Tryg A/S
CSE:TRYG
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Welcome to the Tryg Interim Report Q1 2023. [Operator Instructions] This call is being recorded. Today, I'm pleased to present CEO, Morten Hubbe; CFO, Barbara Plucnar Jensen; and CCO, Johan Kirstein Brammer. Speakers, please begin.
Good morning, everybody. My name is Gianandrea Roberti. I'm Head of Investor Relations at Tryg. Just to recap, we publish our Q1 results earlier this morning. And here with me, I have top management of the company: Morten Hubbe, our Group CEO; Barbara Plucnar Jensen, Group CFO; Johan Kirsten Brammer, Group CCO; and Mikael Karrsten, Group CTO. With these words, over to you, Morten.
Thank you, Gian, and we start our Q1 in the rather technical department, welcoming a new set of accounting standards, IFRS-17, almost like Christmas Eve. This has been a change quite long in the making, and it is now finally upon us. We published a newsletter all the way back in the spring of 2022 and a more comprehensive deck at the end of March this year, with fully restated figures, both for the group and for all business units. I hope that has been helpful for all of you in a -- your [ own ] modeling and preparation.
I think we mentioned already previously that the new accounting standard would not have much of an impact on our figures. And we've shown that pre-tax net profit, equity and dividends are all unchanged. Clearly, we benefit from the fact that we run a pure non-life business with a relatively short duration of the liabilities, and we've been using mark-to-market for both assets and liabilities for many years, unlike many, many insurance companies out there.
In general, of course, the goal of the new accounting standard is to improve comparability across companies, something that has always been quite difficult in the sector, and then time will tell if that will indeed become a reality.
On Slide 4, we report an insurance service results, one of the new jargon words for insurance technical result, of DKK 1.474 million in Q1. That is an increase of DKK 460 million or some 45% versus pro-forma Q1 last year. And bear in mind, that is, of course, a pro forma where we have added the acquired entities to the comparable number to compare apples and apples. And still, we see an increase of 45%.
Now clearly, one needs to understand that there are significant tailwind factors. We see a significant higher interest rate, and we see the large claims and weather claims have been lower and more favorable than expected. And clearly, that provides significant positive tailwind, while negative currency movement is a clear headwind, and Johan will comment more on this in detail.
We see positively a driver of underlying claims, which improved 70 basis points for the group, while showing a modest deterioration for the private segment. Profitability initiatives in Commercial and Corporate has helped offsetting the Private segment trend. And as we've been communicating for quite a while, it has been a clear part of our strategy to improve pricing, profitability and earnings in Corporate and Commercial, and we're seeing that happening.
Investment result of DKK 167 million, primarily helped by good equities and return, fixed income returns, and both the free and match portfolio contributed positively.
And then very pleased to announce that we pay a Q1 dividend per share of DKK 1.85 that is an increase of 19% compared to first quarter last year, driven by the full consolidation of Codan Norway and Trygg-Hansa, the synergies rolling in and a strong solvency of 200 at the end of Q1. So very pleased to, at this point in time, be above the pre-acquisition dividend per share.
On Slide 5, we report customer satisfaction of 86, which is an improvement of 1 percentage point compared to last year. And we do know that there is a very strong link between customer satisfaction and the retention rate, and particularly in the period of price increases, that is very, very important, and we continue to have a strong focus in this area.
In this slide, we've described various areas where we saw improvements, and I would also add that we see improvements in the customer satisfaction, in our claims handling, where we see a much higher satisfaction. Particularly we see that when customers use our Straight Through Processing in the new Guidewire system in both Denmark and Norway, that not only reduces the cost and handling process, it significantly increases the speed and the customer satisfaction with the claims handling. So we look forward to continuing and fulfilling our Guidewire project. So Johan, over to you.
Thanks a lot, Morten, and I'm turning to Page 6. And on this slide, we're illustrating the uplift of Tryg's insurance service result of DKK 358 million from Q1 2022, which at the time did not consolidate Codan Norway and Trygg-Hansa, to the DKK 1,014 million consolidating Codan Norway and Trygg-Hansa, to the reported level in this quarter, Q1 2023 of DKK 1.474 million.
The main drivers of the movement between DKK 1,014 million and the DKK 1.474 million are a significantly higher interest rate level, approximately 200 basis points and much lower large and weather claims, another 200 basis points taken together versus the corresponding quarter in 2022. Improved underlying claims ratio of 70 basis points, including the RSA synergies, also helped the performance in this quarter.
To the right on this slide, we are showing the change mix of the insurance services result for the full year 2022 versus the full year 2021. And as you can see, we are, as a result of the acquisition, able to report a significantly more balanced footprint in terms of earnings distribution, with Denmark and Sweden almost evenly contributing and Norway also adding nicely. And one has to remember that the Norwegian business is also the smallest and therefore, it's natural that it contributes less to the overall results.
If we turn to Page 7, this slide illustrates the development in the insurance service result for the 3 main segments: Private, Commercial and Corporate. And the focus on this slide should really be on the comparison versus the pro forma figures, and the most important comment that I will make is on the corporate segment.
We are showing here a big movement from the minus DKK 95 million insurance service result in Q1 last year to plus DKK 246 million this quarter. The negative number last year was solely driven by the reserve strengthening following the big hike in inflation expectations, which amounted to more than DKK 200 million in Q1 and was booked in the runoff result, therefore, driving the overall negative insurance service result under IFRS-17.
An opposite entry under the new accounting standard was booked in the investment results driven by the value change in the inflation swap. This is visible in the IFRS-17 deck that we published at the end of March that Morten alluded to before.
In the Private segment, it is worth mentioning a large difference in the runoff result versus Q1 2022. As you probably recall, Q1 2022 was the last quarter before the full consolidation and the results of Trygg-Hansa reflected that with a large runoff gained big book just before the transaction was closed fully.
In the right hand side of the slide, we are unfolding the building blocks that explain the near DKK 450 million high insurance services result in Q1 2023 versus the same quarter last year. As mentioned previously, our discount rate of the liabilities is approximately 200 basis points higher, reducing claims cost accordingly. And in addition, large weather claims were both below normal and well below Q1 2022.
Further, the 0.7 improvement in the underlying claims ratio also adds around DKK 60 million to DKK 65 million of earnings. And finally, the RSA synergies are also helping in reducing the expense ratio that we now report a 13.3% versus a 13.7% pro forma figure in Q1 2022. As for headwind, we experienced a material headwind from currencies with second NOK nearing all-time loads in the last 20 years, totaling around DKK 50 million impact.
Turning to Page 8 on the RSA synergies. In Q1 2023, we have delivered additional synergies of DKK 64 million from the RSA acquisition, which brings us to a total of DKK 470 million accumulated. With the Q1 synergies of DKK 64 million, we are progressing well to reach the target of DKK 650 million for this year.
Synergies continue to have a significant impact from admin and distribution with DKK 22 million in Q1, driven by both FTE reduction as well as the termination of ITE contracts in Norway in this particular quarter. This is the main driver behind our low group expense ratio at 13.3% in this quarter compared to the guidance of an expense ratio of around 13.5% in 2024.
Procurement is also a big driver of synergies by focusing on the utilization of lowest price contracts. Our synergy target remains unchanged at DKK 900 million in 2024, although we are pleased to see that we are slightly ahead of our plans. And with that, I'll be moving into the next section on revenue and portfolio and moving to Page 10.
Tryg reported a revenue growth of 4.6% or 5.5% adjusted for customer conversions in Norway and Sweden as part of the RSA transaction. Growth was broadly based across business units and primarily driven by price increases to match the ongoing claims inflation. In a period like this with significant price adjustments, it's not surprising, we see some impact on the retention rate, which somewhat impacts the growth levels also.
We have a strong focus on profitability, and we are pricing the business to cater for the relatively high inflation environment. As for the private segment, it continues to have a fairly high growth of just under 5%, which in this quarter is primarily driven by price adjustments. We've been converting and repricing portfolios in Sweden as planned from our original Swedish business in Moderna to Trygg-Hansa and in Norway from Codan Norway to Trygg-Norway. The growth would, in fact, have been 6.2% adjusting for this, which is in line with our expectations.
The Commercial segment had a growth of approximately 4% when adjusting for the reclassification of portfolio from Commercial to Corporate in Norway. We saw the highest growth in Denmark and more modest growth in Norway and Sweden. The Corporate segment also had a growth of approximately 4%, adjusting for the reclassification of portfolio between Commercial and Corporate in Norway. And in general, we saw high acceptance of price hikes, which was the main reason for positive growth, despite the rebalancing activities around the portfolio and the reduction of exposure to international property and liability.
With that, moving to Page 11 on pricing. We continue to monitor inflation developments very closely and we're disciplined with the procurement lever to mitigate this development as well as the price lever to protect our book of business. The macroeconomic situation remains volatile, and therefore, this has been an area of heightened focus for Tryg for quite some time.
Private -- increases in Private and Commercial in 2023 for the main products on average 5% to 6%. So it's worth highlighting that these graphs show the impact on earned premiums. This means that the full impact of price adjustments in general will take 12 to 24 months to fully flow through in this chart.
Turning to Page 12 on customer retention. Retention rates deteriorated somewhat for Private Denmark and were virtually stable in Sweden and Norway. In Denmark, we saw some impact from price increases and lower retention rate, especially for our single product customers. In the Commercial segment, we also saw a slight deterioration in the Danish part while the figures were virtually stable for Sweden and Norway.
The drop in Denmark was driven by the implemented price adjustments, particularly in the Buildings segment. However, taking a step back, it is important to stress that the overall retention levels remain high for the Private and Commercial segments, which is very important for us and a key feature of our markets despite the slight drop in the first quarter this year.
And with that, I'll hand it over to you Mikael.
Thanks, Johan, and we turn to Slide 14. As previously mentioned, the group underlying claims ratio improved by 70 basis points, broadly in line with recent developments. The Private segment reports a small underlying deterioration of 20 basis points, driven by the travel insurance business, including the related credit card business. And here, it is important to remember that the travel patterns were still quite different in Q1 2022 as this was the last quarter where we still had, to some extent, impact from the COVID-19 restrictions.
In Commercial and Corporate segments, the improvements are primarily driven by price increases, portfolio pruning and reduction in exposure towards less profitable segments. And we continue to expect the underlying claims ratio to improve in 2023 versus 2022. As mentioned multiple times previously, we strive to report as stable results as possible, but we do live in volatile macroeconomic environment, which also impacts the way we conduct our business.
Turning to Slide 15. This slide follows up on a similar one that we showed in the Q4 2022 presentation. We expect price increases on average between 5% and 6% in our major products, motor and property, across all geographies, and in accident, it is somewhat less, all to broadly match claims inflation. And needless to say, we remain very alert on the inflation issue and continuously monitor developments. In addition, we continue to work diligently with our procurement agreements to mitigate inflation development as much as possible.
And moving to Slide 16. Q1 was a favorable quarter when it comes to large and weather claims as both of these were below Q1 last year and below our normalized expectations. Weather claims, in particular, were low as the few storms that we experienced in the quarter did not result in very high amount of claims. The runoff result was 2.5%, virtually at the same level as Q1 2022. And we have guided for a runoff result between 3% and 5% in 2024, which is a broad guidance that cater for positive and negative events.
The discount rate on liabilities was 3.1%, flat versus Q4 in 2022. And here, it is important to remember that these discount rates of liabilities is now a function of interest rate movements in 3 geographies and not primarily just the Danish curve as before the RSA transaction. In this specific quarter, interest rates have been falling in Denmark, nearly across older curve, but came up in Sweden. And in general, it's also important to note that internal model development and adjustments can also have an impact on the discount rate of liabilities.
Moving to Slide 17. In the Q4 results, we talked about the hardening reinsurance market, and here, we give a little bit more nuance to that. We reiterate that the higher reinsurance prices that came in the 2023 renewal have an effect of 0.3% on the core, equal to approximately DKK 100 million, an increase which we are -- and -- are planning to pass on to our customers. It's important to remember that the increase is hitting only part of our reinsurance program, primarily the Nat Cat coverage and our protection for large property claims. The rest of the program is broadly unchanged.
And in the top left graph, we have also shown how we have adjusted the Nat Cat retention level to cater for the fact that we're a significantly larger group post the RSA Scandinavia acquisition.
And by that, I pass on to you, Barbara.
Thank you very much, Mikael. Well, looking at the expense ratio for the first quarter, we look at a level of 13.3%, which is a lower level than we are used to, which is due to the fact that the targets have been changed slightly during -- or due to IFRS-17. We also, in that context, adjusted our guidance for the 2024 numbers, so that will move from 14% to 13.5%.
The positive development was supported by RSA synergies of DKK 22 million related to admin and distribution. And in general, Tryg has a strong focus on the expense level as this is a competitive advantage supporting our market position. As we've mentioned before, we allow ourselves to invest some of the synergies harvested in the future development of our business. So therefore, you should not expect to see a full one-to-one impact going forward.
Now please turn to Slide 20 for input on our investments, where we provide the usual overview of our investment portfolio. Tryg has approximately DKK 67 billion invested in assets, which are split in a match portfolio of DKK 47 billion and a free portfolio of DKK 17 billion. The match portfolio primarily consists of Nordic covered bonds, reflecting our geographic split and characteristics of our insurance liabilities, while the free portfolio has a diversified asset allocation in order to achieve the best risk-adjusted return. As mentioned before, we aim to have a low-risk profile and are overall comfortable with the investment approach, which is unchanged compared to previously.
On Slide 21, you can see the breakdown of the investment result for the quarter. Tryg is in Q1 reporting an overall investment result of DKK 167 million with a positive contribution from both the free and the match portfolio. In general, both equities and fixed income assets performed well, while the outlook for properties is somewhat challenging at the moment. The free portfolio generated a positive return of 0.8%, and we managed to navigate through the short banking crisis in a decent way as we had insignificant exposures to Credit Suisse and also bank issued Tier 1 loans.
Please remember that we published the percentage return of the free portfolio on tryg.com, which allows you to track any moves on the free portfolio on a daily basis. One thing I would highlight on this page is also that the result for Q1 '22 is restated following the application of IFRS-17. The change applies to other financial income and expenses, where the value adjustment to the inflation swap will occur.
On Slide 22, we provide further details on our real estate investments, and you will see that the picture is very similar to what we have shown previously. We have a well-diversified real estate portfolio where a smaller proportion is invested directly, but the majority is invested via real estate funds. The portfolio is well diversified also when it comes to both geography, but in particular, also with respect to specific sectors. Long term, the real estate portfolio has produced good and solid returns.
Please turn to Slide 23. At the end of Q1, as Morten and Johan has mentioned, Tryg is reporting a solvency ratio of 200 versus 201 at the end of Q4 '22. At the beginning of March, Tryg managed to refinance the 2 Tier 1 loans maturing in 2023. A proportion of the loan maturing in October is still outstanding. Hence, the current level of solvency includes a temporary uplift of just below DKK 200 million, stemming from the issue of the new Tier 1 loan minus the partial buyback of the old loan. As mentioned, this is a temporary issue, which has a positive impact on the solvency ratio of 2 to 3 percentage points and will disappear at maturity in Q4.
The owned funds movement is primarily explained by the generation of operating capital, the payment of dividends and the aforementioned new Tier 1 loan minus the partial buyback of the old loan. The SCR is virtually flat. As you can see, the moving parts shown in the slide are pretty small and are primarily related to financial markets and currencies with opposite signs.
On Slide 24, you can see a historical overview of the development of our solvency. As just mentioned, Tryg reports a solvency ratio of 200 at the end of the first quarter or approximately 198 when adjusting for the temporary impact of the refinancing. We believe the current level of solvency remains very supportive of the dividend outlook. In general, we believe that at times like now with volatile markets and macroeconomic uncertainties, a healthy balance sheet is a prerequisite to run a solid business.
On Slide 25, we provide the solvency ratio sensitivities, which remain unchanged from previous quarters. The biggest sensitivity is to covered bond spreads, which should be no surprise given the fact that covered bonds are by far the largest asset class in our investments. When looking at equities, the sensitivity appears low, and this is due to the fact that any asset moves are virtually matched by an automatic adjustment of the underlying capital charge.
With this, I will hand over to Morten for the final remarks on our Q1 presentation.
Thank you, Barbara. And on Slide 26, we update our insurance service result target with the new IFRS-17 accounting standard as if we were still at our Capital Markets Day date. And of course, the main change is rather mechanical and it's the fact that we're moving out approximately DKK 200 million of insurance operating expenses and move them into other income and costs. And therefore, the moving out of DKK 200 million lifts the target by the same DKK 200 million, as you see on the left.
On the right, we're highlighting that, of course, there are many moving parts that will impact our 2024 insurance service results. Currently, we clearly see higher rates as a strong positive, but currencies have moved sharply lower compared to the Capital Markets Day date and is a key negative. Together with reinsurance prices that also hit our results temporarily, until we pass that on to our customers.
Now clearly, it's impossible for us to predict how interest rates and currencies will move between now and until the end of 2024. But these are, of course, external drivers that you will be able to monitor from the outside.
On Slide 27, we're summarizing a few details important to remember for our 2023 P&L going on. And we are booking in Q1 some DKK 120 million of integration costs related to RSA Scandinavia and the remaining final DKK 180 million will be booked in Q2, and then we are done with that. As a reminder, the synergies from RSA Scandinavia are moving along nicely, targeted to reach DKK 650 million at the end of '23 and DKK 900 million at the end of '24.
And then the line of other income and costs will now see the addition of the DKK 200 million of cost that comes from education and development costs, that I mentioned before, moving out of insurance service result and moving into the other line. So this line should be around DKK 1.4 billion per annum from 2024, including around DKK 1 billion per annum of intangible amortization from the RSA Scandinavia and Alka acquisition, completely as communicated earlier.
And then on Slide 28, we show the updated insurance service result target and the change of DKK 200 million from IFRS-17. We also showed the implied expense ratio target, while the combined ratio target has not changed as is already guiding to as or below 82, of course, increasing the likelihood of being below.
We've made no other changes to our financial targets. And then we on Slide 29, finish, as always, with our favorite quote from John D. Rockefeller. We are very well aware of our investment case and IFRS-17 doesn't change that at all. For us, making sure we pay our dividends, and we follow our strong trajectory of growing our dividends after the RSA transaction is extremely important, and we are very pleased that with the dividend per share of DKK 1.85 in Q1, we increased our dividends per share by 19% year-on-year, and we are now at a point where the dividends per share is already higher than it was per share prior to the acquisition and prior to the rights issue.
So with that, we will hand over to your questions.
[Operator Instructions] The first question will be from the line of Asbjorn Mork from Danske Bank.
The next question will be from the line of Alexander from Citi.
Firstly, just on the underlying loss ratio improvement. I know you previously had sort of 78 bps as a guide. I just wondered if you could help me with the sort of moving parts there. If I look at sort of full year 2022, it looks like travel could be up to sort of 60 bps headwind on the group, which would imply sort of 130 bps, 140 bps improvement on the underlying level, of which claims and procurement synergies could be for 40 bps of that, which are sort of more back-end loaded. So it's sort of 70 bps, 80 bps ongoing a little bit of a conservative target or is it sort of commercial and corporate sort of improvements that are tailing off a little bit? Just great if you could give a little bit more detail there.
And then secondly, just on pricing adjustments you've made. Clearly, sort of the most amount of rate is being put through in Norwegian motor at the moment at 10.8% on an earned basis. Has sort of the approach changed on a written basis at all where you're putting through the pricing increases and the rate that those are going through sort of given the outlook that you have on inflation?
And then finally, just on the number of FTEs, that's up sort of 200 or 3% of the total since the end of last year. But on the synergy side of things, you're talking about sort of being primarily driven by a reduction in FTA -- FTE. So just wondering why the increase is there?
If I start with the first one on underlying claims improvements, I think it's, first of all, important to say that we don't give specific guidance on the underlying claims ratio improvement. Having said that -- I mean, you have seen our historical performance. And also if we look at the individual sort of parts of the travel impact on our underlying claims ratio, yes, it has moved it up, but I don't think you can make the sort of perfectly mechanical switch because it's also the fact that we have a stand-alone travel product in Denmark. We're obviously pricing for that, which has an impact as well. So I would say you're sort of broadly correct, but it's a little bit less mechanical than that.
And as for your second question on the pricing in motor in Norway, you're right to say that the Norwegian price increases sort of stand out a bit compared to Sweden and Denmark. I think for that, it's not that there are any particular dynamics going on. This is also reflecting a little bit the timing of the price increases. So this indicates that Norway was a little bit of a headstart in the motor repricing, and that's why we're seeing the hikes in the Norwegian market.
On top of that, there is, of course, the currency debate also that since currencies and the NOKs are moving, there is a little bit of an import of inflation also through motor parts from abroad. So that's also why the changes in the Norwegian prices are a little bit higher than what we are seeing in other markets.
And then I think your last question was around the FTE movement of, you can say, both the cost chart we have and in the synergies. I would say it's a very good question. But just to take you into -- you can say the way that we think -- looking at the synergies, we have identified opportunities as part of the acquisition where we can put together group functions as an example, where you can say there's no need to have overhead costs in the setting that we saw before.
So you see across HR, finance, et cetera, you have the opportunity to take out FTEs. That has happened. But at the same time, as I mentioned, some of the synergies we reinvest in the business, and this also goes down to resources and competencies because you can say just since we took over Trygg-Hansa and Codan Norway, we have won some large agreements. For instance, in Sweden, we have the BMW agreement, that requires further staffing.
We want to increase, you can say, the staff we have in some of the claims functions in order to provide the right customer satisfaction there. We want to invest further in the digital competencies and so forth. So that is linked very much to where we want to invest in having a strong and sustainable business also going forward.
And I guess it's also fair to say that there are areas where the larger group can benefit from in-sourcing functions that were previously outsourced. So for instance, in claims in Sweden, but also in IT and IT consultants, there are examples of where we have in-sourced which financial is actually cheaper than the old solution, but of course, adds some FTEs. So that's part of the equation as well.
The next question will be from the line of Jakob Brink from Nordea.
2 questions, please on -- where you ended Morten, on the dividends in your introduction remarks. Just to make sure I understand the -- sort of the pace from here on, how should we look at dividends for, let's say, 2024 compared to '23? Is it, i.e. the ordinary ones or should they be growing in line with technical profit to around your guidance for next year? Or how should we look at that? And also regarding extraordinary dividends or the potential for those or buybacks, should they then be on top of that? Or should we look at sort of profit growth versus total payout? Or -- any clarification would be nice.
Yes. Obviously, very relevant. I would say that as you probably allude to in between the lines, we do have a good and strong solvency and we do deliver good results as it is. When we set out on the Capital Markets Day in 2021, we pointed to it -- you can say, dividends in the range between DKK 17 billion and DKK 19 billion. That was ordinary dividends, and that was including the share buyback of DKK 5 billion, which we are progressing well on.
But obviously, as we have been doing historically, at the end of the year, we will take an assessment of where we are in terms of operational performance and how the world looks at that point in time to see whether we have capacity to pay out further dividends as extraordinary dividends.
It's also fair to say that we have the guiding range on the ordinary dividends between 60% and 90% of our operating profit. So I would say in that space, expect us to revisit that at the end of the year when we know how the results have been delivered.
And I think on [indiscernible], Jakob to calculate, how would the DKK 1.85 per share develop next year. I think your assumption that it will develop with the trajectory of earnings is right. That is roughly the right assumption.
And then on -- my second question on price increases. Just trying to sort of estimate the -- let's say, the midterm premium growth for Tryg. So obviously, price increases have gone up. You're showing the graph. Was it [ DKK 14 million ] with around 5% to 6% on house and motor and somewhat less on accident. But on a sort of a total group level, I guess the first question would be, what is the current price increases you're putting through, also then the industrial and business segment? And I guess, going forward, is there any reason to expect that market share gains would decline amid higher price increases or should we then basically be looking at sort of at least midterm higher premium growth levels than we have seen in, let's say, the past few years?
I think, first of all, I absolutely see where your question is coming from. And I think as we are saying on Page 14, the average pricing we are going through is around 5% to 6% for the major categories. There are certain parts of our book, especially in the Corporate segment where we've seen higher price increases than that.
You're asking how this flows into the growth numbers of the company. And I think, first of all, we do not guide on growth. We don't want to be hung up on a growth target. We are now, especially in times like this with inflation, very focused on our profitability. We'll of course, take profitable growth when we can. But at times like this, it's about keeping inflation off the premises of Tryg.
We are seeing a mix change, of course, in the growth numbers. So historically, we've been saying that when we look at growth, we would like 1/3 of it coming from new customers, 1/3 coming from upselling and cross-selling and 1/3 coming from price. In times like this, price is definitely taking over a little bit as the lead singer here, being more -- around 70% to 100% of the growth is coming from price, especially over time as we start earning the price initiatives that are being put through at the moment.
So I must say we don't guide on growth, but I think looking back at our historic growth levels, it's probably the best predictor of where the growth will be in the future. We've been hovering around the 5% mark for a while. I expect that to somewhat continue, but it will be taken over more by price than organic growth.
That being said, I would like to stress that we are actually still seeing organic growth in our business also. We are seeing -- in the vast majority of our business units, we are seeing organic healthy customer growth, and we are also still seeing cross and upselling feeding into the growth numbers. But over time, as the price initiatives take effect, price will more and more take over.
And then I guess also to supplement that we are reminded again this quarter, how important it is to continue to work with our cross-selling and upselling because it's quite clear that the customers that react to price increases and leave as a result of price increases, they are predominantly single product customers where we have not yet been able to cross and upsell them.
So of course, it has an impact when we increase prices and some of the single product customers leave. But for all of the multiproduct customers, we see a healthy development. So I guess in some -- Jakob, to your logic, as we earn the premiums, that will pull up the growth, but also as we spend more time talking to customers about price increases, we'll sell a little bit less to new customers and new products, and that will pull it a little bit down.
Final add-on I would make, you -- you asked about the Corporate segment. And you're correct that we increased prices more in Corporate, and that's particularly in the property and liability space and sort of -- the more Scandinavian that business becomes, sort of the more price receptive it is.
The next question will be from the line of Faizan Lakhani from HSBC.
My first question is on retention. It's weakened a little over the quarter, and I assume that means that the other insurers, your competitors are not putting through the same level of rate. Does that imply that your inflation assumptions are more prudent than the broader market?
Second question is on Sweden. So you can see on an earned basis that Sweden has had lower levels of rate increases. But I guess I want to ask what sort of written level given the fact that Swedish CPI is quite high? It would be fair to expect an uptick in the average premium in Sweden?
And the third one, I just want to follow up on the underlying development. I fully appreciate that you don't really give guidance on that. But when I just sort of think about the moving parts going forward, you have sort of a 30 bps headwind from reinsurance, but then I assume travel should bounce back nicely maybe back to sort of more normalized level? And then sort of -- I guess, the -- sort of the remainder of the equation is, will rate be ahead of inflation? And would it be fair to expect a similar quantum of underlying improvement going forward?
Maybe I'll kick it off on the first question around the customer retention versus competition activities. I think I'm not going to comment too much on our competitors' actions. I think I must say I do find the markets fairly disciplined in Denmark, Sweden and Norway. We are putting through the price increases. We see fit -- and we are seeing, as Morten also alluded to, a slight impact on retention levels, especially on the single product customer. But broadly speaking, we are quite comfortable with the levels where we are with customer retention hovering around the 88% to 90% mark. That's a fairly good level to be at.
And overarchingly, I do feel that the market is doing -- is moving in the same direction broadly speaking. So I don't see us doing differently from competitors, to be honest.
There's really more small deviations in which quarter does which competitor increase the price on which product. There's no sort of broad signal that any 1 particular competitor is not increasing prices. So it's more timing and smaller deviations on that.
I think if I go on to the second question and specifically Swedish price increases, and I think probably referring to Slide #11 on that, I think it's important to note that the numbers stated in the Slide 11 on the different geographies, those are the average prices. So there is also risk mix that can change from 1 quarter and 1 year to another. And specifically, if I take an example on, for instance, the house in -- on Slide 11 for Sweden, there is a little bit of a mix change with having slightly more apartments, slightly less houses in the -- in our book of business, and therefore, that affects the average prices. So you shouldn't make a one-to-one connection, although it's obviously clearly correlated with the rate increases.
And I guess, over time, we may actually think about adjusting that data set a little bit because I guess, we use it to try to give you an impression of what happens to price. But as you say, Mikael, when you get mix and exposure changes into the number, then actually doesn't fully fulfill the purpose. So we might want to think about updating that, but we'll get back to you on that.
And on the underlying -- I think you alluded to that we also there have headwinds and tailwinds. And obviously, you're correct around the headwind of reinsurance of 0.3%. As we alluded to, that is something that we are passing on to customers and we'll make sure that we get out over time. But obviously, there is a timing impact given the fact that the increases of reinsurance at year-end, I guess, surprised the whole market to be higher than anticipated.
When it comes to the effect on travel, that has been significantly larger than, I guess, anyone had anticipated given the changed patterns and behaviors around travel after COVID-19. We would also anticipate exactly like you alluded to, that this would be normalizing at this point in time, in particular, taking into account the macroeconomic environment that we operate in. But I can just say that when -- looking at our data, we can see that there is still a lot of travel activity going on.
We had in the first quarter, 30,000 calls on travel, which is double what it's usually at that point of time. And also, if you just look at the number of claims under travel, we saw an increase in Q1 '23 of 12% compared to '22, and it's up by 20% compared to pre-COVID times in 2019. So I think there's still a large demand to go traveling and it's not an area that has been expected -- or has been impacted as you would expect, given the macroeconomic scenario.
Over time, I think you're probably absolutely correct in your conclusion, it's just difficult to conclude when we will see more normalized patterns than now.
On the positive side, I think customers in Scandinavia hold their traveling quite dearly, but they also hold their insurance quite dearly. So even though economy is more constrained, they seem to hold on to both. But I think as you say, Barbara, we do believe that travel will normalize over time, but I wouldn't put it into your spreadsheet just around the corner because the data is not showing that yet.
And I guess just following up on underlying then. I guess, it's amazing that you sort of achieved 70 bps again. But given the fact you are pricing for inflation now rather than above inflation, I struggle to see how you can maintain that same level of momentum across the year, unless I'm really missing something here?
No, I think what's really quite important is that historically, the underlying improvement claim mainly from private lines. It's quite clear that what we've been doing over the past couple of years is to say we need the mix of earnings to be more sustainable. So we have been increasing prices on Corporate significantly more in property, Corporate as high as 15%. And in many cases, it's not just about the price increase. It's about saying goodbye to exposures in more exotic or higher-risk corporate property and higher risk corporate liability.
So every time we say goodbye to an exposure, which is too low margin and too high exposure, then we improve our underlying claims. So it is a mixture of price and exposure, particularly in Corporate and in Commercial. So that is very much following the path of the strategy we have laid to become even more retail and even less volatile.
The next question will be from the line of Asbjorn Mork from Danske Bank.
A question, if I may, on your Slide 26, on your guidance for 2024. Just to make sure if I read it correctly, basically, what you're saying is that you will meet sort of the upper end of that range given the headwinds and the tailwinds that we're seeing for 2024. I'm just wondering, because it looks like the net tailwinds around a couple of hundred million-ish, which would explain the difference from DKK 7.4 million as a midrange to the top end. But then if I look at sort of the premium growth on '22, '23 going into '24 from inflation and your ambition to reprice, to mitigate inflation, I guess that should have a net positive impact on your technical profits or insurance service results, also leading back to your hence comments on the DKK 12 million to DKK 24 million month period it takes to sort of reprice fully through.
So just really -- the question is really, is there something we are missing here a bit? Are you sort of -- were you a little bit behind the curve on repricing initially that you're trying to sort of gain that back? Are you importing some inflation that is sort of a headwind from the weaker NOK and SEK? Is there something to -- the disposal to retention? Is there something here that sort of, I guess, makes you believe that you will not be able to benefit from the nominal growth to your premium base in '24, all else equal? That was the first question.
I will try and see if I can reply on the many questions that were in the question, so to speak. I think you're obviously right that when -- looking at the chart that we have made in Slide 26, our intention is basically to show that there is headwinds and tailwinds. Some of them we are in control of ourselves. Some of them are coming from the outside. So for instance, the moves in interest rates is obviously something that we are not in control of, but it has a direct impact on our numbers.
So in that context, what we are trying to do is obviously to acknowledge that there are big moving items that impact our results and performance. This is very much taking a starting point when we set the strategic targets back in 2021 and what has happened since then -- But I think what we're trying to say is also that we don't know how rates, we don't know how currencies, we don't know how, you can say, some of the other items will move coming forward to the 2020 timing.
You're right that when looking at the repricing, we will see a benefit of that over time, and it's also reflected in growth numbers and so forth. But again, like we've just been alluding to and [ Mika ] took you into the details of reinsurance, There are also things moving the other way. So I think the pointer is clearly towards the upper part of the range, but whether you can say that will be where we land or slightly above or below, that comes down to all the other factors that are not in our hands leading up to '24.
So I guess you also tried to ask, Asbjorn, is there something that you're missing in the equation? I think the short answer to that is no. And I think if we could all agree to fix interest rates and currency rates today and keep them fixed until the end of '24, then we would be able to be much firmer on the right-hand side. But here, as you say, Barbara, we try to acknowledge the impact and we try to be transparent about the impact, while acknowledging at the same time that we cannot predict how they will move on currency and interest rates until the end of '24. So no, you're not missing anything, but that is just the background.
But I guess, I mean, one thing, it's out of your hands, which is why you showed this slide, which obviously makes a lot of sense. I'm just more curious on the fact that if I sort of look at the nominal growth that you would be expecting in the next couple of years due to inflation and your ambition to keep your combined ratio unchanged, hence reprice fully, I guess this should be a positive. I guess you can also ask the other way around, since inflation went from 0 to 10, headline inflation that is, in a very short period, obviously, that's a difference between headline inflation and insurance inflation. But still, were you sort of at some point behind the curve, considering how remarkably stable your underlying claims ratio has been? Have you sort of -- are you trying to catch in on something that we have not been able to see in those numbers? Or is it just conservative system from your side? Or how should we look at it?
I think just to answer that, Asbjorn, I absolutely see where you're coming from. Of course, when inflation comes in with the speed it came in, there's, of course, a little bit of a delay in our ability to react on pricing. But in general, I would say we are not behind. We're not in front of the curve. We are on the inflation curve. Don't expect the inflation to sort of go back to 0 as we've seen some years ago, right? There's a wage inflation coming into the numbers also. So I think we are where we want to be on inflation, but we don't expect inflation to drop to 0. We expect it to sort of find a new level also with wage inflation going in.
So I don't think we have been behind. Of course, it takes some time for us to implement pricing initiatives, but we feel comfortable where we are exactly being where we want to be right now on inflation.
And then I guess also, Asbjorn, it's in a picture which is still so fairly mixed as we see now, we see no reason to jump to a simple conclusion. If we take, for instance, inflation in Norway, headline is now down to around 6.5%. That's great. The inflation in Sweden is now up to almost 10% headline. So clearly, they're moving in different time zones compared to each other.
Also think that the increase we've seen in travel, for instance, was clearly larger than what we anticipated, really hasn't got anything to do with headline inflation, but it's more a claims pattern that hits. So I think when you do the math and you look at the right-hand side, if higher interest rates and currencies stay where they are, do they point to a higher end of a range? As you said, Barbara, yes, they do.
But we don't want to simplify a conclusion on where they are at the end of '24. And we also don't want to jump to a simple conclusion given that Sweden and travel and a number of other issues are still moving in an unusual pattern. So yes, the more volatile the surroundings are, then yes, it leads us to being slightly more conservative or hesitant in prediction.
If I may, on Norway, you reported a combined ratio of about 98%, if we adjust for runoff gains. You do state that all countries had milder weather in Q1. So I'm just wondering why are we still seeing so very high combined ratios for Norway? Anything we should be focusing on here?
I think when looking at Norway, in particular, I think the comment we make on weather is in general. If you look at weather claims, we have an assumption that typically, what we've seen historically is 40% of the weather claims will be in the first quarter. This year, we have seen significantly less weather in our business than compared to last year and also compared to the ordinary assumptions. But where we have seen weather on a recurring basis, it will be in the Norwegian market, where the swing between warmer weather, very cold weather, ice and so and so forth has had an impact on motor claims. So that is where you would have seen the impact of some of these things. So you can say the comment we make across is still a little bit nuance when it comes to the different countries. And here, it is one of the factors that is impacting the Norwegian business.
That being said, I think what we have been alluding to in particular, when it comes to the new strong Swedish business that we have in our business and the levels that you have historically experienced in Denmark, you see that Norway is trending at a somewhat low -- higher level when it comes to the combined ratios than you would see in the rest of the business.
Final question from my side on your investment portfolio, especially your free portfolio. I see you still have around 20% of the free portfolio in equities and around 1/4 in real estate and also seems like 55% of your real estate exposure is in the U.S. I'm just struggling a bit to really grasp why is it you want to have those kind of exposures, including the capital charge in your free portfolio when risk-free rates and cover bond returns are at much, much higher levels than they've been for many, many years? I understand you did not want to maybe sell out of your equities book last year when everything was in negative territory, but on the back of a positive Q1, what is sort of the business rationale? Of course, there's some, you can say, diversity in it, but you're making much, much lower return on own funds on equities and property than your uncovered bonds, and it just adds a lot of exotic exposures and uncertainty, I guess?
Yes. How do I answer that- I would say I don't characterize it as being exotic. If you come back to the profile that we have around our investments, we like to have a low-risk profile, we like to be diversified. And as you can see in the slide in the pack, we have a number of different assets in our free portfolio.
The real estate portfolio is one where when you break it down, you have the geographic split, and you can say, historically, we have had good returns on our real estate portfolio. If you remember just a year and a little bit more back where equities and fixed income markets were all down, the asset class where we actually did benefit from, was in particular real estate.
As mentioned, it's a portfolio that you can see, we have a mix between the direct investments as well as the real estate funds. And bear in mind that when pointing to it, in particular the U.S. exposures we have, it is a mix of residential, office and so forth properties. And in the majority of those, you would see, you can say, the rent being adjusted for when it comes to inflationary pressure. So you will have that index-linked adjustment to the rents that we have on the properties. So you would not have the same kind of exposures that you would see if that was not the case.
So I think looking at the overall asset allocation, it is contributing with diversification. It's contributing with an asset class, which is not always correlated in the same way as you see across the others. So it gives a good substitute to -- or a good complement to the rest of the investment portfolio.
And I think on the equity side, Asbjorn, the entire insurance sector has reduced the equity exposure and still our equity exposure is lower than the average of the industry. So we'd like it to be lower, and we believe it makes sense that the insurance sector has reduced its equity exposure in general. So what you're asking is, should it be even lower? Should it be 0 or should it be something else, which is a dialogue that we are also having, but I think the fact that the industry has lowered their exposure, and we're below the industry average, that's a place we like to be. And we do, from time to time, have the discussion, should it be even lower, but that's not the conclusion we have reached, and I don't think it's just around the corner either.
But is it -- I mean -- are my numbers, you're making 10% to 15% return on own funds on equities and real estate exposures and you're making 50%, [ 5-0 ], on covered bonds. Is that also numbers that you do recognize?
I would have to check up on that Asbjorn. Let us come back to that, but I'm not fully sure that we see it in the same way.
And how did you factor the diversification into that and net interest rate exposure?
That is before diversification, obviously, but the vast difference -- I mean, different -- so material that I just...
Why don't we take a separate discussion, both on the gross numbers before diversification and then also the net numbers after diversification, because, of course, we try to model the whole thing, including diversification. But why don't we take an offline on both?
Let's do that, definitely.
The next question will be from the line of Youdish Chicooree from Autonomous Research.
I've got 2 questions, please. The first one is on -- just on claims inflation. If you just could provide us an update on your expectations for 2023? I believe you talked about the possibility of inflation easing in your last conference call. But judging from what you -- I see from your slide deck, I see basically no change in your expectations. So if you could provide an update on that, that would be helpful.
And then secondly, if I could come back on the development in the underlying loss ratio, especially in light of the RSA synergies you're planning to realize this year. I mean, from what I can see, I mean, so far, 3/4 of the efficiencies you've achieved have been on the admin. You basically achieved like 75% of what you planned on that being in distribution and only 1/3 on procurement and claims. And so I was wondering -- I just step up your initiatives on the claims side. Is there any reason why the year-on-year improvement in the underlying loss ratio doesn't get even better? Or am I missing like any headwinds -- any -- sorry, a headwind to the development? So those are my 2 questions.
And if I start with the first one on claims inflation. I think, first of all, it's important for us, and as Morten and others have been saying as well, that, I mean, we are not sort of flagging green on that inflation should go down rapidly. We need to look at the numbers that we're seeing out in the market, which are still sort of very high inflation numbers, although they've come down a little bit in some specific countries. So we're not sort of jumping to conclusions on that. And hence, we are still pushing rates at the levels that we are stating here, sort of the 5% to 6% on motor and property, as we alluded to. And part of that is also mitigated by our procurement agreements, as said.
So I think the -- sort of your guess is as good as mine on sort of where does inflation go from here. But I think we need to stay on the curve, as we said before. And before we can see sort of the clear signs of inflation coming down, we will sort of be at the levels that we are now.
So, Youdish, we may wish for the reduction. We appreciate the reduction in Norway. But as you say, Mika, we don't put into our modeling assumption or our price increases and assumption that inflation reduces.
And, as for your second question on the impact of synergies on our underlying claims ratio, I think you're right in saying that the synergies will, of course, help improve the continued improvement of the underlying loss ratio. The categories to look at for this particular quarter, we are making a step out on 2 categories in the synergies, both on claims and procurement. That's respectively DKK 9 million and DKK 21 million, a total of DKK 30 million, suggesting that there's a contribution to the improvement of 70 basis points -- of around 30 basis points coming from the synergies.
And you're right in saying that those 2 categories, procurement and claims, we are expecting to see a step-up over the next 7 quarters before we complete the DKK 900 million of synergies. So yes, it has contributed healthy to the underlying improvement, and it will continue to do so over the next 7 quarters.
And I think it's also -- just add. I think it's also fair to say that admin and distribution are some of the first areas that you can address in a transaction like this. So that's down to the phasing and it's exactly like we also expected from the outset.
I guess, Youdish, the logic is that on claims and procurement, the difficult part is that there's lots of IT and process and steering in using new procurement agreements for a new member of the family. And that's why adapting these processes and IT takes more time than changing and letting go of a headcount in admin or reducing reinsurance cost. So I think that is completely as planned that procurement started very early, but the impact takes longer because of processing and IT and steering.
Sorry, just to mention, we have time for the final question now.
The last question will be from the line of Martin Gregers Birk from SEB.
A question on runoff gains. And I guess one of the big restatements in connection with IFRS-17 -- And I'm just wondering whether the 3% to 5% is still a level that you guys target given that you didn't realize it last year and this year's -- or this Q1 runoff basis also sort of soften in that respect? That's my first question.
Then the second question, I guess, since we talked best, there has been a verdict by the Danish Supreme Court on the tax treatment of bonus model. And then you pay out 6%. I know that this is silly and maybe important for you guys. But if it wasn't double tax, the percentage point would be a whole lot higher. What are you thinking in that respect in terms of changing the model? And what kind of implications could that have on target in itself?
Well, if I start with the runoff gains Martin, obviously, we have given the steer on the runoffs in the range between 3% to 5%. I think it's not materially different, but probably you should assess that to be somewhat more towards the lower end of the range, but nothing material has changed even following the IFRS-17 implementation.
I think on your second question, Martin, I think mainly, it feels unfair, right, an income that has been taxed once, shouldn't be taxed again a second time. But that makes no sense. So it feels unfair. I guess the taxes -- tax seldomly feels very fair, but here it feels particularly unfair. I think the fact that bonus is 6% this year has nothing to do with that. That's really more of reflecting a year where investment income in '22 was lower for everyone, including TryghedsGruppen, which, of course, has an impact on their ability to pay a bonus and therefore, they chose 6%. We're really pleased with the 6%. We like 8% even better.
Of course, every time the tax authorities, they know to --eliminating the double taxation. We try to investigate -- and TryghedsGruppen tries to investigate are there other ways of handling such a bonus, but there's no conclusions from that, and we do not anticipate any changes around the corner. But it doesn't mean that we don't -- they don't continuously investigate if there are options. But I think at the end of the day, particularly for our retail customers, the most important is that they get the signal that they get a bonus. And if then one day, we can avoid the taxation, that would be another feather in the head. But we're not expecting that just around the corner.
Thank you very much to all of you for the very good question. As always, Investor Relations is around for any follow-up, and we will meet you and speak to you in the next few days. Thanks a lot.