Topdanmark A/S

CSE:TOP

Earnings Call Transcript 2023-Q2

[Operator]

Welcome to the Topdanmark's Half Year Report for 2023. [Operator Instructions] This call is being recorded. I'll now hand the call over to CEO, Peter Hermann. Please begin.

[Peter Hermann, executive]

Thank you, operator, and good afternoon, everybody, and good morning to the USA. Thank you for joining us in this conference call. My name is Peter Hermann, and I'm the Group CEO of Topdanmark, and with me is our Group CFO, Lars Kufall Beck; and Head of Investor Relations, Robin Lofgren. We're hosting this conference call because earlier today, we published our Interim Report for the first half of 2023. And naturally, the news value of today's release is lower than usual as we preannounced the results and updated profit forecast on Monday. Nevertheless, I would like to start with a few opening remarks before handing over to Lars to comment on the results in more detail.But before going into the financial figures, let me briefly comment on the progress with our acquisition of Oona Health. Last week, we received a formal approval of the acquisition from the Danish FSA. We're very happy of course, to have yet another piece of the puzzle laid, and we are now only waiting the approval from the Danish Competition Authorities before we can finalize the acquisition. The approval process is progressing according to plan, and we continue to expect closing of the transaction in the second half of 2023. And as mentioned on previous occasions, we are very much looking forward to welcoming more than 200 new colleagues to Topdanmark and also to become a leading player within health products and services.Can I have slide 2, please? Turning to the financial performance in Q2; this was a challenging quarter. Net profit amounted to DKK260 million with an insurance service result of DKK450 million and a combined ratio of 82.3%. The quarter was marked by higher claims frequencies across a few product categories, and we thus saw our underlying claims ratio deteriorate by 2.4 percentage points. And last, we go through the dynamics in more detail in a minute, but let me take the opportunity to put the Q2 results into perspective. Our customer promise is that we are here to help and that we have done in a busy quarter where we saw higher frequencies, more fires and cloudburst, rain and drought.Financially, we delivered a combined ratio in Q2 that is among the best in the market as has been the case for many quarters now. And just to be very clear, Page 1 of our equity story states that our DNA is a focus on profitable growth in that order. And that means that we favor profitability over growth, both in the past, present and future. This also means that we will continue to adjust our pricing in accordance with risk premium, and that goes for potential higher frequencies as well as a hardening reinsurance market. On the investment side, we posted a loss of DKK82 million, post mainly by the waste indexation of workers' compensation provisions.Insurance revenue grew by 1.4% in the quarter. This was low as expected, but we are still 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 initiative has also caused a higher churn rate as expected. An important topic over the recent quarters has been the very high inflation. We are pleased to see further evidence that inflation has already peaked as the Danish Consumer Price Index continued to drop to now 2.5% here in June. And as you know, the Consumer Price Index is not a good proxy for inflation in an insurance company as we buy significantly different goods and those include in the index.But on those goods, we also see signs of falling inflation as delivery time from suppliers is normalizing and demand for new construction and private consumption is decreasing. This all leads to a drop in material prices in general, although at energy, heavy metal and materials, which we do not use to any large degree, still experience elevated price. The next phase of the inflation cycle that we also have to tackle is about real wage inflation, real wage growth. In the short term, we are in a good position to handle innovation through procurement and underwriting, etcetera, and 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 Q2 results in more detail, please?

[Lars Beck, executive]

Yes, I will and thank you, Peter. If we take a closer look at our Q2 results, the profit after tax amounted to DKK260 million, as Peter mentioned. The result is affected by two main items that I would like to address: higher claims frequencies across a few products and a negative net investment result due to a loss on the matching portfolio. In terms of the technical results, we delivered a combined ratio of 82.3% or 84.5%, excluding run-off and a growth of 1.4% in the quarter. The quarter was characterized by a high level of large-scale claims and higher claims frequencies with more fire-related claims in-house, fire and drought related claims in agriculture and a higher claims frequency in motor, including a few large commercial motor claims.If we strip out all the usual moving parts, the underlying claims ratio rose by 2.4 percentage points in the quarter. Motor accounted for approximately half of this deterioration on group level as the number of motor claims increased by more than 5 percentage points compared with Q2 2022. The other half of the deterioration primarily relates to the [indiscernible] claims with in-house and agriculture, as I just mentioned. The investment result was a loss of DKK82 million in Q2, impacted by a loss on the matching portfolio driven by two different things. On the duration part, the main negative was a spread widening on Danish mortgage bonds throughout the quarter.This overshadowed the positive effects from running yields and a lower spread between Danish and euro interest rates. Within workers' compensation, wage indexation of provisions contributed negatively to the net investment results. As this was the main reason for our profit warning on Monday, let me try to further clarify the method by which we incorporate future wage inflation in our reserving. For the short term, we adapt a simple average of the wage inflation forecast from the Danish Central Bank and the Danish Economic Council. These projections are updated twice a year. For the longer term, we adapt the Danish CPI market curve plus a real wage constant based on historical average.We choose to add a real wage constant concept as we see a long-term tendency that collective agreements in Denmark ensure real wage growth. Adding a constant on top of the market-based inflation curve thus means that our reserving is quite prudent. In Q2, the short-term rate projections from the Danish Central Bank and the Danish Economic Council increased, reflecting finalized collective agreements in the Danish labor market. The higher projections resulted in an upward adjustment in the front end of the wage curve. It's important to be aware that there is normally a time lag between changes in inflation and wage expectations.And overall, we do believe we have an appropriate hedge in place. And just to add, as Peter also alluded to, in May, the Danish monthly inflation numbers experienced a largest decrease in the last 40 years, which affected the short end of the inflation curve causing negative valuation adjustments on inflation swaps in Q2. On the investment side, we continued the reduction of our CLO exposure now standing at around DKK100 million. We aim to reduce the CLO exposure further over the coming quarters. And in addition to balance the portfolio against adverse shocks, we reduced the allocation to equities and added to fixed income securities for the second quarter running. And just let me quickly comment on solvency.Our solvency cover increased to 378% in Q2, mainly due to earnings in the quarter and a lower solvency capital requirement following further CLO sell-off and the shift in investment portfolio from equity to fixed income. Our solvency cover remains elevated as we continue to hold excess capital for the acquisition of Oona Health, which, as Peter mentioned, is still expected to close in the second half of 2023. Can we have slide 3, please? And just allow me to briefly comment on the renewal of our catastrophe reinsurance program on July 1, 2023. It is evident that the reinsurance market has toughened significantly. And consequently, we decided to increase our retention from DKK100 million to DKK150 million on the catastrophe program.In addition, pricing increased substantially. However, in the market, we have heard intelligence of risk-adjusted price increases of anywhere between 20% and 50%. And I can confirm that our risk-adjusted price increase is definitely in the lower end of the market experience. As a consequence of the higher retention, we have also updated our assumptions for normalized weather-related claims per annum from DKK285 million to DKK350 million. That is an increase of DKK30 million in a normal year. As the program is renewed on July 1, the increase only affects the second half of 2023, and that is by DKK15 million. And let me also make it clear that we intend to pass the negative impact from the hardening reinsurance market on to our customers through price increases.Slide 4, please. Turning to the profit forecast model for 2023, which high level was provided to the market on Monday; we have narrowed the assumed combined ratio for 2023 from between 82.5% to 85.5%, that to now between 83.5% and 85.5% excluding run-off in the second half of the year. On the negative side, we incorporate the experienced higher large-scale claims and higher claims frequencies in Q2, as mentioned, as well as an ongoing impact of higher motor frequencies into the second half of the year. In addition, the net impact of hardening reinsurance markets on the renewal of our catastrophe reinsurance program was a little higher than anticipated.Partly offsetting this, on the positive side, we incorporate run-off and the lower-than-forecasted weather-related claims in Q2. As shown premium growth is lowered from between 2% to 3.5% to now above 2% based on the developments in the first half of 2023 and the prevailing competitive dynamics in the Danish market. In terms of the net investment result for 2023, that is lowered by approximately DKK175 million, which incorporates the full year impact of the change in wage expectations on the workers' compensation provisions. As is evident from this, this indicates a further and no negative impact to be seen in Q3. In conclusion, the post-tax profit forecast model for 2023 is now between DKK1.05 billion and DKK1.2 billion, and that, as usually, excludes run-off in the second half of 2023.Could you turn to slide 5, please, sorry, and over to you, Peter, again.

[Peter Hermann, executive]

Yes, thank you Lars. This concludes our opening remarks, and we're now ready to answer your questions. So please keep your questions to one or two at a time. If you have more questions, feel free to enter the queue again for a second round. So operator, may we have the first question, please?

[Operator]

[Operator Instructions] The first question will be from the line of Asbjorn Mork from Danske Bank.

[Asbjørn Mørk, analyst]

Yes. I'll let myself to two questions. First, if I could get a little bit more flavor on sort of the underlying claims trend to 240 basis points. And I guess, especially the 120 basis points relating to motor insurance. If you look at slide 6, it looks like prices are more or less flat year-over-year, a little bit up but not much. And I remember you did some price adjustments in the beginning of 2022. Is that basically what we're seeing now that you have lowered prices or you sort of miscalculated the insurance risk here?And should we expect you to sort of reprice quite significantly upwards. So what exactly is it that has sort of gone wrong in the motor frequency versus your expectation also, I guess, linking to your underlying claims ratio, which also deteriorated in Q1? And if I just -- if I don't adjust [indiscernible] and look at the trends in Q3 and Q4 '22, there was also quite a significant year-over-year deterioration to your online claims -- so a little bit more flavor here would be helpful.

[Peter Hermann, executive]

Maybe we can just start by saying that I think its two different things, at least for this year. In the beginning of the year, we still saw -- you will say at least comparing with 2022, there was still COVID-19 effect in the books on 2022, where actually that the country closed down that we also mentioned from Q1. And actually, on top of that, we also saw in March, which actually also made the frequency go up. It was not happening in 2022. So that's one thing. Then you can say, what about the pricing?It's true that as also mentioned on these calls that everyone knows how much they are most insurance costs meaning that we have also looked into when we have, you can say, full customers where to do the price increases should it be on motor on house, [indiscernible] insurance so on and so on. That's, of course, also a tactical point of view. So that's the reason why you can say we haven't, you can say, put forward all of the price increases on motor alone product by product, but look, we've added more from a customer point of view.And then maybe you can say that one thing that could maybe be one explanation to hit this -- behind having a higher frequency in Q2. If you look at last year, Q2, at that stage, we had the very, very high gas prices, electricity, gasoline and so on, that may people maybe drive less -- but I think it's prudent that when we see, you can say, frequency going up by another more than 5% on motor in a quarter here. And also, yes, we have some explanation for Q1.Then it's just instead of saying that this will not probably just go away, then we have put into some, you can say, deterioration on the frequency also in the -- for the next half year, more from a pool point of view, but it's actually quite difficult to compare now, but what to compare with because there's a lot of numbers here affected by the COVID-19 and then we see a quarter very high could be so on by the gasoline and so on. But yeah, so it's prudent. I don't think it's to do with pricing because we have actually put prices forward. You can also see that it's going up again a little. But I think it's [indiscernible] to say that the competitive situation also have made us a little more aware of not to put forward just on most of them.

[Lars Beck, executive]

And I think just to underpin, it's super important to note that the challenge we see here in Q2 and which we have also taken with us for the rest of the year in terms of motor in our forecast is related to frequency only. When we look at our average claim size development, inflation in motor is very much under control.

[Asbjørn Mørk, analyst]

But if I may just follow up on that because we've seen some of your peers reporting the same on frequency in motor and it seems -- it sounds on you as if this is sort of a teaser product -- this is probably where you do not want to reprice too much up. So is that -- is this 120 basis point headwind. Is that basically what we should expect going forward? And then you need to make up that lost revenue on other product lines or should we see some sort of material repricing on the motor side your side?

[Lars Beck, executive]

Well, that depends on what you put into materials. But clearly, we're not going to just lean back and say motor prices are what they are and other products have to subsidize this. So we will, of course, during the autumn. First of all, we're looking into whether this is indeed a trend that we have assumed for the forecast. And then secondly, we will also look into the details about how and where is that potential pricing measures need to be taken.

[Asbjørn Mørk, analyst]

But is there also an electric vehicle element here or is it just the gas prices?

[Lars Beck, executive]

Electrical vehicles are part of our motor portfolio. However, it represents what I would call still a very, very small or even insignificant part of the total portfolio. So that is not what's driving it.

[Asbjørn Mørk, analyst]

Okay. Fair enough. Final question my side on inflation.

[Lars Beck, executive]

Actually, we've made -- we've made quite a lot of analysis and of electrical vehicles this year to get a good and thorough understanding of the risk picture. And at least when we look at it, you're right that in the early days of the electrical vehicles, it was to compare with muscle cars, I would say so very fast and people use the power of the car, so to speak. But when we look at it now, it's a completely different risk pattern we're looking into for electrical vehicles. And actually, when we compare a lease electrical vehicle with a certain age, the risk premium for an electrical vehicle compared to a diesel or gas or hybrid is actually not that different.

[Asbjørn Mørk, analyst]

All right. Just a final question my side on inflation, Peter, you mentioned that you're seeing inflation coming down in materials, but then we're seeing wage inflation coming up. And you spent quite a lot of time last year saying that your claims pattern was more like three quarter wage inflation or wages and one quarter materials. So I'm just wondering these changes that we're looking into, could you sort of quantify and help us a bit on what that means on actual nominal claims inflation on your side now versus expectations if these trends continue?

[Peter Hermann, executive]

We have you can say -- we have already been saying our inflation, we also put in, of course, price increases to you can say, stick to the profitability, looking both material and wages coming up. But it's true that if wage keeps coming up, then as you're saying, actually, for some of that business line is more wage than materials driving the price. Then, of course, you can say then we also look -- have to look at that on prices, but we had already you can say, in terms of our own claims inflation, then we have actually also considered the wage drift upwards when we did the first inflation-based price increases.But now you can say if wages keep coming up, then, of course, we need to go out and see if we should do more price increases on that. Sorry, just one more thing. You can say wage inflation, at least that goes into the index that we are doing every year, you can say material inflation will not always go in there, but you can say most of the product lines is actually indexed by based on the wage. So it will come in you can say automatically. And of course, we also need to look in if product [indiscernible] at least do something more.

[Asbjørn Mørk, analyst]

Okay. So you don't see the composition changes of wages going up. That doesn't mean that the total nominal claims inflation will increase necessarily.

[Peter Hermann, executive]

You can say -- of course, we will make inflation go up if we use more wages than materials. But just to say that the index on the product is based on the wages. So you also get the premium, you can say automatically coming in there.

[Operator]

The next question will be from the line of Jakob Brink from Nordea.

[Jakob Brink, analyst]

Lars, if I could just come back to the topic on the inflation swap and the adjustments you did Monday. Just so I fully understand so you said after having sort of -- after the first period where you used the Central Bank forecast, you would use some kind of market inflation. Is that correct? And is there any specific index we should look at?

[Lars Beck, executive]

If you turn to slide 14 a little bit, which is a slide we've actually tried to indicate that exactly we do -- and what we do, as I said, is for the first [Technical Difficulty], we use the estimates from the Danish Central Bank and the economic outlook. And after that, we use the Danish CPI market curve from the market. But what we do there is that in addition to just making CPI [Technical Difficulty] we do add a constant [Technical Difficulty] that from our point of view, represents the fact that in Denmark we have for a number of years, having real growth. And that we feel prudent that we [Technical Difficulty] on the CPI curve as well [Technical Difficulty] we don't get a tail that bites us once real wage growth occurs. And [Technical Difficulty] constant factor at this point in time is 1% flat that we are adding on to the CPI curve.

[Jakob Brink, analyst]

And then that will remain flat. So even, let's say, CPI goes up or down with whatever you will keep one.

[Lars Beck, executive]

Yeah, we will keep the constant factor, at least one. So the CPI, the constant factor is the same for all the years and on the axis of the CPI curve.

[Peter Hermann, executive]

[Technical Difficulty] constant here, that we base that on a historical average. But at the moment, it's 1%, if, for example, we see going forward that wage will likely -- growth will be more than 1% on top of the, you can say inflation then, of course, we'll use that but for now.

[Jakob Brink, analyst]

And just remind me -- so how much of this is new -- so what did you do last year, for example? So what inflation did you use then?

[Lars Beck, executive]

This is exactly the same method that we have applied all year long.

[Jakob Brink, analyst]

Okay. But I would have -- isn't it fair to -- now we didn't talk about it last year because it was all baked into your technical profit, but your inflation swap I presume would have gone up in value quite a lot last year, while.

[Lars Beck, executive]

Actually not last year because remember that the devaluation of the inflation -- is not based on actual inflation, but on inflation expectation. And inflation expectations already increased in 2021. So the majority of the positive impact actually came in 2021.

[Peter Hermann, executive]

Q3 and Q4 in '21 and actually also something in the start of 2022. But most in '21. So it's a long hedge, you can call it.

[Jakob Brink, analyst]

But I guess these inflations -- or this inflation swap support you had then in, let's say, latter half of '21 and beginning of '22. I guess they hit your technical profit and hence, your -- we didn't adjust for it. So isn't that also part of the headwind we are seeing now? I guess you must have had a fairly significant support to your underlying combined ratio last year from the inflation swap.

[Lars Beck, executive]

It is important to note that it does not impact [Technical Difficulty] that much. The impact is clearly on the already established provisions for annuities and capitalization. It impacts the already existing provisions on the balance sheet and hence, you would see in the run-off result, which is where it ends up.

[Peter Hermann, executive]

That's the main part, we can say, 55% of our -- you can say, ability for provisioning, that is actually worker compensation. So that's the main part that you can say, more going to run-off, but it's true also that you can say, looking at the years for workers compensation will also be -- every new claim will be a little more expensive, but that is part of the total picture.

[Jakob Brink, analyst]

And so basically, the -- I'm just thinking now. So basically, we should expect if the -- now it's in a different line. Okay. Fair enough. I think I get it now. And if I may, just, Peter, on our usual discussion, you mentioned again that you -- in the beginning, you wanted to stress that, of course, you do only profitable growth. But could you then tell me what is profitable growth in your view?

[Peter Hermann, executive]

Yeah, that's a good question. I think actually, if you look at the -- as you say at least we have been working for long time [Technical Difficulty] profitability, I would say [Technical Difficulty] on the meeting we had [Technical Difficulty] last time. If you look at the trend, we've actually been in a better and better business. You will say in terms of combined ratio [Technical Difficulty] going downwards. At the moment, we have [Technical Difficulty] in the market that we don't have the highest growth. But we think it's important that we still will do prices also we're talking about frequencies as Lars now mentioned, but also reinsurance prices.That, of course, can affect both churn and -- but we will do that [Technical Difficulty]..But it's -- I think its [Technical Difficulty] what you're pointing to. I think in one quarter, you can say a lot of [Technical Difficulty] and so on. I wouldn't use [Technical Difficulty] to conclude but now it's going the other way around. [Technical Difficulty] I'm still confident about that we are doing the right things. But of course, sometimes thing happens with the time lag. We need to have some time to put in the right you can say pricing increases and the right way to do it. So -- but I think that we are still going towards having better productivity over time. And then growth will come up [Technical Difficulty] let's see depends on the level as well.

[Operator]

The next question will be from the line of Youdish Chicooree from Autonomous Research.

[Youdish Chicooree, analyst]

I'll ask two questions to start with, if I may, please. The first one, if I can go back on your comments on motor. It sounds like you're saying you're kind of wait and see more about the increase in frequency. And then depending on whether you see a trend, then you will adjust prices. And the reason you're doing that is because of the competitive situation. Is that -- did I hear correctly?

[Peter Hermann, executive]

Yeah, you can say that we are looking at just to [indiscernible]. We have seen high frequency, yes, we have prudently, I think we think, put in some more frequency in the second half year than we expected due to the fact that we have now seen higher frequencies in some quarters. But we don't know whether due to the fact that it's quite difficult to compare with what actually -- what is the reason? Maybe it is the reason that there were high gasoline and electricity price of last year. That, of course, could be a positive if it doesn't keep on going.And of course, if frequency keeps up, then of course, we also look into the pricing. But what I mentioned is that motor is, of course [Technical Difficulty] change prices on. We have just said until now, we have been a little more reluctant in using that. But still, if you look at the page 6 of our investor presentation, we have actually from 2020 going forward, also raised prices on motor. So I'm just saying that it's a little more tricky in competitive situation. But we will do that if that's necessary to protect [indiscernible].

[Youdish Chicooree, analyst]

No, I get the point that you've increased prices in the past, but the point is whether they were high enough, right? I mean -- but I get there's a hesitation that I sound there's a hesitation to increase prices further like get ahead of the curve because I guess you think you might lose volumes. Is that a description?

[Peter Hermann, executive]

It may be fair to say that -- but, yeah. But I think it's important that we will do it. We have done it. But you can say it's being ahead of inflation here. No, we have not chosen to be ahead of inflation on motor. We have been ahead of the inflation on the other lines.

[Youdish Chicooree, analyst]

All right. And then the second question, I'd like to go back, if I may, on the inflation swap accounting. Obviously, look, last quarter, you basically -- you revised up your wage inflation assumption. You took a reserve charge. At the same time, you lost money on the inflation swap. So when you say there is a substantial lag before these two things come in line. So you're kind of saying that, well, in the next review of the Danish Central Bank and the council, you would expect that they bring down their wage inflation because that's the only way then you reverse this impact, right?

[Lars Beck, executive]

I would be surprised if for the next release that comes from the Central Bank and the Economic Council that we actually took down wage expectations in the short end of the curve because remember, we are planning those estimates in the short end of the curve. When we look at the hedge over a time period and what we have done internally is to look at the period from 2021, which was where inflation expectations started to rise and looking until the end of the year, where we now have the increased wage inflation expectations from the Central Bank and Economic Council.When we look at this in aggregate over the period including the updated full year forecast, which I alluded to, that there's also a negative impact in Q3 in that from the increased wage inflation when we look at the forecast throughout the year on all factors, we actually have a very, very good hedge in place. So [Technical Difficulty] inflation swap gives us the impact, not only in terms of positive or negative signs, but actually also magnitude, it does give us the hedge that we are looking for.But there is a time lag of between 18 to 24 months. And that having said that, I think it's also, of course, important to remember that what we've seen over the last two years is unprecedented, at least for many, many years. I know I'm not that old but at least in my time, it's unprecedented. So it's been some very, very volatile inflation expectations that we have seen. And that filters through and hence, the impact and the effect of the time lag is more visible now than what would be in a normal environment.

[Youdish Chicooree, analyst]

Right. No, no, I appreciate that. I fully appreciate that. But I'm just wondering that in that case, if, for example, if you could provide, let's say, on the reserve side, the sensitivity of your reserving to, let's say, changes to short-term inflation, that's possible in the future. And similarly, maybe provide us like some indication of how we can best measure these movements because I appreciate what you said that you've got a good hedge, but obviously, they can have quite a material impact in the quarter.

[Lars Beck, executive]

Yeah. Thank you so much. And I should add -- probably have said that in the introductory notes that what we are planning to include in our Q3 investor presentation is a new slide that both gives you the reference to where the updated wage inflation expectations are actually published and also give you a sensitivity analysis as to what wage inflation increases or decreases, what impact that will have on our [indiscernible]. So we will, for Q3 investor, if not sooner, we will have a slide giving you that exactly so you can do your pre-closing analysis and consensus estimates yourself.

[Peter Hermann, executive]

And just maybe one more comment just about motor, just to tell you that we still have a satisfying combined ratio on motor, just to make that clear.

[Operator]

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

[Jan Gjerland, analyst]

I just had the follow-up on the weather and drought, which seems to be sort of a little bit more farfetched now. So how important has that been to your second quarter weather-related stuff? And how do you think about that for the second half of this year? How much is built into your sort of expectation now last Monday when it comes to the -- into the equation here? And secondly, second question is for Oona. Could you just set the solvency or adjusted the solvency ratio for Oona and have you had any update on Oona's expectations for 2023? How was the Q1 or the first half results for Oona? Could you shed some light on that?

[Lars Beck, executive]

I think if I take the last one first. What I meant was that the solvency cover, we have of 378% end of Q2 is elevated compared to where we would normally be. And that is because we still hold equity to pay for the Oona acquisition. So hence, that's why it's updated. And in terms of Oona performance, no, we do not have anything to disclose on that.

[Peter Hermann, executive]

In terms of drought you're mentioning that we are saying that you can say now, Lars also described that the deterioration in the underlying half of it was from motor. The rest you can say is actually from frequencies. And especially it is fires due to -- fires in private houses, but also fires in agriculture business. Actually, we have an okay level of fires in commercial. And then we also have the drought. And we can say we are the only company -- insurance company in Denmark having the crop insurance, of course, when you have a drought that can also give you some claims. But you can say that is maybe around DKK10 million in the quarter or something for these kind of claims.So of course, there could be a [indiscernible] going forward. Also, if you look at drought coming into the second half of the year on the other hand, it's raining in Denmark at the moment. So who knows what's going to happen. But just to make a little -- just to give you a heads up here, if we take all of our exposure to crop insurance then it's a little over DKK50 million, you can say, in total estimated max P&L -- estimated maximum loss. So it's not the biggest exposure at the moment. So of course, that will have an effect going into the second half of the year depending on how much the rain will take away control and so on.

[Operator]

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

[Vinit Malhotra, analyst]

So my two questions, please. One is the motor inflation or frequency, other commentary which you said should remain high into second half. And I think you mentioned somewhere in another answer that it was a prudent assumption. I'm just curious if it was a prudency or just where you have some reasons why this trend should continue in the second half? And second question is just on the wage inflation topic. In my sense -- so my sense was that the wage inflation -- the wage negotiations went on for quite some time last year.And then after much debate, we found out the numbers already or maybe February, March. So isn't this another way to think that, okay, we've known for a few weeks a month, what the Danish wage inflation agreements are or wage increase agreements are? And so how should we explain to investors that, okay, if we knew the Danish wage inflation agreements, why is Topdanmark making a change now in 2Q in this way?

[Lars Beck, executive]

I think if we take the last question first, labor union agreements was -- negotiations was finalized at least in the month of April. And then as we stated also in the slide on wage indexation in the presentation. There is some processing time before the Danish Central Bank and the Danish Economic Counsel comes out with their updated forecast. And that is what we used. Then you are perfectly right saying, well, okay, that came out then in May, which is actually when it came out. So shouldn't you have known this in May? And then we just have to say, yes, we did know already in May what the wage indication would be like and we could have calculated the effect.It's important to note that, of course, we look at the overall P&L of it, hence the warning that came out on Monday when we looked at everything in combination. And also, hence, the lessons learned, as I said to Youdish just before, we will put out a slide that shows you the sensitivity on the provisioning side to Danish wage inflation changes so that you have an opportunity to actually do this yourself and also so that we also have a better [indiscernible] into this. So yes, you're right, this is an IFRS 17 first-time adoption level and an area where we will improve. In terms of motor, what I said was that when we look at average claim size development, inflation seems to be under control.It's not that we don't have [indiscernible] -- of course, we have that, but that is very much under control. And we have -- when we look at this, the challenges we have in Q2 in motor is entirely related to frequency. And then as any actuary or statistician would say, having one data point, which is what we have now. It's not enough to decide whether it's a trend or not. So what we have the prudency done is to assume that this is actually a trend so that we have a worse claims frequency on motor in the second half of the year compared to what we had anticipated when we did our last forecast, and that is what is baked in or build in to our updated full year profit forecast.

[Vinit Malhotra, analyst]

Okay. So there is a potential upside if it turns out to be a little better than?

[Lars Beck, executive]

If it's only one quarter, yes, then the increased impact from that that we have put into the forecast is potentially an upside. But then again, as we also said, that only explains half of the underlying -- the rest of the underlying development in the quarter is from stochastic claims. And I think it's important for everyone to remind ourselves that it's an insurance business that we're running. And you will see stochastic elements to our claims experience on a quarter-by-quarter basis.

[Operator]

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

[Martin Gregers Birk, analyst]

First question on net investment income, we have seen the dividend go out. We have seen -- we still see some excess capital towards the Oona transaction. And we also see running yields going up. What is an annualized run rate of your net investment income going forward once the Oona transaction has closed? That would be my first question. And then second question on reinsurance, you mentioned the reinsurance prices are but so sure your net retention. If we had assumed that you would have kept DKK100 million net retention, how much would that have impacted your reinsurance price?

[Lars Beck, executive]

If we take -- as usual, take the last one first. We don't disclose that. Naturally, in the process, we evaluate all scenarios, and we also had pricing in the cases for the first DKK50 million of coverage but decided that, that was not worthwhile in terms of risk and reward. And then you can look at how we have updated our annualized model -- weather or cost to weather and make your own calculation as to what does that then imply for prices. But clearly, a DKK100 million layer in today's market would be exchanging money and nothing else. And in terms of the annualized investment results post Oona, I assume you will get that when you look at our profit forecast for 2024. But until then, I would -- in your expertise, that will probably put in something around DKK100 million or so.

[Operator]

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

[Faizan Lakhani, analyst]

Hi. This is Faizan from HBC. I just wanted to sort of come back to the frequency and sort of more of a helicopter view, I guess, I'm a little bit confused in the sense you're talking about being a very, very low combined ratios and talking about issues in most frequency. Is there a view that actually you're now at the right level of profitability and you're willing to take the headwind in motor going forward in order to maintain competitiveness or will you look to actually prices come back down to the combined ratios to adjust for that.And I guess the same sort of sentiment on the reinsurance change as well. Will you be looking to reprice to factor in the DKK30 million headwind next year to sort of the reinsurance as well? So if you can just help me understand that, that would be great. In terms of going forward and the outlook beyond 2023 on premium, you still see [indiscernible] through a lot of rates. Do you have any intention to really grow volume significantly from here or should we expect sort of 2% to 3% sort of growth rates going forward?

[Lars Beck, executive]

If we take the easiest one, I think, which is the reinsurance part, and thank you for the question, Faizan. As we also write out explicitly in the report, we intend to pass the negative impact from the hardening reinsurance market on to our customers through price increases. So that is the plan. I think in motor, what we said, we have definitely not said that we are not going to work with prices in motor. What we have said is that we've now had one quarter, one observation. And before we judge whether that's a trend or not, we have to get a little bit more data. And in parallel with that, of course, we are looking into the pricing structure and [indiscernible] of our motor insurance. So I think that's as close as we can get it.

[Peter Hermann, executive]

And going [indiscernible] we're not guiding for '24 yet. But just to say that we have said overall that we -- again, the profitable growth that we will align our growth, you can say, with market. So we think that we should have growth in -- according in line with the market sometimes growth to the GDP or something growth side or something -- but yeah, it depends a lot of the things because there could be other things, but we were a little in front of the curve in one place, had a little more churn and so on. If there will be some competitive situations where we could either increase prices more and keep the same growth or we could maybe you can say, take some more market share if we were in a good situation. So we cannot give you a full answer on the 2024 yet. We will do that when we reach the last part of the year here. But going forward, I think that overall, it's around the GDP or something the market growth.

[Operator]

[Operator Instructions] The next question will be a follow-up from the line of Jakob Brink from Nordea.

[Jakob Brink, analyst]

Just a few follow-up, please. On your growth rate, so we obviously know in Denmark that there is not that high of a price sensitivity for especially for retail clients. Many of your competitors are significantly cheaper and they do not take market share. So what do you think the actual problem is? Is it lack of partnerships? Is it -- I mean, any indication, please?

[Peter Hermann, executive]

[Technical Difficulty] we can see that we have had higher churn, which is okay when we look at overall profitability. But this is, of course, always [Technical Difficulty] volume times a combined ratio [Technical Difficulty] that much growth. For us, it's will say it's a matter of getting the best, what we call efficient brand [Technical Difficulty] best place to be here. So I don't think that's a straight answer to that. That will depend on competition situation as well. But we will still work towards you can say, improving our profitability in [Technical Difficulty].

[Jakob Brink, analyst]

I'm just wondering, so I mean, if you look at some of your customer-owned competitors, they're cheaper, at least on a headline, they're significantly cheaper than you and some of your larger competitors, but everyone are raising prices, even some of the mutuals have cut their customer bonuses this year for the first time in a very long time, and still, you're not very growing or growing very much. So it just seems like maybe it's not just a pricing thing, but it's something else.

[Peter Hermann, executive]

[Technical Difficulty] at the moment -- spending a lot of time and money [Technical Difficulty] for the future in our core systems. [Technical Difficulty] you can say at the moment [Technical Difficulty] a lot of new products to the market for a while. We have, of course, introduced the new cyber insurance and so on, but we haven't put all our efforts in putting new products to the market, for example. [Technical Difficulty] job Insurance, but you can say that is something that we think is more important and actually to be even more efficient and develop for the future instead of just coming up a new product that we think will have a little more growth on in the short run. [Technical Difficulty] explanation for how we are [Technical Difficulty].

[Lars Beck, executive]

Peter also alluded to -- we have seen an improvement in [Technical Difficulty] also seen a lower outflow in terms of [Technical Difficulty] this year compared to [Technical Difficulty], as we've also said that we would. But of course, also here, there is a time lag from insurance also the [Technical Difficulty] actual growth in your earned premiums. So that still hurts us from an earned premium point of view.

[Jakob Brink, analyst]

Actually, on the price increases and you've said it quite a few times that you're ahead of the curve. If we look at page 6 in your own slides and the trend in average premiums, I agree that it was a very rapid increase in 2021. But as far as I recall from then, it was -- the whole explanation back then was that you had gotten behind the curve and inflation didn't really pick up until mid-'21. So this was more of a repair of something that basically -- that you didn't have the right pricing on the housing product due to pipes and whatever. So it's 9%, 10% of this increase was related to basically catching up to where you should be. You have only around 5% or so left for two years, which is not enough to cover inflation, I guess. So this isn't the problem more that you had gotten behind and then you sort of panicked and raise prices too much in one go rather than it's you being ahead of the curve.

[Lars Beck, executive]

The price increases, [Technical Difficulty] actually not related to price -- to inflation. That was related to a number of other challenges that we had in the housing product back in 2020, where we had a number of activities should improve probably with in-house and price was only one, but actually it was a smaller element to that product return to profit improvement program that was run. That also included, as we talked about before, the procurement initiatives and also very much a significant improvement in quality doing on the assessment, etcetera, etcetera, before risk was actually underway. So that was only one part of the probability improvement project that we were running. So I don't buy the way you calculations work.

[Peter Hermann, executive]

I'll also say [Technical Difficulty] you can say the trend on the combined ratio, I think it [Technical Difficulty] we have been [Technical Difficulty] in front of the curve because you can see that [Technical Difficulty] and say at least we are in the market where we also have competitors with different combined ratio. So you can say we have been in front of the curve. We're not saying we're in front now. We have some -- more that were in line with inflation now [Technical Difficulty].

[Jakob Brink, analyst]

Yes. I don't know it's -- you're breaking up a bit. So maybe you didn't hear me because that was exactly last what I said before that the price increases you did in '21 was not related to inflation, but all kinds of other problems. So if you take 9% out of this red or purple line, then there is only 5% or so left, which doesn't seem like a lot to cover inflation.

[Lars Beck, executive]

I just want to say, you can't take -- you can't do 9% minus 5% because the 9% was only one element out of the profitability improvement projects that we did on houses. And actually, the smaller part of it, if you look at the total improvement that we saw in our housing portfolio.

[Jakob Brink, analyst]

Okay. I'll maybe give you a call later, but I'm not sure I understand. But -- and then just a final one on the swap. What was the negative impact specifically of the inflation swap in Q2?

[Lars Beck, executive]

I think it's minus DKK6 million. It is in the report. Minus DKK6 million in the quarter, yes, Jakob.

[Operator]

As there are no further questions at this moment, I'll hand back to the speakers for any closing remarks.

[Peter Hermann, executive]

Yeah. Thank you, and thank you for taking the time to attend our conference for all the good questions here. As you know, you are always welcome to reach out to Robin, if you have any further questions. We wish you all a pleasant rest of the day and hopefully a good summer. See you. Bye.