markets we operate in. A, to be the leading provider of occupational pension in both Norway and Sweden. B, to be a Nordic powerhouse in asset management. And C, to be a fast-growing challenger in the Norwegian retail market for financial services.Let me turn to how we have succeeded in developing these commercial positions. We continue to deliver strong double-digit growth across all business lines. But notice that the growth has accelerated in all areas the last year. Let me dig a bit deeper in the 19% year-over-year growth within asset management. As seen on this slide, the net flow has been strong and consistent the past years. This has strengthened our position and we are now the fourth largest asset manager in the Nordics.During 2023, we had a net inflow of NOK 70 billion. One important driver for growth is alternatives. For example, Cubera, our private equity brand, has recently raised EUR 700 million in its latest fund. Based on Asset Manager Watch latest publication, we had the highest net flow of all asset manager in the Nordic last year. Furthermore, we continued to increase the share of non-captive capital. In 2023, 49% of the assets under management are from external investors, an increase of 6 percentage points since 2020.Moving from growth to profits. The Group profit for the full year was NOK 3.5 billion. This is an increase of 27% compared to last year. Adjusted for integration costs from the acquisitions of Danica and Kron, the result was NOK 3.7 billion. As previously communicated, this is below the NOK 4 billion ambition set on our Capital Markets Day in 2020. The increase in Group result is driven by double-digit volume growth, and as previously mentioned, and satisfactory margin development in all segments, except insurance. And insurance has been challenging. We delivered a combined ratio of 102% in 2023, 10 percentage points higher than targeted. This implies loss profits of NOK 700 million given our actual premiums for 2023.Let me do a little deep dive into the challenges in the insurance area and our mitigating actions to get the combined ratio back to the targeted level, below 92%. The claims development within our insurance segment has been challenging during 2023. We have seen weather such as torrential rain, increased frequency of claims, inflation and currency and persistent high disability rates. The development is a market challenge, but given our exposure to disability products and motor, we are disproportionately affected. We are taking several mitigating actions to improve the results. We are repricing our products across all segments. Significant price increases has been implemented throughout 2023. And disability products has been repriced 1st of January, 2024. And we will continue to address prices until we are profitable.Within the P&C segment, we will enhance the risk selection process and monitor and adjust the terms and conditions. We have also initiated our cost program related to claims handling, which aims to reduce costs with NOK 150 million within 2026. Furthermore, we have initiated preventive disability measures. Despite a challenging year for insurance, the underlying development in growth and profitability are moving the Group in the right direction.And let me finish up with how everything falls down to the bottom line. By using pre-tax figures, we can illustrate the underlying improvements and exclude this year's positive tax income, which would have made the figures even better. The result in 2023 has increased with 27%. Combined with the share buyback program, this has resulted in a 32% growth in earnings per share.

[Johannes Narum, executive]

Thank you, Odd Arild. Now let's take a closer look at the numbers. Lars, please go ahead.

[Lars Aasulv Løddesøl, executive]

Thank you, Johannes, and good morning to you all. The quarterly result ended at NOK 947 million, below our plans and market expectations. This is explained by weak insurance results in P&C and disability. Furthermore, we have booked NOK 81 million in special items relating to non-recurring elements. The weak operating results are partly made up for by strong financial results and performance-related income booked in the fourth quarter. Earnings per share comes in at NOK 2.14. The solvency is down to 192% due to higher SCR. The running yield in the guaranteed portfolios is well above the average interest rate guarantee.Fungibility of cash is key to upstream growing results in the Group companies to cash available for distribution to our owners. As the life company has capital release from the run-off of the guaranteed liabilities, we now increase the dividends from the life company above the statutory result. By keeping a reasonable cash buffer at the holding company level, we are also able to contribute capital to subsidiaries that are growing. With the upstream of cash from subsidiaries and the sale of Storebrand Health Insurance expected to be executed in the first quarter this year, we have sufficient cash to deliver growing ordinary dividends, continue with share buybacks and support further growth in the front book of Storebrand.The solvency margin ended the year at 192%, a strengthening of 8 percentage points since year-end 2022. There are 2 main drivers behind the capital generation of 26%. One, the cash results that were generated during 2023 explains roughly 14 percentage points. Secondly, the remaining 12 percentage points mainly stems from good long-term risk management through turbulent markets. During 2023, Storebrand bought back shares worth NOK 1.5 billion and set aside NOK 1.8 billion for dividends, which reduced the solvency margin by 13 percentage points. Repayment and reduction of eligible subordinated debt and the acquisition of Kron reduced the solvency margin with an additional 5 percentage points.At our Capital Markets Day in December last year, Storebrand announced that we in a normal year will produce around 18 percentage points of solvency margin from earnings and operations before growth and dividends. In this respect, 2023 was a good year with 26 percentage points of solvency from results and operations, especially when considering that this includes the strong growth in unit-linked reserves of NOK 65 billion and NOK 10 billion in increased lending in the bank and 12% growth in insurance premiums.If we look at the solvency developed in the fourth quarter, the solvency margin was down by 12 percentage points. The main contributors are; one, a decrease in interest rates, 88 basis points in the 10-year Norwegian swap and 109 basis points in the 10-year Swedish swap, explaining roughly 5 percentage points of the reduction. An increase in the equity stress from symmetrical equity adjustment explains another minus 5 percentage points, whilst increased capital requirements in the bank due to both increased capital requirements and strong growth explains another negative 3 percentage points. The sensitivities are somewhat increasing as interest rates are lower. At the same time, we expect sensitivities to be reduced in the fourth quarter following new rules for buffer capital for paid-up policies in Norway.Fee and administration income is up 19% quarter-on-quarter and 12% year-on-year. The insurance results are weak. Cost is up. But adjusted for integration costs, currency and performance-related expenses, we are delivering on the guided NOK 5.3 billion despite some negative one-offs. More details on costs can be found in the appendix.Financial results are strong in line with guiding, following the higher interest rate level. We had a small tax gain in the quarter, primarily related to asymmetric treatment of currency hedges. The normal tax rate remains at 20% to 22%. The same numbers broken into savings, insurance and guaranteed shows a 13% improvement in savings, a 47% improvement in guaranteed, almost NOK 700 million improvement in other and a large shortfall in insurance. Overall, the cash equivalent earnings are up by 27%.As Odd Arild has already illustrated, the front book savings business in Storebrand continues to grow double-digit within unit-linked, asset management and banking. We continue to improve our market shares with acceptable margins. The combined insurance premiums are up 13% year-on-year. The quarterly increase is almost entirely driven by price increases, whilst in the full year numbers, there is also some volume growth. In P&C, we increased our market share in the retail market from 6.2% to 6.6% during the year.As Odd Arild has shown, the difference between an average 102 combined ratio for the full year over the targeted 92% is equivalent to a shortfall of approximately NOK 700 million in results. The shortfall can be evenly split between P&C and disability. For disability, roughly NOK 300 million in reserve strengthening has been done during the year, of which approximately NOK 200 million in the last quarter. For both products, price adjustments and other actions will continue until satisfactory profitability has been restored.Our clear ambition is to be back at the targeted combined ratio of 90% to 92% in 2025. For 2024, we expect a significant improvement, but not quite to 90%, 92% on average. The guaranteed business continues to fall as a percentage of total pension reserves. Buffers have been restored in the fourth quarter. Results are strong, primarily due to higher profit split from the Swedish operation. We continue with our track record of 100% wins of tendered processes in the public sector. And we will book positive transfers of approximately NOK 3.1 billion in the first half this year. And on other, we see significant improvement in financial results.Some of you will recognize this picture from our Capital Markets Day in 2020 and 2023. It illustrates the transition of Storebrand where Future Storebrand grows with low capital requirements with guaranteed business and long-term run-off with the capital requirements going down drastically as the duration comes down and interest rates have come up. Despite the weak year for insurance, Future Storebrand made almost NOK 2 billion on around NOK 6 billion in capital requirements, securing an ROE in excess of 30%.We expect improving insurance results going forward on limited capital needs for an even higher ROE. The run-off business made NOK 1.6 billion on NOK 21 billion in capital, securing a return on equity of 8%, significantly up from historic 2% to 3%. In the coming years, we expect further capital release from this book and improving results from profit sharing. In combination, this should secure better results on less capital for further improvements in Group ROE.2023 concludes the first year of IFRS 17 reporting. IFRS 17 significantly changes the way to account for insurance results. For Storebrand, this impacts P&C and guaranteed life products. The results reflect the same factors we have seen presented under the cash equivalent setup I've just been through with weak insurance results and strong financial result. Our statutory accounts give a full disclosure with comprehensive notes.Storebrand has set ambitious targets on sustainability. Like many other companies, we support the Paris Agreement for Net Zero in 2050, but we also have ambitious intermediate goals. Yesterday, we got another A rating from the Carbon Disclosure Project. We have recently also been appointed one of the most sustainable insurance companies in the world by Dow Jones Sustainability Index. Our annual report for 2023, which will be published in the middle of March, is built on the CSRD framework, one year ahead of the regulatory requirements. Storebrand's ambition is to be in the forefront of sustainable finance through our commitment to society, through our own operations and through products and services.Finally, I leave you with our financial ambitions towards 2025. Despite weak insurance results for 2023, we are committed to continue to deliver strong financial results and cash repatriation to our shareholders.And with that, I pass the word back to you, Johannes.

[Johannes Narum, executive]

Thank you, Lars. We are now happy to take questions from our audience. [Operator Instructions] And we have our first question here already from Hakon Astrup in DNB Markets.

[Håkon Astrup, analyst]

2 questions for me. The first one, high level on insurance. So you have been taking market share in this segment in Norway for a while as well as profitability has deteriorated. In retrospect, have you been too aggressive on market share in insurance? And the last question also on insurance. Can you say how much you're increasing premiums by now and especially in motor and disability where profitability is more challenging? And do I understand you correctly that these price increases are sufficient to restore profitability?

[Lars Aasulv Løddesøl, executive]

On insurance market shares and profitability, we have seen through last year, a very significant or terrible weather, which has hit all of the different suppliers in the Norwegian market. So that hits us as well. And we are now taking the new experience in terms of weather-related claims as well as an increase in frequency on motor claims into our tariffs in order to price correctly for the future, just like everyone else does.The price increases that we have done through 2023, we're up to 30% in disability, certain disability lines, lower on other disability products and around 10% on P&C insurance. What we are going to do from now on will reflect the new experiences that we have. And obviously, we cannot give you an exact figure of what we're going to do forward, that's [ illegal ]. But we will continue to price in order to reach the profitability goals we have, which is based on the combined ratio of 90% to 92%, which we aim to achieve for full year 2025. And we will be significant on the way there during 2024.

[Håkon Astrup, analyst]

Can you say something about the price increases you carried out the 1st of January this year?

[Lars Aasulv Løddesøl, executive]

Yes. Most of the disability products are priced on an annual basis with renewal as of January 1st. So the price increases that we -- that I talked about between 10% and 30%-ish was implemented as of January 1st this year and the renewals have come through without an increase in churn.

[Johannes Narum, executive]

We have the next question here from Thomas Svendsen in SEB.

[Thomas Svendsen, analyst]

Yes. So a question to unit linked in Norway where you have a decline in the income fee margin there. It's quite lower than what you have been used to, at least at the beginning of this year. That's the first question. And second question on unit linked Sweden. There was a sharp uptick in costs Q-over-Q and also a much higher level there, taking down the pre-tax margin. So could you comment on that?

[Lars Aasulv Løddesøl, executive]

Sure. On unit linked Norway, the margin decline continues as we have guided on. And on Capital Markets Day, we guided that the margin range that we expect going forward is between 50 and 60 basis points. It's now 58 basis points in the quarter. So very much along the lines of the guiding that we have given. We do expect a gradual decrease from here, but the momentum and the decrease is decreasing. So it will be less decline going forward, but also some decline from these levels on an average basis over the next couple of years. On...

[Odd Arild Grefstad, executive]

And I think also on the Norwegian unit linked, I'd like to add on that, because you have seen very strong growth in the portfolio during the fourth quarter. And the growth in itself, of course, means that we have gradually fees on growing volumes that has somewhat watered out the margins also in the fourth quarter. So that is a very strong growth in the volumes.

[Lars Aasulv Løddesøl, executive]

Yes. The fixed administration element becomes a smaller percentage when the overall volumes increase. So on the cost level in Sweden, the actual cost level in Sweden is practically flat for the full year. But during 2023, we've sold more unit linked products and less guaranteed products. And that means some of the sales cost is -- goes towards the unit linked business instead. So the overall cost level is very much under control in Sweden, but there has been a shift in the cost level from the traditional guaranteed products to the unit linked products as a consequence of where the new sales have come.

[Johannes Narum, executive]

We have the next question from Peter Eliot in Kepler Cheuvreux.

[Peter Eliot, analyst]

I had a couple of questions on solvency, please. I mean, if I look at the sensitivity to interest rates, if I look back, say, at Q1 2023 when rates were lower than they were at the full year, the interest rate sensitivity was minus 4 points, at the full year it was minus 7 points despite the higher interest rates. So I'm just wondering why it's increased so much? That would be the first one.And the second one, you mentioned that the organic capital generation was better than you had expected despite the growth headwinds. Could you just explain why that was the case? Why did it end up better than your expectations?

[Lars Aasulv Løddesøl, executive]

A small correction. I did not say that the capital generation was higher than expected, I said it was high. So -- and we're very obviously happy that we have strong operating capital generation. In terms of the solvency sensitivity, when rates came down in the last quarter, we are closer to the interest rate guarantee, and therefore, the -- when you do different kind of scenarios, there are more scenarios where you go through the interest rate guarantee and that increases the sensitivity somewhat.

[Peter Eliot, analyst]

Sorry, I was comparing it to Q1 '23 where interest rates were lower than they were the full year '23.

[Lars Aasulv Løddesøl, executive]

No, I think when you look at this from quarter-to-quarter, there will be some different elements that make the sensitivity vary. I cannot give a precise answer for why the Q1 was a little bit different. If you go back to Q4 2022 and compare it with now, which is pretty similar interest rate levels, you will see that the sensitivities are roughly the same. So there are -- we can do a little bit of digging why Q1 was a little different, but I think there is pretty much a consistency here in the sensitivities.

[Johannes Narum, executive]

We have the next question from Vegard Toverud in Pareto.

[Vegard Toverud, analyst]

I have 3 questions, if I may. On the operating expense side, we talked a little about in Sweden [Technical Difficulty]

[Johannes Narum, executive]

I think we lost you for a second there, Vegard. Can you please repeat the question?

[Vegard Toverud, analyst]

Yes. I have 3 questions. So we discussed some on the cost allocation in unit linked Sweden. On asset management, could you discuss a little the cost development there? There seems to be some one-offs, but also adjusted for this, costs seems slightly on the high side. If so, is this driven by personnel, IT expenses or if you could give us some color that would be nice?Secondly, you commented that the combined ratio for 2024 in the insurance segment will not reach the target of 92%. Is the middle ground or the middle between the 102% for 2023 and the 92% a good expectation? And finally, on solvency. The benefit from credit spreads seems to be less than at least I had anticipated beforehand. Is there any potential lag effects into Q1 or how should we look at the solvency development quarter-on-quarter?

[Lars Aasulv Løddesøl, executive]

So if we start with the operating expenses in Storebrand asset management, there are some one-offs and there are also some of the bonuses that are paid within private equity and real estate on a transaction basis will fluctuate somewhat from quarter-to-quarter. The overall cost control in Storebrand asset management is according to plan, but there has been some restructuring of some offices and personnel that has led to somewhat higher cost in the fourth quarter. And combined ratio?

[Odd Arild Grefstad, executive]

Yes. Maybe on the combined ratio, as we said, the difference between the 102% and the 92% should be well managed throughout 2024 and 2025. As Lars said, we have done some reserve strengthening at -- especially end of 2024 for disability. And that means that we should have a good opportunity also to reach a much better combined ratio already in 2024. But I think what you said, middle point between these 2 numbers, 102% and 92% could be a good estimate for where you should, well, see the combined ratio in 2024.

[Lars Aasulv Løddesøl, executive]

And in terms of solvency for going forward or coming from here, the -- obviously, the interest rates have gone up so far in the quarter, that's good. We have a profitable business in general, which is good and should add solvency. Then we did get access to new buffers as of year-end, but we also have to model in all of the changes in the buffer rules into our equation going forward. So all in all, I would not give you any guiding on exactly how that's going to go, but we -- in general, we have a positive momentum in the business.

[Odd Arild Grefstad, executive]

And I can just add on the...

[Vegard Toverud, analyst]

And specifically then on impact on credit spreads.

[Lars Aasulv Løddesøl, executive]

Yes. When you look at the Q4 solvency, the positive effect of credit spreads are in the solvency ratio. But then there have happened other things that we've tried to disclose in the movement. I would say that when you look at it top-down, you see that the SCR has increased and own funds are really stable. And then you get a denominator and numerator effect that gives a larger effect than what you would kind of expect looking from the outside.

[Johannes Narum, executive]

The next person in line is Hans Rettedal Christiansen in Danske Bank.

[Hans Rettedal Christiansen, analyst]

So 2 questions from me, please. First one is just on [ boarding ] loss. You mentioned capital generation going forward and specifically on the sale of Helseforsikring where you say you're looking into -- or it will support your ordinary dividends and share buybacks as well as investing in the business. Could you perhaps say anything around sort of the potential for extraordinary dividends given your solvency ratio and such?And then my second question is regarding the NOK 300 million in reserve strengthening that you're doing in health and Group life, of which NOK 200 million was done this quarter, which kind of reflects or resembles what the NCD also did in children's disability. Could you just explain what is driving that sort of strengthening? And how you can be sure that you've done enough now given the development in 2023?

[Odd Arild Grefstad, executive]

Well, let me start on these 2 questions. First of all, if you look at Storebrand health, of course, we need to get the money on account before we start to distribute them. But I think what you also saw from the increase in the ordinary dividend this year and an 11% increase in ordinary dividend takes into account that we will grow ordinary dividends going forward as we see both the capital generations and the result is coming through and we have the NOK 1.5 billion in share buybacks that we expect to do annually.Then when it comes to the reserve strengthening, it's of course, a complex matter. We look at the increased disability in the Norwegian society altogether, especially when you look at the younger people, there is higher levels of disability. Most of them are not into workforce, of course, but you can see it in, as you say, products as children insurance and so on. But we also see that young people into the workforce and even professionals have a higher level of disability compared to what we saw before.We took that into account into the pandemic. So we increased our buffers in the pandemic towards disability, but we expected actually that it was somewhat down to a more normal level after the pandemic. That has not happened. The disability levels has been kept on a higher level. So what we now have done is to also make sure that we have reserved the different years after the pandemic up to a higher consistent level. And of course, going forward, we have also taken these assumptions into our plans when we have done price increases.

[Johannes Narum, executive]

We have the next question here from Ulrik Zurcher in Nordea.

[Ulrik Zürcher, analyst]

Just one question for me on non-life repricing. So if 2025 shows the same claim frequency, including the bad weather as we saw in 2023, will you then be able to reach your below 92% combined ratio target?

[Odd Arild Grefstad, executive]

All of the experience that we have will be built into the price increases. The price increases in P&C happens like on -- throughout the year, slightly high around January 1, but basically, it happens throughout the year. So we will be able to reprice when we get the experience into our numbers on an ongoing basis. And that's why I'm saying that if the bad weather continues into 2024, which it has done so far, then we will not expect to be fully repriced for the new situation during 2024. But our ambition is to be fully repriced for all of the new experience that we see in 2025.

[Lars Aasulv Løddesøl, executive]

Yes. So that means that we are still what we are seeing, expect to reach the level of 90% to 92% in combined ratio in 2025, but we will gradually move towards that with reduced combined ratios in 2024.

[Odd Arild Grefstad, executive]

But I think if I may add also that if tail incidents happens within insurance, then it will have a natural variation in results. That's just how it is if there are something that is far out on the tail. That is, of course, not necessarily priced on a normal basis.

[Lars Aasulv Løddesøl, executive]

Yes. And you have also differences between different quarters. Normally, the weather is harsh when it comes to the combined ratio. So we expect first quarter and the fourth quarter to have somewhat higher, but by talking about the total combined ratios over the year.

[Ulrik Zürcher, analyst]

Okay. But I'm trying to -- so last year, it was -- I mean, the storm funds was probably an outlier, but was the other quarters outliers or...

[Odd Arild Grefstad, executive]

I think we had 3 large natural peril situations last year. Normally, it's on every 20 year or every 50 year I think is normal. So there was a very special year when it comes to P&C insurance in Norway last year. And on top of that, we had extremely steep inflation and the currency effect for all the spare parts that was also imported into Norway. So it was a very special year when it comes to insurance. That had the impact on combined ratio. Some of the effects will not occur in 2024, but of course, weather conditions will be -- have effect on combined ratio.

[Johannes Narum, executive]

We have the next question here from Tryfonas Spyrou in Berenberg.

[Tryfonas Spyrou, analyst]

Most of my questions have been answered. I just have 2 questions. One is on the buffer. Obviously, I think the buffer increased from something around NOK 6 billion to NOK 15 billion. It looks like it hasn't really been reflected in solvency capital generation. So maybe you can share a word on that. And then the second is on the dividend per share trajectory. Obviously, 11% growth is quite strong. It looks like buybacks account 4% of that living 7% nominal dividend growth, which is obviously somewhat higher than what you've done before. Is this new level sort of sustainable going forward? Is this what we should expect?

[Odd Arild Grefstad, executive]

I can start on the dividends. I think we had this question also on the Capital Markets Day. We expect to have gradually quite strong growth in the results in Storebrand going forward, aiming for the NOK 5 billion result in 2025. And based on that, we expect also to have growth in dividends that is, well, combined to that growth we see in the results going forward. And on top of that, we have the dividend -- the share buyback program. So yes, we expect to grow reserves and we expect to grow dividends accordingly.

[Lars Aasulv Løddesøl, executive]

And with respect to buffers in solvency, the effect that we come into a new year and get access to new buffer that has been captured by the solvency numbers in the fourth quarter. But the fact that they're changing the buffer rules has -- will be modeled into the solvency during the first quarter, together with the fact that we will with a larger risk capacity also take more risk in order to achieve a higher return for our customers. So the solvency effect will be a combination of the 2 and should not be significant.

[Odd Arild Grefstad, executive]

And then if I can add just on buffers in the quarter. Some of the movement you see is changes in values and bonds at amortized cost, which is mark-to-market in the solvency calculation. So that is kind of a difference between the statutory accounting and the solvency accounting that doesn't really affect the solvency from quarter-to-quarter.

[Johannes Narum, executive]

We have the next question here from David Barma in Bank of America.

[David Barma, analyst]

The first one, just to come back on the P&C profitability. So I understand the guidance for '24 and '25. For '23 or the fourth quarter, can you help us understand what the underlying profitability is in your mind and mostly adjusting for the frequency and the cat experience, that would be very helpful? And secondly, on the holding financial results, we talked a little bit about this at the CMD, but could you give us some indication as to how sensitive that line is the changes in interest rates? And maybe to put it another way, how sustainable the 4Q level is? And then lastly, on real estate. Can you talk a little bit about where the write-downs came from in the quarter? And how comfortable you are with the valuation of your book at this stage?

[Odd Arild Grefstad, executive]

Sure. On P&C underlying profitability, it's very hard to say that there has been an increase in frequency in general and there has been bad weather and water pipes, et cetera, and there has been torrential rains. And I don't know if it's kind of a theoretical analysis that you have to make an underlying profitability. I think what's important is that all of the new experience that we have will be put into the pricing. And this is happening not only with us, but with all our competitors as well. So we have seen quite hard pricing in terms of what has been disciplined in pricing in the Scandinavian market for a long time and we expect that to continue going forward.In terms of holding company financial results, the average duration in the holding company portfolio is around 1.5 years. So there's a little bit of delay. And if rates increase quickly, you'll have a mark-to-market fall initially, but it will not take a long time before you get a higher running yield. And vice versa, when rates fall, you have a capital gain initially and then somewhat lower running yield going forward. So -- but it's fairly sustainable and it will have a slight lag to the short-term interest rate level.On real estate write-downs, we have written down -- we have used a higher discount rate for our properties in Norway and Sweden, which in combination between what happened in 2022 and 2023 has reduced real estate values about 20%. But then practically, all of our holdings are fully let out with good rental contracts with the CPI inflation factor. So the rentals have gone up. The rentals have increased with inflation, i.e., around 10% in Sweden and 7% in Norway, which both in last year and this -- both in '22 and '23. So that has increased the running yield and has reduced the fall in property values.So in the appendix of the presentation that we just held, you will see more details on rentals, rent contracts, running yield and the effect of the write-downs. All of our properties are mark-to-market. Every quarter, we have our internal model supported by external analysis. And we feel very comfortable with the pricing. We also see now coming into this year that we see more transactions taking place in the markets where buyers meet sellers at these yield levels. So that indicates that the market is now stabilizing and we should be expecting to benefit from the higher running yields in these portfolios going forward.

[Johannes Narum, executive]

We have the next question from Johan Strom in Carnegie.

[Johan Ström, analyst]

So I'd like to come back to the comments that you made on the public sector. 100% hit ratio is obviously impressive, so I have a few questions on this. First of all, do you feel happy with the prices and perhaps profitability on these contracts? Is it meeting your overall return on equity targets? And then in terms of volume, how much have you won in the public sector so far, the total? And is there a target for 2024? Perhaps you have some visibility on upcoming tenders, et cetera.

[Odd Arild Grefstad, executive]

Yes. Let me start on the public sector. We are very pleased, of course, to see the hit rate of 100% in this portfolio. There is the profitability, obviously, meet our targets. What we need, of course, is still a growth in the portfolio to have even a higher critical mass that reduces the average cost in this portfolio as we are building solutions and systems with the growth of the portfolio. But the underlying profitability in the public sector portfolio is strong.When it comes to the portfolio altogether, around NOK 20 billion is in my head. I don't know, Kjetil, you have the same number in your head.

[Kjetil R. Krokje, executive]

I think that's correct, including the NOK 3 billion won in the fourth quarter. That will be transferred now early 2024.

[Odd Arild Grefstad, executive]

So that is very good. The problem in this market, as you know, is that we see too low levels of tender offerings. So that needs to change going forward. And we also see now in the aftermath of the election last year when you have something changes the demographics of the different municipalities that we expect much higher levels of tender offerings already this year. And we increased our target that used to be NOK 5 billion in net flow to us annually to, I think it was NOK 7 billion in the last Capital Markets Day, and that seems to be a level at least that could be reached in '24 based on the level of tender offerings we already see have been communicated to the market.

[Johan Ström, analyst]

That's helpful. And then a quick question just on the buybacks. It's been a bit of a stop-and-go in these events. I'm just curious if there's anything you can do to make them more even throughout the year? I'm just curious on this since we're getting closer to the AGM and new application.

[Lars Aasulv Løddesøl, executive]

So what we are doing now, we are -- we have announced NOK 400 million to take place up until the AGM, which is 4th of April this year. And then we will apply for a new tranche of NOK 1.1 billion after we get the new approval from the AGM. At that time, we will be in a red period with the first quarter. So it's likely that we will come back and restart the NOK 1.1 billion program towards the end of April after announcing the first quarter numbers. We are looking at different ways of getting an approval to go across the AGM. And we'll revert to the market when we have more details on the availability of such an option.

[Johannes Narum, executive]

We have the next question here from Jan Erik Gjerland in ABG.

[Jan Gjerland, analyst]

Firstly, on the buffer funds from 1st of January. How could we read you when it comes to wanting the -- what kind of desire level do you have on your, let's say, 8 different kind of paid-ups portfolio, which you elaborated on the Capital Markets Day? Is it so that you wanted to be fully filled up before you start to have a profit sharing or should you expect some partly profit sharing during 2024 and then a full effect in 2025 or is it so that you start full off with some portfolios and then you wait for buffer building to be built? And how should we just read you on that topic?Secondly, on the bank growth. It seems like it's now diluting you a little bit on the solvency situation. So why should you grow the bank so much? What is it really giving you when sort of you're challenging the retail market in Norway when it comes to growth, but this comes on benefits on the solvency side?

[Lars Aasulv Løddesøl, executive]

All right. Let me start quickly on the paid-up policy. As we said on the Capital Markets Day, we have around NOK 40 billion of paid-up policies, which we are kind of very close to being in profit sharing territory and there's no need to build a lot more buffers. And then we have kind of a, what we can call, a middle portfolio or consisting of several portfolios of roughly NOK 50 billion. Here, we need to build a little bit more buffers also with the new referrals and gradually start taking profit sharing. And then the last part of the paid-up policy portfolio consisting of roughly NOK 45 billion, we will need to build substantially more buffers before we start profit sharing to make sure that they are robust enough to handle market downturns. And how this works now is that these policies are invested in very safe assets to make sure that we meet the interest rate guarantee. And then you gradually build up buffers, you can take on a little bit more risk and then create a surplus return over the interest rate guarantee. So to sum up, around about NOK 90 billion, pretty close to or starting profit sharing and the last NOK 45 billion a good bit further away.

[Jan Gjerland, analyst]

And when it comes to return, if I can have a follow-up, what kind of return do you see in these 2 largest portfolios, as you said, which are closer to getting a profit sharing on? Is it this 4.4% as an average or is it better or lower than the average?

[Odd Arild Grefstad, executive]

Let me have a look here. We have some disclosure on this on the expected returns. So I can...

[Lars Aasulv Løddesøl, executive]

I think also we had a couple of quite good slides on this in our Capital Markets Day that tries to target what kind of profit sharing you should expect in '24 and in '25.

[Odd Arild Grefstad, executive]

Absolutely. But the updated numbers on expected return is 4.2% now as per Q4, looking 12 months ahead. Of course, there's a little bit difference between the portfolios here. But I think it's a good starting point to use that to calibrate what kind of profit sharing you can expect for '24 and '25.

[Lars Aasulv Løddesøl, executive]

But obviously, those portfolios that have a higher risk they also have a higher expected return, but more volatility in the results depending on whether equity markets go up and down -- up or down, et cetera. So obviously, where you have risk-free or almost risk-free portfolios, you have a lower expected return.

[Odd Arild Grefstad, executive]

If you look at the bank, first of all, I would say, I'm very pleased to see the bank in the competition really growing very well. It's, as you know, an important part of our retail strategy, cross-sells into both savings and insurance and we see very strong cross-sells. I think we have talked about more than 40% cross-sells into, well, part of insurance portfolios from the banking operations. So it's strategically important for us.When it comes to capital, well, it's more about optics, because we are taking the right capital for different businesses in Storebrand. The guaranteed business needs more capital than the defined contribution business. And the bank should be measured out of the CRD measurements. And as you know, we have historically also changed our target when it comes to capital from -- well, our capitalization from NOK 180 million to NOK 175 million based on the growth of bank and asset management as a part of the Group, and we are prepared to do that also going forward. So it should not be a burdensome for, well, the distribution and our measurements, how stable and solid we are to grow a bank in Storebrand. It's more about the optics of the numbers.

[Johannes Narum, executive]

It seems like we have a last question here from Hakon Astrup in DNB Markets.

[Håkon Astrup, analyst]

So on unit linked, looking at the transfer balance in Norway, it looks like another quarter with negative transfer balance. Can you talk a little bit about what is driving this development? And also how you see the competitive situation at the moment?

[Lars Aasulv Løddesøl, executive]

The transfer balance is slightly negative this quarter. The large negative transfer for the full year was part of the Danica portfolio with if that was transferred out for competitive reasons in the second quarter I believe. So -- but it has more or less stabilized now at a much lower level. We continue to win contracts. There is some churn in the market and has been slightly in our disfavour for 2023. But we continued to work with -- we've maintained our 13% plus market share in the unit linked market in Norway since it started back in 2001 and we continue to operate with a profitable market-leading position in this market.

[Johannes Narum, executive]

That concludes today's presentation. Our next set of results are due on April '24. So we look forward to seeing you then. Thank you, and good bye.