Gjensidige Forsikring ASA

OSE:GJF

Earnings Call Analysis

Gjensidige's Growth and Pricing Strategies Drive Q3 2024 Performance

In Q3 2024, Gjensidige reported a profit before tax of NOK 2.215 billion, with insurance revenue up nearly 12%. While underlying profitability faced challenges from rising claims costs, effective pricing increased the insurance service result. Claims inflation projections adjusted to 4%-6%, down from 5%-7%. Significant price increases are expected, with motor insurance premiums forecasted to rise by over 40% by year-end. The company's strong growth momentum is evident, especially in Norway and Denmark, with a strong capital position supporting dividends. Nevertheless, the combined ratio target for 2024 remains unattainable due to weather-related claims.

Strong Revenue Growth Amidst Rising Claims

In the third quarter of 2024, Gjensidige reported a profit before tax of NOK 2.215 billion, marking a significant increase compared to the same period last year. This growth has been primarily driven by an increase in insurance revenue, which rose by approximately 12%. Despite the positive revenue figures, underlying profitability remains a concern as it was negatively affected by higher claims costs, particularly in Norway. The company noted that while claims inflation has stabilized, it expects claims costs to increase by 4% to 6% over the next 12 to 18 months, adjusted from a previous estimate of 5% to 7%.

Effective Pricing Measures and Market Strategy

Gjensidige has responded to rising claims by implementing effective pricing measures. They successfully increased average premiums by nearly 13% over the last 12 months, with further increases anticipated, projecting an average rate increase of 17.5%. By the end of 2024, the company expects average premiums to rise over 40%. This aggressive pricing strategy is part of their effort to align premiums with the increasing claims frequency and severity, which rose from 5.8% to 7% year-on-year in the motor insurance sector.

Focus on Cost Management and Customer Retention

Despite the challenges, Gjensidige has managed to keep customer retention rates high, especially in Norway. The retention rate remains stable even with significant pricing increases, showcasing strong customer loyalty. Moreover, the company reported a competitive cost ratio of 11.8%, a slight reduction from the previous quarter. This is indicative of effective cost control measures being in place. However, they noted that the underlying profitability for the commercial segment has decreased compared to last year, particularly in Norway.

Investment Returns and Future Projections

Gjensidige's investments yielded returns of NOK 1.307 billion, contributing to an annualized return on equity of 23.5%. With a strong capital discipline and a solvency ratio of 164%, the company is well-positioned to support its dividend policy and maintain adequate capital reserves to meet growth ambitions. They reiterated their financial targets for 2025 and 2026, aiming for a combined ratio below or equal to 83%.

Challenges Ahead in Achieving Combined Ratio Targets

Despite the positive outlook on revenue and measures taken to improve profitability, Gjensidige does not expect to meet its combined ratio target for 2024 due to ongoing high claims levels, particularly related to severe weather. The company is committed to enhancing its operational efficiency further while addressing the volatile nature of claims in the property insurance segment. They are closely monitoring claims trends and will adjust pricing strategies as necessary to safeguard profitability.

Looking Forward

As Gjensidige moves into the final quarter of 2024, the focus will be on sustaining revenue momentum through continued pricing adjustments and enhancing operational efficiencies. Investors should monitor the ongoing changes in claims inflation as the company navigates through significant pricing strategies while maintaining high customer satisfaction levels across its offerings. The strong capital position and commitment to financial targets strengthen the company's long-term viability, despite short-term challenges.

Earnings Call Transcript 2024-Q3

[Operator]

Hello, and welcome to the Gjensidige's Q3 2024 Results Presentation. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]

I will now hand you over to your host, Mitra Negård, Head of Investor Relations, to begin today's conference.

[Mitra Negård, executive]

Hi, everyone, and welcome to this third quarter presentation of Gjensidige. My name is Mitra Negård, 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 run through the numbers in further detail. And we have plenty of time for a Q&A afterwards. Geir, please?

[Geir Holmgren, executive]

Thank you, Mitra, and good morning, everyone. Let us turn over to Page 2 for comments on our third quarter results. Some technical issues here. [Technical Difficulty]

Let us turn over to Page 2 for comments on our third quarter results. The profit before tax was NOK 2.215 billion. General insurance service result was NOK 1.590 billion -- sorry, the general insurance service result was NOK 1.590 billion, up year-on-year also when adjusting for the one-off expenses recognized in the third quarter last year. The strong growth momentum continued this quarter with insurance revenue for the group increasing by almost 12%.

Underlying profitability came in lower, negatively impacted by higher claims costs in Norway. We are not satisfied with the underlying profitability, but I'm very pleased to see that due to the effective pricing measures, the insurance service result is increasing.

Our investments generated returns of NOK 1.307 billion, which together with good results from our pension business, contributed to delivering an annualized return on equity of 23.5%. Jostein will revert with more detailed comments on the results for the quarter.

So a few words about property insurance on Page 3. As we have mentioned earlier, claims frequency for property insurance is volatile, being more exposed to weather and stochastic factors such as fires. Both private and commercial property claims increased this quarter when adjusting for the severe weather claims in the third quarter last year.

Fires were the main drivers behind the increase in our private portfolio this quarter. Commercial property is highly prone to quarterly volatility. Claims inflation has been stable for some time and developed as expected. We assume the gradual decline in wage increases will bring down claims inflation. Therefore, our updated estimate for claims inflation for the next 12 to 18 months has come down to 4% to 6% from our previous projection of 5% to 7%.

We monitor the situation closely and are prepared for changes, especially from currency movements and energy prices. Staying ahead of the claims curve is our #1 priority. We continue to increase prices to reflect the long-term impact of more frequent weather incidents. Our implemented measures so far this year will raise average prices by more than 10% by the end of 2024. Measures have been stepped up further with more than 60% price increase going forward.

So over to Page 4, and a few words on motor insurance in Norway. We saw higher claims cost compared with the third quarter last year, reflecting a continued increase in claims frequency, higher repair costs and a shift in the claims mix towards more expensive losses. Although we do not rule out quarterly volatility, we expect claim frequency to remain at this level going forward.

Repair costs have developed as expected, and we assume the increase to remain at 4% to 7% over the next 12 to 18 months. The claims mix varies depending on weather, driving behavior and a mix of type of cars in our portfolio. Motor is a core product and have a strong focus on ensuring that our prices correctly reflect relevant long-term trends.

As you can see on this slide, we have continued to pull through significant price increases in this quarter, raising average premiums by almost 13% during the last 12 months. We will increase prices further, currently with an average rate of 17.5%. By the end of this year, we expect the average premium to have increased by more than 40%. I'm very encouraged to see that we are able to put through these significant unnecessary price increases and that these measures are gradually improving profitability.

Moving on to Page 5. Private continued to generate strong revenue growth this quarter, driven by both Norway and Denmark. It is very encouraging to see the continued high retention in Norway despite the significant price increases. The good growth momentum in private Denmark continued in the third quarter, driven by organic growth and contribution from PenSam.

Underlying profitability for private was lower than the same quarter last year, and we will continue to meet this with targeted pricing measures. Growth in our commercial portfolios in Norway and Denmark was strong this quarter 2. Customer retention in Norway remains at a very high level. Retention in Denmark was slightly down compared to the second quarter.

Underlying profitability for the Commercial segment was lower than the same quarter last year, driven by Norway. Although more prone to quarterly volatility in claims, we see the need to continue raising prices also for this portfolio. The Danish commercial portfolio showed a higher profitability.

Our Swedish operations are progressing well with good revenue growth in both segments. The underlying profitability improved compared with the same quarter last year. We have a strong focus on improving risk selection and implementing pricing and cost-efficiency measures.

Over to Page 6. We continue to follow up on our strong sustainability ambitions. We have a number of innovative initiatives, as you can see on this slide. The initiatives will create a great customer value and reduce claims cost over time. With these, we are taking important steps towards delivering on our ambitious targets to contribute to a safer society, sustainable claims handling and responsible investments.

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

[Jostein Amdal, executive]

Thank you, Geir, and good morning, everybody. I will start on Page 8. As Geir mentioned, we delivered a profit before tax of NOK 2.215 billion in the third quarter. This is significantly higher than the same quarter last year, driven by the insurance service result, the result from our pension business and the financial results from our investments.

The insurance service result in the third quarter last year included one-off expenses of NOK 409 million. But even adjusted for this, the result increased this year driven by continued strong revenue growth, partly offset by higher claims, primarily in Norway.

We are monitoring the development in claims closely, and we will swiftly adjust and implement higher prices where it is necessary. Although the underlying frequency loss ratio for the group was higher compared to the same quarter last year, I find it encouraging that the deterioration is lower than the previous quarter as our implemented measures are starting to earn its way into the profit and loss account.

The development in other items reflects the write-down of goodwill related to the agreement of the sale of operations in the Baltics as announced in late July. We have also generated a higher result for our mobility services while higher interest expenses on subordinated loans and increased amortization of intangible assets impacted the results negatively.

As announced earlier, the results for our Baltic operations are presented in one line from this quarter. As you can see on this slide, profits from discontinued operations amounted to NOK 32 million for the quarter with the improvement driven by an increase in net finance income and insurance service results. We are waiting for regulatory approvals of the sale and expect to close the transaction at the latest by the beginning of 2026.

Turning over to Page 9. The strong growth continued in the third quarter with insurance revenues for the group increasing by 10.6% in local currency. Growth in private was driven by both Norway and Denmark. The increase in Norway reflects price increases in all main products, product lines and especially for motor.

The market share remained broadly stable. The strong revenue growth continued in Denmark, driven by price increases for all the main products and some volume growth. PenSam also contributed to the growth, but even excluding this, the growth in Denmark was 11.7%.

Revenues for commercial continued to rise significantly driven by both our Norwegian and Danish portfolios. The strong growth in Norway was driven by price increases for all products, solid renewals and some volume growth. Growth in Denmark was driven by price increases for all main products and higher volume for some products.

Sønderjysk contributed with 2.6 percentage points to the growth. Premium accruals in the quarter also contributed to the increase. The growth in Sweden was driven by price increases in the private and commercial portfolios. Adjusted for a premium correction made in the fourth quarter last year, growth measured in local currency was 5.8%. Insurance revenue for private motor insurance decreased during the quarter due to lower volumes.

Turning over to Page 10. The group's loss ratio increased by 1.3 percentage points this quarter, reflecting a higher underlying frequency loss ratio in private and commercial. Large losses, including weather-related losses, were lower, whereas the discounting effect and risk adjustment contributed negatively. We are confident that the ongoing pricing measures will improve profitability over time. However, bear in mind that the implemented pricing measures take time to get fully reflected in the accounts and the quarterly volatility in claims frequency and severity will impact the result also in the future.

Let's turn to Page 11. We have a dedicated focus on operational efficiency, and I'm very pleased that we have managed to bring our cost ratio further down to a very competitive level at 11.8% this quarter. Bear in mind the one-offs in the third quarter last year. But even adjusted for this, we managed to bring down the ratio by 20 basis points.

The cost ratio in private improved due to cost recognized in the third quarter of 2023 following the renewal of a distribution agreement in Denmark. Efficiency measures in Norway and growth in insurance revenue also contributed to the improved cost ratio. Commercial cost ratio was slightly higher, both in Norway and Denmark. And the improvement in Sweden reflects the higher insurance revenue.

Over to Slide 12 for comments on the pension operations. Our pretax profit adjusted for the change in the contractual service margin was NOK 182 million. The insurance result was down when adjusting for positive effects from modern changes and a write-down on the core IT system last year. The decline was driven by an increase in the number of settled claims for child pension insurance and the accounting rules of recognized as losses on onerous contracts immediately, whereas profitable contracts are recognized through the CSM over time.

Net finance improved, mainly driven by lower interest rates in the quarter. Results for our unit-linked business improved with higher administration and management fees due to the growth in the number of occupational pension members and assets under management. Assets under management rose to NOK 84 billion from NOK 79 billion in the second quarter due to both good investment return and portfolio growth.

Moving on to the investment portfolio on Page 13. Our investment portfolio generated positive returns for all asset classes, except private equity, which showed flat returns in the quarter. The match portfolio, net of unwinding and the impact of changes in financial assumptions, returned 70 basis points, mainly reflecting lower credit spreads and the fact that the investments did not fully match the accounting-based technical provisions.

The free portfolio returned 2.1 percentage points this quarter, reflecting positive returns from high running yields, falling interest rates and positive equity markets. The risk in our portfolio was brought somewhat down from the second quarter. We have a balanced portfolio and solid fixed income investments with a large majority having an investment-grade rating.

A few words on the latest development of our operational targets on Slide 14. Customer satisfaction is at a very high level and confirms that our products and services are meeting or even exceeding the expectations of our customers, particularly in Norway. We will continue to seek further improvement in all our markets.

Our retention in Norway remained high and stable. Retention in Denmark was slightly down, while in Sweden it improved compared with the second quarter. Digitalization and automation are key measures to maintain high cost efficiency with the effect on both the cost and the claims ratio.

Our digital distribution index improved by 7.5% in the first 9 months this year, with the increase in Q3, driven by the higher digital sales. Digital claims increased during the quarter, driven by Norway and Sweden. Automated claims also increased in the quarter. We will start reporting on our new metric distribution efficiency from the fourth quarter of this year.

Over to Page 12 (sic) [ 15 ]. We have the solvency ratio of 164% at the end of the third quarter, down 6 percentage points from Q2. Solvency II operating earnings and returns from the free portfolio contributed positively to eligible own funds. The formulaic dividend reduced own funds.

As announced earlier, we have exercised the call option on one of our Tier 2 bonds with an outstanding loan amount of NOK 241 million. Although the settlement took place in October, we took account of this in our calculations for the solvency ratio for the third quarter.

The capital requirement increased by approximately NOK 0.5 billion with the main drivers being higher underwriting risk due to growth increase in technical provisions and changes in currency rates. Market risk decreased due to lower risk in the investment portfolio.

To sum up on Page 16. We continue to have a very strong growth momentum. Sorry. Sorry, I'll leave that for Geir.

[Geir Holmgren, executive]

Yes, sorry for that. Okay. Yes, to sum up on Page 16, as Jostein said, we continue to have a strong growth momentum, and it is particularly encouraging to see that our customer loyalty remains high despite the implementation of extraordinary pricing measures in Norway. The increase in claims costs in Norway continued as expected this quarter. We have a strong focus on improving profitability with significant and targeted pricing measures, tight cost control and efforts to further enhance operational efficiency.

We are convinced that the combined ratio for the group and the underlying frequency loss ratio for private and commercial will improve over time. Due to significant weather-related claims and provisions in the first quarter and the high level of claims so far this year, we do not expect to deliver on our combined ratio target for 2024.

We maintain all our financial targets for 2025 and 2026. We are committed to having a strong capital discipline, and our solvency position is strong, supporting our ability to deliver on our dividend policy.

And with that, we will now open the Q&A session of this presentation. Thank you.

[Operator]

[Operator Instructions] And we will now take our first question from Faizan Lakhani of HSBC.

[Faizan Lakhani, analyst]

My first question is on the solvency position. So the SCR has increased by about 10% year-to-date. And if we continue with this level of SCR growth, they will continue to put pressure on your solvency position. At what point does the solvency level become constrained for your growth ambitions?

My second question is on the combined ratio target. Back in 2023, when you are made as a CMD, at that point, it included the Baltics. Now, the Baltics are a pretty small part, I think 5% of insurance revenue, but they're operating at a sort of mid 90% to 100% level combined ratio, which would suggest for a 40, 50 bps strain to your combined ratio guidance for 2026. So should we assume now that you're aiming for 81.5% 2026 combined ratio guidance?

[Geir Holmgren, executive]

Okay, I'll start on the first question. There is -- I mean, we don't give any guidance on the further growth of the SCR, but it's a bit more than usual this third quarter due to the growth in the underlying business and that there is -- some of that growth has come in -- has not been paid out. So main technical provisions have increased. But of course, everything is reflected in the P&L. And that just drives how the capital requirement works.

It drives the capital requirement somewhat more than usual on the nonlife underwriting risk side this quarter. That's not something we do expect to repeat and look at a bit more on the longer term. I think the important point there is that if we look at the year-to-date figures, we do generate a solid amount of own funds above what is required for sustaining the business with capital and resulting in dividend capacity, which is sufficient for delivering on the dividend policy. Financial targets?

[Jostein Amdal, executive]

Yes, financial target, we will get a combined ratio target for 2026. What are we going to do when they take out the Baltic operations? Our financial targets with the cost of combined ratio for '26 is below or equal to 83%. We are -- that's a target we are aiming for. And then taking out the Baltic operation, we are still having the same target in '26. There has not been done any reassessment on that.

[Faizan Lakhani, analyst]

So can we say that, that you're diluting your '26 target? Is that the right way to think about that?

[Geir Holmgren, executive]

I think the right way to think about it, it's less than 82%. And how much less, we never really talked about.

[Operator]

And we'll now take our next question from Ulrik Zürcher of Nordea.

[Ulrik Zürcher, analyst]

One question about retail motor. I think we can all see what you're trying to do. Like since 2022, I get around 13% inflation, 10% increase in frequency and then you reprice a bit over 20%. But I was just wondering how certain can you be that claims frequency now have stopped because you -- when you started repricing for it or announced it in Q3 2023, then it's like you are expected to take a year, but then we clearly had another surprise, but you're saying it's stabilized now. Like what is the risk if these keep accelerating?

[Geir Holmgren, executive]

Okay. When it comes to claims frequency. If -- at Slide 4 in the presentation we had, we said that the claims frequency increased by 7% compared to the third quarter last year. This is somewhat higher than the frequency development compared to look at the second quarter last year and second quarter this year. So what you are saying is that we are continuously following the situation. We are making -- understanding the drivers behind the claims development. We expect -- we don't expect frequency or claims development to go down and that also all the main reason for doing the heavy repricing we are doing at the moment.

What we then see is that we, over time, will improve profitability due to the pricing measures we have and also due to the high retention rates we have in Norway. So we are having high customer loyalty, and we are confident that we will come through with all the pricing measures and that the profitability will improve. And we are sticking to the -- or having the same financial targets of 25% and 26% as earlier announced.

[Ulrik Zürcher, analyst]

Yes. But I guess what I'm asking is like how confident are you that like that claims frequency won't rise further next year, for example?

[Geir Holmgren, executive]

If the claims frequency will rise further next year, we will continue to do our repricing to follow the claims development. That's the most precise answer we can give. I cannot give any guarantee that claims frequency will be stable from the position it is nowadays.

[Operator]

[Operator Instructions] We will now move on to our next question from Hans Rettedal of Danske Bank.

[Hans Rettedal Christiansen, analyst]

Yes. I was just wondering on the claims frequency on the property side in Private Norway, which is down 20% this quarter. And then in Q2, it was up 8%. Of course, a lot of the decline in this quarter was driven by the Storm Hans, could you say anything about the sort of underlying trend in the frequency for property in Q3 relative to Q2? And perhaps also sort of seen up against the comments that you have on the higher development in this segment?

[Geir Holmgren, executive]

Okay. I think I can start, and then, Jostein will probably continue. On the property side, the results are more volatile in nature. What we have seen during the last 2 quarters, especially on the private side, is that we do have more fires than expected, and that's also more fires than we should expect due to the long-term trend over many, many years. But -- and these fires have impacted results due to the high losses also related to each incident.

When you come to and look at property and the more water damages and water losses, this is more due to how we think on repricing when it comes to property over time. And also, when you look at Slide 4, you can see that we have quite heavy pricing measures going on in the private segment when it comes to repricing the property portfolio as well.

[Jostein Amdal, executive]

If I may add, the volatility in frequency number kind of underlines the message that there is a lot of volatility in property and the down 20% this quarter is, of course, due to Hans and the rain event in the late August last year, and this is very stochastic and weather-related.

[Operator]

And we will now take our next question from Vinit Malhotra of Mediobanca.

[Vinit Malhotra, analyst]

So my one question would be, Jostein, you mentioned that the pricing would take time to work through the -- to the underlying, and that's something we clearly appreciate. I'm just curious if, a, in motor or in private, private, you mentioned fires, but in either one or both of them, are you -- is the trend that you saw in 3Q in line with what you expected, you would say? Or was it better or was it worse? And also in the same line is the deductibles 0.7 points. Is it working out to your expectation? Or is it different? I just want to see the trend versus your expectations.

[Jostein Amdal, executive]

Still a quarter is a very short time period to judge whether expectations are correct or not. But I think we are seeing a slightly higher claims frequency in motor in the third quarter than what I expected at the end of the second quarter, as witnessed by the increase in claims frequency year-on-year moving from 5.8% to 7%, but as a quarter, this could be a bit volatility around such numbers quarter-by-quarter, but slightly higher. Deductibles are working through as expected, and we continue to have the same message there. I mean giving decimal points like 0.7 is a bit misleading the effort, but it seems to be working as we expected.

[Operator]

And we will now take our next question from Michele Ballatore of KBW.

[Michele Ballatore, analyst]

Yes. So I have 2 questions. So the first question is in terms of the targeted increase in prices I saw an increase from 2Q to 3Q in both property and motor, Private Norway. So in that slide, where you show the prices increases and following claim frequency and everything. So this is the first question. Can you maybe explain, I mean, why you are doing that, give more details about this change?

And the second question is about the -- going back to the solvency, I mean, the increase, the operational increase in required capital every quarter is quite significant. Can you maybe give more details about the split between P&C growth in pension growth, in overall non-life growth? And also, what should we expect in terms of outlook on this specific factor?

[Geir Holmgren, executive]

Okay. I'll start with the first one on the price increases. If you look at the motor, I think we have the same number as in the second quarter is there. What is important to be specific about is that we only talk about the price increases we have implemented. We're not talking about what we are going to implement. We will be evaluating the situation on the claims side continuously to see if there are more needed. And then we'll tell you about that in the quarterly presentations.

So -- but on the property side, we have increased the pricing measures somewhat as a response to what we see as the claims development. So these 2 are well linked. And in a way that is the start of the questions around the solvency requirement as well because the capital charge is in line with the development on the claims side as it is both by the running claims in the P&L account and technical provisions in the balance sheet. So these 2 factors are important drivers for the capital charge.

So we have a -- when we have a high claims increase, countered with high price increases, there is also an effect on the SCR development going forward. But typically, somewhat more muted since there are diversification benefits within the capital requirement calculation.

And then you asked about the split between the growth in the life or pension business and the non-life business. We have one slide in the back of the deck where we look at this per unit as well per company. But on the -- if you look at Slide #43, we had split the capital requirement into non-life and life on the underwriting risk side. And you see that the life underwriting risk is fairly stable, whereas the non-life and health underwriting risk is increasing from there. I will then, yes, check on the development there. But you have the split value at least there on the capital requirement for life versus non-life.

Generally, the life risk grows in line with the active members in the occupational pension schemes, fairly [indiscernible] there's a growth development there more than the pricing effect. And yes, I will talk about how this should develop going forward. I think it will, in general, develop, as I said, in line with claims development, but most likely muted effect due to the diversification.

[Michele Ballatore, analyst]

Sorry. Just to follow up on the first question, maybe I'm confused. But what I was referring to is in Slide 4 -- sorry, in Slide 3 or Slide 4, when you say full-year '24 expect above 14% in the average premium in force. This number increased from 2Q to 3Q. That's what I was referring to, sorry.

[Geir Holmgren, executive]

Sorry. Yes, that is the effect in the actual. So the pricing measures is 17.5%. And what we do now expect to see in the average premium average policy in force at the end of the year, a bit more than 14%. It was 1 percentage point lower, which was in the second quarter just due to the fact that we now see that we are getting price increases through and we have passed one more quarter. And then we'll update you again on that number with the actual number then when we report on the fourth quarter.

And the capital charge for life underwriting risk was up NOK 0.1 billion from the past quarter or the previous quarter. So it's a more moderate growth than the non-life underwriting risk because it's mainly growing in line with members in the occupational pension schemes that we have on our book.

[Operator]

[Operator Instructions] There are no further questions coming through. I will now hand it back to Mitra for closing remarks.

[Mitra Negård, executive]

Thank you, everyone, for your good questions. We will be participating in roadshow meetings and conferences during the next few weeks, starting with Oslo today. Please see our financial calendar on our website for more details. And with that, thank you for your attention, and have a nice day.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.