Topdanmark A/S

CSE:TOP

Earnings Call Analysis

Stable Earnings and Optimistic Guidance Amid Weather Challenges

The company reported a net profit of DKK 261 million and a robust insurance service result of DKK 400 million, in spite of facing the highest weather-related claims in a decade due to severe weather events. These extraordinary events led to a combined ratio of 84.7%. Despite the challenges, efficient claims handling and profitability focus allowed the company to post 2% revenue growth and undertake pricing adjustments ahead of inflation. The company has improved its profit forecast for the year to DKK 1.1 billion to DKK 1.21 billion and aims to implement targeted price increases across select products from January 2024.

Strategic Acquisition Poised to Strengthen Market Position

Topdanmark is on the verge of acquiring Oona Health, pending approval from the Danish competition authorities. Expected to conclude by the end of the year, this move will integrate over 200 new team members, signifying Topdanmark's ambition to become a powerhouse in the health products and services sector.

Challenging Weather Impact Mitigated by Strong Performance

The third quarter presented a test of resilience with intense weather events triggering an unprecedented number of claims. Despite these conditions leading to DKK 153 million in weather-related claims, Topdanmark emerged with a robust net profit of DKK 261 million and a combined ratio showcasing strong market competitiveness at 84.7%, or 86.0% prior to runoff. This performance highlights Topdanmark's enduring commitment to supporting its customers during turbulent times, underpinned by a marked improvement in the underlying claims ratio and a steady 2% growth in insurance revenue, buoyed by effective pricing initiatives and cross-selling strategies.

Navigating Inflation with Tactical Pricing Adjustments

Inflationary pressures were a paramount concern, but Topdanmark tackled the challenge head-on. With inflation showing signs of stabilization, the company has adeptly managed the impact through strategic pricing. This fiscal prudence will extend into the next year as price increases across selected products and customer segments are set to take effect from January 2024, reinforcing Topdanmark's intention to match inflation rates and uphold its profitability mandate.

Investment Loss Offset by Underlying Claims Trend and Solvency Strength

The third quarter's investment narrative saw a DKK 37 million loss, reflecting the dual effects of wage indexation related to workers' compensation provisions and the volatility of equity markets. Nevertheless, a noteworthy improvement in the underlying claims ratio of 1.8 percentage points and a bolstered solvency cover of 405% underpin the financial stability of Topdanmark. Its reduction in CLO exposure to DKK 25 million further attests to the company's solid risk management and prudent capital allocation as it retains excess capital in anticipation of the Oona Health acquisition.

Forecast for 2023 Shows Optimistic Outlook

While weather-related and large-scale claims have invoked heightened scrutiny, they remain within the anticipated range. This, coupled with the positive run-off in Q3, has paved the way for an improved profit forecast. The projected combined ratio for 2023 has been adjusted, showing a narrower range of 83.7% to 84.7%, excluding Q4 run-off, with an unchanged expectation for premium growth above 2%. These refinements underscore Topdanmark's evolving financial landscape and its proactive stance in adapting to market dynamics.

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by, and welcome to the Topdanmark Third Quarter 2023 Earnings Call. [Operator Instructions] Finally, I would like to advise all participants that this call is being recorded. Thank you.I'd now like to welcome Peter Hermann, CEO, to begin the conference. Peter, over to you.

[Peter Hermann, executive]

Thank you, operator, and good morning, everybody, and thank you for joining us for this conference call. My name is Peter Hermann, and I'm the Group CEO of Topdanmark. With me is our group CFO, Lars Kufall Beck and Head of Investor Relations, Robin Lofgren.We are hosting this conference call because earlier today, we published our interim report for the first 9 months of 2023, and 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. As you know, we are only awaiting an 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 a closing of the transaction before the end of this year. And as mentioned on previous occasions, we are very much looking forward to welcoming more than 200 new colleagues to Topdanmark and to become a leading player within health products and services.Would you take Slide 2, please? If we turn to the financial performance in Q3, this was actually a satisfactory quarter. Net profit amounted to DKK 261 million with an insurance service result of DKK 400 million and a combined ratio of 84.7% or 86.0%, before runoff.The quarter was marked by a high level of weather-related claims after an eventful quarter with multiple cloud bursts, heavy rainfall, a hail event in Northern Italy and the storm Hans. In fact, weather-related claims were higher than in any third quarter over the past 10 years. And actually, the total number of claims in the quarter was the highest ever experienced in a Q3.Again, this quarter, I believe we have fully lived up to our customer promise of being here to help, also when times are turbulent. But despite this, we continue to deliver a combined ratio in Q3 that is among the best in the market and has been the case for many quarters now. I'm particularly pleased to see a marked improvement of our underlying claims ratio in the quarter. This is a clear testament to our DNA of focusing on profitable growth in that order.And naturally, we will continue to adjust our pricing in accordance with risk premium going forward. On the investment side, we posted a loss of DKK 37 million caused mainly by wage indexation of workers' compensation provisions, just as expected, and after Q2.Insurance revenue grew by 2% in the quarter. This was low, as expected, but we are beginning to see signs of improving growth rates as projected. 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 initiatives has also caused a higher churn rate this year as expected.An important topic over recent quarters has been the very high inflation. And as mentioned before, inflation has already peaked at the end of last year, and the Danish Consumer Price index continues to drop, to now 0.9% in September.And as you know, the Consumer Price index is not a very good proxy for inflation in an insurance company, as we buy significantly different goods than those included in the index. On those goods, we see signs of falling inflation as delivery time from suppliers has normalized and demand from new construction and private consumption is decreasing as well.As a result, material prices has dropped and are beginning to stabilize. The current phase of the inflation cycle is about real wage growth. In the short-term, I think we're in a good position to handle inflation through procurement and underwriting, et cetera, and we've already imposed inflation-based price increases across a number of products. And also, we remain committed to our target of maintaining profitability by pricing at least in line with inflation over time.And our focus on pricing will continue in the coming period as we work to pass the negative impact from the hardening reinsurance market onto customers. Therefore, we will be implementing price increases across selected products and customer segments with effect from 1st of January 2024.And Lars, will you then take us through the Q3 results more in detail, please?

[Lars Beck, executive]

Yes, I will. And thank you, Peter. If we take a closer look at our Q3 results, the profit after tax amounted to DKK 261 million, as Peter mentioned. The result is affected by 3 main items that I would like to address; a high level of weather-related claims, a strong underlying claims trend 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 84.7% or 86.0%, excluding runoff and a growth of 2% in the quarter. The quarter was characterized by a higher level of weather-related claims, most notably due to the very wet weather we experienced. We experienced multiple cloud burst across the country and many days with heavy rainfall, and we even experienced a storm, which is somewhat atypical for our third quarter.In addition, the hailstorm that hit the northernmost part of Italy caused many motor claims and the weather also caused many claims among our agriculture customers with a crop insurance. As a result, weather-related claims amounted to DKK 153 million, which is significantly above the normalized level of DKK 95 million.Besides the wet weather, large scale claims were also somewhat above the normalized level due to a few single fires in the commercial segment. If we adjust weather and large-scale claims to the modest level, our reported combined ratio for the quarter would have been 81.7%. And if we strip out all the usual moving parts, the underlying claims ratio improved by a full 1.8 percentage points in the quarter.This is a result of our continued efforts to become more efficient as well as our implemented pricing initiatives. Furthermore, the wet weather in Q3 caused fewer fires in the agriculture segment. Interestingly, the improvement is seen despite high motor frequencies which remained at the level experienced in Q2, and we believe it is fair to assume that this is the new normal level after COVID-19. So we see solid trends in the underlying claims ratio, but as we have continuously communicated, please do note that there is a significant level of volatility in the underlying claims ratio, which can affect positively or negatively in single quarters.If we turn to the investment result, this was a loss of DKK 37 million in Q3, in line with expectations. The matching portfolio saw, as expected, a further negative impact on wage indexation of workers' compensation provisions due to rising wage inflation expectations. This was partly offset by a spread narrowing of Danish mortgage bonds, and the free portfolio was negatively impacted by the equity market movements in the quarter.We also continued the reduction of our CLO exposure as promised, and we are now standing at an exposure of around DKK 25 million, while our overall asset allocation was roughly unchanged during the quarter. And before rounding off my comments on the investment results, I want to draw your attention to Slide 14 in the Investor Relations presentation, where we, for the first time, have provided you with sensitivities to workers' compensation, both in relation to inflation expectation and bond yields, as promised at our Q2 release.Let me quickly comment on solvency. Our solvency cover in the quarter increased to 405% mainly due to earnings in the quarter and a lower solvency capital requirement, following the further CLO exposure reduction. 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 before the end of this year.Could we turn to Slide 3, please? Before looking at the profit forecast model for 2023, let me first comment on the developments in Q3. As mentioned, the quarter was marked by a high level of weather-related claims, actually the highest level in any Q3 over the past 10 years. This phenomenon was not specific to Denmark, as the rest of the Nordics and Continental Europe saw similar trends.In addition, we experienced another quarter with more large-scale claims, both in the Private and Commercial segments. To this end, and as a result of the hardening reinsurance market for both catastrophe and per risk programs, we increased our normalized weather-related losses last quarter.We continue to monitor and follow up on the developments closely, and we remain comfortable with our current level of normalized or modeled weather-related and large-scale claims. And just to apply some context, in a normal year, we would expect 5 to 6 cloud burst and 2023 is so far in line with this expectation. Despite the headwind experienced in Q3, the updated profit forecast has been improved by the run-off experienced in Q3, and this is a consequence of the improvement in our underlying claims ratio experienced in Q3.Thus, we have improved the assumed combined ratio for 2023 and narrowed the range from between 83.5% and 85.5% to now between 83.7% and 84.7%, excluding run-off in Q4. The assumed premium growth for 2023 is unchanged at above 2%. And in conclusion, the post-tax profit forecast model for 2023 is improved to now between DKK 1.1 billion and DKK 1.21 billion, excluding run-off in Q4.Could we take Slide 4 please, and then, back over to you, Peter.

[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 round. So, operator, may we have the first question, please?

[Operator]

Thank you, Peter and Lars. [Operator Instructions] And your first question comes from the line of Asbjorn Mork from Danske Bank.

[Asbjørn Mørk, analyst]

I have 2 questions. One, if I may start on underwriting and repricing. Looking at Slide #5, motor continues to be dead flat. Lars, you mentioned, this is the new normal we're seeing in terms of frequencies. And if I look at Item #9, there has been around 100 basis point deterioration due to frequencies year-to-date. So, basically, a little bit of a comment from your side on what are you seeing in terms of repricing and what is your policy here? And, on that note, considering the improvements we've seen to the underlying claims ratio in Q3 versus the ratio in Q2, what kind of tailwinds are you seeing going into Q4 and 2024?

[Lars Beck, executive]

I can take the motor part. You're absolutely right that we have seen frequencies in 2023, both in Q2 and -- as we mentioned, and also in Q3. Q3, I want to highlight that there is no material deterioration to what we was expecting. And as said too, we believe this is the new normal.I think it's important to note that the motor product as a whole is still a profitable and very attractive line of business for us, and we have already implemented inflation-based price adjustments. We, of course, continue to follow up and monitor the development and our pricing on the motor products and all other products.We also know that motor is a very and highly competitive and price-sensitive policy. And we, of course, also are alert to the competition situation in this. And therefore, the price increases that we all have mentioned, that we will also be seeking will be implemented across a number of products and not only on motor.

[Peter Hermann, executive]

And just maybe briefly on the underlying because as you know, we're not guiding on the underlying claims ratio here. But of course, there are some effects on the underlying, improvements that we also will see going forward for the next quarters. But as you also know, as we have also mentioned also when we had, you can say, deteriorating underlying, and also now when we have, you can say, bettering in the underlying is that there is still, you can say, volatility in our insurance portfolio.And just for -- mentioning just an example, this quarter, we had a lot of, you can say, wet weather that also meant to say fewer fires within private and agriculture, which also you can say improved the underlyings. But of course there will be -- there is some underlying, you can say tendencies also from the efficiency improvements we're making, some pricing initiatives that goes for both travel at the [ content ] insurance, accident insurance and some of those, of course, we also see -- expect that we see in the next quarters.

[Asbjørn Mørk, analyst]

If I just may follow up on the first part of the question relating to motor insurance. So it sounded like you were going to or you have been repricing in accordance to inflation, but not according to frequencies. So -- I mean some of your peers have been out, quite a lot of them actually saying that they want to price higher for motor. So, would you see this as an opportunity to take market share rather than to follow-up on the repricing side?

[Lars Beck, executive]

As we said, we look at the portfolio at an overall. And at an overall level, we are committed to maintain our profitability, both in terms of it inflation. But of course, also when we see frequency increases in certain products. But it's important to note that we look at a portfolio as a whole.

[Asbjørn Mørk, analyst]

Okay. That's fair. Second question on the storm surge, we had in the weekend and obviously, October has also started pretty bad last year, [ with ] reinsurance expert. So could you just remind me how does you -- or how do you expect your side ways reinsurance to kick in here? As I understand, it's not going to be relevant in this case, but just if it was, how would you be covered?

[Peter Hermann, executive]

Can I maybe -- before we answering that question, maybe just to make one statement about what had happened over the weekend, just to give it a little maybe a flavor here. We have around 1600 reports of claims until now. And you can say, as you know, some of the claims will be covered by the Danish Natural Hazard Council that has this storm surge pool. And just to, again, highlight, around 300 out of this 1,600 is on the storm surge pool.That doesn't mean that in the last 1,300, there could also be claims here, which will be covered by the storm surge trade pool. We are looking into that at the moment. So this is just to say, if this is where we are. Of course, we still see claims coming in, but you can say the tempo with the claims coming in is actually already, you can say, lower now than it were during the weekend and also yesterday.And just to give -- not to make a comparison and guidance, but just to say, when we had the storm Noa last year in February, we had 1,300 claims. That had a total cost of around DKK 16 million. So, I'm not saying that this is the same storm because storms hits different areas with different paces and so on. But just to say, out of the 1,600, you can remove 300 at least.Of course, there could be more claims coming in. And last year, 1,300 claims in the storm was DKK 16 million. So just to say, we are not even close to having a situation where this will be covered by reinsurance. But I don't know Lars...

[Lars Beck, executive]

Yes. And the question that asked around or the answer to your question Asbjorn is also that we do not see this as a reinsurance event at this point in time.

[Asbjørn Mørk, analyst]

No, but that was actually not the question because I already understood that. It was more that, could you just update us on how does your sideways reinsurance actually work in a situation like this?. So if you had a new event tomorrow, how would you be covered?

[Peter Hermann, executive]

Well, that all depends on the size of the event, of course.

[Asbjørn Mørk, analyst]

Okay. I would think we can take that bilaterally, okay.

[Operator]

Your next question comes from the line of Tryfonas Spyrou from Berenberg.

[Tryfonas Spyrou, analyst]

I had a question, just coming back to the margin, underwriting margin. I guess you mentioned, Lars, the 81.7% combined ratio, you mentioned sort of improving underlying. I guess why not go for more market share and growth? It looks like the margin is at a pretty good place. So I was wondering if there's anything more you can add there? I know that you mentioned the underlying is probably not all sort of improvement from pricing, it could be some [ largely to] more the claims, reducing fire claims and so forth. So, maybe any comments you can add on how you think about the actual profitability of the business at this point in time and how you think can take market share or maybe grow the [ back of that ]?And the second question is on solvency. If I sort of do the math, take out the dividend based on the DKK 13 per share, which consensus estimates take the capital earmarked for the Oona deal and up back to Q4 profits and maybe reduce the capital requirement when it comes to -- on the back of the lower CLO exposures, you can manage to get rid of them, get to around 190 solvency going forward for Q4. Is there any scope you can pay out, I guess, more than 100% of your earnings this year, given that earnings is much lower than the last year, that would imply a more, I guess, steady dividend trajectory? Or we should not expect anything when it comes to that.

[Peter Hermann, executive]

I can maybe start with the first one. I think that if we're still looking at what you can say, the historical development now also, you can say, over the last 2 or 3 years, actually, where we've worked with domestic price initiatives and efficiency gains, also in a time with inflation, we have actually had, you can say, pretty good combined ratio levels also compared with the market as a whole.And we have also seen that had an effect on growth. We have not had the highest growth during that period. We have a profitable growth and that we still have a positive growth, which we are happy about, both in private and also the agriculture and the commercial segment.If you look at, you can say, from an overall perspective, actually, the growth has been higher on agriculture and commercial this year. But if you look at Q3, actually isolated, we actually see higher growth within the private segment now. So, what we're seeing is that after some of the things we have done, also working, of course, with the competitiveness and pricing and so on, we can see that churn is now at least lowering and being better in private.So we actually see sales is also picking up, churn is getting better. That could, you can see, mean you can say a high growth in that area going forward. And then on the other hand, we have also had, you can say other initiatives for profitability within commercial and agriculture.Also, you can say, with a lower index on workers' compensation, the loss of this MasterCard Travel insurance agreement, meaning that you can say we have had higher churn in agriculture and commercial lately. So -- but going forward, we think that, yes, it could be the -- growth could be higher than at that present level here going forward. But again, we will always look into keeping and maintaining profitability before growth. So that's an important statement.

[Lars Beck, executive]

And I think if we turn to the solvency part, without giving any guidance here, but it seems like your Excel sheet is working. And when it comes to solvency, I think it's important to note that our nominal solvency capital requirement is so low now that even small changes will have a fairly large impact in terms of percentage points.So, actually, be careful about the last 2, 3, 4, 5 percentage points because nominally, that does not mean a whole lot. Furthermore, it's important to note that we are currently having equity exposures and at a very, very low level compared to where we have been historically. Therefore, we do expect for the interim period to operate with a little bit higher solvency percentage than otherwise would have been the case, adjusted for Oona and payout of ordinary dividends, of course.Having said that, however, it is still clear our ambition that we have said many times to be able to have a dividend capacity for Topdanmark that equals 100% of the earnings for the year. But of course, and that's the caveat that the final decisions on dividends are, of course, made by the Board and ultimately decided at the annual general meeting.

[Operator]

Your next question comes from the line of Youdish Chicooree from Autonomous Research.

[Youdish Chicooree, analyst]

I've got 2 questions, please. The first one is on claims inflation. I think you talked about a material reduction in headline CPI in Denmark. But you also talked about a few factors that's driving down claims inflation in both motor and property. So, I was wondering, well how come you've basically maintained your expected range of 2% to 4% like throughout this year? Is it the case that you see inflation more towards the bottom of that range now? That's my first question.And the second one is, just wondering if you could help us understand or quantify some of the moving parts in terms of the year-on-year change in the discounted underlying loss ratio? Because basically, there are really 3 elements here. I mean, there's obviously the benefit from new efficiency and pricing measures, but then there seems to be a bit of luck in terms of having basically no fires. And then finally, offsetting these improvements, there is a drag from higher motor frequency. So I was just wondering if you could help us understand how these 3 factors are affecting the result actually.

[Peter Hermann, executive]

Just regarding the first one, you can say -- we're saying we're not guiding or getting into with the inflation level. We're just saying that the 2% to 4% we're seeing over time, as you can say, a level in Denmark. And actually, that corresponds actually quite good with the political intentions of an inflation level in the societies within Denmark here. So at the moment, we will always say that we will price accordingly to inflation to maintain and you can say, protect profitability.What we are seeing now is now, yes, the CPI has gone down. And you can say we've also said that, that is not a good proxy, as I also mentioned, because we are buying other goods. But we are always following this. And of course, you have to do this with a longer sight because we're not pricing every month, we have to do this, you can say at least yearly and then sometimes little longer.I think actually, in a long time, we've been in front of the curve. You can say no, [ we can still ] say that we are pricing in line with inflation. And now also, as I mentioned, putting price increases forward due to higher and hardening reinsurance market and more weather-related claims. But actually, we think that overall, I think we have, you can say, inflation pretty well under control, actually, but let's see how it will move. But we are -- yes, over time, we see inflation level of 2% to 4%. So it's not a guidance for this quarter, it's looking forward.The other question, Lars?

[Lars Beck, executive]

No, that was more on the year-on-year change on the underlying. Just one final comment on the inflation part. It's important to note that even though the CPI has come down, actually, inflation, if you adjust for energy prices in September were still almost at 4% in Denmark. So inflation is still -- the core inflation is still at a high level. And in terms of the underlying, you're right that we still have -- we have tailwind from the increased -- from the continued increased interest rates. And then we have, you could say, in the underlying portfolio, we have both pluses and minuses.So, we have seen things that gone worse as we've also touched upon earlier this year and also for the quarter, namely in particular, motor frequencies. But we also have a number of other lines of businesses where we have improved our underlying claims ratio. So, I think if you look at the actual claims impact, it is a mixed bag of both pluses and minuses, some of them driven by external factors. We see this frequency of motor as a macro event, whereas the purchases and the improvements we definitely see as a result of our continued pricing and procurement and efficiency initiatives.

[Youdish Chicooree, analyst]

Okay. Can I kind of just follow up on -- just on the claims inflation? I understand you don't want to give a guidance, and the expectation you've put forward is your medium-term expectation. But, as we stand today, if you compare the situation from the start of the year, would you say claims inflation has come down quite materially or is it broadly unchanged?

[Lars Beck, executive]

It's come a little down, I would say.

[Youdish Chicooree, analyst]

Just a little down. Okay.

[Operator]

Your next question comes from the line of Vinit Malhotra from Mediobanca.

[Vinit Malhotra, analyst]

Just 1 question on the Slide 8. In 3Q '22 discount effect noted here is 3.6%. But if I just remember a conversation with the IR team, I think it was 2.4% for the distinct quarter, which means that the underlying improvement in loss ratio is smaller at about 40 basis points.First of all, is that something that you would still say agrees with your reading of the situation? And then even within this, I mean, I'm sure Youdish just asked about the drivers. And if you don't mind, again, just clarifying how much do you think was the agriculture? Good luck, if you like, of fewer fires in that 40 basis points, if that is the right number?

[Peter Hermann, executive]

I think if I take the discounting part first. Remember, last year, in our Q3, we were actually quite vocal about the way or the fact that we changed the principle for discounting within the quarter. So there was a high discounting impact in Q3 last year, which, all else being equal, would have been lower had it not been for the change in principle. And hence, I do not follow your argument about significantly lower improvement in the underlying. Underlying is underlying and they are at a comparable basis.

[Vinit Malhotra, analyst]

No, no. What I mean is, in the same table, if I change 3.6% to 2.4%, it will...

[Peter Hermann, executive]

But we didn't disclose that.

[Lars Beck, executive]

Vinit, just to make clear, underlying is undiscounted, right? So that means we take out everything related to discounting. So it is like-for-like, it's basically taking everything back to nothing.

[Vinit Malhotra, analyst]

Okay. And just a question on the -- how much was the, [ this year ] fire, please, if you can clarify it again. Apology if I missed them.

[Lars Beck, executive]

I don't have a guidance. You can say -- we're not taking it more than what we have shown in the investor report, which is just some cases. Just -- I'd like to just point out that, yes, we have efficiency gains also from pricing within content insurance or accident and other parts of the travel insurance and so on. But we haven't a number just to say that we have also been -- as part of the underlying is also that, for example, fewer fires due to weather, more [ wet-related ] claims.And sometimes it happens that you have more claims that just go, you can say, above the threshold for reinsurance and getting it into the weather related claims. Sometimes you have fires, for example, just below, which will be on your underwriting. So the point is, it is an improvement, and we also see some of the things going forward of the improvements. But just to say, it's not 1.8%, which is, you can say, the improvement level going forward each quarter. That is more the point to say. But other than that, I don't think we can get it closer than that.

[Operator]

Your next question comes from the line of Martin Birk from SEB.

[Martin Birk, analyst]

Two questions from my side. The first one being on weather, and now that we talk weather in Q4, I noticed there was also quite a large cloudburst hitting the city of Aarhus in the beginning of October. What do you make of that? Is that a claims driver? That is my first question. And the second question goes on your Oona acquisition. We have yet to see it closing. I know you have guided for H2, but I guess we are a long way into H2 by now, what is holding you off on this one?

[Peter Hermann, executive]

Of course, again, the only thing we can say, our weather in the Q4 is that -- our normalized weather level is DDK 75 million. And it's true that we had a pretty big cloudburst over Aarhus which, of course, we also have customers within Aarhus. And then, yes, we have this claim that I just described about at least the amount of claims and so on going forward. But let's see, we cannot say we're not -- we cannot say whether it's enough on the high -- whether it's enough or not. But yes, the normalized level is DDK 75 million. Let's see how that will surpass when we have this Q4.And then your questions to Oona is just to say, actually, nothing is holding us up because we have answered all the questions. So we are just awaiting the competition authorities. We foresee that this will be soon because there's not much -- not many questions left at least. But of course, you can say, when we are sitting here on the 24th of October, then you could say that when we set the second half year, there's also some timing from we get the approval till the closing can be done.So you can say, actually, it can earliest be the 1st of December for closing or it could be the 1st of January, but it will be one of them. So nothing is holding us up. We expect to get it soon, and then it will probably be the 1st of December or the 1st of January, let's see.

[Operator]

Your next question comes from the line of Jakob Brink from Nordea.

[Jakob Brink, analyst]

Maybe just starting where Martin left. So, on your guidance for this year and also, when we should include Oona, given also the integration cost, could you -- so your guidance includes nothing from Oona, right? So no integration cost and no profit impacts. But I guess the closer we get to 30th of December for the closing, will you then still book the integration costs this year or will they then also be postponed to next year? Or how should we look at that?

[Lars Beck, executive]

Yes, if I take that first, you're absolutely right. The closer we get to the year-end, the less integration, we will be able to do. I think the -- upon the time of closing, we will book transaction costs related to the transaction. What we've said earlier is, we expect in aggregate DKK 100 million cost for acquisition and integration costs, including transactions costs, of course.And clearly, we cannot put a provision aside for integration cost unless there is a liability, an actual de facto liability associated with that. And hence, in any scenario, I believe that what you should potentially consider this year is that if we close on December 1, then it's only the transaction costs that are going to impact the numbers.And as and when the approval comes from the authorities, we will, of course, give you some insight as to what do we expect in terms of cost for this year on transaction-related costs.

[Peter Hermann, executive]

And it's true that there's nothing now included in the numbers of Oona.

[Jakob Brink, analyst]

And let's say it's only transaction cost and it close 1st of December, then the profit contribution from 1 month, is that then roughly offsetting the transaction costs or not?

[Lars Beck, executive]

No, I don't think they're earning that much money or our advisers are too expensive. I'm not sure there will be a 1-to-1, but we'll give you some input on that.

[Jakob Brink, analyst]

Okay, fair enough. And then sorry to come back to this question, but the underlying improvement, I don't have all the break points, but I guess if we look at the gross efficiency gains, it's around DKK 110 million this year, it's around 1% on the combined ratio. But typically, we have been -- I think you've been running at maybe 60%, 65% net of gross, so 0.6%. So still, there's quite a long way up to 1.8%, when also you have the motor frequency headwind. So just so I understand fully what is the remaining fairly large chunk that is leading to this improvement?

[Lars Beck, executive]

I think we are not going further into details in terms of the different line of business. But as we've said, clearly, our efficiency programs has an impact. What we've also been saying, and I think that's important to note that if you go back over the last quarters, and in particular, last year, we've also been saying consistently that there has -- both the baseline but also the actuals have not been quite comparable when you looked at the underlying part.In particular, when it comes to how to adjust for COVID and how to adjust for the impact of the inflated energy prices that we saw in the first -- in particular, in the first half of last year. So clearly, there is also an underlying impact from that, where we are probably year-to-date, at least getting some tailwinds from what we saw in terms of both COVID and inflated energy prices in 2022.

[Jakob Brink, analyst]

Sorry, I'm not sure I understand that. So what was those energy-related that pushed up the underlying? I can't remember we talked about that.

[Lars Beck, executive]

No, sorry. What I'm saying is that last year, we saw impacts that was not comparable with the previous years, and it's a little bit the case this year that you cannot compare like-for-like. Last year, we also saw that with the first summer, for instance, where we saw an amazing boom in travel activities after COVID. That was -- I think there was a record high activity level in the summer last year. This year we've seen a better result on our travel insurance. So that goes the opposite way. So there are clearly impacts from COVID and from energy prices still in the baseline, if you look at it both year-to-year, but also in the quarter.

[Jakob Brink, analyst]

Okay. So, travel goes the right way, efficiency goes the right way, and then you have motor frequency going the wrong way and then you write fires in agriculture. But those are the key elements of the 1.8%?

[Peter Hermann, executive]

Yes. We have some improvements, as I also mentioned in content insurance and agriculture accidents. So [ sum of those ] things there's some underlying improvements based on efficiency, but also pricing levels.

[Jakob Brink, analyst]

Okay. I don't know if I can just ask a very small follow-up. But last, you mentioned the lower equity risk exposure right now, means that you will have a higher solvency ratio than maybe before. Wouldn't it be the other way around or is that because you plan to take it up again?

[Lars Beck, executive]

It was to give us a little bit room for maneuvering in the equity. I'm not saying that we are going to be -- we're not an investment house, and when you buy into sort of Topdanmark, you buy into an insurance risk. However, looking into it, with the current equity exposure we have of around DKK 600 million, I believe that's an all-time low for Topdanmark. And strategically, there might be an idea to improve that a little bit if and when we see it from a tactical level that it makes sense. And that would naturally also draw a little bit on the solvency potential.So again, important to highlight, we are not here to be an asset management house. We are here to be an insurance provider and be good at that. However, of course, there are opportunities where you could increase the equity exposure slightly, which would then also have an impact on the solvency.

[Peter Hermann, executive]

And this -- well, we've also been helped by this anticyclical on the equity. So that actually, that is again, you can say if this drops again, so that also you can say it makes equity, you can say, the solvency requirement from equity going down and you see those exposure. So, the reason we are mentioning is that it's more volatile when you have such a low, you can say solvency requirement. So there could be small changes that actually could impact percentage-wise more than it were before. So we're just saying that instead of maybe having the lowest solvency cover, it could be maybe a good idea for us, at least to have, you can say, a little more maneuver room. So if we took out, you can say, more equities explosion going forward, than we shouldn't -- that would still be able to pay out 100% of earnings if our Board choose to do that. That's just the main argument and reason we're saying it.

[Operator]

Your next question comes from the line of Jan Erik Gjerland from ABG.

[Jan Gjerland, analyst]

The first one is about cost and potential synergies. It seems like the cost line is, of course, up year-on-year as you have sort of highlighted, but it's still a little lower than sort of expectations. So, could you drive us through a little bit of what happened behind that expense line? Is it less sale? Is it lower activity? Is it actually that [ dis-synergy ] from life is better than you thought or how should you read that sort of less uptick than we probably foresaw? That's my first question.

[Lars Beck, executive]

Yeah. You can say that -- actually, I would say that if you look over the year, I think it's actually pretty much in line with what we have, you can say, both guided and forecasted, and we still maintain that we will have this around a little more than 6.5% in costs. There's some phasing between Q3 and Q4 that have, you can say, a beneficial impact this quarter, but will revert, you can say, in Q4. And that's the reason why we maintain it.So this is not that we have got very much better in a quarter. This is a little more phasing actually. So it's still in line, and we are, of course, still, you can say, hit by the synergies from the life and that will also maintain next year, you can say, because we need -- we're still in the process of working with this. So going forward, we still have, you can say, some activities to do after the disintegration of life actually to improve the cost level going forward. But we've also -- next year also have, you can say, headwinds from this.

[Jan Gjerland, analyst]

Okay. Perfect. When it comes to the claims situation then, just a follow-up on all of the questions here. If you look into the private and SME segment, it seems like you're sort of having a higher claims growth, if you look at the year-on-year basis from quarter-to-quarter, while this is sort of getting improved levels, when you look at the year-to-date versus year-to-date last year.So as you alluded to, the private seems to have a higher premium growth over than claims cost growth in private. But when you look at the underlying levels or quarter-by-quarter, it seems like the claims growth is actually increasing the fastest in Q3 versus earlier this year. So it could be that improvement earlier this year is sort of playing us a little bit around.So how should we read about these 2 numbers when it comes to the commercial and SMEs, it seems like the claims growth, just on the underlying number seems to be quite high, while the premium growth is still very low. So how should we think about this when it comes to profitability and your improvement in the agriculture fire this quarter? And how many fires is actually a normal level of fires in Q3?

[Peter Hermann, executive]

It's good questions, but we don't have, you can say exact answers to. You can say that [ of course ] you can it's a little depending on when you have these, for example, weather claims of -- you know large-scale claims on fires, are they above the threshold? You can say, in terms of reinsurance and will go on to the large-scale claims on the weather or is it below? And that, of course is, you can say, something that will be volatile going forward, also, if you can say, is it hitting the underlying is it hitting the lines, large-scale claims and weather related claims.But you can say it's true that the growth in this quarter has been, you can say, it's trending the other way around that private is actually trending upwards in terms of growth and also a little downwards in terms of growth in the SME segment here. But of course, we have some initiatives in pricing going forward. You can say, when we, for example, say that we will impose price increases due to high reinsurance cover, that would mainly also be on the SME segment, because there will be more of the business within SME, that will be, you can say, have a reinsurance cover, where in private it will be a lower part.So, you can say, there's some different trends going forward that could influence the growth and you can say claims level differently.

[Jan Gjerland, analyst]

So it means that this -- is it tougher competition on the SME commercial now than in the private side? Is that what we also should read into this? Or is it just too early to conclude?

[Peter Hermann, executive]

I would say that if you look at the SME segment, where we've seen that within, you can say, worse compensation, we saw higher level of competitive level after some years with a high indexation. We also saw, you can say, higher competitions from both -- yes, both are, you can say, normal competitors. There are also smaller players trying to get a piece of the market and having at least put lower prices on -- with those compensation going forward.That has meant, you can say, higher churn, which is hitting, you can say, the SME segment here. So that at least, you can say, is a sign of higher competition within that area. But still, actually, we have pretty good traction within SME. We have seen little lower growth on agriculture actually this year, also due to the fact that we have imposed new systems and that has actually meant some internal work, you can say, on migrating, on getting things into new system, it's actually working quite well.So people are-- the customers are happy, but has made us a little lower activity in the sales organization here, but we have actually pretty fine level of growth also within the SME. And now, yes, private is picking up to both due to better churn, but also, you can say, sales is picking up. But I would say that the competition level is still quite high actually, Also on private, we can just see that we have competitors also working more with prices than did before maybe.

[Jan Gjerland, analyst]

Would you say it's housing or motor that actually brings them also the growth in the private line?

[Peter Hermann, executive]

What? Sorry, can you repeat? I didn't get that.

[Jan Gjerland, analyst]

You have a growth of 3.2% in the private book year-on-year on a quarterly basis. Is it pricing increases from motor as well as house? Or is it just -- is it a mix or what is driving -- the main driver behind that 3.2% growth?

[Peter Hermann, executive]

It's still, you can say, it's still also some of the price increases we have done earlier on also on house and [Indiscernible], some of the product lines where inflation hit the most. And then we can see that the churn, that's an overall, you can say, that actually will go into the different business line, all the different business lines.And the sales, you can say, that's actually also broadly. So most of the -- if you look at churn and sales, it is broadly across different product lines. If you look at the pricing, it's mainly within the product lines, we did some pricing initiatives on, which was mainly related to the inflation, which was more house and content insurance and so on, and a little on accident.

[Jan Gjerland, analyst]

Okay. Is it possible to say anything about the normalized level of number of fires in agriculture at all?

[Lars Beck, executive]

No, we don't disclose that.

[Operator]

[Operator Instructions] And you've got a follow-up question from Martin Birk from SEB. Your line is open.

[Martin Birk, analyst]

Just to follow-up on my previous questions regarding Oona. I guess if I go to the competition website, it seems like the application was complete on the 19th of September, and given the 25 workdays in the first round, which is today, you should receive, I hope, approval today. Then my question is, why do we need to wait until 1st of November for this to close?

[Lars Beck, executive]

I mean, practically -- from a practical point of view, without going into details about how SPA is structured. There are post deadlines in the SPA as to how and when we close after receiving the approval from the competition authority. And the deadline for closing November 1 has passed.

[Martin Birk, analyst]

Okay. But what needs to be finalized after? I mean, you should receive that today, right? So what needs to be finalized after receiving that approval, that's going to take so long.

[Peter Hermann, executive]

They have 25 days after a final and then there could be a situation where there's additional questions. And it is not prolonging and it's not making a new 25 days, but it's just prolonging maybe some days or 2. So we haven't -- of course, if we receive it today, we'll of course, announce it today. So of course announce it when we get it, but we have not received it yet, but we also expect it to happen soon.But, as Lars was mentioning, that just means that it cannot be the 1st of November due to, you can say other deadlines in the agreement.

[Martin Birk, analyst]

Okay. But, if it goes above the 25 days, then it needs to go to the second round, correct?

[Peter Hermann, executive]

Not if it's, you can say clarification of questions in the process, then it could only be -- then it could be even days that has been spent on that question, unless, of course, it will go into a second round. We don't expect that, but just to say that, so it doesn't mean that it will go into a second round. It could just leave at that and they can follow-up questions that has to be answered. That could just prolong with the days you're spending on that question. That is how the system is working.

[Operator]

That brings us to the end of our Q&A session. I'd like to turn the call back over to Peter for closing remarks.

[Peter Hermann, executive]

Okay. Thank you, operator, and thank you for all of you for taking the time to attend this conference. And 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. Thank you.

[Operator]

This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.