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Gjensidige Forsikring ASA
Earnings Call Analysis
Q4-2023 Analysis
Gjensidige Forsikring ASA
The company closed the fourth quarter with a profit before tax of NOK 1.607 billion, marginally lower than the previous year. Revenue continued to grow robustly, marked by a 9.1% increase in local currency terms. Private insurance results dipped, partly due to harsh weather impacting loss ratios, but the company has taken actions to improve this as policies renew and premiums are earned. Commercial results were positive, particularly in Norway and Denmark, attributed to revenue growth and better underlying frequency loss ratios. Challenges in Sweden from weather and losses, and improvements in the Baltics, present a mixed regional performance picture.
Performance in the Private segment was driven by both Norway, with notable price increases, and Denmark, benefitting from higher property insurance volumes and contributions from Pensam Forsikring. Although market shares were stable and there was no significant customer drop-off due to price hikes, weather-related claims did burden the loss ratios. Commercial insurance saw growth in revenue anchored by price and volume increases in property and motor insurance, setting a positive outlook for future growth.
The company witnessed a 5.5 percentage point year-over-year increase in the group’s loss ratio due to a rise in underlying frequency loss ratio and bigger-than-anticipated claims, particularly from motor and property insurance. The firm's response includes enhanced pricing measures to manage claims inflation. Cost ratios improved to 13.3%, with the company highlighting efforts to maintain competitive cost levels through operational efficiency, digital technology investments, and automation.
The pension business showed a decrease in profit despite growth and higher finance income, mainly due to higher claims frequency in children's disability pensions and a lack of actuarial model changes that had boosted the previous year's figures. The investment portfolio had a solid quarter, generating a 3.1% return with balanced risks and a substantial part of fixed income investments rated investment grade.
Solvency ratio at the end of the fourth quarter stood at 166%, lower by 19 percentage points from the previous quarter, reflecting the impact of the proposed dividend for the year and the PenSam Forsikring acquisition. While eligible own funds decreased, operating earnings and contributions from the investment portfolio softened this decline. The company remains vigilant on capital requirements, which have grown due to increased premium volume and underwriting risks, alongside a focus on internal model improvements for efficiency.
The company prides itself on high customer satisfaction levels, particularly in Norway, which is a testament to its service quality. Retention rates are high and stable, with improvements noted in Denmark and the Baltics, and a keen focus is on digitalization to enhance efficiency and customer experiences. Looking forward, the company has set ambitious targets over the next three years, emphasizing profitable growth and operational efficiency.
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Good morning, everyone, and welcome to this Fourth Quarter Presentation of Gjensidige. My name is Mitra Negard and I'm Head of Investor Relations. We will, as always, start with our CEO, Geir Holmgren, who will give you the highlights of the quarter; followed by our CFO, Jostein Amdal, who will go further into detail on the numbers. And after that, we will go into Q&A and have plenty of time to answer your questions. Geir, please?
Thank you, Mitra, and good morning, everyone. 2023 turned out to be a year marked by significant weather events in many places around the world. Storms, floods and torrential rain hit our region in the third quarter followed by more storms and heavy rain early in the fourth quarter. Winter arrived early with several periods of heavy snowfall and low temperatures. 2024 has started off with tough weather conditions in our region. This has and continues to cause difficult driving conditions. RedGo had more than 28,000 assignments in the Nordics during the first 9 days of January, up 150% compared with the same period last year. There have also been many damages from frozen pipes and water damages with significant impact on property claims. I'm very pleased to see how our competent and dedicated teams have taken care of our customers and how efficiently we have processed the large number of inquiries and claims.Now let us turn over to Page 3 for comments on our fourth quarter results. We generated a profit before tax of NOK 1.607 billion. The general insurance service result was NOK 734 million reflecting continued strong revenue growth and efficient operations. However, the result development compared to last year was negatively impacted by our private business driven by weather-related claims and an elevated level of underlying claims frequency particularly for motor in Norway. The result both for private and commercial was also impacted by a strengthening of reserves for claims in Norway, which had incurred earlier in 2023. Thanks to our efficient operations, the cost ratio remained at a highly competitive level of 13.3%. Our investment generated returns of NOK 1.876 billion reflecting the development in the capital markets. The return on equity for 2023 ended at 18.2%.Jostein will revert with more detailed comments on our results for the quarter. So turning to Page 4 and looking at the full year. We delivered a pretax profit of NOK 5.551 billion. We generated strong revenue growth last year. Our operations ran well and efficiently and we had good returns on our investments. However, the weather conditions in the third and fourth quarter and the oneoff expenses we recorded in the third quarter prevented us from reaching our targets for combined and cost ratios and return on equity. The combined ratio was 87.6%, up 4.8 percentage points from 2022. The increase was primarily driven by the Private segment. I am very pleased that our Danish Commercial portfolio and our Baltic business achieved lower combined ratio for the year. Our Swedish operations delivered a somewhat higher combined ratio. Our cost ratio in 2023 was 14.4%. Adjusted for the oneoffs in the third quarter, it was 13.2%.We have an efficient capital base. Our solvency ratio at year-end 2023 was 166%, well within our target range. Return on equity for the year was 18.2%, somewhat below the target. So let's turn to next page for a few comments on the proposed dividend. Our Board has proposed a regular dividend for 2023 of NOK 4.375 billion corresponding to NOK 8.75 per share. This is up 6.1% from the regular dividend in 2022. The proposal corresponds to a payout ratio of 106% and requires an approval from the FSA as the amount exceeds 100% of the total comprehensive income in the parent company. Based on the strong capital position for the group, we expect the application to be approved. For our Norwegian general insurance customers, this once again bodes for distribution of a solid customer dividend from the foundation, Gjensidigestiftelsen.With this, our solvency ratio is at a good level enabling us to maintain our S&P A rating as well as providing us with sufficient financial flexibility. Our solid capital position also enabled us to maintain a high and stable stream of regular dividends. Our dividend policy remains unchanged. We aim to pay a high and stable nominal regular dividend. Over to Page 6. We saw an increase in claims frequency for private motor in Norway last year and took swift action to address this from the second quarter and we continue with further targeted measures through the year. The tough weather condition in the fourth quarter increased the frequency issue identified in private motor leading to increased claims for property, but within private and commercial portfolios. We estimate that 70% of the total increase in claims frequency for motor in the fourth quarter was weather related.For property, we saw some increase in claims frequency, which we believe are related to weather and large claims and not an underlying trend. We stepped up price increases through 2023 to mitigate the impact of higher claims frequency on top of the high inflation level. The increase in average portfolio premiums for motor went up from 6.1% in January to 7.7% in December. This was above the claims inflation of 6.5% for the year. We are now implementing further price increases, which we expect to increase the average premium levels by at least additional 10% for this year. For property, the claims inflation through last year was approximately 4%. The price increases last year were on average 5.7% and we are in the process of increasing prices further with an expected effect of average price level of additional 7% to 8% on the portfolio for 2024.On top of the pricing measures, we have adjusted terms and conditions to bring down the claims frequency and we are now increasing deductibles for the remaining motor coverages. Our measures will have a gradual effect on insurance revenue, claims frequencies and results as policies are bought or renewed and premium is earned. We will be monitoring the situation closely and implement further changes if necessary. We have a strong focus on these actions and I'm convinced that we will succeed in improving profitability for Private Norway in 2024. Let us turn to Page 7 and a few words about inflation. The general inflational pressure has continued to ease although the level is still high. We are monitoring the development very closely and are pleased to see that our close cooperation with suppliers and our highly developed analytical approach provide a strong base for making forecasts.And our advanced and flexible pricing models ensure that our tariff 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 continue to come down because of weaker construction activity and lower raw material prices. However, this is expected to be offset by wage increases. We have a tight dialog with our material suppliers making us confident that we will not be met with extraordinary changes anytime soon. The weak Norwegian krone and general inflational pressure continued to drive higher repair cost, but the effect on total claims will still be contained due to our supplier agreement. Our current estimate for the claims inflation for motor in Norway is slightly down from our October projection starting with 7% in the short term and gradually declining towards 4% over the next 12 to 18 months.Moving to Page 8. The strong growth momentum for Private continued in the fourth quarter mainly due to price increases. Both the Norwegian and Danish portfolios continued to increase in revenue. Retention levels in Norway remained high and sales were strong, particularly for motor. Retention in Denmark is improving and we will continue to put through several initiatives. We have renewed several partner agreements recently as you can see on the slide here. These are important supplements to our distribution. We also entered a new bank assurance partnership in Denmark with a Nordic digital bank, Lunar. Underlying profitability for private declined as explained earlier. Our Commercial segment continued to grow strongly and retention remained at a high level. We are very encouraged by the solid January renewables in Norway and Denmark. The price increases averaged 11% in Norway and 7.5% in Denmark.In addition, approximately 20% of the growth in Norway can be ascribed to growth in underlying volume. For the Danish Commercial portfolio, the corresponding figure is 30%. Our top ranking among the large players in the FC Survey is a strong vote of confidence from commercial insurance customers in Norway. Underlying profitability improved driven by both Norway and Denmark. Our Swedish operations are progressing well although profitability was negatively impacted by the weather conditions and higher than normal medium sized losses. We will continue our efforts to increase results going forward, among others, through digitalization. Our Baltic business continues to generate strong revenue growth and I'm very pleased that profitability improved this quarter too.We are pleased with the renewal of our reinsurance program. We have managed to renew the capacity we require. Prices and retention levels are somewhat up from last year although much more moderate than for 2023. Over to Page 9. I'm very happy to see our strong sustainability efforts through 2023 and strong recognitions on our progress in the field as you can see on this slide. It is rewarding to see that our efforts to help customer prevent damages is both creating customer satisfaction and business value while also supporting our strong sustainability ambitions.With that, I will leave the word to Jostein to present the fourth quarter results in more detail.
Thank you, Geir, and good morning, everybody. I will start on Page 11. As Geir mentioned, we delivered a profit before tax of NOK 1.607 billion in the fourth quarter, slightly below the same quarter last year. Our insurance service result was lower than last year despite a continued strong revenue growth. Private showed a lower result. As Geir explained, the fourth quarter turned out to be very challenging in terms of weather adding to the underlying weakness of the loss ratio. We have taken what we deem to be necessary actions and expect results to improve as policies are gradually renewed and premium earned. Commercial's result increased due to strong revenue growth and an improved underlying frequency loss ratio both in Norway and Denmark. Results for Sweden were lower compared to the same quarter last year driven by the weather conditions and somewhat higher than normal medium sized losses.Results in the Baltics continued to improve with a significantly lower loss ratio. I'm pleased to see the progress of our turnaround process here. Our pension business generated a lower result despite growth in the business and the higher finance income. This was due to a strengthening of reserves for children's disability pensions during the fourth quarter this year. In addition, there was a positive impact on the result in the fourth quarter of 2022 related to a change in the actuarial model for paid-up policies. The change in the results from other items is primarily due to higher interest expenses on subordinated loans. In addition, results from mobility services are still in the red reflecting ongoing measures to streamline and integrate the operations.Turning over to Page 12. Our strong growth continued in the fourth quarter with insurance revenues for the group increasing by 9.1% in local currency. Growth in private was driven by both Norway and Denmark. The increase in Norway mainly reflects the significant price increases being put through. Market shares remained broadly stable. Customers are contacting us to discuss their coverage and seek advice. However, we do not see any signs of customers cutting back on insurance. I'm also very pleased to see growth in our Danish Private portfolio this quarter driven by both price increases for all the main products and higher volumes for property insurance. The addition of Pensam Forsikring also contributed to the growth. 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 in all products 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 in addition to the portfolio of Pensam Forsikring, which we added from the third quarter. The strong January renewals in both portfolios bode well for growth going forward. Higher revenue in Sweden was driven by volume and price increases in both the private and commercial portfolios, primarily for commercial property insurance and private health and motor insurance. An accounting adjustment to the portfolio reduced the premium growth. Adjusted for this, the growth was 7% in the quarter. The strong revenue growth in the Baltics continued this quarter driven by price increases in all the main product lines, but particularly commercial health, property and motor insurance.Turning over to Page 13. The group's loss ratio increased by 5.5 percentage points from the fourth quarter of 2022. The development reflects an increase in the underlying frequency loss ratio. In addition, runoff gains were somewhat lower and large losses were higher year-on-year. Higher interest rates resulted in an increase in the discounting effect. The main driver for the increase in the underlying frequency loss ratio was private driven by motor and property insurance. As mentioned, this was related to the difficult weather as well as a general increase in claims frequency for motor. We are addressing this by continuing to put through effective and differentiating pricing measures beyond the expected claims inflation. I'm very happy with the improvement in profitability in commercial particularly in Denmark driven by property, health and travel insurance despite negative weather effects and reserve strengthening also for the commercial portfolio in Norway.The increase in the loss ratio for the fourth quarter was also driven by strengthening of reserves for property and motor insurance in Norway. Many of the claims from earlier quarters last year were comprehensive and complex to assess. With a very high number of claims in several periods, it took time to get the full overview of the damages and determine the causes and eligibility for coverage. We have increased our reserves to reflect higher severity than we initially estimated. For motor, we have adjusted our models to further improve the quality of estimates. Sweden showed lower underlying profitability driven by private motor and property insurance, which were impacted by several periods with heavy snowfall and low temperatures. In addition, commercial motor and property insurance were negatively impacted by higher than normal medium sized losses.The underlying frequency loss ratio in the Baltics decreased reflecting improved profitability in commercial property, health and motor insurance. Let us turn to Page 14. Our group cost ratio came further down to 13.3% this quarter. Excluding the Baltics, our cost ratio was 12.6%, also this metric down year-on-year. I am pleased with the cost ratio in Norway this quarter as well as the improvement for the Commercial portfolio in Denmark. Private in Denmark showed a higher cost ratio mainly driven by Pensam and higher IT expenses. Sweden had a higher cost ratio mainly due to a strengthening of the sales force and higher depreciation driven by digital technology investments. The Baltics also showed an increase in the cost ratio due to higher sales activity. 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 15 for comments on our pension operations. Our pretax profit adjusted for the change in the contractual service margin was NOK 137 million compared with NOK 174 million in Q4 2022. The underlying results for our pension business continued to improve due to cost efficient operations and a good growth momentum. The decline in the result was mainly driven by strengthening of provisions for children's disability pension as a consequence of higher observed claims frequency. Our provisions reflect the current assessment of risk in our portfolios and our reinsurance programs reduced the downside risk. The other main driver of the decline in the pension result was a positive impact in the fourth quarter of 2022 related to a change in the actuarial model for paid-up policies. There were no model changes related to paid-up policies in the fourth quarter of 2023.Net finance income turned positive this quarter reflecting lower interest rates and a higher running yield. Assets under management rose to NOK 69 billion. We have an agile and highly cost efficient pension business set for further growth going forward. Moving on to the investment portfolio on Page 16. Our investment portfolio generated a return of 3.1% in the fourth quarter with positive returns for our asset classes. The match portfolio returned 3.7% this quarter. Net of unwinding and the impact of changes in financial assumptions, the return was 1% mainly reflecting lower credit spreads and the fact that the investments did not really match the accounting based technical provisions. The free portfolio returned 2.3% this quarter reflecting positive returns from a high running yield, lower interest rates and credit spreads as well as positive equity markets.The risk in our portfolio was broadly unchanged from the third quarter. The derivative positions took down the exposure in listed equities by approximately NOK 400 million compared to the NOK 1.5 billion recorded as carrying amount at the end of this quarter. We have a balanced portfolio and solid fixed income investments with a large majority having an investment grade rating. Over to Page 17. We had a solvency ratio of 166% at the end of the fourth quarter, down 19 percentage points from Q3 and mainly reflecting the proposed dividend for 2023. Eligible own funds decreased by NOK 1.5 billion reflecting a positive contribution from Solvency II operating earnings and the free portfolio, which was more than offset by the proposed dividend for 2023. The acquisition of PenSam Forsikring reduced eligible own funds by approximately NOK 200 million.The capital requirement increased by approximately NOK 0.5 billion with the main drivers being higher nonlife underwriting risk due to growth in premiums and some insured and higher life underwriting risk partly reflecting the reserve strengthening in the pension business. Market risk was lower due to less exposure to credit risk. The Norwegian FSA has approved a minor change in our internal model regarding health insurance reducing the capital requirement with approximately NOK 100 million. A few words on the latest development of our operational target on Slide 18. Customer satisfaction continues to be 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.Even though we are in a challenging period with increasing prices for many of us, our customer retention in Norway remains at a high and stable level and this applies both for private and commercial customers. During the quarter, the retention improved in Denmark driven by the Private portfolio and in the Baltics while it was stable in Sweden. Digitialization and automation are key measures to maintain high cost efficiency with effect on both the cost and the claims ratios. Our digital distribution index improved by 4% in 2023 driven by digital sales mainly in Private Norway and digital service in Commercial Norway. This was offset by a decline in digital customers in Denmark due to the ongoing implementation of the new core system. Digital claims reporting increased primarily due to an increase in Denmark.I will now hand the word back to Geir.
To sum up on Page 19. Our strong growth momentum is very encouraging. It is a result of high customer satisfaction and high retention. The fourth quarter was challenging in terms of claims frequency. We are handling inflation well and we have strong measures in place to mitigate the effects of the elevated claims frequency in Norway. We have set ambitious targets for the next 3 years and we are confident to deliver on them. We will continue to focus on profitable growth and further improve operational efficiency, which together with our strong product offering should bode well for continued solid results and attractive returns.And with that, we will now open the Q&A session of this presentation. Thank you.
[Operator Instructions] Our first question comes from Freya Kong from Bank of America.
Firstly, could you help me understand the relative contributor to underlying frequency loss ratio deterioration in private maybe between bad weather, ongoing frequency issues and then the intra-year reserve strengthening that you flagged maybe on a full year basis just so we can get a clear view overall? Secondly, we've now seen a year of worse than expected frequency and you are taking actions to mitigate it. But can you help us identify -- have you identified the source of it? Is it just more driving post COVID or has claims behavior somehow changed? And then last question just on pricing. Based on what you're saying, it seems like you are accelerating the price increases from last year into this year, but the retention level still remains quite high. Does that mean the market is largely moving in line in terms of pushing price increases?
I can start and then probably Jostein can follow up. As you comment, there is a decline in the underlying frequency loss ratio especially in private in Norway. The reason I would like to divide in 3. It's like 30% is coming from weather-related claims, 40% is strengthening reserves and the remaining 30% is a combination of elevated claims frequency for motor and volatility in more medium sized claims for property, mainly fires. When it comes to price and pricing measures, as we have described, we have started actually from end of second quarter last year with additional pricing and additional to what we have done on the inflation side especially for motor. And we also showed in presentation the average premium per insured unit and it has increased during the year and we'll put on additional pricing measures on top of that in January this year, February this year as well, which also leads to mitigate the frequency development we have seen during the last quarters.
Your second question, Freya, on the reasons for the change in the frequency for motor I think you asked. And I think to elaborate on what we said in the previous 2 quarters calls, there is a combination of factors. One is the more moving out of the post-pandemic restrictions, which has probably increased frequencies somewhat. Weather is still an important explanation for the frequency of motor as well especially now in the fourth quarter. And then as we talked a bit about on the previous calls, there is a creep up on the frequency due to deductibles having been normally stable and the changes in the loyalty programs. So I think we don't provide you with a kind of very detailed breakdown, but these are the factors that we build our case on.
And to add that please limit your questions to 2 at least in the beginning so we're sure that everyone that has questions can get them through.
Our next question comes from Hakon Astrup from DNB Markets.
Two from me. The first one just based on how Q1 has started and also the deteriorating underlying claims frequency trend that we see in motor. Is your 2024 combined ratio target of below 84% at risk in your view? And then also a question following up on the retention side. So given that you're ramping up price increases in Norway both in motor and on property on the private side, have you seen any deteriorating trend in churn on the back of this with what you're doing now in January so far? That was my 2 questions.
In Norway, the temperature has been in many places very low during the start of January this year. We also see that we have some days with heavy snowfall, which also led to many incidents as earlier commented. We see that RedGo has during the first 9 days of January had more than 150% more incidents to handle than the average in January last year. So this definitely has an impact on the frequency when it comes to the losses. Then your next question about combined ratio target for 2024. We are doing a lot of pricing measures started in July last year. This will have a positive impact unless we have some extraordinary bad weather condition from second quarter in 2024. So we are not considering anything about changing the financial targets for 2024. When it comes to retention rates, we see that the general renewal for commercial with 40% of the portfolio being renewed. We are very happy to see that the renewal rates or retention rates are still very, very high. And we have a solid position especially in the Norwegian market, high customer loyalty, high customer satisfaction. And I'm very confident that we will come through all the price increases mentioned with still high retention rates. Jostein, anything to add?
Just on the first question there. So we don't need any say additional lock in this year in order to reach our target in your view?
I think it's too early to change the targets after 3.5 weeks, whatever it is.
Tryfonas Spyrou from Berenberg.
I have 2. The first one, I just wanted to understand again how comfortable are you getting back to the below 84% target for 2024 given the actions you've taken so far? I guess looking at numbers on Slide 6 of the presentation, it looks like you will only fully price in frequency during 2024 as the 2023 price increases only appear to sort of mitigate claims inflation. So presumably it would take more than 12 months for the 2024 actions to kick in. So I just want to understand how comfortable are you with that target. The second one is on the reserve strengthening for claims incurred earlier in 2023. I guess can you elaborate a bit more on what has actually driven this? Presumably these are not sort of big claims in the Private segment, which would suggest there are lots of small claims sort of understated. Surprised to see this development. I'm not sure you have seen anything similar before. Was it just a case of the workload is too high in the claims department so are you doing anything to adjust the underlying cause so this doesn't happen again?
What we tried to illustrate and I know it's some new numbers on this slide the #6, I guess it is where we have this mitigating increased loss ratio in private. In the middle of the page there where we have this, if you look at the motor side, an average premium per unit of 7.7% higher than what it was the year before. What that means that in the portfolio, the average price of the vehicle is 7.7% point higher and that is an effect of what we went into 2023 with in price increases and the increased price increases during the second half of 2023. But of course those price increases that we decided on then are not fully reflected in that number because policies were renewed in private mainly fairly evenly distributed throughout the year.It actually means that we have higher price increases ongoing as policies renew and as we sell to new customers. So the speed is picking up. And as we talk about for coming now, we look at pricing measures on top of what we have already done of at least 10% on average. So I think it takes some time to get policies renewed and the accounting effect shown through the earned pattern, but we have much higher price increases than the actual or expected claims inflation -- actually both actual and expected claims inflation. And that makes us confident and positive around the combined ratio development going forward. And then of course there are the risk of volatility. So when you ask how confident we are, quantify that. But given normal kind of weather and no other kind of surprises, we stick to that combined ratio target.
So just 1 point. Is it fair to assume that the bulk of that earning to come through the second half of this year as opposed to the first half and then there will be sort of a nice improvement in the combined ratio later during the year?
If we look at the average price increases, they will be gradually into the portfolio as policies renew and shown in the account as we get the earned effect of that. And then we'll see what the results development will be. On the second question on the reserve strengthening. These affect both Private and the Commercial segment and it has been a combination of motor and property, but mainly I would say it's more of an issue in property than in motor. There has been a large increase in claims that have been slightly more complex. And although events like Hans, the storm we had in the third quarter is covered through reinsurance -- the financial effect is covered through reinsurance and the Norwegian Natural Perils Pool arrangement, it's still our claims adjusters that need to do the work. So it has increased the workload quite a lot. Hans was an extreme event. Norwegian met office call it a 1 in 200-year event. We think it is much more frequent than that, but it is an extraordinary event. We handled the situation very well towards the customers and then we see that there has been changes in the assessments of the individual claims afterwards. And as we mentioned also previously today, we see an increase in slightly more larger and complex claims as well. So it's a mixture of effects there. Yes, I'll stop there.
Maybe a clarifying point. The price increases that you would need to put it through for these claims, would you have enough? Would you renew these policies now? So you have the figures estimate and you base your pricing of that or would some of these policies be repriced based on previous sort of loss estimate?
Everything that is renewed or sold now will be based on the current loss estimates if I understand your question correctly.
Ulrik Zurcher from Nordea.
You're increasing prices above what you previously said, which indicate that you might think that some of the claims frequency observed this winter or at least in Q4 is permanent. Can you quantify this a bit further? Like the price increases, what do they assume about next winter? Does it assume that next Q4 will be the same as this one?
Okay. Ulrik, we have done many different types of pricing measures at the moment both regarding motor and property. And if you look at the change in the underlying frequency loss ratio in the last quarter, 30% is related to weather claims. But we are not saying that weather claims are volatility alone. When we are doing the pricing measures, we are taking into account that we will come in a situation that we can handle weather claims or more weather-related claims volatility in the future. And we say that 40% of the frequency change we have seen is related to reserve strengthening and 30% is a combination of more elevated claims frequency for motor and some volatility in medium sized losses especially tires. So probably some part is due to volatility, but we are taking into account that we will be positioned where we can handle such weather incidents that we have that we see. If we sum up 2024 and 2023 in total, you can argue that it's a normal year, but we are doing many pricing measures and other measures at the moment to come in a situation and a position to handle incidents that we have seen in the past. But we don't expect that due to climate change and weather change in the future, we will see such a year every year coming up. So it's a slightly increase of the risk, but not that kind of volatility we have seen in the last year.
Okay. That's a good answer. And the second question is you had quite a high increase in the capital charge for nonlife and health underwriting risk Q-on-Q from NOK 11.1 billion to NOK 12 billion. Like what was the reason for this? It's not only PenSam I assume.?
If you look at the nonlife underwriting risk, the increase there is mainly a factor of good premium growth and growth in the sum insured, which are kind of driving the catastrophe risk modeling and there we're using the standard formula so it's more like a fixed percentage in a way. And on the life side, this is actually also reflecting the increase in the reserves for children's disability pension that we talked about, which still also using standard format as a percentage on the reserves really. So when you shrink reserves, you also get a higher capital requirement. And there is some other...
Okay. But going forward, it will roughly stay at its current level compared to premiums then?
Yes. That's the best approximation you can make I think.
Alexander Evans from Citi.
Just firstly, if you could just help me understand the difference between sort of 3Q and 4Q in frequency? Very helpful that you split out the 11% year-over-year in motor in 4Q. What was 3Q? And then secondly, just on you mentioned reinsurance increases at 1/1, but also the retention increase. If you could just give a little bit of detail on that and how that you think impacts the volatility that you'll see in weather in 2024?
I would like to answer the first one, but I don't have the figure in my head, Alex, on what was the increase in frequency Q3. We'll get back to you on that one I think. Mitra is looking at me. Maybe we don't get back, but we try.
Sorry. I guess if I ask it a different way. Is basically the change from 3Q to 4Q basically the weather impact and what you say is underlying roughly about 4 percentage points year-over-year. Is that the same?
I think on the frequency side for motor the 11%, I think you could say that the increase from Q3 to Q4 will be mainly weather-related. On the reinsurance program, I mean as we said, we renewed the reinsurance program basically as it has been in 2023. And there were some, but just a moderate increase in the kind of the rate level that we paid on the reinsurance program. Not quite I caught your question around how this should influence volatility.
I think you mentioned in your comments before that you also had a slight increase in the retention levels that you attained. I don't know if you can give any more detail around that?
Yes. On the catastrophe risk, the increase in the retention level was NOK 50 million. Nothing more than that.
We'll now move to our next question from Youdish Chicooree from Autonomous Research.
My first question is if I could go back on the underlying frequency loss ratio. You gave us a split between the various factors that impacted it; winter weather, reserve strengthening for claims booked earlier in the year and frequency increase in motor. That split you gave us, does that explain the increase for the full year or is that like in relation to the fourth quarter specifically?
Fourth quarter.
Fourth quarter, okay. And then in your opening comments, you talked about ongoing work going on in getting your own internal model approved. I mean do you have some further timelines around which modules or which elements might get approved in H1 this year, please?
The 3 main areas we looked at are the same that we talked about in the Capital Markets Day. It's the storm model, it's the correlation between underwriting and market risk and there's some buffers that we've been forced to put on to our own estimates. And we don't have a clear timeline for when that will be resolved, but we are working diligently together with FSA to get as much as possible approved as fast as possible. But we talked about this for a long time and this will take time to get approved.
But is that going to be this year or do you think it's quite hard to put a date on it?
I think it's hard to put a date on it.
Thomas Svendsen from SEB.
I have 2 questions as well. First, when you look at the Norwegian operations both in Q4 and the full year, you have this deterioration on the private side while the commercial is sort of largely stable. So could you highlight a little bit on why this difference between commercial and private?
They are different products in different markets. So there has been some kind of a difference exposed and also they come from a much higher profitability level. If you remember fourth quarter of last year, we were somewhat weak on the Commercial Norway portfolio if we went back to that. So that's some of the reasons. But nonetheless, we're very pleased with the development in the Commercial Norway portfolio. I mean we do have a small improvement in the underlying even though we've had some of the same weather effects in the commercial portfolio and the same strengthening of reserves there as well. So the kind of underlying improvement in commercial is in a way slightly better than the accounting numbers show. And then of course motor weighs much more heavily in the private book than it does in the commercial book. What we talked about in probably this is the third quarter is the underlying deterioration in private motor business. That is a very small part of the commercial book.
But do you see any change or any difference in behavior within the motor in each of the 2 segments coming from different terms, et cetera? Or possible to comment on that?
There might be differences between kind of if you look at the same object like a private personal vehicle. But I mean this is just a small part of the commercial book so it doesn't really weigh that much in that development.
Okay. And second question, just if you look at 2023 as a whole, would it be possible to sort of quantify the effects of sort of normal weather in terms of Norwegian krone in total?
I don't have the figure at least. We focused on the fourth quarter and gave you the breakdown there.
We also commented on the weather effects in the third quarter report. So you have those numbers in terms of Hans and torrential rain, et cetera. And then you have the comments on what we have in the fourth quarter regarding the 3 main drivers behind the deterioration of private.
And I think I'll also just stress what Geir said what is normal here. We do believe that there will be -- there's a risk of a higher level, but not the same level as we've seen this year 2023 and we're taking that into consideration in pricing. So we're pricing for slightly in a way higher than historical weather pattern if you look at last 10 years or something like that. We think it will be higher in the future and take that into consideration.
Hans Rettedal Christiansen, Danske Bank.
So I was just wondering each quarter we speak about the customer retention rate and that it's high and sort of stable and you're very happy with that, but then your profitability is suffering. So my first question is why can't you go down on the retention to sort of improve the profitability quicker? And then my second question is around the proposed dividend where firstly, it's above 100% so you need FSA approval. And then is there sort of any risk around this that we should consider? And then secondly, it's also on the back of sort of a very bad year. Why do you propose such a high increase in the dividend? Is it due to the customer dividend model or is there any other thoughts around this because of course you also have to sacrifice some solvency to do so?
Okay. Starting with the retention rates. We're coming from a situation in Norway with extremely high customer satisfaction, a solid position, a value proposition that's very well recognized and appreciated by customers. We put us in a situation where you can actually do the pricing measures that we have listed up in this presentation and during the Q&A now. We are aiming for improving our results and bringing down the underlying frequency loss ratio as I mentioned, but adding additional measures on the top and reducing the retention rate. It's nothing actually we went into or tried to consider. We are doing the thing on the pricing side. That would mean it's the right way of handling it now to actually improve the results and the main ambition is actually to improve the profitability as fast as this can. When it comes to dividend and risk of not getting it approved. We have a solid capital position. The Board has done their consideration and assessment of the situation and we expect that the FSA will approve the application. And the high increase in dividend, as you mentioned. We are still within our solvency ratio range between 140% to 190%. We still have a solid capital position in the group, very solid capital position. So that's part of the consideration that we have done and the Board has done then concluding on the proposal on the dividend.
And also of course there's, let's say, a forward-looking element in setting the dividend. The Board takes into consideration what they think is the expected solvency capital generation over the coming years when they make this assessment and it's within the dividend policy.
And we haven't changed our dividend policy, high and stable dividend which also means that we have set a floor for next year as well.
Johan Strom from Carnegie.
A few questions from me as well. And thank you very much for adding that Slide #6 in the presentation. It's very helpful in such a volatile period. You talked a little bit about terms and conditions and in particular the comments on higher deductibles caught my and some investors' attention today. So can you perhaps give us some numbers on this? For example what was the old and what is the new typical deductible for motor in the Norwegian Private market? And after these increases, do you expect the potential impact on claims frequency to come already this year? And secondly, Geir, you mentioned that the solvency position allowed you to maintain an S&P A rating. Is there a specific solvency margin level that is needed to meet this requirement?
Yes. On the last one, I think we actually discussed that and talked about that at the Capital Markets Day when setting and changing the lower limit of the solvency range. So going into the capital model for S&P, we see that above 140% is, call it, important or is a relevant topic when talking about keeping the A rating.
On the deductibles, typical. I mean the deductible is somewhat differentiated by type of claim that you talk about. But on the kind of the main coverage, what we call it, comprehensive motor insurance; the typical retention deductible level will be increased by NOK 2,000. And then of course there is a bit different between the different customer groups depending on agreements and so on, but the typical would normally be NOK 6,000 or NOK 8,000 for the full comprehensive coverage. And then there's a different deductible for glass and the roadside assistance and so on.
If I may, does mean that you expect a potential impact on claims frequency in 2024 then?
Sorry, the second part. Absolutely. I think there is first, of course only policies that have renewed after we changed the terms will have this increased deductible and that's where we can see the effect. But we've already done this -- decided on this increase so this will have an effect gradually during 2024 and the effect will come on. Some claims will be now not claimed because of the higher deductibles and the average claim that will be claimed will have than a NOK 2,000 lower claim number -- claims cost because of the higher deductible. So an effect both on the average claim and the claim frequency. But policies need to be renewed before this actually has an effect.
Tryfonas Spyrou, Berenberg.
I just had 1 maybe comment and then 1 question. The comment is have you considered whether it will be appropriate to set a weather-related claims budget to help us chart the actual claims from the rest of the claims. And I think it would probably maybe shorten the duration of the call as well in terms of the discussion on the annual frequency and the surprise in the 2. The second one is on the discounting headwind from sort of low interest rates. Can you maybe help us understand what would be sort of the discount -- the impact of the discounting on combined ratio maybe for 2024 versus 2023?
I'll start on the weather budget. We do give you a budget on large claims and events including weather events like Hans. We have not considered setting up a weather budget where we get an increase in the frequency over time due to weather conditions. We haven't really considered that. Yes, there's so many. We're not going to do that, stop there. Discounting 2024 versus 2023. Of course long interest rates especially above the 2-year point were reduced during the fourth quarter compared to third quarter. But where they are compared to where we started the year, I think the long rates are more or less at the same level when we exit 2023 as we entered 2023 so there on the short end from memory are slightly higher now. So I think based on that, I think there is a fairly neutral expectation on the discounting effect 2024 versus 2023. But then of course you have to make your own estimates. So where will interest rates go in 2024? I'm sure you're better in predicting that I'm.
I guess this will be probably be the exit discounting so the Q4 would be fair sort of starting point for estimating the 2024 quarterly impact going forward?
Yes. I mean if you look at -- yes, I think that's a fair estimate. We do calculate the discounting effect monthly and then give you the quarterly numbers. So yes, we'll do that. We calculate discounting every month.
Freya Kong from Bank of America, follow-up question.
We've talked a lot about the I guess claims inflation outlook and premium outlook for private. I was just wondering if you had any comments on commercial given that the underlying profitability is already quite strong. What's the claims inflation and pricing outlook in that segment?
Talking about claims inflation especially in Norway, we divide it by motor and property across private and commercial. So within motor, as we said, 4% to 7%, closer to 7% in the short term. But after 12 to 18 months, close to 4%; within property, 4% to 6% and some changes. As we have commented on what's driving the inflation a little bit changing from reduced raw material prices to not so high inflation raw material prices and more on the wage increases and the weaker Norwegian krone as mentioned.
I guess I agree on the similar claims inflation drivers. But on pricing, it seems that commercial has kept at pace with the claims inflation. I guess what your pricing outlook is or for '24 actually?
Yes. What we have seen in the last quarter is especially on the motor side and some on the property side, the frequency has increased and that's what we aim to mitigate by the pricing measures. And the Increase in the claims frequency had a higher impact in Private segment and that's also the reason for having more and tougher pricing measures in the Private segment.
Okay. So maybe commercial price increases relative to private this year. Is that a fair assumption?
Then given we look at price increases in commercial, as Geir mentioned in the opening presentation, that a very large part of the portfolio renews at January 1. We've seen very good price increases there both in Denmark and for that matter in Sweden as well, much above the expected claims inflation. So that everything else equal, it should bode well for the profitability going forward in commercial, but we'll see what happens on the claims side.
And we'll take the last question in the queue from Jan Erik Gjerland from ABG.
Two questions. The first one is of course an early start with the potential synergies between Norway and Denmark when it comes to commercial and private. But what have you seen as sort of the biggest advantage that you share concerns between the 2 countries in commercial and private this time around? Is it anything we should sort of have in our minds into 2024?
Jan Erik, good question. I think I referred to what we said on the Capital Markets Day and with our ambition when it comes to the synergies and positive impact on the results coming from the close integration between Norway and Denmark. What we have done is we have worked systematically to go through the Private, Commercial segments and also the claims area, set up a claims program to improve the results and profitability in both segments. But I also think we mentioned some specific topics we are working on on the claims here including procurement, including automation and so on, which will have an impact. But if you look at 2024, '25 and '26; the positive impact will be of course largely in '26 and I will look at 2024 as more a year for investments and doing the right things to integrate the organization successfully and to do all the measures we need to do to actually realize the synergies we have talked about. But from day to day we actually see how we improve when change in competence and resources across the borders have a positive impact on culture, a positive impact on understanding the business, a positive impact of how we actually deal with data and improve our operational efficiency. But too early to let that flow through and give positive numbers this year.
Okay. Competition then, could you give us a sort of feel for the competitive environment in each of your markets, in each of your segments? So we better understand since most of the competitors also are struggling with weather higher combined ratio, some of them was even above 100% or we should read your potential volume loss, et cetera, into '24 and '25?
I'll kick off with the Norwegian side. It's a long answer if we're going through all segments there, Jan Erik. But what we have seen previously in 2023 is that we have had I would dare to say much better numbers on the profitability level than the other players and that we continue to keep up the retention levels even with the current strong pricing measures that we are putting through is probably a sign that other players are seeing the same need to price up due to the claims picture and their profitability levels and targets. So I guess indirectly, I think that it is a sign that this is a picture overseas as we do and probably we think we are earlier than the others in raising prices -- have been earlier than the others raising prices. We'll see when the other companies report how that is working out. And Sweden...
Sweden, Denmark?
Yes, Sweden, Denmark. At least in Denmark, we've now seen that in the -- what we talked about for several quarters that when we got through this system change and kind of washed out the effects of the losing the credit agreement. We will be picking up in growth again in the private segment in Denmark. And I think that's a very encouraging sign that we see now in the fourth quarter. The Commercial business in Denmark has been fairly robust all the time and we continue to see kind of great success in the renewals there this January. So I think our competitive position there is quite well and we saw total market here reporting not too strong numbers either on growth or profitability. So I think there is a sense, a common view I think of the situation in Denmark as well. But we'll see. There are other companies reporting very soon so we'll just have to pay attention and see what they're saying, companies that are larger than us in Denmark. I'll stop there.
Yes. Thank you very much all for all your questions. We will be participating in road show meetings in several cities the next months starting with Oslo today and London tomorrow. More details on this on our website in our financial calendar. Thanks for your attention and have a nice day.