Gjensidige Forsikring ASA

OSE:GJF

Earnings Call Transcript 2022-Q3

[Operator]

Hello, and welcome to the Gjensidige Q3 2022 Presentation. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. And for the duration of the call, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end of the call. [Operator Instructions]

I will now hand you over to your host, Mitra Hagen Negard, Head of IR, to begin today's conference. Thank you.

[Mitra Negård, executive]

Thank you. Hello, everyone. Good morning, and welcome to Gjensidige's third quarter presentation. My name is Mitra Negard, and I am 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 always we have lots of time for Q&A after that.

Helge, please.

[Helge Baastad, executive]

Thank you, Mitra. Good morning, and welcome everyone. This is the 48th quarter since our IPO and the last quarter I have the pleasure to present Gjensidige's results. As announced earlier, Geir Holmgren, will be assuming the position as CEO from January. I'm very confident in handing over the baton to Geir. With his competence and capacity will further cultivate our great organization and secure continued strong value creation in Gjensidige.

Let's then move to Page 3 for comments on the third quarter results. We generated a profit before tax of NOK 1,486 million. The underwriting result was a very strong NOK 1,909 million, the highest we have ever had in the quarter when adjusting for the extra runoff gains back in Q4 2018. The earned premiums continued to rise strongly at the healthy 7.1% or 8.2% in local currency. Large losses this quarter were lower than expected level, contributing to the good development in results. We continued improving our underlying profitability when adjusting for the COVID effects last year. Our combined ratio for the quarter was 76.3%, including a cost ratio of 12.9% for the quarter. Continued heavy turmoils in the financial markets resulted in a negative return on our investments of NOK 328 million this quarter. This impacted our return on equity, which came to 18.4% year-to-date. Jostein will revert with more detailed comments on the results for the quarter.

So then turning to Page 4, a few words about our operations. I will start with inflation which continues to be a global challenge. Claims inflation so far has been in line with our expectations and we have not had any significant challenges related to supply of materials or labor. Demand for our products and services remains strong and we are able to pass on necessary price increases to stay ahead of the inflation curve. Global economic and geopolitical uncertainty have reached new heights. Strong governance finances, particularly in Norway mitigate the risk of a grave recession in our region. And historically, non-life markets have proven to be highly resilient to economic downturns. We expect this to be the case going forward too. But, of course, a further dramatic escalation of the war in Europe can severely impact our business too.

We continuously monitor the development in close cooperation with our partners. As we always do, this is under any circumstances the most important thing to do for an insurance company and we are well prepared. Based on our latest analysis, we expect claims inflation for private property in Norway to remain in the 5% to 7% range going forward, driven by high energy prices and labor rates. Pressure on materials' prices seems to have peaked, because of demand cooling off, lower raw material prices and more stable supply chains. For motor in Norway, we expect a continued increase in spare part and labor prices. Our claims inflation expectation is unchanged in the range of 4% to 7%, at the higher end in the short-term. For all products, we will continue to put through price increases at least in line with expected claims inflation and we are confident that we will be able to pass this through.

The strong development of our Norwegian operations continued in the third quarter. Premium growth in private remained high despite tough competition. We have managed to continue to put through necessary price increases while maintaining very high customer retention and profitability is very good. Premiums continued to grow strongly in our commercial segment as well as the retention remained at a high level. Profitability climbed further to a very good level. Going forward, we will continue to raise prices to reflect expected claims inflation and we are confident that we will be able to put these through. For certain pockets in the large corporate portfolio and in certain segments, there is still a need for price increases beyond inflation.

Performance in Denmark was somewhat weaker than the same quarter last year. I'm very pleased with the premium development in the commercial portfolio. Growth in the private portfolio was impacted by competition and lower Danish motor and property sales. We continue to move forward with the new core IT system. The private products are being migrated over to the new platform and the system is providing increasing support for our distribution activities. The acquisition of the dental insurance company, Dansk Tandforsikring, is now complete, and we are very eager to further develop the business in Denmark and later on in our other Nordic markets.

I'm pleased to see that our turnaround efforts in Sweden continued to show results with improvement in underlying profitability quarter-over-quarter. Operations are becoming increasingly efficient. We have good risk selection and pricing execution, resulting in more healthy portfolios and good growth in the commercial portfolio. But of course, given the size of our operations in Sweden, we are prepared for potential volatility in the results. Our transformation in the Baltics continues with full force. Profitability has improved considerably both quarter-over-quarter and compared with the same quarter last year. Thanks to better tariffs, price increases, pruning and cost saving initiatives, and we are well underway to reach a combined ratio below 100% from Q4 this year. Although also for this segment, we must be prepared for volatility, not loss because of macro uncertainty.

Then over to Page 5. We continue to make progress on sustainability. We have a number of initiatives as you can see on this slide, taking important steps towards delivering on our ambitious targets. I'm particularly pleased with having launched our first taxonomy aligned product and there is more to come. We have got a strong recognition this quarter too with top ranking in PDC's climate index.

And with that, I will leave the word to Jostein to present the third quarter results in more detail.

[Jostein Amdal, executive]

Thank you, Helge, and good morning, everybody. I'll start on Page 7. We delivered profit before tax of NOK 1,486 million in the third quarter. Premium growth was the main driver behind the increase in the underwriting result. We saw good growth in all segments and improvement in the underlying profitability for the Group, when adjusted for the COVID-19 impact on claims in same quarter of last year. I'm particularly pleased with the development in commercial and I find the good progress in Sweden and the Baltics very encouraging. Private maintained a very high level of underlying profitability, confirming our strong market position and efficient operations. Our investment portfolio generated negative returns this quarter too, reflecting the tough market conditions. Our pension business generated lower results, I will revert on both of these in a moment.

Turning to Page 8. The strong development in premiums continued in the third quarter, up 8.2% adjusted for currency effects. We saw a strong increase in premiums for the private segment, driven by price increases for motor, property and accident and health insurance, as well as higher volumes for motor and travel insurance. I'm very happy that we maintained our strong competitiveness and continue to hold our superior market position. The significant rise in premiums in the commercial segment followed effective pricing measures and solid renewals for all main product lines and volume growth for motor and accident and health.

Premiums in Denmark increased by 5.4%, measured in local currency, driven by growth in the commercial segment and the contribution from them. Premiums in the private segment excluding the contribution from NEM were somewhat lower, impacted by a 2.7 percentage point decrease in customer retention. Premiums in Sweden, measured in local currency increased by 9.2%, driven by volume growth in both the private and the commercial portfolio. Customer retention increased by 2.5 percentage points with improvements in both portfolios. Earned premiums in the Baltics increased by 6.7% measured in local currency, driven by growth in most insurance lines except for motor. The increase in premiums was a result of pricing measures. The customer retention rate decreased as a result of the implementation of higher prices. This is something we have been prepared for on the path to improve profitability.

Turning over to Page 9. Underlying frequency loss ratio remained stable. However, when we adjust for the absence of COVID-19 impacts on claims this year, the underlying frequency loss ratio improved by 0.8 percentage points. This strong development was driven primarily by commercial, based on effective pricing measures, solid renewals and good risk selection. The Baltics also showed a significant improvement. Large losses were slightly higher than last year, but still well below average expected levels. To get this slightly lower runoff gains, this brought the loss ratio for the quarter up to 63.3%.

Let's turn to Page 10. We recorded NOK 1,040 million in operating expenses in the quarter. Our cost ratio move further down by 0.7 percentage points to 12.9%. And if you exclude the Baltics, the cost ratio was 12.3% for the quarter. The main drivers of this improvement are premium growth and strong cost discipline across the Group. Our cost ratio in Norway improved by 0.7 percentage points to 10.2%, thanks to premium growth and continued focus on cost efficiency. Sweden and the Baltics showed an improvement as you can see from the chart on this slide, thanks to effective cost cutting measures and higher premiums. The increase in Denmark's cost ratio is a consequence of a strengthened sales force and higher IT costs related to the ongoing transition to the new core IT system.

A few comments on our pension operations on slide 11. The pre-tax profit came to NOK 46 million, down year-on-year, reflecting the expected decline in margins with a new individual pension accounts and the lower financial income. The negative impact following the introduction of individual pension account was partly offset by growth in the number of pension members, contributing to an increase in insurance income. We continue to grow our business and have a strong focus on being a cost-efficient player. We expect profitability to increase again in the medium term, driven by further growth. Assets under management decreased by 3.5% from year end last year to NOK 50 billion, reflecting development in the financial markets. Annualized return on equity was 13.1%. The solvency ratio at the end of the quarter was 170%.

Moving on to the investment portfolio on Page 12. Our investment portfolio generated a return of minus 0.6% in the third quarter, reflecting the significant market turmoil this quarter too. The match portfolio returned minus 0.2% and the free portfolio returned minus 1.2%. The result for the quarter was negatively impacted by higher interest rates, a decline in the equity markets and higher credit spreads. All asset classes except fixed income instruments with a short duration and PE funds showed negative returns. We have continued to reduce risk somewhat in our portfolio in response to the market conditions.

It is worth mentioning that our equity risk exposure was NOK 1.2 billion lower than the NOK 2.8 billion recorded as a carrying amount at the end of the quarter due to derivative positions. We are prepared for further market turbulence for quite some time. Although we cannot avoid the impact, we have a balanced portfolio and solid fixed income investments, with the large majority having investment-grade rating. Our investment strategy remains firm. The increase we see now in interest rates will increase future investment income.

Over to Page 13. Our capital position is very strong. With the solvency ratio of 190% at the end of the quarter, down 2 percentage points from Q2. Eligible own funds were slightly down with the Solvency II operating earnings offset by loss in the free portfolio and the subtraction of the formulaic dividend. We had a minor increase in the capital requirement with premium growth and changes in currency rates, more or less offset by a lower market risk as a result of lower equity exposure.

Few words on the latest development of our operational targets on slide 14. Customer satisfaction continues to be at a very high level. Retention in Norway is slightly down from the second quarter, but still on a very high level. Retention in Denmark and the Baltics came somewhat down, but we're satisfied with the improvement in Sweden. We have delivered on our annual goal of 10% increase in our digitalization index, which measures progress in our digital sales and service interaction with our customers. On the claims handling side both our digital claims reporting for the Group and automated claims processing in Norway have risen further to 77% and 58%, respectively. We'll continue to develop these digital services further going forward.

Before handing the word back to Helge, I will take the opportunity to announce that on the 22nd of November, we'll be holding a webinar on the implications of IFRS 17 and 9 on our accounts. We will also publish a guide actually based on results. [indiscernible] will share the details shortly, which in mean time sales dissipates.

[Helge Baastad, executive]

Thank you, Jostein. Before concluding today, I would have to take the opportunity to have a quick look at Gjensidige's strong track-record of creating value for all the shareholders in [indiscernible] here on Page 16. We have delivered on our ambitious targets in the form of [indiscernible] since the IPO back in 2010. Gjensidige has generated a total shareholder return of more than 600% during this period. Average return on equity has been 19% and we have paid out NOK 63 billion in dividends. We have achieved solid topline growth while demonstrating strong underwriting and cost discipline and at the same time, we have received the strongest vote of confidence from our customers with customer satisfaction and retention having through very high levels. This is all, thanks to our superior brands, loyal customers, our unique customer dividend model of the technology platform and strong analytical capabilities, all parts of the solid fundamental necessary to continue delivering on our attractive value proposition.

With of course the most important drivers are our people and our culture. These are key to our success. We are very happy to see that our employee engagement scores continue to be very high and we succeed in attracting confidence. Our excellent ranking in IPSOS reputation survey is a pleasant reminder of how we are viewed among the regional customers and effecting marketing to employers. In this year's survey, Gjensidige once again ranked highest among all companies in the finance sector and number 5 among all Norwegian companies in the survey. This is indeed a strong vote of confidence.

On to Page 19. Gjensidige's priorities towards 2025 remains firm. The Group will build on the strong and unique position in Norway. Profitability for operations outside Norway will be improved with particular focus on Sweden and the Baltics, as well as tapping further into the attractive opportunities in Denmark, not the least, driven by the new core IT system. And lastly, the Group is committed to continue capital discipline with a rational approach to M&A and capital distribution back to shareholders.

To sum-up the quarter on Page 20, we have delivered a very strong quarterly underwriting result. We are confident that we will continue to stay ahead of claims inflation. Unless the current geopolitical situation becomes dramatically worse, we do not expect to see any significant spillover to our underwriting results. We expect to deliver on our combined cost and solvency ratio targets this year. Our financial results and return on equity are, of course, highly dependent on the development in the financial markets. Our good underwriting results outlook and strong capital position provide us with a solid base to deliver a continued steady and nice regular dividend curve. Special dividend have been and will still be utilized from time-to-time to ensure an efficient capital structure.

And with that, thank you very much. We will now open for Q&A session.

[Operator]

[Operator Instructions] We will now take our first question from Hakon of DNB.

[Håkon Astrup, analyst]

Two questions from me. And the first one on costs. You delivered a strong quarter in terms of cost ratio below 13%. So just wondering how you see this development going forward? Should you expect to see similar kind of cost ratios as we've been able to reprice the premium base quite good recently? And that was the first question.

The second question on inflation, continue to be quite high. And just wondering if your outlook for the pricing in line or above claims inflation? Do you expect to continue to do that also in the shorter term, based on the recent repricings you have done?

[Helge Baastad, executive]

Hakon, I can start with comment on the cost ratio and Jostein will start-up with the inflation question, and I can fill-in if he want to do that.

Our cost ratio in Norway, as you saw and as you have seen improved by 0.7% in the quarter, thanks to premium growth and continued focus on cost efficiency. And as you know very well, and as we have commented, we continue to work on enhanced cost efficiency in making room for investments. So the target is unchanged. Before IFRS 17, it's below 14%. But as you know, good operation and cost efficiency never go out of fashion. So this is extremely important for organizations. So we are working with all kind of efficiency measurements quarter-by-quarter, but the target is unchanged. And with IFRS 17, we will comment in more detail the consequences of IFRS 17.

[Jostein Amdal, executive]

Yes. On the inflation side -- sorry, Hakon?

[Håkon Astrup, analyst]

Yes. I was just saying thank you to Helge for answering the question.

[Jostein Amdal, executive]

On the inflation side, I guess, the main point of your question is, do we manage the price according to -- at least in line with the inflation going forward. I think the answer to that is yes. We do still continue to price at least in line with inflation for the main product lines in Norway. As Helge said in his remarks, we do see fairly stable inflation picture NOK from last quarter and we are pricing in line with that. And then there are some pockets that still we need to be repriced in the commercial or we aim to reprice in the commercial lines. As we have seen from the fairly large improvement in the Baltics, they were priced more than the current claims inflation. And the same goes really for Sweden and Denmark also priced at least in line with claims inflation. And the question is kind of do we manage to get this to, and of course that's a forecast, but so far we have managed to do that. And our expectation is that this is actually achievable within today's competitive environment.

[Helge Baastad, executive]

Just to add a comment, you remember we came behind the curve in '18 for motor insurance and we were quite alone with price increases above 10% and we almost managed to get that through without losing any volume. And Hakon, today our peers are also pricing in line with claims inflation or above claims inflation and the levels is below actually what we experienced in 2018. So we managed to get this through. And our peers are acting more or less in line with what we do.

[Operator]

We'll now take our next question from Alexander of Credit Suisse.

[Alexander Evans, analyst]

So the first one would just be on inflation in general, and thanks for giving the color around some of the Norwegian markets held up. I think you previously gave claims inflation guidance of about 5% in Denmark. Just eager to hear how you think claims inflation guidance right now is for that? And if you could give any comments around Sweden as well. I know you have a relatively sizable underlying frequency loss ratio deterioration there. So if you could sort of give some details on what's really been driving that trend. Is that sort of Gjensidige issue or more of a market issue?

And then just on some of the wider commercial improvements, is it possible to attribute all of this to rate or what proportion of this is actually better risk selection and how sustainable is this 4 percentage points?

And then finally just around private. Obviously that's largely flat in the quarter year-over-year. Is it the expectation now that you're sort of pricing in line and actually you're just targeting cost reductions going forward?

[Helge Baastad, executive]

Yes, I give the word to Jostein, and comment claims inflation in more detail for Denmark and Sweden.

[Jostein Amdal, executive]

Yes. Starting with Denmark, this claims inflation picture in Denmark is very similar to what we see in Norway. Talking about motor 4% to 7%...

[Operator]

One moment please while I reconnect the speaker.

[Jostein Amdal, executive]

Let's start again, inflation in Denmark. For motor, same range that we talked about, so Norway 4% to 7%, for property about 5% to 8%, maybe percentage points higher than in Norway. So it's a fairly similar claims inflation picture in Denmark and Norway and driven by the factors, underlying high increase in energy prices and expectations about wage or labor across development. So in Sweden, we actually see a bit slightly lower inflation picture. On motor, 3% to 5%, but for property it's more or less the same as in Denmark and Norway at around 5% to 7%. Big difference in commercial properties has a slightly higher expected claims inflation and private property due to the -- it's a bit higher material content in the commercial properties that we fixed and the private properties.

The second part was on the underlying frequency loss ratio in Sweden. I think that we also talked about this in the previous quarters that the quarterly losses in Sweden are somewhat more volatile due to the portfolio size and composition. So I think the kind of the correct view on Sweden, in my mind, is if you look at the actual combined ratios or loss ratio, we are actually quite happy with a combined ratio of 88 in 7.9 in Sweden for the quarter. And I think that we're looking for combined ratios, very low 90s. If you look at year-to-date, we have 92.9 combined ratio in Sweden and we expect that to continue downwards going forward. Yes. So rather the Q3 last year was exceptionally good. I think that [indiscernible] more in line with what we do expect. I haven't seen…

[Alexander Evans, analyst]

Just to clarify on Sweden. So, you're happy you're pricing in line with claims inflation in Sweden. Is that a decent takeaway?

[Jostein Amdal, executive]

Yes, absolutely. But I think it's -- I mean actually we talked about also in, I guess, remarks of the call that there is some volatility to be expected in both Sweden and Baltics due to the size of the portfolio quarter-by-quarter, but the long-term trend is obviously -- definitely good.

Commercial improvement, I'm not able to quantify how much it's kind of improved risk selection, how much is pricing, but it's absolutely right, we have improved or/and continuously improve risk selection and proving the portfolio all the way towards what we think is the best parts of the portfolio. At the same time, as you price at least in line with expected [indiscernible]. So it's a combination of the 2 factors.

Private, we continue to price at least in claims inflation there. I mean if you take away the COVID-19 impact from that we have in 2021, there is an underlying improvement also in private. So I think that is and you need to look from what level we're talking about improvements, which is a very high profitability level as a starting point.

[Helge Baastad, executive]

If I may add a couple of comments regarding the commercial segment, Jostein. I would say that I'm extremely satisfied with the development in our commercial business. And you have to remember that the large chunk of that portfolio is SME, and it's also our position in the agricultural sector in Norway. So what we see both regarding the combination of volume and price driven growth, our ability to quarter by quarter drive the cost, relatively cost ratio down and our ability to, I would say, more and more digitalize the whole operation as we have done in the private sector. This is really digitalized, industrialized and very advanced business for Gjensidige today. It's very important. It's not typically commercial as you think of commercial, it's lots of SMEs, it's direct business as you know, so this is really in the heart of the Gjensidige's business model.

[Operator]

We'll move on to our next question from Ulrik of Nordea.

[Ulrik Zürcher, analyst]

I have 2. I was wondering if you could give a bit more flavor on the cost element in other items, that is not amortization or related to the debt cost. It was very high this quarter but I understand it include a settlement with some fire mutuals? That's my first question.

And the second one is that, if you could give a update on the running yield on your different types of bonds, would be helpful?

[Helge Baastad, executive]

Yes. On the first one, it's true that the single largest element of that item in this quarter's result is the final settlement of court dispute we've had with local fire materials that left us some time ago. We agreed between the parties not to disclose the amount, but it's a settlement that both parties are happy with. So that's the single most important part. And as you correctly point out, there is interest rates on the hybrids. There is IFRS 16 kind of lease costs and also ordinary amortization of intangibles, and the results from the mobility compounds, if you could say that Falck Lietuva rebranded to RedGo, fleet and Gjensidige mobility group company. These are the main corporate deals.

[Ulrik Zürcher, analyst]

But well from the mobility space, will that be a negative contribution in some of the next quarters, like you're doing investments, you're putting it altogether or…

[Helge Baastad, executive]

Yes. The underlying development within that kind of conglomerate compound, the mobility space is very good, what we have now -- and in line with what we talked about earlier. And then what you have now is the startup costs, integration, rebranding, getting kind of all the systems up and running. This is kind of in a way part of the investment case, underlying things are going very well.

[Jostein Amdal, executive]

And we are on the positive side on the synergies, talked about in June. So it really works as we communicated in June on the revenue.

[Mitra Negård, executive]

In terms of the running yield, Ulrik, for the bond portfolio was 3.4% that also includes the hold to maturity portfolio.

[Operator]

[Operator Instructions] We'll now move on to our next question by Tryfonas of Berenberg.

[Tryfonas Spyrou, analyst]

This is Tryfonas from Berenberg. And congratulations Helge on your retirement. I just have a broader question on the competitive environment, looking at maybe sort of 2 years out. Obviously, we've got your reinvestment rate for bonds, I think, is now 5.5%. I guess this is quite a substantial level compared to what we've seen in prior years. And given that obviously the margins across the industry, and among the listed sort of players and obviously are really, really good. I was just wondering whether we should expect to see some competition presumably from players that are not listed or any sort of disruption given you can now earn a decent return on your equity, based on your investment portfolio? So any color on how you view this risk and we really appreciate it?

[Helge Baastad, executive]

Yes. I think, I commented during my presentation, it's tough competition. And although we present strong figures quarter by quarter, but it's tough competition. Disruption, we have discussed disruption for years, and it's important to remember that lots of the insurtech initiatives we see around the world is related to the front-end solutions that we see that the banks and insurance companies in the Nordics have implemented in their business models. I do not see an international entrance into these markets for the next couple of years, next 3 years.

The challenge long-term is related to the dynamic in the motor industry markets and we commented that when we introduced our Gjensidige mobility group initiatives earlier this year, at the moment, it's also interesting to follow [indiscernible] in Norway. They have been lords regarding their ambitions, so growing the business and also trying to enter into the SME market. But as I commented some minutes ago, it's extremely industrialized and advanced business model we have in Gjensidige related to the SME market in Norway. So it's not only to enter into that market. It's lots of component, very integrated with people, technology, processes, et cetera.

Regarding interest level and increased interest level is that will give us more pressure on combined ratio. I think we commented last quarter that as long as we are below 5%, we think that same type of targets will continue for peers and ourselves. So all else equal, increased interest level at towards 5% will give us over-time better EPS, same type of financial targets and same type of competitive dynamics. That's my best perspective for the next couple of years. And it's not that easy to enter market in -- I would say, we are talking about claims inflation and this is dynamic. We have lots of resources working with claims inflation every day and we price in line or above claims inflation. So jump into a market with that kind of development, it's not that easy either. So I don't think that's the best actually window to answer market if you want to go into the insurance industry. So more of the same for the next couple of years.

[Operator]

We will now move on to our next question from Blair of Bank of America.

[Blair Stewart, analyst]

Quite a few of my questions have been answered, including the very last one. So, thank you for that. Just on the investment income side, I think you've talked about the running yield today and we know roughly where the new money yields are. I just wonder if you could comment on the impact on the expected investment income? And how long that will take to feed through just a one or 2-year effect, just to get a flavor for how that's going to evolve?

And then secondly, just on the competitive environment in Denmark, specifically you talked about greater levels of competition, just wonder if you could comment on what's going on, on the ground there?

[Jostein Amdal, executive]

We're expecting the company to have just kind of on average around between 3 and 4 years duration. So it's kind of that idea of kind of how fast this will go into the accounting profit. But remember that, then from a solvency perspective, this is all mark-to-market, starting 1st of January 2023 everything on the book will be mark-to-market. So in a way, you will see there the actual interest payout level into the accounts when they move out IFRS 17 in 1st of January. So I guess that's the more important picture beyond the fourth quarter.

On the level of competition in Denmark and what's happening on the ground, I think we seem to be very competitive on the commercial side, ingraining in volume without sacrificing on the profit side. And on the private side, I think there is more day-to-day competition than what we've seen and also we are suffering a bit from the reduced car and private property turnover in Denmark because that's for us an important sales channel, may be relatively to the others, like car dealers or car partnerships and through the real estate brokers since we're market leader on the change of ownership insurance and the property market. My thinking around that is that this is a temporary segment, we're going to be back on track in developing markets, in line with market growth in the private parts also going forward.

[Blair Stewart, analyst]

Okay. I guess on the first point, we'll hear more about IFRS 17 and how you expect to implement that in due course. But your point, I guess, is that you know, it will allow us to see the impact of moving to market yields more quickly. Is that the point you're stating?

[Jostein Amdal, executive]

Yes, I mean, if you've been and continued with IFRS 4, this would have kind of moved into accounts as kind of old bonds matured and the new bonds were in large part of portfolio. But given IFRS 17, we don't have mark-to-market on all -- the whole fixed income book and then the split there.

[Blair Stewart, analyst]

And just if I may, not really a question but, Helge, I know this is your last results presentation. And I think you were -- it was nice to see you talk about the track record that the company has established over the last decade or so. And I remember, I was fortunate enough to be involved in the IPO process and had many interesting conversations with you around that time, can't believe it was 2010, a long time ago. But congratulations on what you've achieved over that period of time. The returns have been spectacular and it's been a pleasure to be involved with you over that time. And congratulations and very good luck.

[Helge Baastad, executive]

Thank you very much for good words. Yes, it's actually 12 years since we deal with IPO, so time flies. So once again, thank you. Thank you very, very much.

[Operator]

We'll now move on to our next question from Jan Erik of ABG.

[Jan Gjerland, analyst]

Hello, it's Jan Erik Gjerland from ABG. Just a couple of questions from my side as well. Just on the follow-up on the following question on the interest rate sensitivity. Could you give any sense to how much you will and hike your running yield from 1st of January, to be frank on that question?

[Jostein Amdal, executive]

I think the running yield on the portfolio at the moment is considered best -- kind of if we move to IFRS 17 today, we have a running yield on portfolio from 3.4%. I think that is where we get. And then as existing bonds mature and new ones [indiscernible] that will gradually increase the running yield of the portfolio. But as from January 1, it will be mark-to-market. So it will be the rate that is in the market at that time, which is determined as the interest rate, it's the market rate, really.

[Jan Gjerland, analyst]

Yes. Okay. So we will learn more on it in November as you said. Secondly, then on retention, I think I heard that you just have some less retention in Norway. What has really happened to that? Is that some customers you wanted to get rid of or is that sort of competition that forced it to happen?

[Jostein Amdal, executive]

It's a marginal decline in the retention at a very high level, above 90. They haven't really given that too much consideration, Jan Erik, this is very small changes.

[Jan Gjerland, analyst]

Have you read more into the affordability issue now as we have moved on since we met in late August and seeing more of the households struggling to sort of having the volume portion impact in your business?

[Helge Baastad, executive]

Short answer is no.

[Jan Gjerland, analyst]

Okay. And then on the Norwegian retail and commercial business, you are up for a renewable now on 1st of January. How much of the book in the commercial will be renewed roughly?

[Helge Baastad, executive]

Around 40% is renewed on January 1st.

[Jan Gjerland, analyst]

Okay. And finally on the Norwegian retail. Could you give any color on the sort of the flattishness of the curve? Are you now happy with the profitability, as you said, its at a very, very high level and you would now rather be certain that you are making the clients happy, so you can have a decent level of premium growth without actually hurting the profitability a lot. Is that what you're thinking off, as you mention in both instances?

[Jostein Amdal, executive]

First of all, I mean, you look at the numbers, and it's obviously extremely good numbers. So yes, we're happy with that. And no, we're never totally satisfied. So we're always trying to improve on what we have both on profitability and volume here. We are still pricing, at least in line with claims inflation also for Norwegian private segment. And we hope to improve also loss ratio going forward without losing or increasing retention or losing customers. But this is an optimization that we do daily, weekly, monthly.

[Helge Baastad, executive]

Just to add, Jostein, as you remember, Jan Erik, for many quarters we communicated price up at least in line with claims inflation for motor and we also communicated above claims inflation for property. We are now really satisfied with the profitability levels. So the communication is pricing above, at least in line with claims inflation for both these 2 product groups. So we are happy with the level. We see we have strong competitiveness. We have a very strong cost position. But it's always, as you know, profitability before market shares. So we are not stressing about competition and trying to increase market shares and things like that. This is same type of ambitious development based on profitability before market shares.

[Jan Gjerland, analyst]

Very clear.

[Helge Baastad, executive]

It's in line with claims inflation for both property and motor.

[Jan Gjerland, analyst]

Okay. Then I would just step up. Congratulation with your fantastic track record at Gjensidige Forsikring, since you started long before the IPO and hope you will succeed in your next position. So good luck for the future.

[Helge Baastad, executive]

Thank you, Jan Erik. Thank you very much.

[Operator]

We'll move on to our next question from Vegard of Pareto.

[Vegard Toverud, analyst]

Just a follow-up here on Denmark. If I read the report share correctly, it seems that your volumes in Denmark are down year-on-year in private. I wondered if you could give some more details to the competition, why you're down and also if you can, how much you have increased premiums in Denmark in the same period?

[Jostein Amdal, executive]

It's correct that if you take away the effect of the NEM business that we bought, premium volume in the private part of Denmark will be down, but overall premiums in private including NEM is up. And also of course you see the positive development within the commercial lines in Denmark, compensating for the fall in the private part for the segment as a whole.

Competitive situation, it's not anything particular that has changed in my view. I mean, this is the same main competitors as we have seen for a long time. You might have seen that there has been some changes and some partnerships, large partnership competitive arrangements in Denmark between other competitors not involving us. So there is a competition for the large partnerships, I would say. And yes, being the latest one to move however. Otherwise, we are still very positive about the future development for our partnerships for the home real estate brokerage and the car importers or car partners. And then temporarily, I would assume there is a lower new car sales and lower volume of property transactions in Denmark as I said in the one of the previous question, and given our market share within change of ownership insurance in Denmark that hurts us somewhat more than the others. Yes, I think that's it.

[Vegard Toverud, analyst]

Understood. And there is no implication from the change of IT system and the like?

[Jostein Amdal, executive]

No, I think there is in general [indiscernible] of the new IT system among our front people that meet the customers, clear improvement there. But not everything is incurred, still I think around 70%, 80% of the portfolio now moved into the new system on the private segment and then commercial will follow later.

[Operator]

We'll move on to our next question from Hans of Danske Bank.

[Hans Rettedal Christiansen, analyst]

So I was just following up on the question on Denmark and relating to the customer retention that you show on slide 14 in the presentation. I was wondering, is the decline, is it because you're pricing or is it because your claims handling? I guess, with the new IT system, I would have assumed sort of that this should be moving in the other direction?

[Jostein Amdal, executive]

Are you talking about retention levels?

[Hans Rettedal Christiansen, analyst]

Retention levels in Denmark.

[Jostein Amdal, executive]

In a way, a bit some technicalities related to the home -- lack of sales in the change of ownership there, because that is multi-year contracts and then they kind of move out of the portfolio and there is not new property transactions coming, there will be a reduction in retention. And also there is a re-pricing, of course, in the Danish portfolio to keep track with inflation, which has increased churn somewhat, but I would not describe it to the new core system in anyway. It is also somewhat that we love this distribution arrangement with new credit bucket from the half year ago is now. And that still continues to hurt our retention level somewhat.

[Hans Rettedal Christiansen, analyst]

And just a follow-up on that, how do you sort of plan on turning that curve around?

[Jostein Amdal, executive]

Well, then we are still going to meet expected inflation on the pricing, so that is not an issue, but we are just working every day on improving the sales organization and are slowly getting more traction on the new partnerships that we have with the home real estate broker and the new car partners. So it's nothing dramatic changes, it's just going to hard work and slow improvements there.

[Operator]

We'll move on to our next question from Vinit of Mediobanca.

[Vinit Malhotra, analyst]

Vinit from Mediobanca. Quick ones, please. First is just back on the commercial, just to understand, to say a farmer has his personal car that he insuring with you, is that counted in commercial motor or is that counted in personal lines. I'm just trying to understand because now it's been over 2 or 3 quarters of spectacular performance in the commercial lines. And I'm just trying where there is any other volatile items, agricultural crop, I don't know, something else just, but I'm just curious to understand.

And the second question is just on the private equity funds, where we see remarkable 5% return in 3Q. Just curious if some of this is a model return or is it a valuation that your funds have provided, could it be at risk because that looks like pretty surprising number?

And lastly, of course, I've missed it was his last call and congratulations from my side as well.

[Helge Baastad, executive]

Thank you, Vinit. As you know, the agricultural segment in Norway is not that big. We have around 70% market share. That's the roots, you know for Gjensidige. And a typically Norwegian farmer in average, of course, they have cars. They have some buildings. They usually also have another job beside their work on the farm. And everything around that farmer is registered into the commercial book. But you know, I think the total turnover of the agricultural segment is not that big if you compare that with the total commercial book. I think it's one-twelfth or something like that, NOK 1 billion out of NOK 12 billion, NOK 13 billion, something like that. But that's right, his personal car is part of the commercial book.

[Jostein Amdal, executive]

Actual revaluations in the portfolios, underlying portfolios of the -- it's not a model development. And it's also partly related to currency movements where there has been some unhedged dollar based investments in that portfolio. So we get positive return from the exchange rate movements, since the dollar strengthening against Norwegian kroner.

[Operator]

[Operator Instructions] We'll move on to our next question from Jimmy of UBS.

[Yu Fan, analyst]

I have 2, please. First one, on the cost ratio, you mentioned that the wage inflation is having a impact on your claims. And I presume those would have some impact on the cost base for yourself as well. Could you give us some color in terms of how your cost base is going to move going forward in part occurred in relation to wage inflation?

[Helge Baastad, executive]

So far this year, the average -- I would say, the changing wages in average was 3.7% and we have some more than that, of course. But I guess, around 4% is a figure for 2022. I guess also 4% to 4.5% will be the figure for the next couple of years. So this is not any dramatic driver for our cost base. And you also have to remember that we everyday work with digitalization automation and try to do all the processes in a more effective way. So that's more important discussion compared to wage and wage increases related to the cost base and the cost ratio.

[Yu Fan, analyst]

Okay. And my second question is around the credit risk in your investment portfolio. I guess, there is a small negative in the match, some bigger negatives in the free. I just wonder what's your kind of views on the fields about your credit exposure in your investment portfolio of all, especially ones that are exposed to covered bond spread?

[Jostein Amdal, executive]

It is true that especially the Danish part of the match portfolio, there is a lot of covered bonds, Danish reallocated bonds, which we are -- it's a bread and butter instrument for us as a hedged instrument, more or less no default risk, but there is, of course, mark-to-market risk, and optionality within that portfolio, which has hurt us somewhat this year. We'll continue to use that for the hedging of Danish liabilities. Also in the Norwegian part, there is some Norwegian covered bonds in the match portfolio, more even development, I would say, than the Danish, but yes we're still very comfortable about using those for hedging. Regarding the digital risk, that's very, very small.

[Yu Fan, analyst]

I also just want to echo the remarks. So congrats Helge on the amazing achievement and best of luck for the future.

[Helge Baastad, executive]

Thank you. Thank you very much.

[Operator]

We'll now move on to our next question from Michele of KBW.

[Michele Ballatore, analyst]

One question from me. Of course, you have done -- back in 2018, you guided us through the improvement of your pricing infrastructure, general pricing infrastructure, especially motor. Would you maybe give us some sense of the improvement that you have made to this infrastructure in the past couple of years, let's say, 3 years? And also what kind of improvement you envisioned, considering developing and changing environmentally high inflation in general?

[Helge Baastad, executive]

I can start and Jostein you have to fill me in afterwards. But, yes, you're right. If you go back to 2018, we came behind the curve related to motor insurance. That was also a question about claims inflation and that was due to, as you remember, the rapid shift toward the modern cars with all kind of technology and spare parts and increased claims costs. In addition to that, it was also spare parts and currency issues and everything happened quite fast and we came behind the curve. We established a project internally, we called it back on track.

It was a very, very close cooperation with Jostein, the private division, the commercial division also. Obviously, they also have lots of cars in Norway. And of course the claims operations. And we actually created a new type of process, I would say, much more agile process regarding attracting changes, regarding repair cost, process, claims inflation. So we established actually best practice, I would say, for much more rapidly to change prices on the go based on all the dynamics around us. And I think that processes we established in '18 has been extremely important for us in the claims environment, our inflation environment we have now these days. And you can maybe continue to say something about that, Jostein.

[Jostein Amdal, executive]

Yes. And I mean if you want to kind of highlight really one thing about all the improvements we did after 2018 is really close cooperation with our suppliers within the processes where we have been major purchaser of the federal services Norway, we have the best terms possible with our supply and a very close and frequent dialogue so that we can early detect changes in their expected materials in price increases. And so they can bake that into our tariffs and our prices. I think that has been extremely helpful in the last 3, 4 quarters and have had this volatile inflation situation and really have helped us where we are, where we actually have hit fairly well the actual claims development as witnessed by the price increases and the loss ratio we have delivered.

[Helge Baastad, executive]

And since '18, we have also moved global into the motor industry in Norway with the initiatives on Gjensidige Mobility Group. So we are actually sitting around the table together with actually the suppliers and our main partners in the claims handling process. So we have a completely different situation. Now, I'm talking about motor insurance these days compared to '18.

[Operator]

We will now take our last question from Samant of Citi.

[Samant Singh, analyst]

I hoping that I am audible. Just one, coming back to the wage inflation, because you alluded to that in the coming years, wage inflation will be like around 4%. So what is your long-term wage cost assumptions that is embedded in your bodily injury claims. And do you see that there is any risk of sort of increasing the long-term wage inflation assumption, because of the higher forecast for the next few years?

[Jostein Amdal, executive]

Sam, I mean, this is of course an extremely important question for us to see long-term. But if you talk about long-term for more than next 3 to 4 years, we haven't really changed our long-term forecast here. There is a considerable volatility and uncertainty around inflation and growth and so on. Currently, a very high inflation spilling over into high wage inflation, expects forecast very moderate growth, maybe a recession next year which will probably dampen wage increase again thereafter. And as we're moving back towards a more normal level, we see still similar interest rates targets from or claims inflation targets from the central banks around 2%. So our long-term forecast are really the same as kind of the experts in the central banks and developments as they did.

Moving towards invitation longer term, maybe around 2%-ish again long-term with a wage development, slightly higher than the inflation, so we'd be in a long-term real wage drop. And this is baked into our really long-term part of the reserving as well. The current higher inflation is handled within the reserves we have, and we're not really concerned about that.

[Samant Singh, analyst]

Yes. And just a clarification on the G-factor probably that is related to national pension, basic pension amount. So as I understand, it is related to, I mean, it is set by politicians. And is there any ends also related to the wage inflation? So do you see any sort of probability of getting the G-factor getting increased?

[Jostein Amdal, executive]

Again, really long-term, which I mean most of the reserves on this personal injury related claims are really long-term. Next couple of years, we do expect, as Helge said, you know, if wages is around 4%-ish and we do you expect the G-factor to be somewhere in the same range. But really long-term nothing has changed. And large part of that reserves is kind of from being paid out 4 to 5 years ahead and swagger all the way towards 40 years. On that perspective, we haven't really changed our forecasts.

[Samant Singh, analyst]

And just last one on the large claim, because the quarterly budget ranges around NOK 1,360 million, but we continuously see almost lower amount that back. So what are the structural thing, is the underlying risk for large claims is reducing? What are the components that are driving your license roadmap? Should we expect this sort of trend going forward or would you expect volatility and more comfortable down the line going forward?

[Jostein Amdal, executive]

I think, I mean, this is -- this is a really long-term focus that we have, which have developed based on our internal model. In the longer term, the underlying question growth in the commercial book, both those will have increased our estimate of large claims and potentially more volatile weather situation due to climate effects will also increase it. On the other hand, what we have witnessed is partly good risk selection that have made us actually deliver or giving us lower large claims for most of the periods that we've seen behind us, most of the quarters that we have reported. I mean, the real long-term average, it's really hard to make a precise estimate in that. We see that has been on the conservative side for the last several years, but yes.

[Operator]

Thank you. There are no further questions. I will hand you back to your host to conclude today's conference.

[Mitra Negård, executive]

Thank you. Thank you for all your good questions every one. We will be participating in a number of roadshow meeting and one conference. And in the next quarter, we will be meeting investors in Norway, the UK, Germany, Sweden and Finland. For more details, please have a look at our website. Thanks all for your attention, and have a nice day.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. Stay safe. You may now disconnect.