Gjensidige Forsikring ASA

OSE:GJF

Earnings Call Analysis

Company Initiates Pricing Measures to Combat Inflation

In response to inflation forecasts, the company has implemented pricing measures starting from July. These price adjustments are designed to exceed the inflation rate and will take 12 months to apply across the entire portfolio. The positive impact of these measures is expected to unfold over 12 to 24 months, with noticeable improvements projected for next year. While this quarter has experienced the initial stages of repricing, minor changes such as deductible adjustments also contribute to the strategy, though the full effect depends on each contract's renewal cycle. In a focused effort to manage rising costs, the company is closely monitoring developments and remains committed to proactive pricing and operational adjustments to mitigate the impact on frequency and overall performance.

Impact of Extreme Weather and Operational Challenges on Results

The company faced a lower insurance service result compared to the previous year, predominantly due to extreme weather events and specific one-off expenses. While these events led to substantial claims, the underlying business shows resilience, with a notable increase in insurance service results by NOK 250 million when adjusted for such items. The weather-related claims amounted to NOK 559 million, while the one-off expenses totaled NOK 409 million, weighing heavily on the quarter's performance.

Rising Loss Ratios Signal Challenges and Strategic Actions

The group's loss ratio rose by 6.2 percentage points over the same period last year, influenced largely by severe weather occurrences. Underlying frequency loss ratios climbed, particularly in motor insurance and damages to crops, indicating lower profitability in those segments. The company has responded with precise and differentiated pricing actions aimed at countering the anticipated claims inflation.

Elevated Group Cost Ratio and IT System Modernization

A significant increase in the group cost ratio from 12.5% to 17% was reported. Stripping away one-time costs of NOK 409 million, the adjusted cost ratio would be a steady 12.6%. A primary cause of the one-offs is attributed to the write-down of the group's core IT system and associated costs for error correction and system implementation delays, which will ultimately pave the path towards greater efficiency and support future growth.

Pension Business Thrives Amid Cost Efficiency and Growth Momentum

The pension business recorded a significantly better result than the previous year despite facing one-off effects, mainly due to IT system write-downs. The pretax profit adjusted for one-offs showcased an impressive turnaround to NOK 119 million from a loss of NOK 16 million year-over-year. This improvement was fueled by higher interest rates, growth in the number of occupational pension members, and assets under management reaching NOK 64 billion, positioning the business for sustained growth.

Investment Portfolio Generates Modest Returns in a Tough Market

The company's investment portfolio returned a modest 0.2% in this quarter, impacted by volatile markets and rising interest rates. Despite these challenges, solid fixed income investments contributed positively, with a large majority of the portfolio holding an investment-grade rating. The slight reduction in portfolio risk, revealed through lower exposure to equities, demonstrated a cautious approach in this uncertain financial environment.

Strong Solvency Ratio Emboldens Dividend Payment Confidence

The solvency ratio stood at 185%, rising by 5 percentage points from the previous quarter, signaling a robust capital foundation. Eligible own funds increased by NOK 600 million, influenced by operating earnings and the effects of financial activities such as loan issues and buybacks. The company’s capital position and underlying profitability remain healthy, reaffirming their capability to maintain dividend payments in line with the dividend policy.

Closing Summary: Positive Outlook with Challenges in Meeting Financial Targets for 2023

In conclusion, external factors such as weather and one-offs have had an impact on recent results, but the consistent revenue growth gives the company confidence in further operational improvements. However, achieving financial targets for the year 2023 may be a difficult task due to these same adversities. The outlook for the insurance service result remains good, supported by the company’s solid capital position and reliable profitability, ensuring their capacity to pay dividends in alignment with their policy.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, and welcome to the Gjensidige's Q3 2023 Results Presentation Call. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]I will now hand you over to your host, Mitra Negard, to begin today's conference. Thank you.

[Mitra Negård, executive]

Thank you. Good morning, everyone, and welcome to the third quarter presentation of Gjensidige. My name is Mitra Negard, and I'm Head of Investor Relations. As always, we will start with our CEO, Geir Holmgren, 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 of course, we will have plenty of time for Q&A afterwards.Geir, please?

[Geir Holmgren, executive]

Thank you, Mitra, and good morning, everyone. We have put behind us a quarter marked by extreme weather events in many places around the world, including our regions. The storm Hans in early August caused severe damages across Scandinavia and the Baltics. The following floods in Norway resulted in unprecedented levels of damages to private assets, crops and public infrastructure. And just a few weeks later, Oslo and the surroundings experienced severe torrential rains adding to the damages. Claims in Norway related to these events are estimated at NOK 3 billion to NOK 4 billion for the insurance industry as a whole and the put our organization to the test.I am very proud of how we took care of our customers when it mattered the most. Our competent and dedicated teams immediately reached out to our customers. They worked day and night to handle the large number of inquiries. Our effective digital customer interfaces and strong supply network made it possible to swiftly process claims, limit damages and start repair despite scarce capacity. The events we have experienced this year are a tough reminder of the climate changes we must be prepared for. This has also fueled the insurance industry's engagement to hold fruitful discussions with municipalities. We have a strong common interest in preventing damages, not the least related to building concessions in exposed areas. We are convinced of the benefits of dialogue and knowledge sharing, and we will continue to develop relevant insurance solutions and ensure that our prices correctly reflect the risks we insure.Now let me turn over to Page 3 for comments on our third quarter results. We generated profits before tax of NOK 1,120 million. The general insurance service result was NOK 1,111 million, reflecting continued strong revenue growth and efficient operations. However, the result was significantly impacted by severe weather claims and one-off expenses. Adjusted for this, the results improved compared with the same quarter last year. The one-off expenses are related to write-downs on our IT system in Denmark, provisions of the announced restructuring of the group and expenses related to distribution agreements in Denmark.The underlying profitability was negatively impacted by, among others, the elevated level of claims frequency from motor in Norway. We are implementing targeted measures to mitigate this. We continue to have efficient operations. Our cost structure, excluding the one-off expenses was at highly competitive level. Our investments generated returns of NOK 190 million, reflecting market conditions. And we generated an annualized return on equity of 17.9%.So let's turn now to Page 4 and a few words about the inflation. The general inflationary pressure has eased somewhat lately; however, the level is still high. Thanks to our repricing ability and supplier agreements, we are able to mitigate the impact on claims cost. We put strong efforts into monitoring the development in claims inflation. And after all, this is the most important part of the insurance operations. Our close cooperation with suppliers and our highly developed analytical approach provides a strong base for making forecast and our advanced and flexible pricing models ensure that our tariffs continuously reflect expected claims inflation.Based on our latest analysis, we currently expect claims inflation for property in Norway to remain in the 4% to 6% range. Material prices are coming down as a result of weaker construction activity and lower transport prices. This is expected to be offset by wage increases. Prices of spare prices for cars continue to be under pressure, not least due to the weaker Norwegian krone. Our current estimate for claims inflation remains in the 5% to 7% range. Given the recent development, we see the risk of elevated inflation levels for longer. The high fluctuations in currency and energy prices naturally creates some uncertainty in our forecast.Going forward, we will continue to price at least in line with expected claims inflation. For certain pockets in the large corporate portfolio and in certain commercial segments, there is still a need for price increases beyond inflation. And for motor insurance in Norway, we have already started to increase prices beyond expected claims inflation to mitigate the impact from higher claims frequency. Thanks to our strong market position, we are confident that we will be able to put through the necessary price increases.Moving on to Page 5 and a few words about our -- on our performance. This was the first quarter with our new organizational structure in place. We are fully focused on identifying and implementing measures to further improve our operations across our markets. As mentioned earlier, we see a promising upside potential to be released going forward, and I'm looking very much forward to share more on this with you at our Capital Markets Day in November.Moving back to our third quarter performance. Private continued to generate strong revenue growth, driven by Norway. Retention level in Norway remained high and sales continued to be strong, particularly for private motor. Our excellent ranking in Ipsos' reputation survey is a pleasant reminder of how we are viewed among Norwegian consumers. In this survey, Gjensidige once again ranked highest among all companies in the finance sector and #6 among all Norwegian companies in the survey. This is indeed a strong vote for confidence.The Danish private portfolio is still impacted by the market condition and the organization focusing on completing the new IT system. We have a strong focus on growing our Danish business as well, both organically and through M&A. The acquisition of PenSam and expected closing this quarter will be a good supplement to our growth initiatives. And we will improve retention rates in Denmark through numerous initiatives. The underlying profitability for private was lower than the same quarter last year, primarily reflecting the increase in motor claims frequency in Norway and lower profitability in Denmark.The development in Norway is driven by factors such as level of deductibles and bonus programs. We took swift action to address this back in the second quarter, and we have continued with further targeted measures. We stepped up our price increases from July and onwards. We have also increased the level of several deductibles with the first price coming into effect from November. Price increases takes some time to work their way through to be fully earned in the accounts, typically 12 to 24 months. Changes in deductibles have a more immediate effect on frequency, but of course, only on policies that have been sold or renewed at new terms. We will be monitoring the situation closely and implement further changes if necessary. We have a strong focus on this action and I'm confident that we will succeed in improving profitability for motor in Norway from next year.The strong growth momentum for commercial continued this quarter, driven by both Norway and Denmark. We have successfully implemented necessary price increases, while maintaining high retention in Norway. We're strongly focused on growing our Danish portfolio as well. The addition of [ Sonderjysk's ] portfolio from September is a huge contribution and we will increase customer retention in Denmark. Underlying profitability for commercial was lower than the same quarter last year, driven by Norway.The Danish commercial portfolio showed higher profitability. The insurance landscape is rapidly evolving, and we are convinced that it's essential to adapt to the changing needs of the customers and partners. We are strongly convinced on the operational benefits of our new core IT system, which is currently being implemented in Denmark. It is designed to pave the way for more robust and agile technology framework going forward. The useful insights and valuable experience we have gained over the past 4 years will enable us to proceed more effectively. We plan to start using the system for the Danish commercial portfolio in 2025. When we start changing the core system for Sweden and Norway, the experience from the project so far will be of course also be hugely beneficial.Our Swedish operations are progressing well with good revenue growth. Underlying profitability was lower than last year, impacted by higher normal medium-sized losses. We will continue our effort to increase results going forward, among others, through digitalization. To that end, we are very excited about having completed the first fully automated claims processes in Sweden. I'm pleased to see how our Baltic operations continue to generate strong revenue growth. Underlying profitability was somewhat lower than the same quarter last year. However, I'm confident that we are on the right path to improve results here.So over to Page 6. We continue to make progress on sustainability. We have a number of innovative and attractive initiatives, as you can see on the slide, taking important steps towards delivering on our ambitious targets, and I'm very happy to see that our efforts are appreciated and recognized among others confirmed by the AAA score we have received from the MSCI this quarter.So with that, I will leave the words to Jostein to present the third quarter results in more detail.

[Jostein Amdal, executive]

Thank you, Geir, and good morning, everybody. I'll start on Page 8. As Geir mentioned, we delivered a profit before tax of NOK 1,120 million in the third quarter, broadly in line with the same quarter last year. Our insurance service result was lower than last year due to claims related to the extreme weather events and one-off expenses. Adjusted for these items, the insurance service result was up by NOK 250 million compared to the third quarter of last year. Net claims related to Hans reinstated statement premiums, claims related to the torrential rain and damages to crops amounted to NOK 559 million. The one-off expenses amounted to NOK 409 million in total. The bulk of the weather claims and one-offs were recognized in the corporate center.Private showed a lower insurance result reflecting strong revenue growth for Norway, partly offset by high claims frequency for motor and lower results in Denmark. The insurance result for commercial increased due to strong revenue growth, higher run-off gains and higher discounting effects. Results for Sweden were lower compared to the same quarter of last year due to somewhat higher than normal medium-sized losses. The Baltics showed improved results due to revenue growth and run-off gains. Our pension business generated a significantly better result than last year despite one-off effects. I'll present further details on this in a moment. The change in results from our items -- from other items primarily reflected improved results from mobility services and lower other cost from general insurance.Turning over to Page 9. Our strong growth momentum continued in the third quarter with insurance revenues for the group increasing by 9.5% in local currency. Growth in private was driven by Norway. We have implemented significant price increases for motor, as Geir mentioned, and we will continue with further increases to mitigate the impact of higher claims frequency. Price increases for property and accident and health insurance, in addition to higher volumes for most of the main products, also contributed to the growth.The Danish private portfolio showed a slight reduction reflecting low activity in the Danish real estate market, tough competition and strong focus on implementing our new IT system. We are looking forward to adding PenSam Forsikring later this year, which together with our sales initiatives and partner agreements will contribute to growth in our Danish business.Revenues for commercial rose significantly, driven by both our Norwegian and Danish portfolios. The strong growth in Norway was driven by price increases, strong renewals and higher volumes for accident and health insurance. Growth in Denmark was driven by higher volumes and significant price increases in property and motor insurance. The recently acquired Danish dental insurance portfolio and Sonderjysk Forsikring in the commercial portfolio also contributed to the growth.Sweden also showed good growth in revenue, reflecting volume and price increases in both the private and commercial portfolios. The strong revenue growth in the Baltics continued this quarter driven by price increases and higher volumes for all the main product lines. We have a strong momentum in the Baltics which together with pricing measures generated significant sales this quarter and bode well for revenue growth going forward.Turning over to Page 10. The group's loss ratio increased by 6.2 percentage points from the third quarter last year. The development reflects significantly higher large losses as a consequence of the severe weather events, in addition to a higher underlying frequency loss ratio. Run-off gains and the discounting effect contributed positively.The main drivers for the increase in the underlying frequency loss ratio were commercial and private in Norway, reflecting lower profitability primarily for motor insurance and weather-related damages to crops. Commercial Denmark showed an improvement in underlying profitability, while private Denmark had lower profitability, the latter driven by the motor and property insurance lines. Sweden and the Baltics also showed lower underwriting profitability, driven by higher midsized claims for motor in Sweden and property claims in the Baltics. We continue to put through effective and differentiated pricing measures beyond expected claims inflation.Let's turn to Page 11. Our group cost ratio increased from 12.5% to 17% this quarter. The increase was due to the one-offs of NOK 409 million in total. Net of these items, the cost ratio would have been broadly flat at 12.6%. Excluding the Baltics and one-offs, our cost ratio was 12%. Also, this metric broadly flat year-on-year. The majority of the one-offs this quarter is, as Geir explained, related to the write-down on our group core IT system. Replacing a legacy system is both comprehensive and highly complex. The progress was delayed during the pandemic restrictions, and the move from the old to the new core system has taken its toll on operations.The write-downs reflect a shorter lifespan for parts of the system than earlier anticipated and cost related to fixing errors in the programming and implementation process. Modernization of the system in Denmark is crucial in paving the way for increased efficiency, reducing costs, preparing for future growth and staying ahead of the technological development.I'm pleased with the cost ratio in commercial this quarter improving further to a very competitive level. Private showed a higher cost ratio driven by one-off -- by the one-off in Denmark, strengthening of the salesforce and higher IT expenses in Norway. Sweden had a stable cost ratio and the Baltics showed an improvement, the latter due to revenue growth. We have a dedicated focus on operational efficiency and will continue to put through strong efforts into maintaining a competitive cost level.Over to Slide 12 for comments on our pension operations. Our pension business continued to perform well due to cost efficient operations and a good growth momentum. The results in the third quarter include one-offs with a net negative effect of NOK 65 million, mainly related to a write-down of parts of the core IT system impacting results for both insurance services and the unit linked business. We also recognized a small one-off in the insurance result related to changes to our actuarial models.Due to these changes, we expect a more stable development in our insurance service result for the pension business from the fourth quarter this year. Our pretax profit, adjusted for these one-offs and for the change in the contractual service margin, was NOK [ 119 ] million, compared to the loss of NOK 16 million in the same quarter last year. The improvement was driven by higher interest rates and continued growth in the number of occupational pension members and assets under management, somewhat contracted by an increase in costs due to the high activity level. Assets under management rose to NOK 64 billion. We have an agile and highly cost efficient pension business set for further growth going forward.Moving on to investment portfolio on Page 13, our investment portfolio generated a return of 0.2% in the third quarter, negatively impacted by rising interest rates and negative stock markets, while a high running yield in the fixed income portfolio contributed positively to returns. The Match portfolio returned 0.7% this quarter. Net of unwinding and the impact of changes in financial assumptions, the return was 0.6%. The Free portfolio returned minus 0.5% this quarter with negative returns on all asset classes reflecting market conditions.Compared to the end of the previous quarter, the risk in our portfolio was slightly lower with derivative positions taking down the exposure in listed equities by approximately NOK 500 million compared to the NOK 1.4 billion recorded as carrying amount at the end of this quarter. We have a balanced portfolio and solid fixed income investments, with the large majority having an investment-grade rating.Over to Page 14, a few words about our successful issue of a subordinated loan back in September. We wish to utilize what we saw as attractive market conditions to ensure an optimal capital structure. We issued a tier 2 loan of NOK 1.2 billion with a floating rate coupon of 3 month NIBOR plus 225 basis points. The bond was settled on the 26th of September. We also took the opportunity to buy back NOK 696 million in our tier 2 loan, which was issued in 2014 and has the first call next year. Net of the buyback, our outstanding loan amount increased to NOK 504 million.Over to Page 15. We had a solvency ratio of 185% at the end of the third quarter, up 5 percentage points from the second quarter. If we take into account the acquisition of PenSam, which we expect to complete later in the fourth quarter, the solvency ratio would have been 183%. Eligible own funds increased by NOK 600 million this quarter, with contributions from Solvency II operating earnings and the net effect of the loan issue and buyback, partly offset by formulaic dividend and acquisition of the commercial portfolio from Sonderjysk Forsikring.The capital requirement was stable, with the main drivers being higher nonlife risk, reflecting revenue growth, offset by lower market risk as a result of lower exposure to equities. The write-down of the group core IT system does not impact eligible own funds in the Solvency II calculation and hence the dividend capacity, since the funds do not include intangible assets. As a reminder, the third quarter is the last quarter during the year, with the eligible own funds taking account of the formulaic dividends. As always, our fourth quarter and year end calculation of eligible own funds will reflect the Board's proposed dividend for the year, instead of the formulaic dividend based on an 80% payout ratio. In accordance with our dividend policy, the regular dividend of NOK 4,125 million, which we paid earlier this year, serves as a baseline for the Board's proposal.A few words on the latest development of our operational targets on Slide 16. Customer satisfaction continues to be at a very high level and confirms our strong customer offering, particularly in Norway. We will continue to seek further improvements in all our markets. Retention in Norway remained at a high level, while improving in Denmark, driven by the private portfolio and the Baltics. Retention in Sweden was somewhat lower as a result of the significant price increases.Digitalization and automation are key measures to maintain high cost efficiency, with effects on both the cost and claims ratios. Our digitalization index, measuring progress in digital sales, digital service in the interaction and digital customers rose further this quarter. Digital claims reporting declined, primarily due to a change in the measurement method. The underlying development was still positive. Automated claims declined slightly.And I'll then hand the word back to Geir.

[Geir Holmgren, executive]

So to sum up on Page 17, our results were impacted by weather and one-offs this quarter, but the strong momentum in revenue growth continued and we look forward to further improve our operations. We are handling inflation well and we have strong measures in place to mitigate the effects of the elevated claims frequency for motor in Norway.So the outlook for Gjensidige insurance service result remains good. Due to the severe weather events and one-off expenses, it will be challenging to deliver on our financial targets for 2023. Our solid capital position and strong underlying profitability secure our ability to pay out dividends according to our dividend policy.So with that, we'll now open the Q&A session for this presentation.

[Operator]

Thank you. [Operator Instructions] We'll now take our first question from Alexander Evans at Citi.

[Alexander Evans, analyst]

Firstly, just on the IT write-down, it seems sort of a bit of a cost overrun because of the customization there. I wonder if you can give us a little bit of a flavor of how much customization needs to be done beyond this in order for it to roll out into Norway and Sweden, what a likely timeframe that would be. And just remind us, what cost savings are of the new IT systems relative to the old ones.Secondly, just on Norwegian motor claims inflation of 5% to 7%. If I just sort of look at what you're suggesting on the gross written premiums at 7.5% year-over-year and maybe claims frequency is up 5% year-over-year, I mean, that would seem to suggest that pricing needs to be at least sort of 10 to 12 and maybe not all of that sticks, so even slightly higher. And if you look at one of your peers, [ Norwegian Motor ] in premium growth, that's 11% year-over-year in 3Q. So are you not 5 percentage points behind the curve there on getting to an adequate level of profitability? And then just secondly, on some of the top line growth that you've seen that's in sort of Norwegian commercial and Sweden as well, but you're also seeing pretty material deteriorations in underlying loss ratio. So how confident are you on some of that business that you're writing in those segments?

[Geir Holmgren, executive]

Okay, I can start with the first question about IDIT and our core system implementation in Denmark and then in Sweden and Norway as well. Starting with some words about IDIT. It is one of the most recognized core systems when it comes to P&C in globally. We are very confident that this is the type of core system we need for further develop our business in all our markets. Everything we have seen so far have made us sure that the decisions that have been made in the past are the right decisions.So about the write-downs we have done this quarter, it's due to some factors that have been explained, but in addition I can comment on -- we have actually made up a module handling APIs, which are the interfaces to more local reporting standards and some internal needs we have in -- to have the best digital customer front solutions as well, and some many other examples. But we have concluded that it's the best way to give us the right flexibility, to give us the best solutions going forward. It is -- the best way to do that is to have this module developed by our own expertise and own team. So this is the main reason for having this module internally and not using the standard module from the package.Going forward, this flexibility given from the system will also improve our competitiveness in the markets we are operating. And as I told, we have definitely made the same decision about core system if we have the choice to do it again.

[Jostein Amdal, executive]

Moving on to the pricing of motor in Norway, which I think was your second question, Alex. I think what we've said and what we are doing is pricing ahead of and beyond what is the expected claims inflation level, also taking into account the frequency development. I think the 11% [indiscernible] is kind of not our focal point. What our focal point is what we see as the expected picture going forward. And we're putting through a combination of pricing measures which is stepped up in July, and changes in terms and conditions, notably deductibles for certain coverages. The total package here will give a positive effect on the underlying frequency loss ratio of motor itself going forward. But as we talked about, it takes some time to get these measures worked through the portfolio.It's important to notice that we did have pricing measures in place before July as well. I mean we are -- we have stepped them up in July when we saw this frequency issue in the second quarter. And, yes, I think that should bode well for the development going forward in motor. And then as that is an important part of private, it will also be important for the private portfolio -- private segment going forward.And third question was really underlying frequency loss ratio everywhere else, if I understand you correctly?

[Alexander Evans, analyst]

Yes, just on some of the growth that you're adding on to those segments there at the moment.

[Jostein Amdal, executive]

Specifically to the growth?

[Alexander Evans, analyst]

Yes, I mean, there's quite a lot of material growth, but also it seems like the underlying loss ratios perhaps aren't in the right place. So I mean, is it the new business that you're writing you're very confident on, or what is the rationale for that?

[Jostein Amdal, executive]

Well, I think if you look at the composition of growth here, it's a combination of volume growth organically. Some -- but not a lot -- not the majority is inorganically, and the remainder really being price increases. And if you look at the drivers of the growth in the different segments, I'd say, we start with the smallest one in the Baltics. It's a combination still. I think we are on a very strong path towards delivering on what we said, that we should have a combined ratio below 100 for 2023. We are there still, slight increase this quarter. But, I mean, we're confident that the price increases we have put in place will develop a good profitability path both in 2023 and 2024. The inflation picture in the Baltics is cooling somewhat down, although from a very high level. That should be positive for our underlying profitability in 2024. Also same picture a bit for Sweden, but there is slight uptick in the [ loss ratio ] this quarter, but that is volatility really more than -- the underlying trend is still positive also for Sweden.

[Operator]

We'll now move on to our next question from Freya Kong at Bank of America.

[Freya Kong, analyst]

Just to come back to the frequency and claims inflation. So my understanding or my interpretation is that you are pricing for severity inflation and you have good visibility on this, but where you've been surprised has been frequency. And this seems to be mostly in motor, and you said you would look to monitor this. What have you seen over the quarter? Is it just more people getting back on the roads? Or has behavior changed in customers? What's driving this frequency uptick?And secondly, just on the investment portfolio return. Would you be able to break this down between regular income versus mark-to-market effect? And what's the reinvestment rate on your fixed income book?

[Geir Holmgren, executive]

I can start with motor and frequency. As you explained, we are -- have been, over time, pricing at least in line with inflation. So it's more a question about frequency. And as we explained last quarter, it's frequency related to motor and especially in Norway. We have pointed out some factors that have driven the weaker frequency we have seen. Like a couple of years ago, introduced a bonus program, which have some negative impact. We have also seen the deductibles have been [ fixed ] for some years, which are -- even though we have some years with high inflation as well. So what we are doing is doing pricing measures. We are changing terms and conditions, as explained earlier today. And what we have done through third quarter, we also see that we are, at the moment, pricing beyond price inflation when it comes to motor and which is important to handle the frequency challenge we have seen. So this -- we are getting insights every month about how the development is and we are taking pricing measures and other measures to mitigate the negative impact as well. And I'm confident that next year we'll see great improvements from all the measures taken.

[Jostein Amdal, executive]

In terms of the investment portfolio, it's -- we don't really break down in kind of mark-to-market changes and what we call coupon and -- the whole portfolio is mark-to-market. So that's the most meaningful way to look at it. If we look at the reinvestment here, we have a running yield now of 4.76% in the whole of the bond portfolio and the hedged part has a higher -- have higher running yield. I think that is the kind of the message because we are around 5% [indiscernible] in that way.

[Operator]

We'll now move on to our next question from Hakon at DNB Markets.

[Håkon Astrup, analyst]

Two questions from me. First one, a follow-up on the core IT system. So I didn't catch when you expect to implement this in Norway. And can you talk a little bit about the implementation risk in Norway, given the hiccups that you have experienced in Denmark? That was the first question. And the second question's regarding the upcoming CMD. Should we expect any changes to your financial targets? Or is it more of an educational session?

[Geir Holmgren, executive]

Okay. I can take the first one, Hakon. When it comes to the core IT system, I think during the last 4 years, we have experienced a lot of how to run the process, how to mitigate implementation risk, how to cooperate with the external partners, which is very important. We have also a period in the past with the pandemic with remote cooperation as well. So it has been some challenging situation. We have not decided on when to do this implementation in Norway yet. We are aiming for finalizing the commercial portfolio in Denmark. That's the first and the next most important step. And then we will take a decision on Sweden and Norway as well. But I'm very confident that when we do this in Norway, we are well prepared, we will do that in a shorter time frame and with lower risk, and we will also have measures to mitigate implementation risk doing that in the Norwegian market.

[Mitra Negård, executive]

In terms of your question on the financial targets, Hakon, the targets you see today are the ones that apply until we eventually should announce any changes. So in due course, if we change the targets, they will be announced.

[Håkon Astrup, analyst]

Okay. And that can happen at the CMD, if I understand you correctly or any other time.

[Mitra Negård, executive]

We will announce them in due course when relevant. But we're looking forward to see you all at the CMD and looking forward to sharing insights on our business that day.

[Operator]

We'll take our next question from Thomas Svendsen at SEB.

[Thomas Svendsen, analyst]

Two questions. First on motor Norway. So on this increased deductibles, could you just give us sort of what is the typical deductible for a typical car on that product today? And how much do you intend to increase it in kroner, just so we get a feeling of how much that is? And second question on the solvency ratio. How are the process going on getting approved your own internal model? And if you -- that one is approved, do you consider the difference between your own model and the [ partial ] model to be excess capital? Or should we expect your ratio or range of solvency to go up in connection with having that model approved?

[Geir Holmgren, executive]

Yes. The first one, Thomas, regarding deductibles, a couple of examples. The deductible you have when you want to have some roadside assistance and deductibles when it comes to changing glass on your car are 2 examples that are top of mind when we actually do the changes going forward.

[Thomas Svendsen, analyst]

But if it is your casco insurance, you typically maybe have NOK 7,000 for a car. And I guess that's -- people found out that NOK 7,000 is cheap to get your car -- your bumper repaired. So are you also intending to increase that typical NOK 7,000 for a casco claim?

[Geir Holmgren, executive]

I think the standard deductible now is NOK 6,000. And this is one of the measures we are looking into, but haven't decided on yet.

[Thomas Svendsen, analyst]

Okay. So not decided on the casco, only on the glass and the roadside.

[Geir Holmgren, executive]

No, glass and roadside assistance. But we are looking into a number of measures for other deductibles as well.

[Jostein Amdal, executive]

On the partial internal model and then the potential consequences of getting the whole own calibration approved, I think we talked about several times that this is something we're working on continuously, but it is a slow moving matter. And -- but if kind of what -- we have the capital we need and the capital requirements we need. So I think it's fair to consider that if it was to be approved, there would be a different view on how much capital we need, to answer it broadly -- a bit broadly.

[Geir Holmgren, executive]

Thomas, you can just add one more example from your first question regarding the casco for commercial car. We are increasing the deductible during this autumn from NOK 10,000 to NOK 12,000.

[Jostein Amdal, executive]

For commercial cars.

[Geir Holmgren, executive]

Commercial cars.

[Operator]

We will move on to our next question from Hans Rettedal at Danske Bank.

[Hans Rettedal Christiansen, analyst]

So just touching back on the underlying frequency loss ratio and you've covered the motor inflation, but in the report, you're also mentioning agriculture and marine insurance where you're seeing lower profitability. Could you just sort of explain a little bit on the size of those lines and also what you're seeing there?

[Geir Holmgren, executive]

I think specifically on -- this is the commercial portfolio in Norway and specifically on agriculture, what has been driving, and I think we tried to get that through in the report, is that that's driving by the crop losses in the third quarter. I mean, if you remember back to 2018, we had quite a large crop insurance loss due to drought and this time it's a combination of very dry weather in June and then we got the heavy rain in August and that has led us to assume a loss related to that type of insurance. Now that is something that is a bit technical to get the claims amount confirmed because it needs to go through some kind of public process. But we have assumed that -- and that is the main driver behind the comment on the agriculture. The marine side, it's a fairly small increase in the underlying frequency loss ratio that was related to fish farming.

[Hans Rettedal Christiansen, analyst]

Okay. Are you able to split the NOK 559 million that you have in claims costs related to Hans and torrential rain and damages in crops? Sort of how much of that is the crop part of the equation?

[Geir Holmgren, executive]

We haven't disclosed that amount. It's a minor part of the total. The big parts are in order of magnitude, Hans, the torrential rain and then agriculture crop.

[Operator]

We'll take our next question from Jan Erik at ABG.

[Jan Gjerland, analyst]

Just to come back to the write-down on the IT system. It's just a little bit confusing that you write down sort of a new system, even though this is some partial part of the ongoing situation here. Wouldn't it be sort of better to have pay as you go for those kind of internal work model when the IT system is different? Or how should we consider your sort of work process going forward when it comes to the implementation of the IT system? Should we expect a higher cost ratio as you actually do this implementation so that we should then expect further sort of one-off write-downs when you are done with partial of them as you go ahead with the commercial in Denmark and then you'll also consider what to do in Norway? And is the first thing is, is this system bought to sort of be implemented in Denmark, Norway and Sweden? And if it's not, how should we then think about the total cost of this system? Is it so that it's too costly for just to be run in Denmark? And is this the potential of further write-downs down the road because you haven't implemented it in Sweden and Norway, if that could be an outcome?

[Jostein Amdal, executive]

I think we follow the generally accepted accounting principles for these kind of projects where we capitalize on the investments up till we take the system into use, and then when we start taking it to use, as we have done in private Denmark now, we depreciate it over approximately 10 years. What we have done now is that we see that some parts of the system will have a much shorter lifespan than we originally thought, because we need to develop our own kind of solution for this digital interface that Geir talked about in a previous question from Alex. And what that means is that you can't assume a [ 10 year ] when you're actually working on a separate solution. And this has specifically been related to the digital interface between the core calculation engine and policy handling system and the kind of external system and other systems that are related to this core, where we see that we have been so much forward in the digital solutions and Scandinavian insurance business is so interlinked with public and other external data sources that we need to do something that is a bit more tailor-made to our needs there.We do not expect any further one-offs related to this. There is no guarantee in that for those kind of system. But we've taken the [ work ] that we deem necessary for this project. And as I think Geir talked about in a previous question also regarding when will we start using it in other geographies, we are completing it now in private Denmark. We're moving on to commercial Denmark, where we expect to take it into use from around the change of year '24, '25 and then moving on to Sweden and Norway. And we haven't set a specific time line for that further implementation as of yet. But the intention is this is going to be the new group core IT system. So the work we've done now in Denmark will benefit Sweden and Norway and large part of the cost that we have already incurred here will be lower cost when implementing it in Sweden and Norway.

[Jan Gjerland, analyst]

Okay, can you just remind us how large is this CapEx actually being to -- being at the end of the day, you think? And secondly, the depreciation that you started with when you sort of take the system in use, how large is that? Could you just remind us of that level and how much savings you expect then from the same system? Is it the depreciation in line with the savings expectations or is it actually higher at the end of the day?

[Jostein Amdal, executive]

We haven't disclosed the total CapEx related to this project so -- and we're not doing it now either. The savings and the main benefits are, mainly this is a modern system. The old system was developed back in, I guess, '90s somewhere, and this system is just 30 years newer and will be much better to run for us, much more modern. The old system was transaction-based pricing model, whereas this new system is more volume-independent. So it will have -- and as the business has been growing, we expect to save also on the cost side from the new system. I think I will leave it at that.

[Jan Gjerland, analyst]

Okay. Can you give any ratio levels or expectations?

[Jostein Amdal, executive]

I think that would be kind of going against what I have said, I think, of not giving you the total CapEx and then this depreciation.

[Jan Gjerland, analyst]

Okay. Just one final thing on the underlying, do you expect any volume effects from your new price initiatives and hiked deductibles? Are you sort of now in a common market standard or are you above the market standard when it comes to deductibles?

[Geir Holmgren, executive]

Yes, as you know, Jan Erik, we have a strong position in Norway. We are market leader both in the private and commercial segment. We have very high customer loyalty, high retention rates. All the repricing we have done the last year haven't had any impact on our retention level. I'm very confident that all the price increases we are doing at the moment and all other measures will not have any impact on the retention.

[Operator]

We'll take our next question from Vinit at Mediobanca.

[Vinit Malhotra, analyst]

So let me just ask one thing about frequency, please, which is a doubt for me still. This topic was also in Q2 and we had said, or we had discussed then that the pricing and deductible actions would be helping, mainly pricing would be helping in Q3. So I'm just curious, are you seeing some improvement already in Q3? And then obviously, I noticed, just to clarify, you did say that once you put the November deductible changes then probably improvement accelerates. So -- but I'm just curious, did you see any improvement already in Q3 versus Q2 for motor frequency?And second question is on the run-off, where in the private line, there's actually a negative charge. I'm just curious because it seems all the run-off is coming from mainly the commercial segment this quarter. So any commentary would be helpful.

[Geir Holmgren, executive]

I can start with the first one. We started with all the pricing measures in July, which means that we are repricing beyond the inflation we are forecasting, which also means that the impact and the positive effect will gradually come. But it will take 12 months to do all the price increases for the whole portfolio, catching up with all the renewals throughout the year and the whole portfolio. And so the impact will actually come gradually during the first 12 months after we have done the repricing for each contract. So what we have said earlier and what we said today is that we will see the positive impact in between 12 and 24 months. So we'll see the positive effect more in detail next year. But yes, we have started to price and we had done it beyond the inflation rate already. So that's helpful quarter-by-quarter going forward.

[Jostein Amdal, executive]

On the run-off question, it's -- sorry, Vinit, please go ahead.

[Vinit Malhotra, analyst]

No, no, I was saying that the deductible changes might accelerate this 12 to 24. Is that a fair understanding?

[Geir Holmgren, executive]

Yeah, when you introduce the deductibles, they will have an immediate effect, but I have to add that it's done by renewable. So starting from November, it will have an immediate effect on the contract having renewables in November. But then you have to look at it month-by-month going forward to catch up with the whole portfolio.

[Vinit Malhotra, analyst]

Okay, and this is a major new step, you think? Or is it just a minor change to deductibles?

[Geir Holmgren, executive]

This is a minor change, but this is one of many types of measures we are considering.

[Jostein Amdal, executive]

And your run-off question, Vinit. I think if you look at kind of by segment it's a run-off loss in private Denmark, but kind of all other segments that are [ included in this cost ] have a positive run-off gain. But I'm not quite sure if I understood your question correctly.

[Vinit Malhotra, analyst]

Is there anything to note or flag about a negative charge in private lines?

[Geir Holmgren, executive]

[Technical Difficulty] loss income in private Denmark or let's say, this is a slight [Technical Difficulty], it's not that big and it's not something to flag specifically.

[Operator]

We'll now take our last question from Faizan Lakhani at HSBC.

[Faizan Lakhani, analyst]

My first question is on the Solvency II. It's currently helped by the debt issuance. Can we treat that as real capital or when you come to tender your debt, that will come off next year? And I guess the follow-up to that is, just thinking about the roll forward from here, you've obviously got strong net income, but you have quite a high dividend cost. Your SCR seems to be going up every year, given the fact your growth is quite onerous, I guess, given the fact you're growing in commercial. But then you should have this potential CapEx headwind as well going-forward. What does that mean for your Solvency II roll-forward going-forward? Should we expect that to grow over time?And second question is, I just wanted to confirm on the motor frequency. So although, you've said that you are pricing for the frequency and severity, how would I think about it on a risk-adjusted basis if you were to adjust TNCs in line with Alex's question around sort of the 5% to 7%? Just to try and understand what is the net rate increase that you're really seeing on that [ part ]?

[Jostein Amdal, executive]

I'll start with the solvency question. It's true that we have remaining around NOK 500 million, which has it -- off the tier 2 issue from 2014 that has its first call in October '24. And of course, we intend to call as it is customary. We do still have capacity to issue more subordinate debt and we will consider whether that is beneficial or not within that time frame. I think that we'll let you know if we issue something. We intend to kind of have the most optimal capital structure at any time. And of course, at the time, usually you tie in some kind of credit spread and we need to find the best entry points for that. We disclosed the remaining capacity for both tier 1 and tier 2 debt in the presentation, at least in one of the pages in the appendix there. And on the tier 2, we now have NOK 0.4 billion in remaining capacity. And of course, if we redeem the NOK 0.5 billion that we have in October '24, that capacity increases by this NOK 0.5 billion. So then we have somewhat short of NOK 1 billion. And then the underlying growth in the SCR will increase that capacity as we go forward. In addition to that, we have remaining capacity for tier 1 debt at around NOK 2 billion.But as we said before, it's not our intention to utilize the full capacity on the tier 1 side because that increases the volatility somewhat. The CapEx does not affect this calculation. It's been grown from the soil and from long terms as it's incurred. I mean it's specifically talking about the development of the core system for [indiscernible]. That's taken out of the solvency calculation as we are investing. So I wouldn't be too concerned about that. I think we have a -- you could see it as a conservative tweak of a characteristic of the Solvency II system that this is taken out immediately.

[Geir Holmgren, executive]

And the second one on motor and pricing. We have started with the repricing and we are pricing beyond our inflation forecast. And what we have seen in the last quarter is that we are actually -- we're pricing beyond the inflation, which is very helpful when it comes to take down the frequency. And we will follow this month-by-month with newer insights and developments, and we will continue with pricing measures and other measures to actually mitigate the development,We have seen on the frequency side during the last quarters. So that's our target, I would say. And it's always helpful to price beyond the inflation, and we will continue to do that.

[Faizan Lakhani, analyst]

I guess, as a sort of follow-up question to Alex's where inflation is 5% to 7% on severity. I can see from Page 9 that your gross return premium is up 7.5%. So that would only suggest you're pricing in 0.5% for frequency. But your comments suggest that it's more the fact that we have to sort of take into consideration TNCs, and it's unfair to see that 7.5% as the correct figure. So if we were to sort of adjust for the TNCs, what does that 7.5% become is what I'm trying to get at.

[Geir Holmgren, executive]

Yes, 7.5% is motor more in general, including other types of motor as well, not only cars. And in addition, this is a starting point when you are doing this repricing. And as we mentioned, we are adding other measures as well to taking care of or mitigating the frequency development we have seen in the last quarters.

[Jostein Amdal, executive]

I'll just add that on a risk-adjusted basis as you talk about pricing and comparing the combined effects of a price increase, which is north of 7.5% for personal cars, as it's a part of the motor book, and the effects on -- expected effects on frequency, that means that the effects are somewhat bigger than just the price effects that you see from the accounting figures. And this is what drives the improvement in the underlying frequency loss ratio going into 2024.

[Operator]

There are no further questions in queue. I will now hand it back to Mitra for closing remarks. Thank you.

[Mitra Negård, executive]

Great. Thank you all for your participation, and as always, good questions. I would like to take the opportunity to remind you of our Capital Markets Day in Oslo on 22 November. You'll find registration details in the release we published last week. And we will be participating in road show meetings in several cities during the next few months, starting with Oslo today. Please see our financial calendar on our website for more details on this.And with that, thank you for your attention and have a nice day.

[Operator]

Thank you. This concludes today's call. Stay safe. You may now disconnect.