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Gjensidige Forsikring ASA
Earnings Call Analysis
Q2-2024 Analysis
Gjensidige Forsikring ASA
Gjensidige delivered a strong profit of NOK 1.830 billion in Q2, compared to NOK 1.334 billion in the same period last year. This growth is driven by a 10% increase in insurance revenues, despite facing higher motor and property insurance claims in Norway. The company's solid market position and analytical capabilities have enabled them to maintain stable market shares while implementing significant price increases to counteract rising claims.
The insurance service result faced a negative impact due to a rise in motor and property insurance claims, particularly in Norway and Denmark. Claims frequency for motor insurance in Private Norway increased by 5.8%. To address this, Gjensidige swiftly adjusts tariffs and has implemented price increases expected to raise average premiums by 13% this year, with further hikes planned. These measures aim to improve profitability despite short-term volatility.
The company's performance varied across regions. In Norway, growth was primarily driven by price increases in motor insurance, while Denmark saw a 9.7% revenue growth driven by price hikes across all products. Sweden and the Baltics also showed positive developments with strong revenue growth driven by price adjustments and improved cost efficiencies. The group's cost ratio improved by 0.4 percentage points, highlighting the effectiveness of ongoing efficiency measures.
Gjensidige continues to prioritize sustainability and product innovation. Their efforts were recognized in a sustainability survey by the Norwegian Business School. New product offerings such as comprehensive cyber insurance for SMEs in Norway and bundled insurance for young individuals in Denmark demonstrate the company's commitment to adapting to market needs and enhancing competitiveness.
The investment portfolio generated solid returns, contributing to an annualized return on equity of 20.2%. The company maintained a healthy solvency ratio of 170% despite a slight decrease from the previous quarter. Looking ahead, Gjensidige remains confident in meeting its financial targets for 2025 and 2026. Significant and targeted pricing measures, along with disciplined prioritization of profits over volume, are expected to improve the combined ratio and profitability over time.
Higher claims in Q2 pose challenges to meeting the combined ratio target for 2024. However, management is fully committed to enhancing profitability through continued price adjustments and cost-efficiency measures. The company expects claims inflation to remain between 5% and 7% in the next 12 to 18 months. Strategic initiatives, including targeted pricing and operational improvements, aim to mitigate the impact of increased claims and ensure long-term profitability.
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Hello, and welcome to the Gjensidige Q2 2024 Results Presentation. My name is Laura, and I will be your Coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Mitra Negård, Head of Investor Relations, to begin today's conference. Thank you.
Thank you, operator. Good morning, everyone, and welcome to this second quarter presentation of Gjensidige. My name is Mitra Negård and the I'm Head of Investor Relations. As always, we will start with our CEO, who will give you the highlights of the quarter, followed by our CFO, Jostein Amdal, who will go through the numbers in further detail. And we'll have plenty of time for a Q&A afterwards. Geir, please.
Thank you, Mitra, and good morning, everyone. We have put behind us a quarter with high claims in Norway. I will revert on how this has impacted our results and what we are doing to mitigate the impact on our profitability going forward.
Now let us turn over to Page 2 for comments on our second quarter results. The profit before tax was NOK 1.830 billion, an increase from NOK 1.334 billion. The general insurance service result was NOK 1.434 million. This result includes a positive impact of NOK 402 million from a change in the risk adjustment. The strong growth momentum continued in this quarter with insurance revenue increasing by almost 10%. Insurance Service results decreased mainly due to higher motor and property insurance claims in Norway. Adverse claims in the first quarter also impacted results negatively. Our investments generate returns of NOK 540 million, and the annualized return on equity was 20.2%. Jostein will revert with more detailed comments on the results for the quarter.
A few words about property insurance on Page 3. The significant increase in property claims in the second quarter for private and commercial in Norway was due to fires. As mentioned earlier, property insurance is different from motor in the sense that claims frequency is much more volatile in nature, being more exposed to weather and stochastic factors such as fires. While we see a long-term decreasing trends in fires, water damage is rising due to climate changes. We will continue to develop relevant insurance solutions with incentives for loss prevention. The insurance industry is engaged in fruitful discussions and share valuable knowledge with municipalities to prevent losses.
To this end, the recent parliamentary notice in Norway is very encouraging, proposing extensive measures to prevent weather-related losses. These includes physical measures as well as mapping, planning, monitoring and alerts. In terms of claims inflation, we expect to remain in the 5% to 7% range for the next 12 to 18 months. We have increased prices of several years to take account of not only claims inflation, but also more frequent weather events. The implemented measures so far will raise average prices for more than 9% by year-end, and this will increase further due to ongoing pricing measures, gradually improving profitability.
So over to Page 4. We have seen continued increase in claims for motor in Norway this quarter. As you can see on this slide, motor claims frequency in Private Norway was up 5.8%. Repair costs have developed as expected, which, together with a higher share of more expensive type of losses, has resulted in higher claims severity. Our analysis points to several reasons for the rising in claims frequency and claim severity in Norway. The growth in the vehicle fleet with an influx of wider, longer and heavier vehicles, with more horsepower is one of the most important factors.
The post pandemic rebound in driving has also contributed to higher traffic density. Economic growth and high inflation, partly driven by the weak Norwegian kroner have also impacted claims. We expect claims inflation for private motor in Norway to remain at around 7% throughout 2024, gradually declining towards 4% over the next 12 to 18 months. Other factors such as weather conditions and modern cars with touchscreens have also impacted claims in addition to the level of deductibles and bonus programs. We expect these factors to impact claims going forward, both in terms of short-term volatility and as long-term trends. Our prices shall reflect the expected long-term trend impact on claims.
As you can see on this slide, we have continued to put through significant price increases. The implemented measures will increase average premiums by more than 13% this year. This will increase further due to ongoing pricing measures with the level of purchases being brought to 17.5% from July. We are fully committed to improve profitability meaning that we are willing to sacrifice some volume to achieve this if necessary. We will continue to strengthen pricing measures and adjust terms and conditions to ensure that the increase in claims is mitigated. So far, we have been able to do this without any negative impact on churn. This is a proof of our strong brand and position in this important market. Our significant measures will gradually improve profitability as policies are renewed and premium earned.
Moving to Page 5. I'm very pleased with the continued strong growth momentum in Private Norway. Retention remains very high despite the significant pricing measures. Other recent top ranking among general insurance companies in the Norwegian Business School survey on customer satisfaction and loyalty is very encouraging. The new core IT system for Private Denmark is working well and supports sales activities. Revenues have increased strongly, both organically and with the contribution from PenSam.
And customer retention is improving. Our new agency partner, FOMO in Denmark, will further strengthen our position in the Danish private segment. Growth in commercial in Norway continues to be strong. The July renewals have gone well so far. Customer retention is high and our market share has increased, passing 31% in the first quarter. I'm very pleased with this, having in mind that we are prioritizing profit before growth. Growth in Denmark is also strong with organic growth supported by the Sønderjysk portfolio.
Sweden is progressing well with profitable growth and continued improvements in operations, particularly for claims processes through digitalization and automation. We will continue our efforts to increase profitability going forward through improving risk selection and implementing pricing and cost efficiency measures. Our Baltic business showed strong growth and continued improvement in profitability, driven by tariff improvements, portfolio pruning and enhanced operational efficiency.
Over to Page 6. I have made a few changes in our group management team. After 18 years in Gjensidige, Aysegul Cin has decided to seek opportunities outside the group. She will be replaced by Vivi Kofoed from the 19th of August. Vivi has extensive experience from our industry, and she has held various positions in Gjensidige in Denmark, Sweden and the Baltics. She is currently responsible for digital marketing and CRM in Private. Vivi will be a strong contribution to the management team.
Other changes to be mentioned are the Strategy, M&A and Group Development, which are now part of the CFO division. This sustainable department is organized in Analysis Product and Price. And Communication, Brand and Sponsorship are now part of our People and Communications division. I'm very pleased with having a strong and very competent management team to run our operation. The management team is highly committed to improve profitability and do what's necessary on pricing, risk selection and cost efficiency.
Turning to Page 7 on our unique customer dividend model, which is an important retention tool. The customer dividend model, together with our ESG measures and Gjensidige's business ambition to promote a safer and better society, strengthen Gjensidige's important role in Norway for the 16th time since 2008, the Foundation has distributed its share of regular dividend from Gjensidige to our general insurance customers in Norway. This year, 890,000 customers will receive a total of NOK 2.5 billion, corresponding to 11.1% of the premiums paid in 2023.
Over to Page 8 and a few words about our product innovations. Our SME customers in Norway, offered a new cyber insurance product with a more comprehensive assistance than earlier, including services such as technical and legal investigations, monitoring and media and crisis management. We also launched a new legal insurance for covering, among others, legal advice and assistance in the event of a dispute. In Denmark, we have launched a new bundled insurance concept for young and an insurance onset related to violence and threats of work for certain occupational groups. These are examples of how we continuously work to further develop our offering to the SME segment and to strengthen our competitiveness in Denmark.
Over to Page 9. We continue to take important steps towards delivering on our strong sustainability ambitions, and it is very encouraging that our efforts are recognized. Most recently, in the year's top ranking among all insurance companies in Norway in this year's sustainability survey conducted by the Norwegian Business School.
With that, I'll leave the word to Jostein to present the second quarter results in more detail.
Thank you, Geir, and good morning, everybody. I will start on Page 11. As Geir mentioned, we delivered our profit of NOK 1.830 billion in the second quarter. I'm very pleased that we continue to deliver strong revenue growth. The insurance service result this quarter includes a positive impact of NOK 402 million from a change in the risk adjustment under IFRS 17. We calibrated the percentile on liabilities in connection with our annual assessment to better reflect our solvency ratio target and cost of equity. The insurance service result was negatively impacted by rising claims in particular for motor and property insurance for private and commercial in Norway.
The result in Denmark also reflected this development with weaker profitability for motor insurance across both segments and property insurance in Private. Adverse development in claims for Private and Commercial in the first quarter of 2024 also contributed with 2 percentage points to the deterioration of the underlying frequency loss ratio for the group in the second quarter. We are closely monitoring the development in claims, tracking all relevant factors. Tariffs are adjusted swiftly and implemented on an ongoing basis. And with our solid analytical capabilities and strong market position, I'm confident that we will improve profitability.
I'm encouraged by the progress in both Sweden and the Baltics. The insurance service results increased reflecting good top line growth, improvement in the underlying frequency loss ratios and enhanced cost efficiency. Our Pension segment reported an increased profit compared to last year, reflecting a higher net finance income. The development in other items reflects a higher result for mobility services, which was offset by higher interest expenses and subordinated loans and increased amortization related to the bolt-on acquisitions last year.
Turning on to Page 12. Our strong growth continued in the second quarter with insurance revenues for the group increasing by 10% in local currency. Growth in private was driven by both Norway and Denmark. The increase in Norway mainly reflects price increases, especially for Motor. Market shares remain broadly stable. The revenue growth in Denmark was strong, driven by price increases for all the main products and some volume growth. PenSam also contributed to the growth. But even excluding this, the growth in Denmark was 9.7%. Revenues for commercial continued to rise significantly, driven by both our Norwegian and Danish portfolios. The strong growth in Norway was driven by price increases for all products, solid renewals and volume growth for Motor.
I'm very pleased that our market shares have increased while implementing such strong price increases. Growth in Denmark was driven by price increases for all products and higher volumes, resulting in an organic growth of 11.3%. The portfolio from Sønderjysk contributed another 4.3 percentage points in growth in Denmark. The growth in Sweden was driven by price increases in the private and commercial portfolios. Adjusted for a premium correction made in the fourth quarter last year, growth measured in local currency was 4.5%. The strong revenue growth in the Baltics continued this quarter, driven by price increases in all the main product lines.
Turning on to Page 13. The group's loss ratio increased by 2.7 percentage points. Excluding the NOK 402 million change in the risk adjustment I explained earlier, the loss ratio was up 6.8 percentage points. This was mainly driven by a higher underlying frequency loss ratio in Private and Commercial. Adverse development claims in the first quarter of 2024 for Private and Commercial in Norway also contributed with approximately 2 percentage points. As mentioned, we have implemented targeted pricing measures to improve profitability. We are confident about the strong trajectory for revenues and expect improved profitability. Quarterly year-on-year comparisons may, as we have seen several times, be impacted by volatility in claim frequency and severity in the short term.
Let's turn to Page 14. Our group cost ratio improved by 0.4 percentage points, mainly due to efficiency measures and growth in the insurance revenue. Excluding the Baltics, our cost ratio improved by 0.4 percentage points to 12.5%. The cost rate in Norway came further down this quarter, thanks to efficiency measures and higher reinsurance revenue. The private and commercial portfolios in Denmark showed a higher cost ratio, mainly driven by higher IT expenses.
PenSam and the Sønderjysk portfolio also contributed to a higher cost ratio. The cost ratio in Sweden improved due to increased insurance revenue and cost efficiency measures. The Baltics also showed a decrease in the cost ratio due to higher insurance revenue and good cost discipline. We have a dedicated focus on operational efficiency, and we'll continue to put strong efforts into maintaining a competitive cost level.
Over to Slide 15 for comments on our Pension operations. Our pretax profit adjusted for the change in the contractual service margin was NOK 386 million, significantly up compared with the second quarter last year. We calibrated the percentile on liabilities for pension similar to what we did for general reinsurance, resulting in a positive impact on the pension business, insurance result and CSM. The insurance result was down when excluding the impact from the change in risk adjustment and positive effects from model changes last year. The underlying development is positive. However, the reported results from a negative development due to losses on onerous contracts being recognized immediately and profitable contracts being recognized over time.
Net finance income improved, driven by a higher interest rate level than last year and moderate interest rate changes in the quarter compared to the same period last year. Administration and management fees increased, driven by growth in the number of occupational members and assets under management. Results for our unit-linked business decreased due to a change in allocation of costs for our pension life business and a higher headcount. Assets under management rose to NOK 79 billion.
Moving on to the investment portfolio on Page 16. Our investment portfolio generated positive returns for all asset classes. The match portfolio net of unwinding and the impact of changes in financial assumptions returned 60 basis points reflecting lower credit spreads and the fact that investments did not fully match the accounting-based technical provisions. The free portfolio returned 50 basis points this quarter, reflecting positive returns from higher running yields and positive equity markets whereas an increase in the interest rates during the quarter had a negative impact on the result. The risk in our portfolio was broadly unchanged from the first quarter. We have a balanced portfolio and solid fixed income investments with a large majority having an investment-grade rating.
A few words on the latest development of our operational targets on Slide 17. Customer satisfaction is at a very high level and confirms that our products and services are meeting or even exceeding the expectations of our customers, particularly in Norway. We will continue to seek further improvement in all markets.
Our customer retention in Norway remained at a high level, both for private and commercial customers. Outside Norway, retention improved, driven by Denmark. Digitization and automation are key measures to maintain high cost efficiency with effect on both the cost and claims ratios. Our digital distribution index improved by 5.5% in the first half this year, driven by all 3 parameters: digital sales, digital customers and digital service. Later this year, we will start reporting on a new metric distribution efficiency. Digital claims reporting increased this quarter, driven by Norway and the Baltics. Automated claims processing in Norway also increased.
Over to Page 18. We had a solvency ratio of 170% at the end of the second quarter, down 7 percentage points from Q1. Solvency II operating earnings and returns from the free portfolio contributed positively to eligible own funds. While formulaic dividend reduced eligible own funds. Bear in mind that the positive impact from the change in risk adjustment for general insurance and the pension business do not have any solvency effect. The capital requirement increased by approximately NOK 0.3 billion, with the main driver being higher underwriting risk due to growth.
As you know, the approved version of our partial internal model differs from our own model. The differences lie in the calibration of certain important parameters in the model, including the star modeling. We sent an application to the Norwegian FSA under storm model earlier this year. We are in close dialogue regarding additional documentation and we will continue to have a dialogue on the remaining differences between our own and the approved model. If all differences get approved, the cap requirement will be reduced by another NOK 2.7 billion. I'll now hand the word back to Geir.
To sum up on Page 19. We continue to have a very strong growth momentum, and our capital position is solid. The second quarter results were significantly impacted by higher claims in Norway. The result in the first half this year will challenge our ability to deliver on our combined ratio target for 2024. Together with my management team, I'm fully committed to improve profitability. The increase in claims is being met with significant and targeted pricing measures, we will improve the combined ratio for the group and the underlying frequency loss ratio for private and commercial over time. And let me be clear, we maintain all the financial targets for 2025 and 2026.
And with that, we'll now open the Q&A session of this presentation.
[Operator Instructions] We will now take our first question from Tryfonas Spyrou of Berenberg.
I guess the question will be maybe for Jostein. Upon your transition to IFRS 17, you mentioned 85 percentile is going to be at risk adjustment slightly sort of align with your customer equity. I guess, how has your estimated cost of equity has changed now? And what is actually driving the change? I would have thought the customer equity should be higher, not lower, given where interest rates are versus own? And just conceptually, around the uncertainty on the claims churn and all the volatility, I was intrigued by the timing. On the surface, it looks like there's less prudence in the reserves and appear, well, a bit more?
And then the other one is more to Norway. If you can just clarify the comment you made on the fleet. Are these mainly electric cars in the fleet? It appears to have been a step-up in new car sales, electric new car sales in 2023 due to change in tax in Norway. And can you please comment whether your market share also sort of slowly step up in terms of your business mix and whether this could be one of the drivers behind step up in increase in frequency of claims? So those will be my 2 questions.
The change in the risk adjustment is something we do once a year typically, based on updated models and assessment of both the solvency targets and the cost of equity versus the risk-free rate. And normally, it would not be -- I think the change this quarter is probably slightly more than normal -- or this year, it's slightly more than normal. But it's a combination of reduced solvency ratio target last year, model updates at the end of the 2023 going into 2024, and the difference between the cost of equity and the relevant risk-free rate. And this is behind the change in the percentile from 85% to 80% of the probability distribution for the claims reserve in old terms. That was the first one.
The second one on the electrical cars, whether our market share has increased, if I understand you correctly, that was the first of your own question. And that's -- I think we have a good market position. We are pricing electrical cars as we do other cars in the same profitability targets. There's no difference there. And market shares are overall broadly stable in the car market in Norway, at least for us.
And can you just clarify, there's been a step-up in new car sales in terms of electric vehicles in 2023. So if you have stable market share that means you have structurally higher sort of insured cars when it comes to electric vehicles. So can that step up be, obviously, basically the cause of being associated with higher claims frequency and severity. Can that be -- is that a key driver of what we saw over the last year and what you're seeing now in your view?
We are not more exposed to EVs than other more traditional cars. Market share is approximately 25%, 26% when it comes to both EVs and traditional cars. If you go into the reasons or the drivers behind higher claims when it comes to motor in Norway, I think you kind of go back to Slide 4. It's definitely not the introduction of EVs and the higher sales of EVs, it's more on the types of vehicles we are seeing at the moment. We are broader. They are longer. They are more touchscreens and so on and the driving pattern and driving behavior have been changed over time.
And what we are doing going forward is do all the repricing based on the level we are seeing at the moment and that kind of development. And we don't expect the frequency to go down and the severity to go down. So we are doing all the repricing based on the pattern we are seeing at the moment.
We will now take our next question from Freya Kong of Bank of America.
I guess my question is, where has your claims experience year-to-date continue to negatively surprise versus your own expectations? Given you've essentially revised down your Q1 figures. Is this more in the frequency or the severity side or both? Because to me, it seems like the main difference versus Q1 was perhaps more buyers and profit in Q2. And then just following up on this, do you think keeping unchanged outlook for claims inflation in Norway motor and property is prudent given the experience we've seen so far?
Yes. So see from, I think, our 2 sides on property and motor in Private Norway would be helpful in seeing the changes in the -- or the claims experience, what it has been. And I think the previous quarter, we reported a 5% underlying increase in frequency from Q1 and we report a 5.8% increase in underlying frequency from Q2. So it means there has been a small step-up in the change of the frequency development on private cars in Norway. And that is an underlying, there's no weather effects.
On the property side. We see a fairly high increase in frequency. We think this is more volatile. So this is not so much a trend in our mind. I think on the combination of how this plays out into the next 2 quarters, we have seen claims inflation very much in line with what we have told you. It's within these intervals that we have given you. And we think the claims inflation picture going forward for property, 5% to 7% is prudent and around 7% for motor is also prudent as a claims inflation picture. If you look at our pricing measures that takes into account the effect of increased frequency and the type of claims we have seen. So they are -- as you see from these slides, pricing up much more than the expected claims inflation.
[Operator Instructions] And we'll now move on to our next question from Alex Evans of Citi.
Firstly, just a clarification. I think you previously had the target of Norwegian Private lines underlying improvement at some point in 2Q and 3Q. Is that no longer the case? And then secondly, just on the movement in risk adjustment, your previous sort of run rate of reserve releases is about 2%. Is it possible to give any color what you think the movement in the risk adjustment means for that now?
Okay. I'm taking the first one. We are strongly committed to improve our profitability. The combined ratio for the group and the underlying frequency loss ratio for Private and Commercial will improve over time due to the significant ongoing pricing measures and the disciplined prioritization of profits over volume. And as you know, quarterly comparison may be impacted by volatility in claims frequency and severity. But if we look at the July renewals for motor in Private Norway, the prices are increased by 17.5%.
And if you look at the average number when it comes to premiums for motor in Norway last year, the average premium increased by 7.7%. And for this year, we expect the prices to increase by 13% on average. And in addition to that, as I told, we are increasing the prices further going forward. So renewables from July will have price increases on 17.5%. These are significant price increases and will improve profitability and we are fully committed to do that going forward.
Alex, could you repeat a bit on the risk adjustment question, please. I fell off a bit there.
I mean, historically, you've had reserve releases of 2%. You're obviously moving down and being less prudent in that. Is it possible to give us the sort of quantification of where you think reserve releases on an ongoing basis is now?
Sorry. The reserve releases are, of course, unrelated to the risk adjustment. I'm sorry, I misread you there. Now that on the reserve release side, I think, what we are telling you is as before that we do not guide on any reserve releases and just point to what it has historically been excluding these 5 years of communicated specific reserve releases that we took out at 1 billion a year. If you look back at the history, it's around 1% to 2% a year. This quarter was 1%, I think, and we don't have a specific target for that.
And we will now take our next question from Ulrik Zürcher of Nordea.
I was just wondering, you previously said you expected around 12% to 13% claims inflation for motor in Norway using 2022 as a base and then 5% increase in claims frequency over -- again, over 2 years. Have any of those components changed for you now? And then just secondly, a short one, like is it possible to quantify surprise on property in Private and Commercial Norway because like I mean this surprised expectations were very big.
The 2-year figures for the claims inflation. I mean, 2 years around 12% claims inflation that stands as it is. As I said in the previous question, the claims frequency has now developed a bit higher than we said in the previous quarter. So there's some increase there. And we see that as an underlying. So it means there is not as a trend, and we are taking that as a basis for going further.
On the property side, as I said, there is quarterly volatility that means that each and every quarter, especially the number of fires or weather-related wins can be very volatile. And we see now an 8% increase in the number of claims compared to Q2 last year. It's hard to tell whether end of these are actually the normal, but the increase is at least very significant. We take that into account when we estimate prices or the need for prices going forward. We are prudent, we feel, in taking account that there might be a prolongation of this frequency number.
Yes. But on the property side because what makes it a bit difficult to see for us is that there is also an increase in severity. So like how much does this cost you versus expectations or something like that? Is it possible to say?
I think I'll refrain from kind of estimating that number. But given the volatility in trend, there is -- in the number of claims, there is also volatility in the type of claims from each and every quarter, and fires are typically more costly than other types of property claims. So if we have a high increase in fires, as we talked about in this slide, that means also the average claim is typically much higher than, yes, the average of all the whole portfolio type of claims.
Okay. But it is fair to say that property was what had a big effect this quarter? Not motor. It's up a little bit. I know on frequency, but doesn't seem that much.
No, I think both are drivers of the results of this quarter, Ulrik.
Ulrik, if you look at Slide 3, at the bottom, on the right side, you see incurred revenues for rolling 12 months for property Private Norway and you see incurred claims rolling 12 months. And you see if you compare this figure to the motor figure on the next page, you see that on incurred claims, even though it's rolling 12 months, it's quite volatile, and that's due to fires and due to motor claims and it's much more volatile from quarter-to-quarter.
Yes. That's where I had my statement from that. That it looks the property was the big surprise. But yes.
And we will now take our next question from [indiscernible] of ABG.
When it comes to Page 3 and 4 on the incurred claims changes going forward, it looks like at least on your property side that you have a nice downtick into the second half. And then, of course, you price in line more with inflation, so it's not calling that fast upwards. Should we expect property to be sort of the winner in the second half of this year since you had a tough comparison from Q3 last year with the flooding of homes, et cetera, and the tough winter.
So it means that the frequency and the severities, you don't expect to come back in the second half of this year. While on motor, you actually expect severity and frequency to stay high and now you actually start to price that into your pricing for motor. Is that fair to assume that, that is what you're looking at?
It's very difficult to comment on that and be precise on that. But if you look at the actual claims inflation last year, 4%, and if you looked at all the pricing measures in place now for property, what we have then and what we are doing at the moment, you see that expected price increases and average premium for 2024 is 9%. But if you look at the pricing measures and the renewals now in July, the prices are up 15.5%, which is a significant increase and definitely very much above what we see on the inflation side.
Can I also understand that have you sort of changed your repair cost agreements with the suppliers in a way, which has surprised you negatively versus your expectations due to the high inflation in the past so that those kind of agreements have hit you extra this quarter or when does these agreements being negotiated?
We have many different types of agreements, both on property side and motor side. They are renewed on an ongoing basis, I would say, but we are not having doing all the renewals of these agreements in one single quarter. That's an ongoing negotiations and agreements that we work on continuously, I would say. Yes.
There has been no negative surprises in the renewals that we have had so far over the last quarter or anything on these agreements.
We'll take our next question from Vegard Toverud of Pareto.
I wondered if you could comment a little more on how the claims impact from Q1 came into the Q2 numbers. Also, if there's any difference here between commercial and private lines, and also if this in any way, have impacted the frequency numbers you have helpfully commented on Page 3 and 4.
Yes. Good question. It has hit both Private and Commercial in Norway, I would say, approximately in the same range, actually slightly more on the commercial side than the Private side. It has been a combination of late reporting of claims due to what we would call the Easter effect, where there were a lot of holidays just around the turning from Q1 to Q2 and an increase in already reported claims. It is something we are used to that there is some kind of volatility between quarters in terms of claim sizes, but maybe slightly more now than typical.
It has a slight effect on the underlying frequency loss ratio of both Private and Commercial Norway in the second quarter. given that it's both the number of claims and size of claims, it's a bit hard to distinguish the effect on the frequency number and the average claim as such. We haven't really done that exercise. But this has some effect on both of those, of course, given that this has affected the underlying frequency loss ratio.
So that's helpful. Just to trying to dig into it slightly more. You mirror comments from a competitor, which reported also last week and commented on the same effects. So the reason why claims are then adjusted upwards, is that due to strains or bottlenecks in some part of the total claims handling business for Norway, for instance, in taxation of all the claims, et cetera. I'm just trying to understand why this seems to be an industry issue in the first half of this year.
I think it's a complex set of reasons behind that change. And I also note that the other companies have seen the same, although I think that was mainly a comment made for Denmark, I think for at least the comments I saw. But it's seen across the industry. And I think it's a strain on not necessarily the insurance companies, claims organization, but all the total supply network that kind of actually physically do the repairs here. Based on a very large number of claims that we talked about: first, second half of 2023 and then a harsh winter that we reported on in the first quarter, which has made the overall strain on the value chain around fixing claims that has had strains that's led to increases. I think that is probably the main reason behind this.
We'll now take our next question from Håkon Astrup of DNB Markets.
My question would be on the churn in Private Norway. So far, a very limited impact from the price increases, but you're now ramping up the price increases, if I understand you correctly. So end of 2024 price increases will be above 50% loss in Private motor and property. So do you expect that to have any impact on churn? And if churn increases, will this impact your behavior?
Thank you, Håkon. The retention number is still high, both in Private and Commercial segment, especially in Norway. We have just the customer dividend model. We have just paid out the customer dividends as well, which we know have a very positive impact on loyalty and customer satisfaction. With this background, I am confident that we will comb through all the price increases we are doing at the moment with good and high retention levels. We are prioritizing profit before growth.
And if we see that the churn somewhat will increase for some time, we are still confident that this is the right thing to do, and we will do all -- have all the measures planned will be implemented regarding risk selection, pricing measures changes when it comes to the terms and conditions to improve the profitability and make sure that we reach all the financial targets of '25 and '26. But saying that the customer satisfaction and loyalty is at very high numbers in Norway, and we have a very good situation to do all the repricing measures we are doing at the moment.
And we'll take our next question from Faizan Lakhani at HSBC.
The first one is on the chart that you show with the property sort of long-term trend and how that develops. It appears that prior to sort of 2019 or COVID, it was sort of still above where it is right now and yet you're expecting to drop down to maybe sort of the trend line for 2022. I can understand some of that may be the structural decrease in fires, but that sounds quite punchy for a reduction in this. Are you comfortable with your incurred claims trends that you're forecasting in property?
The second question is sort of a big picture question on the fact that you maintained your 2026 target of a combined ratio of a sub 82%. If I look at where your starting point is today, 88.9%, you take away 3% for weather. You're at 86%. You've earmarked something like NOK 800 million worth of claims efficiencies. Could you sort of guide in terms of how much of the claims efficiencies have come through? How much of the benefit deductible has already come through? How much more is set to come? And realistically, how much can you bridge via sort of pricing actions to get to that 82% combined ratio guidance that you have for 2026?
I think the most important thing here to take into account is that we have a 12-month policies. We are renewing prices now -- or renewing policies, sorry, now at a rate of more than 15% in private property in Norway. And we believe that is enough given our average kind of short-term forecast for -- short term meaning 12 to 18 months. If we see that this is not enough, we will take the necessary measures or actions to correct that, which will lead to a good profit or the target profit levels more than 18 months further down.
So as I said on the previous question, there is high volatility around property claims. We've kind of assessed where we think we are here and that is included in our forecast. If we are not correct about that, we'll change the measures and we're able to do that fairly quickly. In terms of the longer-term picture, 2026, there is really not that much in what we see now that kind of is a negative towards that target. We have been running fairly high price increases all through the last 12 months. We are stepping it up now. We haven't seen an increase in churn. The retention rates are more or less the same, actually quite high. And that actually is a positive for the longer-term profitability for the company. And of course, related to churn, this is also a question of kind of how the overall market reacts to these high claims numbers and that is something we will learn over time.
And sorry, just a follow-up on that question, how much of the claims efficiency that you laid out, how much have you actually achieved so far towards your target 2026 target already?
Yes. Sorry, I forgot that part. Of the NOK 800 million, we announced at the Capital Markets Day, fairly small amount is now still realized, and I think we're planning an update on the progress there at some time, but not today.
We'll now take our next question from Thomas Svendsen of SEB.
Yes. A question on the dividend policy because if we look at the EPS first half this year and adjusted for the change in risk adjustment, you are far behind last year. So how important is it to keep the dividend and not cut it from 1 year to another?
We maintained our dividend policy. As we have told before, the floor on the dividend per share was set last year with NOK 8.75. And when we say the dividend policy is maintained, that's our background also for doing all the assessments going forward, but it hasn't changed due to the results we have seen in the first and second quarter.
Okay. And second question on the claims frequency in motor because it seems like the tone has changed a little bit from optimism last quarter. So how sure can we be that it's actually not increasing. So it's increasing further amid increased economic activity in Norway?
We are not satisfied the results in the second quarter, but all necessary actions have been taken. Repricing is at an extraordinary level. July renewals, price increases at 17.5% for Motor Private Norway. All the financial targets for '25 and '26 are maintained. And I'm very committed to improve profitability and do what's necessary on pricing, risk selection and cost efficiency going forward.
We'll now take our next question from Hans Rettedal of Danske.
I was just wondering on your communication where in Q1, you said that you expect improved underlying frequency loss ratio year-on-year for Private Norway during the next 2 quarters. And given that it didn't happen this quarter, do you still stick with that statement for the next quarter, so in Q3?
Yes. Norway, I mean, we are strongly committed to improve profitability. That's the main point there. With the measures that we have in place, as Geir commented in his presentation, we will improve profitability over time. But quarterly profits or quarterly comparisons may be impacted by volatility in claims frequency and severity and the financial targets for 2025 and 2026.
Okay. And then I just have a follow-up to that. I guess you guys touched upon previously as well. But on the chart in the lower left -- right-hand corner on Page 3 on the property claims inflation. If you compare that chart to what you reported in Q1, I mean there hasn't been any change in sort of the illustratory effect, whereas in the motor chart I guess you've kind of picked up the incurred claims. So how should we think about that compared to the results that you've given this quarter and especially then on property, which seems to be sort of bang in line with what you were expecting in Q1?
As I commented on the frequency of motor, it's 8% higher than the frequency in Q2. And there is a lot of volatility from quarter-to-quarter on the number of claims and the claims mix or the type of claims that you have in property whether it's fires or water leakages and whatever it is. So whereas we say that the increase in frequency in motor of 5.8% compared to Q2 2023, up from 5% in the comment previous quarter, we say that is trend, whereas the properties more in the short term, but is dominated by volatility in a number of types of claims.
Yes. For property, we have seen a high number on fires than we have seen before, which has to be stochastic. The long-term trend when he comes to fires are decreasing and which we have seen over many, many years due to many different sizes of prevention measures in place.
Okay. But is it just because the chart hasn't actually changed quarter-on-quarter? So is it then the severity component that has changed quarter-over-quarter?
The frequency has changed 8% compared to the same quarter of last year. I mean, we didn't have actually had over the first quarter. But I mean that's what we've seen in the second quarter is a lot of fires and they are more costly. And that's why I'm saying it's a bit careful reading and trend into the claims frequency numbers quarter-by-quarter on property because there is so much volatility there.
And we'll now take our next question from Youdish Chicooree at Autonomous Research.
I've got 2 questions, please. The first question is on your price increases and your financial targets for 2025. I mean there is a significant step-up in your price increases from July. Now as you said earlier, it's going to take you 12 months to work for your renewal book and there's potentially another 12 months before you fully are through those price increases. So what gives you confidence that you can hit your combined ratio target for 2025? That's my first question, please.
The financial targets are unchanged there, and that is because we believe we'll reach them. And the pricing measures we are taking are -- I mean, we started stepping up price increases in the second quarter of last year, and we talked quite a lot about that, and that was especially for Motor. And then we gradually increase them. And we're stepping up 1 more time now. We're talking about a 13% increase in the average price for a car within our stock at the end of this year and that will continue to increase given the 7.5% rate of change now from July. So I think we believe we will be adequately priced. Of course, you can never be sure. And if you are surprised negative, we will continue to adjust our measures.
Yes, if you look at the price increase for motor and add the price increases we did last year with the price increases, we already have done this year, you see that the average premium increased by approximately 22% over 2 years. In addition, the repricing levels we are having in the market at the moment is even higher. So this is definitely measures that have a strong impact on our ability to reach the financial target for '25 and give a very good also trend when reaching the new targets for '26.
Okay. All right. And my last question is on the frequency loss ratio. I mean, in terms of the change year-on-year, you've told us that 2 points is from some late reporting from Q1. Of the remainder, are you able to help us like split the 3.6 increase between what you would call the bad luck in terms of property claims [indiscernible] claims and what is actually the motor component, please?
I think, bear in mind, that Motor is around 40% of the overall private Norway book, so it will be very important to have the hit there that correct. And the second largest product is property, which is a bit more volatile from quarter-to-quarter. I think that's the guidance I can give you there.
[Operator Instructions] We'll now move on to our next question from Johan Ström of Carnegie.
So I'm wondering if you see any changes in the customer behavior in terms of coverage. I mean, after all these price hikes, which are well above inflation, insurance has become fairly costly. So are you seeing any customers reducing the coverage?
Yes. Thank you, Johan. We haven't seen any changes in the retention level during the last quarter and we are spending more time with customers during the last 3, 4 quarters due to the high inflation numbers we are facing and the more stressful economic situation for house holdings. But we haven't seen any negative top line development due to the high price increases and changes in insured sums and change in insurance plans.
We'll now take our next question from Michele Ballatore of KBW.
Yes. So I will go back to Slide 4, I mean, which is an interesting slide in terms of the long-term trends in the claims development in Motor. My question is, I guess, around -- do you see the same trends emerging -- the same structural trends emerging also in Denmark and Sweden? Or are these countries different to some extent? Can you maybe clarify and give more color on that?
It's an interesting debate really because we've seen also industry-wide numbers in Denmark, talking about an increase in the claims frequency from motor also there. We've seen a slight increase, but we ascribed that quite a lot to weather-related effects, especially in the very early 2024 rather than an underlying trend in the same way as we've seen in Norway. So I guess the answer to your question is much less of a trend in Denmark. And the same really goes for Sweden. We don't quite see the same trend in Sweden, but bear in mind that our portfolio in Sweden is much smaller, so maybe we're not the best to catch that trend, whereas we have quite good visibility in both Denmark and Norway.
And when it comes to all the other elements driving behavior, terms and conditions?
I think many of the factors are not especially typical for Norway. When it comes to types of vehicles, the size and traffic density, when it comes to driving behavior attention, it's then probably seeing similarities across the Nordics due to the vehicle fleet in the different markets.
The main distinguishing factor is probably the amount of electrical vehicles in Norway, which is much higher than in the 2 neighboring countries. But if you look at the new sales now in Denmark, of course, you see that EVs are dominating there as well, not as much as in Norway, but still increasing rapidly.
And we'll now take our next question from Vinit of Mediobanca.
My 1 question on Slide 3, please, on property in Norway. Could you just say something more -- one level more about the measures being taken to reduce exposure to fire risk, fires? Is it that you're increasing far more for a certain class of business within property or something there to suggest why this problem of fires should go away in the near term? And also, if I can for -- I know we are only allowed one question, but property, this deductibles, could you give us an example because property deductibles were differently treated by customers than motor deductibles, where sometimes people might or might not make a claim, but in property, they probably will still make a claim. I'm just curious on these 2 topics, but I'm happy to wait later as well.
We talked about the trend in fires is actually a long-term reduction in fires. If you look at -- take this number of fires in private property Norway for the last 10 years and just smoothen that curve, it's a clear downward trend. That's why we, in a way, think that this is a volatility issue in the second quarter and not as much a problem as water damages, which are more susceptible to climate-related changes. So there are kind of no new measures to reduce fires because these measures are really taken, what we're talking about for private property, is mainly pricing to fix or to compensate for the claims we've seen.
And I agree with you, the deductible on property is more. It takes down the average claim size by a small amount. The increase in deductible doesn't quite change the frequency as such on the housing, but it might have an effect if you change deductible on small ticket policies like [ confidence ] and so on. But the main measure we are taking here, both for property and motor, is pricing measures.
But saying that, we have a very comprehensive risk selection and risk assessment procedure when it comes to property. And both the kind of building, type of building, the types of material used and so on to help us with the risk selection and the pricing as well due to fire exposure.
And we'll now take our next question from Tryfonas Spyrou.
Just maybe one more on the property. Can you maybe -- and I know you probably touched on this a little bit, but the trend between -- during COVID, 2020, 2023, that the structural sort of [indiscernible] up on revenue versus claims. Can you maybe elaborate a little bit more on what was the key driver behind that? And why do you seem comfortable that we're not going to revert back to the mean, it looks like the claims been structurally higher than what you show on Slide 3. Maybe just as a follow-up to Faizan's question earlier.
I think the claims inflation, the average claim size will gradually go up. And I think that has been in line with what we've guided to, 5% to 7%, somewhat volatile for the material side for a certain period, but that's kind of quite down now and the main driver being the wage or labor cost part of the claims picture. And as I said, on a number of claims and some of the composition of the type of claims will be a bit volatile over time related to fires, whether there are some weather-related events like we had in the first quarter. So there will be some volatility there. But yes, I think the main long-term driver will be the average claim size or the claims inflation related to property.
Can I ask on the commercial side, are you seeing similar trends as the graphs on Slide 3 and 4 on Property and Motor? Is that similar trend on the commercial side?
I think we've seen some similar trends on the motor side for commercial motor. And commercial motor is much more different types of motor vehicles from large trucks to car fleets. But if you kind of cars that physically are on the same type as we have in the private portfolios, fleets, [ taxis ] and so on, there's a very similar claims pattern developing. Fires is much more volatile in -- it's even more volatile within commercial because fires there can be much more different in size than in private property. And I don't see no trend in the amount of our number of fires within commercial.
And we'll now take our next question from Freya Kong of Bank of America.
Can I just ask what the priorities for your new EVP of claims will be when she starts? Do you think the issues that you've seen are, I guess, more broad-based across the market? Is everyone being negatively surprised on frequency? Or do you see something in your systems that need to be improved to catch these issues sooner or rather better anticipate?
I think I'll just remind of the priorities we've set for the -- first of all, we have announced a claims program. And Vivi will step into the requirements we had on Aysegul as in her role to deliver on that program. Also, we have behind us starting from, say, August last year and are very high inflow of claims which has led to an increased backlog compared to what was normal. We worked hard to bring that backlog down come quite a far, but there is still some work to be done, and we will also focus on that. And of course, a high-quality claims process is important both for the customer satisfaction that we deliver on the target and to keep the claims cost under control. And both of these things will be on top of our priority list.
And we'll now move on to our next follow-up question from [indiscernible] of ABG.
Just taking Håkon's retention question back in time here. So how will you differ between your customers when it comes to hikes, price hikes? Will most of them then get a sort of a better client being in the lower end and those who are of least profitability get a much, much higher level. So you try to price them out of your book or how should we look at your sort of repricing or just a different kind of client hikes or profitability of clients, please?
Yes. If we look at our primary segment, we do have different customer groups grouped by the kind of profitability or customer score as we call them. So many different types of groups, depending on the level of profitability per customer. We are doing all the price increases to all the groups, of course, higher for the type of customers that are less profitable. But even the more profitable customers are getting quite high price hikes going forward, I would say. So definitely above 10% per customer going forward as well and even quite much higher than that as well.
Isn't it the risk that you actually then push them away because they would get a more decent offer somewhere else?
Well, we do have experience based on what kind of price hikes each single customer can manage. And due to the high level of satisfaction, which we know per customer group and dependent on how profitable the customer is also, so we are confident that all the price hikes we are doing at the moment will put us in a position where the retention rates still will be high and approximately at same level we are seeing at the moment.
And we will take our next follow-up from Faizan Lakhani of HSBC.
I know this was covered last quarter, but I just wanted to sort of catch up on again is the fact that you've increased your large loss budget by some 20%, yet you didn't change your combined ratio target. And personally, I would assume that means mechanically you're forecasting a better underlying frequency loss ratio going forward. Can you maybe just help bridge how that works?
Again, I think correct assumption is that the total claims forecast is taken into account when we estimate the combined ratio or how to reach the combined ratio target. And the pricing measures we do will compensate for both the expected development in the underlying frequency loss ratio and the large claims budget or forecast, if you like. I reiterate that this large claims number is especially volatile over time. But on average, we'll have that included in the pricing on the different products.
Okay. So you need to in fact achieve 1 point more in the combined ratio via pricing to hit the targets, if that's my understanding, correct?
Yes.
There are no further questions in queue. I will now hand back to Mitra for closing remarks.
Thank you, everyone, for lots of good questions as always. We will be participating in roadshow meetings and conferences and group investor meetings organized by brokers in August and September. These meetings will be held in Oslo, London, Stockholm and Frankfurt. Have a look at our financial calendar on our website for more details. And with that, thank you for your attention, and have a nice day and a lovely summer.