Wenche Martinussen is working continuously to simplify pension for our customers
By putting the customer �rst and investing sustainably Storebrand will be best at saving for retirementsaving for retirement
Director's report Corporate Governance Management Storebrand ASA Board Storebrand's corporate bodies
STOREBRAND GROUP Profit and loss account Statement of total comprehensive income Statement of financial position Statement of changes in equity Cash flow analysis Notes
Score 79 out of 100 Ranked 9 out of 148 in insurance
Ranked A Ranked 20 out of 100 most sustainable insurance company in the world
At the end of 2014, there were 2,298 employees in the Group, compared with 2,223 at the start of the year. Women represent 51 % of our employees. The average age of our employees is 40. The average term of service is 9 years. All employees of Storebrand are treated equally, regardless of age, gender, disability, religious beliefs, cultural background or sexual orientation.
Storebrand delivers very good quarterly results for the insurance business. Growth is driven by strong sales agreement with Akademikerne, which entered into force on 1 January 2015 and includes 110,000 members.
Storebrand takes a new step in customer orientation by establishing overall operating and product areas within the Group. Staffan Hansen, former head of Asset Management, replaces Sarah McPhees position as CEO of SPP, while Jan Erik Saugestad takes over as Executive Vice President for Asset Management.
NHO and Storebrand agree on a new and expanded agreement on pensions to NHO's members through 2021. The deal is the biggest in the Norwegian pensions market, and consolidates Storebrand's position as market leader.
Storebrand is together with other leading industry players among the initiators of the climate report "Norway 203040 - Business Opportunities". The report was presented to the Prime Minister Erna Solberg and Climate and Environment Tine Sundtoft at Storebrand, Lysaker, 20 October.
In October, the Group communicates restructuring. It is expected a reduction of 65 FTEs. It will also be necessary for staff reduction in other parts of the Group in 2016.
How was this last year for you? “We continue to deliver a good return to our customers, and we have successfully grown our non-guaranteed business – both in Norway and Sweden. We have increased the rate of change in 2015, by, for example, entering into partnership with the US IT company Cognizant. This cooperation will provide our customers with more innovative solutions and the Group with cost reductions.
What has been the most important this year in the eyes of the analysts has been adaptation to Solvency II, which was introduced from 1 January 2016. I am very satisfied with the job we have done here, and the Solvency II results we have delivered so far have been good.”
We have not achieved our growth targets for the banking business in 2015, but we see that the arrows are pointing in the right direction at the end of 2015. In 2016, we have great expectations that we will grow in the home mortgage loan market, particularly in fixed-rate lending and home mortgages for young people. And we are the only bank where you are young until age 40.”
The shareholders are concerned about the low interest rate level being challenging for Storebrand, since the company guarantees the return for a large portion of the customers' pension assets. What actions is Storebrand taking to continue to fulfil customer commitments and earn money, even if the interest rates remain low? “We have taken many actions to remain robust in a low interest rate environment. We continue to shift our balance sheet from products with guaranteed interest rates to products without a guarantee. Our costs are being reduced. We have built up a portfolio of bonds with a long term to maturity that we will hold until maturity over a period of several years. Together with property, these bonds will provide an ongoing, secure return, which will cover the interest rate guarantee and strengthening of longevity reserves – but probably not more than that. We expect to achieve a four per cent annual return on the paid-up policy portfolio until 2020. After 2020, the interest rate guarantee for our guaranteed portfolios will be reduced from the current 3.5 per cent to around 3 per cent, which we are comfortable with in the current situation.”
Solvency II, the new European solvency regulations for life insurance companies, was introduced in Norway in January 2016. What is the practical importance of the regulations entering into force to Storebrand? “This ensures clarity in important framework conditions related to our Group's capital situation. It is a major advantage for analysts and shareholders.
"In an increasingly individualised pension market, it is important to succeed in the retail market. I am very happy to welcome more than 26 000 new retail customers to Storebrand in 2015. More than half of the customer growth comes from people with their occupational pension plans in Storebrand, indicating that we succeed in offering relevant and attractive private financial solutions."
period of 16 years we must increase this to 130 per cent – so we must continue to increase our equity in the future. Also note that we have not paid a dividend to our shareholders since 2010. We are not adequately capitalised until we are able to pay a normal dividend. When we start to pay a dividend, we would like to do so every year. The Board of Directors proposes, as is known, that no dividend be paid for 2015, but a dividend is planned for 2016.”
A higher life expectancy in the population is a challenge for the life insurance companies, which have to set aside more money to cover additional years of pension payments. The authorities have given the industry a deadline of 2020 to set aside an adequate amount of money. Storebrand chose nevertheless to accelerate the strengthening of reserves for increased longevity, so that the full impact of increased longevity on the results was recognised by the end of the 2015 financial year. Why? “We had an opportunity to complete the owner's share of the reserve strengthening now, and we did so. Now, we will not have to take these provisions into account in future quarters. Note that the changed allocation is only an accrual and does not entail any change in the expected use of equity. We expect accordingly that the remaining reserve strengthening will be covered by the surplus return on the customers' assets and elimination of profit sharing.”
Storebrand has entered into several major agreements with corporate customers and organisations in 2015. The largest agreement was an expansion of the pension cooperation with the Confederation of Norwegian Enterprise (NHO). How important is this agreement to Storebrand? “It is a very important agreement. NHO with its 20,000 member companies is a very important partner to us. The agreement entrenched our position as the market leader for defined contribution pensions. We are looking forward to providing NHO members with market-leading and customer-friendly solutions.
We have also had an agreement to provide pensions to NHO's member companies earlier. This agreement has now been expanded and extended to the end of 2021. While the old agreement was aimed primarily at small and medium-sized enterprises that have requested the minimum scheme, the new agreement is formulated so that it is also attractive to large companies. The agreement will also be very competitive for higher savings rates and contain new digital customer-friendly services – which our other customers will also benefit well from. We have therefore great confidence that the volume associated with the agreement will increase quickly in the future, and that the NHO customers will continue to be among our most satisfied corporate customers.”
Another major agreement is the insurance agreement with the Federation of Norwegian Professional Associations (Akademikerne), which entered into force on 1 January 2015. This agreement encompasses 110,000 members. How many of Akademikerne’s members have availed themselves of the offers in the agreement with Storebrand so far? “First off, I would like to say that it is really satisfying that Akademikerne have chosen us. Akademikerne is a large, attractive and demanding customer group with substantial insurance needs. Up until now, we have received NOK 225 million in group insurance agreements. These are agreements that have primarily been transferred from DnB, but we have also entered into some new group agreements. In addition, we have received NOK 80 million from new sales of individual agreements, distributed across 8,000 new private customers. Sales to date are better than our expectations, so we are very satisfied with how it has started.
After a demanding start in the first quarter with long call waiting times, we are now receiving good feedback from Akademikerne’s member organisations. This agreement is the main reason for the strong growth we have experienced in the insurance area, with premium growth of 17 per cent for the past year.”.
Increasing life expectancy, low interest rates and new capital requirements through Solvency II have made the management of paid-up policies very challenging. This came to a head in 2015, when the paid-up policy company Silver was forced to submit an application to the authorities for exemption from the introduction of Solvency II. What does this say about the challenges facing paidup policies as a product? “Silver finds itself in a very special situation. The rest of the Norwegian insurance business finds itself in a very different situation. We have used five years to prepare for Solvency II and we are well-positioned now. We have abandoned guaranteed products and implemented hard cost cuts. In addition, we have built up a robust asset side that matches our liability side. We started to set aside funds to strengthen the longevity reserves very early. We are carrying our paid-up policy portfolio in a good way.
Having said this: Paid-up policies in isolation are a major problem – both for the customers and the life insurance companies. For the companies, the challenge lies in a high level of working capital. Due to the guaranteed annual return, we must manage long-term pension money in a short-term manner. This gives a guaranteed, but low return – and thus a poor pension for our customers.
Paid-up policies with investment options are a good alternative for many, but not everyone. We recommend investment options only to those who can expect significantly higher pension payments by trading in their guarantee. Since October 2014, almost NOK 5 billion of the paid-up policy funds distributed across around 18,000 agreements have been converted to investment options. That sounds like a lot, but during the same period, our guaranteed paid-up
One example of a climate-related issue that affects investors is the price of carbon emissions, where a growing share of global emissions is being priced now through emission allowance trading. This entails consequences for investors in industries that have a significant climate impact. Companies attempt to handle this through using internal carbon prices.
In a report published by Barclays Bank at the end of 2015, "An in-depth look at COP21 and the long-term implications for the energy industry", the value of income from fossil fuels that risk becoming “stranded assets”, i.e. worthless, if we actually reduce our climate impact and achieve the two degree target, estimated at the staggering amount of USD 34 trillion, USD 22 trillion of which is in the oil industry. This is a risk that must be handled by responsible investors.
In the autumn of 2015, Governor Mark Carney of the Bank of England made an appearance at the insurance company Lloyds of London, where, as a representative for the central bank, he pointed out that the climate crisis is a systemic risk to the entire finance sector, with regard to both investments and risk insurance.
The risk insurance industry is directly affected by climate-related damage, as well as claims for compensation from those who are affected by climate change.
Storebrand acts proactively both as an investor and an actor in the finance sector.
Storebrand sees at the same time that the greatest threat to a further development of our living standard is climate change. The changes are man-made, distributed across the entire planet and represent the greatest challenge of our time. If we are to avoid the worst effects of climate change and limit the increase in temperature on earth to less than two degrees, all sectors of the economy must adapt without delay. Higher energy efficiency, emission-free transport, renewable energy production and smart infrastructure are all keys to such adaptation.
The Montreal Pledge is supported by both the UN Principles for Responsible Investment (UNPRI) and the United Nations Environment Programme Finance Initiative (UNEP FI).
The first Carbon Footprint calculation was made in 2005 for funds at the end of Q1 2015.
The first announcement was made in the first quarter of 2016.
Storebrand has itself been carbon neutral since 2008. This means that we have goals to reduce our own carbon footprint attributed, for example, to the electricity we buy for our offices and travel on official business. We reduce our carbon footprint through buying renewable electricity and origin-labelled heating, through systematically working with our properties and engaging in a dialogue with tenants, as well as increasing the use of technology for video conferences, etc., in order to reduce travel between our various head offices.
Storebrand has reported its climate impact through the Carbon Disclosure Project (CDP) since 2008. In 2015, Storebrand was once again rewarded with inclusion in the CDP Leadership Index for its own transparency with regard to its climate impact.
61 COMPANIES WERE EXCLUDED ON CLIMATE CRITERIA AT THE END OF THE 4TH QUARTER OF 2015
COAL EXCLUSIONS Storebrand has made an effort to reduce its exposure to coal since 2013, and, at the end of the 4th quarter of 2015, Storebrand had excluded 61 companies due to an excessive climate impact, including 40 coal companies.
Climate change is one of the most comprehensive risk factors with regard to sustainability.
SUSTAINABILITY ANALYSIS A large part of Storebrand’s global equity exposure in the pension portfolios is index -managed. Early in 2015, this traditional index-linked management was replaced by near-index-linked management with a focus on sustainability. Research showed that it was possible to increase the degree of sustainability in a portfolio without significantly increasing the index variation. Storebrand is convinced that there is a positive correlation between sustainable companies and returns. The weighted score for the new near-index linked management is approximately 77 of 100 points, versus approximately 68 of 100 points for index-linked management. CO2 emissions have declined by around 18 per cent, since there is a correlation between
sustainable companies and the consumption of resources. The expected index variation remains almost unchanged.
All companies are analysed based on sustainability within the framework of a sectoral analysis.
Climate has been incorporated into the sectoral analyses based on to what extent the sector to which the companies belong contributes to climate change. The analysis consists of two main components: The practice analysis and the positioning analysis. In the practice analysis, an assessment is made of how good the company’s current sustainability and climate work is, and in the positioning analysis the focus is on the company's opportunities and risks related to climate change and future regulations. Some companies in the energy sector are subject, for example, to the risk with stranded assets, and they are therefore measured based on to what extent they invest in coal production or oil sands, for example. The analysis encompasses thousands of companies and each company is given a sustainability rating that is used in all investment decisions. Storebrand increases the weight of companies that have a high sustainability rating, even in near-index linked products.
The Norwegian pension market has been changing in recent years, and individuals have been given greater responsibility for their own pensions. In combination with an increase in sustainable products and services, this has resulted in an increased demand for sustainable products. However, the implementation of sustainability in our main products is just as important to us, especially the main products we recommend to a broad customer base.
PRODUCTS LAUNCHED IN 2015 TO MEET THE DEMAND FOR SUSTAINABLE SAVINGS With regard to the offerings in sustainable savings, Storebrand envisions several theme products related to sustainability, such as water. SPP took in the Parvest Aqua fund from the funds market, a fund that invests in companies engaged in the water sector with a good sustainability profile. The major trend that SPP sees and follows itself is the fact that the sustainability analysis applies to the entire assets under management.
SPP follows the pension market's demand for simplicity and transparency in savings and launched a new fund family in 2015, SPP Mix, with four reasonably priced global funds that take sustainable savings to a completely new and more accessible level. The SPP Mix funds invest in other funds and build on the Group’s market view, as well as the Group’s overall expertise in asset management, sustainability and fund selection. SPP's new Mix funds will make it even easier for our pension savers to select individually adapted savings based on individual risk preferences and benefit at the same time from Storebrand 's/SPP's high standard for sustainable investments. After the change in SPP's existing investment services to Mix funds, the total volume of the funds is NOK 3.3 billion.
The requirements investors place on the managers are continuously developing. In the long-term perspective, it can easily be said that public institutions have gone from the “value of the resources should be higher at the end of the year than at the beginning of the year” to being increasingly more precise with regard to what strategies, risks and other conditions are used and accepted in the asset management. The development of how Storebrand Asset Management's customers and investors view the concept of sustainability and ethics in general has gone from believing that one had to choose between a return on the one side and ethics and sustainability on the other side, to an increasing number of individuals viewing the sustainability analysis as a natural part of the fundamental analysis. Investors see a connection between the question of sustainability, which is not visible in a purely financial analysis, and the future profitability and risk of the investments. The investor will understand and control how one is positioned in the investments in relation to climate issues, corruption risk, resource efficiency, labour law issues, etc.
The Swedish institutional capital is estimated at NOK 5,500 billion and is distributed among pension and insurance companies, AP funds, non-profit organisations, distributing foundations and other capital owners. Storebrand Asset Management estimates that some form of requirement is stipulated with regard to sustainability or ethics for the management of over 70 per cent of this capital in both Sweden and Norway. What is even more interesting is the fact that the capital owners seeking new asset managers are increasingly stipulating requirements for how the intended asset manager will take sustainability into account. According to the Swedish Fund Expert Index, SFEI, a survey conducted annually since 2009 for the purpose of surveying trends within the funds industry, funds experts consider sustainability to be an issue that is increasingly becoming important in connection with the selection of funds.
All the acquisitions Storebrand Asset Management was involved in in 2015 contain some form of sustainability analysis. Investors have already incorporated or will incorporate sustainability as part of their investment strategies in different ways. In addition to the common denominator of seeking to avoid risk and comply with international conventions, the clearest and strongest trend is the fact that the investors will better understand how one is exposed to fossil fuels. During the past year, risk associated with climate change has taken more and more of the focus. The winner of the future in relation to the challenges and opportunities associated with long-term global sustainable growth will be found through sustainability analyses.
Sustainable Investments are going to be less important in the future than it is today.
In order to accommodate this interest in sustainable savings, SPP Fund launched the “SPP Green Bond Fund” in March 2015. Storebrand has a strong position globally within the asset class, since Storebrand has invested in green bonds in connection with the life insurance management since 2011. At the end of 2014, Storebrand was one of the five largest investors in the world in green bonds. The fund invests in green bonds, which are investments were the money is earmarked for climate-promoting investments. Such investments may include the construction of energy-efficient properties, investments in renewable energy, such as wind and sun, investments in more efficient transport, and improvements to water treatment plants. The funds that are invested should generate a return that can be compared with an ordinary bond investment and also go towards investments in a more sustainable future. During the first four months of the fund, Storebrand Asset Management raised a total of SEK 1 billion from external investors, in spite of the prevailing low interest rate environment.
Storebrand Asset Management still has discussions with investors on the development and launch of several cutting edge products, which are in the very forefront with regard to sustainable asset management in Sweden and Norway, and this further strengths our position. However, the most important reason why Storebrand Asset Management is regarded as having one of the strongest positions in asset management and sustainability in Sweden and Norway is the fact that Storebrand Asset Management has integrated sustainability analysis into its management and seeks to offer its customers a complete platform for value-adding asset management.
Processing time for complaints 65% within 3 weeks 61% within 3 weeks 70% within 3 weeks
SPP Fondsförsäkring – Total sustainability rating Fondstorget3 n/a 58.5% Increase in rating
Diversity 79 of 100 points 87 of 100 points 85 of 100 points
Sustainability is a long term issue. Therefore Storebrand has supported our two-year goals with long-term five-year goals. The following targets have been set for the main areas within the Groups long-term commitments to sustainability: Long term goals
Guaranteed Pension Equity: Aggregated sustainability rating Real estate: Aggregated sustainability rating 70 of 100 points
Customers experience that all our relationships, solutions and measures are sustainable 60 of 100 points Two out of three customers shall experience that we deliver on customer promise number 3.
Net Promoter Score (NPS) Top 3 in the industry, corporate and private in Norway and Sweden.
Number of companies in breach of the Storebrand Standard 41 49
OUR WORK ON SUSTAINABILITY Storebrand has signed the UN Global Compact on responsible business practices. The Global Compact's principles encompass human rights, labour standards, and environment and anti-corruption standards. We support the UN Principles for Responsible Investment (PRI) and the UN Principles for Sustainable Insurance (PSI). Storebrand has been a driving force behind the development of the World Business Council for Sustainable Developments Vision 2050, and we are thus working towards a world in 2050 where "9 billion people are living well within the resource limits of the planet". Our sustainability work is regulated by guidelines that are revised annually and adopted by the Board of Storebrand ASA.
ABOUT SCORECARD FOR SUSTAINABILITY The sustainability scorecard shows the sustainability indicators defined by the Group – those that are the most important for Storebrand to report to the stock market. They are a key element in the reports submitted to relevant indices, such as the Dow Jones Sustainability Index and FTSE4Good. The Group's sustainability manager owns and follows up the sustainability scorecard. Ownership of the indicators is well-established within the Group. The sustainability manager and executive vice presidents for the business areas jointly set targets for Storebrand's sustainability work. Interim status reports are submitted to the executive management, and annual reports are submitted to the Board of Directors.
Storebrand ASA is one of the largest companies listed on Oslo Børs measured by the number of shareholders. The company has shareholders from almost all the municipalities in Norway and from 48 countries In terms of market capitalisation, Storebrand was the 12th largest company on Oslo Børs at the end of 2015.
Every year since 1996 Storebrand ASA has given its employees an opportunity to purchase shares in the company through a share purchase scheme. The purpose of the scheme is to involve the employees more closely in the company's value creation. In March 2015 each employee was given the opportunity to buy between 255 and 1358 shares in Storebrand at a price of NOK 29,46 per share. Around 14 per cent of the employees participated and subscribed for a total of 288 916 shares.
Storebrand generated a total return (including dividends) of 19.7 per cent in 2015. During the corresponding period, the Oslo Børs OSEBX index rose 5.9 per cent, while the European insurance index Beinsur showed a return of 12.3 per cent for the corresponding period.
On 1 January 2006, new rules came into force in Norway concerning the taxation of dividends and gains on shares held by private individuals. The new rules are referred to as the “shareholder model”. Under the shareholder model, dividends, less a standard deduction, are taxable, currently at a rate of 27 per cent. If shares are sold, any unused standard deduction can be deducted from the gain on the sale. The standard deduction is set by regulation of the Ministry of Finance at the beginning of the fiscal year. It is calculated on the basis of five year government bonds less taxes (five year government bond x 73 %).
Storebrand attaches importance to comprehensive and efficient communication with financial markets. Maintaining a continuous dialogue with shareholders, investors and analysts both in Norway and internationally is a high priority. The group has a special investor relations unit responsible for establishing and coordinating contact between the company and external parties such as the stock exchange, analysts, shareholders and other investors. All interim reports, press releases and presentations of interim reports are published on Storebrand’s website www.storebrand.no/ir.
Number of ordinary shares 31.12 (1000s of shares) 449,910 449,910 449,910 449,910 449,910 449,910
J.P. Morgan Chase Ba A/C BBH INTL Explore Nominee 7,065,389 1.47 DEU
State Street Bank & S/A SSB Client Omni Nominee 6,400,054 1.19 USA
State Street BANK & A/C Client Fund Numb Nominee 5,300,000 1.12 USA
ELO Mutual Pension I C/O Handelsbanken CU Nominee 4,931,999 1.11 CHE
Financial Calendar 2016 17 February Results 4Q 2015 13 April Annual General Meeting 14 April Ex dividend date 27 April Results 1Q 2016 13 May Capital Markets Day 14 July Results 2Q 2016 26 October Results 3Q 2016
Norway 35% U.S.A. 23% Great Britain15% Luxembourg 9% Sweden 4% Others 14%
The year 2015 has been marked by strong competition in Storebrand's markets, a nervous equity market, a historically low interest rate level and the clarification of important framework conditions. Storebrand's response has been to continue to work at being the best provider of pension savings, in combination with further capital efficiency improvements and cost reductions.
Storebrand has seen continued strong growth for unit linked savings, has delivered a competitive and sustainable return to its customers and increased its assets under management to over NOK 571 billion throughout the year. The Group has reached the targeted cost income level of 60 per cent. Furthermore, the Group have successfully entered into Solvency II without raising new equity capital.
A growing number of Norwegian companies are choosing to convert from defined benefit to defined contribution pensions due to a desire for predictable costs and higher expected pensions for employees. This also applies to Storebrand, and from 1 January 2015 all of the employees in Norway received defined contribution pensions.
MANAGEMENT OF GUARANTEED PENSION Storebrand reported a need to strengthen its reserves by a total of NOK 12.4 billion based on the decision by the Financial Supervisory Authority of Norway in March 2013 to introduce new mortality rates. The reason for the need to strengthen the reserves is the fact that
Norwegians are expected to live longer in combination with the fact that Storebrand has insurance liabilities with lifelong disbursements. This requires increased premiums and higher insurance technical reserves to cover future liabilities. Storebrand has received approval for a seven-year escalation plan, starting from 2014.
Storebrand has the following financial targets: (NOK million) Mål Status 2015
Storebrand achieved a group result before amortisation and reserve strengthening of NOK 1,762 million (NOK 3,423 million) for 2015. The group result after tax was NOK 1,382 million (NOK 2,085 million). The figures in parentheses show the corresponding period last year.
Fee and administration income increased 3.8 per cent for the year. Adjusted for discontinued business, the annual growth rate is 8.2 per cent. The underlying income performance is marked by higher income from products without guaranteed interest rates and a decline in income from products with guaranteed interest rates.
Storebrand has set a target for costs as a percentage of income of less than 60 per cent. In the fourth quarter, the 12-month rolling average was 59.6 per cent1. The costs increased 0.3 per cent based on a 12-month rolling average. Strengthening of competitiveness through continued efficiency improvement is a priority. In the 4th quarter, Storebrand entered into a strategic partnership with Cognizant, which included part-ownership of Storebrand Baltic UAB. The aim of this partnership is to establish a foundation for a customer-centric development of the Group's IT solutions and enhance the efficiency of our operations.
The result is marked by significant items. Costs of NOK 97 million related to reorganisation and the sale of business were charged to the accounts. Costs for 2014 were positively affected by an income of NOK 571 million as a result of changes in Storebrand's own pension scheme.
Insurance reported good premium income growth. The result is marked by reserve strengthening for disability cover related to defined contribution pensions of NOK 100 million and costs related to reorganisation.
There was an impact of NOK -28 million on the same line in 2015 due to restructuring costs.
The asset management business area provides a broad range of savings and investment products for institutional, external and internal customers in both Norway and Sweden, as well as securities funds for the retail market. Of the actively managed equity and combination products, 38 per cent delivered a better return than their benchmark indices. Of the fixed income funds, 36 per cent beat their benchmark indices. The customers' investment portfolios have achieved a combined excess return of NOK 1.0 billion in 2015. Assets under management rose by 7 per cent in 2015 to NOK 571 billion at the end of the year. Good volume growth from both external and internal customers resulted in 12 per cent income growth in the asset management area, compared with 2014. Storebrand is making an active effort to increase the level of sustainability in the portfolios. This work is described in more detail in a separate section of the report.
In the Swedish market, SPP is the fifth largest actor measured by premium income from unit linked insurance and safe custody insurance in the Other Occupational Pension Insurance segment, with a market share of 11 per cent.
Premium income is 4 per cent higher than in 2014, driven by new sales and the return.
INSURANCE Insurance is responsible for the Group's risk products in Norway and Sweden2. The unit provides health insurance in the Norwegian and Swedish corporate and retail markets, P&C insurance and personal risk products in the Norwegian retail market and employee-related and pension-related insurance in the Norwegian and Swedish corporate markets.
2) Health insurance is owned 50 per cent each by Storebrand ASA and Munich Health.
The Insurance result was NOK 488 million (NOK 675 million) for the full year with an overall combined ratio of 92 per cent (84 per cent in 2014). The insurance premiums increased by 17 per cent in 2015. The solid premium growth is driven by good sales of individual property and casualty insurance policies and the new agreement with Akademikerne (Federation of Norwegian Professional Associations) that entered into force on 1 January 2015. The claims ratio increased, which is attributed primarily to strengthened reserves. The cost percentage was reduced by two percentage points compared with the previous year3. The underlying profitability and efficiency is good and shows a satisfactory development.
The combined risk result is satisfactory, with a claims ratio of 77 per cent (71 per cent in 2014). The market for defined contribution pensions is very competitive and the price for disability pension is a key competition parameter. In addition, we are seeing a negative unemployment and disability rate trend. Therefore, the reserves in pension-related group disability insurance were strengthened by NOK 100 million this year. An effort is being made at the same time to strengthen the profitability, including higher prices for unprofitable customers. The underlying risk performance is still good in the P&C insurance portfolio, but claims inflation is increasing somewhat. The overall natural perils result was NOK -10 million, which contributes to the higher claims ratio.
The cost percentage was 15 per cent for the year (13 per cent in 2014). The costs have been impacted by non-recurring effects as they were in the previous year. In 2014, changes in the pension scheme for the Storebrand Group's own employees entailed a significant positive non-recurring effect of NOK 120 million. In 2015, the non-recurring effects related to restructuring costs in Norway and Sweden amounted to NOK 20 million. Adjusted for these non-recurring effects, the cost percentage would be 14 per cent in 2015 (16 per cent in 2014). To strengthen the level of competitiveness and improve cost effectiveness, an active effort is being made to increase the degree of automation, digitization and sourcing of services, as well as the utilization of the economies of scale provided by increased volume.
The investment portfolio of Insurance in Norway totals NOK 6.4 billion, which is primarily invested in fixed income securities with a short and medium term duration.
Balance sheet and market trends Storebrand Insurance offers a broad range of products to the retail market in Norway, as well as the corporate market in both Norway and Sweden. Profitability in the market is still considered good in general, but competition is increasing. We see this in connection with both employee insurance and risk cover related to defined contribution pensions in Norway, where the competition is strong and price is an important competition parameter. Total annual premiums at the end of 2015 amounted to NOK 4.3 billion, NOK 1.7 billion of which is from the retail market and NOK 2.6 billion of which is from the corporate market.
Storebrand enjoys a well-established position in the retail market for personal insurance and is in a challenger position within P&C insurance. Storebrand has succeeded in the retail market this year with premium income growth of 18 per cent compared with the previous year. In 2015, the P&C insurance portfolio surpassed NOK 1 billion at the same time as the number of P&C customers exceeded 100,000. These were two important milestones for the company. This growth is driven by competitive prices, and simple and relevant products, as well as good cover. The new agreement with Akademikerne (Federation of Norwegian Professional Associations), which entered into force on 1 January 2015, also ensures Storebrand of a solid position in the organisational market and contributes to good growth. The growth in personal insurance was stable and in line with the general market growth.
GUARANTEED PENSION Guaranteed pensions consist of products encompassing long-term savings for pensions, where the customers have a guaranteed return or benefit on the saved funds. The business area covers defined benefit pensions in Norway and Sweden, paid-up policies and individual capital and pension insurance.
The result for Guaranteed Pension before amortisation and reserve strengthening totalled NOK 329 million in 2015, which was a decline of NOK 1,136 million compared with 2014. The results in 2015 were impacted negatively by large, special items related to provisions for the use of equity for reserve strengthening due to increased longevity in the Norwegian business and a change in the assumptions for the financial result in the Swedish business.
Fee and administration income has performed throughout 2015 consistent with the fact that a large part of the portfolio is mature and in long-term decline. The income was NOK 1,777 million in 2015, compared with NOK 1,842 million in the previous year. In 2015, income declined 3.5 per cent compared with 2014, but adjusted for foreign currency effects and a minor non-recurring effect, the reduction in income was 6.6 per cent. New subscriptions for guaranteed pensions have been closed for most products, however, premium payments and the accumulation of returns for existing customers is leading to a long-term decline in reserves.
The risk result was NOK 89 million in 2015, compared with NOK 483 million in the previous year. The reason for the change from 2014 is attributed to a positive non-recurring effect of NOK 322 million in 2014 in connection with reserve releases in the Swedish business.
The profit sharing result is generated by the Swedish business and amounted to minus NOK 382 million for 2015, compared with NOK 61 million for 2014. In the 4th quarter of 2015, new estimates for future costs were introduced to the portfolio, and new yield curves adapted to Solvency II were introduced in the models. This has resulted in a combined effect on the profit sharing result of NOK 265 million. Otherwise, the profit sharing result is affected by the performance of the interest rate, credit and equity markets. Due to a moderate return on the portfolios, the company's share of the profit sharing has been low in 2015. The indexing fees are not influenced directly by the financial market performance and amounted to NOK 128 million in 2015, compared with NOK 160 million in the previous year.
Balance sheet and market trends Customer reserves for guaranteed pensions amounted to NOK 267 billion at the end of 2015, compared with NOK 264 billion at the start of the year. Adjusted for foreign currency effects, there is, however, a 2.0 per cent reduction in reserves throughout the year. Transfers from guaranteed pensions have amounted to NOK 7.8 billion in 2015, compared with NOK 14.8 billion in the previous year. From the end of 2014, the customers were given an offer to convert from traditional paid-up policies to paid-up policies with investment choice, and insurance reserves for paid-up policies with investment choice amounted to NOK 4.6 billion at the end of 2015 and are included in the Savings segment.
Premium income from guaranteed pensions (excluding transfers) was NOK 7.8 billion in 2015. This represents a decline of 22 per cent, compared with 2014. The majority of products are closed for new business and the customers' choices about transferring from guaranteed to non-guaranteed products are in line with the Group's strategy.
The Storebrand Life Insurance Group is funded by a combination of equity and subordinated loans. The interest costs comprise a net amount of approximately NOK 90 million for the quarter at the current interest rate level. The financial result includes the return on the company portfolios in Storebrand Life Insurance and SPP, as well as the financial result of Storebrand ASA. The financial result is weaker due to a lower return in the company portfolios.
The Storebrand Life Insurance Group’s solvency margin (Solvency I) increased from 175 per cent to 191 per cent at the end of the year.
ed to the risk-reducing capacity of deferred tax has made a positive impact. Lower interest rates in Norway and a change in the yield curve have had a negative impact on the Solvency II margin. Changes to the regulations, methods and interpretations may occur that can affect the Solvency II margin in the future.
The Life Insurance Group's solidity capital, which consists of equity, subordinated loans, market value adjustment reserves, additional statutory reserves, conditional bonus and risk equalisation reserves, amounted to NOK 61.0 billion at year end, compared with NOK 64.7 billion at the previous year end. The conditional bonus declined by NOK 1.9 billion, due, among other things, to the change in the discount rate and insurance liabilities in SPP. The additional statutory reserves amounted to NOK 5.2 billion at the end of the year, essentially unchanged for the year. The additional statutory reserves declined due to conversion to paid-up policies with investment choice, but increased due to the allocation of the profit for the year. The excess value of bonds valued at amortised cost declined due to lower interest rates by NOK 2.8 billion this year and amounted to NOK 10.6 billion as at 31 December. The excess value of bonds at amortised cost is not included in the financial statements.
At the end of 2015, the Storebrand Bank Group had a core capital adequacy of 13.8 per cent, and a capital adequacy of 17.1 per cent. The bank group has adapted to the new capital requirements and aims to comply with the applicable buffer capital requirements at any given time. The company has satisfactory financial strength and liquidity based on its operations. The bank group, the parent bank, and the residential mortgage company all satisfy current statutory requirements.
RATING Storebrand Livsforsikring AS, Storebrand ASA and Storebrand Boligkreditt AS had the same rating from Moody's at the end of the previous year. Moody's upgraded Storebrand Bank's credit rating from Baa2 to Baa1 in May 2015. Standard & Poor's downgraded its credit rating of Storebrand Livsforsikring AS from A- to BBB+ in July 2015. Storebrand ASA's rating was derived from Storebrand Life Insurance's rating and was adjusted downwards to BBB-. The outlook for the rating of Storebrand Life Insurance and Storebrand ASA was changed at the same time from negative to stable. S&P justified the downgrade of Storebrand Livsforsikring AS by low interest rates combined with a capital-intensive paid-up policy portfolio. S&P points out that the Storebrand Group has implemented good measures, but that changes in the external factors are affecting the risk situation. The outlook for the company is considered stable and reflects an expectation that the company will strengthen its economic capital from the current level. S&P's credit rating of Storebrand Bank remained unchanged during the period.
For insurance and pension products, Storebrand receives payment from companies and individuals to assume the risk that various insured events will occur. For pension products, it is necessary to assume financial market risk to create a return on pension assets. The banking business entails a risk of loan losses. In all parts of the business, operational risk arises due to errors that can inflict losses on customers and/ or costs on Storebrand.
Risk management is about looking at both the positive and negative aspects of risk. Risk-taking should contribute to Storebrand achieving its strategic and commercial targets, including customers receiving a competitive return on their pension products and that Storebrand receives
The majority of Storebrand's risk is from liabilities related to the products. The Group's result and risk are followed up and reported as four areas with different result and risk drivers: Savings, Insurance, Guaranteed Pension and Other.
SAVINGS Savings consists of unit linked insurance, asset management business and the retail market part of the banking business.
For Storebrand, the risk for unit linked insurance is primarily related to future income and cost changes. There is therefore an indirect market risk, because negative investment returns will reduce future income, without a corresponding reduction in costs. Incomes are also reduced if the customer chooses to leave. Market risk, particularly equity price risk and exit risk are therefore the greatest risks to unit linked insurance. There is also a risk that costs may increase.
The asset management business offers active and passive management and the management of fund-in-fund structures for the customer’s account and risk. Operational risks, including compliance with regulations, are regarded as the greatest risks.
and pensions are adjusted upwards with a 0.5 per cent guarantee. The existing portfolio has primarily guarantee levels ranging from 3 to 4 per cent. Over time, new premiums and possible upward adjustment will contribute to the average guarantee level falling.
In order to achieve sufficient returns from the customer portfolios to cover the guarantee, reserve strengthening and any pension revaluation, it is necessary to take investment risk (market risk). This is primarily done by investing in equities, property and corporate bonds. The percentage of equities declined throughout 2015, while investments in corporate bonds increased.
For 2015, the return on the guaranteed customer portfolios has been positive. In Norway, the return has been adequate to cover the guarantee plus the expected contribution to reserve strengthening. Interest rates have fallen throughout 2015, particularly on the short end of the yield curve. In Sweden, the money market rate is negative. Norges Bank has indicated that interest rates will be kept low for several years to come. Falling interest rates increase Storebrand's risk, because it reduces the probability of achieving a return higher than the guarantee. In Norway, the effect will be dampened in the coming years by a large proportion of the investments being bonds held at amortised cost that will greatly benefit from securities purchased at interest rate levels higher than the current levels.
Changes in occupational pension schemes in Norway will reduce the risk of low interest rates over time, since defined benefit-based schemes are replaced by defined contribution pensions or hybrid schemes without a guaranteed return over zero per cent. The change in the market has the greatest effect on new contributions, while existing reserves will continue as paid-up policies.
CHANGING REGULATIONS The regulations that are adopted by the authorities are of great importance to Storebrand. Solvency II will be introduced on 1 January 2016, after the statutory provisions that implement the EU directives into Norwegian law have been adopted by the Norwegian Parliament and the Ministry of Finance has clarified how the transitional rules are to apply. Questions related to pensions have also been placed on the agenda by the parties in working life through special pension reports. Proposals that are put forward during this process may be of importance to the occupational pension market in the future.
Regulations on information and advisory services During the coming years, new EU regulations will strengthen consumer protection through more stringent requirements for information and independent advisory services. This applies to the following directives: MiFID II (sales and advisory services for funds and banking products), PRIIPs (product information on complex savings products) and IDD (product information, as well as sales and advisory services for insurance products). The new regulations are expected to enter into force during the period from 2017 to 2018.
The Ministry of Finance has appointed a committee that will propose the implementation of MiFID II in Norwegian law. The committee has a deadline of 24 June 2016 to submit its report. Work to implement PRIIPs and IDD in Norwegian law has not yet been initiated.
Taxation rules for insurance companies The Ministry of Finance has initiated a process to assess the taxation rules for insurance companies. One proposal is to change the taxation rules for insurance companies so that they are in agreement for tax purposes with the Solvency II requirements for technical insurance reserves that were circulated for consultation in the spring of 2015. During the consultation period, the proposal was criticized for not being studied thoroughly enough. The Ministry of Finance concluded therefore that changes would not be implemented for 2016, and that work would continue on a comprehensive review of the taxation rules for insurance companies. Any changes will not take effect until the 2017 tax year at the earliest.
Value-added tax on financial services In the tax reform that was presented in connection with the government budget for 2016, the Government proposed following up the Scheel Committee's proposal to introduce value-added tax on financial services. It is estimated that this would result in revenues of NOK 3.5 billion for the government and contribute thus to financing the overall reductions in corporate and personal taxation that the reform entails.
The Norwegian United Federation of Trade Unions (LO) and Federation of Norwegian Industries (NHO) have agreed on a joint statement, in which they propose that individual pension accounts be established and that the employees be entitled themselves to choose a provider and management. They also propose that employees should be able to save the difference between the company's savings level and the permitted maximum level themselves. The Union of Employees in Commerce and Offices (LO) and the Enterprise Federation of Norway have reached agreement and maintain their positions for and against the standardization of occupational pensions.
The reports may form the basis for the wage settlement in 2016.
In 2015, Storebrand endorsed two global UN initiatives prior to the Climate Summit in Paris. These initiatives were the Montreal Pledge and the Portfolio Decarbonisation Coalition. The aim is to measure and revise the carbon footprint of our investments and to reduce this footprint. In the second half of 2015, Storebrand reduced its estimated carbon footprint from equity investments by approximately 350,000 ton.
Storebrand increased its investments in the companies that contribute to creating value in a sustainable economy through transferring large portions of its equity investments in the guaranteed portfolio to "ESG enhanced". In this manner, we avoid investments in companies with significant sustainability risks, in addition to increasing the percentage of companies with a higher sustainability rating. Storebrand reduced its carbon footprint in the "ESG Enhanced" portfolio to 2.0 kg CO2e/NOK 100. MSCI World had in comparison 2.6 kg CO2e/NOK 100 as at Q3 2015.
Sustainable development is characterized by development that meets the needs of the current generation, without being at the expense of opportunities for future generations to satisfy their needs. For Storebrand, sustainability is a matter of our own long-term business outlook and security for our customers. As a supplier of pension saving solutions, it is essential that we are able to take a long-term perspective and generate a return for our customers, without making a negative impact on the world in which our customers will retire.
Storebrand also exploits the opportunities to create better business in a sustainable economy through its own sustainable investments and by analyzing global trends such as population growth and scarcity of resources, growth in emerging economies and the demand for sustainable products will increasingly affect the business community in the future.
DIALOGUE WITH STAKEHOLDERS Storebrand has an impact on our society, and our society has an impact on us. Our sustainability work relies on a close dialogue with key players in society. Each year we arrange a dialogue with stakeholders in which we answer questions and receive feedback on what is expected of us and our work on sustainability. In 2015, the subject of this dialogue was what information on investments and savings that important stakeholders would like to be disclosed.
The dialogue with stakeholders was held during the Arendal Week, where Storebrand was present for the first time. In addition, Storebrand was represented as usual at the Almedalen Week in Sweden.
We want to be available and open to everyone and during the year we have met many upper secondary school students, contributed to a number of project assignments in Norwegian, Swedish and international universities as well as contributed to research. We are active in key sustainability organizations, such as UNEP FI, Norsif, Swesif and the Swedish investment collaboration, Sustainable Value Creation. In addition, Storebrand is a member of Swedish Leadership for Sustainable Development (SLSD) together with over 20 of Sweden's largest listed companies. The network is coordinated by the SLSD, and its aim is to develop specific projects and models for work on sustainable development. The main channel for dialogue with the outside world is social media. Both Twitter and Facebook are important channels for feedback from relevant communities, and for availability for dialogue and questions.
The Group places high demands on the companies we invest in, and we place the same demands on ourselves and our suppliers. Knowledge of what sustainability areas are the most important to Storebrand is a prerequisite for being able to make high relevant demands. In 2014, Storebrand conducted a materiality analysis, the purpose of which was to obtain a picture of what subjects are material to Storebrand. The analysis identified the following materialities: industry distrust, climate change, corruption and financial crime, as well as overexploitation of natural resources. The stakeholder dialogue in 2015 confirms the importance of the sustainability strategy and focus on calculating and revising the carbon footprint of our investments. Additional information can be found on www.storebrand.no under our work on sustainability.
STOREBRAND'S OWN ENVIRONMENTAL AND CARBON FOOTPRINT All the units in the Group are tasked with minimizing our environmental footprint by focusing on the consumption of resources. The emissions that we nevertheless have, through travel and the consumption of energy, are compensated for through purchasing verified emission allowances within the framework of the REDD program and Verified Carbon Standard. Storebrand cooperates with Wildlife Works on the purchase of emission allowances from the Kasigau Wildlife Corridor in Kenya, a threatened forest area of high biological importance.
Storebrand also has ethical rules, which are an important tool in our daily operations, and are followed up every year through training and monitoring. Management teams at all levels of the Group discuss ethical dilemmas and review the rules at least annually. The Group's rules
relating to anti-corruption, notification and work against internal fraud are included in the ethical rules and apply to all employees and consultants that work for Storebrand. A notification channel has been established that connects directly to an external partner if the employee wishes to send notification anonymously. Information on notification routines is available to all employees on the Group intranet.
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.
Our head office in Oslo holds environmental certification from the Eco-Lighthouse Foundation, and SPP's new head office in Stockholm was certified at the Sweden Green Building Council "Gold" level and the "Excellent" BREAAM level in 2014.
SUSTAINABILITY OF PRODUCTS AND SERVICES Storebrand is continuously improving the sustainability level of our products and services.
Sustainable investments Storebrand has a significant influence through its investments in thousands of companies in all sectors and regions of the world. We believe that sustainability is about investing in companies that are positioned for major opportunities inherent to a transition to a green economy. Our sustainability team continuously analyses 2,400 companies and assigns a sustainability rating ranging from 0 to 100. This rating is available to the managers and used to calculate the sustainability level for both internal and external funds.
The Storebrand Standard, the strictest minimum requirements in the market, applies to all of Storebrand's self-managed assets. The requirements apply to both equities and bonds, in Norway, Sweden and internationally. The standard means that we exclude individual companies that are in violation of international norms and conventions or are among the poorest 10 per cent of the companies in high-risk industries.
In 2015, we intensified our efforts to reduce our exposure to companies that cause major climate damage and increased the percentage of investments in companies with a higher sustainability rating.
Storebrand increased its sustainability score in equity investments in the guaranteed portfolio to 68 per cent and reduced its carbon footprint by 2.0 kg CO2e/NOK 100. At the end of 2015, 70 companies were excluded on the basis of climate criteria.
Sustainable insurance Storebrand Insurance contributes to creating a sustainable society by providing financial security to customers if an accident were to occur. Storebrand Insurance works with sustainability in two dimensions: Through beneficial pricing when the customers show sustainable behaviours and by developing products and concepts intended to prevent injury, disability and health problems. Storebrand monitors whether our corporate customers run their businesses on the basis of socially responsible principles. For example, a company that is working well in the areas of health, environment and safety will be rewarded in the form of a lower price on employee insurance. In this way we want to stimulate sustainability in our customers' operations.
Storebrand Group's sustainability guidelines • Storebrand's ambition is to contribute to solving society's problems and to create sustainable development locally and globally through our products and services.
• Storebrand will combine profitable business operations with social, ethical and environmental goals and activities. • Storebrand makes demands with regard to sustainability, corporate social responsibility, environmental work and ethics within the Group and for all of our partners and suppliers. • Sustainability must permeate our development of new financial products and services, and it must be fully integrated with our asset management. • 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. • All of the Storebrand Group's self-managed assets are subject to the Storebrand Standard, a minimum standard for sustainable investments, as defined by the executive management. • Storebrand shall integrate sustainability considerations in our insurance business, in the area of product development, customer service and marketing. • Storebrand shall ensure a continuously lower environmental impact from our operations.
DIVERSITY The company has increased its diversity along the same lines as society in general. The company received a score of 85 out of 100 in an employee survey regarding our work with diversity. This is up from 83 for the previous year. Our ambitions include systematic work and an employee composition that reflect society as a whole. The average age at Storebrand is 40, and the average seniority is 9 years. Storebrand had 2,298 employees in the Group at year end. This is an increase of 75 employees in comparison with the start of the year.
The job satisfaction numbers have been stable from 2014 to 2015. The employer's reputation has also been positive and stable, and the numbers for loyalty, dependability and dedication among Storebrand's employees are very good.
When the employees are asked whether they think that it is valuable that the Storebrand Group desires to have a leading position in sustainability, the trend is still positive, with an improvement from 2014 to 2015.
The results show that employees have a high level of trust in their immediate manager and score high for collaboration in the organization. The Group also has good results for the employees' satisfaction with their job content, as well as learning and development.
At Storebrand, all of the employees should have an opportunity to develop in step with the company's needs. In 2015, the company has focused on the fact that the greatest and most important part of skills development takes place through facilitating development as part of the everyday work. Skills development should take place be assigning challenging tasks to employees in their positions, and that they are allowed to develop themselves for new requirements and tasks. The professional competence of employees should be made broader, so that it can contribute to greater adaptability and a greater restructuring capacity for the Group.
The company's vision, customer promises and core values constitute the heart of company culture. In conjunction they contribute to underpinning customer orientation for both managers and employees. The Storebrand Academy is the Group's initiative for custom management development programmes. A new group started in 2015 with 20 capable managers. The course lasts for one year.
Storebrand's executive management and Board of Directors review Storebrand's corporate governance policies annually. Storebrand established principles for corporate governance in 1998. Storebrand reports on the policies and practice for corporate governance in accordance with Section 3-3b of the Norwegian Accounting Act and the Norwegian Code of Practice for Corporate Governance of 30 October 2014. For further information on Storebrand's corporate governance, reference is made to a separate article on page 49 of the annual report. The Board carried out an evaluation in 2015, in which the executive management participated. A total of ten board meetings were held in 2015. The work of the Board is regulated by special rules of procedure for the Board. The Board has established three advisory committees: the Compensation Committee, Audit Committee and Risk Committee. In 2015, the following changes to the membership of Storebrand's corporate bodies took place: Board of Directors of Storebrand ASA: Halvor Stenstadvold, Terje Vareberg and Monica Caneman retired from the Board. Karin Bing Orgland, Nils Are Karstad Lysø and Håkon R. Fure were elected as new members.
The Control Committee was re-elected in 2015, but a decision was made to disband the Control Committee as of 1 January 2016.
Nomination Committee: Leif Ola Rød and Per Otto Dyb were elected as new members. Kjetil Houg and Harald Espedal resigned from the Nomination Committee.
Private occupational pensions The Norwegian United Federation of Trade Unions and the Federation of Norwegian Industries reported on occupational pensions based on a mandate from the collective wage bargaining in 2014. The parties proposed in a joint statement of 19 January to introduce a scheme whereby employees can open an individual pension account that the employers can make contributions to. Employees will thus be able to gather all their pension rights from defined contribution schemes in such a pension account, and they will be free to choose a provider. The parties also propose that amendments to the legislation should be made so that employees would be able to save the difference between the permitted maximum rates and the employer’s level of contribution on an individual basis.
The Solvency II regulations were introduced from the turn of the year, and Storebrand reports a solvency ratio based on the new rules of 168 per cent (without the transitional rules the solvency margin is estimated at 124 per cent). The regulatory minimum level is 100 per cent. The solvency level shows that the Group is robust in relation to low interest rates for a long period of time. The development of interest rates, credit spreads, property and equity values affects the solvency margin. The underlying solvency margin is expected to increase in the years to come. This is mainly due to shorter duration of liabilities, reserve strengthening for longevity and expected result generation in the Group.
The return for customers in 2015 was 4.1 per cent for the largest portfolio of defined contribution pensions and 5.2 per cent for guaranteed pension products in Norway. The return is marked by the fact that we are experiencing historically low interest rate levels in Norway and the rest of Europe. Storebrand has adapted to the low interest rates through building up buffer capital, risk reduction on the investment side and changes to the products. Over time the level of the annual interest rate guarantee will be reduced. In the long term, enduring low interest rates will represent a risk for products with guaranteed interest rates running at a loss, and it is therefore important to deliver a return that exceeds the interest rate guarantee associated with the products. The performance of the property and equity markets is also considered a significant risk factor that affects the Group's results.
Storebrand has entered into a strategic cooperation project with Cognizant, which will take over Storebrand's service centre in the Baltics and deliver service and settlement services to the Group in the coming years. Cooperation will strengthen delivery to customers by means of a larger centre of expertise and greater efficiency. In 2016, this cooperation will require a greater effort and resources in order to make the transition successful, but the partnership is expected to provide lower costs for the Group in the coming years. A reduction of the workforce has been carried out in the Norwegian and Swedish businesses in 2015, and this lays the foundation for lower costs. Cost reductions and adaptations in the business have established a good foundation for profitable growth in the future.
Other income statement elements that cannot subsequently be reclassified through the income statement.
The profit for the year ended 31 December 2015 for Storebrand ASA was NOK 252 million, compared with NOK 273 million for 2014.
Good corporate governance is important to ensure that an enterprise can achieve its defined goals, including best possible utilisation of resources and good value creation. The Storebrand Group ("Storebrand") works continuously on improving both the overall decision-making processes and the day-to-day management of the company.
1. IMPLEMENTATION AND REPORTING ON CORPORATE GOVERNANCE (NO DEVIATIONS FROM THE CODE OF PRACTICE) The Board of Directors of Storebrand ASA has decided that the company will comply with the Norwegian Code of Practice for Corporate Governance and discusses compliance with the Code of Practice in the Board of Directors' Report on page 44. Storebrand complies with the Code of Practice without any significant exceptions. One minor deviation has been accounted for below under section 3.
3. EQUITY AND DIVIDENDS (DEVIATION FROM THE CODE OF PRACTICE) The Board of Storebrand ASA (“Group's Board of Directors”) continually monitors the Storebrand’s capital solidity in light of its goals, strategy and risk profile. You can read more about Storebrand’s capital situation and solvency on page 33 of the Board of Directors' Report. The Board has adopted a dividend policy that states that the dividend paid to shareholders shall normally amount to at least 35 per cent of the profit for the year after tax, but before amortisation costs. The dividend shall be adjusted such that Storebrand is assured the right capital structure. The dividend is set by the General Meeting, based on a proposal put forward by the Group's Board of Directors. The General Meeting may, by simple majority, authorise the Board of Directors to distribute a dividend pursuant to Section 8-1, second paragraph of the Norwegian Public Limited Companies Act (entered into force on 1 July 2014). This shall be based on the annual financial statements adopted by the General Meeting. This authorisation may not be granted for a period longer than until the next Annual General Meeting. In addition, the authorisation shall be based on the adopted dividend policy. The General Meeting will not be requested to provide such authorisation in 2016. Read more about Storebrand's dividend policy on page 22.
At the same General Meeting, the Group's Board of Directors was authorised to buy back shares for a maximum value of NOK
224,954,945. The total holdings of treasury shares must, however, never exceed 10 per cent of the share capital. The buyback of treasury shares may be a tool for the distribution of surplus capital to shareholders in addition to dividends. In addition, each year Storebrand ASA sells shares to employees from its own holdings in connection with the share purchase scheme and long-term incentive schemes for employees of Storebrand. Accordingly, it is appropriate to authorise the Board of Directors to buy shares in the market to cover the aforementioned needs or any other needs. The authorisation is valid until the next Annual General Meeting.
Otherwise, there are no provisions in Storebrand ASA's Articles of Association that regulate the buyback or issuance of shares.
Deviation from the Code of Practice: The Board’s authorisations to increase the share capital and buy back shares are not completely limited to defined purposes. No provisions have been made for the
The general competence rules for board members and executive personnel may be found in the rules of procedure for the Board of Storebrand ASA, rules of procedure for the boards of subsidiaries, instructions for the CEO and the Group’s code of ethics. Board members must inform the company if they have direct or indirect material interests in an agreement concluded by one of the companies in the Storebrand Group. The
The share capital has not been increased in 2015, but an authorisation has been granted to increase the share capital, cf. section 3 above. The Board of Directors may decide to waive the shareholders’ preferential rights in connection with share capital increases.
5. FREELY NEGOTIABLE SHARES (NO DEVIATIONS FROM THE CODE OF PRACTICE) Shares in Storebrand ASA are listed on Oslo Børs (Oslo Stock Exchange). The shares are freely negotiable, and the Articles of Association do thus not contain any restrictions with regard to the negotiability of the shares. All the shares carry equal rights, cf. section 4 above.
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 2015 Annual General Meeting was held on 15 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.
All shareholders may participate at the General Meeting. It is also possible to vote by proxy. Provisions have been made so that the proxy form is linked to each individual item to be considered. We will seek whenever possible to design the form so that it allows voting for candidates who are to be elected. The voting rules for the General Meeting allow separate votes for each member of the various bodies. Further information about voting in advance, use of proxies and shareholders’ rights to have matters discussed at the Annual General Meeting is available in the notice of the Annual General Meeting and on Storebrand’s website.
Storebrand ASA’s Articles of Association regulate the Nomination Committee, which consists of four members and an observer elected by the employees. The chairman of the Nomination Committee and the other members are elected by the General Meeting. The Articles of Association have stipulated that the chairman of the Board of Representatives shall be a permanent member of the Nomination Committee, if the person concerned has not already been elected by the General Meeting. In addition to the shareholder-elected members, a representative for the employees shall participate as a permanent member of the committee in discussions and nominations concerning the election of the Chairman and Deputy Chairman of the Board of Representatives and the Chairman of the Board, as well as in other contexts where it is deemed natural, upon receiving notice from the Chairman of the Committee (as an observer in the latter case).
The Nomination Committee is independent of the Board and management, and its composition aims to ensure broad representation of the shareholders’ interests. Two of the Committee's members are not members of the Board of Representatives. Storebrand does not have any written provisions concerning the rotation of Nomination Committee members, but in recent years members of the Nomination Committee have been replaced as a matter of course due to changes in the shareholder composition.
More information about the members has been published on the Group’s website. The Nomination Committee contacts the company's 15 largest shareholders annually and requests that they propose candidates for the company's Board of Representatives, Control Committee, Nomination Committee and Board of Directors. A corresponding request to the shareholders is published on the company's website.
sentatives. It has 18 members, 12 of whom are elected by the General Meeting and six by the Group’s employees. Members are elected for a two-year term, so that half the members are up for election each year. It is a statutory requirement that the members elected by the General Meeting shall reflect the company’s stakeholders, customer structure and function in society. The company ’s shareholders are broadly represented through the elections that are held.
9. THE WORK OF THE BOARD OF DIRECTORS (NO DEVIATIONS FROM THE CODE OF PRACTICE) Board’s duties In 2015, a total of 10 board meetings were held, one of which was held at the subsidiary SPP in Stockholm. Storebrand’s future strategy is discussed at the Board’s annual strategy meeting, which establishes guidelines for the management’s preparation of plans and budgets in connection with the annual financial plan, which must be approved by the Board. The Board shall stay informed about Storebrand’s financial position and development, and it shall ensure that the company's value creation and profitability are safeguarded in the best possible manner on behalf of the owners. The Board shall also ensure that the activities are subjected to adequate control and ensure that Storebrand has adequate capital based on the scope of, and risks associated with, its activities. The attendance records of individual board members are provided in the overview of the governing and controlling bodies on page 62. The work of the Board is regulated by special rules of procedure for the Board, which are reviewed annually. In order to ensure sound and well-considered decisions, importance is attached to ensuring that meetings of the Board are well prepared so that all the members can participate in the decision-making process. The Board prepares an annual schedule for its meetings and the topics it will consider. The agenda for the next board meeting is normally presented to the Board based on the approved schedule for the year and a list of matters carried forward from previous meetings.
The Remuneration Committee assists the Board with all matters concerning the CEO’s remuneration. The committee monitors the remuneration of Storebrand’s executive personnel, and proposes guidelines for the fixing of the executive personnel’s remuneration and the Board’s statement on the fixing of the executive personnel’s remuneration, which is presented to the General Meeting each year. In addition, the committee safeguards the areas required by the Compensation Regulations in Norway and Sweden. The Compensation Committee held four meetings in 2015.
The Risk Committee was established in 2015. The main task of the Committee is to prepare matters to be considered by the Group's Board of Directors in the area of risk, with a special focus on Storebrand's risk appetite and risk strategy. The Committee should contribute forward-looking decision-making support related to the Board's discussion of risk taking, financial forecasts and the treatment of risk reporting. The Risk Committee has held four meetings in 2015, including a joint meeting with the Audit Committee. Storebrand has applied for exemption from the requirement to establish a special risk committee in subsidiaries in which this may be required pursuant to the Act on Financial Undertakings and Financial Groups.
10. RISK MANAGEMENT AND INTERNAL CONTROL (NO DEVIATIONS FROM THE CODE OF PRACTICE) Management and control The Group's Board of Directors has drawn up general policies and guidelines for management and control. These policies deal with the Board’s responsibility for determining Storebrand ’s risk profile, approval of the organisation of the business, assignment of areas of responsibility and authority, requirements concerning reporting lines and information, and risk management and internal control requirements. The Board’s and CEO’s areas of responsibility are defined in the rules of procedure for the Board and instructions for the CEO, respectively. The Group's Board of Directors has drawn up instructions for Storebrand’s subsidiaries that are to ensure that they implement and comply with the Group’s management and control policies and guidelines.
Risk management and internal control The assessment and management of risk are integrated into Storebrand’s corporate governance. This management system shall ensure that there is a correlation between goals and actions at all levels of Storebrand and the overall policy of creating value for Storebrand’s shareholders. The system is based on a balanced scorecard, which reflects both short-term and long-term value creation in Storebrand.
Risk assessment forms part of the managerial responsibilities in the organisation. The
purpose of this is to identify, assess and manage risks that can hamper a unit’s ability to achieve its goals. The process covers both the risk of incurring losses and failing profitability linked to economic downturns, changes in the general conditions, changed customer behaviour, etc., and the risk of incurring losses due to inadequate or failing internal processes, systems, human error or external events. Developments in the financial markets are important risk factors in relation to Storebrand’s earnings and solvency position. In addition to assessing the effects of sudden shifts in the equity markets or interest rate levels (stress tests), scenario analysis is used to estimate the effect of various sequences of events in the financial markets on Storebrand’s financial performance and solvency. This provides important premises for the Board’s general discussion of risk appetite, risk allocation and capital adequacy. For example, the ORSA risk assessment looks three years into the future, but contains assessments that also have a longer perspective.
The appraisal of Storebrand employees forms an integral part of the value-based management system and is designed to ensure that the Group’s strategies are implemented. The policies for earning and paying any variable remuneration to Storebrand’s risk managers comply with the regulations relating to remuneration in financial institutions, cf. Section 12 below. The CRO and employees with control functions related to risk management, internal control and compliance only have fixed salaries.
A series of risk assessment and control measures have been established in connection with the preparation of the financial statements. Valuations associated with significant accounting items and any changes to policies, etc., are described in a separate document (Valuation Items Memo).
1. The principles for Storebrand's corporate governance have been prepared in accordance with Norwegian law, and they are based on the Norwegian Code of Practice for Corporate Governance published by the Norwegian Corporate Governance Board (NUES). 2. The Norwegian Corporate Governance Board's Code of Practice is available at www.nues.no. 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. 4. A description of the main elements of Storebrand's systems for internal control and risk management related to the financial reporting process is discussed in section 10 above. 5. Provisions in the Articles of Association that refer to the provisions in chapter 5 of the Norwegian Public Limited Companies Act with regard to the general meeting are discussed in section 6 above. 6. The composition of the governing bodies and a description of the main elements in the current rules of procedure and guidelines can be found in sections 6, 7, 8 and 9 above. 7. The provisions in the Articles of
Association that regulate the appointment and replacement of board members are discussed in section 8 above. 8. Provisions in the Articles of Association and authorisations granting the board the authority to buy back or issue the Group's own shares are discussed in section 3 above.
Saugestad has worked for the Storebrand Group since 1999, primarily within asset management as portfolio manager and investment director. He previously worked in Handelsbanken Markets, Nordea Markets and Marsoft Capital
Magnus' previous roles include Executive Vice President at Schibsted ASA and Partner at McKinsey & Co.
She has previously been CFO at Opplysningen 1881 AS, CFO /IR Head at Komplett ASA, CFO at Reiten & Co. ASA, Senior Manager at KPMG, and worked for the Nordea Group Audit Department. Ingerø is a Board Member of Opplysningen 1881 AS and Sporveien i Oslo AS.
Dahlen has previously been a consultant for Kelkoo and Norsk Tipping. COO at Kelkoo/Yahoo London, VP Marketplace at Yahoo Europe, London, Regional Manager at Kelkoo Stockholm, Country Manager at Kelkoo Stockholm, VP International Operations at Kelkoo Paris and Manager at Pricewaterhouse Cooper.
Previous positions include DnB Markets, Equity Research- Head of Bank and Insurance
Håstein has previously worked as Product Manager for Delphi Funds, Key Account Manager in Storebrand Asset Management, Senior Financial Advisor in Fokus Bank and Financial Advisor in Storebrand Livsforsikring AS.
Storruste is the Senior Union Representative for Employees and Head of the Finance Sector Union of Norway at Storebrand.
Dyre Haug is a pension economist at Storebrand AS. He has previously worked as Marketing Director at Sparebank 1 Livsforsikring and the BI Centre for Financial Education.
Previous positions include CEO of Moods of Norway, Vice President and member of management at Aker ASA and CEO of Aker Capital, and Partner at McKinsey & Company.
MEMBERS (ELECTED BY SHAREHOLDERS) Anne-Lise Aukner Trond Berger Maalfrid Brath Jostein Furnes Arne Giske Hans Henrik Klouman Marianne Lie Arild M. Olsen Olaug Svarva Pål Syversen
MEMBERS (ELECTED BY EMPLOYEES) Caroline Burum Brekke Cathrine Kjenner Forsland Hanne Seim Grave Nina Hjellup Rune Pedersen Trond Thire
MEMBERS (ELECTED BY EMPLOYEES) Knut Dyre Haug Arne Fredrik Håstein Heidi Storruste
MEMBERS (ELECTED BY SHAREHOLDERS) Leif Ola Rød Per Otto Dyb Olaug Svarva
Storebrand’s customers should be confident that we see sustainability trends and invest in the companies that adapt to these. Therefore, we use sustainability analysis in addition to traditional financial analysis. Olav Chen Storebrand
Our goal is to provide customers good pension for decades ahead. Therefore, we think long-term and manage assets sustainably.
STATEMENT OF FINANCIAL POSITION NOTES Note 29 Intangible assets Note 30 Tangible fixed assets Note 31 Investments in other companies Note 32 Classification of financial assets and liabilities Note 33 Bonds at amortised cost Note 34 Lendings to customers Note 35 Real estate Note 36 Accounts receivable and other short-term receivables Note 37 Equities and units to fair value Note 38 Bonds and other fixed-income securities Note 39 Derivatives Note 40 Technical insurance reserves - life insurance Note 41 Technical insurance reserves - P&C insurance Note 42 Other current liabilities
OTHER NOTES Note 43 Hedge accounting Note 44 Collateral Note 45 Contingent liabilities Note 46 Securities lending and buy-back guarantees Note 47 Capital adequacy and solvency requirements Note 48 Information about related parties
Net income from financial assets and real estate for the company: - equities and other units at fair value 16 5 17 - bonds and other fixed-income securities at fair value 16 7 774 - financial derivatives at fair value 16 127 -208 - bonds at amortised cost 16 89 90 - profit from investments in associated companies/joint controlled operation 31 34 40
Share of profit for the period - hybrid capital investors 9
Total other result elements not to be classified to profit/loss -111 -245
Total other result elements that may be classified to profit/loss 771 137
Total comprehensive attribute to: Share of total comprehensive income - shareholders 1,830 1,950
Intangible assets and excess value on purchased insurance contracts 29 5,810 5,710
Financial assets at amortised cost: - Lending to financial institutions 10,32 123 207
Financial assets at fair value: - Equities and other units 8,13,32,37 124,476 118,334 - Bonds and other fixed-income securities 8,10,13,32,38 161,653 157,576
Total comprehensive income for the period 753 1,078 1,830 9 203 2,042
Payments - repayment of subordinated loan capital -1 033 -1 976
Net cash flow for the period -2 341 1 260 - of which net cash flow in the period before financial assets and banking customers -2 200 -16 858
A large majority of the financial instruments are measured at fair value (the fair value option is used), whilst other financial instruments that are included in the categories Loans and receivables and Held to maturity are measured at amortised cost. Financial instruments measured at amortised cost are largely related to Norwegian pension liabilities with annual interest rate guarantee. In addition, the majority of loans are measured at amortised cost.
The statement of financial position also includes capitalised intangible assets, which consist essentially of excess value related to insurance contracts acquired as part of a business combination and are associated with the acquisition of the Swedish group Storebrand Holding Group (SPP) in 2007. This excess value is measured at historical cost less annual amortisation and write-downs.
The liabilities side of the Group's balance sheet comprises, for the most part, financial instruments (liabilities) and provisions relating to future pension and insurance payments (technical insurance reserves). With the exception of derivatives that are measured at fair value, the majority of the financial liabilities are measured at amortised cost.
The recognised liabilities related to the Swedish insurance contracts with guaranteed interest rates in the subsidiary SPP are discounted by an observable market interest rate and by an estimated market interest rate when no observable interest rate is available. The yield curve that is used was changed in the fourth quarter of 2015 and now corresponds essentially to the interest rate that is used in the Solvency II calculations.
The consolidated financial statements combine Storebrand ASA and companies where Storebrand ASA has a controlling interest. Minority interests are included in the Group's equity, unless there are options or other conditions that entail that minority interests are measured as liabilities.
Storebrand Livsforsikring AS, Storebrand Asset Management AS, Storebrand Bank ASA and Storebrand Forsikring AS are significant subsidiaries owned directly by Storebrand ASA. Storebrand Livsforsikring AS also owns the Swedish holding company Storebrand Holding AB, which in turn owns SPP Pension & Försäkring AB (publ). In connection with the acquisition of the Swedish business in 2007, the authorities instructed Storebrand to make an application to maintain a group structure by the end of 2009. Storebrand has filed an application to main the existing group structure.
CURRENCIES AND TRANSLATION OF FOREIGN COMPANIES' ACCOUNTS The Group's presentation currency is Norwegian kroner. Foreign companies included in the Group which use a different functional currency are translated into Norwegian kroner. The income statement figures are translated using an average exchange rate for the year and the statement of financial position is translated using the exchange rate prevailing at the end of the financial year. As differences will arise between the exchange rates applied when recording items in the statement of financial position and the income statement, any translation differences are recognised in total comprehensive income.
ELIMINATION OF INTERNAL TRANSACTIONS Internal receivables and payables, internal gains and losses, interest, dividends and similar between companies in the Group are eliminated in the consolidated financial statements. Transactions between customer portfolios and the life insurance company's or other Group unit
When making investments, including purchasing investment properties, a decision is made as to whether the purchase constitutes acquisition of a business pursuant to IFRS 3. When such acquisitions are not regarded as an acquisition of a business, the acquisition method pursuant to IFRS 3 Business Combinations is not applied, and a provision is not set aside for deferred tax as would have occurred in a business combination.
OTHER INCOME Fees are recognised when the income can be measured reliably and earned, fixed fees are recognised as income in line with delivery of the service, and performance fees are recognised as income once the success criteria have been met.
An adequacy test must be conducted of the insurance liability, including the capitalised related excess value (often referred to as the value of Business in Force, VIF) pursuant to IFRS 4, every time the financial statements are presented. The test conducted in Storebrand's consolidated financial statements looks at the calculated present values of cash flows to the contract issuer, often called the embedded value. The liability adequacy test was carried out prior to the implementation of IFRS.
Intangible assets with unlimited useful economic lives are not amortised, but are tested for impairment annually or whenever there are indications that the value has been impaired.
Investment properties are measured at fair value Fair value is the amount for which an asset could be exchanged between well-informed, willing parties in an arm's length transaction.
Definition of amortised cost Subsequent to initial recognition, held-to-maturity investments, loans and receivables as well as financial liabilities not at fair value in profit or loss, are measured at amortised cost using the effective interest method. The calculation of the effective interest rate involves estimating all cash flows and all contractual terms of the financial instruments (for example early repayment, call options and equivalent options). The calculation includes all fees and margins paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.
If there is objective evidence that impairment has occurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not occurred) discounted at the financial asset's original effective interest rate (i.e. the effective interest rate calculated at initial recognition). The amount of the loss is recognised in profit or loss.
HELD FOR TRADING A financial asset is held for trading if: • it has been acquired principally for the purpose of selling or repurchasing it in the near term, is part of a portfolio of identified financial instruments that are managed together and there is evidence of a recent actual pattern of short-term profit-taking, or • it is a derivative that is not designated and effective as a hedging instrument.
With the exception of derivatives, only a limited proportion of the Storebrand Group's financial instruments fall into this category.
AT FAIR VALUE THROUGH PROFIT OR LOSS IN ACCORDANCE WITH THE FAIR VALUE OPTION (FVO) A significant proportion of Storebrand's financial instruments are classified in the category fair value through profit or loss because: • such classification reduces the mismatch in the measurement or recognition that would otherwise arise as a result of the different rules for measuring assets and liabilities, or • the financial assets form part of a portfolio that is managed and reported on a fair value basis
LOANS AND RECEIVABLES Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, with the exception of assets that the company intends to sell immediately or in the near term that are classified as held for trading and those that the company upon initial recognition designates at fair value through profit or loss.
Some of the Group's insurance contracts contain embedded derivatives such as interest rate guarantees. These insurance contracts do not follow the accounting standard IAS 39 Financial Instruments, but follow the accounting standard IFRS 4 Insurance Contracts, and the embedded derivatives are not continually measured at fair value.
FAIR VALUE HEDGING Storebrand uses fair value hedging, where the items hedged are financial assets and financial liabilities measured at amortised cost. Derivatives are recognised at fair value through profit or loss or are included in total comprehensive income. Changes in the value of the hedged item that are attributable to the hedged risk adjusts the carrying amount of the hedged item and is recognised through profit or loss.
The accounting standard IFRS 4 Insurance Contracts addresses the accounting treatment of insurance contracts. The Storebrand Group's insurance contracts fall within the scope of this standard. IFRS 4 is meant to be a temporary standard and it allows the use of non-uniform principles for the treatment of insurance contracts in consolidated financial statements. In the consolidated financial statements, the technical insurance reserves in the respective subsidiaries are included, as calculated on the basis of the laws of the individual countries. This also applies to insurance contracts acquired via business combinations. In such cases, positive excess value, cf. IFRS 4 no. 31b), are capitalised as assets.
Pursuant to IFRS 4, the technical insurance reserves must be adequate. When assessing the adequacy associated with recognised acquired insurance contracts, including pertinent capitalised intangible assets, reference must also be made to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and so-called embedded value calculations.
CLAIMS FOR OWN ACCOUNT Claims for own account comprise claims settlements paid out, less reinsurance received, premium reserves transferred to other companies, reinsurance ceded and changes in claims reserves. Claims not settled or paid out are provided for by allocation to the claims reserve under the item, changes in insurance liabilities.
INSURANCE LIABILITIES Premium reserve The premium reserve represents the present value of the company's total insurance liabilities, including future administration costs in accordance with the individual insurance contracts, after deducting the present value of agreed future premiums. In the case of individual
account policies with flexible premium payments, the total policy value is included in the premium reserve. The premium reserve is equivalent to 100 per cent of the guaranteed surrender or transfer value of insurance contracts prior to any fees for early surrender or transfer and the policies' share of the market value adjustment reserve.
The premium reserve includes reserve amounts for future administration costs for all lines of insurance including settlement costs (administration reserve). In the case of paid-up contracts, the present value of all future administration costs is allocated in full to the premium reserve. In the case of contracts with future premium payments, a deduction is made for the proportion of future administration costs expected to be financed by future premium receipts.
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).
Claims reserve This comprises amounts reserved for claims either occurred but not yet reported or reported but not yet settled (IBNR and RBNS). The reserve only covers amounts which might have been paid in the accounting year had the claim been settled.
Transfers of premium reserves, etc. (transfers) Transfers of premium reserves resulting from transfers of policies between insurance companies are recorded in the profit and loss account as net premiums for own account in the case of reserves received and claims for own account in the case of reserves paid out. The recognition of costs and income takes place on the date the insured risk is ceded. The premium reserve in the insurance liabilities is reduced/ increased on the same date. The premium reserve transferred includes the policy’s share of additional statutory reserves, the market value adjustment reserve, conditional bonus and the profit for the year. Transferred additional reserves are not shown as part of premium income, but are reported separately as changes in insurance liabilities. Transferred amounts are classified as current receivables or liabilities until the transfer takes place.
ADDITIONAL STATUTORY RESERVES The company is allowed to make allocations to the additional statutory reserves to ensure the solvency of its life insurance business. In the event that the company does not achieve a return that equals the basic interest rate in any given year, the allocation can be reversed from the contract to enable the company to meet interest rate guarantee. This will result in a reduction in the additional statutory reserves and a corresponding increase in the premium reserve for the contract. For allocated annuities, the additional statutory reserves are paid in instalments over the disbursement period.
MARKET VALUE ADJUSTMENT RESERVE The current year's net unrealised gains/losses on financial assets at fair value in the group portfolio in Storebrand Livsforsikring AS are allocated to/reversed from the market value adjustment reserve in the statement of financial position assuming the portfolio has a net unrealised excess value. The portion of the current year's net unrealised gains/losses on financial current assets denominated in foreign currencies that can be attributed to fluctuations in exchange rates is not transferred to the market value adjustment reserve. Similarly, the change in the value of the hedging instrument is not transferred to the market value adjustment reserve, but is charged directly to the profit and loss account. The foreign exchange fluctuations associated with investments denominated in foreign currencies are largely hedged through foreign exchange contracts on a portfolio basis. Pursuant to accounting standard for insurance contracts (IFRS 4) the market value adjustment reserve is shown as a liability.
STRENGTHENING OF LONGEVITY RESERVES As is evident from Note 3 to the annual financial statements for 2015 concerning the strengthening of longevity reserves, charges to the owner during the reserve strengthening period will be dependent on a minimum level for the future return on customer portfolios, as well as other conditions and prerequisites. There is still some uncertainty associated with the estimated future charges.
LIFE INSURANCE RESERVES In the fourth quarter of 2015, the discount rate (discount rate model) that is used to discount insurance reserves with guaranteed interest rates in SPP was changed. This change is considered to be an estimate change. The life insurance reserves are estimated as the present value of the expected future guaranteed payments, administrative expenses and taxes, discounted by the current risk-free interest rate. A nominal risk-free interest rate is used to discount pure endowment insurance and health insurance in defined benefit schemes. For other risk insurance, a risk-free real interest rate, or nominal risk-free interest rate, is used in combination with the assumed inflation.
CONDITIONAL BONUS AND DEFERRED CAPITAL CONTRIBUTION The conditional bonus arises when the value of customer assets is higher than the present value of the liabilities, and thus covers the portion of the insurance capital that is not guaranteed. In the case of contracts where customer assets are lower than liabilities, the owners' result is
Costs related to insurance claims are recognised when the claims occur. The following allocations have been made: Reserve for unearned premium for own account concerns on-going policies that are in force at the time the financial statements were closed and is intended to cover the contracts' remaining risk period.
The insurance companies in the Group are subject to their own specific legal requirements for technical insurance reserves, including security reserves, etc. In the consolidated financial statements, security reserves are not defined as liabilities and are thus not recognised in the Group’s equity. The technical insurance reserves shall be adequate pursuant to IFRS 4.
In Sweden, SPP has, in accordance with the Finance Companies' Service Pension Plan (BTP Plan), predefined collective pension plans for its employees. A group defined-benefit pension implies that an employee is guaranteed a certain pension based on the pay scale at the time of retirement on termination of the employment.
Pension costs and pension obligations for defined benefit pension schemes are determined using a linear accrual formula and expected final salary as the basis for the entitlements, based on assumptions about the discount rate, future salary increases, pensions and National Insurance benefits, future returns on pension plan assets as well as actuarial estimates of mortality, disability and voluntary early leavers. The net pension cost for the period comprises the total of the accrued future pension entitlements during the period, the interest cost on the calculated pension liability and the expected return on pension plan assets.
Actuarial gains and losses and the effects of changes in assumptions are recognised in total comprehensive income in the income statement for the period in which they occur. The Group has insured and uninsured pension schemes. The insured scheme in Norway is managed by the Group. Employees who resign before reaching retirement age or leave the scheme will be issued ordinary paid-up policies. The paid-up policies that are included in technical insurance reserves are measured in accordance with the accounting standard IFRS 4.
The Group's tangible fixed assets comprise equipment, fixtures and fittings, IT systems and properties used by the Group for its own activities.
Properties used for the Group's own activities are measured at appreciated value less accumulated depreciation and write-downs. The fair value of these properties is tested annually in the same way as described for investment properties. The increase in value for buildings used by the Group for its own activities is recognised through total comprehensive income. Any write-down of the value of such a property is recog-
nised first in the revaluation reserve for increases in the value of the property in question. If the write-down exceeds the revaluation reserve for the property in question, the excess is expensed over the profit and loss account.
The tax expense in the income statement comprises current tax and changes to deferred tax and is based on the accounting standard IAS 12 Income Taxes. Tax is recognised in the income statement, except to the extent that it relates to items recognised directly in equity. Deferred tax and deferred tax assets are calculated on the differences between accounting and tax values of assets and liabilities.
Pursuant to IAS 10, which deals with events after the balance sheet date, proposed dividends/group contributions are classified as equity until approved by the general meeting.
Upon the acquisition of the Swedish insurance group SPP, excess values and goodwill related to the value of the SPP Group's insurance contracts were capitalised, while the SPP Group's recognised insurance reserves were maintained in Storebrand's consolidated financial statements. These excess values (Value of business in-force) are tested for their adequacy together with the associated capitalised selling costs and insurance liabilities. The test is satisfied if the recognised liabilities in the financial statements are greater than or equal to the net liabilities valued at an estimated market value, including the expected owner's profit. In this test, the embedded value calculations and IAS 37 are taken into account. A key element of this assessment involves calculating future profit margins using embedded value calculations. Embedded value calculations will be affected by, among other things, volatility in the financial markets, interest rate expectations and the amount of buffer capital. Storebrand satisfies the adequacy tests for 2015, and they have thus no impact on the results in the financial statements for 2015.
In the Swedish activities (SPP) there are no contracts with an annual interest rate guarantee. However, there are insurance contracts with a terminal value guarantee. These contracts are discounted by a market-based calculated interest rate where parts of the yield curve used are not liquid. Changes in the discount rate may have a significant impact on the size of the insurance liabilities and impact the results. If the associated customer assets have a higher value than the recognised value of these insurance liabilities, then the difference will represent a conditional customer allocated fund – conditional bonus (buffer capital). Changes in the assumptions for future administrative expenses (cost assumptions) may also have a significant impact on the recognised insurance liabilities. Changes in estimates and valuations may entail
FINANCIAL INSTRUMENTS AT FAIR VALUE There will be some uncertainty associated with the pricing of financial instruments, particularly instruments that are not priced in an active market. This is particularly true for the types of securities priced on the basis of non-observable assumptions, and for these investments various valuation techniques are applied in order to fix fair value. These include private equity investments, investments in foreign properties, and other financial instruments where theoretical models are used in pricing. Any changes to the assumptions could affect recognised amounts. The majority of such financial instruments are included in the customer portfolio.
There is uncertainty linked to fixed-rate loans recorded at fair value, due to variation in the interest rate terms offered by banks and since individual borrowers have different credit risk.
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 measured 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. The assumptions must be realistic, mutually consistent and up to date as they should be based on a cohesive set of estimates about future financial performance. The Group has both insured and uninsured pension schemes (direct pensions). There will be uncertainty associated with these estimates.
DEFERRED TAX The consolidated accounts contain significant temporary differences between the values of assets for accounting purposes and for tax purposes. The current Norwegian tax regulations have been applied when calculating deferred tax in the Norwegian business. This will apply, for example, in particular to investments in foreign companies assessed as partnerships and investments in property. The actual income tax expense will also depend on the form in which the underlying assets will be realised, including whether there will be future input and share
In 2015, a decision was made to set aside provisions for the total estimated direct use of equity and the risk equalisation reserve for reserve strengthening (beyond the expected costs related to conversion to paid-up policies with investment options). The estimates are exposed with uncertainty.
In 2015, the direct equity contribution was NOK 988m. In addition, Storebrand has used funds accumulated in the risk equalisation reserve from 2008 to 2013 (NOK 776m) as a contribution to financing the strengthening of reserves in 2015. Overall, a total of NOK 1,764m has been charged to equity in 2015.
As at 31 December 2015, the remaining required reserve strengthening for the portfolio is NOK 2.2bn.
The table below shows the remaining reserve strengthening for private sector defined benefit pensions and paid-up policies as at 31 December 2015.
Remaining strengthening longevity in per cent of premium reserve 0.4% 2.0% 1.5%
The profit and loss account for Storebrand includes result elements relating to both customers and owners. There is a description of the content of profit generation for the owner from guaranteed pensions in the segment note (Note 5) below.
ADMINISTRATION RESULT The administration result is the difference between the income paid by customers pursuant to the tariff and the company's actual operating costs. The income consists of fees based on the size of customer assets, premium volumes or numbers in the form of unit prices. Among other things, operating expenses consist of personnel costs, return fees, marketing expenses, commissions and IT costs.
RISK RESULT The risk result consists of premiums the company charges to cover insurance risks less the actual costs in the form of insurance reserves and payments for insured events such as death, pensions, disability and accidents. After the introduction of the new mortality tariff in 2013 (K2013), the need for increased reserves was identified, see Note 3.
SPP PENSION & INSURANCE If the total return on assets in one calendar year for a premium-determined insurance (IF portfolio) exceeds the guaranteed interest, profit sharing will be triggered. When profit sharing is triggered, 90 per cent of the total return on assets passes to the policyholder and 10 per cent to the company. The company’s share of the total return on assets is included in the financial result.
Storebrand's business is divided into the following segments: Savings, Insurance, Guaranteed Pension and Other.
OTHER Under the "Other" category, the result from Storebrand ASA and the result from the company's portfolios in Storebrand Life Insurance and SPP are reported. In addition, this includes, among other things, lending to commercial enterprises by Storebrand Bank and the activities at BenCo, as well as minority interests in securities funds and property funds. The elimination of intra-group transactions that have been included in the other segments has also been included.
The results in the segments are reconciled against the Group result before amortisation and write-downs of intangible assets. The corporate profit and loss account includes gross income and gross costs linked to both the insurance customers and owners. In addition, the savings elements are included in premium income and in costs related to insurance. The various segments are to a large extent followed up in the follow-up of net profit margins, including follow-up of risk and administration results. The result lines that are used in segment reporting will therefore not be identical with the result lines in the corporate profit and loss account.
Group profit before profit sharing and loan losses 1,022 1,075 488 675 711 1,404
Group profit before amortization and longevity 1,020 1,091 488 675 329 1,465
corresponding amount, which was previously set aside and charged to the owner in connection with the strengthening of reserves, was also reversed. This is presented on a net basis on the line for provision longevity in the table above.
1) Additional statutory reserves + market value adjustment reserve 2) Conditional bonuses 3) The term solidity capital encompasses equity, subordinated loan capital, the risk equilisation fund, the market value adjustment reserve, additional statutory reserves, conditional bonuses, excess value/deficit related to bonds at amortised cost and accured profit.
Storebrand's income and performance are dependent on external factors that are associated with uncertainty. The most important external risk factors are the developments in the financial markets and changes in life expectancy in the Norwegian and Swedish populations. Certain internal operational factors can also result in losses, e.g. errors linked to the management of the customers' assets or payment of pension.
The Group's organisation of the responsibility for risk management follows a model based on three lines of defence. The objective of the model is to safeguard the responsibility for risk management at both company and Group level.
INDEPENDENT CONTROL FUNCTIONS Independent control functions have been established for risk management for the business (Risk Management Function / Chief Risk
In terms of function the independent control functions are affiliated with the Group CRO, which is organised directly under the CEO and reports to the board of directors of Storebrand ASA. The Group CRO shall ensure that all significant risks are identified, measured and appropriately reported. The Group CRO function shall be actively involved in the development of the Group's ¬risk strategy and maintain a holistic view of the company's risk¬ exposure. This includes responsibility for ensuring compliance with the relevant regulations for risk management and the consolidated companies' operations.
Occupational pension agreements (hybrid) are reported in the Guaranteed Pension segment. This is a small portfolio with limited insurance risk.
GROUP CONTRACTS Savings 1. Group defined-contribution pensions are pensions where the premium is stated as a percentage of pay, while the payments depend on the actual added return. Customers have the option of choosing a guaranteed annual return.
4. Paid-up policies (Norway only) are individual contracts with accrued rights that are issued upon withdrawal from or termination of group defined-benefit pension agreements. Holders of a paid-up policy can choose to convert their paid-up policy to a paid-up policy with investment options.
Insurance – lump-sum payments (Norway only) 5. Group life consists of group contracts with lump-sum payments in the event of death or disability.
Insurance 4. Individual P&C insurance contracts are individual contracts with lump-sum payments in the event of critical illness, cancer insurance, child insurance or accident insurance.
For individual insurance, the premiums for death risk and long life expectancy risk are based on tariffs produced by insurance companies on the basis of their shared experience. This applies to both endowment and pension insurance. Disability premiums are based on the company's own experience.
In 2014, SPP revised the mortality assumptions it uses to calculate insurance technical reserves. The company's assumptions are based on the general mortality tariff DUS 06, adjusted for the company's own observations.
Insurance Tariffs for group life insurance and certain risk insurances within group pensions also depend on the industry or occupation, in addition to age and gender. Group life insurance also applies tariffs based on claims experience. The company's standard tariff for group life insurance, both for life and disability cover, is based on the company's own experience.
The company manages its insurance risk through a variety of reinsurance programmes. Through catastrophe reinsurance (excess of loss), the company covers losses (single claims and reserves provisions) where a single event causes more than 2 deaths or disability cases. This cover is also subject to an upper limit. A reinsurance agreement for life policies covers death and disability risk that exceeds the maximum risk amount for own account the company practises. The company's maximum risk amount for own account is relatively high, and the risk reinsured is therefore relatively modest.
The risk result for Storebrand Livsforsikring AS in the table above shows the total risk result before distribution to customers and the owner. See Note 4 on risk result for the principles for distributing the risk result between customers and the owner.
of the reserves, while the costs tend to be fixed. Lower returns on the financial market than expected will therefore have a negative effect on Storebrand's income and profit.
For customer portfolios with a guarantee, the net risk for Storebrand will be lower than the gross market risk. The extent of measures to reduce risk depends on several factors, the most important being the size and flexibility of the customer buffers and level and duration of the return guarantee. If the investment return is not sufficiently high to meet the guaranteed interest rate, the shortfall will be met by using customer buffers in the form of risk capital built up from previous years' surpluses. Risk capital primarily consists of unrealised gains, additional statutory reserves and conditional bonuses. The owner is responsible for meeting any shortfall that cannot be covered. This is described in more detail in the section below on guaranteed customer portfolios.
For guaranteed customer portfolios, the risk is affected by changes in the interest rate level. Falling interest rates are positive for the investment return in the short term due to price appreciation for bonds, but negative in the long term because it reduces the probability of achieving a return higher than the guarantee. Interest rates have fallen throughout 2015, particularly on the short end of the yield curve. In Sweden, the money market rate is negative. Norges Bank has indicated that interest rates will be kept low for several years to come. Paid-up policies have a particularly high risk in a low interest rate scenario, because there are very limited opportunities for changing the price or terms. In Norway, the effect of low interest rates will be dampened by a large proportion of amortised cost portfolios that will greatly benefit from securities purchased at interest rate levels higher than the current levels.
The financial risk related to customer portfolios without a guarantee (unit linked insurance) is borne by the insured person, and the insured person can choose the risk profile. Storebrand's role is to offer a good, broad range of funds, to assemble profiles adapted to different risk profiles, and to offer systematic reduction of risk towards retirement age. The most significant market risks are share market risk and exchange rate risk.
The most significant market risks facing guaranteed customer portfolios are linked to equity risk, interest rate risk, credit risk and property price risk. The percentage of equities declined throughout 2015, while investments in corporate bonds increased. In Norway most of the credit risk is linked to securities, which are carried at amortised cost. This reduces the risk to the company's profit significantly.
Equity risk is managed by means of dynamic risk management, the objectives of which are to maintain good risk-bearing capacity and to adjust the financial risk to the company's financial strength. By exercising this type of risk management, Storebrand expects to create good returns both for individual years and over time.
Total net currency positions 2014 7,844 1) Equity and fixed income funds denominated in NOK with foreign currency exposure to EUR and USD, for example, amount to NOK 9.2 billion.
Hedging is performed by means of forward foreign exchange contracts at the portfolio level, and the currency positions are monitored continuously against a total limit. Negative currency positions can be taken. Storebrand employs a currency hedging principle called block hedging, which makes the execution of currency hedging more efficient.
SPP: SPP uses currency hedging for its investments to a certain degree. Currency exposure may be between 0 and 30 per cent in accordance with the inestment strategy.
Interest rate risk is in a special position, because changes in interest rates also affect the value of the insurance liability (even if the book value of the Norwegian liabilities with guaranteed interest rates is not recognised at market value). Since pension disbursements may be many years in the future, the insurance liability is particularly sensitive to changes in interest rates. In the Norwegian business, greater interest rate sensitivity from the investments will entail increased risk that the return is below the guaranteed level. The risk management must therefore balance the risk of the profit for the year (interest rate increase) with the reinvestment risk if interest rates fall below the guarantee in the future. Bonds at amortised cost are an important risk management tool.
will receive profit sharing income if the return exceeds the guaranteed interest rate. The contracts' buffer capital must be intact in order for profit sharing to represent a net income for SPP. For group defined benefit pensions (KF), a certain degree of consolidation, i.e. the assets are greater than the present value of the liabilities by a certain percentage, is required in order for the owner to receive profit sharing income.
The tables show a reduction in the buffer capital for Storebrand Life Insurance and SPP as a result of immediate value changes related to financial market risk. The buffer capital consists of customer buffers where changes do not affect the company's result. Due to the fact that the buffer capital is not evenly distributed among the customers, a negative effect on the result for the owner will arise before all the buffers have been exhausted. The effect of the stresses on the result will be significantly lower than a change in the buffer capital. This is described in more detail under the individual companies.
The stresses are applied individually, but the overall market risk is less than the sum of the individual stresses, because diversification is assumed. The correlation between the stresses is the same that is used for RBS.
Based on the stress test, Storebrand Life Insurance has an overall market risk of NOK 7.5 billion, while the buffer capital totals NOK 7.9 billion. The buffer capital consists of additional statutory reserves that can be used for 2016, the market value adjustment reserve and the net unrealised gain in the company portfolio.
The stress tests were carried out on all investment profiles with a guaranteed return and the effect of each stress changes the expected return in each profile. If the stress causes the return to fall below the guarantee, it will have a negative impact on the result for the owner if the buffer is not adequate. Other negative effects on the result are a lower return from the company portfolio and that there is no profit sharing from paid-up policies and individual contracts.
The greatest risks are related to the equity price risk, credit risk and property price risk.
Liquidity risk is the risk that the company is unable to fulfil its obligations without incurring substantial additional expenses in the form of reduced prices for assets that must be realised, or in the form of especially expensive financing.
A particular risk is the fact that during certain periods the financial markets can be closed for new borrowing. Measures for minimising the liquidity risk are to maintain a regular maturity structure for the loans, low costs, an adequate liquidity buffer and credit agreements with banks which the company can draw on if necessary.
Total subordinated loans and hybrid tier 1 capital 2014 7,826 1) In addition, Storebrand Bank ASA has issued hybrid tier 1 capital bonds/hybrid capital that is classified as equity. See the statement of changes in equity.
The loan agreements contain standard covenants. Storebrand is in compliance with all relevants covenants in 2015.
Storebrand is exposed to risk of losses as a result of counterparties not fulfilling their debt obligations. This risk includes losses on lending, but also losses related to the failure of counterparties to fulfil their financial derivative contracts. Credit losses related to the securities portfolio are categorised as market risk and are discussed in Note 8 financial market risk.
Sale and operation of real estate 6,550 46 6,596 98 38 60
The lending-portfolio consists of income-generating properties and development properties with few customers and few defaults, and there is comprehensive and complex risk assessment of debtors. The Corporate Market portfolio is generally secured on commercial property.
Mortgage and asset backed securities 40,965 3,178 3,532 3,654 1,392 52,722
Total interest bearing securities stated by rating 85,571 25,540 32,161 32,307 5,500 181,079
INTEREST BEARING SECURITIES AT AMORTISED COST Category of issuer or guaranteer
Government and government guaranteed bonds 2,638 6,833 1,151 1,144 962 12,728
Total derivatives excluding derivatives in bond funds 2014 1,846 3,923 686 6,455
Both the insurance business and the banking business are exposed to credit risk. The insurance business primarily has a credit risk relating to bonds with significant geographical and industry-related diversification, while the bank is mostly exposed to direct loans for residential property in Norway. In addition, the bank has exposure to lending in the corporate market, primarily related to property. There is no significant concentration risk across bonds and loans.
Bonds and subordinated loans at amortised cost: As a main rule, the fair value for the bonds is based on the prices obtained from Reuters and Bloomberg. Bonds that are not regularly quoted will normally be valued using recognised theoretical models. The latter is particularly applicable to bonds denominated in Norwegian kroner. Discount rates composed of the swap rates plus a credit premium are used as a basis for these types of valuations. The credit premium will often be specific to the issuer, and will normally be based on a consensus of credit spreads quoted by a selected brokerage firm. The writedown test that was carried out has not resulted in the need for any write-downs in 2015.
Debt raised by issuance of securities 15,428 15,428 14,156 15,475 13,986
The Group conducts a comprehensive process to ensure that financial instruments are valued as closely as possible to their market value. Publicly listed financial instruments are valued on the basis of the official closing price on stock exchanges, supplied by Reuters and Bloomberg. Fund units are generally valued at the updated official NAV prices when such prices exist. Bonds are generally valued based on prices obtained from Reuters and Bloomberg. Bonds that are not regularly quoted will normally be valued using recognised theoretical models. The latter is particularly applicable to bonds denominated in Norwegian kroner. Discount rates composed of the swap rates plus a credit premium are used as a basis for these types of valuations. The credit premium will often be specific to the issuer, and will normally be based on a consensus of credit spreads quoted by a selected brokerage firm. Unlisted derivatives, including primarily interest rate and foreign exchange instruments, are also valued theoretically. Money market rates, swap rates, exchange rates and volatilities that form the basis for valuations are supplied by Reuters and Bloomberg.
LEVEL 1: FINANCIAL INSTRUMENTS VALUED ON THE BASIS OF QUOTED PRICES FOR IDENTICAL ASSETS IN ACTIVE MARKETS This category encompasses listed equities that over the previous three months have experienced average daily trading equivalent to approximately NOK 20 million or more. Based on this, the equities are regarded as sufficiently liquid to be included at this level. Bonds, certificates or equivalent instruments issued by national governments are generally classified as level 1. When it comes to derivatives, standardised stock index futures and interest rate futures will also be included at this level.
The types of mutual funds classified as level 3 are discussed in more detail below with a reference to the type of mutual fund and the valuation method. Storebrand is of the opinion that the valuation method used represents a best estimate of the mutual fund’s market value.
Equities Of the shares at level 3, forestry represents most of the value. The external valuations are based on models that include non-observable assumptions. Besides the external valuations that have been conducted as at 31 December 2015, the equity investments are valued based on the value-adjusted equity reported by external sources. Comprehensive external valuations were carried out for the largest forestry investments as at 31 December, and these form the basis for the valuation of the company's investments. Of the equities in addition to forestry, it is primarily direct investments in private equity that are at level 3.
In the case of direct private equity investments, the valuation is based on either the most recent transaction or a model in which a company that is in continuous operation is assessed by comparing the key figures with equivalent listed companies or groups of equivalent listed companies. In some cases, the value is reduced by a liquidity discount, which can vary from investment to investment.
Property funds Indirect real estate investments are primarily investments in funds with underlying real estate investments where Storebrand's intention is to own the investments throughout the fund's lifetime. Real estate funds are valued on the basis of information received from the individual fund manager.
Investment properties The investment properties primarily consist of office buildings located in Oslo and Stockholm and shopping centres in Southern Norway. Office properties and shopping centres in Norway: When calculating fair value, Storebrand uses an internal cash flow model. Net cash flows for the individual property are discounted by an individual required rate of return. A future income and expense picture for the first 10 years has been estimated for the office properties and a final value has been calculated for the end of the 10th year based on market rent and normal operating costs for the property. In the net income stream, consideration has been made to existing and future loss of income due to vacancy, necessary investments and an assessment of the future development in the market rent. The majority of contracts have a duration of five or ten years. The cash flows from these lease agreements (contractual rent) are included in the valuations. To estimate the long-term, future non-contractual rental incomes, a forecasting model has been developed. The model is based on historical observations in Dagens Næringsliv's property index (adjusted by CPI) and market estimates. A long-term, time-weighted average of the annual observations is calculated in which the oldest observations are weighted with the lowest importance. For non-contractual rent in the short-term, the current rental prices and market situation are used.
OTHER FUND UNITS Large portions of the portfolio are priced using comparable listed companies, while smaller portions of the portfolio are listed. The valuation of the private equity portfolio will thus be sensitive to fluctuations in global equity markets. The private equity portfolio has an estimated Beta relative to the MSCI World (Net – currency hedged to NOK) of around 0.45.
REAL ESTATE The sensitivity assessment for real estate includes both investments properties and owner occupied properties.
Guaranteed pension: Defined Benefit (fee based) Storebrand Life Insurance 5,601 7,415
Total gains and losses, bonds at amortised cost 3,880 292 4,172 89 4,083 3,874
Operating costs (including maintenance and repairs) relating to real estate that have provided rent income during the period2 -240 -282
Total income real estate 2,701 1,674 1) Of which real estate for own use 174 169 2) Of which real estate for own use 37 -71
Guaranteed pension: Defined Benefit (fee based) Storebrand Life Insurance -6,003 -14,419
At end of the policy year 327 369 391 461 513 690 - four years later 306 321 - five years later 303
Change in premium reserve customer funds without guaranteed return -12,056 -4,809 -16,865 -19,249
Storebrand Group has country-specific pension schemes. The employees of Storebrand in Norway have a defined contribution pension scheme for their retirement pension effective 1 January 2015. Until the end of 2014, Storebrand in Norway had both defined contribution and defined benefit pension schemes dependent on when the employees of the Group were hired. The effect of this change in the pension scheme was recognised in the annual financial statements for 2014
Pension assets are based on the financial assets held by Storebrand Life Insurance/SPP composed at 31.12: Storebrand Life Insurance SPP
The table shows the percentage asset allocation of pension assets at year-end managed by Storebrand Life Insurance and SPP.
Expected annual increase in social security pensions 2.25% 3.0% 3.0% 3.0%
Percentage change in pension: - The period's net pension costs -4% 54% 30% 9% 37% 22% 15%
2. BINDING GUIDELINES FOR SHARES, SUBSCRIPTION RIGHTS, OPTIONS, ETC. FOR THE COMING 2016 FINANCIAL YEAR To ensure that the executive management team has incentive schemes that coincide with the long-term interests of the owners, a proportion of the fixed salary will be linked to the purchase of physical STB shares with a lock-in period of three years. The purchase of shares will take place once a year.
The remuneration paid to Deloitte AS and coadjutant companies amounts to: NOK million 2015 2014
Expected income tax at nominal rate (27 per cent) 118 -702
1) Storebrand has reduced the exposure to property in its customer portfolios in recent years. In order to enhance the efficiency of the operations and improve the risk management for the remaining property exposure, Storebrand Eiendom Holding AS was dissolved in December 2015. Since the shares owned by the customer portfolio are not encompassed by the exemption method, the taxable loss on dissolution of the company entails in isolation a taxable income of approximately NOK 1.7 billion.
The equity includes a risk equalisation reserve, and tax deductions related to the build-up of this reserve are treated as a permanent difference between the financial and tax accounts (see further information on this under "Reconciliation of the Group's equity"). Use of the fund will in isolation entail a higher effective tax rate.
In addition, the income tax expense is also influenced by tax effects relating to previous years.
Storebrand Livsforsikring AS. If these limited companies that own the properties were to be sold, they could be disposed of practically tax-free.
The tax-increasing temporary differences related to the difference between the fair value and taxable value of investment properties that have arisen during the period of ownership (around NOK 10.2 billion), are included in the Group's temporary differences, on which deferred tax is calculated at a nominal tax rate of 25 per cent. In accordance with IAS 12, no provisions have been set aside for deferred tax related to temporary differences that existed when companies were acquired and the transaction was not defined as a business transfer (basis of around NOK 2.1 billion).
2) In December 2015, the Storting agreed to reduce the company tax rate from 27 to 25 percent with effect from 01 January 2016. Therefore, 25 percent is used when recognising deferred tax/tax assets.
Currency differences on converting foreign units 1 912 71 74 1,058 151
Accumulated depreciation and write-downs 01.01 -336 -5,309 -525 -305 -6,474 -6,035
Acc. depreciation and write-downs 31.12 -409 -6,162 -666 -305 -7,543 -6,474 1) Value of business-in-force, the difference between market value and book value of the insurance liabilities in SPP.
INTANGIBLE ASSETS LINKED TO ACQUISITION OF SPP Storebrand Livsforsikring AS acquired SPP Livförsäkring AB and its subsidiaries in 2007. The majority of the intangible assets associated with SPP comprise the value of in-force business (VIF), for which a separate liability adequacy test has been performed in accordance with the requirements of IFRS 4. In order to determine whether goodwill and other intangible assets associated with SPP have suffered an impairment in value, estimates are made of the recoverable amount for the relevant cash-flow generating units. Recoverable amounts are established by calculating the enterprise’s utility value. SPP is regarded as a single cash flow generating unit, and the development of future administration results, risk results and financial results for SPP will affect its utility value.
INTANGIBLE ASSETS LINKED TO THE BANKING BUSINESS A cash flow based valuation based on the expected result after tax is used when calculating the utility value of the banking business. In the spring of 2014, the board of the bank approved a liquidation plan for the bank's corporate market portfolio. This liquidation has been taken into account in the financial plan. In addition, budgets and forecasts approved by the Board for the next three years (2016 to 2018) are used as the basis for the valuation.
The cash flow is based on two elements, profit/loss after tax to equity and change in expected regulatory tying-up of capital. It is also assumed that all capital in addition to regulatory tied-up capital, can be withdrawn at the end of each period. For the period after 2018, a growth rate of 2.5 percent has been used for the retail market which is also included in the calculation of the terminal value. The required rate of return to equity is calculated based on the capital asset pricing model (CAPM). Long-term risk-free interest is set at the interest rate for 10 year Norwegian government bonds. The market's risk premium is set at 5 percent and this is in line with the risk premium in the Norwegian market.
Since it has been decided that the corporate market activities will be discontinued, a different beta has been used for the retail and corporate markets. The retail portfolio consists of a well-diversified home mortgage portfolio with a low loan-to-value ratio and very limited risk. It is therefore natural to assume that the risk premium for this portion of the business is lower than the rest of the market. The beta has been set at 0.8 in the calculations, which corresponds to the average beta for regional banks in Europe. The risk in the corporate market portfolio is correspondingly higher, since it consists of a smaller portfolio with larger individual commitments. In order to reflect this risk, the beta has been set at 1.5 in the calculations. The use of two different required rates of return is particularly important in relation to the terminal value, in which it is expected that only the retail part will endure.
Value of business in force SPP 20 years 5% Straight line 4,232
Voting rights as a percentage of the total number of shares 10.0% 9.9%
The sale of Ulven AS to OBOS has been agreed on, and the agreed handover will be on 1 February 2016. .
Distribution beween company and customers: Bonds held to maturity - customers with guarantees 15,648
For further information about lending, see note 10 lending and counterparty risk.
Office buildings (including parking and storage): Office buildings in Sweden 1,494 1,002 9.9 51,598
Total real estate 27,303 29,002 886,265 1) The real estate are valued on the basis of the following effective required rate of return (included 2.5 per cent inflation)
2) All of the proporties in Sweden are appraised externally. The appraisal is based on the required rates of return in the market.
Sweden At the end of 2015, there was practically no vacancy in the investment properties.
TRANSACTIONS Purchases: No further property acquisitions has been agreed on in Storebrand/SPP in 4 quarter in addiition to the figures that has been finalised Sales: Sales valued at NOK 3,100 have been agreed on, and it is expected that they will be completed in the 1st quarter of 2016.
Allocation by company and customers: Equities and units - company 113 121
Bonds and other fixed-income securities - customers with guarantee 131,506 130,784
Bonds and other fixed-income securities - customers without guarantee 30,147 26,792
The excess value of bonds valued at amortised cost totalled NOK 10 581 million at the end of the 4th quarter, a decrease of 2.783 million since the turn of the year.
Total insurance liabilities - life insurance 252,663 128,117 2,982 15,452 399,214 369,151 1) Including personal risk and employee insurance of the Insurance segment.
FAIR VALUE HEDGING OF THE INTEREST RATISK AND CASH FLOW HEDGING OF THE CREDIT MARGIN Storebrand uses fair value hedging for interest risk. The hedged items are financial assets and financial liabilities measured at amortised cost. Derivatives are recognised at fair value over profit or loss . Changes in the value of the hedged item that can be attributed to the hedged risk are adjusted in the book value of the hedged item and reconised in the income statement.
Storebrand utilises cash flow hedging of its credit margin. The hedged items are liabilities that are measured at amortised cost. Derivatives are recognised at fair value in the accounts. The proportion of the gain or loss on the hedging instrument that is deemed to be effective hedging is recognised in total comprehensive income. The proportion is subsequently reclassified to profit or loss in step with the hedged item's effect on earnings
Collateral pledged in connection with futures and options are regulated on a daily basis in the daily margin clearing on individual contracts. Collatrals are received and given both as cash and securities.
Securities pledged as collateral are linked to lending access in Norges Bank for which, pursuant to the regulations, the loans must be fully guaranteed with collateral in interest-bearing securities and/or the bank's deposits in Norges bank. Storebrand Bank ASA has none F-loan in Norges Bank as per 31.12.2015.
Loans in Storebrand Boligkreditt AS are security for covered bonds (covered bond rate) issued in the company and these assets are therefore mortgaged through the bondholder's preferential right to the security holding in the company. Storebrand Boligkreditt AS has over-collateralisation (OC) of 25 per cent, however committed OC is 9.5 per cent. Storebrand Boligkreditt AS therefore has security that is NOK 1.9 billion more than what is committed in the loan programme. Storebrand Bank ASA considers that the risk linked to the transfer level of home loans to Storebrand Boligkreditt AS is low.
Total contingent liabilities 7,734 8,225 1) Per 31 December 2015, Storebrand Bank has in addition NOK 2 billion in loan commitment to the retail market.
Transferred bonds still recognised on the statement of financial position 403
The Storebrand Group is a cross-sectoral financial group with capital requirements pursuant to Basel I/II (capital cover) and capital adequacy rules on a consolidated basis. According to the rules on solvency, margin requirements are calculated for the insurance companies in the Group, while for the other companies a capital requirement in relation to the capital adequacy rules is calculated. The calculations in the tables below are in accordance with the §7 of the Regulations concerning capital ratios on a consolidated basis etc.
Primary capital may consist of core capital and supplementary capital. According to the Regulations for calculating primary capital, core capital is significantly different from shareholders' equity in the accounts. The table below shows a reconciliation of core capital relative to equity. Issued hybrid tier 1 capital may account for 15 per cent of the core (tier 1) capital, while any amount exceeding 15 per cent may be included in the tier 2 capital. The core capital will be adjusted for the valuations that are used as the basis for credit calculations at a national level for foreign companies. (§4, 7th paragraph of the Regulations concerning capital adequacy.) For Storebrand Holding AB this will entail an adjustment of SPP AB's estimated insurance liabilities for which a different yield curve is used for credit assessment than is used in the financial accounts. Supplementary capital that consists of subordinated debt may not exceed 100 per cent of core capital, while time limited subordinated debt may not exceed 50 per cent of core capital.
In a cross-sectoral financial group, the sum of primary capital and other solvency margin capital, covers the sum of the solvency margin requirement for insurance operations and primary capital requirements for credit institutions and securities business.In the solvency margin requirement used for the insurance companies, this requirement is calculated as 4 per cent of gross insurance fund. This applies to both Norwegian and Swedish operations. In Sweden, the requirement also includes 1 per cent of the conditional bonus and 0.1-0.3 per cent of mortality risk in the insurance funds. The solvency margin capital for insurance differs slightly from the primary capital that is used in the capital cover. The solvency capital includes a proportion of additional provisions and the risk equalization fund.
As of 1 January 2016, new solvency regulations, Solvens II are implemented.
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 25 for further information about senior employees.
For further information about close associates, see notes 31 and 42.
Cash and cash equivalents at the end of the period 161 82
CLASSIFICATION AND VALUATION POLICIES Assets intended for permanent ownership and use are classified as fixed assets, and assets and receivables due for payment within one year are classified as current assets. Equivalent policies have been applied to liability items.
INVESTMENTS IN SUBSIDIARIES, DIVIDENDS AND GROUP CONTRIBUTIONS In the company’s accounts, investments in subsidiaries and associated companies are valued at the acquisition cost less any write-downs. The need to write down is assessed at the end of each accounting period. Storebrand ASA's primary income is the return on capital invested in subsidiaries. Group contributions and dividends received in respect of these investments are therefore recorded as ordinary operating income. Proposed and approved dividends and group contributions from subsidiaries at the end of the year are recognised in the financial statements of Storebrand ASA as income in that financial year.
A prerequisite for recognition is that this is income earned by a subsidiary that Storebrand owns. Otherwise, this is recognised as an equity transaction, which means that the ownership interest in the subsidiary is reduced by dividends or group contributions.
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/losses shown in total comprehensive income.
TAX The tax cost in the profit and loss account consists of tax payable and changes in deferred tax. Deferred tax and deferred tax assets are calculated on the differences between accounting and tax values of assets and liabilities. Deferred tax assets are recorded on the balance sheet to the extent it is considered likely that the company will have sufficient taxable profit in the future to make use of the tax asset. Deferred tax is applied directly against equity to the extent that it relates to items that are themselves directly applied against equity.
CURRENCY Current assets and liabilities are translated at the exchange rate on the balance sheet date. Shares held as fixed assets are translated at the exchange rate on the date of acquisition.
Net income from bonds and other fixed income securities 48 -1 -14 33 45
– of which FVO (Fair Value Option) 48 -1 -14 33 45
Other benefits -7 -12 1) See the spesification in note 5
The employees of Storebrand in Norway have a defined contribution pension scheme for their retirement pension effective 1 January 2015. Until the end of 2014, Storebrand in Norway had both defined contribution and defined benefit pension schemes dependent on when the employees of the Group were hired. The effect of this change in the pension scheme was recognised in the annual financial statements for 2014.
All members of the pension schemes have associated survivor's and disability cover that is accounted for as a defined benefit pension scheme. There are also defined benefit liabilities in the statement of financial position related to direct pensions for certain former employees and former board members . Employees and former employees who had had a salary in excess of 12G (G = National Insurance Scheme basic amount) until 31 December 2014 were offered a cash redemption option for their accrued rights with payment at the start of 2015. For employees who were a part of the executive management team, these payments were distributed over 5 years.
PENSION ASSETS ARE BASED ON THE FINANCIAL ASSETS HELD BY STOREBRAND LIFE INSURANCE, WHICH ARE COMPOSED OF AS PER 31.12.: NOK million 2015 2014
FINANCIAL ASSUMPTIONS: The financial assumptions have been determined on the basis of the regulations in IAS 19. Long-term assumptions such as future inflation, real interest rates, real wage growth and adjustment of the basic amount are subject to a particularly high degree of uncertainty.
Specific company conditions including expected direct wage growth are taken into account when determining the financial assumptions.
The average employee turnover rate is 2–3 per cent for the entire workforce as a whole, and falling turnover with increasing age is assumed.
Note 6 - Remuneration of the CEO and elected officers of the company
Other non-audit services 23 42 1) Odd Arild Grefstad is the CEO of Storebrand ASA and the amount stated in the note is the total remuneration from the Group. He has a guaranteed salary for 24 months after the ordinary period of notice. All work-related income including consulting assignments will be deducted.
2) Storebrand discontinued target bonuses for executive personnel in 2015. Portions of the former target bonus were converted to fixed salary and accounted for a large portion of the fixed salary increase from 2014 to 2015. See Note 26 in the annual report for 2014 for further information on compensation and payments for accrued rights related to the pension scheme change as of 1 January 2015.
Tax base for the year 216 239 - Use of losses carried forward -216 -239
'permanent differences 25 6 change in tax rules -25 capitalisation/write-down of deferred tax assets 1 6
1) In December 2015, the Storting agreed to reduce the company tax rate from 27 to 25 percent with effect from 01 January 2016. Therefore, 25 percent is used when recognising deferred tax/tax assets.
Note 8 - Parent company’s shares in subsidiaries and associated companies
AS Værdalsbruket2 Værdal 25% 4 4 1) Group contributions received of NOK 16 million have been recognised as the repayment of capital, while NOK 74 million have been recognised as capital contribution.
NOK million 0-6 months months 1-3 years 3-5 years > 5 years Total value
Storebrand ASA had as per 31 December 2015 liquid assets of NOK 2.4 billion.
3) Loans are booked at amortised cost and include earned not due interest.
Cathrine Kjenner Forsland 1,530 1) The summary shows the number of shares owned by the individual, as well as his or her immediate family and companies where the individual exercises signifi cant influence, confer the Accounting Act, Section 7-26.
Statement of financial position items: Subordinated loans to group companies 17
In the best judgment of the Board and the CEO, the annual financial statements for 2015 have been prepared in accordance with applicable accounting standards, and the information in the financial statements provides a fair and true picture of the parent company’s and Group’s assets, liabilities, financial standing and results as a whole as at 31 December 2015. In the best judgment of the Board and the CEO, the annual report provides a fair and true overview of important events during the accounting period and their effects on the annual financial statements for Storebrand ASA and the Storebrand Group. In the best judgement of the Board and the CEO, the descriptions of the most important elements of risk and uncertainty that the group faces in the next accounting period, and a description of related parties' material
Storebrand ASA and the Storebrand Group - Declaration by the members of the Board and the CEO
The annual financial statements as proposed by the Board, the Board's report and the auditor's report have been submitted to the Board of Representatives on 7. March 2016, in the manner prescribed by the law.
The Board of Representatives has no further comments to the Board's proposal regarding the allocation of the profit for the year of Storebrand ASA.
Subordinated loan capital is loan capital that ranks after all other debt.
The earnings per share are calculated as the majority interest’s share of the profit after tax divided by the number of shares. The number of shares included in the calculation is the average number of shares outstanding over the course of the year. If new shares are issued, the shares will be included from the date of payment.
The capital adequacy ratio is calculated by measuring the total primary capital in relation to the capital requirement of 8 per cent.
Guaranteed pension payments from a specified age for as long as the insured person lives. Alternatively, it can be agreed that the pension will end at a specified age. The product is offered in both the private and public sectors. The cover includes retirement, disability and survivor pensions.
Contracts with guaranteed payments for as long as the insured person lives.
Contracts involving a single payment in the event of attaining a specified age, death or disability.
Calculated on the basis of the insurance fund and the risk insurance sum for each insurance sector.
The sale of share options implies the equivalent one-sided obligation. In general, exchange traded and cleared options are used.
At the maturity of the contract, the principal and interest rate terms are exchanged back to the original currency. Cross currency swaps are used, for example, to hedge returns in a specific currency or to hedge foreign currency exposure.
swaps relate to the purchase or sale of a currency for an agreed price at a future date. These contracts are principally used to hedge the currency exposure arising from securities, bank deposits, subordinated loans and insurance reserves. These contracts also include spot foreign exchange transactions.
STOREBRAND ASA STOREBRAND LIVSFORSIKRING AS Storebrand Holding AB SPP Konsult AB SPP Spar AB SPP Pension & Försäkring AB SPP Fastigheter AB SPP Hyresförvaltning SPP Varumärkes AB Storebrand Eiendomsfond Invest AS Storebrand Eiendom Trygg AS Storebrand Eiendom Vekst AS Storebrand Eiendom Utvikling AS Storebrand Finansiell Rådgivning AS Aktuar Systemer AS Storebrand Pensjonstjenester AS Foran Real Estate, SIA2
STOREBRAND BANK ASA Storebrand Boligkreditt AS Bjørndalen Panorama AS Ring Eiendomsmegling AS MPV7 Holding AS
Interest 1) Storebrand ASA owns 25,1 percent and total owner share for Storebrand is 100 percent of AS Værdalsbruket.
2) SPP Pension & Försäkring AB owns 29,4 percent and Storebrand Livsforsikring AS owns 67,7 percent of Foran Real Estate IA.