Tryg A/S

CSE:TRYG

Earnings Call Transcript 2023-Q2

[Gianandrea Roberti, executive]

Good morning, everybody. My name is Gianandrea Roberti. I'm head of Investor Relations at Tryg. We published our Q2 results earlier this morning, and I have here with me, Johan Kirstein Brammer, Group CEO; Barbara Plucnar Jensen, Group CFO; and Mikael Karrsten, Group CTO, to present the report. [Operator Instructions]

With these words, over to you, Johan.

[Johan Brammer, executive]

Thank you so much, and welcome, everybody. I will go straight to Page 3, where Tryg is today reporting a satisfactory insurance service result of DKK 1.759 billion with a single large corporate claim, hitting us for approximately DKK 225 million, while a continuously adverse SEK and NOK currency development is impacting our figures with approximately DKK 100 million in Q2.

We see a positive development in the top line, driven primarily by the Private and Commercial segments and improved underlying performance, including the RSA synergies and high interest rates, which support the insurance service results positively.

The underlying claims ratio for the group improved by 60 basis points, broadly in line with recent experience with profitability initiatives in the Commercial and Corporate segment, supporting the performance while the Private segment reported a small deterioration in line with recent quarters.

The result of the investment activities was a positive of DKK 53 million, primarily driven by positive performance from equities and fixed income asset classes. Tryg is, and I'm happy to announce that, paying a quarterly dividend per share of DKK 1.85 at the same level of Q1 and in line with our quarterly dividend policy and report a healthy solvency ratio of 199, supportive of future capital repatriation outlook.

Turning to Page 4 on customer highlights. Focus on customers are in times like this paramount to us, and therefore, we continue to work with all parts of the customer journey. This includes both touch points and the more process and relationship-driven elements.

In this quarter, we can see that the focus on onboarding processes for new customers has resulted in strong improvements for the KPIs in the Private businesses in both Denmark and Norway.

Turning to Page 5 on the insurance service results. We show in this slide the insurance services result of Tryg's 3 business units being Private, Commercial and Corporate versus the corresponding quarters of 2022.

Please note that one-off movements may impact the reported results for the 3 different business units. And additionally, a large claim in the Corporate segment is impacting the figures for approximately DKK 225 million in Q2.

The insurance service result work is showing the main moving part versus Q2 last year. Positives are the higher interest rates, the improved underlying performance and the business growth. Negatives are the higher large and weather claims, significantly adverse currency developments as well as lower runoff.

The Private insurance service result is reduced by DKK 150 million with DKK 75 million stemming from lower runoffs, DKK 20 million stemming from deterioration in the underlying and the remaining part coming primarily from the Norwegian Natural Perils Pools claim in Halden in Norway.

The Commercial insurance service result is up DKK 50 million, primarily driven by underlying improvement, while lower expenses added another approximately DKK 20 million. The Corporate insurance services result is down DKK 160 million, primarily due to the single large claim of DKK 225 million, which is partly offset by an improved underlying performance.

Importantly, following the acquisition of Codan Norway & Trygg-Hansa, please note that our earnings are significantly more diversified, both in terms of geographies and products.

Turning to Page 6 on the RSA synergies. Tryg is reporting DKK 77 million in Q2, bringing the accumulated total synergies to DKK 547 million out of the targeted DKK 900 million by the end of next year. Approximately 30% of the quarterly synergies came from expenses, almost 50% came from claims and procurement and 20% came from commercial activities.

The most important activities on extracting cost synergies were the termination of Codan Norway IT contracts during May, including a number of IT employees. A significant focus on procurement in Sweden has resulted in improved terms with many of our suppliers. And in addition to that, an increased use of recycled parts are yielding good savings.

In Sweden, we have also consolidated claims teams allowing for the insourcing of services that were previously outsourced. On the more Commercial side, we continue to increase prices, primarily in the Corporate segment, whereas the pregnancy product in Denmark is experiencing very good customer interest in its Premium product version.

With that, I'll turn to the next section on Page 8. Tryg is reporting a revenue growth of 3.9% or around 5% adjusted for customer conversions in Norway and Sweden as part of the RSA transaction. Growth was primarily seen in the Private and Commercial areas and primarily driven by price increases to match ongoing claims inflation. We continue to have a strong focus on profitability and pricing accordingly.

The Private segment continues to have a fairly high growth of 4.4%, primarily driven by price adjustments. We have, as you know, been converting and repricing portfolios in Sweden from our original Swedish business, Moderna to Trygg-Hansa and in Norway from Codan Norway to Tryg Norway. The growth would have been approximately 6% adjusting for this, which is in line with our expectations.

The Commercial segment had a growth of 4.9%, which adjusted for the reclassification of portfolio from commercial to corporate in Norway was approximately 6%. We saw the highest growth in Denmark, driven by both price adjustments and also net inflow of customers, while growth was more modest in Norway and Sweden.

Turning to the Corporate segment. It reported a negative growth of 2.4%, which adjusted for the reclassification of portfolio between Commercial and Corporate in Norway was approximately negative minus 4. We are repricing as well as reducing exposure to certain parts of the Corporate business, in particular, the international property and liability program, which was the main reason for the drop in premiums.

Turning to Page 9 on pricing. We continue to monitor inflation developments very closely and work in a disciplined manner with procurement to mitigate this development as well as with continued repricing to protect our book of business. Leaving aside the general macroeconomic situation, currency developments in Sweden and Norway have an impact, particularly on the imported automobile spare parts.

Price adjustments are in general at a high level for both house and motor, reflecting the need we see in the different markets. Price adjustments are roughly between 4% and 11% for the different lines of business across geographies. It is worth highlighting that these graphs shows the impact on earned premiums. This means that the full impact of price adjustments and generally will take 12 to 24 months to fully show in the P&L.

Turning to Page 10 on customer retention. In line with more recent quarters, we generally see a broadly stable yet slightly sliding impact on the retention rates in both Private and Commercial. This shows our focus on mitigating inflation through pricing, and the development is in line with the experiences in the past from periods where there was a need for adjusting prices similar to now.

We see the highest impact of repricing within the second of one product customers, which, in general, is the most price sensitive and hence shop around more frequently between different insurance providers.

In that context, it is worth noting that customers with one product only, in general, are the least profitable customers.

And with that, I will pass it over to you, Barbara -- over to you, Mikael. Sorry.

[Mikael Karrsten, executive]

Thank you, Johan, and we turn to Slide 12 and the underlying development. The group underlying claims ratio improved by 60 basis points, broadly in line with recent experience and the trend on the last 3 years. Profitability actions, including both pricing and portfolio initiatives in the commercial and Corporate businesses are supporting the performance, while the Private segment deteriorated modestly by 30 basis points also in line with recent experience.

In Private, we can note a negative profitability impact from travel insurance, an area where we are driving price adjustments as well as increased inflation from motor spare parts in Sweden and Norway, significantly above Danish experience following weak currencies.

Turning to Slide 13. We give a little bit more nuance to inflation, pricing and our currency movements impact. Needless to say, claims inflation has moved upwards since the start of 2022, driven by a turbulent geopolitical and macroeconomic environment. Recently, inflation numbers are starting to come down in Denmark, but remain high in Norway and Sweden.

Regardless inflation and actions against inflation, remain a top priority for us. We continue to work hard with pricing and procurement agreements to mitigate the impact of this development, and it's important to remember that wage inflation generally is a better impact indicated than just headline consumer price index development.

On the left-hand side of this slide, we show an overview of the price adjustments for the 2 main product categories measured against expected claims inflation. And going to the right-hand side, and here, we show an example of the interlink between inflation and currency development. In -- where we noticed a sharp increase in car repair costs in Sweden and Denmark, clearly driven by the weak currencies.

This is an area where we spent around DKK 1.7 billion annually and where prices were up 9% from a year ago. Naturally, portfolio actions are being taken to mitigate the development.

Turning to Slide 14. Large and weather claims was unfavorable in Q2 2023 versus Q2 2022 and also versus normalized expectations. As previously announced, in this quarter, we experienced a single large claim in the Corporate business that hit our full retention of DKK 150 million and had a total expected cost of approximately DKK 225 million, including reinstatement premium.

As previously communicated, we note here as well that we increased our retention level for single large claims exposure at start of 2022 from DKK 100 million to DKK 150 million linked to now being a significantly larger entity post the acquisition of Trygg-Hansa and Codan Norway.

In Norway, a landslide hit the town of Halden, resulting in a large claim under the Norwegian Natural Perils Pool. The total cost for the pool is estimated at approximately NOK 900 million and Tryg has a market share just below 11% of the pool. The discount rate in Q2 is significantly higher than Q2 2022, but close to the Q1 level as interest rates did not move much this quarter. Finally, our runoff was 3.2%, in line with previous run-off guidance.

And turning to Slide 15. The expense ratio was 13.3% and at a slightly lower level than the updated target of 13.5% under IFRS 17. As a reminder, the 13.5% target compared to 14% previously, is driven by educational and development costs moved from insurance, operating expenses to the line other income and costs.

The positive development was supported by RSA synergies of approximately DKK 25 million related to admin and distribution and we continue to have a strong focus on the expense level as this is a competitive advantage for us, supporting our market position.

And by that, I hand over to you, Barbara.

[Barbara Jensen, executive]

Thank you, Mikael. Please turn to Slide 17 for more details on our investment portfolio. In this slide, we provide you an overview of Tryg's total invested assets of DKK 61 billion. And as usual, you will find the split between a match portfolio of DKK 44 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. The free portfolio has a diversified asset allocation in order to achieve the best risk-adjusted return. We aim to have a low-risk profile and are overall comfortable with the investment approach, which is basically unchanged compared to previously.

On Slide 18, you have more details on the current performance of our investments. In general, the financial markets were somewhat volatile. However, the overall investment result in the quarter was positive by DKK 53 million, where both the free and match portfolio contributed positively.

Tryg's equity portfolio returned just below 5% and the fixed income asset class has also produced positive returns. Real estate returns have been somewhat challenged by macroeconomic environment and delivered a negative return of 3.1% in the quarter. The difference in this quarter is underlying financial -- or sorry, in the other financial income and expenses line, which was down by DKK 202 million.

This line includes, amongst other things, the quarterly interest payable on our loans, which is approximately DKK 50 million recurring each quarter. There are 2 items that drive the main negative impact in this quarter. Following the implementation of IFRS 17, the inflation swaps used for the workers' comp in Denmark and Motor in Sweden need to be booked in the investment line.

The value change of the inflation swaps amounted to negative DKK 69 million in the quarter. And furthermore, a negative exchange rate adjustment to different balance sheet items, including the Tier 1 and Tier 2 loans accounted for DKK 38 million, heavily impacted by, in particular, the decrease in Swedish krona this quarter.

As mentioned, our approach to the investment results or investment activities remain unchanged. The vast majority of our investments are placed safely in Scandinavian covered bonds.

If you turn to Slide 19, we will make a deep dive on the solvency. In this quarter, Tryg is reporting a solvency ratio of 199, which is virtually in line with the level delivered at the end of Q1. Please note that the current solvency level already deducts the Q2 dividend payment.

Operating earnings and dividends are, as usual, the main drivers of the own funds movement. Other is capturing the lower value of the Tier 1 and Tier 2 loans impacted by currencies. The SCR in the quarter is primarily impacted by currencies development and capital markets movements.

As always, we're showing our Tier 1 and Tier 2 loan capacity, but just to be certain, we have no plans to issue new loans currently. Finally, I would like to repeat that we continue to expect a stable development in the solvency going forward, primarily driven by operating earnings and dividends.

On Slide 20, we're showing the historical and stable development of the solvency ratio. As explained on previous occasions, we are running a very stable business, having a relatively low-risk approach to investments and pay an ordinary quarterly dividend. Hence, we expect solvency ratio to be relatively stable in between quarters. This has also been the picture for the last 4 to 5 quarters following the consolidation of RSA Scandinavia, and we expect little changes going forward.

The solvency ratio for the quarter lands at 199 or approximately 196, 197 when adjusting for the temporary positive impact of the refinancing. We believe the current level of solvency remains very supportive of the dividend outlook.

On Slide 21, you find our updated solvency ratio sensitivities, which is very similar to previous quarters. Our solvency ratio displays the highest sensitivities to spread risk as we have a large amount of our assets in Nordic covered bonds, which is a very safe asset class. In general, we believe that our solvency ratio is not particularly sensitive to capital markets movements.

So not much news here. With this, I will hand over to Johan to conclude our Q2 presentation.

[Johan Brammer, executive]

Thanks a lot, Barbara. And I can say the same, not much news here. This Slide 22 is a rerun of a slide we showed at Q1, illustrating the insurance service result target for 2024, including the main moving parts since the Capital Market Day.

The overall DKK 7.2 billion to DKK 7.6 billion range includes some cost reallocation from insurance operating expenses to the other income and cost line. More importantly, since the end of 2021, we have experienced a sharp increase in interest rates but also a sharp drop in SEK and NOK currencies as well as higher insurance prices with a total cost of approximately DKK 100 million, which has previously been disclosed.

We have disclosed this information previously and therefore, there's no change in this slide.

Turning to Page 23. I would just like to highlight a few things to remember in the second part of 2023. The most important point is that all integration costs from the RSA acquisition is now booked. So the line other income and costs will include going forward, only intangibles amortization from RSA and Alka and other general cost. This line should, therefore, be negative with approximately DKK 360 million to DKK 370 million per quarter going forward. We are pleased to see that our P&L is now finally becoming cleaner and the true earnings power of the new Tryg should be materializing now.

On Page 24, we repeat here our 2024 financial targets updated at Q1 for the introduction of IFRS 17. As a reminder, these are targets as per our most recent Capital Market Day in November 2021, just and only updated for the new accounting regime. We have shown this slide previously, and there is no change to the previous communication and targets.

And with that, I go to Page 24 and we close this presentation with our favorite quote from John D. Rockefeller, "Repeating and reiterating our very clear focus on dividends and capital repatriation in general, make no mistake, this is absolutely unchanged."

And with that, I'll pass it on to questions.

[Operator]

[Operator Instructions] The first question will be from the line of Jakob Brink from Nordea.

[Jakob Brink, analyst]

And I think, I would like to start where you ended, Johan and also Barbara, you had a comment that solvency is very supportive of future dividend potential and you'd like to do capital repatriation. You just finished your share buyback and you have a 200% roughly solvency ratio, which is well above where you used to be. So what should we expect going forward in relation to specials and buybacks, please?

And the second question would be on the -- maybe more of sort of an overall question. So now we have had 2 years roughly with relatively high inflation. Mikael, you had this comment about imported inflation due to FX in Norway and Sweden. So where will you say that we are sort of in the inflation? We also do see some headline numbers starting to trend down. Have we passed the peak of inflation in your view sort of claims inflation? Or are we still seeing it increasing? Could just be interesting to hear your thoughts, please.

[Barbara Jensen, executive]

Well, good morning to you, Jakob. I will start by answering your first question regarding expectations for future dividends. You're absolutely correct. In this quarter, we finalized the share buyback, which we ran from the proceeds of selling Codan Denmark. We're quite happy with the DKK 5 billion that we have returned to shareholders during this program.

For this year, we are paying out ordinary dividends, which are adding up to DKK 7.4 for the full year, which is up by almost 20% compared to last year and which is already above the levels prior to doing the acquisition, which was DKK 7 in 2020. So we are quite focused to accommodate and provide dividends to our shareholders. But regarding specials or another share buyback program, it is something that we will evaluate later in the year in order to come back with the potential for additional distribution to the shareholders.

[Mikael Karrsten, executive]

Thanks. And going to your second question, Jakob, on inflation. I mean, I would say that we are -- I mean, obviously, we're happy to see that inflation is stabilizing in some of the countries, Sweden and Norway, predominantly and as we see some headline numbers of Danish inflation coming down.

Having said that though, I think we are in the -- still the middle of an inflation period and our focus is continuously profitability over growth, and that's how we're treating inflation. So I think it's too early to state anything of sort of inflation being over. We are in the middle of that, and we are continuously taking actions and pricing for it.

[Operator]

The next question will be from the line of Asbjørn Mørk from Danske Bank.

[Asbjørn Mørk, analyst]

A couple of questions. But start with the Slide 22 and your sort of your water chart for your guidance for the next year. It seems like since the Q1 report that you've sort of lowered the green bars a bit or green bar and you see higher headwinds now from currencies that obviously makes a lot of sense. And then reinsurance as well. So maybe just a question on what is it you're seeing in reinsurance that you did not see in the Q1 numbers?

And if you look at the currencies impact. Could you just help me a bit here, you're saying that you have DKK 1.7 billion of motor spare parts and windshields in second mark. What is sort of the total number of claims that you would see you have in all your business areas that would sort of import inflation on the back of the weaker currencies. That will be the first question.

[Johan Brammer, executive]

Thanks for that, Asbjørn. Maybe I'll just kick it off, and then I'll pass it on to my colleagues here. I think, first of all, I think on Chart 22 -- Slide 22, we are deliberately shading the boxes here. So it's not exact science. What we're trying to illustrate on Page 22 is more the fact that we have restated our targets due to the changes in IFRS and we will deliver within the range that we have communicated. And then you're right, there is, of course, impacts that will continuously move. There will be headwinds and tailwinds. We'll continue to update that for illustrative purposes. But the main point here is that we have come out with the target, and we will deliver within that target range for sure.

And I'm not sure, Barbara, do you want to say a few words on the reinsurance part?

[Barbara Jensen, executive]

Yes. Maybe if I -- before I go to the reinsurance part, I think it's important to say that we are continuously focusing on the strategic initiatives that will deliver the targets. As Johan also mentioned, you will see positives and negatives. I think these 2 quarters exactly underpin the fact that the things do move and they do actually move quite fast. So therefore, we stick to what is sort of the contribution from the strategic initiatives and then taking into account some of these more exogenic factors.

When it comes to the reinsurance, I think what we highlighted when we had the Q1 call was that the prices for the renewals of the reinsurance program was significantly up this year. And for the January renewals, it was a little bit late, you can say, to have the full impact of the increase of reinsurance hikes. But what we are, of course, working with in the commercial and the corporate space is to make sure that the prices that we are now quoting to our customers are reflecting the increase in the reinsurance cost.

So I think that's how you should think about it that from this quarter and onwards, we will be reflecting the full impact of the reinsurance cost.

[Asbjørn Mørk, analyst]

Okay. But is it fair to assume that -- I mean, at least I know your comment that it was not rocket science or exact science, but it seems like your -- you expect it to meet sort of the mid-range of the guidance range now versus sort of the upper end in Q1. Is that a fair interpretation of the slide?

[Johan Brammer, executive]

I think the best way to interpret the slide is that we have come out with a range, and we will deliver within that range.

[Asbjørn Mørk, analyst]

Okay. Fair enough. One question, a little bit back to one of the previous questions on dividends versus buybacks. Now if you're meeting your target for next year, which you say you will, you're trading at a dividend-adjusted fee of something like 13x. So I guess you are actually making a higher return by buying your own shares than investing in foreign equities. So should we expect you to lower your free portfolio equity exposure and do buybacks instead? Is that something you're considering now versus 6 months ago where your price -- share price was at another point?

[Barbara Jensen, executive]

I think it's a very interesting point you made in terms of looking at swapping you can say, the investments in equities to dividends. I think we are, with our free portfolio continuously looking to generate, you can say, a low-risk yield where asset allocation is a very high priority.

I think when it comes to the capital distribution to our shareholders, obviously, we always assess what is the excess capacity coming back to, like you point out, the solvency ratio coming back to what do we see of possibilities to distribute more on top of what we already pay in the ordinary dividends.

[Asbjørn Mørk, analyst]

All right. I guess, the most low-risk, high -- despite investment you can make is in your own stock. So that's good to hear.

[Operator]

The next question will be from the line of Alexander from Citi.

[Alexander Evans, analyst]

Firstly, just on the underlying claims ratio. So I mean, it looks like there's 40 bps from claims and procurement synergies in the quarter. So that was sort of remaining 20 bps. Is that how we should think about the underlying of the business there? I don't know if it's possible to give any color on sort of what magnitude you think travel is in this quarter relative to where it was last quarter and some of the other moving parts there.

And then secondly as well, I just wanted to clarify and go back on the earlier questions on that reinsurance costs. So are you saying that basically in the first quarter, the sort of full picture wasn't captured within that sort of slide and now this sort of bigger impact is now being reflected. I think that's great.

[Mikael Karrsten, executive]

Right. If I start with the question on underlying, I think the way to think about it generally is that we drive a number of different actions, pricing different synergies through RSA portfolio actions. And that sort of in combination gives the 60 basis point improvement. Having said that, obviously, we have a much larger share of that in the Corporate space and to some extent, also the Commercial space where we can drive more of those pricing actions.

And the question specifically on travel, we have -- if we compare this year relative to last year and the individual quarter, that is roughly DKK 30 million impact. So you can sort of backwards calculate the sort of impact for that.

[Barbara Jensen, executive]

And I think if I may just add to that, Mikael, some data points around the travel activity, I think we have on previous calls spoken about the fact that -- in 2022, you saw an increase of travel by 20% compared to pre-COVID times in 2019. But what we have seen in the recent year is now in Q2 2023, we are up by 8% compared to to '22. So there is still a reasonably high focus on traveling despite whatever talks about, the macro, et cetera.

I think your assumptions on the reinsurance cost is pretty much in line with what has happened. So as said, we did increase prices to reflect higher reinsurance costs for the full year, but maybe not to the full magnitude of where we saw the market end. Because if you remember, there was a smaller supply of capacity in the reinsurance market at the same time of higher interest rates. So you did see money flow elsewhere and that put an additional cost on the reinsurance programs for the renewals. So that is the part that we are going back now.

[Alexander Evans, analyst]

And is it possible just to follow up on reserve releases. I noticed that reserve releases in private lines is 40 bps this quarter, a bit of a step down from last year. it also looks like you've got some negative runoff in commercial property. I was just wondering what sort of the big drivers are of reserve releases at the moment? And where do you see that going?

[Barbara Jensen, executive]

Yes. I think in general, you could say that we have communicated a level between 3% and 5% for, you can say, the runoffs in general. Obviously, you will find a larger proportion of the reserving related to the longer-tailed business. And therefore, you can say you will see some of it in those areas. So Commercial and Corporate with a more long-tailed business in general. Or if looking at the private Swedish, you would also see something there. But in general, I wouldn't read any further into, you can say, the levels there.

[Operator]

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

[Tryfonas Spyrou, analyst]

I have 2 questions, please. The first one is on FX settling. I mean, is there risk here when it comes to the cash being upstream coming from Sweden and Norway, versus the dividend paid in Danish kroner. I was wondering how you're thinking about this and how you consider hedging some of the exposure here?

And then the second one is on the last claims volatility. I appreciate all you have done in the last years to reduce exposure to the Corporate line. However, it doesn't seem this for now that this has had a commensurate impact on the volatility of large losses. Appreciate now the fast the nature of these claims, but how should we think about this dynamic? I appreciate the questions that weren't clear, but I guess I just want to get some reinsurance, where the actions taken will lead to let volatile results going forward.

[Johan Brammer, executive]

So maybe if I could just start on your second question, the last claims. I understand your question as to the fact that we've been trying to reduce our exposure to large claims. And here we are with the quarter with a large claim. I think this is sort of the stochastic variance that we will encounter as an insurance company. And I must say, in a quarter like this where we have more than DKK 410 million in large claims, we normally would expect around DKK 200 million. Now we have more than DKK 400 million.

I think this is just down to the stochastic variability as an insurance company. We don't see any patterns here. And I think, to be honest, the comfort that we see is that we're actually able to deliver a fairly strong technical result, even despite the fact that we have more than doubled what we would normally expect in large claims.

So I think, if anything, you should read into the fact that we are comfortable with our position, we don't see any exposure on our book that we shouldn't have. So this is more a positive in the sense that we're delivering a strong result with a lot of large claims in this particular quarter.

And as for your first question on FX, Barbara?

[Barbara Jensen, executive]

Yes. I think if you look at the hedging we do, we do the hedging of our balance sheet items. So that is a strategy that we have implemented and are happy about. In the results, obviously, you will see 2 impacts. One is when you convert the results in the Swedish and Norwegian business into Danish kroner, there you will see an impact of the weaker kroner. And then as we have talked about also when it comes to the spare parts, for instance, in motor, where you do see some impact of imported inflation, which is exactly what we are mitigating with the supplier agreements that we have as well as the pricing initiatives that we drive through.

So I would say when it comes to the P&L, we should be very much focused on working with that on an ongoing basis, but the hedges we have applied to the balance sheet.

[Mikael Karrsten, executive]

And I think, maybe adding one comment to your question on the large losses. I mean, obviously, continuously, we obviously look at the large losses if we can take any learnings from them, et cetera, et cetera. I mean what is supporting that we see this as a stochastic elements is that these are customers that we have had for a long time. It's not new customers. It's very stable books that we have in the Corporate business. And then additionally to that, as you mentioned, we are moving out and down exposuring on some specific elements. So I think that sort of adds to our comfort that it's stochastic.

[Tryfonas Spyrou, analyst]

Okay. That's very helpful. I guess just to come back on the -- when you mentioned the balance sheet, Barbara, just to confirm, you hedge sort of the cash being muted in foreign currency from the subsidiaries coming into sort of Denmark. You hedged that exposure there when it comes to the cash coming in.

[Barbara Jensen, executive]

Sorry, the line is really bad, Tryfonas. So we hedge which part?

[Tryfonas Spyrou, analyst]

So the cash being paid in Norwegian krona and Swedish currency, is that being hedged? Obviously, you pay out the dividend and you manage your cash in Danish Krona, but you can see the cash in sort of foreign currency you get. Is that what you mean you hedged, when you say you hedged to have balance sheet items?

[Barbara Jensen, executive]

You see the items that we hedged, it's for instance, the Tier 1 and 2 loans. Those are denominated in Norwegian and Swedish krona and is part of our capital structure. So those are the kinds of items that we hedge.

[Operator]

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

[Youdish Chicooree, analyst]

I've got 2 questions, please. The first one is on motor inflation of around 9% you're seeing in Norway and Sweden, which I guess is probably more than twice the level of you have of inflation in Denmark. And the first question is really, I mean, how confident are you can raise prices by that level without impacting your customer retention level in these markets? That is my first question.

The second one is on wage inflation assumptions and workers' comp reserves. I know, when you transition to IFRS 17, you changed the index you use for your wage inflation assumptions. Could you remind us of that change? And whether there is a risk that those inflations assumption have to be revised to reflect more are the current market implied inflation expectations?

[Mikael Karrsten, executive]

Right. So if I start with your first question on the motor spare parts inflation in Sweden and Norway. I think the way to look at this is, I mean, obviously, this is not an inflation that is only affecting us. It's affecting the entire market. And I think our pricing power is quite good, which is also demonstrated by the retention numbers that we're showing. So I think overall, we're confident that -- I mean, we can assume these inflationary numbers and drive actions for it.

[Johan Brammer, executive]

And just to be -- just on that, I totally agree. But just to make it very clear. We don't have any confusion as to our list of priorities at the moment. The list -- on top of that list is to keep inflation out of the premises of Tryg and we will price our way through that. Is there a risk that it will have an impact on customer retention possibly, but we'll take that risk. We need to make sure that we keep inflation off the premises. We will not shy away from that.

[Youdish Chicooree, analyst]

Just to follow-up on that. So does that mean you're seeing, let's say, a step-up in the like -- in the level of price increases across the market such that you're not seeing like suffering any loss of volumes at the moment?

[Johan Brammer, executive]

Very -- we see our retention levels at very high levels and fairly stable even though we're going through these price regimes as we are. We are seeing a little bit of impact on retention levels. But it's predominantly on the customer segments that only have one product, which are the most price-sensitive parts of the portfolio and also the part of the portfolio where we make the least profits. So we do see a little bit of an impact, but it's an impact where we wanted to be. So we feel confident whether we can continue to price through it.

[Barbara Jensen, executive]

Youdish, if I may comment on your workers' comp question regarding the inflation assumptions, you're absolutely right. Before, we used to have both the underlying liability as well as the hedge booked as a net result and the technical result. But following the change to IFRS 17, you will have the gross effect where you have the liability in the insurance result as well as the impact of the inflation swap on the investment result. That is what you can also see the impact of in this particular quarter in the investment line.

That is something we have implemented when we implemented IFRS 17, so we do not anticipate to change anything there. And also, if I may get your attention to Page 5 in the IFRS 17. Note that we sent out at the end of March. There, we also describe the inflation assumption that we use for the reserving where this is based off the Danish National Bank wage expectations. So that is already into the approach that we have taken when implementing IFRS 17.

[Youdish Chicooree, analyst]

And -- but how often is that updated -- because previously, you were using like a market-based measure, which was basically volatile.

[Barbara Jensen, executive]

Yes. We used to use a more mark-to-market because they were, you can say, both the -- as mentioned, the liabilities and the assets were booked in the same line. So you had more or less the same volatility in those 2. But as I said, we actually believe that this is a better proxy for taking into account the rate expectations in our reserving. So that is what we have been using for this year. And it is something that is, you can say, updated, as I believe, once a year.

[Operator]

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

[Jan Gjerland, analyst]

The wage inflation -- I just want to check the wage inflation for which you just talked about. You said you just update this once a year. Is this a new figure, which we referred to top yesterday into your new figure? Or is this going to happen throughout the year? How should we read them the updated wage inflation when it comes to your reserving policy on your underwriting here? If you could clear some around that form.

[Barbara Jensen, executive]

Yes. I think I will hesitate from commenting on top. I will focus on what we are applying and what we have been doing since the implementation of IFRS 17. And therefore, you can say the split that you now have between the inflation swap in the investment line and the underlying workers' comp liabilities in the insurance service result is actually the new component for us by the introduction of IFRS 17. We are not changing anything to the way that we are accounting for this. We did that as part of the implementation 1st of Jan.

[Jan Gjerland, analyst]

Okay. So what kind of wage inflation did you then have 1st of January? Was that the previous inflation thing, which then the Central Bank and the counsel had? Or is this data which they have not promised -- published new data, which then you have to implement for 1st of January next year. How should we read that?

[Barbara Jensen, executive]

I think you should read it that we always have a look at the Danish National Bank wage expectations, and that is what we build into our models around the reserving on the way of workers' comp.

[Jan Gjerland, analyst]

Okay. Then just on the reinsurance. Did you say that earlier on the call that the reinsurance cost you transferred to your corporate customers was not the full cost at the end of the day from the 1st of January renewal. So you will have further price hikes 1st of January and next year, driven by this reinsurance cost that is high. So we have some headwind on your reinsurance cost this year, if I could think about that.

[Barbara Jensen, executive]

Yes. I think we continuously look at what is the reinsurance cost. So again, there will be a renewal for 1st of Jan '23 that we will have to reflect in the price increases there. But bear in mind that we have a significant part of the book, which is not renewed at the January renewals, but which are renewed throughout the course of the year. And that is where we have the last bit.

And I think it's important to say that when we did the price increases 1st of Jan, we already had a significant uplift in the reinsurance program cost. It was just the fact that it ended out being slightly higher than what we had anticipated in the ordinary price increases. So it's that delta that you can say we need to carry through. And where all the renewals following the January renewals already are taking into account, of course, the higher reinsurance costs.

[Johan Brammer, executive]

So essentially, there are no news today. We're essentially just reiterating what we came out with at Q1 stating that we are passing on the reinsurance hikes onto customers ongoing.

[Operator]

[Operator Instructions] The next question will be from the line of Faizan Lakhani from HSBC.

[Faizan Lakhani, analyst]

I wanted to come back to the underlying development. Just trying to use the calculation of 1,700 currently that you provide. I calculate the potential sort of impact this quarter about 40 bps sort of headwind to the underlying? And then, I know Alex from Citi sort of tried to record the synergies were. But when I look at the synergies year-to-date, it's [ 577, ] last year it's [ 142. ] So overall sort of DKK 435 million movement over the year, that would probably suggest maybe 1 point improvement of which some will come to the underlying. I'm trying to strip those 2 elements out to work out what is the underlying from the work you've done on rates plus the shift in business mix to corporate. That's my first question.

The second, as I should be a bit more aware of this, but I am fully understood around the inflation swap and the wage inflation changes. I would assume that they would have been offsetting factors. So therefore, if inflation swap is negative this quarter, then we should have seen the opposite impact come through in PYD this year. So is that the case? And how much of that was there in the insurance results?

And third and very final quick question. How much more reinsurance retention do you need before you start to tap into sort of the weather retention?

[Mikael Karrsten, executive]

Right. If I start with your first question on underlying, I think, first of all, obviously, there's a number of different factors affecting the underlying and all the actions that we're driving. But to shed a little bit more nuance to, I think the 2 factors you alluded to, specifically in Private.

And as I said before, if we look on the travel side, we observed that we have a result impact of DKK 30 million sort of quarter this year relative to a quarter a year ago. And if we then look at the specific things on motor spare parts, I think, first of all, it's not fair to sort of state that the full 9% is something that we should take out of the underlying. I think what we are trying to sort of convey here is that we have seen additional inflation in motor Norway and motor Sweden.

And I think that was stated in the previous question here, a fair assumption would be roughly 1/2 of that, I think we see as more sort of excess inflation due to the weak currencies. The rest, we have obviously sort of anticipated inflation sort of before that. So I would sort of as a ballpark number, take 1/2 of that.

[Barbara Jensen, executive]

And on the -- you were asking about the inflation swap that has a negative value in the investment result and then the potential positive impact on the technical result. There is a link. But again, bear in mind that as you have in the investment result and mark-to-market on the swap curve and the reserving and the impact there is based on the national bank expectations or the Central Bank expectations you will potentially see a timing difference in the impact in these 2 items. Take it as a 1:1.

[Faizan Lakhani, analyst]

Just to follow up on that. Are you saying you've reflected the Danish wage expectation Council's estimates at the start of the year. But from what your peer has suggested that, that exercise happens twice a year. So I don't see why we've not seen that iteration come through in H1, I guess, as well for Q2 on the liability side.

[Barbara Jensen, executive]

No. I think you will have a minor impact. But it's not a 1:1 as with the moves on the value of the inflation swap.

[Operator]

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

[Vinit Malhotra, analyst]

Just one question is on -- the usual 3 topics, I would say, inflation, reinsurance -- actually mainly 2 topics. So in inflation, I'm just curious, when I look at Slide 9, the table on the right-hand side, at the bottom table shows that as much as Norway seeing a very big increase in car insurance prices. The average print price is still maybe below the Danish level. I'm just wondering if that is something to read into and how far up can the Norwegian market take these prices? You're already doing 11% increases. And from where we are sitting, I mean, inflation is becoming, at least in U.K., it's becoming a bigger topic, not a smaller topic. So I'm just curious about this Norwegian motor situation that the average price is below even Danish. And any comment on that would be very helpful.

Second thing is just to clarify on this inflation. So just I guess summarizing my own head, sorry, to both to waste your time. But is there any scenario where something could change and then you would be also likely to take a charge for this inflation definitions or mark-to-market or any other effect in the rest of the year?

And last question is on reinsurance. I think from the Analyst Day, I remember the communication was at about DKK 100 million shift to the originally thought CMD November 21 targets from reinsurance. And are you indicating that, that is still unchanged? Or are you suggesting that the pass on to the corporate customers should reduce that in some way. So just to clarify these 3 topics, please.

[Barbara Jensen, executive]

Yes. I mean, if I should start, then we can move from the back. As already mentioned, we have been passing on the increase on the reinsurance program to the corporate and the commercial clients, with the full effect from the second quarter of this year and with an almost full effect since 1st of January. So you should anticipate that we are working to, you can say, mitigate the increased prices that we saw around the January renewal as part of the ordinary course of business.

Regarding the wage inflation, again, I cannot comment what other peers are doing in the market. We chose an approach in terms of how to apply it in implementing the IFRS 17 by 1st of January. We have the methodology defined and I said, I can only refer to the IFRS 17 note that we have out there.

And if you have further questions following a read-through of that, then do not hesitate to reach out. Because we have quite a detailed explanation, both in terms of the impact on the technical result as well as the investment result there.

For the inflation and the differences between the countries?

[Mikael Karrsten, executive]

Yes. So turning to Slide 9, which I think you referred to. I think first of all, it's important to state here that what we are showing on this slide, that's average prices. So it's not an equal sign to rate just to make sure that, that's coming through.

And I mean, actually, I would sort of simplify my answer saying that no, you shouldn't read anything into that because, the fact that there is a difference in average prices between Norway and Sweden and Denmark, for instance, on motor is very much reflected in sort of what risk mix that we're having in the different portfolios and also the fact that sort of the same market trends or the same effects that we are seeing in our book. It's also reflected on the market in general. So no, I wouldn't read any sort of challenges into that, the way you asked the question.

[Johan Brammer, executive]

And in general, we just want to reiterate our confidence that whatever inflation we are seeing across geographies, we are able to pass through the appropriate and needed price increases that will be carried out. And I think on Page 10, we're also showing that the customer retention is broadly stable despite the need to go through price increases. So we are confident that we are where we want to be on pricing for inflation. We're not ahead of it. We're not behind that we are where we want to be on inflation, and we'll continue to push through the price increases needed to push inflation out.

[Operator]

As there are no more questions, I'll hand it back to the speakers for any closing remarks.

[Gianandrea Roberti, executive]

Thank you very much to all of you for the very good question. As always, Investor Relations is around for any follow-up. And I guess we will also meet you during the summer and after the summer. Thanks a lot for now.