ALM. Brand A/S

CSE:ALMB

Earnings Call Transcript 2022-Q3

[Operator]

Good day, everyone and welcome to the Alm. Brand Interim Report for the Third Quarter of 2022. My name is Charlie and I'll be coordinating the call today. [Operator Instructions] I'll now hand over to your host, Rasmus Nielsen, Chief Executive Officer, to begin. Rasmus, please go ahead.

[Rasmus Nielsen, executive]

Thank you. Good morning, and thank you for taking the time to join us on our call today on the Alm. Brand Group's result for the third quarter of 2022. As usual, I have with me today, our CFO, Andreas and our IR team with Mads and Mikael.

As you all know, this morning, we have published a consolidated set of numbers that includes Codan for the full quarter and thereby, we are able, for the first time, to present numbers that reflect a full quarter for the combined business of Alm. Brand and Codan, thus making it easier to do the like-for-like comparisons to previous quarters. Again, this has been a busy quarter with a lot of actions as we've been progressing on the integration alongside with overlooking and securing that all parts of the day-to-day business -- in line with our expectations.

On top of this, we have today announced that we have reduced headcount by an additional 110 across the organization. Most of this is achieved over the last months by restraint in filling vacant position, thus allowing us to limit the number of layoffs. This is yet another step in shaping the business and trimming the cost base to secure strong competitive and profitable business.

To me, it is important that we stay on track and deliver on all the initiatives that we have communicated to you and this is exactly what we are doing.

Let's turn to Slide 2 and kick off with our highlights. This quarter, we have succeeded in further growing our business whilst taking important steps in integrating Codan into the Alm. Brand Group. Alm. Brand has successfully maintained strong organic growth, just about 5% in both personal and commercial lines. Further, at the same time, Codan has grown premiums well and especially bancassurance. Also, as expected, we have seen the first round of positive effects from the synergy initiatives implemented back in June and they are now flowing into our results with an immediate effect on net earnings in the third quarter. Included in the numbers for Q3 are synergies of DKK 46 million on top of DKK 8 million in Q2. And we are, therefore, fine on track to meet the full year number of DKK 110 million as previously communicated.

The development has been satisfactory with total claims broadly as expected. Although there has been a lot of moving parts including tailwind from higher interest rates and more or less has offset higher gains inflation. The numbers shown -- show that most part of the business portfolio has performed well in the quarter but they also show that large claims in Codan's commercial lines are volatile.

Adding all together, business is in good shape, and the technical result reflects a business that continues to develop satisfactory, and a little ahead of our initial forecast. Therefore, we have already upgraded our guidance for the full year technical result back in October.

And now, I'll turn to Slide 3 with our financial highlights. Non-Life technical results, including Codan adds up to DKK 370 million compared to DKK 170 million reported in the third quarter of last year. I'm pleased with both how our business is performing with respect to growth in premiums and the ongoing programs to secure a realization of synergies and cost savings. And I also noticed that the special situation around high inflation and high interest rates add special dynamics to our business.

Inflation has now been a theme for almost a year, and we have successfully navigated to offset or delay the full impact of higher prices. But surely, we are also seeing some of the effects from higher prices on energy and materials. However, we strongly believe that we are in a comfortable position as our indexation of premiums, coupled with selected price increases, are set to mitigate inflation effect next year.

Investment income was a loss of DKK 63 million. Although this number is not at all as high as the number we would order back in Q2, there is still a high amount compared to what we normally report and reflects both the inclusion of the Codan investment portfolio and the fact that the financial markets have had yet another quarter with exceptional price and spread movements. However, we should recall that although the investment loss has hit our business here, now, then we fundamentally benefit from higher interest rates on our insurance business.

Other costs amounted to DKK 13 million with net headquarter costs fairly unchanged. Execution of the initiatives to integrate Codan and realize synergies continues in line with our plans. And in this quarter, we have spent DKK 60 million to further progress on this. Customer relationships and brand amount related to Codan will be amortized over 8 to 10 years, respectively, at an annual rate of DKK 360 million, i.e. DKK 90 million per quarter. This is, of course, a noncash item. And please remember that this will have no effect on our dividend capacity going forward.

Now please turn to Slide 5 for the operational performance. As said, the group made a technical result of DKK 370 million in the third quarter. The result from Alm. Brand was DKK 258 million against the DKK 170 million last year, thus showing a positive development as underlying business developing with case benefiting from tailwind due to higher interest rates, which complicates for claims inflation and higher claim frequency. This quarter, both large claims and weather-related claims are lower compared to last year which, of course, also adds to the profit. And lastly, Alm. Brand was able to reduce expenses as cost initiatives had an effect.

However, in all fairness, it should be recalled that Alm. Brand last year had a one-off cost related to the recalibrating our provisioning model of DKK 23 million. But even when taking that aside, the development this quarter adds to the positive trajectory of our results. Codan's technical result amounts to DKK 112 million. Overall, this is satisfactory number for the quarter. And as such, we are pleased with the development. But we also acknowledge that the Codan business come with more volatility compared to what we have in Alm. Brand. A key action point for us will be to reduce volatility so that the business can produce stable net results with a high degree of predictability.

Our investment strategy remains a conservative long-term strategy with respect to overall portfolio exposure. I will argue that this has been a quarter with an extraordinary development in the financial markets. Therefore, the gains that we had on our books back in mid-August was wiped away in the last half of the quarter.

Please turn to Slide 6. Premium income grew organically in Alm. Brand by 5.1% in the quarter, i.e., keeping the high pace from the previous two quarters with equal contribution from both personal and commercial lines. We talked about inflation for some time now. And clearly, inflation has become more and more visible also in our numbers during the last two quarters. Although we have successfully implemented an initiative in claims handling and procurement to offset this, then we are seeing claims inflation ticking up further as the indexation of premiums this year is based on inflation last year then increases in premiums have been lagging.

But looking into the New Year, we will expect that our regular indexation, which includes a significant hike from construction cost inflation and additional selective price increases on specific product categories will allow us to catch up. And again, our profitability is more important than growth as such.

And now, please turn to Slide 7. Weather has generally been nice and mild with no special events in late summer or early autumn, thus there has been only a very few weather-related claims across the group, totaling a minus 1 percentage point. Large claims, on the other hand, was somewhat to the high side and, to some extent, reflecting a more volatile nature of the acquired corporate business.

Large claims in Alm. Brand were at a normal level of 8 percentage points but in Codan they jumped to 17 percentage points partly driven by the large claims announced in connection with our Q2 report. Adding weather-related large claims together gives a total of 10 percentage points in Alm. Brand and the numbers for Codan add up to 70 percentage points, thus resulting in a group number of 40 percentage points.

And now, I'll turn to Slide 8. Here, we have illustrated the bridge for the Alm. Brand combined ratio from last year to this year. Starting point back in Q3 last year was a reported number of 88.7 and included in this was both tailwind from COVID-19 and headwind from changes in risk margin here shown on the delta year-on-year. Adjusting for these allow us to compare Q3 this year with last year, which shows an improvement of 410 basis points. Some of this is due to lower large claims and lower weather-related claims, but in line with still that underlying performance is doing well despite claims inflation and increase in claims frequency as both cost reduction initiatives and tailwind from high interest rate level keeping.

Codan had a combined ratio of 92.3 in the quarter. This is on an overall level in line with our expectations prior to taking over the company. Personal lines are doing well overall, but commercial lines hit a combined ratio of around 100 this quarter. This is, of course, not sustainable. Adding Alm. Brand and Codan together leaves the group at a combined ratio of 87.3, and I think that this is a fine number given that we are in the early phase of joining the two companies and realizing the synergies.

And now, please turn to Slide 9. For the personal lines, claim ratio for Alm. Brand was 67.6 against 62.9 same quarter last year, i.e., also this quarter somewhat higher as claims frequency has increased partly because of the normalization after lesser COVID-19 and average claims costs have increased due to inflation in the speciality materials and energy. The expense ratio improved to 17.0, i.e., down a healthy 290 basis points relative to last year and included in this is, of course, the effect of the synergy initiatives implemented back in June.

In Codan business achieved a very satisfactory combined ratio of 80.6, reflecting a very low level of claims in the quarter. The expense ratio was 23.8, still high, but moving downwards compared to previous quarter supported by higher premiums.

Please turn to Slide 10 in commercial lines. Also for the commercial lines, the overall picture is that business is doing well. The combined ratio in Alm. Brand was 80, i.e., down 12 percentage points relative to last year and flat relative to a very good second quarter we had this year. Also in commercial lines, we see claims inflation, but it should be noted that most of our benefit from higher interest rates derived from the long-term -- long-tail provisions that we do for claims in commercial included here in, for example, workers' compensation.

The combined ratio in Codan was just above 100. And as mentioned before, this is affected by a higher amount of large claims on Coke generation plants as well as traditional industrial production facilities and warehouses.

We acknowledge that the steps taken over the last couple of years to reduce exposure to specific segments and the ongoing improving, and we will continue and for some parts of the portfolio accelerate these initiatives to ensure an attractive combined ratio.

The expense ratio in Alm. Brand was -- has been relative -- has been reduced by the 140 basis points to 12.8%, reflecting both a very tight cost control and effect -- and the effect of the implement synergy initiatives. Codan expenses ratio -- Codan expense ratio was at 14.2%, leading to a group total of 13.5% for commercial lines.

And now, please turn to Slide 11. Here, we have included a slide with our updated take on inflation. The overall situation remains pretty much unchanged with claims inflation ticking up for specialty building construction and also repair. Not surprisingly, this is caught primarily by higher prices on materials, which have surged more than 13% year-on-year driven by sharp increases in carpentry, gallery and painting work. So far, we have successfully mitigated some of this effect due to strong and valuable relationship with partners based on long-term contracts. Further, we now see indications of a slowdown in construction works, and this is everything else equal, a positive for the price.

Based on this, we foresee a total claims inflation of 4% to 5% this year, somewhat higher for case related to building damages, which will be around 7%, thus significantly lower than the overall inflation on construction cost.

And now, we conclude with some comments on synergies and investments before turning to the outlook for the year. Please go ahead, Andreas.

[Andreas Madsen, executive]

Thank you, Rasmus. Please turn to Slide 13 for an update on synergies. An essential part of our investment case is, of course, that we, each and every quarter, deliver on the synergies that we have promised you and thereby, step-by-step add to your comfort in us reaching the full target. To make this happen, we invest a lot of resources in both detailing and validating all the plans that we have, and we do our utmost to continue to deliver on these plans.

Back in August, we told you that we had identified and implemented initiatives that would get us to a total of DKK 110 million in synergies with a profit loss effect for this year. This is still the case. Our numbers for Q2 included a modest DKK 8 million in synergies, and the numbers for Q3 include an additional DKK 46 million. Thus, so far, we had a total of DKK 54 million. The synergies that we will harvest in Q4 will be slightly higher and bring us to the total of DKK 110 million. This is a strong number and ahead of the initial plan, but even more importantly, is that the initiatives that we have already done will have a run rate of approximately DKK 200 million in the years to come. We have an ambition of delivering on DKK 240 million next year. So we're already now in a good position to meet this target.

And now, please turn to Slide 14 for investments. After adding the Codan investment portfolio, our total portfolio has doubled. Consequently, in absolute numbers, the investment result has increased, thus it makes sense to comment separately on this. The total investment portfolio now amounts to DKK 21.8 billion, split between a hedge portfolio of around DKK 15 billion and a free portfolio of around DKK 6.8 billion. Overall, we consider our investment strategy quite conservative that it includes investment limits capital designs to curb the impact of the investment on the negative result relative to the total result of our group.

This quarter, the financial markets have had yet another negative development across most asset classes, and the net result for us is a loss of DKK 63 million. We are, of course, not happy about this, but we think that the loss is manageable in the quarter where we make a technical result of DKK 370 million, meaning the loss in no way is jeopardizing the overall results of the group. And again, bear in mind that over time, our business will gain from a higher interest rate level in general.

And now, please turn to Slide 16 for the outlook for the year 2022. Back in October, we upgraded our guidance for the technical result to -- from DKK 1.050 billion to DKK 1.1 billion, reflecting the positive effect from higher interest rates and the run-off results in Q3 and today, we reiterate this guidance.

For Alm. Brand, we now guide for a technical result of approximately DKK 800 million against previously DKK 750 million to DKK 800 million, and for Codan, we guide for a technical result of approximately DKK 275 million against previously DKK 225 million, both including synergies.

Further, as a direct consequence of the development on financial markets, we now expect investment income to be a loss of DKK 350 million. This is a lot worse compared to our expectations in mid-August, where we were looking at a number around DKK 100 million in losses, but it reflects that the market volatility has been extreme and unusual in a period of time where inflation has further accelerated and interest rates have been hiked by central banks. Our guidance on group costs remain unchanged at a total of DKK 100 million.

Adding it all together leads to a guidance on the group pretax result for continuing activities of DKK 600 million to DKK 650 million against DKK 750 million to DKK 850 million 3 months ago.

Our earnings guidance is based on an organic growth of 5%, meaning a slightly higher and soon last quarter, thus adding to the positive trajectory we have seen in the first 9 months. Also, we would expect combined ratio to be at 89, excluding any effect from run-offs for the remaining part of the year and expense ratio of 18, reflecting a higher level of costs in Codan. Further, we are on track to harvest DKK 110 million of synergies this year, and we expect to incur special costs related to the integration of Codan and restructuring of DKK 350 million.

On top of this, we'll have special costs relating to the carve-out of Alm. Brand Liv business and our share of costs related to the bankruptcy of Gefion Insurance, in total DKK 80 million. Finally, we'll depreciate customer relations and brand over the next 8 to 10 years at a monthly rate of DKK 30 million, thus totaling around DKK 240 million this year. And just to be clear, this as well as restructuring costs will have no effect on dividend capacity for the years to come.

And with this, I include -- I conclude my presentation and hand over the word to our moderator. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Asbjørn Mørk of Danske Bank.

[Asbjørn Mørk, analyst]

A couple of questions from my side. First, on the inflation environment and your comments around compensating for inflation for next year. So if you look at your Slide 11, you're saying general claims inflation of 4% to 5% this year, obviously, discounting has been quite a sizable tailwind we're not really seeing in the numbers. And you also say that basically inflation is offsetting that. So basically, you're wording around compensating for claims inflation for next year, is that going to be -- how should we read that, should be -- is that 2023 in isolation? Or is it sort of a combination of the '22 and '23? So basically, the things you have not been able to reprice fully yet, we will get back next year. So we should expect you to reprice by around 2% higher than claims inflation next year to offset for the miss or the lag that we haven't seen so far. Is that how we should see it? And how much can you actually do competitive in this competitive environment at the moment?

[Andreas Madsen, executive]

Thank you, Asbjørn. This is Andreas here. Let me try to answer that clearly. It's possible. I think -- well, you can say that we have been seeing inflation pick up in recent months, and that's what we're trying to communicate now that we now are expecting for the full year, 4% to 5%. That does that mean that we've been met by 4% to 5% in the numbers for or will be met by that in 2022. That's where the prices will basically end up at the end of '22.

So you can say that going into next year, we still feel -- we feel fully confident that we will be able to get compensation via both a very sound index -- indexation and also selected price hikes that will sort of net. We will be able to mitigate the effects for claims inflation in 2023. And on top of that, you could say that we do see in the numbers positive from interest rates and discounting and that will have also a positive effect next year. So that -- I hope that answers the question.

[Asbjørn Mørk, analyst]

Well, maybe if I ask it a little bit differently. If I look at your pro forma numbers of the group, your underlying claims ratio is up 90 basis points year-over-year. And obviously, there's no COVID-19 adjustment for Codan. So that's, of course, one thing. But nevertheless, there seems to be a deterioration despite your higher rates benefiting you significantly on the discounting rates. I guess the true underlying is worse. My question was more when you say compensate for next year, is that -- will that also include sort of the repricing that has not had a full effect for this year but will come through in 2023?

[Andreas Madsen, executive]

I would answer that shortly, yes, that's what we mean. But maybe just a short comment on underlying loss ratios because you are right. Now I'm talking into realized numbers we've had in the quarter. Open and [indiscernible] and in Codan and as a group as such. You are right to conclude that when you look at the numbers, the underlying loss ratio in reality has deteriorated a bit due to both claims inflation beginning to pick up also with effect in 2022. So that's a part of it. And another part of it is also, as we do mention in our report that we are seeing also somewhat higher frequencies in small claims.

How much of that is structural is still to be seen. But we have seen a slight pickup in small claims in this quarter, also compared -- yes, also when we adjust for COVID on the Alm. Brand side. And on Codan side, as you mentioned result, it's a bit harder to know exactly. They haven't estimated the COVID effect historically. But I would say that a significant part of the pickup in frequency is caused by COVID on that side. But that does not change the fact that we have a slight observation. We need to be very focused on going forward.

[Asbjørn Mørk, analyst]

All right. Then on your costs, I'm sorry, there's going to be a couple of questions in one. But basically, just first of all, if we look at the Codan cost base, it's down quite significantly in Q3. You talked about high cost in Q1 and Q2 as being temporary. But obviously, it seems like bancassurance is still having a pretty good Q3. So a little bit of comment on that. And basically, it sounds like the cost ratio across both personal and commercial and both Codan and Alm. Brand is coming down. I'm aware of the one-off last year, but still also underlying -- it looks moving in the right direction. And the question relates to the fact that you obviously have the synergies, how you prove to some extent.

So if I look at your -- the cost improvements in Alm. Brand and Codan combined, about DKK 43 million, you're realizing synergies of DKK 46 million. But I guess there's also an underlying cost inflation, not only to your claims side, but to your operating cost, wages, IT licenses, et cetera. So maybe if you could just split that up a bit and say how much is actually the gross cost headwinds that you're seeing from inflation? And how much -- or is this actually the true delivery on the underlying cost side and not just from realized synergies?

[Rasmus Nielsen, executive]

Yes, I can get a little bit into that, Asbjørn. You are right that we feel that the cost in Codan is pretty much under control. And that's also why we did this initiative with 110 FTEs, which are very much linked to Codan. We need to ensure that Codan is getting right into 2023, and that's why we did this exercise here in -- yes, here in this week.

When you look at the Codan cost side now, you're right, it is lower than we have talked about before, and we are happy for that. And at the same time, we are keeping the top line, especially in the bancassurance, which we are very pleased for. So we're quite happy about that. Of course, we have some work to continue on.

Codan, as such, is still on a high level of cost levels than Alm. Brand just in the basics without synergies, and that we will cater for going forward. And then, of course, you have the role of inflation discussion next year with which increases and all that. And that, of course, we are taking into account looking into the budget for 2023. And we will get back to that when we come up with the guidance for 2023.

[Asbjørn Mørk, analyst]

But is the 110 redundancies that you announced today, are they part of the very high cost base that Codan had in Q1 and Q2 this year?

[Rasmus Nielsen, executive]

Yes. You can say that. Codan came in a bit higher than we actually expected when we start looking into the figures more than a year ago. And that's why we have taken necessary steps here to align the cost in order to get where actually our starting point is.

[Andreas Madsen, executive]

But maybe just a comment. It's not -- I mean, the cost base is -- reflect reductions in the whole group, especially across staff functions. So it's not only an effect you will see in Codan. You'll see it across the group. But as we've also commented on, with a tilt towards, especially bancassurance in Codan.

[Rasmus Nielsen, executive]

And if you look at the overall picture, it's smaller things in the broader picture, we just need to take action now. That's it.

[Asbjørn Mørk, analyst]

Just to the cost -- absolute cost level in Codan is down DKK 100 million Q-over-Q. So it's a quite sizable number?

[Andreas Madsen, executive]

Yes. And some of that has to do with the fact that they are -- they're front-loaded in their investments. And that's also the fact that the way that Codan historically have done their accounts, they have the full partnership costs. They have that in Q1, where a lot of renewals are. We're looking into how we'll be doing that in terms of our accounts, but that means that Q1 is also a heavier quarter than the rest of the quarters because of that effect.

[Asbjørn Mørk, analyst]

Okay. That's clear. A final question from my side, Rasmus, you said that your aim is to reduce volatility in Codan ahead. Considering the large claims that you've had Q1 was wind turbines, Q2 with solar panels in the U.S.,now Q3 seems to be more like a fire claim issue for the Danish business. But how will you lower that volatility? Is it only going to be future underwriting? Is it going to be reinsurance? Is it going to be changed to the geographic setup of your business?

[Rasmus Nielsen, executive]

I would say, Asbjørn, it will be a bit of everything. Also focused management and leadership together with underwriting, all the things you manage, we have focused on and working on each single day. Here in Q3, we had three large buyers, that happens now and then. But of course, it should not happen each quarter. So that's how it is.

And one thing we will work on is to -- we'll get back on that in the capital market update. But one thing we will work on that and we do work on is that Codan will take smaller portions in the larger areas and individual contracts. And that is what they have worked on in Codan for some years now, and we definitely continue that work.

[Operator]

Our next question comes from Jakob Brink of Nordea.

[Jakob Brink, analyst]

I would like to go back to Codan, please. So if we take your implicit guidance for when you reported Q2 for Codan, the DKK 225 million we deduct the DKK 90 million that you already reported in Q2 and then the synergies that were allocated to -- no, just take out the DKK 90 million then we get to around DKK 67 million per quarter in the -- per quarter in Q3 and Q4, i.e., just DKK 275 million less DKK 90 million divided by 2, and it came out at DKK 112 million. Could you maybe -- what went better than you expected? Because looking at large claims in commercial Codan, that doesn't look very good. So what exactly went so much better?

[Andreas Madsen, executive]

Yes. Let me try to comment on that. You're right that large claims are above where we would expect them to be. But keep in mind that some of that was also included in our guidance in August of DKK 225 million where we had this single large claim we also commented on coming out there. But apart from that, you're right that what has, so to say, surprised us is that -- it's the overall loss ratio on small claims. They have a sound development, at least compared to where we were seeing it. So that is most of the improvement.

And as you can see also in the quarter that you have Codan personal lines coming out with very strong combined of DKK 80 million, and that's also a bit below where we had them in our expectations. So that's the reason for that.

[Jakob Brink, analyst]

Okay.

[Rasmus Nielsen, executive]

To add as well, myself from IR, that, of course, I mean when we increased the guidance, we also took in the run-off result from Codan for Q3.

[Jakob Brink, analyst]

Okay. That's...

[Rasmus Nielsen, executive]

Yes, the upgrade, but it was -- I mean we did on October 13, the DKK 37 million one-off gains came into the technical result for Codan as well.

[Jakob Brink, analyst]

Okay. Makes sense.

[Rasmus Nielsen, executive]

It's not that different.

[Andreas Madsen, executive]

You can say that it is mostly run-offs, but -- and then you have the two other effects moving in opposite directions.

[Jakob Brink, analyst]

Yes. Okay. Going on with Codan just the -- still then, which is pretty unchanged from Q2, but the implicit guidance for the fourth quarter, again, if we have DKK 275 million. We deduct what you booked in Q3 and the DKK 90 million from Q2. Then, also we take out the synergies from Q3 and also what you then is expecting, given you DKK 170 million for the whole year. So what is left for sort of true underlying Codan. It looks to be a combined ratio of around 97% in Q4. Why that high? Is that due to seasonality? Or is it you being cautious? Or is something -- is there some one-offs? Or why is it that high?

[Andreas Madsen, executive]

It is somewhat to do with seasonality, especially, you can say, large claims have a certain seasonality where they would typically tilt towards being a bit higher in Q4. That's also what you see if you go back in Codan numbers historically. So you can see -- and then there is probably about also given the quarter we just delivered and the last claims -- the picture we also had there, we felt that it was good to be at least on the conservative side compared to where we were previously.

[Jakob Brink, analyst]

Okay. But it's just -- so we have talked...

[Rasmus Nielsen, executive]

Sorry, also on Codan, I mean, when you calculate, I mean when we do with DKK 25 million at a time, then actually 2 percentage points became -- I mean, that's almost entire, I mean, in [indiscernible] amounts, we change it by. So it's perhaps a bit -- I mean, it's perhaps a bit -- if you are, I mean, making just a little bit conservative, then it's easily explained by, I mean, doing it in buckets of DKK 25 million. So it becomes a little sensitive, at least small.

[Jakob Brink, analyst]

I see. Okay. On the private lines in Asbjørn's question before, so just trying to split up the cost between the different items that you -- like you said, [indiscernible] would be a front-loaded partnership costs. If I -- of course, that was the same last year. So trying to do sort of taking out partnership cost also from the first half last year and then taking out one-off cost and other from reported costs, there was a quite significant increase in the residual or underlying cost in the second half of '21 compared to the first half of '21.

Now, of course, the split between H1 and H2 one partnership costs should be the same this year, as you said, it's front loaded. But given what you reported now with a fairly big decline in reported costs in Codan private, it looks as if the second half year underlying cost of sort of the residual cost is not really going to increase. Is -- what has happened? Or was there something there to be aware of last year or -- yes?

[Andreas Madsen, executive]

I think when you look at cost ratios, at least, it should be -- you should keep in mind that -- I mean, they were also in 2021, ramping up significantly in terms of staffing. They were -- they have partnership effect as you're trying to sort of do like-for-like, and that's fair enough. But they were ramping up a lot both in staff and IT investments. And that -- the mechanics are that -- we're only now truly in the previous quarter and this quarter, starting to see premiums come in at a very sound growth levels. So you can say that's at least an effect that they really didn't see the premiums in the books in any full effect last year.

So -- and that being said, I think we are -- it's taken a bit of time for us just to get clarity on this. And with the things that we -- what we've done now is that we have -- we've tried to scale this to the business that is actually being delivered also in terms of costs. And now I think we're approaching the levels that we will see in a normal quarter without these special partnership costs in the numbers.

[Jakob Brink, analyst]

But I guess all the 110 reductions of redundancies you did, which is not only Codan, but I understand some part of it, is not in the Q3 numbers. So what is sort of, I guess, as you say, you have the premiums that are lagging the costs, so they are starting to come in now. Are they fully in? So as you said, is it rightsized? And then of course, you're even taking out further FTE. So where on that cost ratio trajectory are we? Are we, I guess, with...

[Andreas Madsen, executive]

Yes. Just a quick comment, Jakob, just -- we split all costs in the group, also in Codan. So you can say that some of the overall reduction that has been also in staffing in our staff functions, but also sort of benefiting [indiscernible] in Q4 -- in Q3, sorry. So the total DKK 54 million we're delivering on the group, a sound part of that is actually also coming down to the [basic]. And even though we actually didn't touch the bancassurance that much in the first round, it was mostly double functions in staffing. So I think you should keep that in mind also when you look at -- that's also helping the picture, so to say, overall picture in personal lines in Codan.

[Jakob Brink, analyst]

Okay. So -- but is it possible for you to maybe -- I'm a bit confused with all these back and forth. So what is -- what -- so if Q1 and Q2 expense ratio Codan private was very high. This quarter was quite good. Is there more to go? Or what is sort of the run rate we should be looking at going forward?

[Andreas Madsen, executive]

We need to see a further improvement in costs in Codan personal lines going forward. And some of that -- now we did something today, which will help that picture also tilted towards that segment, but also across the rest of the group. And we should -- and we need to be able to -- we will deliver on that. And then we need to deliver on the overall synergies. We also have planned to help improve also personal lines Codan going forward.

[Jakob Brink, analyst]

Okay. There's still improvement from the 9-month level and then synergies on top?

[Andreas Madsen, executive]

Yes.

[Jakob Brink, analyst]

That's what -- yes. Okay. Then on the inflation, 4% to 5% might sound fairly pretty much in line with what we have heard from other companies, maybe a bit higher. But 7%, I think, sounds somewhat higher. I think so we can [indiscernible] that is up at these levels and also looking at the construction price index for Denmark, that might be around 7%, but obviously, that has 75% materials and 25% labor and you are the other way around. So the way I see it, market inflation is only around 5% on house. And then I guess you have procurement that even though it's not the best in Alm. Brand, maybe but will be. It's still a bit strange that it's higher inflation than market inflation or...

[Rasmus Nielsen, executive]

Yes, Jakob, I think -- I mean, when you have to say when we say 4% or 5%, it's where we see the year end as, I mean, when we weigh that in -- and that is -- it's countered by a quite healthy indexation we did by the start of the year. So if you're talking net effects here, it's a quite low net effect you are looking into after...

[Jakob Brink, analyst]

Actually -- I actually mean why was your absolute inflation higher than the market inflation. That, I don't figure.

[Rasmus Nielsen, executive]

What was that the 7% you mentioned?

[Jakob Brink, analyst]

No, but didn't you say in your slides, didn't it say, 4% to 5% and then didn't say, house, 7%. Did I read wrong?

[Rasmus Nielsen, executive]

Up to 7% for some of the claims, I guess. So it's for some of them. And I guess that is -- that's the number that we think we could end up with in Q4 without being sure, but we are also taking a conservative view on -- in this area as well.

[Jakob Brink, analyst]

Because I think [indiscernible] around 3% to 4%. So 7% sounds quite high.

[Rasmus Nielsen, executive]

But is that for the year or whether end of the year?

[Andreas Madsen, executive]

I think 3% to 4% sounds low if we're talking building costs in total. I'm not sure we are dealing -- we are -- yes.

[Jakob Brink, analyst]

It's fixed price agreements. So -- but okay, let's take -- we can take it tomorrow, but okay -- and then just...

[Andreas Madsen, executive]

I'm sorry. But for wages themselves are probably moving at around 3% to 4%. We will take it tomorrow, Jakob, if that's...

[Jakob Brink, analyst]

Yes, let's do that. We can take it tomorrow. But then maybe just a final one from my side. Did the price increases that -- so as you've been also -- so you basically have the opportunity to do quite massive indexations on the House product on 1st of January. Are you going to do that or your competitors are obviously not because they're using the salary index. So have you decided how far you can go above competition without ruining market share pace?

[Andreas Madsen, executive]

In general, I would say, we will be taking advantage of the opportunity we have with indexation. But we are also obviously looking at the specific segments and specific customer groups and also weighing out at least how much do we need to do on top of that in the segment. So when certain segments and customer groups are hit by very high indexes, we obviously take that into account deciding on the overall price increases they will have. But you will see -- expect to see a sound effect -- a high overall effect from indexation, especially in the [indiscernible] part of the group.

[Operator]

[Operator Instructions] Our next question comes from Martin Birk of SEB.

[Martin Birk, analyst]

Perhaps just a couple of follow-ups on what we've always already discussed. But maybe first question on premium growth now that we're talking 2023 already. One of your peers is also referring to a workers' comp index, which will be dropping significantly next year. And I wonder sort of the bits and pieces, whether 5% index is still going to be a sustainable level? Or should we look higher or lower, what you think?

[Rasmus Nielsen, executive]

Yes, I can say you're right that as such, the workers' compensation index will, it seems likely will decrease, and we're taking that into account of course when we look into 2023.

[Martin Birk, analyst]

Okay. But you're not willing to give any more color on it?

[Rasmus Nielsen, executive]

No, I think we should wait for that.

[Martin Birk, analyst]

Okay. And then perhaps also coming back on costs, if I calculate correctly, reaching 18% for the full year debt. Also -- is in January being quite a pickup in new expense rate Q-on-Q going into Q4. What is the reason for that?

[Rasmus Nielsen, executive]

That is, at least not the intention, Martin that our customer increasing -- basic cost will increase in Q4. I think it's the simple math of having Codan in with the full quarter in Q4.

[Martin Birk, analyst]

Okay. And then final question on net investments. Following the market setback in Q3, what kind of running yields are you guys targeting now?

[Andreas Madsen, executive]

Yes. I would say, putting it very roughly, but something like 3% running yield on our free portfolio. So yes, and you can do the math, but we have around DKK 6 million, maybe above -- a bit above that, that comes to just below maybe around DKK 200 million in running yields on the free portfolio. And as you are aware, we are aiming to match the rest as closely as possible.

[Operator]

[Operator Instructions] At this time, we currently have no further questions, so I'll hand back over to Rasmus Nielsen for any closing remarks.

[Rasmus Nielsen, executive]

Yes. Thank you for listening. Thank you for the good questions and all that. Take care.