Topdanmark A/S

CSE:TOP

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to the Topdanmark Interim Financial report for Q1 2023. [Operator Instructions]

I'll now hand it over to the speakers. Please begin.

[Peter Hermann, executive]

Thank you, operator, and good morning, everybody. Thank you for joining us this conference call. My name is Peter Hermann, I'm the group CEO of Topdanmark, and with me is our group CFO, Lars Kufell Beck; and Head of Investor Relations, Robin Lofgren. And we are hosting this conference call because earlier today, we published our interim report for the first quarter of 2023.

I would like to start with a few opening remarks before handing over to Lars for comments on the results in more detail.

So could we see Slide 2, please. Let me first briefly comment on the significant piece of news from last month. We have entered into an agreement to acquire Oona Health, including the subsidiary Dansk Sundhedssikring, which is a market-leading specialized Danish health insurer. And after the sale of our life insurance operation last year, Topdanmark is now a fully focused nonlife insurer, and health solutions are core products of the non-life insurance market. And therefore, I'm pleased that we, with this acquisition, will secure a strong position in this fast-growing market with high customer loyalty. In other words, there's no doubt about the excellent strategic fit of this transaction.

But it's not just the strategic fit that is quite strong, so are both the current financial situation and the outlook for the business. Oona Health currently exhibits very strong financial operating performance, which is accretive to Topdanmark's current performance and targets. Oona has historically demonstrated double-digit premium growth with a compound annual growth of 24% per year in the last 3 years. On our numbers, we forecast more than 10% operating earnings per share accretion for Topdanmark in '24 and even adjusting for the purchase price, we see 1% to 2% operating EPS, earnings per share, accretion. It is rather unique that this acquisition of a clear growth case creates shareholder value already in year 1. In addition to this, we see a strong top line synergy potential exploring cross and upselling between our portfolios. So we expect the closing of this transaction in the second half of 2023, and we are very much looking forward to welcoming more than 200 new colleagues to Topdanmark. So that was just the first thing.

Let me go to Slide 3, please. Now turning to the financial performance in Q1, we delivered a good set of results. Net profit amounted to DKK 373 million with an insurance service result of DKK 426 million and a combined ratio of 83.6%. And once again, we see clear evidence of the robustness of our business model and the solid effects of our ongoing efficiency and pricing initiatives. And despite some turmoil in the banking sector during March, financial market performance was good, and we posted a net investment result of DKK 106 million in the quarter. Insurance revenue grew by 2.5% this quarter, and we are seeing continued growth across all business areas, partly driven by our pricing initiatives, but also by up and cross-selling to new and existing customers. However, our continued work with pricing initiatives has also caused a higher churn rate as expected, especially in the private segment.

An important topic over the recent quarters has been the very high inflation. We are pleased to see further evidence that inflation has peaked in Q4 as the Danish consumer price index continued to drop to now 6.7% in March. As you know, the consumer price index is not a good proxy for inflation in an insurance company as we buy significantly different goods than those included in the index. On those goods, we also see signs of falling inflation as notably timber prices are decreasing. In the short term, we are in a good position to handle inflation through procurement and underwriting, and we currently see somewhat lower claims inflation than the market inflation, as also underpinned by our combined ratio numbers. We have already imposed inflation-based price increase across a number of products, and we remain committed to our target of maintaining profitability by pricing at least in line with inflation over time.

But Lars, will you take us through the Q1 results in more detail, please?

[Lars Beck, executive]

Of course, I will, and thank you, Peter. If we take a closer look at our Q1 results, the profit after tax amounted to DKK 373 million, as Peter mentioned. The result is affected by 3 items that I would like to address. First, a sound development in our technical results; secondly, a strong investment return; and finally, a somewhat higher effective tax rate due to certain technicalities that I will talk you through.

In terms of the technical results, we delivered a combined ratio of 83.6% or 85.9% excluding runoff and a growth of 2.5% for the quarter. The quarter was affected by many weather-related events, including the wettest January on record in Denmark, but weather-related claims were almost in line with the forecast. In addition, we saw significant positive impact stemming from the rising interest rates when comparing to this time last year. At face value, the underlying claims ratio rose by 1.5 percentage points in the quarter.

But it's important to note that Q1 2022 was positively impacted by low frequency in general across product lines, while frequency specifically within motor was higher in Q1 2023 as the northernmost parts of Denmark experienced high snow depths during March. Please note that we do not include such claims in our weather-related claims definition. Furthermore, please note that the products affected by a frequency normalization after COVID such as travel, personal accident and also motor all shows good profitability. And on the positive side, our efforts to become more efficient continue to deliver strong results.

Now turning to the investment results. The investment return was DKK 106 million in Q1, impacted by favorable developments across multiple asset classes, including strong equity markets, higher running yield on short-term liquidity and a net gain from hedging the Solvency II curve. On the negative side, we performed a value adjustment on our domicile property in the quarter. We continued to reduce our CLO exposure during the quarter, but due to market conditions, specifically in March, we do retain some exposure to CLOs over the quarter end. Please note that we have already further reduced our CLO exposure since end of March, and we aim to reduce it further over the coming quarters. Furthermore, during the quarter in February, we have assessed the relative valuation between equities and fixed income, and we have also reduced our equity exposure and increased our fixed income exposure accordingly in the month of February.

Tax for the quarter amounted to DKK 138 million corresponding to an effective tax rate of 27.1%. This does appear somewhat high and is affected by the value adjustment on our domicile property that I mentioned before. The value adjustment or impairment was nontax deductible as the book value is below building costs. We do continue to assume an effective tax rate of 25.2% in the coming quarters, in line with the statutory tax rate in Denmark.

And finally, a comment on our solvency cover, which increased to 351% in Q1, of course, mainly due to the lower proposed dividend following the announced intended acquisition of Oona Health. Underlying the negative impact on own funds from removal of the volatility adjustment to the interest rate curve was more than offset by higher profit margin. So the solvency capital requirement increased marginally in Q1. And as we still retain some exposure to CLOs, our continued efforts to reduce this will likely further decrease the solvency requirement in the coming quarters, all else being equal.

Could we turn to Slide 3, please, looking at the profit forecast model. Turning to the -- sorry, next slide, not Slide 3, next slide, sorry. Turning to the profit forecast model for 2023, we have improved the assumed combined ratio from between 83% and 86% to now between 82.5% and 85.5% excluding runoff in Q2 through Q4. On the positive side, we did see a one-off profit of DKK 60 million in Q1. While on the negative side, we expect slightly higher costs in the rest of the year as we see a higher impact of the new collective salary agreement that was adopted and will become effective here in April than what we had foreseen. Underlying profitability remains very stable, and we [ also ] continue to find the forecasted level for combined ratio, very strong, given the prevailing macroeconomic uncertainty.

The assumed premium growth for 2023 is unchanged at 2% to 3.5% based on the development in our portfolio. And hence, in conclusion, the post-tax profit forecast model for 2023 is lifted by DKK 100 million to the range of [ DKK 1,150 million to DKK 1,410 million ], excluding runoff in Q2 through Q4.

Slide 4, please, and over to you, Peter, for concluding remarks.

[Peter Hermann, executive]

Yes. Thank you, Lars. And this concludes our opening remarks. So we are now ready to answer your questions. Please keep your questions to 1 or 2 at a time. And if you have more questions, feel free to enter the queue again for a second one. So operator, may we have the first question?

[Operator]

[Operator Instructions] The first question is from the line of Youdish Chicooree from Autonomous Research.

[Youdish Chicooree, analyst]

I have 2 questions, please, both of them on the underlying claims ratio. In the quarter, it was up by roughly 1.5 percentage points. And I was wondering if you could tell us how much of the deterioration is down to more normal frequency and how much is down to just having snow in parts of Denmark. That's the first question. And then secondly, just trying to think on the trajectory going forward. I believe I think at some point last year, you were already saying frequency had normalized. So I would have thought like the year-on-year comparisons should become easier, but clearly, there seems to be still like an impact from higher frequencies. So if you could just talk about how you expect this to develop over the coming quarters, that would be very helpful.

[Lars Beck, executive]

Thank you, and thank you for your questions. In terms of the underlying claims ratio, as you say, yes, deterioration by 1.6%. The vast majority of that is coming from the travel and personal accident part and not from the weather-related claims on motor that we saw. You're absolutely right that last year, we did say, in particular, in the second half of the year, we did note that frequencies had started or had normalized, and we're coming to a normalized level. That does not, however, account for Q1 2022. In Denmark, actually, the country was closed down. We were actually locked down up until February 2022. So clearly, frequencies for Q1 last year was impacted by COVID. So you're absolutely right. For Q3 and Q4, yes, we did see 2022 as a normalized level. But for Q1, there is clearly still a frequency impact from COVID in last year's numbers.

[Youdish Chicooree, analyst]

And I suppose there will be some impact in Q2 as well, right?

[Lars Beck, executive]

Yes, but they're -- but smaller than in Q1.

[Operator]

The next question will be from the line of Asbjorn Mork from Danske Bank.

[Asbjørn Mørk, analyst]

Yes. A couple of questions from my side, if I may start on your growth in the private segment, the 0.6%. And I fully acknowledge the IFRS 17 impact from the lack of discounting effects here, but still 0.6% does look rather low. Could you sort of split that up -- that back some bit and say what are sort of the growth trends here in terms of repricing versus net outflow of customers? I guess you are repricing something like 4%, 5%. And you are stating that Nordea is having better traction than the last customers from Danske. So what is it really that is -- that continues to have a negative impact here? Is it IT issues? Or have you repriced too heavily as you -- I think you were also alluding to at some point in '22 that you might have? So a little bit of comment on that and maybe also how that impacts your cost ratio in private going forward now with the union agreements since you're not growing the premium side.

[Peter Hermann, executive]

Yes, it's true that if you look at it, you can say the intake is not that high and will probably be higher [indiscernible] maybe due to the inflation index, but the intake is not that high in private. That's one thing. And as you know, that we have done repricing and that has also meant higher churn. So you can say that is actually the main message is that we did -- we had the repricing, we have seen churn. And then you can say, as you know, that we are not doing this premium discounting or the interest rates on the [indiscernible].

So that gives, you can say -- actually say, pretty low, you can say, growth within the private, but it's actually not -- it's actually more or less in line with what we have seen in the previous quarters actually. But you can say sales is picking up and -- but it's true that going forward, we also see higher costs at least higher than foreseen this year due to the collective agreement, salary agreements. So the cost ratio is -- expense ratio will go a little up also in private. And as -- the main part is actually the synergies from the life, which we have [ stated ]. But you can say, there's nothing more to that, actually what we have already seen in the last quarters, but we can say the positive thing is that sales are at least picking up and turning slightly -- starting to, you can say, flatten out.

[Asbjørn Mørk, analyst]

But I guess since your peers are also repricing, I guess, the net outflow should sort of come down to a more normalized level. Wouldn't that be solved as expected at some point? [ Wasn't anything happening ] in Q1?

[Peter Hermann, executive]

Now depending on, you can say, competitors, how they are moving in the market and the prices they do, as you've seen the last several quarters, you can say, we have seen also better combined ratios in Topdanmark than at least compared with this. So that, you can say, so the effect is also that we've seen higher churn. So depending a little on the movement by competitors, yes, then maybe the same sales are picking up. So maybe that would get, you can say, better growth percentages going forward in private as well.

[Asbjørn Mørk, analyst]

All right. Fair enough. Second question from my side would be on the investment mix changes. You're saying that you've reassessed the relative valuation between equities and fixed income. And could you just elaborate a bit on what is it exactly -- what is the rationale? What kind of returns you've seen from the different asset classes? And would it be fair -- I mean it looks like you sold down something like [ DKK 0.5 billion or DKK 0.6 billion ] of equities. Would that be something like 39% lower SCR? And will that come back to shareholders? Or what is sort of the rationale here?

[Lars Beck, executive]

I believe the DKK 0.6 million is a little bit on the high side in terms of what we do, but it was fairly simple. When we looked at this in February, the conclusion on our side was clearly that, in particular, U.S. equities seems like they were trading at a high price. But if you could put that back into certain fixed income, including certain high yield, we could get a very decent return on those asset classes instead. Of course, if you make larger changes, that does impact the solvency requirement as well. It's already included in the calculations. Right now, we do not foresee a scenario where we will be exiting equities completely. On the other hand, we are pleased with the position we have now. But -- and the comment, I believe, was -- we made or we have made is also a follow-up from last quarter where we were challenged a little bit about whether equity is the right thing to do right now. And this is just to make you all aware that we are actually deliberately making conscious decisions on this and not just sticking to what we had.

[Peter Hermann, executive]

And the smaller CLO positioning, getting out of that, and actually it's, you can say, a beneficial on the solvency.

[Asbjørn Mørk, analyst]

But when you say that equities were expensive, was that basically saying that you do not think that the absolute returns on equities will be positive? Or is it relative to the solvency requirement that comes with investing in equities versus covered bonds? So what is it, more a return on own funds calculation or an absolute return calculation?

[Lars Beck, executive]

A relative return gain, of course.

[Asbjørn Mørk, analyst]

Versus own funds?

[Lars Beck, executive]

Yes. If you go into sort of medium-term duration flexes in Denmark, you can acquire decent results without -- basically without any capital requirement, whereas U.S. equities, it's different and you also have FX positions, et cetera, et cetera. So it's clearly a relative gain we're talking about here, not absolute.

[Operator]

The next question will be from the line of Faizan Lakhani from HSBC.

[Faizan Lakhani, analyst]

My first question is on the Oona Health transaction. I wanted to understand how the intangibles are amortized over time. And does this implicitly provide a tailwind for the solvency going forward? So just to understand that would be helpful. The second is on the profit margin improvement on the solvency. What was the driver behind that? And my final question is on the average premium on Slide 6. It appears that you were ahead of pricing and speed of increases were starting to tail off in back end of last year, but it seems to have accelerated in Q1. I'm just trying to understand that you're already operating at a very strong combined ratio, you're seeing pricing ahead of the market. So why the speed-up in terms of putting rate through?

[Lars Beck, executive]

Thanks, Faizan, and thank you for your questions. In terms of the intangibles and the depreciation or amortization of that, we have not made any decisions yet. I mean we will only be finalizing the -- or doing the purchase price allocation exercise as and when the transaction closes. If you look in terms of what peers are doing, it seems like whatever is allocated to customer contracts and brand is amortized over a 2-year period. And I think that seems like to be the best practice in the market. So of course, if we do not do something like that, then that would be an outlier, if we put it like that. In terms of whether it gives us tailwind on solvency going forward, it will not. I mean if you take our current solvency ratio and you take out the money that we have to use to pay for Oona Health, you would basically bring that down to a normalized level, and then you would have a buildup of both intangibles and also certain tangible assets, of course, on the balance sheet. So no, over time, we do not expect this to give us any solvency tailwind because we're using [ free ] funds or own funds to pay for the acquisition.

[Faizan Lakhani, analyst]

Sorry, just a follow-up on that, but your shareholder equity doesn't change, I guess, in this transaction because there's a lot of goodwill. Surely, that builds a lot of tangible. Somehow you sort of calculate as your own funds, if you -- I don't know the current figure, but it's something like DKK 2 billion goodwill potentially, that's sort of DKK 200 million a year that sort of rolls off, effectively. I don't quite fathom why that wouldn't...

[Lars Beck, executive]

No, no, because it's not all of the intangibles that you amortize right? So goodwill you do not amortize. It's only the part related to the brand and the customers. So yes, potentially, there will be some -- a lot of if's and but's and when's. So our approach is to wait until we have the final purchase price allocation, and then we can also help you model the impact going forward. And in terms of the profit margin, well, it's basically all input parameters, including lapse ratios, et cetera, et cetera, that have been reassessed. So there's not one silver bullet here that has changed it. It's a revaluation of the model and all of the input parameters.

[Peter Hermann, executive]

Looking at the average premium, it's true that it's ticking up a little here in Q1, but that's actually what we already told you that would happen because we have already worked for a long time with actually getting the right price and also being little ahead of inflation. And as we said, we still saw, you can say, inflation going up, maybe in a less manner now because -- but still in a high range, and that was the reason why we said we would introduce, you can say, inflation-based price increases. And that is what you can see also, you can say, increasing the average premiums in Q1. So I would say that we are -- you can maybe call it more, as we are pricing in line with inflation at the moment. So that's the reason.

[Operator]

The next question is from the line of Jakob Brink from Nordea.

[Jakob Brink, analyst]

Just maybe starting on Oona, please. Looking at Oona's annual report from last year, there's just some pretty big movements also in their guidance for this year from the reported profit last year. It seems to be coming from some other costs and also very high premium growth. I think I know why, but it would be good if you could maybe put a bit more details on that, including if I look at Dansk Sundhedssikring's annual report, it looks like they have DKK 30 million, DKK 40 million higher net profit for 2023 guidance. So I guess that's related to [ loss ] in Sweden. Any words on the Swedish business or basically that difference, please? And then just back to Asbjorn's questions in the beginning around growth in the Private segment and also your inflation levels here. So I guess you didn't give us before, the actual gross numbers, but if you have 2% to 4% inflation, looking at your graphs there, it looks like maybe 5% premium growth and you're only growing 0.6%. Would it be fair to say then that you're losing maybe 4% of the volumes? Or is there some kind of price, sort of, lags that are maybe disturbing that estimation?

[Lars Beck, executive]

Thank you, Jakob, for your questions. I think regarding Oona Health and the questions related to that, I just want to reiterate what we said earlier on. One, of course, we've done our due diligence and have our case on the numbers. And until closing, of course, in terms of financials for Oona, including guidance for 2023, we have to refer you to their reports and have -- don't have any further comments on it.

[Jakob Brink, analyst]

But could you maybe just help us understand still what's the difference then between Oona group and Dansk Sundhedssikring of that DKK 30 million, DKK 40 million? And I guess, also it's Topdanmark is going to have a Swedish operation.

[Peter Hermann, executive]

[ I'm sure ] that I can tell you that, looking from an Oona perspective, yes, then the DFS Health, the Swedish part of Dansk Sundhedssikring is giving a negative result. So that's, of course, you can say, and at least one of the differences. And maybe we said it the last time as well, I can't remember, but just to say that in the press release, we have said that we, of course, are taking over, hopefully, a business consisting of mainly Danish operation and then also a smaller Swedish one. And we will, of course, when the acquisition will be approved, then we will look into that together with the Board saying, do we think we will continue that? Or do we think we should not continue that? But we cannot answer the question at the moment other than saying that Topdanmark is a Danish business, and we have also bought it mainly due to the Danish operations, and we will consider the Swedish operation going forward.

[Jakob Brink, analyst]

And the guidance you made on the EPS increase, and you mentioned in the press release, was that based on Oona or Dansk Sundhedssikring?

[Lars Beck, executive]

That was based on Oona.

[Jakob Brink, analyst]

Okay. Okay. And then the premium growth, I don't know if you can get any closer to that, please?

[Lars Beck, executive]

I think it's just technicality, Jakob. Maybe then Peter want to review further, just a technicality issue, you should be careful about making, of course, direct comparisons of growth in the quarter and what happens in the portfolio because this is, of course, the portfolio which was, for the vast majority, with annual policies and hence a negative portfolio outflow in Q2 2022 will impact your nominal growth in Q1 2023. So you should be careful about making just one-to-one assumptions or relations between actual growth and portfolio growth. I don't know, Peter, if you have any further comments on the Private part.

[Peter Hermann, executive]

No, I would say -- but it's true what you're saying, Jakob, we have done, you can say, these inflation-based price increases. We have also a little smaller indexation. And all in all, it's true that the growth is not high in the Private segment. And then you can say the main reason is that we have seen more churn on this portfolio. So you can say, yes, we have -- as I said early on, we have also priced in front of inflation that actually have improved the combined ratio but also meant higher churn. Now I would say that we are more or less, I would say, more in line with inflation at the moment we're pricing. And going forward, yes, let's see how competitors will act as well. And then, as I said before, we are seeing sales, at least, picking up and churn flattening out a little more. So that's -- it could be that, you can say, the growth will actually improve going forward.

[Jakob Brink, analyst]

Maybe just a follow-up, what kind of customers are leaving? Is it one-product customers like we saw in Tryg? Or is it sort of more broad-based and maybe also who is taking the market share?

[Peter Hermann, executive]

There's not one competitor here, you can say that we are also seeing one-product customers leaving us, but I assume and I admit we have also seen, you can say, customers with more products leaving us. So of course, we're still doing this on a risk-based view on this. So of course, we're trying to see if we can stick to the best customers, so it's only better [indiscernible]. We have also seen good customers leaving us due to the competition situation in Denmark. And it's not one competitor here. It's -- but we have seen some competitors being quite aggressive in some parts. And sometimes, if you get one product, maybe you can get a hold of the customer. But -- so it's not a simple view. This is -- but we are trying to do what we can. We actually are good at protecting our customers, actually defending them and getting them back. So that's also part of actually why the churn is lowering at the moment.

[Operator]

The next question will be from the line of Jan Erik Gjerland from ABG.

[Jan Gjerland, analyst]

Jan Erik Gjerland from ABG here. Just a couple of questions as well. Just back on the inflation and the growth here, is it so that you are testing your sort of your customer churn on your profitability, et cetera, not to lose to profitable customers? Or how do you really go ahead when you're looking at your increase of premiums? Is it flat through all or is it so that the best customer get lower? Or how do you treat them differently, so to speak? And how has this workmen compensation indexation, which I think was low in this quarter, hit your sort of the SMEs because that is growing very fast? So how -- where are you repricing [ very far ] from the SME side versus the private side, if I could start with that?

[Peter Hermann, executive]

We definitely do it on a, you can say, on a customer level. Of course, you can say, inflation hits, you can say, all around. But when we do price increases, we, of course, look to the, you can say, the expected risk, meaning that you will not increase good customers as much as less-good customers. So it's not just one [indiscernible] fits for all. So when we do say that we benefited in price, plus 2%, 3%, whatever percent it is, that is an average. That could be plus 10%, 11% and 0% for others [indiscernible] prices. So we're trying to do at good pace and, of course, to keep as much of the good customers as well. That's one thing. The other thing was workers' compensation, yes, the index was more than 10% -- 13% -- actually 14% last year, actually 2 last years. And this year, it's 2.5%.

So we have actually seen some churn here in terms of also because interest rates are also -- has -- ticking up, meaning that you can say the expected risk on workers' compensation have actually gone down. That has improved the result as well, but also that some competitors are also lower. We are also looking into this. So we are also looking into how to protect the portfolio, but also making sure that we still have the profitability here. But this is, as you know, always a gain between having -- keeping your profitability and growing. And at the moment, yes, we have seen a lower growth going forward. But I think actually, we have an okay growth at the moment, looking in terms of what is happening in the market inflation-wise and so on in terms of our pricing efforts. So we're still happy to protect the profitability going forward. So -- and then that also goes with then the workers' compensation.

[Jan Gjerland, analyst]

Okay. Perfect. Just on the risk margin in the claims levels, rates improved by 50 basis points, it seems, between Q1 last year and this quarter. Is it the same issues like in the solvency risk margin thinking when it comes to the improvement? What's behind the improvements? If you could just relate to that?

[Lars Beck, executive]

Yes. And there's also some certain technicalities in relation to the first time adoption of the IFRS 17 impact that is in that category, Jan Erik.

[Jan Gjerland, analyst]

Okay. But is this a level going forward? Or is it just a onetime happening, as you say?

[Lars Beck, executive]

Jan Erik, there's also an element of the fact that our solvency is simply lower. You're comparing to Q1 where we included the life in there as well. Our solvency is -- our solvency requirements, sorry, is lower now, and that will also help us going forward.

[Peter Hermann, executive]

Yes, depending on the development of the solvency, Jan Erik.

[Operator]

The next question will be from the line of Martin Gregers Birk from SEB.

[Martin Gregers Birk, analyst]

Just coming back to premiums. I guess, 2.5% is a pretty good starting point to reach your premium guidance for the full year. But I did have the impression that your premium growth guidance was going to be fairly back-end loaded. So how do you see sort of the premium pattern over the coming quarters from here? That will be my first question. And then the second question is back to [ Forsikring ] and the stickiness of those premiums, given it's a daily broker business. Any questions on that? Or any -- sorry, any comments on that?

[Lars Beck, executive]

I think, let's say, if we start, you actually provide that 2.5% is a good starting point for the year. However, there is, of course, an idea behind us keeping the guidance split between 2% and 3.5%. That is because we are looking into a high macroeconomic uncertainty. We are looking into, as we have over the last years, a highly competitive environment in Denmark. And then we are also, in particular, on the workers' comp side, as Peter alluded to, we are seeing competitors being more aggressive there. And on these workers' comp business, we do have a high average premium per policy. So some movement in the market will potentially impact our growth moving forward or going forward. So hence, we stick to the 2% to 3.5%. Yes, we've had a good start, but that has not led us to become more optimistic for the year.

[Peter Hermann, executive]

Maybe just your questions to Oona, Martin, yes, actually, a bigger chunk of the business within Dansk Sundhedssikring is actually also coming from the broker channel. But if you look at the churn and the retention levels, actually over time in that portfolio, it has been quite impressive that it hasn't been suddenly it's broker business, it's been broker business actually for a long time and the churn or retention, same view, but it's actually pretty good. So they have -- but it's pretty sticky business also within the broker business here.

[Martin Gregers Birk, analyst]

Do you anticipate -- a question out of curiosity is that, if you manage to make one of these Oona clients a full Topdanmark client and out of [indiscernible] health insurance element in it, that would be sold to someone else, [indiscernible] would they be able to target sort of the rest of the P&C insurance that, that particular customer may have?

[Peter Hermann, executive]

Yes. So all in all, you can say it's always -- we're also trying to up-selling and cross-selling if we are able to do it. I think you should always consider, you can say, the channel or the -- you can say the value of the lead. For example, when we have leads [indiscernible] from Nordea, then it is a customer actually looking into that private economic situation where insurance is a part of it, that's one kind of lead. You can say another lead could, of course, be a customer who has let's say, health insurance. But of course, we could also talk with the person about other insurances as well, but it's a different lead. And then it's true that if you have some -- for example, some of the customers within Oona is actually administration deal. So they actually do -- they don't own the customer, you can say, but they do administration in terms of claims handling and so on. So that will not be, you can say, where you have the consent from the customer to actually contact them. So it will depend on the different customers in Oona whether you can say it's a good lead or not.

But I think actually what is -- what should be easy is that for example, all of Topdanmark customers not having, you can say, health insurance into the private division, for example, where you can say, of course, that you can contact them with the Oona product, but there could probably also be some benefits of actually seeing some of the Oona customers that could get some Topdanmark insurances. But it's not all customers within their product customer portfolio that will be easy, so to speak, or just to, yes, go to because we have to -- that's also broker business, so then maybe we could take it otherwise from other places and so on. So we have to look into that. But we have, of course, built into our economic financial view on it, also some up-selling across portfolio [indiscernible].

[Operator]

The next question will be from the line of Tryfonas Spyrou from Berenberg.

[Tryfonas Spyrou, analyst]

I have 2 questions, please. The first one is Oona Health. I was wondering if you can share some more details on how you expect to generate revenue synergies and how much [ can you ] talk to the numbers. I appreciate that there will be no integration with [ Oona Health ], you can say, or operate as a standalone company, [indiscernible] so forth. So maybe you can share some thoughts on the expected -- as you see it, and how the order should look like going forward? And the second one is on expense ratio. You mentioned it's expected to be a little bit higher this year. Can you maybe help us understand what you mean by little? Is it more like 20 bps? Or is it closer to 17% or even above? So any color there will be appreciated.

[Peter Hermann, executive]

We don't have -- you can say, we don't have numbers for you, you can say, for the longer run on the acquisition on Oona Health. We want to be certain that we do the deal and then we'll incorporate, you can say, our expectations of that business together with Topdanmark going forward when we stack milestone. But it's -- but based on the scenario, we are looking more into a top line synergy case than a cost-optimizing synergy case. And that's the fact that we want to keep it as a separate company and also work with their brand as well as we just mentioned. And we have, you can say, a good starting point, but they have -- they're #1, you can say, in terms of market share within the health insurance business.

So we don't want to stall that, but we want to make sure that we can use potential upselling going across the different portfolios here. But we don't have numbers for you to say that this is how much and how much. The only thing we can say is that, as we lay forward, that we -- we're looking into, you can say, a 10% higher operating earnings per share going forward, just looking forward for next year and, you can say, 1% to 2% looking at also taking care of the purchase price. So that's the numbers we will give you at the moment.

[Lars Beck, executive]

In terms of expense ratio, yes, you're right, we are guiding that it will be a little bit higher and we are not giving any specific interval or guidance on it. But clearly, when we say a little, we measure it in basis points and not percentage points. So your assumptions doesn't seem like it's completely off compared to our internal modeling.

[Operator]

The next question will be from the line of Vinit Malhotra from Mediobanca.

[Vinit Malhotra, analyst]

I have 2 questions. One is on Slide 12, please, where you say inflation has peaked. And I'm just trying to understand, isn't this -- I mean, are you -- do you have a differentiated view versus your peers because I've heard some of your peers are still trying to be ahead of inflation, where you're saying you're at par with inflation on pricing? And could that be an opportunity to reduce the customer churn, if you see that? Any comments on that, please? And second question is on just the claims trend and weather. Slide 28 is my reference point here. It doesn't look like travel, for example, is much higher than pre-COVID, slightly higher. Would you say that there is something different about your portfolio and travel compared to peers? And also the same question on your portfolio versus peers on weather, where we actually didn't hear much of a weather commentary from Tryg last week. So I'm just curious on your positioning versus peers on weather and travel.

[Peter Hermann, executive]

Inflation -- it's true that we're saying that it has peaked, you can say, that just means that you can say the increases are a little lower than they were before. And we're just saying that if you look at the competitive situation, we have already, you can say, done quite a lot of, you can say, price increases. And that's the reason why we had shown -- you can say, we think, good combined ratios also compared with the peers over the last year or so. So of course, there's a balance between keeping up prices and also keeping a competitive level. So that's the reason why we -- as we've shown, the average prices of the premium is still going up because we are doing the price increases, but we have to consider also the competitive situation. That's the reason why we are saying that we continue more in line with inflation at the moment where I would say that we have been in front before.

And in terms of travel, just to say that I think it's important for you to know that if you look at frequencies, then we can see, yes, frequencies is ticking up due to the fact that it has normalized, people are traveling more. But on the other hand, remember that we lost the Mastercard agreement with [ Sig Bank ] which was, you can say, also got a lot of customers with a travel insurance. They are out of the books, meaning that you can say, in terms of frequencies, number of claims, that of course, will go down and we don't have that anymore. But you can say it is going up in terms of, you can say, the normalization, people are traveling more. So underlying, we can see more claims, you can say, if it was an one-to-one. But the problem is that now when you look at the numbers, it is without the Mastercard agreement, so that, you can say, means that we see fewer actually travel claims.

And weather -- the reason why we're mentioning weather is that we see differently on weather. I think that the best -- when we look into weather, we take all the claims that is connected with weather, storm and rain and so on. But for example, if you have a car that is -- that will do a single accident due to heavy snowfall that will, for us, be a motor claim and not a weather claim. So I think the reason why we are measuring weather like this in the report is to say that remember, when we take out weather to come to the underlying, then it's rain and storms and so on, but it's not, for example, snow on personal accident and most of the people do claims due to the fact that it's been snowing or it's icy or something. They will be either a personal claim or motor claim and not a weather claim. I just know that other competitors are looking at this a little differently when they do this, what they take out of the gross claims to come to the underlying.

[Operator]

The next question will be a follow-up from the line of Asbjorn Mork from Danske Bank.

[Asbjørn Mørk, analyst]

Just a couple of follow-up questions, if I may. First, on the underlying claims ratio, the undiscounted 150 basis point deterioration year-over-year. If I look at sort of Q4 trends, it was 290 and in Q3 it was 420 deterioration and [ little bit ] on IFRS 17, but looking at the improvement trends and the sort of the [ commissioning ] you do on automotive. So I was just wondering, is it fair to assume Q2 underlying undiscounted will be sort of flattish year-over-year? Is that a reasonable assumption?

[Lars Beck, executive]

We don't guide on that, Asbjorn, but what I do want to acknowledge is, as you say, that there is actually G&A improvement trends over the last quarters, but we do not guide on the underlying [ statements ].

[Asbjørn Mørk, analyst]

Okay. Fair enough. And then second question, going back to Oona. I know what you said about the brokerage portfolio and the sort of the loyalty of the customer base. Just wondering if there's any sort of white label solution products from other insurance companies that could be at risk here? Or have you seen any sort of negative synergies from you being the owner of Oona versus sort of the competitive situation? And then also looking at the insurance reserves in Oona, I don't know how much flavor you can give, but just the claims provisioning was actually down a little bit in '22 despite of the high growth. I guess there could be some discounting effect here. But maybe just a little bit of comment on how much you've been into the provisioning side of Oona before you did the acquisition?

[Lars Beck, executive]

Of course, we've been doing our due diligence very, very thoroughly on the Oona case. I think if you turn -- if you look at customer vulnerability, we have not pinpointed like these are the customers we believe there is a risk that we'll lose. But in our case, we have, of course, built in from a prudency point of view, of course, built in a certain initial churn that you would be expecting when it comes to an acquisition like this. And in terms of the claims provision, it is driven by 2 things. It's, of course, to the largest extent, driven by the increase in interest rates that we have seen. And then it is also because there has been an underlying improvement. If you look at the numbers, there has been an underlying improvement in the claims ratio for Oona Health. That, of course, helps the provision at [indiscernible]

[Operator]

[Operator Instructions] Our next question will be a follow-up from the line of Jan Erik Gjerland from ABG.

[Jan Gjerland, analyst]

Just on the cost side. Would any of the cost increases be because you have to sort of sell more to existing clients? Is that some part of the equation? Or is it just purely that you have lost out of the life synergies?

[Lars Beck, executive]

No, there are no specific impacts from cross and upsell. It's the life synergies, a few one-offs in the quarter. And then as we said, looking ahead, the new labor union agreement in Denmark is becoming a little bit more expensive than what we had included in our forecast. On the other hand, we made good progress with our efficiency program. So that offsets part of the headwinds that we are getting. And in aggregate, that's why we are guiding a little higher expense ratio for the year compared to our initial guidance.

[Jan Gjerland, analyst]

Okay. And then I can't remember if it was Jakob or Asbjorn who talked about the competition, but who are you losing to? Are you losing to the large ones or are you losing to the smaller [ mutuals ] at all? How should we read the competition picture in Denmark at the moment, both private and SMEs?

[Lars Beck, executive]

From our side, there are no changes to -- if you look at the private side, no changes to what we have seen over the last years, there's not one specific competitor who is [ taking ] off or sweeping off the whole market. In terms of the SME portfolio, we are -- as you can also see in our numbers, we're still growing, and it's a focus area from our side, as you know. And hence, we are happy to see the results. And we believe that, that demonstrates the good and strong value proposition, product offering and service that we deliver to our customers.

[Peter Hermann, executive]

And you can say that -- one thing that is affecting at the moment, you can say, the commercial side [indiscernible] -- industrial side is also, you can say, the toughening of the insurance market. That will make it at least more difficult, you can say, if you don't have the right reinsurance program or you can say the [indiscernible]. So there could be some changes in the competitive situation for if you're a smaller player not being able to, you can say, have so much risk on their own part. So -- in that, we can see we're in a good position to grab that with the reinsurance program we have and also our strong, you can say, capital position. So that's also why we are seeing that we get some growth also going forward here. But on private, as Lars was saying, it is -- you can say the same as we've said, there's competition out there, and the inflation and interest rates and so on have given us, you can say, more competition actually lately in the last year than we have seen maybe previously, but no changes or whatever.

[Jan Gjerland, analyst]

Just a follow-up then. Is it also that you've seen any changes in the volume behavior because of affordability? Last year, we didn't see anything of that, but maybe the interest rates are starting to show more tougher signs now with energy prices and interest rates moving upwards. Is there any signs of that in your portfolio at all? Or are you seeing that people actually are doing the same or are they taking off the plate for their cars or their #2 cars to make their insurance costs lower?

[Peter Hermann, executive]

We haven't seen that many movements in that part, you can say. What we can see, for example, looking at the some of the check insurance we have, we can see that, yes, we have seen a little more people using that, meaning they've lost their jobs. But there are so many insurances that you need to have, so to speak, by law. So we haven't seen a big, you can say, decrease in the want for insurances. Also, if you look at the commercial side, yes, have we seen more bankruptcy in there? No, not much, actually. So at the moment, it's quite stable. The Danish society has been quite good. Also with these new times but of course, going into a recession, of course, that -- it could look different. But we're not seeing a picture that people are starting to not take out insurances. On the other hand, you can say people are starting to travel more, meaning that we see, you can say, they check out more insurances there.

[Jan Gjerland, analyst]

Okay. Then just 2 technical questions. The one is for Oona Health. Are you going to have that as a separate business unit? Or is it going to be integrated in the private or the SMEs? Or will you have it as a one banner?

[Lars Beck, executive]

We have not decided on that yet, Jan Erik, but we will, of course, in due course, come with a conclusion and also pro forma numbers.

[Jan Gjerland, analyst]

Then finally, on Page 22 in your report, you have this elimination growth of DKK 4 million on the gross claims from DKK 11 million in operating cost that is taken out of the sort of the -- or added to the insurance service results, but taken out of the combined ratio. How should we treat those going forward? Is this totally technical? Or should we see it roughly being -- roughly 0 over time?

[Lars Beck, executive]

It's really only related to technical. And it has actually always been like that. It's just not been visible in the sense that we had life. But now the -- you can say, the operating entity in non-life and group is the same and because we don't have the life company any longer. So it's purely technical that is being eliminated. And whenever we do our profit forecast model and also our actual combined development, it's based on a like-for-like scenario. And you're right that in the quarter, the elimination was above DKK 10 million. That's a little bit high. On average, over the last years, what we've seen is, on an annualized basis, it's below DKK 30 million.

[Operator]

As there are no further questions, I will hand it back to the speakers for any closing remarks.

[Peter Hermann, executive]

Okay. Thank you for taking the time to attend our conference. As you know, you're always welcome to reach out to Robin if you have any further questions. We wish you all a pleasant rest of the day. Bye.

[Operator]

This now concludes the conference call. You may now disconnect your lines.