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Gjensidige Forsikring ASA
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Good morning, everyone, and welcome to this third quarter presentation for Gjensidige. My name is Mitra Negård, and I'm Head of Investor Relations. As always, we will start with our CEO, Helge Leiro Baastad, 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 as usual, we have plenty of time for Q&A towards the end.Helge, please.
Thank you, Mitra. Good morning and welcome, everyone. I hope you are healthy and well.We are very happy to continue breaking records for our results, thanks to our solid brand, efficient operations and dedicated employees who put strong efforts in serving our customers every day.Let's turn to Page 2 for some comments on our very solid third quarter results. We generated a solid before -- profit before tax of NOK 2.022 billion, of which NOK 1.804 billion in underwriting result. This is the best third quarter underwriting result in our history.Earned premium rose by a healthy 8.2% or 9.1% in local currency. This reflects strong operations, effective pricing measures, good risk selection and stringent cost control. We continued improving our profitability through both strong growth and very efficient operations. Our cost discipline remains strong, as you can see from the ratio of 13.6% for the quarter.We generated the financial result of NOK 207 million, reflecting the turbulent market conditions during the quarter. And our return on equity came to a very good 26.9%. Jostein will revert with more detailed comments on the results for the quarter.Then turning to Page 3. As you saw from our release this morning, the Board has decided to distribute a special dividend of NOK 4 per share related to excess capital release. This is in line with our dividend policy and our practice over many years. The payment of this special dividend is pending approval from the FSA as it will bring our payout on the 2020 results above the threshold of 100%. We expect the FSA to approve this, and we'll revert with the relevant key dates as soon as we get their decision.Then turning to Page 4, a few words about our operations. Staying ahead of claims inflation is key to maintaining good profitability and has a high priority with us. Inflation has picked up during the past months as a result of supply shortages and high demand for many products. This price increase for construction materials and spare parts for cars is so far in line with what we expected when we spoke about this in July in connection with our second quarter earnings release.Repair costs were not impacted during the third quarter. However, we expect this to gradually become apparent in claims inflation from the fourth quarter, lasting well into 2022. And we are prepared. We expect in -- an increase in claims inflation for private property in Norway to be around 5% to 6% and for motor at 4% to 6%, both driven to a larger extent by material prices, although for motor, the increase is somewhat limited due to a stronger kroner, and we expect labor costs to rise moderately.In response to this, we are adjusting our tariffs accordingly, and we will continue to raise prices for private property insurance in Norway well above expected claims inflation. For motor, we will continue to raise prices at least in line with claims inflation. We are comfortable that we will be able to put through the necessary price increases given our strong market position and the fact that this impacts the whole industry.We expect claims inflation to rise in Denmark as well for the same reasons, and we will not compromise on profitability. Therefore, we will put through necessary price increases.The extent, reach and duration of the inflationary pressure the world is experiencing now is uncertain. We cannot rule out that the current rate of claims inflation will pick up or last for a while. It can impact more than just materials, most importantly, labor costs and claims for personal injuries. This would impact the whole industry. And once again, thanks to our strong market position and agile capabilities, we expect to continue staying ahead of and pricing at least in line with expected claims inflation.Sales in Private Norway have been strong this quarter too. Business volumes are up, and we have managed to continue to put through necessary price increases while further increasing customer retention.The Commercial segment has also continued the good development through the third quarter with strong renewals, adding new business and putting through necessary price increases. Retention has risen even higher to 92%. Going forward, we will continue to raise prices beyond claims inflation for certain pockets in the large corporate portfolio in the Commercial segment to further improve profitability. The market continues to be hard, so we expect to be able to put this through.The strong momentum in Denmark continues with good premium growth and higher profitability. The NEM transaction was completed earlier this month, and we are very excited to commence partnership with particularly 2 saving banks in Denmark. And we have expanded our partnership network by entering into an agreement with Home, a leading Danish real estate broker. This will further strengthen our position for private property insurance in Denmark.We have moved forward with our new core IT system, which is now applied for selected areas of new sales. Migration of existing private customers has just started, and after completion, will be followed by including commercial insurance lines. We are convinced about the benefits of the new system and look forward to generate efficiency gains from next year.Profitability in Sweden is improving. As mentioned earlier, we are fully focused on transforming our Swedish business to become a more digital insurance provider. Our ambition is to deliver excellent customer experiences through digital services and a high degree of automated internal processes. We look forward to speaking more about our plans and measures at our Capital Markets Day in November.Results in the Baltics are weak and far from satisfactory. We have a clear ambition to improve results there, with a particular focus on distribution, pricing and claims handling processes.Then over to Page 5 and a few comments on our latest product development and sustainability initiatives. Starting from January, Gjensidige will contribute to safer property transactions for home buyers, selling real estate agents, by providing new ownership change insurance in Norway. This product is adapted to new regulation, which will come into effect from January, protecting buyers to a higher extent than earlier. We expect this product to be in strong demand, catering to the seller's liability for hidden defects or deficiencies.We are happy to announce several new sustainability measures to this quarter. Firstly, a great achievement, which has been followed up by several peers. Gjensidige has lifted the damage threshold for condemnation of vehicles by 20% to 80% of the vehicles replacement value. This is a new standard for the industry in Norway. With this, we aim to reduce waste and climate footprint in claims processes. We also expect this to simplify claims processes and reduce the time taken for claims settlements.Another initiative is our People Way Project in Denmark providing our largest suppliers with tools to improve efficiency in their claims handling. We are very happy to see that it has proven successful, with the suppliers having achieved higher customer and employee satisfaction as well as lower repair costs.In terms of service development, we have expanded our Helsehjelp 24/7 product with a digital psychologist therapy available for all Private customers in Norway.We continuously monitor EU regulations related to sustainability. We are preparing for reporting according to the EU taxonomy from 2022, among others, by amending product design and services, tariffs and damage prevention initiatives.Mental health among the youth is an important area for Gjensidige. The group has established a common project together with Gjensidigestiftelsen, the foundation, which will, over the next 3 to 5 years, work on implementing measures to improve life skills. Within Gjensidige, the project is initiating several initiatives, most recently added by agreement to support 2 Norwegian organizations, MOT and Ungt Entreprenørskap, which have a strong base in primary schools.With that, I will leave the word to Jostein to present the first quarter results in more detail.
We delivered a profit before tax of NOK 2.022 million in the third quarter, which is slightly below the third quarter of last year. Our underwriting result was up NOK 292 million, and our pension business also contributed with an improvement. However, our financial result was significantly lower than in the third quarter of last year, reflecting the somewhat turbulent markets, particularly in September. Good premium growth and improved profitability drove the strong improvement in our underwriting results. Our Danish operations and Commercial in Norway were the main contributors for the improved results, although Private in Sweden also contributed to the increase. The Baltic segment generated lower results.We estimate the COVID impact on claims to approximately NOK 64 million or 0.9 percentage points on the loss ratio for the third quarter. With these restrictions lifted in Nordics, we expect activity to return to more normal levels. And hence, COVID impacts on claims are expected to gradually come down to 0. It is, of course, difficult to predict the long-term impact from the pandemic on customer behavior or the risk picture. But so far, there are no major changes evident.Turning to Page 8. Earned premiums were up 8.2% or 9.1% adjusted for currency effects. All segments recorded higher premiums in local currencies. We saw a strong increase in premiums for the private segment driven by price increases for motor, property and accident health insurance as well as higher volumes from motor insurance.We also increased the number of customers. We maintained our strong market position and competitiveness. Demand for travel insurance is still picking up, and we're now in line with pre-pandemic levels.The rising premiums in the Commercial segment followed effective pricing measures, solid renewals and portfolio growth, including one new large contract included from the first quarter. All the main product lines in this segment recorded higher premiums.In Denmark, premiums increased for both the Commercial and Private segments. The premium growth in the Private segment was primarily due to growth in change of ownership insurance driven by a continued strong housing market. The premium growth in the Commercial segment mainly reflects volume growth in all lines of business and price increases in the workers' compensation product line.Travel insurance volumes were up year-on-year but were still below pre-pandemic levels. Earned premiums in Sweden measured in local currency increased by 0.8% mainly due to volume growth and price increases in the Commercial portfolio. This was slightly offset by a volume decrease in the private portfolio.The rise in premiums in the Baltics was mainly driven by health, motor and property insurance lines. Travel insurance volumes increased significantly compared to the same period of last year, but they were still below pre-pandemic levels.Turning over to Page 9. The loss ratio for the third quarter improved further, down 1.9 percentage points to a very strong level of 62.4%. Large losses were flat with a nominal level significantly below our expectations for a quarterly average. Runoff gains were somewhat higher than both the third quarter of last year and planned releases.The underlying frequency loss ratio improved by 1.4 percentage points, with effective pricing measures and good risk selection being the main drivers. Adjusted for the effects of COVID-19, the underlying frequency loss ratio improved by 1.6 percentage points.We continue to improve our key figures in all segments, excluding the Baltics, and happy with both the direction of development and the level of profitability. We, however, sometimes seen improvements also in Sweden. And although the third quarter generally is the best quarter and the relatively smaller scale we have in Sweden means there will be higher volatility in quarterly results there, the profits we report now are quite good, and we're optimistic about the development going forward.The Baltics has a very clear upside potential. We'll continue to implement measures to increase growth and improve operations going forward, and we look forward to speak more about this at our Capital Markets Day in November.So let's turn to Page 10. We recorded NOK 1.024 billion operating expenses in the quarter. Our cost ratio moved further down by 0.3 percentage points to 13.6%. And if exclude the Baltics, the cost ratio was 13% for the quarter. The main driver of this improvement is our premium growth and strong cost discipline in the group.Our low cost ratio in Norway came further down by 0.1 percentage points to 10.9%. Denmark recorded a 0.4 percentage point decrease in the cost ratio to 13.6% driven by good premium growth. We expect the new core IT system to contribute to further cost efficiency in Denmark when the system is fully up and running for our products and customers.The cost ratio in our Swedish business decreased by 0.4 percentage points, coming to 7.7% for the quarter. The cost ratio in the Baltics increased by 0.7 percentage points driven by provisions related to higher sales volume.A few comments on our pension operation on Slide 11. The pretax profit came to NOK 55 million, up year-on-year, reflecting growth in the business. Assets under management continued to grow, reaching NOK 48 billion in the third quarter. Annualized return on equity was 14.3%. The solvency margin at the end of the quarter was 152.4%.So far, the introduction of individual pension account has not led to any significant change in the market dynamics. However, it's prudent to expect some pressure on our profitability in the short to medium term. We and other places in Norway are in the process of transferring policies and expected to be completed towards the end of this year.Moving on to the investment portfolio on Page 12. Our investment portfolio generated a moderate return of 0.3% in the third quarter. The match portfolio returned 0.5%. A mixed development for the different asset classes in the free portfolio resulted in 0 return for this portfolio in the quarter.Market movements during the quarter reflected moderation of expectations for economic growth and somewhat increased expectations for inflation. Returns on cyclical assets such as equities were tempered, although there was dispersion across the markets. Some increase in interest rates and somewhat lower credit margins also impacted returns.Our private equity holdings performed well, reflecting higher market valuations. Returns on the property investments were also good, reflecting the strong commercial real estate market in Norway.Over to Page 13. Our capital position is very strong with a solvency ratio of 182% at the end of the quarter. The ratio is down 30 percentage points from the end of the second quarter, with the main drivers being the special dividend of NOK 4 per share and redemption of our Tier 1 loan of NOK 1 billion in September.Solvency II earnings. Here mainly, the strong underwriting result contributed positively to eligible own funds. Our capital requirement rose as a result of growth in our P&C and pension business as well as higher market risk. Holding increased exposure to convertible bonds and increased market risk in Gjensidige Pensjonsforsikring.The NEM Forsikring transaction in Denmark was closed earlier this month. Together with closing of the toll company transaction, which we also expect will be carried out in the fourth quarter, these factors should bring down our solvency margin by 5 percentage points, all other things equal.Finally, a few words on the last -- latest development of our operational targets on Slide 14.I'm very pleased with the progress on operational targets this quarter. By delivering on these operational targets, we continue to improve our competitive position and lay the ground for future profitability. Customer satisfaction continues to be at a very high level. The retention in Norway is slightly up from the last quarter from an already very high level. And retention outside Norway has improved slightly in Denmark and Sweden and are somewhat down in the Baltics.We have further exceeded our target on sales effectiveness based on running 12 months at 23% compared with our baseline year of 2017 driven by a combination of good sales and stringent cost control. The share of automated tariffs is stable compared to the level last quarter, and they currently stand at around 55%. Progress is good, and we'll continue to include more products going forward, in addition to further refining tariffs already included.On the claims handling side, digital claims reporting has gone slightly up this quarter and has reached a target of 80%. And the share of claims handled fully automatically has improved as well. For claims process to be defined as fully automated, no human interaction is required. We will continue to develop these digital services further through the remaining of 2021 and onwards. We have reduced claims costs further and exceeded the target even more this quarter, with procurement and insurance fraud prevention making the largest contribution to the increase.I'll then hand over back to Helge.
Thank you. Yes. Then to sum up on Page 15. We are very pleased with the strong results we continue to deliver. We will continue to focus on growth in our markets. Together with strong and efficient operations, this is the prerequisite to continue delivering solid results and attractive returns. We are committed to having a strong capital discipline, and our solvency position is very robust, also after distribution of yet another special dividend.Economic prospects in our Nordics markets are encouraging, and the pricing environments continue to be very good. This, together with our strong product offering and efficient operations, lay the ground for continued strong results going forward. Thus, we are confident that we will deliver on all our financial targets this year.Let's turn then to our final page in the presentation. A quick reminder of our Capital Markets Day on the 24th of November. We are looking forward to this opportunity to speak about our ambitions and plans. And we hope you will watch our webcast and participate in our Q&A sessions.And with that, we will now open for the Q&A sessions of this presentation.
[Operator Instructions] We will take the first question from Alexander Evans from Crédit Suisse.
Congrats on the record result. Maybe just on the underlying frequency loss ratio. You mentioned that's down 1.6 percentage points adjusting for COVID. If we focus on the Norwegian portfolio, you mentioned the higher price in property and in pockets of Commercial. Is that what's driving the improvement here? And then are you finding it easier to put through higher rates in other lines like motor as well? Or is that just risk selection is improving? I'm just trying to understand the sense of the outlook that we should expect in the Norwegian portfolio.And then secondly, just on the split between volumes and premiums -- volumes and price, could you give a little bit of a split on the private and commercial lines? And how do you think your market share has been developing here?And then just finally on sort of -- on the growth angle. Obviously, you got very strong organic growth. What does the NOK 4 special mean for your growth ambitions outside of Norway? And do you still perhaps feel a need to catch up on deals given what we've seen with Tryg and Alm. Brand?
I can maybe start in some general comments, and Jostein can give you some more information about the underlying frequency, claims development.In Norway, we are now very pleased with the profitability in Private. Motor is at a good level. And when we talk about price and volume, it's -- as we communicated after second quarter, it's a 50-50 mix between volume and price-driven growth. If you are taking market shares or not, I think that's the lagging. After second quarter, I think we were stable or maybe 0.1%. Wasn't that right?
It's flat compared to what we had in the second quarter.
Yes. Yes. So we are in a very good position when it comes to the Private profitability. As you know, we have communicated price increases above claims inflation for property for a while, and property profitability has improved, and we will continue pricing up property insurance beyond the index.Commercial, we are very pleased with the improvement in profitability. And it's highly customized price initiatives and measures within our Commercial business, and still, it's pockets where we will price above index for Commercial business in Norway.Volume-price, I commented the mix between volume and price-driven growth of cars or motor. When it comes to private property, it's a good mix between volume and price-driven growth also there, but it's mainly price-driven for private property. Yes.And underlying frequency claims development, Jostein, maybe you have some comments on that.
No, but it's -- and I think, Alex, your question was mainly related to Commercial, if I understood you correctly, where we are seeing -- in which areas where we see it's most easy to increase prices for -- if I understand it correctly, that -- in Commercial, I think we have, in general, priced above expected claims inflation for all lines of business. So it's -- I think it's wrong to point at one specific pocket.But what we've said in the previous quarterly presentations and still continues to hold is that we see the need more to price up in the larger end of the spectrum for larger customers rather than the SME part, reflecting the difference in profitability there. So I think I'll stop there in terms of being more specific on the commercial lines.If you look at the improvement in the underlying frequency losses, it's driven by both good risk selection and the price increases that we see. You see we have 1.4 percentage points improvement year-over-year on the Commercial -- in the Commercial area in Norway.And you have the last question about dividends and what that's -- if that signals anything in terms of ambition for growth, then I would say no. We still have room, we believe, for bolt-on acquisitions given the solvency we have and the dividend generating capacity that we continuously have. And if there is something big, we will, as earlier, revert to the capital markets for financing. So it's -- and the strategic agenda and the M&A ambition is -- remains the same.
We'll now take the next question from Håkon Astrup from DNB Markets.
Two questions from me. The first one, on inflation. So just based on your judgment, have you so far seen any repricing activity on the back of the current inflationary pressures on materials, et cetera, either from you or from peers? That was the first question.And the second question, on runoff. Just wondering if you, at some point, will provide some guidance to indicate the levels you expect for runoffs in 2023, for instance, on your Capital Markets Day next month.
Claims inflation has been the big topic for many months now. And I think I commented that during my presentation that we do not have any change in our expected claims inflation prospects going forward compared to what we said in July. And I also commented that we do not see the surge in prices in our Q3 repair costs.When it comes to pricing, I think -- I said that we think the market is still hard. And we are moving towards end of the year and lots of renewals. So I think this topic is the main topic for all of our peers also. And as I said, we do not -- it's claims inflation for materials. And of course, it's also problems and bottlenecks in the supply chain. And with that uncertainty, we think and we have seen price increases around us. So we still see the market as hard, and we expect this to be hard into 2022 as well.
Yes. If I may fill in, I mean, this is something we are keeping an extremely close track on, on a very decentralized, detailed level. And the -- we are fairly confident that our terms with the suppliers is -- given our size and the work we do here and best in Norway, although we don't -- and we don't have fixed price, but I think we have the best price here for our materials.And if you look at the numbers for the third quarter is, there is no sign of any specific spike in inflation for our inputs. But as Helge mentioned in his presentation just a few minutes ago, we are monitoring this very closely because we do see globally that there are signs of disturbing, and we need to be ahead of that. And the first line of defense there is, of course, that we do increase prices somewhat above our expectation for claims inflation.Runoffs in 2023, I can only repeat what we've said for so many quarters now. We have a planned runoff release until the end of 2022 of approximately NOK 1 billion based on specific lines of business and vintages going back 2008 to 2014. And then we do reserve according to best estimates for all new claims that occur. I think that is the message.
Sorry. If I understood you correctly there, you will not provide any, say, guidance with regards to the runoff level after 2022. Is that correct?
No. The -- I think the only possible guidance given the accounting regime is an expectation of 0, and then you will have for yourself to look back at what has typically been the runoff patterns. Capital costs, these are -- we're talking about, say, NOK 30 billion of technical reserves that are estimated based on expectations of future claims going as far ahead as 40 years, and there is still uncertainty around that. And on average, I think there has been a slight degree of conservatism on how these claims have been reserved. But the accounting principle is best estimate, and hence, the expectation of 0 [ in our case ].
We will now take the next question from Will Hardcastle from UBS.
Just following up on that runoff. Obviously, it's coming -- the surplus runoff coming to an end in, again, 2022. Can you say anything about how the reserve buffers are now compared to when you initially announced this level of excess runoff per annum? Have they sort of trended exactly in line with what you assumed? I presume so because that's what's coming through your solvency, but just to be clear on that.And the second one, how should we think about your solvency level now within the range? Is it fair to simply say post the acquisition completions, you're broadly now at the midpoint of the range and that's where you feel most comfortable, and so we should think about distributions each year to land around this level? Is that a fair assumption?
I'll -- it was a slightly blurred line, Will. But if I understand you correctly, you're asking about this originally planned pool of runoff gains that we communicated, whether that has changed over the course of the year. Is that correct?
Yes. Was the reserve prudency as broadly as you expected when you initially set it?
Yes. That -- it has been. There has been no changes to the degree of significance in that investment of those vintages. They have runoff as planned. And it's, of course, on average -- over the last few years, we've also had a slightly positive runoff gain on top of that due to normal volatility in numbers. And as I -- in my response to Håkon's questions earlier, that there's -- it's a typical tendency to be somewhat conservative reserves, but that is nothing we guided for.About the solvency level, we report 182% after these transactions that we are -- have completed and are expected to complete in Q4. It would have been 177% at the end of the third quarter. And then, of course, you also need to remember that the formulaic -- having a formulaic subtraction of 80% of the profit after tax, which is already included in the solvency calculation.We have a solvency ratio of 150% to 200%. We are comfortable within that. The midrange is a nice enough place to stay. But our dividend policy is high and stable nominal dividends on the ordinary dividend. And if that kind of -- if the underlying profits increase, we also intend to increase the regular dividend. And then if there is kind of excess capital building up due to profits or onetime effects, then that will be considered for special dividends as we've done for a number of years now.
That's brilliant. And if I may just follow up on the solvency, was there any model approval within the quarter in terms of moving the models closer together?
No.
No change.
We'll now take the next question from Ulrik Zürcher from Nordea Markets.
I only have one question left now. You mentioned a lot of times during the presentation that you will not compromise on profitability. But a little bit -- depending on how we calculate seasonal effects there, it looks like you're 5 to 10 percentage point too low on your combined ratio versus your target. So does this mean that you're targeting a combined ratio in the low 80s instead of the low 90s excluded runoff gains now?
I think it's fair to say, Ulrik, that we have the financial targets that we have. And if you join the Capital Markets Day in November, I guess we will elaborate around financial targets going forward. But you have to know that it's seasonality in the business, we are in a strong situation now. And when we talk about financial targets, it's long-term financial targets. So we will come back in more detail in November on that.
We will now take the next question from Blair Stewart from Bank of America.
Well done on the numbers, guys. I've got 3 questions, I think. Just on inflation, are you seeing labor shortages in the Norwegian labor market that's being seen in other countries? And is that a possible driver of wage inflation? So maybe just comment around that, what's going on in the Norwegian labor markets?Secondly, if you do see any impacts of inflation over and above your existing guidance, is that something that will impact the existing reserving position of the company? Is that something that we might need to look at, the existing assumptions for inflation if you do see a spike up in inflation over and above your expectations?And finally, just focusing in on that 13.8% increase in Commercial premiums, could you maybe unpack that a little more? You talked about one large contract. I'm just trying to get a handle on whether that's being driven by volume gains or price.
Maybe the first one, and Jostein, the 2 second ones there. And we haven't seen any labor shortage in third quarter. And as I said, we haven't seen this affected us in the third quarter figures. Going forward, it -- we have seen this internationally, but supply chain problems can create bottlenecks for spare parts. Then we are talking about motor insurance. As you know, these chips for electrical cars is a problem. And this can delay repairs and increase the costs, for example, for higher usage of rental cars, et cetera, et cetera. So going forward, this is strongly focused when we are working with our suppliers and with price measures going forward. But we haven't seen anything in the Norwegian markets so far related to labor topic.
Yes. Interested to know why you think that. Just, Helge, why do you think the Norwegian market is not seeing labor shortages but others are? Any thoughts?
It can be lots of reasons for that. It may come. We are in the same situation as other countries. But in our figures, our claims during the third quarter, we haven't seen this as a problem so far, but it may come there.
And it's also probably -- could be a different sectors hit at different times as well. In terms of your second part, on the inflationary potential effects of an increase in inflation on the reserves, it's related to the question about wages versus material inflations because materials is where we've seen the inflationary spikes in kind of in the -- or increases so far. And that's mainly hitting short tail lines of business with -- meaning a fairly short time frame, it can happen too when it's paid out. So the inflationary effect is not that as big there.And then risk here is, of course, on the personal injuries that -- underlying wage inflation, which, again, affects the government-based amount, the amount, in the longer term. And then there is an obvious risk there that if there is a prolonged wage inflation, this might affect their serving level on the personal injury lines. We reserve according to our own forecasts of this going forward in the longer term, but if that is a wrong forecast, then there is a risk reserve as well.But I think having said that, we are fairly confident that we have enough reserves and have kind of provisions for somewhat increases in -- somewhat increased wage inflation in the long term.
Are you able to say what your assumption for wage inflation is within your reserves? Or is it a range of assumptions?
That's not something we disclose.
Okay. And just on that 13.8% premium increase in Commercial?
Yes, it's -- we're not disclosing -- I mean the one contract you mentioned, we aren't disclosing the exact numbers there. But when you take that away, it's still a very large increase in earned premiums for the Commercial segment. And it's spread evenly across all products really and in segments, both small and large customers. And it's a mixture of both pricing and volume effectively in Commercial. We are also winning new customers there. So it's net. So I think it's a combination of our kind of very good competitive position and of the competitors' need to do something about their profitability loads because they are behind us in the repricing curve makes -- gives us room to do the same and with effects you see in the numbers.
We will now take the next question from Jan Erik Gjerland from ABG.
One question left from my side as well. On the inflation side, when you talk to your suppliers, when do they hike the price during next year? And what kind of impact would that have for you? Is it sort of that you will have it early in the year, in the middle of the year, running for another 3 years? Or how should we read that on your inflation side as you sort of -- are now ahead on premiums growth, but maybe inflation is coming behind you, as you say, and you are preparing for it with higher prices? But how should we read it into your supply chain on the different side, motor, property, health, et cetera?
I think the final part of your question there highlights the complexity in answering that because it's extremely varied between the different lines of business and what type of suppliers you're talking about. So to give a general answer, that is -- in terms of sales dynamic, we are -- typically, going into a new year, a larger share of the supply agreements are signed at the end -- in the beginning of the year. We do not book prices as such for a number of years going forward, but we have fixed margins on certain types of suppliers. But this varies so much between kind of property, garages or repair shops on the car side and what we do on the health side. So it's very hard to give one specific answer to that, Jan Erik.
If you could take the largest one, on motor then. Is it so that you typically have different agreements with the different suppliers or garages or -- fully due on 1st of January? Or is it so that you haven't spread even there through the year?
There is the largest share now being renegotiated in the -- at the -- in the fourth quarter and applying for the next year. And also, on the motor side, there is fewer counterparties than on the property side because there are chains and the larger suppliers. So it's a more, in a way, transparent market, what's going on there. And it's specific prices on -- yes, in a very detailed level on specific parts and services that they do when they fix the car.
Okay. Just one follow-up. Last time, you said that you don't see any large inflation on painting within floors and concrete, et cetera. Has that changed now? Since wooden materials, et cetera, et cetera, it was not part of the -- biggest part of your repair costs.
That's correct. And we see -- on average, we say that the expected future claims inflation in -- on the property side, I think we said around 5% last quarter, and we think it's now maybe 5% to 6%, is kind of our estimate now based on where we see after very detailed analysis of the different parts that go into fixing a typical claim.
For motor, I think we said 4% to 5% after second quarter. And today, we say 4% to 6%. So -- and Jan Erik, our first line of defense regarding this uncertain future is price increases above this claims inflation level. I think that's the situation for the whole market also.
Understood. What do you see from smaller peers which sort of -- do not have the sort of advanced pricing and agility? Are they sort of trying to pick up customers these days because they have lower price than you? Or is it so that they are just afraid and just pricing up everywhere and clients come back to you?
If they are afraid or not, I don't know. But when I talk to the sales reps and the distribution, they are talking about our main peers. There's Fremtind, Tryg. So that's the large one. The situation we had said several years ago with lots of small players, I do not hear that much about them at the moment and we do not see them either.
We will now take the next question from Thomas Svendsen from SEB.
Could you talk a little bit of -- more about this new change in ownership market? What do you think about the potential market size there, if it's more liabilities to ensure so it will be bigger than the old change in ownership market? And what do you think about your market share there? And how are you going to distribute this new insurance?
Yes, yes. I mean, first of all, this is, I would say, good news both for consumers and insurance companies, gives, in our view, a better regulation of these transactions. These are extremely important for ordinary person's lives. And also the increased requirements for, what do you call it, surveyor reports on the houses before a transaction is also very good because this takes down the risk and it clearly -- more clearly than before, states where the issues are.We have, as you know, not been part of the change of ownership insurance market in Norway under the previous regime, but we'll now offer our change of ownership product. We have extensive experience with this in Denmark, which I think is slightly a model for the new -- to a certain extent, at least a model for the new Norwegian regulation as well. And we are actually leading in Denmark in this area. We -- the main distribution channel for this product will be through...
Norwegian's real estate.
Yes. Real estate agents. So it's paramount to have agreements with these real estate agents for the distribution. We'll not comment on the specific market share targets or anything like that, but this is -- in a way, it's good news. It's more to the insurers and it's a well-regulated product and a type of risk which we are well used to look at.
The total market is also uncertain. But over time, we are talking about some few billion Norwegian kroner in total markets for this change of control products. So it's good for the total market development.
Yes. And of course, there will be an introduction or period where both consumers and the insurance companies need to be kind of well acquainted with the new product and the risks that are in it. But I'm not that stressed about the risk. It creates ordinary property risk. And it also feeds well into the ordinary property product because we then have more risk information about the [ OBX ] that we insure.
Finally, I think it's important to really have control for -- regarding pricing. But as you know, this is a 5-year product. And that's the main difference between this change of control ownership product and motor property and other 1-year risk products. So you have to really know what you are doing when you price this. And as Jostein said, we have really good and strong experience from Denmark.
Okay. But do you think it will be -- is it possible to say or to try to think it will be bigger than the whole market? Or is it fair to say it will be smaller than the whole market just because you do a much more check of the real estate before you sell it? Or is it impossible to say?
On the whole market?
Yes, on the whole change of ownership market. I think that the size of the market -- yes, the size of the change of ownership market...
The size of the market...
Yes, versus the whole change of ownership...
NOK 3 billion to NOK 4 billion over year -- NOK 3 billion to NOK 4 billion over some years, I think, this market could be.
We'll now take the next question from Vegard Toverud from Pareto.
I also have some questions about the inflation part of business and for the property product. Is it so that the construction cost index is the starting point or basis for your repricing discussions?
It's a -- I would say, yes, for the average of the portfolio. Yes, it's a starting point, but please remember our kind of our -- this analysis or this presentation that we gave in the second quarter in terms of how much is materials and how much is wage. And then you have the estimates on wage increase, which are still fairly moderate, I would say. We're talking about maybe some 3% expected wage inflation going forward. And then the remaining part, which is, say, 80% -- 75%, 80% of the total claims cost is wages and the remaining 15%, 20%, 25% is materials. And we said the overall mix of that, we do expect some 5% to 6% claims inflation going forward.
And when I take the latest numbers and use the same share for materials and labor, I guess still somewhat higher number. Is the reason for your number being lower that you further divide this into even more gradual parts and your material consumption is different from that of the index?
Definitely. It's not like the index. I think there are something like 30,000 different kind of type of cost lines in our calculations, et cetera. It's a starting point for average, but that's not to say it will be equal to the average, at least not in a short time frame.
But shouldn't this set you up for a significant margin expansion then going into next year?
I can only give you our expected claims inflation and our statement that we price on average above the expected claims inflation for property -- for our property.
Yes. And -- but this starting point for that claims inflation, is that your expected claims inflation? Or is it what the market expects or the CCI?
No, of course, it's our. Our, of course.
We will now take the next question from Faizan Lakhani from HSBC.
Congratulations on a very good set of results. I have 3 questions. The first question is on the Swedish business. So the improvement in the Swedish loss -- underlying frequency loss ratio this quarter was particularly strong, especially when you compare it to the year-to-date picture. Now I appreciate some of that is sort of volatility and seasonality. But can you just elaborate on -- more on what the drivers of this were? And just more broadly, what is the level that you'd be happy to operate at in Sweden?And the second question is, if I remember correctly, at the half year, it was mentioned that pricing in Denmark is slightly below claims inflation. However, if you look at the improvement quarter-to-quarter, it appears to be quite robust. How should we square the 2?And the final question is on runoff. So the Danish runoff was very strong. Can you just provide some information on what lines of business this has come from? And just coming back to the link between inflation reserves, are you allowing for higher levels of inflation for your 2021 accident year relative to what you reserved in previous years?
I'll start with the 2 first ones, and then I'll -- I might need to get some help for me to rephrase the third one.But in Sweden, yes, we do have a very strong quarter-over-quarter improvement. But we've seen this trend now, also -- and we see also the trend, so the previous quarter that the improvement was underway in Sweden. And as I said in my presentation then, we are actually more optimistic about the development in Sweden now. But the third quarter is seasonally the best, and given the size, there is more short-term volatility in the -- also in the underlying results in the Swedish portfolio than in the other businesses.Having said that, I mean, the improvements we see now is based on improved risk selection, probably especially in the commercial portfolio, and also that we managed to get through the price increases that we were hoping to get through there. So it's the result of kind of some -- I would say, an ongoing effort for the last 1 to 2 years, I would say, in improving the quality of the portfolio. Yes. And at the Capital Markets Day, we'll talk a bit more about the overall turnaround in the Swedish business more than I can do at this moment.Denmark, I think we are aiming to price in line with claims inflation at least there as well. And there has been some focus on the discussion, I would say, between Tryg and the Financial Services Authority or the competition authority, whatever it is, on the degree of -- on the possibility to get through price increases without notifying customers specifically. And we kind of are now on the pricing in what we call normal price increases for our Danish Private business. That should be in line with...
But the improvement there is still pretty strong. I mean if it's in line with claims inflation...
Pardon?
I mean if it's in line with claims inflation, I would have expected the improvement in the underlying frequency loss ratio to be a little bit more muted than it has been. I mean, is that just earnings through higher premiums from previous years and the improvement going forward will be more limited?
We have a 1.6% increase in the -- percentage points increase in the underlying claims inflation adjusted for [ the dividend ] and COVID effects in the Danish business. Combination of price increases, improved risk selection, I would say. But there's always been volatility in quarterly numbers in nonlife insurance. So I think you should probably look at it over a bit longer-term perspective.And please -- could you please rephrase the third question? I didn't quite catch what you were asking about there.
Yes. I mean, actually, there are 2 parts. The runoff in Denmark was very strong. Can you just break down where that came from by line of business? And the second part is just going back to the inflation linked to reserves. Are you allowing for higher levels of inflation in your 2021 accident year relative to your previous accident years?
On the last part of the question, I would say no. We are taking into account both what we've seen, inflation and our claims inflation expectations when we set the reserves. So I think we are correct as to our best of our knowledge.On the first part, where the claim runoff gains in Denmark comes from, we have one part which is the planned part, which -- from the workers' compensation line of business. It is going okay. And then the rest is kind of evenly spread out. I see there is runoff claims both in motor property and other small lines of business as well. So it's fairly well spread out during the third quarter.
We will now take the next question from Derald Goh from Citigroup.
Just had a couple of questions, please. So the first one, just circling back about -- in inflation. But could you maybe talk about what are the inflation levels that you're seeing in Denmark and maybe in the multi-property lines? And related to that, do you also have the same kind of procurement contracts that you do in Norway? Or what are the levers do you have there?And the second question is just on the Baltics. Could you maybe elaborate more about what is the operational focus there? Because if I look at the underlying loss ratio, it still looks pretty weak. But yet, you seem to be growing volume quite strongly.
Claims inflation in Denmark, I think we see -- looking at similar levels in Denmark, and it's the same drivers as we see in Norway. So we're talking slightly lower inflation -- claims inflation in motor than we see in property. I would say it's in the 4% to 6% range there.So it's also an element in this that we see. This is the kind change for the typical claim year-over-year. But there are also improvements in risk collection will improve claims frequency and so on. So there are other parts that need this picture. So it's -- yes. If you look at motor and property together, we're talking about the range of, say, 4% to 6%.And then your question about the supplies? Is that...
No. I guess it was our focus in the Baltics. Wasn't that right?
There was a question about the supplies in the market and [indiscernible]. It's about kind of we have the same type of -- sorry?
Yes. Sorry. I'm just keen to hear about if you have the same kind of procurement contracts in Denmark as you do in Norway or if you have any other levers that you have to mitigate the inflationary pressures.
Yes. No, the procurement contracts are of the same type. It's not -- we do not have fixed prices as such. But we have, as in Norway, very professional claims handling organization that has the best possible contracts with our suppliers there. Of course, we are a market leader in Norway and have -- are the largest buyer of -- procurer of a large type of things in -- which are relevant for claims inflation. Not so in Denmark, but I think we still have a very good set of contracts with our suppliers there. But as we said repeatedly now for the last couple of quarters, we didn't have fixed price contracts over a number of years.
Regarding the Baltics, as Jostein said, we will give more insight into the Swedish and the Baltic business in November. But we have used the word transforming to a fully digital provider in Sweden. So that -- in Sweden, we are working with sort of a new type of business model, while we in the Baltics focus on optimizing and continuously improve what we are doing there.And we look at it and if they manage to operate in the Baltic area with sort of the same type of business model as we have. So it's about distribution, improving data analytics and price optimization. And it -- to actually implement lots of measures as we know of -- that if they manage to operate with the same type, as I said, business model with better profitability level than we have had for a while. But we will give more insight into that -- all the measures we are dealing with in the Baltic in November.
We'll now take the next question from Jan Erik Gjerland from ABG.
Just a couple of ones. The Swedish flooding, did that have any impact to you this quarter? Secondly, do you have any Nordic clients that have risks outside the Nordics? For instance, if there should be flooding in Germany, flooding in France or anything, particularly, in England, et cetera, which could hurt them? And is there any opportunities in Denmark taking either people or clients when you see now Codan being sort of separated up into Alm. Brand?And finally, the 160 basis points underlying breakdown, could you please break it up into what kind is price driven, what is average claims driven and what is frequency driven?
Regarding the Danish market, Jan Erik, as we have said several times, it's more fragmented compared to Sweden and Norway. So we are hunting opportunities in the Danish market all the time. I will not go into and comment on people and customers and opportunities related to Alm. Brand, but we are hunting all kind of opportunities. And it's more fragmented market, and we see lots of opportunities in Denmark, actually.
In terms of the Swedish heavy rainfall in Gävle, we were exposed to that and have booked a loss related to that event in our third quarter results. I don't think we've specified the number.
No. But as we discussed in the preselling period calls, so you can see that this is a limited number.
Yes. Somewhat effect on Sweden, but on the group level, it's nothing large. We have not extremely limited exposure to kind of floodings that we've seen further down in Europe. We don't have clients with that kind of exposure. And then the 160 basis points, no, I don't have that breakdown for you, Jan Erik.
Can you tell anything about where -- what would you see underlying there? Is it mainly pricing?
For the group, 1,160.
Yes. Referring back to Thomas question about -- sorry, Vegard's question about profitability.
I guess it's fair to say it's more price driven than volume driven. But compared to what we had communicated for some years now, we had a very solid good balance in the Private segment volume and price, and we are really pleased with that good mix.
I think the 1.6 in the underlying, I mean, given that we do price above expected claims inflation, I think it's fair to say that the larger share of that improvement is related to pricing. And as Helge said earlier, I mean, first line of defense in terms of increased claims inflation is decreased prices. And then, of course, on the quality of tariffs is extremely important there, that we manage to attract the right risk -- right type of risks to our portfolio. And the work we've done over a number of years in automating tariff process there means that we have more time to analyze and increase the quality of the tariffs here. And that -- I think it's hard to pinpoint exactly where that pops up. But in the overall picture, I think that's also an important contributor to our improvements.
There are no further questions in the queue. I would like to hand the call back over to your hosts for any closing remarks.
Thank you. Everyone, we will be participating in a number of roadshow meetings during the next weeks, virtual outside Norway on -- all right. I'll continue. The meetings will be held with investors in Norway, the U.K., Sweden, Denmark, France and the Netherlands. Please see our financial calendar on our website for more details. And finally, a kind reminder of our Capital Markets Day on the 24th of November. We hope you all can join us in this digital event. Thank you for your attention, and have a lovely day.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.