Growth in emerging markets Operating in emerging markets gives us different challenges than in industrialized countries. Natural disaster and corruption is part of the risk picture.
Having said that, it was nothing that we were not prepared for here. We have adapted our business to Solvency II over the last threeyear period, and we are well on our way. What is new now is that we have a specific date for the introduction, as well as transitional rules for Norway, to work with.
This autumn, the regulations for paidup policies with investment options entered into force. Storebrand is the only company allowing all gainfully employed customers to trade in their guarantee. While the other companies are waiting until they have finished strengthening their longevity reserves, Storebrand is using equity to allow the customers to convert. Why are you doing this? What is the most important is the fact that the new rules will give many of our customers an opportunity to receive a better pension. For many individuals – young employees in particular – this is clearly a better alternative than being locked into a solution with a guaranteed low return over many years.
How much has this cost the company in the form of equity in 2014? In 2014, a total of 3,500 customers with paid-up policies valued at just under NOK 1 billion converted to policies with investment options. In total, this has cost us around NOK 30 million.
There has been some focus on this recently: Calculations from Øystein Medlien in Grieg Investor, published in VG last year, showed that the socio-economic losses associated with guaranteed returns in defined benefit schemes totalled NOK 550 billion. Common sense dictates that something must be done about the requirements for annual guarantees to make the management of the guaranteed products better for the customers, and I have faith that this is something the authorities will be looking at.
In the longer term, it is exciting to think of the hybrid model as an opportunity to reform the entire public service pension system. This is something that will emerge sooner or later in order to harmonise the pension systems in the private and public sectors. The hybrid model, with lifelong disbursements and opportunities for wage inflation adjustment, may be a solution.
A major international ranking of sustainability, the Dow Jones Sustainability Index, celebrated its 15th anniversary in 2014, and highlighted the fact that 16 of the companies have been on the list every year since the start of the index. Storebrand – along with BMW and Deutsche Bank for example – is one of these companies.
BASED ON OUR PROPRIETARY SUSTAINABILITY RANKING The system for the sustainability labelling of funds is based on Storebrand’s proprietary sustainability rating of 2,400 companies. The rating gives the company a score of 0-100 based on financial robustness, sustainable operations and positioning for global trends. The most sustainable companies are those who are energy-efficiency, treat their employees well and offer sustainable products or services. A fund that owns many such companies will also have a high sustainability level. The calculation is also weighted so that the more the fund invests in the best companies, the higher the level.
Average sustainability score for the life balance sheet investments1 57 of 100 points 73 of 100 points 65 of 100 points
Employees' awareness and support of Storebrand's corporate responsibility work 84% 85% 86%
Result before amortisation 1,047 670 2) Adjusted for the positive non-recurring effects related to pensions in 2014 and pensions in 2013. Without adjustment for these effects, the increase would be 56 per cent.
The retail bank is a direct bank that offers a wide spectrum of banking services to the retail market. Strong interest rate margins at the start of the year yield an average margin of 1.22 per cent overall for 2014. The deposit portfolio grew by NOK 1.1 billion, while the lending portfolio remains stable at approximately NOK 24 billion. This primarily consists of low-risk home mortgages. The reversal of prior provisions gives a reversal of lending losses of NOK 1.3 million in 2014.
For non-guaranteed pension products the customer has the financial market risk. In Norway, the disbursements are time-limited, and therefore Storebrand does not bear the risk from increased life expectancy. In Sweden a large portion of the portfolios have lifelong disbursements, but the customer can choose time-limited disbursements.
In order to achieve sufficient returns from the customer portfolios to cover the guarantee, reserve build-up and revaluation of pension, it is necessary to take investment risk (market risk) beyond investing in secure fixed income securities. This is primarily done by investing in equities, property and credit bonds. It is possible to reduce market risk but then the probability of achieving the necessary level of return is reduced. The investment strategy and risk management must balance these considerations, including the effect on the required rate of return from the required build-up of reserves. Dynamic risk management of the equity percentage is also utilised.
Interest rate risk is in a special position because changes in interest rates also affect the value of the insurance liability. Since pension disbursements may be many years in the future, the insurance liability is particularly sensitive to changes in interest rates. Risk management shall reduce this risk by undertaking investments with a corresponding level of interest rate sensitivity. In Sweden management of interest rate risk is based on this principle, but primarily targets the financial result. The yield curves in the financial statements and the solvency accounts are based on different principles.
The HR Department is responsible for ensuring that the Group’s employees are familiar with and aware of what the ethical rules mean in the employees’ day-to-day work. This is accomplished through measures such as e-learning, dilemma training, group work, and the question and answer service on the intranet. The HR director has the overall responsibility for the ethical rules.
• Storebrand’s goal is to be leading in sustainability in the Nordic region and one of the foremost companies in the world in the area of sustainable investments.
Board of Representatives: Arne Giske, Arild M. Olsen, Jostein Furnes (former alternate member), Caroline Burum Brekke (employee representative ) and Hanne Seim Grave (employee representative) have been elected as new members. Joakim Gjersøe, Per Otto Dyb, Cathrine Kjenner Forsland (employee representative) and Alina Jakubenaite (employee representative) have been elected as new alternate members.
Storebrand’s corporate governance principles have been laid down in accordance with the Norwegian Code of Practice for Corporate Governance. The management and the Board of Directors of Storebrand conduct an annual review of Storebrand’s adopted corporate governance policies and compliance therewith. Storebrand reports in accordance with section 3-3b of the Norwegian Accounting Act and the Norwegian Code of Practice for Corporate Governance.
new issues. The authorisation is valid until the next Annual General Meeting.
6. GENERAL MEETING AND CONTROL COMMITTEE (NO DEVIATIONS FROM THE CODE OF PRACTICE) General Meeting Pursuant to the Articles of Association, Storebrand ASA’s General Meeting shall be held by the end of June each year. The 2014 Annual General Meeting was held on 9 April. All shareholders with a known address will receive notice of the General Meeting, which will be sent out no later than 21 days prior to the General Meeting. The deadline for registration is three working days before the General Meeting.
7. NOMINATION COMMITTEE (NO DEVIATIONS FROM THE CODE OF PRACTICE) Storebrand’s Articles of Association regulate the Nomination Committee, which consists of four members and an observer elected by the employees.
Board committees The Board has established a Remuneration Committee and an Audit Committee. Both committees consist of three board members, two shareholder-elected board members and one-employee elected board member. This helps ensure thorough and independent consideration of matters that concern internal control, financial reporting and the remuneration of executive personnel. The committees are preparatory and advisory working committees and assist the Board with the preparation of items for consideration. Decisions are made, however, by the full Board. Both committees are able to hold meetings and consider matters without the involvement of the company’s management.
Storebrand has a common internal audit function, which conducts an independent review of the robustness of the management model. The internal audit function’s instructions and annual plan are determined by the Board pursuant to the current legislation, regulations and international standards. The internal audit function produces quarterly reports for the boards of the respective Storebrand companies and the Control Committee.
3 Any deviations from the Code of Practice are commented on under each section in the statement above, see the deviations discussed in section 3.
His previous positions include Special advisor in Storebrand, Head of Asset Management Department of the Norwegian Ministry of Finance, Director General at the office of the Prime Minister and Head of the Domestic Policy Department and Advisor in McKinsey&Co
MEMBERS (ELECTED BY SHAREHOLDERS) Terje Andersen (4,500) Anne-Lise Aukner (0) Trond Berger (837) Maalfrid Brath (8,063) Jostein Furnes (0) Arne Giske (0) Marianne Lie (0) Arild M. Olsen (200) Olaug Svarva (0) Pål Syversen (0)
Net income from financial assets and real estate for the customers: - equities and other units at fair value 17 20,735 16,772 - bonds and other fixed-income securities at fair value 17 9,516 2,942 - financial derivatives at fair value 17 -1,328 -3,598 - bonds at amortised cost 17 3,784 3,526 - interest income lending 171 130 - profit from investments in associated companies 34 25 29
Real estate at fair value 24,175 262 24,437 28,723 240 28,963
Investments in associated companies (normally investments of between 20 per cent and 50 per cent of the company’s equity)
DEFINITION OF FAIR VALUE The fair value of financial assets listed on a stock exchange or on another regulated market in which regular trading takes place is determined as the bid price on the last trading day up to and including the reporting date.
Loans and receivables are carried at amortised cost using the effective interest method. The category is used in the Norwegian life insurance business linked to insurance contracts with a guaranteed interest rate, and in the banking business.
Some borrowing in foreign currency is hedged by means of hedging instruments (derivatives). The cash flows in the hedged item coincide with the cash flows of the hedging instruments. Derivatives are recognised at fair value. Hedge accounting is carried out by dividing the hedge into fair value hedging of the interest and a cash flow hedging of the margin. Net changes in the value of the cash flow hedge are recognised in the Statement of Total Comprehensive Income.
INSURANCE LIABILITIES, SPECIAL INVESTMENTS PORTFOLIO The insurance reserves allocated to cover liabilities associated with the value of the special investments portfolio must always equal the value of the investments portfolio assigned to the contract. The proportion of profit in the risk result is included. The company is not exposed to investment risk on customer assets, since the customers are not guaranteed a minimum return. The only exception is in the event of death, when the beneficiaries are repaid the amount originally paid in for annuity insurance and for guaranteed account (Garantikonto).
STRENGTHENING OF LONGEVITY RESERVES In a letter dated 8 March 2013 the Financial Supervisory Authority of Norway (Finanstilsynet) determined that a new mortality basis, K2013, would be introduced for group pension insurance schemes in life insurance companies and pension funds with effect from 2014. This requires increased premiums and higher insurance technical reserves to cover future liabilities. On 2 April 2014 the Norwegian Financial Supervisory Authority published guidelines for escalation plans for provisions for long life, based on a letter from the Norwegian Ministry of Finance dated 27 March 2014. The period for strenghtening of reserves may have a duration of up to 7 years (up to and including 2020). The reserves may be funded using the excess return in customer portfolios, but the pension scheme must cover a minimum of 20 per cent of the total requirement for the strenghtening of reserves.
In Storebrand’s life insurance activities, a change in the estimates related to technical insurance reserves, financial instruments or investment properties allocated to life insurance customers will not necessarily affect the owner’s result, but a change in the estimates and valuations may affect the owner’s result. A key factor will be whether the assets of the life insurance customers, including the return for the year, exceed the guaranteed liabilities. This will apply in particular to the guaranteed Norwegian obligations that are being built up to meet increased life expectancy in the future. Read more about this in note 3.
FINANCIAL INSTRUMENTS AT AMORTISED COST Financial instruments valued at amortised cost are assessed on the reporting date to see whether there is any objective evidence that a financial asset or group of financial assets is impaired.
A certain degree of judgement must be used in assessing whether impairment has occurred and the amount of the impairment loss. Uncertainty grows when there is turmoil in financial markets. The assessments include credit, market and liquidity risk. Changes in assumptions for these factors will affect an assessment of whether impairment is indicated. There will thus be uncertainty concerning the recognised amounts of individual and group write-downs. This will apply to provisions relating to loans in the private and the corporate markets and to bonds that are recognised at amortised cost.
OTHER INTANGIBLE ASSETS WITH UNDEFINED USEFUL ECONOMIC LIVES Goodwill and other intangible assets with undefined useful economic lives are tested annually for impairment. Goodwill is allocated to the Group’s cash generating units. The test’s valuation method involves estimating cash flows arising in the relevant cash flow generating unit, as well as applying the relevant discount rate. Tangible fixed assets and other intangible assets are assessed annually to ensure that the method and time period used correspond with economic realities.
PENSIONS FOR OWN EMPLOYEES The present value of pension obligations depends upon the financial and demographic assumptions used in the calculation.
Result before profit sharing and loan losses 322 129 3,387 2,522
The internal audit function is organised directly under the Board and shall provide the boards of the relevant consolidated companies with confirmation concerning the appropriateness and effectiveness of the company’s risk management, including the efficiency of the various lines of defence.
Insurance 5. Group life consists of group contracts that are offered in Norway with lump-sum payments in the event of death or disability. 6. Health and P&C insurance contracts are group contracts with lump sum payments for occupational injury insurance, critical illness, cancer insurance, child insurance or accident insurance that are offered in Norway.
In the Swedish operations management of interest rate risk is based on the principle that the interest rate risk from assets shall correspond to the interest rate risk from the insurance liabilities, entailing that the financial result has low interest rate risk. However, because the solvency accounts are based on a different yield curve, an interest rate risk relating to solvency then arises.
Loans to the corporate market (drawn) total almost NOK 9.3 billion. There is also about NOK 108 million in unused credit facilities and about NOK 90 million in guarantees. Loans to income-generating properties constitute some NOK 7.9 billion of the corporate market portfolio, while construction loans represent approximately NOK 0,9 million. The loans are primarily localised in greater Oslo. The portfolio’s collateral is for the most part in commercial properties.
Government and government guaranteed bonds 4,554 7,523 1,146 1,178 958 15,359
Total bonds and other fixed-income securities 36 435 147 501 339 184 275
Equities Under equities, it is primarily forestry that is invested at level 3. Forestry investments are characterised by, among other things, very long cash flow periods. There can be some uncertainty associated with future cash flows due to future income and costs growth, even though these assumptions are based on recognised sources. Nonetheless, valuations of forestry investments will be particularly sensitive to the discount rate used in the estimate. The company bases its valuation on external valuations. These utilise an estimated market-related required rate of return. As a reasonable alternative assumption with regard to the required rate of return used, a change in the discount rate of 0.25 per cent would result in an estimated change of around 3.25 per cent in value, depending on the maturity of the forest and other factors.
SENSITIVITY ANALYSIS PENSION CALCULATIONS The following estimates are based on facts and circumstances as of 31 December 2014 and are calculated for each individual when all other assumptions are kept constant.
The remaining amount is converted to synthetic shares based on the market priice. These are registered in a share bank with a lock-in period of three years. At the end of three years, the value of the synthetic share is calculated at a new market price. Half of the amount paid from the share bank shall, after tax, be used to purchase shares in Storebrand ASA at market price, with a new three-year lock -in period.
The Board of Directors of Storebrand ASA has had a dedicated Compensation Committee since 2000. The Compensation Committee is tasked with making a recommendation to the Board of Directors concerning all matters regarding the Company’s remuneration of its Chief Executive Officer. The Committee is responsible for keeping itself informed and proposing guidelines for the fixing of remuneration of executive personnel in the Group. The Committee is also an advisory body to the CEO with respect to remuneration¬ regimes that cover all employees in the Storebrand Group, including Storebrand’s bonus system and pension scheme. The Compensation Committee satisfies the follow-up requirements set forth in the Compensation Regulations.
3. STATEMENT ON THE EXECUTIVE EMPLOYEE REMUNERATION POLICY DURING THE PREVIOUS FINANCIAL YEAR The executive employee remuneration policy established for 2014 has been observed. The annual independent assessment of the guidelines and the practising of these guidelines in connection with bonuses for the 2014 qualifying year and with payment in 2015, is carried out in the first six months of 2015.
For further information about lending, see note 10 Lending and counterparty risk.
Group - of which premium income received in advance 687 405 709 1,800 1,800 1,910
Total insurance liabilities - life insurance 62,553 41,893 88,190 15,014 4,186 211,835 78,541 63,476 142,017 15,299 369,151 347,475 1) Including personal risk and employee insurance of the Insurance segment.
The financial assets transferred have consisted of swap agreements with the Norwegian state through the Ministry of Finance concerning the pledging of financial collateral. The swap agreements that were entered into by means of auctions administered by Norges Bank were redeemed in 2014.
Companies in the Storebrand Group have transactions with related parties who are shareholders in Storebrand ASA and senior employees. These are transactions that are part of the products and services offered by the Group‘s companies to their customers. The transactions are entered into on commercial terms and include occupational pensions, private pensions savings, P&C insurance, leasing of premises, bank deposits, lending, asset management and fund saving. See note 26 for further information about senior employees.
USE OF ESTIMATES AND DISCRETIONARY ASSUMPTIONS In preparing the annual financial statements, Storebrand has made assumptions and used estimates that affect the reported value of assets, liabilities, revenues, costs, as well as the information provided on contingent liabilities. Future events may cause these estimates to change. Such changes will be recognised in the financial statements when there is a sufficient basis for using new estimates. The most important estimates and assessments are related to the valuation of the company’s subsidiaries and the assumptions used for pension calculations.
Actuarial gains or losses and the effect of changes in assumptions are recognised in other comprehensive income. The effects of changes in the pension scheme are recognised on an ongoing basis, unless the changes are conditional upon accrued future pension entitlements, The effects are apportioned on a straight line basis until the entitlement has been fully earned. The employer’s National Insurance contributions are included as part of the pension liability and are included in the actuarial gains/
Tax base for the year 239 138 - Use of losses carried forward -239 -138
Net deferred tax asset/liability in the statement of financial position 400 458 -of which changes in deferred tax assets recognised in the balance sheet 19 82
Interest rate futures are standardised contracts which are exchange traded and are subject to established clearing arrangements. Profits and losses on futures contracts are recognised daily and settled on the following day.