Gjensidige Forsikring ASA

OSE:GJF

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Gjensidige Q1 2018 Results Presentation. Today's conference is being recorded. At this time, I'd like to turn the conference over to Janne Flessum, Head of IR. Please go ahead.

[Janne Merethe Flessum]

Good morning, and welcome to this first quarter presentation of Gjensidige. As always, we will have our CEO, Helge Leiro Baastad, running you through the highlights from the quarter, before our CFO, Jostein Amdal, gives you the numbers in more detail. And of course, we will have plenty of time for Q&A at the end. So Helge, please.

[Helge Leiro Baastad, Chief Executive Officer]

Thank you, Janne. Good morning, and welcome, everyone. 2018 has started off with a harsh winter with heavy snowfall and low temperatures. Several places in central areas of Norway reported up to 3x higher snow depth compared to normal level, resulting in difficult driving conditions and heavy snow creating huge damages on building. This together with volatile capital markets characterized the first quarter results.As previously communicated, weather conditions in the first quarters over the past few years have been relatively benign contributing to better results than we would normally expect for winter quarter in our region.Last time we had a really harsh winter was in 2010, so it's important to remember the seasonality we have in the Nordic region and there are strong variations in the Nordic and Nordic weather conditions, which this winter is a clear reminder of.Our results are summarized on Page 2, profit before tax amounted to NOK 727 million in the quarter. The underwriting result was NOK 411 million and the combined ratio was 93%.We had a premium growth of 5.7% and we managed to continue operating in a very cost efficient and lean way. Considering historical average claims levels, we estimate the weather-related deviation in the frequency claims levels during the first quarter this year to be in the range of NOK 250 million to NOK 300 million. And even more, if you compare with the first quarter last year, which was benign weather wise.Large losses were also high compared with the first quarter last year, partly due to the heavy snowfall. Demanding weather conditions primarily impacted the Norwegian business. We are happy to see our operations outside Norway deliver significantly improved results compared with the first quarter last year despite weather also being more adverse in this region.The operations outside Norway contributed to a total of NOK 104 million to the group's underwriting result. Looking aside of weather effects, the underlying inflation trend we had seen in motor insurance over some quarters now continues into 2018. We have price measures in place and more are to come through higher and more frequent increases as our tariff system is set to be even more agile going forward.The financial results came in at NOK 255 million or NOK 203 million adjusted for a non-recurring item. We are satisfied with these results on our investments considering the market volatility during the quarter. Annualized return on equity year-to-date was 9.3%. The maps shown on Page 3 illustrate both the difference in weather between winters 2018 and '17 and also that they are quite extreme in opposite directions with regards to long-term, median snow depth. We encourage you to study the weather statistics every quarter as it is a highly relevant leading indicator for Nordic insurance.Just to give a few examples of winter weather effect this quarter. We saw 4x more damages year-to-date compared to the same period last year related to roofs collapsing due to heavy snow. At Oslo emergency ward, they have treated 30% more fractures so far this year compared to the same period last year. And we had an increase of more than 15% in the number of motor claims in Norway during first quarter this year compared to the same period last year.Based on the large amounts of snow this winter, the Norwegian Water Resources and Energy Directorate sees a higher than normal risk for severe spring floods in Southern Norway. If such large floods occur, it should impact our second quarter 2018 results.As the largest General Insurance company in Norway, we see claims prevention as an important part of our mission. So as a precautionary measure, we are in the process of delivering pumping and drying equipment to the high-risk areas for floods. This is the first time an insurance company in Norway takes this kind of large-scale preventive measures.Then moving on to Page 4, and leaving the weather for now. I want to give you some examples of our agility in the customer interface, contributing to keeping up our strong competitive position. Time-to-market is of essence when developing the best digital customer experiences, which is 1 of our 3 operational strategic priorities. The other 2 strategic priorities are related to analytics and people. All 3 are equally important to secure the position as the most customer-oriented insurance company in our region and at the same time delivering on our financial target.We are continuously monitoring market trends and [ putting ] strong efforts into introducing user-friendly and cost-efficient customer interface solution with high speed to market. In order to succeed in this area, we are reliant on attracting employees with relevant competencies. We are competing with all industries that attract the best people and I'm glad to see that Gjensidige is able to recruit highly skilled digital talent.Our attractiveness was confirmed when we received the national award as the industry's most attractive employer last year. A selection of [ many ] concepts and offering we have launched in Norway very recently are illustrated on this slide. Firstly, we have introduced intelligent inbound call routing making us able, based on a sophisticated prediction model, to automatically route each customer to the service team with the relevant experience on the expected reason for the call. This gives a better customer experience and is more efficient for both the customer and contributes positively to the customer satisfaction.Secondly, we have established a direct messaging system, which is linked to each claims report. Customers, having reported a claim, can correspond directly with the claims handler, enabling efficient claims handling processes by making it easier for the customers to follow up the progress and for the claims handler to provide updates or request input.Thirdly, earlier this month we launched an online mental health counseling service for our private customers over 18 years with child insurance or disability insurance. Customers are offered a web-based program for mental self-help, which may either be an alternative with additional therapy or an offer which may assist while waiting for a regular psychologist consultation, for which the waiting time may be several months. The program is developed by psychologists and the service is launched together with the startup company.Then moving on to our mobile solutions. A few weeks ago, we launched a brand new digital concept for young customers to ensure that small ticket belonging buy a travel insurance or have their claims handled. It took us only 5 weeks from idea to launch of the concept via the live app and we are probably the first company to let customers buy insurance through augmented reality. It has been very well received in the market.We also launched a health and lifestyle app in November last year targeting customers between ages 20 and 45. The customer receives health and lifestyle-related advice, articles, activity tracking and more, all to contribute to having a healthy lifestyle.Then the final example is by far the largest initiative in the first quarter, a real estate brokerage and property condition insurance. We want to create a better balance between sellers and buyers of homes, reduce the number of conflicts and make real estate transactions more predictable. We have introduced a new insurance product, which guarantees the condition of the property. With this guarantee, real estate buyers get more better protection against [ hidden effects ] than they have today. We are the first insurer to offer this in the Norwegian market and believe this will become the gold standard going forward.I will now let Jostein to [ discuss ] the results in more detail.

[Jostein Amdal, Executive VP & CFO]

Thank you, Helge, and good morning, everybody. I will start on Page 6, where you can see that the reported profit before tax of NOK 727 million in the quarter. This is down compared to the profit we reported for the first quarter last year, driven by lower underwriting and financial results. Both the Private and Commercial segments in Norway were impacted by the weather-related increase in claims. We estimate the weather-related deviation in claims compared to historical first quarter averages to approximately NOK 250 million to NOK 300 million. The difference is even larger compared to Q1 '17, which was particularly benign weather-wise.As announced earlier, starting from this quarter we will provide more insights in the Nordic results by reporting Sweden and Denmark separately. The underwriting result for Denmark of NOK 85 million rose considerably compared to the first quarter last year. Both the Sweden and Baltics segments contributed positively to the underwriting results, reflecting the ongoing restructuring programs.The Pension business recorded stable profits of NOK 32 million. Retail banking recorded higher profits of NOK 122 million, mainly driven by portfolio growth. As mentioned, the financial result from our investment portfolio declined to NOK 255 million, reflecting higher volatility in the financial markets during the quarter.Turning to Page 7. Premiums rose 5.7% compared with the first quarter of 2017; 4.2%, adjusted for currency effects. All main product lines in the Private segment recorded higher premiums during the quarter. Premiums from the Commercial segment were up compared with last year, following solid renewals for most product lines, particularly for motor, property and liability. Sales initiatives towards new sectors also generated positive contributions to premiums for the Commercial segment.Premium growth in Denmark was driven by the Mølholm acquisition. Adjusted for this and currency effects, premiums were down compared to the last year due to re-underwriting and general price adjustments in the commercial insurance plans.Earned premiums for the private insurance plans in Denmark were up during the quarter. Earned premiums for Sweden increased compared with Q1 '17, driven by the significant premium increases introduced in 2017. The Baltics, we recorded lower premiums adjusting for currency. The decline was driven by portfolio restructuring and repricing activities aimed at improving profitability.The development in the loss ratio is shown on Page 8. Both large losses and frequency claims were up compared to the first quarter of last year. The harsh weather conditions in Norway negatively affected by frequency claims and impacted the loss ratio by 45 percentage points more than expected based on historical averages. Large losses were up 2 percentage points, partly due to the weather conditions in Norway. Run-off gains came in somewhat higher than the expected level of NOK 250 million per quarter and reducing the loss ratio by 1.5 percentage points compared with last year. Frequency claims rose 5.9 percentage points, with motor and property in Norway significantly impacted by the weather conditions.The underlying motor claims inflation trend, seen over some quarters now, continued into 2018. In Norway, we now expect an inflation of [ around 6% ] over the next 12 to 24 months, slightly higher than before. This is due to the changes in our no claims bonus system, which were expected to result in an increase in the number of smaller reported claims. In order to mitigate the expected claims inflation in motor insurance, we have implemented pricing measures and will continue with this going forward. Our planned average price increases in private motor in Norway, going forward, are now at least in line with expected claims inflation. We will, however, need to balance price and volume considerations continuously. Bear also in mind that it takes 24 months from the initiation of price increases until these are to be reflected in the accounts. We are pleased to see positive developments in the loss ratio in Denmark, Sweden and the Baltics and we are confident the positive developments in these segments will continue.Let's turn to Page 9 for an overview of large losses. Total large losses amounted to NOK 225 million, somewhat lower than the expected level and corresponding to 3.8 percentage points on the combined ratio. The impact is 2 percentage points higher than the first quarter loss level. And the Commercial segment recorded significant portions of large losses with NOK 118 million for the quarter, partly related to the heavy snowfall this winter.Moving on to Page 10 to commence the run-off gains. Run-off gains for the quarter came to NOK 340 million, higher than the currently expected level of NOK 250 million. Random variations as well as an adjustment of large loss provision explain the additional NOK 90 million of run-off gains. Our expectation remains that there will be approximately NOK 250 million per quarter in run-off gains for the rest of 2018. The run-off had a positive impact of 5.8 percentage points on the combined ratio.Let's turn to Page 11. The cost ratio for the quarter was 15.3%, reflecting continued good cost control. Cost ratio, excluding the Baltics, rose 14.5%. The cost ratio in the Baltics segment is continuously improving due to ongoing restructuring efforts.Page 12 illustrates highlights from bank and pension operations. Gross lending in the bank for the quarter was NOK 47 billion and measured by lending more than 75% of the bank's customers are general insurance customers in Gjensidige. The majority of these lending volumes are related to mortgage and just a small portion to consumer finance loans.The bank reported a pretax profit of NOK 122 million in the first quarter and the improvement from the same period last year was driven by portfolio growth. Annualized return on equity amounted to 10%.The pension company recorded a profit before tax expense of NOK 32 million. Assets under management in the pension operations amounted to NOK 29 billion, 70% of the customers in our pension business are general insurance customers as well. Annualized return on equity amounted to 12.9%.Moving on to the investment portfolio on Page 13, investment portfolio of NOK 56 billion yielded a return of 0.5% in the quarter, which we deem satisfactory considering high market volatility during the quarter. The result was positively impacted by NOK 52 million related to the sale of a Danish IT company FDC. Asset allocation in the free portfolio reflected preparations for dividend and tax payments with adequate funds, investments in money market instruments.The match portfolio yielded a return of 0.7% on a portfolio of NOK 34 billion. A large part of the match portfolio consists of bonds at amortized cost, which yielded a return of 1%. The running yield in this portfolio was 3.9% at the end of the quarter and the average reinvestment rate was close to 3%. Unrealized excess value amounted to approximately NOK 1 billion. The free portfolio, which amounts to NOK 22 billion, yielded a return of 0.1% in the quarter. The return was generated by our investments in private equity funds, and property offsetting the impact from weak equity and bond market.Last but not least, looking at our capital position on Page 14, the capital position is still strong. In February, Gjensidige was granted an approval from the FSA to use a partial internal model to calculate the regulatory capital requirement. The approved model is more conservative than the model Gjensidige applied for. The FSA has specified some areas, which have to be further validated and documented to get an approval for Gjensidige's original version of the model.Gjensidige has decided to accept the approval and we will continue our dialog with the FSA, the aim is to have the original version of internal model approved. However, this will take time. The legal perspective has since approved the internal model, this gives a solvency margin of 159% while own calibration of internal model gives a solvency margin of 171%. These solvency margins are calculated using [ booked ] reserves. Gjensidige solvency margins should have been calculated using the best estimates. This would have resulted in solvency margins of 188% and 203% respectively. Changes in the capital position from these 2 perspectives from last quarter are relatively small.Eligible capital increase is mainly driven by retained earnings and lower technical provisions due to higher interest rates. The capital requirement is stable from last quarter. We will continue to balance our capital structure in a disciplined way in order to support the target [ return next ], whilst the same time allowing us some leeway for further bolt-on acquisitions and stable dividend.In the interim report, we have again discussed some of the uncertainties related to the capital position, given the new tax proposal that has been launched, we assess the likelihood of a taxation on the security provision as high, this will reduce solvency capital by approximately NOK 700 million, however, we expect the cash effect to stretch over the next 10 years. I will then hand the word back to Helge.

[Helge Leiro Baastad, Chief Executive Officer]

Thank you, Jostein. To sum up, we delivered results highly affected by the harsh winter weather and volatile financial markets in the first quarter. Looking past the winter, we experienced overall good competitiveness and good progress in our operation overall and balancing cost efficiency measures with strategic investment is high on the agenda also during 2018. Over time, we still expect growth in line with nominal GDP growth and the combined ratio target corridor is unchanged. Thank you. We will now open for the Q&A session.

[Janne Merethe Flessum]

Operator, we are then ready for questions.

[Operator]

[Operator Instructions] We will take our first question today from Vinit Malhotra from Mediobanca.

[Vinit Malhotra, Research Analyst]

Helge, just looking -- now it's 2 quarters in a row we are hearing about the Norwegian winter and snowfall related effects coming out despite the large loss. Have you explored or debated the possibility of some kind of a reinsurance solution for this kind of frequency, some kind of an aggregate cover or something on to that effect, which could provide some relief from this volatility? That's the first question. Second question is on the solvency, I mean, I'm a bit surprised because I originally thought you were going to have a discussion with FSA to more align yourself or align or to bring -- or to reduce the gap, let's say, between your understanding and their understanding. And I think now you have stated that you would not be pleading at all. How should we think about the targeted, then, because if the FSA is applying stricter rules, are you likely to change your target range, if anything, or -- because that will be important for us to understand the future plans to return [indiscernible]?

[Helge Leiro Baastad, Chief Executive Officer]

Thank you for your question. I would pass actually both of them to Jostein, just to remind you on the reinsurance policy we have, we have had that for many years and it's based on more a capital tool protecting our capital, excess of loss, if Jostein and his team has had discussions, I will actually pass both the questions to you, Jostein.

[Jostein Amdal, Executive VP & CFO]

Yes. I don't think I'll comment on the discussions we've had internally. Just to remind you that the reinsurance program is protecting ourselves against events or [ deemed losses ], natural perils events of about NOK 200 million [ as one event ] will be protected. We have not -- this is not natural perils as such. This is weather that has affected many larger business and especially motor and property. And just remember, motor is not really a natural perils business as such. It's just a more higher frequency of collisions or losses on the motor portfolio. On the solvency position, we usually have an annual cycle, where we discuss targets or buffer targets about this legal and capital requirements each fall. We have, based on this scheme, 170% to 175% buffer ramp and all that is standing.

[Operator]

Our next question comes from Jonny Urwin from UBS.

[Jonathan Peter Phillip Urwin, Director and Equity Research Insurance Analyst]

Just one question from me. We've seen quite a lot of deterioration come through in the underlying loss ratio in recent quarters and I understand of the driver of that claims inflation has run ahead of pricing, but you're saying today that planned price increases are in line with claims inflation, but I wondered, are you already pricing for claims inflation now and so we should expect more deterioration, but at least you stemmed the tide on the front book or are you still in catch-up mode and you plan to catch up in the next -- in the coming months?

[Helge Leiro Baastad, Chief Executive Officer]

I think I'll answer that. Price increases that are being effective, everything renewed now, will be in line with claims inflation on average. And our planned price increases going forward would be at least in line with claims inflation.

[Jonathan Peter Phillip Urwin, Director and Equity Research Insurance Analyst]

And can you give us an indication of what both are? I know on motor you were flagging -- it was around 5% claims inflation, wasn't it?

[Helge Leiro Baastad, Chief Executive Officer]

Yes. And now we've changed that to around 6% where the loss increase is due to the changes in the [ no claims ] system, which makes it a bit, you can say, less promising if you have a smaller claim and expect that to have an impact on claims frequency, in line with what we've seen a couple of our competitors have done and their price to catch, so it mitigates that. So in [ Norway ] for us, a forecasted increase in the claims [ amount ] is not a problem as soon as we are able to [ price it ] and this is what we're doing now.

[Jonathan Peter Phillip Urwin, Director and Equity Research Insurance Analyst]

And I guess that you're also saying in your commentary that the tariff model will be more dynamic going forward. So I guess the aim of that is to prevent this sort of situation arising again.

[Helge Leiro Baastad, Chief Executive Officer]

That's 2 parts, one is our [ ambience ] is actually forecast against inflation. And the second is when we see a change to implement the changes in the tariffs. And it's the last part that's kind of Norway has improved through the more agile tariff system but to be able to forecast due to claims inflation is still based on competences of the people that are closest to the business.

[Operator]

Our next question comes Niccolo Dalla-Palma from Exane.

[Niccolo Cornelis Modesto Dalla-Palma]

My first question is on the solvency targeting -- so first if you could confirm that the single A rating target is now being dropped for good so that we -- because I see we're not getting that information anymore. And secondly, related to that, if you were to go as low as 125% solvency on the legal perspective, would you be able to keep your single A rating? I would like to understand that. And then a question on the taxes, so there is a NOK 700 million impact to come through solvency, you mentioned there is a provision already taken. So is my understanding correct, when we look at reported profit there will be no impact at all or will we see something in reported profit over time from the changes that we've seen? Thank you.

[Helge Leiro Baastad, Chief Executive Officer]

Okay. First, we'll not drop the A rating target. It is still important, as I have explained earlier, that we have an A rating for some segments, especially on the corporate business for the bank, for the company and also on the reinsurance side. So there are several commercial reasons for keeping an A rating and we still have that as our financial target. Whether we will be able to keep an A rating as 125%, one of the reasons I dropped reporting the number from A from the S&P model is that it's just one part of the basis that S&P uses for giving us our rating and we don't have a specific view on kind of the bottom level of solvency margin that should support an A rating, that's more -- as from our communication with S&P. When we have a range of 125 to 175, in the middle point there is 150, which is kind of a reasonable starting point from where we think we should capitalize over time. But that's -- one of the previous questions asked that, it depends a bit on the conservative [indiscernible]. We'll take all these things into consideration from the set of targets. The tax [ provision ], you are perfectly right, there is no effect on the P&L. It's the paid tax that increases but also that's a bit of a solvency capital effect, the tax liability that we have on our books before this change, if it's occurring, was deemed as a kind of perpetual tax -- deferred tax liability and now it's then more immediately paid and then it will need to be [ deducted back ] from the solvency calculation in our interpretation.

[Operator]

Our next question comes from Youdish Chicooree from Autonomous Research.

[Youdish Chicooree, Research Analyst]

I've just got one question and again it's on the motor claims inflation in Norway. So you've increased your inflation expectation by around 1 percentage point to around 6% today. So I'm wondering whether the objective there is to actually stabilize underlying profitability in motor in 12, 20-month time. Are you happy for underlying profitability to decrease because other parts of your portfolio are actually performing quite well, especially your international operation and if you look at the headline ratios you are reporting excluding weather, they are still solid in other parts of your business?

[Helge Leiro Baastad, Chief Executive Officer]

You are correct. The expected inflation now is 6%, up from 5%, and as Jostein said, all of the price initiatives this year will meet -- at least meet this claims inflation expectation going forward. So measures are taken to increase prices to meet that claims inflation. We expect, however, prices to increase as I said even more going forward to compensate for this claims inflation. So we are not happy to -- over time to reduce the profitability in motor in Norway. But as we also have said, it has been claims inflation since end of '16 to '17 and we will not catch up with that development, but going forward we will meet the claims inflation with price initiatives.

[Operator]

Our next question comes from Steven Haywood from HSBC.

[Steven Haywood, Analyst]

I've got a couple of questions please. You mentioned that the winter has been about NOK 250 million to NOK 300 million higher than the average on the weather claims in Q1. Can you tell us what exactly has been the average winter claims in Q1 over the last several years. And then on your tax, quite a few changes, you've mentioned that there is another potential change coming through that could have a NOK 0.2 billion to NOK 0.6 billion impact, could you just describe this further, gives us a bit more detail and let us know whether this is a one-off or could be a yearly impact on tax? And then finally, you are instituting a new property condition insurance, now is this similar to the Danish change of ownership insurance? What sort of premiums do you expect to receive in this new line of business and what is the take-up so far?

[Helge Leiro Baastad, Chief Executive Officer]

It's really hard to be very concrete on what's an average winter especially in Norway. I guess they have that winter more or less in Sweden as well but it's different as you know in Denmark. And last really harsh winter, we experienced was in 2010. And that was a different kind [ wholly ], it was related to [ temperature ] and freeze. I think we also, at that time, and that was a bit significantly lower premium volume, communicated around NOK 350 million related to that harsh winter. It was -- since '11, '12 until this winter, it has been very benign and very mild, so if you compare the winter effect in 2018 to '17, you're comparing a very harsh winter with a very benign winter. I guess the normal should be somewhere in between but it's hard to actually be very concrete on that going forward. But as I communicated, this winter started very early and it's still snow up in the mountains, there's huge amount of snow, and it has been very volatile. So this is an extraordinarily harsh winter. We do not expect that kind of winter as a usual with going forward.

[Jostein Amdal, Executive VP & CFO]

On the tax question. There are 2 other items there, in addition to the security provision and one part is the so-called Norwegian guarantee provision, where we in our books have certified a deferred tax liability and that might not be the correct way -- one of the possibility outcomes of the taxation is that there will not be a tax liability and that also is a positive, [indiscernible] possibility of increasing the amount of products that's due to the remuneration guarantee arrangement, this is a guarantee arrangement for customers in long-life insurance sector, which does not exist in most places in Europe. And this capital is not included in solvency capital in our perspective, which in a way represents some kind of an upside for us as well, if that changes now. And the second part is natural perils capital, where we have not set aside the correct [indiscernible] in our account on the assumption that the tax on this natural perils capital is never going to materialize because as long as we continue writing property business, we'll continue to have this natural perils capital in our balance sheet. The [ precaution now ] assumes a taxation of profits on natural perils business going forward and there is a small possibility that that might change the way it needs to be [ booked ] in accounts, i.e. setting up a deferred tax liability and that's being debated and there is, I would say, a very small probability that will also have a contagion effect on the capital but we regard, as I said, that's really unlikely.

[Helge Leiro Baastad, Chief Executive Officer]

Okay, on the brokerage company. We launched this Gjensidige brokerage company in February and it's a combination actually of a completely new insurance product in the Norwegian market. It's a 5-year lease product. We have looked, of course, and we are involved in this kind of business in Denmark. In Norway, it has been a completely different situation. It has been a protector product for the seller and it has been more or less all the insurance companies and a small niche [indiscernible]. So what we have done here, we have created a completely new taxation of properties. We have launched a very digital brokerage company and we have introduced a completely new risk product for both sellers and buyers. It has been some learnings from Denmark, but it's not the same product as in Denmark. It's a completely new concept in the Norwegian market, and it has been very well received, and we believe that we will see a change actually in this market going forward where you will see all the insurance companies following us on this with a completely new combined insurance product for buyers and sellers.

[Operator]

The next question comes from Jan Erik Gjerland from ABG.

[Jan Erik Gjerland, Research Analyst]

It's Jan Erik from ABG. I just have 2 questions. The first one is a follow-up on the large -- the premiums from the property side and the competition. Is it so that you compete head-on-head with protector? And on the premium side, how much do you really think it could be adding to your private lines in Norway? And the second part is, on the price and premium increases and in general, on the private side you may have some further competition from the banks et cetera, DNB, while on the commercial side, it might be easier as Trygg has said that they are willing to give up business, but just wanted you to tell us about the competitive picture both on the new property side and also on the general side?

[Helge Leiro Baastad, Chief Executive Officer]

Thank you, Jan Erik. Gjensidige [ Baltic ] handled the property insurance concept, so far it's very limited, this will take time. We will not compete head-on-head with protector; it's a completely new type of product. It's a 5-year risk product. It's combined, as I said, combined insurance product for both sellers and buyers. To the brokerage company and this new insurance product, we believe it will be positive for our traditional [indiscernible] insurance product. So this is the initiative to ensure that we have more dynamic in the home and [ content ] process. It's a new product that will take time and it's not directly in competition with the protector, [ i.e. the ] product.

[Jostein Amdal, Executive VP & CFO]

In terms of competitive situation in private, in general, and in commercial in Norway, I think so far we've managed to keep our position very well. You got market shares and so we are still stable. So the picture there hasn't really changed that much over the last couple of years. It's been quite a long [indiscernible] more aggressive and we are stable and some of our main competitors have been losing and DNB is stable. It's hard to predict what's going to happen going forward, but we think that most of these players will have to prioritize volume, sorry, profit before volume, and will have seen [ being perfect ] the same way as we have done. We haven't looked into their results yet, so probably they have some [indiscernible] either. But we think as a 35% player I think it's a phase that they will have to see [indiscernible] and meet the price accordingly. I don't really foresee a business [indiscernible] in the competitive position. In terms of commercial [indiscernible] and we've seen that Trygg communicated that they'll focus on profitability. And it's [indiscernible] account that is in the higher end of the commercial segment and it remains to be seen what really happens when customers are on tender. But we at least prioritize profitability above volume with margin here.

[Helge Leiro Baastad, Chief Executive Officer]

Just to add, we had the Capital Markets Day back in 2014 and we talked about 1% to 2% claims inflation. What we are talking about today is 6%. It's lots of structural changes, electric cars, hybrid cars, leasing is a completely more dominant concept now compared to what we saw some few years behind us. We, as you heard, we will increase prices, with higher price increases going forward compared to what we have done. We are market leader. We will do this and actually we have said several times, profitability before market share. If this reduces volume a bit, we are prepared to take that as well. We think we have to increase prices to meet a completely new type of motor insurance market in Norway, with significantly higher claims inflation. And the signal is that we are in the mood of higher price increases going forward, with more [ frequency ] due to the new tariff system, more agile.

[Jan Erik Gjerland, Research Analyst]

Thank you. Just one follow-up on the commercial side. Is this how that you've seen any more foreign competition, if you think about the typical Nordic ones? Or is it so that they are still not apparently [ herein ] on the commercial side and [ large ] corporate side?

[Helge Leiro Baastad, Chief Executive Officer]

It's the same as we have had all the [ years in Norway ]. And you know the [indiscernible] segment and that's actually the competition.

[Jan Erik Gjerland, Research Analyst]

Okay. Finally, just remind us on the flooding, last time it was a big flooding in Norway was in '1995 and you were not listed, but you were definitely a insurance company. Could you just give us an example of how damaging that was to and what has happened on preconditioning measure done in the past? As I said, you have always done some stuff to prevent the flooding to happen or not to happen, but just to make the damages less damaging for you, what have you done and how 'was 1995 compared to what you see today?

[Helge Leiro Baastad, Chief Executive Officer]

'95, that's the biggest one. We had also a flood back in 2011. It was quite significant. Just to remind you of the figures in '11, the industry estimates back in '11 was NOK 200 million and we had around NOK 65 million, that was in '11. In '95 do we have figures from '95? It's a question mark. No? Okay. The market was [ NOK 1.6 billion ], Jan Erik back in 1995.

[Jan Erik Gjerland, Research Analyst]

I think like that's adjusted to today's nominal kroner value.

[Helge Leiro Baastad, Chief Executive Officer]

Yes. So NOK 1.6 billion for the total market and the last flood we had recently was in 2011 and that was the market damage [ NOK 200 million ].

[Operator]

Our next question comes from Johan Strom from Carnegie.

[Johan Ström, Analyst of Financials]

So first of all, on the claims inflation. Jostein, can you just confirm that the uptick from 5% to 6% of motor claims inflation was driven by the changes on the bonus system? And then secondly on your capital position. The uncertainty related to the PIM model and maybe a little bit on the tax side has reduced your solvency uncertainties. So how should we think about the unutilized NOK 1.5 billion to NOK 1.9 billion of subordinated loan capacity or how do you see the market for potentially utilizing some of that now?

[Jostein Amdal, Executive VP & CFO]

Yes. It's due to the [indiscernible]. And in terms of the uncertainty related to the partial internal model, as we've said, we kind of disagree with the assumptions made by the FSA like, for instance, the correlation from the standard formula between market risk and then rightly discussed we were poised to do. But decided against the kind of, what's called, complaining and not accepting the model. We rather assessed model and that now in the legal formula and then we continue our work over time with the FSA, and internally with our documentation, so that we are able to get more of our internal model approved. And for internal purposes, as we present here, this is our own calibration of the internal model, with a slightly higher solvency margin. What we implemented now is some of these requirements from the FSA and then as we say in the report, during 2018 there are some number of smaller changes we need to do because everything else equal will reduce the solvency margin by 10 percentage points at year-end. But then, of course, we also work at the same time with our own model and to improve it and then discuss with FSA whether we can get the same change there, but that will take time as, Helge said. With the uncertainties created by the tax hearing in Norway, I think it's highly likely that the NOK 0.7 billion of hit on the solvency due to the security provision, that will occur, but I also think it's fairly unlikely that will have a negative effect on the -- from a taxation of natural perils capital, we think that is really very unlikely because the natural perils capital stays with the company as long as it's a growing concern. Only if we close the business will that come, taxation, hopefully that is in [ eternity ] and then there is no present value of the tax bill. And then there finally was the guarantee provision. As I answered to a earlier question, there is both upside and downside to the changes there. But from a solvency perspective, it's more of an upside than a downside I think. The final question was on the [ new life ] capacity for subordinated debt, maybe then Tier 1 debt. We see as usual that the market is fairly positive for those kind of occasions now. The last one was [indiscernible] a spread of [ 260 ] basis points. So we follow that market and try to evaluate the possibilities there really on a continuous basis.

[Operator]

Our next question comes from Wajahat Rizvi from Deutsche Bank.

[Wajahat Rizvi, Research Analyst]

Wajahat Rizvi from Deutsche Bank. Can I ask A question again actually on Solvency margins? So on a partial internal model basis, you're looking at your solvency ratio range of 125% to 175%. So on average let's say you are at 150%, after this 10 percentage point impact, that you have highlighted you will be almost at that level then on top of that, you have highlighted that EIOPA [ has stressed ] that changes may impact your solvency negatively by 5 points and then you have this ongoing drag from the tax charge, which you have also highlighted. So I'm just wondering after -- if we capture all of these things, you will be below the midpoint of your appetite range, would you need to change your dividend philosophy or raise capital or do anything to shore it up or move back in the upper end of the range or you are happy to operate a bit more flexibly around the middle of this appetite range?

[Helge Leiro Baastad, Chief Executive Officer]

I'll start at the back-end of your question that we're happy to operate flexibly within that range. We don't see that these uncertainties will have any effect on our ordinary dividend capacity, so no and the first part of the -- yes, as we said that they are 10 percentage points, that effect, if everything is implemented and we think that the NOK 700 million is likely to go through in the parliament besides finally on the new tax regulation but we do think that the other big changes are unlikely to go through. Remember also that, what is historically the most winter was -- this easily is most negative quarter for us and a new [ build up ] accumulated retained earnings over the next [ 3 ] quarters.

[Wajahat Rizvi, Research Analyst]

And can I just ask a follow-up on this EIOPA you have made, the changes stress parameters for interest rate risk. So as I understand, that is on standard formula and given that you have moved to partial internal model, I would have thought you would have no impact from that change, so why is change in standard formal also hitting your partial internal model?

[Helge Leiro Baastad, Chief Executive Officer]

That's a very good question. And because we are on the partial internal model on the non-life insurance business, but this is also a pension business. And that is on the standard formula and that is affected, that's why we have these numbers.

[Wajahat Rizvi, Research Analyst]

Okay. So the pension business is still on a standard formula?

[Helge Leiro Baastad, Chief Executive Officer]

Yes. We don't have any plans to change into internal model for that part of the business for some time.

[Operator]

Our next question comes from [ Frederik Patua from Chilton ].

[Unknown Analyst]

Just 2 questions from me. The first question is going to be on the guidance. If I understand correctly, the guidance is not changing, but doing the math around and the adjustments for the weather and for the release, the reserve release, the quarter basically combined was 95 versus 92 last year, so a 300 bps move. So the first question is, is the math correct on that? And the second question is going to be how do we reconcile those numbers with an impact guidance given that investment income is as well under pressure and the P&C side has seen a, combined, going up by 890 bps. So I'm just trying to reconcile the numbers and see how we should think about that guidance being intact and also the fact that the reserve release have gone up, how should we anticipate that going forward? I think it's been the highest quarter almost for the last few years on this side. So thanks for reconciling the 2 sides of the equation here.

[Helge Leiro Baastad, Chief Executive Officer]

In terms of run-off, I don't really remember if that's highest ever, but our guidance there is that we do expect, based on planned reserve releases from intensified kind of buffers in the reserve of NOK 250 million or NOK 1 billion a year approximately. We are working on the balance sheet item of more than NOK 30 billion, so there's some actual volatility around that. In the first quarter, as we said, there is kind of one large loss that has been correctly estimated [indiscernible] normal volatility in the reserve situation, which explains the NOK 90 million on top of the NOK 250 million. Our guidance is the same still going forward. You should expect around NOK 250 million a quarter with some volatility around that, yes, nature of the business. In terms of guidance, we don't have a short-term guidance. We only have long-term financial targets, and they remain the same and we believe that they are perfectly achievable with the measures that we have in place. [indiscernible] 86 days now given the current run-off guidance.

[Unknown Analyst]

On the run-off, just on the run-offs, if we can have a bit of -- is there any reason of this increase because that's we are talking about NOK 340 million, so 5.8% versus 4.3% last year. How should we think about it going forward?

[Helge Leiro Baastad, Chief Executive Officer]

NOK 340 million versus NOK 250 million, which is kind of the deviation from the guidance. This NOK 90 million, I [ explained ] it's partly due to kind of one large loss provision that has been reduced and partly it's some normal volatility around -- as I explained it's a balance sheet item if more than [ NOK 30 billion ] with estimates going [ 2030 ] I think is the choice, it's naturally somewhat volatile.

[Operator]

There are no further questions left in the queue. I'll hand the conference back over to your host for any additional remarks.

[Janne Merethe Flessum]

Okay. Thank you for participating, everybody. Just reminding you of the roadshows we are doing this quarter, so London, Copenhagen, Paris and Edinburgh. We hope to see you there and hope to see you also in London tomorrow in the Analyst Presentation there. Thank you and goodbye.

[Operator]

This will conclude today's conference call. Thank you for your participation. You may now disconnect.