Gjensidige Forsikring ASA (GJNSF) Q2 2023 Earnings Call Transcript

Gjensidige Forsikring ASA (OTCPK:GJNSF) Q2 2023 Earnings Conference Call July 14, 2023 3:00 AM ET

Company Participants

Mitra Negard - Head of Investor Relations

Geir Holmgren - Chief Executive Officer

Jostein Amdal - Chief Financial Officer

Conference Call Participants

Freya Kong - Bank of America Merrill Lynch

Youdish Chicooree - Autonomous Research

Tryfonas Spyrou - Berenberg

Vinit Malhotra - Mediobanca

Hakon Astrup - DNB Markets

Thomas Svendsen - SEB

Jan Erik Gjerland - ABG Sundal Collier

Michele Ballatore - KBW

Vegard Toverud - Pareto

Faizan Lakhani - HSBC

Mitra Negard

Thank you. Good morning, everyone, and welcome to the Second Quarter Presentation of Gjensidige. My name is Mitra Negard, and I am Head of Investor Relations. We will start the session today with our CEO, Geir Holmgren, who will give you the highlights of the quarter; followed by our CFO, Jostein Amdal, who will discuss the numbers in further detail. And we have plenty of time for Q&A after that. Geir, please.

Geir Holmgren

Thank you, Mitra, and good morning, everyone. We have put behind us a busy quarter, implementing the changes we announced in April. The new organization structure is now in place. We have defined and filled all senior management position and have a strong, highly motivated and very competent management team in – to run our operations. The latest addition to our executive management team is our new Chief Technology Officer, [Johan Rusof]. He has extensive experience from technology sector and I am looking very much forward to having him on Board. Johan will join us at the latest in October, replacing Tor Erik Silset, who is seeking other opportunities outside the group. I am highly convinced that the changes we are implementing will further strengthen our fundamentals and release the full potential in Gjensidige.

As explained earlier, we will step up implementation of our best practices across the group and sharpen our focus on strategic initiatives, innovation and agile work matters. To that end, I am very happy to announce that we will be sharing insights on our new strategy, ambitions and plans at our Capital Markets Day on the 22^nd, on November here in Oslo. I look forward to talk more about how we will release our full potential, including a Nordic growth agenda supported by our competent and dedicated people and our digital capabilities. We will provide more details on this day in a while, but in the meantime, please save the date.

Now let us turn over to Page 3 for comments on our second quarter results. We generated a profit before tax of NOK 1,334 million. The general insurance service result was a solid NOK 1,509 million, reflecting continued strong growth in insurance revenue, effective pricing measures, good risk selection and cost control. Underlying profitability was impacted by an elevated level of large losses and higher claims frequency for several products in Norway. We are monitoring this increase closely, and I will revert on this shortly.

Our investment generated returns of minus NOK 199 million, reflecting market conditions, and I am very pleased that we have generated an annualized return on equity of 19.5% year-to-date. Jostein will revert with more detailed comments on results for the quarter.

So let's turn to Page 4 and a few words about inflation. So far, claims inflation has developed in line with our forecast. We have advanced dynamic tariff models and robust processes to manage and stay ahead of claims inflation. Together with our deep expertise, wide channel network and significant data pool, we are able to make tariff adjustments in matter of days and implement pricing measures upon renewable throughout the year. With almost all claims settlements managed through long-term supplier agreements and the best teams – terms in the markets, we will mitigate the impact of rising inflation on our profitability.

General inflation remains at elevated levels and you see that the initial pressure on material prices is gradually being replaced by wage inflation. Our competent team follows the development in all [input prices thoroughly]. We currently expect claims inflation for property in Norway to remain in the 4% to 6% range. Our expectation for claims inflation for motor in Norway is 5% to 7%. This is up 1 percentage point in the lower end of the range compared with what we have expected three months ago. We have not seen any need for changing the estimate for the higher end, but given the recent developments, we do see the risk that inflation levels remain elevated for longer. We are continuing to price at least in line with expected claims inflation.

Moving on to Page 5 and a few words about our performance and profitability measures. We have fit behind us a quarter with good performance in Norway, despite higher losses than the average expected level for a quarter. With a significant amount of snow in the mountains, this year, we are very happy that we avoid the large floods and it seems like we also will avoid a severe drought in Norway.

We have seen an increase in revenue for private from all main product groups. We maintained high customer retention amid tough competition and necessary price increases. We are particularly pleased with the sale on motor insurance and rising market share for both secondhand and new cars, and profitability continues to be good although we saw an increase in the loss ratios for several products.

Our Commercial segment also generated strong growth this quarter driven by price increases and higher volumes. Sales generated from the SME segment increased compared to the second quarter last year, and it was significantly higher than the sales growth from the large accounts. We saw an increase in loss ratio for the main product lines for certain pockets in the large corporate portfolio and in certain commercial segments, there is still a need for price increases beyond inflation, but I'm happy to share that the July 1st renewables went very well with necessary price increases and retention remains at a very good level.

The recent increase in claims frequency for several product lines in Norway is being closely monitored. We have strengthened pricing measures and we will adjust terms and conditions including deductibles, both in the private and commercial portfolios to ensure that we over time mitigate the increase in claims frequency. We are confident that we will be able to get this through and we will continue to prioritize profitability over growth.

The insurance result outside Norway increased compared with the same quarter last year. I'm very pleased with the continued revenue growth in Denmark. The recently announced acquisition of the commercial portfolio from Sønderjysk and the PenSam Forsikring are good strategic fits and will contribute to our organic growth in both portfolios in Denmark upon completion this year.

Underlying profitability in Denmark was slightly down from the same quarter last year. We are getting closer to a complete migration of the private products in the new core IT system in Denmark, and we will gradually move over to the commercial products starting from next year. Sales activities will continue to be somewhat negatively impacted by the process. However, I am confident that our ongoing efforts will improve profitability over time.

Our Swedish operations are progressing well with a slight improvement in underlying profitability. We will continue our efforts to increase results going forward among others through strengthening our distribution. To that end, we are in the process of establishing a new sales center in [indiscernible], which offers good access to highly competent sales personnel. The center will be ready for operation in the fourth quarter this year. And I'm pleased to see how our Baltic business has delivered on both sales and profitability this quarter. Our new CEO for the Baltic operations assumed his position earlier this month. Bogdan Benczak has long experience and documented results from his career in the Baltic and Eastern European insurance markets, and he will have a strong focus on implementing measures to improve results.

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 this slide, taking important steps towards delivering on our ambitious targets. We have also received a strong recognition this quarter with top ranking among all insurance companies in Norway in this year's sustainability survey conducted by the Norwegian business group.

So turning to Page 7 and our unique customer dividend model. The customer dividend model together with our ESG measures and [indiscernible] ambition to promote a safer and better society strengthened. You can see this important role in Norway. For the 15 time since 2008, the foundation has distributed its share of regular dividend from Gjensidige to our general insurance customers in Norway.

Our unique customer dividend model is an important retention tool. This year, 860,000 customers will receive a total of NOK 2.4 billion corresponding to 11.3% of the premiums paid in 2022. So as you can see on this slide, the model is well known and it is strongly appreciated by our customers supporting our strong brand and delivery of superior customer experience.

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

Jostein Amdal

Thank you Geir, and good morning, everybody. I will start on Page 9. As Geir mentioned, we delivered a profit before tax of NOK 1,334 million in the second quarter. The insurance service result reflects a continued strong momentum for topline growth and efficient operations. The results from our Norwegian operation were negatively impacted by significantly higher large losses than in the second quarter last year.

Large losses are random in nature, and this quarter we saw an increase in amongst others fires in addition to our share of the significant natural perils event in April. Our results in Norway also reflect the higher underlying frequency loss ratio for motor and property insurance. We consider the change in itself to be within the normal range. However, as Geir mentioned, we are following the development closely and have implemented pricing measures and will make necessary adjustments to terms and conditions to ensure that we will maintain good profitability.

We generated higher insurance results outside Norway driven by an increase in run-off gains, discounting effect and insurance revenues. The depreciation of the Norwegian Kroner also contributed positively. We also saw a continued considerable improvement in the results in the Baltics, owing to successful pricing measures and a better risk selection. The financial result was primarily impacted by rising interest rates through the quarter.

Our pension business generated a significantly better result than last year. However, the figures were in the red due to two one-off effects. I'll discuss further details on our pension business in a moment. Results from other items reflect higher interest expenses on our Tier 2 loans as a consequence of higher interest rates.

Now turning over to Page 10. The good development in our insurance revenue continued in the second quarter, up 8.1% adjusted for currency effects. We saw an increase in revenue for private from all main product groups and I'm very pleased that despite price increases, we maintained our superior position and increased the number of customers. It is also very encouraging that our strong momentum in the sale of motor insurance continued this quarter.

The Commercial segment generated a very strong topline growth, reflecting effective pricing measures, solid renewals and higher volumes for accident and health insurance. Insurance revenue in Denmark increased by 8.6% measured in local currency, primarily driven by volume growth and significant price increases for commercial property and motor insurance.

The recently acquired dental insurance portfolio also contributed to premium growth. Lower activity in the Danish real estate market. Tough competition and strong focus on implementing our new IT system resulted in a decrease in the Danish private portfolio. We are looking forward to adding Sønderjysk’s commercial portfolio and PenSam Forsikring later this year, which together with our sales initiatives and partner agreements will contribute to growth in our Danish business.

Insurance revenue in Sweden rose by 2.2%, measured in local currency, driven by growth in the commercial portfolio. The private portfolio declined due to necessary pricing measures for motor insurance. Insurance revenues in the Baltics increased by 11.5%, measured in local currency, driven by price increases and higher volumes for the private and commercial portfolios. We have a strong momentum in the Baltics, which together with pricing measures generated a significant sales this quarter and bode well for revenue growth going forward.

Turning over to Page 11. The group's loss ratio increased by 4.1 percentage points, negatively impacted by significantly higher large losses and a 2.8 percentage points increase in the underlying frequency loss ratio. Both run-off gains and the discounting effect contributed positively latter due to higher interest rates.

The main drivers for the increase in the reported underlying frequency loss ratio were motor and property insurance in Norway. Denmark showed a small increase in the frequency loss ratio driven by motor while both Sweden and the Baltics reported improved underlying profitability.

Let's turn to Page 12. Our cost ratio remained stable at 13.6%, thanks to revenue growth and strong cost discipline across the group. Our cost ratio when excluding the Baltics was 13%. I'm particularly pleased with the cost ratio in commercial this quarter, declining to 8.1%. Private showed the higher cost ratio driven by an increase in IT expenses and strengthening of the sales force. The cost ratio in Denmark improved due to higher insurance revenue. Sweden showed the higher cost ratio as a result of an increase in marketing and sales activities. The strong improvement in the cost ratio in the Baltics despite the high sales activities is encouraging.

Over to Slide 13 for comments on our pension business. Our pension business continued to perform well due to cost efficient operations and a good growth momentum. The results in the second quarter include two one-offs with net negative effect of approximately NOK 18 million, bringing the reported profit before tax to a negative NOK 3 million. Adjusted pre-tax profit, including the change in CSM and adjusted for these one-offs would have been NOK 26 million positive.

In comparison, the pre-tax profit according to the old accounting standard was NOK 66.3 million, an increase of 52% compared to the same quarter of last year. The significant improvement in insurance service result compared with the second quarter of last year reflects a one-off-reversal of previously recognized losses on onerous contracts.

Net finance income was impacted by a negative one-off, as well as reflecting high and raising interest rates. As announced earlier, we expected high volatility in the results this quarter as we have been in the process of refining our models. We still expect some volatility in the third quarter results and then a more stable development from the fourth quarter of this year.

The net income from the unit link business continued at the high level due to growth in the occupational pension members and assets and 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 the investment portfolio on Page 14. Our investment portfolio generated a return of minus 0.3% in the second quarter, reflecting higher interest rates, rising stock markets and a high running yield on our fixed income investments. The match portfolio returned minus 0.6%. Net of unwinding and the impact of changes in financial assumptions, the return was minus 0.2%.

The free portfolio returned 0.1% this quarter. 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 600 million compared to the NOK 1.8 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 15. We had a solvency rate of 180% at the end of the second quarter down 1 percentage points from Q1. If we take into account the portfolio acquisition from Sønderjysk and the acquisition of PenSam Forsikring, both expected to be completed in the second half of this year. The solvency ratio would have been 173% this quarter. Eligible loan funds remained stable compared with the first quarter. The contribution from the solvency to operating earnings was offset by the formulaic dividend we deduct every quarter.

The Norwegian FSA has approved a minor change in our internal model regarding non-life capital requirement. As a result of this, total capital requirement for the quarter remains unchanged, despite the impact from growth and changes in currency rates. There is still a significant difference in capital requirements between our own model and FSA approved model we report on every quarter. We are very confident that our own model reflects the best estimate for risk and capital needed. We aim to have our own version approved in the long run, but this will take time.

A few words on the latest development of our operational targets on Slide 16. Customer satisfaction continues to be at the very high level and confirms our strong customer offering, particularly in Norway. We will continue to seek further improvement in all our markets. Retention in Norway remained at the high and stable level. In Denmark and the Baltics, retention increased during the quarter and it came somewhat down in Sweden.

Digitalisation and automation are key measures to maintain high cost efficiency with effect on both the cost and the claims ratio. Our digitalisation index measuring progress in digital sales, digital service interaction and digital customers rose further this quarter. All parameters show the positive development. Digital claims reporting was slightly down and automated claims processing was unchanged this quarter. Our operational KPIs are important to support delivery on our strategic priorities and financial targets. We will continue to improve delivery on all these metrics going forward.

And I will hand the word back to Geir.

Geir Holmgren

Thank you. To sum up on Page 17, we are pleased with a strong result this quarter and our sustained growth momentum. As mentioned, we are closely monitoring the recent increase in claims frequency in Norway. Gjensidige has strengthened the pricing measures and will adjust terms and condition to ensure that we are – over time we will mitigate the increase in claims frequency. The outlook for our business is good. We will continue to price at least in line with claims and inflation, which together with cost discipline and our efficient operations, ensure that we are the best possible – on the best possible trajectory to continue our solid performance and deliver strong insurance results.

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

Question-and-Answer Session

Operator

[Operator Instructions] Now we are going to take our first question from Freya Kong from Bank of America. You can go ahead now. Thank you.

Freya Kong

Hi. Good morning. Thank you for taking my questions. Three, if I can, please. Firstly, with respect to the pricing increases and terms and condition changes you've put through, how long do you expect this will take to start improving results? Secondly, I think one of your peers commented that weaker currency was having an impact on claims inflation for imported parts, therefore leading to higher claim severity. To what extent have you seen this or expect to see it? And just lastly on the investment portfolio, would you be able to give some color on the running yield within this and the current reinvestment yield? Thank you.

Geir Holmgren

Yes. I think I can start with your pricing question and then Jostein will continue with the currency and investment portfolio questions. Well, when it comes to pricing, if we split that into two dimension, looking at the inflation we have over the last year priced at least in lining with what we see and compared to our inflation forecast across all segments and all products. What we're seeing now is high frequency on the claim side when it comes to motor, travel, health especially in Norway. We are doing pricing measures already in place. So we expect quarter-by-quarter that this will have positive impact on our results.

Jostein Amdal

Yes. On the imported inflation through currency weakness in Norway and Denmark – Norway and Sweden and especially the Danish Krone is fairly strong. And this is a fact that this – the weakened Norwegian currency will have an impact on this, probably having an effect already on the claims inflation. But this is factored into the expectations we gave you on the products and especially in property and motor and probably more so for motor than property. So that's included in the 5% to 7% range and we gave you on the motor claims inflation.

Thirdly, on the running yield in the portfolio. For the total bond portfolio, the running yield is 4.5%, whereas for the Norwegian hedge portfolio, the running yield is now 5.6%. So that's the reinvestments in the quarter. I don't quite have at hand, but in a way all the – the whole portfolio is now mark-to-market. So it's on average in line with what we gave you as a [rounding edge].

Freya Kong

Okay. Thank you very much.

Operator

We'll take our next question from Youdish Chicooree from Autonomous Research. You can go ahead now. Thank you.

Youdish Chicooree

Hi. Good morning, everyone. I've got three questions as well. I mean, the first one I'd like to go back on the topic of the time it takes for you to earn through the price increases you are making now in a response to higher frequency in motor. Because you know, we saw almost like a 3 point deterioration in your frequency loss ratio in the quarter if we adjust for discounting, the deterioration is more like, it's closer to 4 points. So my question is, should we expect you to report like a weaker and – frequency loss ratio in the coming quarters before maybe next year we start to see an improvement? That's my first question. Secondly, on the frequency in motor, I mean, how does the current levels of frequency compared to, let's say, pre-pandemic levels because I thought things had already normalized by last year.

And then finally, my third question is on the benefit of discounting in your insurance service result or combined ratio. I mean, it was I think 2.7 points in the quarter. So roughly 240 million benefit. I mean that is very little change from last quarter. I mean, it increased from 2.6 to 2.7 when swap rates especially for Norway at the [three year-end] of the curve has increased by almost 120 basis points. So why did that your discounting benefit hasn't changed? Is that because you're using a startup period rate? Or is that something that we should expect next quarter? So if you could shed some light on that, that'd be very helpful.

Geir Holmgren

Okay. I'll start with the last question and then we'll work through your previous two questions. On the discounting rate, the increase in rates is mainly rated to Norwegian Krone rates, the Danish and Swedish rates, especially the loan rates in those two countries are actually lower than they were in the second quarter, the curve has inverted. So that's – I think that's explains your question really.

Youdish Chicooree

But – does Norway is not like disproportionately have a higher waiting in the way you discount.

Geir Holmgren

[Indiscernible] proportion to the premiums, that's what you mean. It's not disproportionately, but you can say basically distributed as premiums are distributed. So I guess, given the currency development, slightly less than 70% on total.

Youdish Chicooree

Yes. Sure. But if I look at your like private and commercial segments, those are basically Norway, right?

Geir Holmgren

Yes. That they are…

Youdish Chicooree

Yes, the currencies. So the improvements are very similar. We're talking about 20 basis points increase when we've seen much higher increase like by at least a 100 basis points.

Geir Holmgren

Yes. It is.

Youdish Chicooree

So I'm wondering whether there's a timing issue or not you know.

Geir Holmgren

It is a timing issue in the sense that we discount every month so that an increase just in the latter half or just very late in the second quarter will have a more limited effect than if it had taken place in the start of the quarter.

Youdish Chicooree

All right. Okay. Got it. Maybe I'll follow-up later on that. Thank you.

Geir Holmgren

Perfect.

Jostein Amdal

Do the first one.

Geir Holmgren

Yes. When it comes to impacts on pricing measures, I think when talking about motor, I want to say in the claims – increased claims ratio, when we change the prices this is over the measures that we have implemented. So it will have a positive impact quarter-by-quarter going forward, but we also plan to do some changes within terms and conditions that will – we need some time to consider the changes, so that will take a little bit more time. But we expect the total measures we are doing will have a positive impact going forward actually quarter-by-quarter as I said. Of course, when we are doing our pricing – change the prices, it'll have full effect after one year. But we have – in the private market, we have renewables month-by-month, so a greater part of the portfolio will have the changes month-by-month going forward.

Youdish Chicooree

Okay. Thank you. And on frequency?

Jostein Amdal

Yes. I think as you know, there's a lot of things affecting the frequency development over time. So going back to pre-pandemic levels, say almost three and a half years ago, whatever it is, things changed, but the actual claims frequency is now actually slightly lower than it was back in 2019. Yes, it’s lower than it was in 2019 still, but there are a number of reasons behind the changes in claims frequency. So it's hard to say if that's related to something with the pandemic or anything. It's hard to discern from the overall movements. But still at the lower level than claims frequency in 2019.

Youdish Chicooree

Okay. Thank you. Thank you very much.

Operator

We'll take our next question from Tryfonas Spyrou from Berenberg. You can go ahead now. Thank you.

Tryfonas Spyrou

Yes. Hi. I guess just coming back to the frequency topic. I mean, I now think that Norway has a much higher sort of deterioration in underlying loss ratio versus Denmark. So I was wondering if you can maybe point out any sort of changes in behavior or patterns that could explain that. And again, you mentioned changes in [indiscernible] that you're putting through. Is that to sort of tackle or just is that an issue? Is there anything that sort of cut you out in terms of the current ratio? Just trying to understand what is really driving the frequency dynamic a bit more particularly in Norway versus Denmark. So that's the first question. The second one is on the pension. Again, the result is very weak. You did mention volatility in this given opportunity. Is there any sort of steering you can give us going forward in terms of what should we expect under sort of the pension result? Thank you.

Geir Holmgren

I can start with the first one. If we look at terms and conditions, there are many factors we are looking into. What we have seen during the last quarter is a negative change in the claims ratio. That's something we want to handle and take immediate action. So that's the reason for the new pricing measures. But when it goes to the terms and condition, what we go into is to see if there are any changes in the driving patterns. If there are any, we are looking at deductibles when it comes to motor insurance. So it's many different topics we are going into, which will also when we conclude on what to do they will also possibly impact in addition to the pricing measures.

Jostein Amdal

On the pension question, I mean, I agree it's minus 3. It's weak in the IFRS 17 results. I apologize for that. These are still somewhat volatile as I mentioned in my presentation. I'll start with the old accounting regime, IFRS 4, where results were record high at NOK 65 million and that’s 52% from the second quarter of 2022. So I just put that aside and see that there is a high growth in number of customers and assets under management. So the kind of the stable fee-based business is going quite well. And we are reporting more than 20% for return on equity according to the old equity accounting standards. Under IFRS 17, we are taking into account the market movements on the effect on liabilities and assets there. They do have two one-offs, and then you should have the change in this contractual service margins as I think you should correct for when looking at the second quarter results, bringing it to NOK 26 million plus as I mentioned in the presentation.

Going forward higher interest rates is positive for the pension business. And we do not see any changes to the higher growth in assets and management and members in the pension arrangements. So we're very positive on the future profitability of pension business. And bear in mind that the accounting standards do not change the underlying solvency calculations or cash flow uncertainty. So in the long run, these numbers will be the same, but the periodization will be different due to the mark-to-market versus the old regime to that. So it's not a very precise answers, but I think the underlying business is going very well. Higher interest rate is positive for this kind of business. I think that's the two main messages.

Geir Holmgren

Just like to add one comment on – sorry, I'd just like to add one comment to the first question about T&C and pricing measures. We are in a very good position in the Norwegian motor market. We have a solid customer reputation. We have seen high retention numbers. So I'm also very confident that all the measures we are planning and implementing will also be successfully going through. So keeping up with a good market position as well.

Tryfonas Spyrou

Thank you. Just on the differences between the countries. Is there anything you notice in terms of pattern and behaviors in Norway versus Denmark or even Sweden? Anything you can give us more color on.

Jostein Amdal

We noticed a slight deterioration in motor profitability in Denmark as well. So the development is similar, but more accentuated in Norway if you compare Q2 2022 to Q2 2023. Please also bear in mind that we are looking at very high profitability levels as a starting point much higher in Norway than in Denmark. So that's maybe the why the percentage changes can come somewhat higher there. But in terms of driving behavior or kind of other factors, I think they should be fairly similar in Norway and Denmark.

Tryfonas Spyrou

Okay. Thank you.

Operator

Our next question will be from Vinit Malhotra from Mediobanca. You can go ahead now. Thank you.

Vinit Malhotra

Yes. Good morning. Thank you very much. If I can just – so my question is on pricing inflation and frequency. First is just the interest rates effect on the P&L. I mean, I can see that the discounting effect is slightly up. 2Q was 241 million was 219 million, so maybe 20 million higher. But then you are talking about the investment income, which is quite a bit of a swing. Now I'm just curious from the outside, isn't the whole purpose of the design for IFRS 17 and IFRS 9 just to make the balance sheet a bit more so – or the financial reporting a bit more balanced because just economically, it's very difficult to say to somebody that rising interest rate was so bad for the insurance companies. I'm just curious if there's any commentary on that you could help.

And second thing is just on the results again, I think there's been now a few quarters where – maybe two or three quarters where it's either volatility in claims or something else, which affects the results. Have you considered being short solutions? And I know that maybe expensive, but have you conducted some kind of a cost benefit check here, which says that, hey, maybe we should do that in the next maybe year. So I'm just curious because otherwise we go quarter-after-quarter of claims volatility and maybe just curious to hear what you thought about that. Thank you.

Jostein Amdal

On the interest rates, I mean, I agree that the IFRS 9, IFRS 17 has actually now – all assets are mark-to-market, which makes it at least in theory easier to see the economics behind the business. And the free portfolio at the moment is fairly low risk, which means that it is more dominated by interest rate risk than equity market risk in a way. And then we have a period of rising interest rates, you get mark-to-market effects on that part of the portfolio. And as you can see, we provide you with the returns per asset class, and I think they stop with this.

And then on the match portfolio, there will be smaller mismatches from quarter-to-quarter. In the longer run, this should balance out. If you look at the first half of the areas of the first and second quarter, you see that there's a small positive return on the match portfolio. I think this is – yes, from time to time there will be some volatility around that. But in the long run, there is – the match portfolio should lead a slightly positive return really because there is some credit risk in the bond that hedge these insurance liabilities. The free portfolio will depend, we will vary the allocation over time there, but at the moment, very low risk allocation. On the second part. Pardon?

Vinit Malhotra

Is there a big duration mismatch in free portfolios causing this volatility value?

Jostein Amdal

No, not a big…

Vinit Malhotra

The liability move.

Jostein Amdal

It's not a big mismatch, but the liabilities are measured when we hedged liabilities, you take as a starting point to solvency two values because the solvency two figures are the most important ones. That's a slight mismatch there, but it's not usually important. But otherwise, it's not a perfect match. But I wouldn't say it's a big mismatch, no.

On the second part, on the volatility, do have you considered insurance result? I think the easy answer is no. We don't think that would be appropriate for this kind of volatility that we have been talking about. We use reinsurance as more of a capital tool to hedge against large losses or events. And I don't think this qualifies for that. Then I think our way of looking at it, this is within a normal world. We are talking about the previous few quarters. If there are deterioration in the underlying frequency loss ratio that is – all the measures are much better and reinsurance to contract that like terms and conditions and pricing that we have been talking about today.

Vinit Malhotra

Sure. Thank you very much.

Operator

We'll take our next question from Hakon Astrup from DNB Markets. You can go ahead now. Thank you.

Hakon Astrup

Good morning. Two questions from me. The first question is on repricing. And just wondering how much on average are repricing in a region multi portfolio to contract the 5% to 7% in claims inflation and also the higher frequency? And then on the competitive situation in Norway, I know it's early days, but what are you seeing in terms of pricing actions from the competitors both to contract higher frequency and claims inflation?

Jostein Amdal

I think you as always, we're not giving a precise answer on how much the pricing. We say that we are pricing now above the expected claims inflation to meet both the claims inflation and what we see on the frequency side. And I think the term Geir used was strength in pricing measures. So I think that's suffices for – you have the numbers on the insurance, yes. What do competitors do? I mean, that's not – you can't really see that directly. We can see what other competitors are reporting of development in loss ratios and their communication in that respect. And I think we see that those that have reported are also talking about claims frequency and motor and then we'll see what the remaining competitors really report as the second quarter reporting season goes on.

Hakon Astrup

If I may just follow-up…

Jostein Amdal

Yes. One more – I guess, I have one more comment. If you kind of look at our competitive position and how we're managing to get those price increases through, we see very strong sales still. I mean, as Geir mentioned, we have already started rising prices more than the expected claims inflation and we still see that the sales development is very good within motor. So I think that might say something about what other competitors are doing as well.

Hakon Astrup

That's a good point. And just one quick follow-up. So if you are now pricing the higher end of 5% to 7% on motor, we think that is sufficient to count to the claims inflation side of the higher claims. Is that correct?

Jostein Amdal

The higher end of 5% to 7% range is due to what we have seen on inflation and is – yes to compare that number to our inflation forecast. So our best estimate at actual inflation when it comes to motor is slightly above 6%. So I think all the price increases are done in the past is at least in line with what we are seeing on inflation. So if you look at inflation as one topic, we want to look at the claims frequency as another topic and some additional price measures are both implemented and will be implemented during the next quarters.

Hakon Astrup

Thank you so much.

Operator

We'll take our next call from Thomas Svendsen from SEB. You can go ahead now. Thank you.

Thomas Svendsen

Yes. Good morning. I have two questions. First on the solvency ratio and sort of solvency position. So since it'll take a lot of time to get the internal model approved, why don't you just lower or have you considered lower your solvency range target to sort of mitigate that problem that you are – has more capital on the solvency ratio indicates? And the second question, it doesn't look like that when looking at the premium growth, but do you see any behavioral changes among your clients due to the fact that the price or insurance are increasing or is sort of a demand constant despite the price hikes? Thank you.

Jostein Amdal

Thank you, Thomas. And the first one is, if we changed our financial targets, we'll let you know. That's an easy answer. These are the financial targets that we have including the solvency margin target range, and if they're under change that then we will make that public to everyone.

Geir Holmgren

Okay. The second one is, yes, the customer behavior due to the economic situation. We don’t know if you look at our numbers, we do not see any signs of customers more in general reducing their insurance coverages or changes in the plans. But we spend a lot of time with the customers on when they're calling to our customer centers to get advices and to go through their arrangements. So that's something we spend a lot of time on nowadays. Of course, that's natural. Natural to see that we have many questions about connected to their expenses of the insurance covers. But we don't see any signs on reduced demand for other products.

Thomas Svendsen

Okay. And just follow-up on – actually two follow-ups on just on the solvency. Again, you can just give an update on sort of how you see the solvency in relation to rating and how much rating is sort of this, I say for your solvency capital or solvency capital targets. And second, follow-up on this claims frequency. Is there anything you can do with the products like within motor sort of the retention or the own – the money that the clients need to pay for themselves? It's quite low even for very expensive cars. So all they have to pay €350 to get the repair done. Is there something you can do with the products there to sort of increase the retention and maybe have the same price? Or do something smart with the products to mitigate this increase claims frequency?

Jostein Amdal

I'll start with the solvency and Geir will do the other one. The rating at A, which is our target, could be supported by a lower solvency margin than the 180 that we report. So that is not kind of any binding factor at the moment. Exactly where that limit is, it's not a formula, but we think it's considerably lower than 180, yes.

Geir Holmgren

Yes. I think can give one example of possible change within the terms and conditions. We're talking about retention or deductibles. So this is something we will consider during the next month in addition to the doing the pricing measures. And what you also see is that when we do changes in the terms and conditions, that they will also have immediate effect on the frequency as well, including a potential change in the level of deductibles. We're actually doing some changes at the moment or planning to do some changes when it comes to deductibles in some products in the commercial lines.

Thomas Svendsen

Okay. Thank you.

Operator

We'll take the next question from Erik Gjerland from ABG. You can go ahead now. Thank you.

Jan Erik Gjerland

Thank you. Jan Erik Gjerland from ABG. Just two questions from us before we end. Did the frequency increase now come surprisingly to you? Secondly, do you expect any profit sharing from your payments book as you running sort of more for the guarantee levels for this year? Thank you.

Geir Holmgren

A bit unclear on this, what you asked about from the second question Jan Erik, could you please repeat that?

Jostein Amdal

Profit sharing.

Geir Holmgren

For the pension policy. Okay, yes.

Jan Erik Gjerland

Yes. Thank you.

Jostein Amdal

The first question about frequency, have in mind – bear in mind that – have in mind that we are on very good profitable levels when talk about our motor insurance and the profitability. We are having already very good claims ratios. So we are talking about some changes at a level which is fairly good I will say, very good I will say. So when we observe that during the latest quarter, we also want to take immediate action to don't let this development continue. So that's the reason for the measures we are taking and we want to do that immediate when this observed the negative changes.

Jan Erik Gjerland

Perfect. Thank you.

Jostein Amdal

On the profit sharing of the paid up policies, I mean the recognized return and then we'll have to look at the IFRS 4 figures which are more relevant for this question was 1.1% for the first half of year, and the average annual interest rate guarantee is 3.4%. But that hides the fact that there is a number of different portfolios with different interest rate guarantees. So I would say that on some of these portfolios, they might be able to look at that there will be a non-profit sharing – the 80/20 profit sharing model for 2023, but we'll see on – as an annual calculation, we'll have to see at the year-end.

Jan Erik Gjerland

Thank you. Very, very clear.

Operator

We'll take the next question from Michele Ballatore from KBW. You can go ahead now. Thank you.

Michele Ballatore

Yes. Thank you. Two question from me. So the first question is about – still about the pricing and frequency. I'm guessing what I'm trying to understand is, when you started to increase prices on your pricing strategy, I mean, how much of what you're observing now was in those numbers in that pricing strategy and how much is, let's say a surprise, how much is new? You mentioned in private, increased frequency in basically everything, the motor and property, travel, health, accident. I mean, to what extent you still have to, let's say catch up in terms of your pricing strategy and how much is already included there? And then the second question about the solvency, I mean just for clarification, the 3% touch points that you have improvement – the model improvement, is it – I mean, should we expect the gap between the current model that you have and internal model to be feel like that like progressively or is it going to be like one goal and this 3 percentage point was like part of the, let's say the approval process that was approved? Thanks.

Geir Holmgren

Okay. I can start with the first one about pricing and what you see on the claims frequency in motor. The last quarter, the fourth quarter 2022 and the first quarter this year, have in mind that the first quarter this year was a winter quarter, which is when we have – and especially this year, we had bad driving conditions as well with icy roads and high claims than normal winter quarter. So that was more a volatile development and higher claims ratio in motor than expected and what's average or normal. What do I see now is a week development compared to our ambitious profitable levels we have in motor. So that's also the reasons for that doing the pricing measures. But we don't want to disclose how many – compare the weakness to what we expected or to what is a surprise or what do I talk about, but have in mind that we are still on a very profitable level when it comes to motor insurance in Norway.

Jostein Amdal

Solvency, I think the 3 percentage point improvements that we got through this FSA approval is more typical of what will happen. There are – will at any time be some applications within the FSA to change parts of the model and hopefully that will result in a gradual improvement or gradually closing the gap between the overall version and the approved version.

Michele Ballatore

Okay. So it would be gradual. Let's say the reduction of the gap between the two models.

Jostein Amdal

Yes. That's my expectation.

Michele Ballatore

Yes. Okay. Thank you. Thanks.

Operator

We'll take the next call from Vegard Toverud from Pareto. You can go ahead now.

Vegard Toverud

Thank you. Good morning. Thank you for taking my question. I'm returning to also this frequency issue as you have highlighted it yourself in the report and the presentation. As I understand you are happy with your pricing compared to the inflation part, but it's the frequency that has increased and you're making a point of it, and you are also changing terms and conditions. So I'm just a little puzzle how this all fits together. The frequency now being at the lower level than in 2019 came as a surprise to you to such an extent that you had to change or that you had to start or work on changing terms and conditions to maintain the claims. Is that the correct interpretation? Thank you.

Jostein Amdal

As I think we talked about when we looked at the long-term changes in claim frequency, because there are a number of elements that influence this. And of course we follow this a bit of more often than the quarterly reporting. And we've seen over some time now an increase in the claims frequency, but probably various reasons behind that. We have talked about already that question from Thomas that deductibles are getting fairly low as inflation have kind of reduced the value of the Krone and deductibles have been nominally fairly flat. And they could be all the changes as well behind this claims frequency that we have been talking about. The important point, I think is that we see this claims and frequency – increasing claims frequency and are taking measures. We have strengthened pricing measures and are looking at terms and conditions to mitigate that effect.

Vegard Toverud

It's not very clear to me. If you are experiencing a normalization, you're making a point that the frequency is now lower than it was back in 2019. So have you expected the frequency to stay at the COVID-19 level? Is that the case? Or have COVID impacted your models in any way? Or are there other interpretations or how should we interpret the full information package?

Geir Holmgren

I think, I made a point of saying that there is not so easy to say that this has something to do with pandemic or not. There are a number of factors that change the claims frequency over time. I'm mistaken in fact that the claims frequency at the moment is lower than it was in 2019. But whether that has something to do with post long-term driving pattern changes due to pandemic or not, we don't really have any facts to argue for against that.

Vegard Toverud

Okay. Thank you. I hope that we can have an opportunity to return to this topic at a later session. Thank you.

Operator

We will take our next question now from Faizan Lakhani from HSBC. You can go ahead now. Thank you.

Faizan Lakhani

Good morning. Thank you for taking my questions. The first is coming back to the Norwegian business. As mentioned that there are a number of different classes that you point to where there's an issue, so it's not just motor, there's also accident, health and property. Could you provide a split on how much of the underlying deterioration was the three different buckets? And I guess my second question is, you've made it clear that you've been pricing for claims inflation not for claims frequency, but when I look at the written premium over the last quarters, up to 6% in private, of which, if you're pricing for claims inflation up to the 5%, that'll suggest that there's a delta of about 1% in the potentially for pricing claims frequency. So as it stands, if we ignore the fact that you would earn the premium through, that would suggest that you're only going to see a 1 point improvement in the underlying frequency loss ratio if you were to price at this level. So are we saying now that 2022 was the peak in earnings and now we've got a factor in deterioration from here? If I could get some steer on that. And my third question is on Denmark, last quarter you had a significant issue in accident and health, you've not really pointed to anything on that this quarter. So is that just a one-off volatile item or is this a more structural there? Thank you.

Geir Holmgren

I think we point to the report that the main drivers of the underlying frequency loss ratios development was motor and property and in that order. And then that there's a weakness also in a number of other [last spaces], but there will be some ups and some downs from quarter-to-quarter. So we haven't given any further detail on that. And then…

Faizan Lakhani

Sorry, but just to come back to that, but I guess the way you sort of described it is that the motor frequency is more structural and the other the more sarcastic or volatile. So I guess getting a sense of how much is motor and how much in everything else is pretty important. It'd be good if we get some sort of steer on that point.

Geir Holmgren

Yes. I do see your point. And we also agree that the underlying frequency loss development in private properties probably more kind of volatility or sarcastic, but – And then the pricing measures that we're talking about has been foremost in within motor insurance. But we have not giving out the split on the development of underlying loss ratio per line of business. We haven't done that before either.

Second question was on, if you could look at the written premium in private, I think, I interpreted that you talked about private.

Faizan Lakhani

Correct.

Geir Holmgren

And as you see that in the second quarter, the written premium was 8.3% higher than in the second quarter of last year. So it's an increase of a bit more than the 6.4% we talk about in the insurance revenue growth, which I mean points to the fact that there have been talk about that we have already starting rising prices more than we have communicated as an expected claims inflation. I think I'll defer the calculation down. It's probably quite faster, but I didn't want to rubber stamp it or anything like that. And the third question was on Denmark and accident and health. I'll have to think about that. Able to help me on the – why we didn't on the development of accident and health compared to the first quarter. I'll have to think about it…

Faizan Lakhani

Okay. Thank you very much. Appreciate it.

Operator

We currently have no questions coming through. [Operator Instructions] There are no further questions, so I will hand you back now to Mitra to conclude today's conference. Thank you.

Mitra Negard

Thank you. Thank you, everyone for your good questions as always. We will be participating in roadshow meetings and conferences from August. Through August and September, we will be meeting investors in Oslo, London, Stockholm and Paris. For more details, please have a look at our financial calendar on our website. Thank you very much for your attention. Have a nice day and lovely summer. Bye.