Norway’s Storebrand Buys Real Estate, Mortgages to Escape Negative Yields

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Storebrand ASA, Norway’s largest listed insurance company based on assets under management, is buying mortgage bonds and real estate to escape negative rates.

“Mortgage and corporate loans, where we are familiar with the credit quality, are exciting,” Chief Executive Officer Odd Arild Grefstad, said in a March 13 interview at his office in Oslo. “Real estate and infrastructure are also exciting asset classes for life and pension insurance.”

Plunging rates on government bonds in Europe are forcing life insurance companies to seek out other asset classes as they must meet obligations on guaranteed insurance policies. Almost half of Storebrand’s asset allocation for guaranteed policies in Norway is invested in hold-to-maturity bonds. As bonds mature, the Oslo-based company must reinvest while finding returns high enough to cover guaranteed rates.

Storebrand, which has 535 billion kroner ($65 billion) under management, has about 11 percent of its customer portfolios, with rate guarantee in Norway, invested in real estate. The average return on real estate in Norway is about 4.8 percent, according to Grefstad. While the company invests in mortgage and corporate bonds mostly from Norwegian and Swedish issuers, it also looks for opportunities from other European issuers that sell in the Norwegian or Swedish currencies.

Housing Bubble?

“This is a safe asset allocation,” he said. “We have robust buffer capital to cover periods of lower, insufficient returns.”

Storebrand’s shift into the housing market comes amid growing concern low rates are fueling a housing bubble in Norway, Europe’s second richest nation. Norwegians owe their creditors about twice as much as they make in disposable incomes, more than at any time in the country’s history. House prices jumped about 9 percent in February from a year earlier to a record high.

The company forecasts an average return of 4 percent on its portfolio for guaranteed paid-up policies until 2020. The interest rate guarantee is 3.5 percent to 3.8 percent.

Storebrand is shunning government bonds with low and negative yields. The rate on the Norwegian 10-year bond was 1.49 percent on Monday.

Cash Pile

“We don’t invest in negative rates,” he said. “We’d rather build up a pile of cash.”

Rates may potentially fall further in both Norway and Sweden. Norway’s central bank will probably cut its key policy rate at its next meeting on March 19, according to DNB ASA. Sweden introduced negative rates in February and announced purchases of government bonds.

“This is unchartered territory,” Grefstad said. “The massive rate cuts and the injection of liquidity in the markets is a little bit of an unknown experiment and no one knows how it will play out.”

While the Norwegian economy has slowed after a more than 50 percent fall in oil prices since June 2014, Storebrand sees stable flows of 10 billion kroner to 11 billion kroner in premiums to its unit-link business in 2015.

“The savings coming in have a good stickiness because the employer contributes automatically for its employees,” he said. “As long as the unemployment is low there’s good pace in the economy from Storebrand’s point of view.”

Solvency Safe

According to Grefstad, there’s “nothing indicating” mass unemployment in Norway or Sweden and the growth over the past will continue. Storebrand’s unit link reserves grew, on average, 25 percent a year from 2011 to 2014 and assets under management 9 percent, on average, a year in the same period.

“There’s more upside than threats,” he said. “I expect growth, not least in unit link and it will also affect the growth of assets under management.”

Insurance companies in Europe are adjusting to the regulations of Solvency II, which is intended to reduce the risk for insolvency and losses for policyholders. The regulatory framework, effective from Jan. 1, 2016, sets out new capital requirements for insurers. Storebrand has a Solvency II-ratio of 148 percent, based on transitional rules, compared with its target of 130 percent, according to Grefstad.

“We’re pretty sure we will have a safe Solvency II margin,” he said. “Changes in interest rates until January will have a small impact on the company’s ratio.”

Storebrand’s shares have fallen more than 65 percent since a high in April 2007 as lower rates put pressure on profit margins. The company hasn’t paid dividend since 2011. It has a policy of not paying dividend unless its Solvency II ratio is at least 130 percent.

“The ratio is an important milestone in order to be capable of paying dividend again,” he said. “We’re in a good position regarding our capital goals.”

There will be a total assessment at the end of the year and the economic outlook will also determine whether the board will propose a dividend.

“When Storebrand starts to pay dividend again we are going to pay every year and we wish to pay an increasing dividend every year,” he said.