GJNSF - Gjensidige Forsikring ASA (GJNSF) Q1 2023 Earnings Call Transcript
2023-04-28 12:18:01 ET
Gjensidige Forsikring ASA (GJNSF)
Q1 2023 Earnings Conference Call
April 28, 2023 03:00 AM ET
Company Participants
Mitra Negard - Head of Investor Relations
Geir Holmgren - Chief Executive Officer
Jostein Amdal - Chief Financial Officer
Conference Call Participants
Alexander Evans - Citi
Tryfonas Spyrou - Berenberg
Hakon Astrup - DNB Markets
Blair Stewart - Bank of America
Thomas Svendsen - SEB
Ulrik Zürcher - Nordea
Hans Rettedal - Danske Bank
Vegard Toverud - Pareto
Faizan Lakhani - HSBC
Vinit Malhotra - Mediobanca
Presentation
Mitra Negard
Thank you. Good morning, everyone and welcome to this First Quarter Presentation of Gjensidige. My name is Mitra Negard and I am Head of Investor Relations. We will start this session with our CEO, Geir Holmgren, giving you the highlights of the quarter; followed by our CFO, Jostein Amdal, going into the numbers in further detail. And we have plenty of time for Q&A afterwards. Geir, please.
Geir Holmgren
Thank you, Mitra and good morning, everyone. As we saw in the press release we published this morning, we are transforming our organizational structure to further enhance operational excellence and strengthen our position to become a leading general insurance company in the Nordics and Baltics.
Let us have a look at the highlights of the changes on Page 2, before discussing our first quarter results. Gjensidige has a very strong position today. Thanks to our deeply customer-oriented culture and unique competencies and also due to our solid operations and industry-leading cost position but we cannot rest on our laurels.
Industry trends call for a strong focus on building customer relationships as well as the capability to respond to these changes in customer needs. The changes we are implementing will further strengthen our fundamentals and enable us to deliver on our strong ambitions.
At the core, this transformation is about stepping up implementation of our best practice across the group and sharpening our focus on strategic initiatives and innovation. All based on the superior position in Norway. Our Danish operations have matured and grown to a size that calls for a closer integration with our whole market operations.
And we see significant opportunities in further efficiency gains for claims handling. As you can see on the slide here, our operations in Norway and Denmark will as the 1st of July be organized into three-business areas; private, commercial and claims handling. This will release further benefits of scale and increase synergies across our two largest markets. We will also increase our focus on sustainability, people, stretching M&A and communication through three new staff areas.
So over to Page 3, the changes you'll see on this slide will be effective from 1st of July, until then we will have an interim structure in place as described in our release today. With me, I have a highly competent, experienced and motivated management team. As you can see, there are also two new team members starting on the 1st of August; Siri Langangen, EVP People coming from Starcraft and Vibeke Hansen Lewin, EVP Communication, Brand and Sustainability coming from D&B.
I look forward to working together with a new team and I'm very confident that they together with the rest of the group will ensure that we will step up implementation of our best practices across the group, realize group synergies and reach our financial goals.
Now let us take turn over to Page 4. For comments on our first quarter results. This is the first quarter we are reporting according to the new IFRS accounting standards. I'm very pleased that despite the high complexity involved, we have had a very smooth transition. Thanks to have a strong and competent team.
We generated a profit before tax of NOK 1491 million. The general insurance service result was a solid NOK 1115 million reflecting continued strong growth in the insurance revenue effective pricing measures, good risk selection and cost control. Underlying profitability expressed through our underlying frequency loss ratio was impacted by the high motor claims due to difficult weather conditions in Norway this quarter.
Large losses below than we have expected for a quarterly average this year. And we reported run-off gains as opposed to run-off losses last year. Bear in mind that due to IFRS 17, we now compare with the two 2022 run-offs excluding the planned releases in May last year.
Our investment generates returns or NOK 794 million reflecting improved market conditions. And I'm very pleased that we generated an annualized return on equity of 20.1%. Jostein, will revert with more detailed comments on the results for the quarter.
Moving on to Page 5, and a few words on our operations. We are continuing to price at least in line with expected claims inflation and see that we are good at forecasting claims inflation, and are able to pass on necessary price increases. We are confident that this will continue, and we will prioritize profitability over growth also going forward. General inflation remains at elevated levels.
In terms of claims inflation, the initial pressure on material price is gradually being replaced by wage inflation and depreciation or the Norwegian kroner, against several currencies. Energy prices continue to be volatile. We currently expect claims inflation for a private property Norway, to remain in the 4% to 6% range.
Further, we expect claims inflation for motor in order to remain in the 4% to 7% range and at the higher end in the short term. For certain pockets in the large corporate portfolio, and in certain commercial segments there is still a need for price increases beyond inflation. We have put behind us a quarter with strong performance in Norway despite the challenging winter weather. I'm very pleased, with a continued significant growth rise in insurance revenues in private despite tough competition.
We managed to put through necessary price increases, while maintaining our high customer retention and profitability continues to be very good. The development of our mobility service is encouraging RedGo has recently won significant commercial tenders, and has further strengthen our offering in the important car dealership channel.
As explained earlier, we aim at generating considerable claims handling synergies by integrating road assistance in our value chain. We are making good progress and I'm confident that this will come through. We have also seen very encouraging results from cross selling motor insurance service hold type [ph] customers and I'm excited about our newly launched app which will deepen our ties with customers.
Our commercial segment also generated solid results this quarter despite the difficult weather. Insurance revenues continue to grow at a high rate, and retention is at a very good level. I will revert shortly with some further comments on our commercial portfolio.
The underlying performance in Denmark was somewhat weak than we saw in the last quarter -- in the same quarter in 2022. We continue to grow insurance revenues in commercial portfolio. And this quarter, we also saw a slight increase in the private portfolio. The acquisition of the commercial portfolio from Gjensidige Forsikring in Denmark is yet an example of adding attractive bottoms with a good strategic hit supporting our growth agenda. It is expected to close in third quarter.
Progress in the new core system in Denmark -- IT system in Denmark is good, and we are getting closer to a complete migration, over the private products. We expect to start migrating the commercial products next year. This will strengthen the operational performance considerably, when fully implemented.
I'm very pleased, with the growth in our Swedish business. The underlying profitability in Sweden was somewhat weaker this quarter compared, with the first quarter last year. We will continue our efforts to increase profitability going forward through implementing pricing measures, improving risk selection and implementing cost efficiency measures.
In the short-term, we will have particular focus on strengthening our distribution and continue developing digital customer solution. This quarter we have implemented several partner API's, as well as online self-serving solutions for our customers. I'm encouraged by the pace of our digitalization, which will support delivery on both our top line and profitability and business.
We saw better performance in the Baltics this quarter. Although, the numbers are still in red. I'm pleased to see an improved underlying profitability, as we have put through unnecessary price increases and improved risk selection. But we need to deliver significantly better results, which calls for strong focus on ongoing measures for 2023. We still expect the combined ratio to move below 100% and then further improve the following years.
Over to Page 6, a few words about how we have succeeded in establishing a healthy commercial portfolio. We have generated strong growth in our commercial portfolio over the past years driven by both significant price increases and new business. And we have achieved this without having to compromise on our strict profitability requirement. Thanks to our excellent underwriting and strong analytical capabilities. We are managed to further improve the quality in our portfolios, as you can see from the chart on the right hand side here.
The customers we have kept are more profitable than the ones we have shed. This is no coincidence, but rather a result of sophisticated analytical tools and resources as well as an extensive database built over many years. We have a strong team of data engineers and data scientists, who will hire -- who have established efficient processes to gather data and gain further insights.
Our advanced modeling tools generated predictive output and support our decisions and priorities. We utilize refined customer scoring models, which helps us effectively differentiate on pricing. These models and our extensive knowledge base and share that profitable customers are offered lower prices -- price increases than less profitable customers. And we makes sure that we use our resources effectively and concentrate our efforts towards value creating activities.
We see significant potential in sharing the state of the art processes and methods we have operations outside Norway. The new grid structure and core IT system are important contribution to reach our goals.
Over to Page 7, we continue to make progress on sustainability. We have several new initiatives this quarter, as you can see on the slide, supporting our efforts to deliver on our ambitious targets. And as you can see on the right hand side, we are well underway to deliver on this. This quarter, I'm particularly pleased we are having launch of a second taxonomy aligned product and there is more to come. We have got a strong recognition this quarter too with top ranking in the Sustainable Brand Index.
With that, I will leave the word to Jostein to present the first quarter results in more detail.
Jostein Amdal
Thank you Geir, and good morning everybody. I will start on Page 9. We have been well prepared for the transition to IFRS 9 and 17. And we welcome these as they drive greater consistency and allow for increased competitive building between insurers.
As mentioned earlier, although, our accounting particularly for a pension business is significantly different. The new accounting standards have no implications on the fundamentals for our business, the waver on our business or in bank profitability cash flows solvency and dividend capacity remain unchanged.
As Geir mentioned, we delivered a profit before tax of NOK 1,491 million in the first quarter. The Insurance services result reflects a continued strong momentum for top line growth and efficient operations. The results from on regional pressures were significantly impacted by higher motor claims. This year we had a long winter with several days of difficult driving conditions caused by heavy snowfall and the fluctuation in temperatures.
Our operations outside Norway generated high reinsurance results compared with the first quarter of Gjensidige. High run-off gains and discounting effect with the main drivers of this in Denmark and Sweden. The depreciation of the Norwegian Kroner also contributed to the high results.
The Baltics reported a loss, however, the underlying profitability improved considerably year-over-year. The financial result was good reflecting and generally positive development in the capital markets in the quarter. Despite a good development in our pension business, we recorded the loss based on the new accounting standards. This is the return a symmetric recognition of losses on risk contracts and profits on new contracts. I will discuss this in further detail in a moment. The decline in other items is primarily related to the gain on the sale of Oslo Areal recorded last year.
Now turning over to page 10. The good development in our insurance revenues continued in the first quarter, up 7.4% adjusted for currency effects. We saw a strong increase in revenues for the private segment, driven by price increases for motor, property and excellent health insurance. And despite the price increases, we maintained our superior position and increasing number of customers. The sale of motor insurance was particularly good this quarter proving our competitiveness and powerful distribution capacity.
I am very pleased as we generated significantly higher revenues in the commercial segment as well, all the main products from good growth. We continue to succeed in implementing effective pricing measures and have solid renewals. This quarter we have higher volumes for accident and health insurance.
Insurance revenues in Denmark increased by 7.7% measured in local currency, primarily driven by volume growth and significant price increases for property and motor insurance in the commercial portfolio. We also generated a slight increase in our private portfolio. The dental health insurance we acquired last year, Dansk Tandforsikring also contributed to premium growth. We're looking forward to adding Dansk’s [ph] commercial portfolio later this year.
Our Swedish operations generated revenue growth of 9.5% measured in local currency. Both the commercial and private portfolios rose this quarter driven by volume and price increases. Insurance revenues in the Baltics increased by 5.9% measured in local currency, primarily driven by pricing measures. We saw growth in the main insurance lines except for motor where the significant price increases we are putting through led to a drop in volumes. Gross written premium was up 17.2%.
Turning over to page 11. The group's loss ratio decreased by 1.3%. The underlying frequency loss ratio increased by 3.1 percentage points with the primary driver in Norway being weather related increases in motor claims in addition to normal volatility. The increase in the underlying frequency loss ratio in Denmark is due to lower profitability for health insurance, normal volatility and somewhat lower price increases and claims inflation.
For Sweden the main explanation for the increase in the underlying frequency loss ratio is volatility in medium sized gains within property. The Baltics sold and improved on the rank frequency loss ratio, mainly as a result of the significant repricing measures taken there. Large losses for the group were significantly lower than the same quarter in 2022 and lower than expected. Both run-off gains and discounting effects were higher. The latter due to the rise in interest rates last year.
Let's turn to page 12. Our cost ratio remained stable at 13.4%. Thanks to revenue growth and strong cost discipline across the group. Our cost ratio when excluding the Baltics was 12.7%. The cost ratio in Norway increased slightly to 10.5%. Due to strengthening of the sales capacity in private and higher IT expenses. Denmark and Sweden showed an improved cost ratio due to the increase in revenues and higher cost efficiency in Sweden. The Baltics cost ratio increased somewhat due to higher commission following the high sales activities in the quarter.
Over to slide 13 for comments on our pension operations. Our pension business continued to perform well due to cost efficient operations and a good growth [indiscernible]. However, with the new accounting standard, the reported results give a different impression. We reported a volume driven insurance revenue growth of 9%. The insurance claims expenses increased by 76%, reflecting the accounting rules and losses and unrisk contracts.
Based on IFRS 17 life insurance contracts are separated into profitable and onerous contracts. Best estimate future profits on the profitable contracts also called contractual service margin are set aside as a liability. These are gradually released over time as the contracts expire.
While the loss component arising from onerous contracts are taken into the P&L directly at recognition of the contracts. The asymmetry in recognition of profits and losses has a negative impact on the reported results particularly for companies with significant growth such as our pension business. We are working to refine the models that measure whether contracts are profitable or loss making for accounting purposes, which may lead to some volatility in the IFRS 17 results these first quarters of reporting.
On this slide, we have shown both the results according to IFRS 17 and an adjusted version where we have included the change in contractual service margin, moving the result in the first quarter from a negative NOK 8.5 million to a positive NOK 44.4 million. I'm very pleased to see how we succeed in growing our business and generating strong results. Assets under management rose to almost NOK 61 billion reflecting the good growth in pension members.
The net income from the unit-linked business continued at a high level due to growth in occupational pension members and assets under management, somewhat contracted by an increase in costs due to the high activity level. We have an agile and highly cost-efficient pension business set for further growth going forward. The new core system which is currently being implemented in pension will provide further opportunities for digitization and automation of processes.
Moving on to the investment portfolio on Page 14. Our investment portfolio generated a return of 1.3% in the first quarter with positive returns on all asset classes. The result for the quarter was driven by the rise in global equity markets, depreciation of the Norwegian kroner and lower credit spreads and interest rates, especially outside Norway. A high running yield contributed to good returns. The match portfolio returned 1%. Net of unwinding and the impact of changes in financial assumptions, the return was 0.3%.
The free portfolio returned 1.8% this quarter. Compared to the end of the previous quarter, the risk in our portfolio was somewhat reduced, the derivative positions taking down the exposure listed equities by approximately NOK 500 million compared to the NOK 1.7 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 report a solvency ratio of 181% at the end of the first quarter, up two percentage points from Q4. Eligible own funds increased with a sensitive operating earnings including the seasonal increase in premium provisions. Returns on the free portfolio also contributed to the increase in eligible funds. The form like dividend decreased the funds by approximately NOK 900 million.
The capital requirement increased primarily due to growth, currency rate changes and higher market risk for life insurance. If we take into account the portfolio acquisition from Gjensidige Forsikring and smooth out the seasonality in premium provisions, the solvency ratio would have been 174% this quarter.
A few words on the latest development of our operational targets on Slide 16. Our high customer satisfaction score confirms our strong customer offering, particularly in Norway. We will continue to seek further improvement in all our markets. Our intention in Norway remains high. We have room for improvement outside Norway which we will achieve through a broad range of measures aimed at strengthening customer relations.
Digitisation and automation are key measures to maintain high cost efficiency with effect on both the cost and claims ratio. Our digitisation index measuring progress in digital sales, digital service interaction and digital customers rose further this quarter. Digital sales and service interactions showed a particularly strong development this quarter. Digital claims reporting declined slightly due to rolled assistance now being included as of 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.
I'll now hand over back to Geir.
Geir Holmgren
To sum up on Page 17. We are very pleased with the solid result this quarter despite the challenges posed by the difficult weather conditions. I'm very excited about the transformation we are about to carry out which over time will lay the ground for an acceleration of implementing best practices across the group. The outlook for our business is good. I'm confident that we are in 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] The first question comes from the line of Alexander Evans from Citi. Please go ahead.
Alexander Evans
Hi. Thanks for taking my question. Firstly, just on the underlying frequency loss ratio. So ex-the discounting impact that's a 440 basis point deterioration year-over-year. Previously, when there's been occasions of the degree of underlying weather you've broken out why not this time? I mean, is it possible to give some clarity on actually how much of this is weather and how much you're seeing on, sort of, just higher claims inflation and stuff like that?
Secondly, on the organizational change. So I mean it looks like you don't really have a Head of Sweden and the Baltic anymore and then moving into Head of Claims. Are you kind of done with the journey in Sweden? And is that, sort of, up for sale essentially?
And then just on the sort of expense ratio we can see a 90 bps deterioration in private lines there and you talked about strengthening the sales force. What's the rationale behind this sort of change? Are you feeling you're a little bit underweight in private relative to your Norwegian market share or there some sort of areas that you're specifically trying to target there? Thanks.
Jostein Amdal
I'll start with the under frequency loss question. I mean -- we did a couple of times earlier make the calculation. It is a calculation for with some uncertainty. And it's definitely a clear connection with the weather we see kind of the days when there are weather events or rough weather, we'll see a significant increase in the number of reported claims. But we decided this time not to give the exact number because of this uncertainty and having to report adjusted for weather impacts last year and so on in next year. So it is definitely -- and especially, for motor a significant impact from weather and we do not -- haven't provided the specific number. I think the important question is...
Alexander Evans
May be I ask in another way, are you confident that your pricing for claims inflation there?
Jostein Amdal
Yes, that's what I was going to say, Alex -- that's the main message really that we are very confident that we are pricing at least in the expected and realized claims inflation for this motor business although the results in the first quarter is worse than expected than going into the quarter.
Geir Holmgren
Okay. Regarding Sweden and Baltics, as you can see operations in the Baltics will be followed up by the Gjensidige Group Development division. And the changes have no implication of our views on these segments. And I'm very confident that we will be able to deliver satisfactory returns going forward.
And both the operations in the Baltics and operations in Sweden are part of our core operations. Although, Sweden for some geographical reasons you can actually argue that it's more -- should be more integrated within the group. But going forward we are focused on all the measures we are having in these markets. And having said that we will also look at -- always look at opportunities and also see how we can create the best shareholder value going forward.
Alexander Evans
Thanks, guys. Can I just -- sorry just a follow-up on that one. I mean you talked about sort of the synergies that integrating Norway and Denmark will have. Is it possible just to put some numbers around what you think this is going to improve for Gjensidige?
Geir Holmgren
I'm very confident that when integrating operations in Denmark and Norway, we will achieve -- that will actually improve our operational excellence and strengthen our position in these markets. And a key goal for NCD is to have high operational efficiency throughout all our business. And I think this is a very good step forward to improve that. Saying that we will do necessary assessment and see how what kind of impact it would have on our targets. And if we do any changes we will announce that if and when relevant.
Alexander Evans
Last question about the costs in the private segment. I mean, we have a fairly analytical approach to the value of increasing and decreasing sales force and we see that there is value in increasing sales capacity somewhat in private where we -- so we staff up some of the call customer centers.
Given the kind of where we see that we are actually competitive now and can get positive net return from these employments. And also as we mentioned there are also some increases on the IT side that also contribute to the increase here. Okay. Thank you.
Operator
The next question comes from the line of Tryfonas Spyrou from Berenberg. Please go ahead.
Tryfonas Spyrou
Hi there. Thanks for taking my question. So just firstly on the underlying frequency loss ratio in Sweden and in Denmark, we had a pretty big swings here year-on-year. I was wondering if you could share some more thoughts on what are the key drivers here.
I guess, more particular in Denmark, whether you can comment on which lines of business claims inflation is higher than pricing. I think you made a comment there. And then if you can share some numbers?
And the second question is on the solvency. You mentioned that when adjusting for the portfolio you acquired and the seasonality premiums solvency is down sort of seven points. I guess can you help us unpack the difference between the two?
I guess the impact of not new material. So if you can help us identify what's what and how should we expect the seasonality and provisions to affect the solvency going forward? That's my question. Thank you.
Jostein Amdal
I can start with the last one first, the solvency. The two factors that we mentioned that will affect the solvency going forward. I mean the core reported number is 181%. So it's kind of guiding a bit there on, on the development forward.
Sønderjyske Forsikring ASA which is a portfolio of DKK 200 million in premium volume that we acquired for a price of DKK 200 million is not formally approved. We expect that to take place in the third quarter maybe at the end -- towards the end of the first -- third quarter and that should have an approximate effect of around three percentage points on the -- on the solvency ratio but formerly it won't have an effect until we actually are approved as buyer of that portfolio.
And the other part which is an approximately four percentage points is that there is seasonality in the premium provision where we have a high -- high-positive effect in the first quarter and then that will gradually taper off towards the end of the year. This happens every year and it's due to that so much of the commercial premium is to renew that January one is kind of the driver behind that.
So -- and of course going forward, it will be -- the typical pattern will be that we have a positive profit and subtract as usual the 80% for like dividend every quarter going forward. And then towards the fourth quarter at the end of the year then we subtract the actually proposed dividend. This is the typical pattern.
Underlying frequency loss ratio in Sweden and the Baltics, if we start with Sweden where we have the largest swing in the underlying frequency loss ratio. That is driven by -- part of it is driven by -- actually more than half is driven by some volatility in medium-sized claims which means claims that are below NOK 10 million, but for a fairly small segment such as Sweden does have an impact in a short period as a quarter within property both for the private property and commercial property side.
And then, there is some underlying call deterioration within health insurance in Sweden. And then, you have some various effects that kind of have a negative effect on the Swedish partner. But I think it's important for me to emphasize that more than half of this negative development from quarter one last year to this year in Sweden is due to some I would call it medium-sized claims and volatility which should not be an expectation not to be repeated.
Denmark, related also there, somewhat deterioration due to health insurance there. The increased frequency -- claims frequency with the health insurance, in -- across the Scandinavian countries. And then there is also probably some weather-related effects on the motor side but much less pronounced than Norway. And then, you have as I said some effect due to price increases not quite kept in line with the inflation estimates, which has kind of affected more -- is a very -- a small discrepancy but hitting both commercial both property and the motor across the border.
Tryfonas Spyrou
That's very helpful. And just a quick follow-up to that. Would you say that the sort of underlying base effect from frequency normalizing post-COVID-19 last year, and obviously, and also are there any sort of comments you can make on the currency effect and that will that impact in your the import of spare parts in Norway as well. So, any comment there? Helpful.
Geir Holmgren
I think the weakened Norwegian more, more focused. Currency is more focus when you look at the Norwegian numbers where of course the Norwegian kroner has depreciated across most other or other major currencies at least. And it's a topic that, they kind of keep a very high focus on given the - especially in motor a large share of imported parts. That's important for our estimates for claims inflation going forward for motor in Norway, particularly Danish currency of course been much stronger, so it's much less of an issue in Denmark than in Norway. Yeah. And of course, our approach when you see an underlying deterioration is kind of focus on things that we could do in pricing or in terms and conditions that will mitigate this going forward. An important message I think is that we continue to price at least in line with expected claims inflation. And then there if you look at short periods like a quarter there will be some volatility.
Tryfonas Spyrou
Okay. That's helpful. Thank you.
Operator
The next question comes from the line of Hakon Astrup. Please go ahead.
Hakon Astrup
Good morning. Two questions from me the first one on motor in Norway. I wonder, if you can give some more flavor on the sales inflation there the 4% to 7% that you provided seems a bit low given what you see in terms of wage growth and also the recent depreciation of the Norwegian currency. And how has the development has the inflation here picked up compared to last year? That was the first question. And the second question on your out-of-stock statement on the growth side. During the past quarters you have had an expectation that short-term growth should be above growth in nominal GDP, but I didn't find that statement this quarter. And should we read anything into that you have to say -- on to that? Thank you.
Geir Holmgren
On the motor inflation side, we say that in the short term we are at the higher end of that growth, and then longer term we elected to see to be more in the middle or maybe towards -- the important driver motor is approximately 50-50 claims and labor costs. And we typically secure the labor part for some period or the cost per type of repair for some period. So our experience in claims inflation is a mixture of our agreements and the general inflation anxiety and of course our wage inflation and the development parts prices. And we do of course fear that there is a risk -- that there is a lag between currency movements and our spare parts. But we keep a very keen eye on that close contact with the suppliers to anticipate their price ranges and that is baked into this estimate.
I think macroeconomic uncertainty is higher than it has been over the last one year to have been higher than for long. So it's more -- it's less visible maybe than it was typically but -- or it has typically been but yes we have -- if you look back we've been fairly good at hitting these estimates that we've provided to you and I hope that will continue. Growth --
Hakon Astrup
And just I may follow-up on that one you see that claims inflation on the motor side is now picking up in Norway just following what has happened on the -- with the currency and also the recent rate negotiation?
Jostein Amdal
Actual claims inflation hasn't so far picked up. We are looking 12 to 18 months ahead. And we see that we are on the higher end of that 47% into in the first part of that estimate.
Hakon Astrup
That’s right. Thank you.
Jostein Amdal
The growth statement. It's just, we've taken away the short-term focus and said long term its normal GDP around that. Yes.
Hakon Astrup
So you do not expect short term, but that growth should be above nominal GDP anymore.
Jostein Amdal
Exactly.
Hakon Astrup
Is that how we should relate, or is it -- really?
Geir Holmgren
Its really does have no change in outlook, but we removed that short-term statement.
Hakon Astrup
Okay. Thank you.
Operator
The next question comes from the line of Blair Stewart of Bank of America. Please, go ahead.
Blair Stewart
Thank you. I've got a couple of questions. On the pensions business, I understand the differentiation between onerous and profitable contracts and the way that the account team works.
So I just wondered if you can maybe explain a bit more about what constitutes an onerous contract and you talked about maybe looking to change the modeling of what -- how you define an onerous contract under the accounting. And if you could talk a little bit about what is an onerous contract and how that's coming through.
And related to that, why is there such amount of volatility on a quarter-on-quarter basis. It's quite something you can explain why the numbers are bouncing around as much as they are.
The second question is just, I guess, viewing this from an outsider's perspective, integrating Norway and Denmark, but not Sweden seems odd. Other operational factors behind that? Is the Swedish business just too difficult or too different to integrate it into the others?
And then, just a couple of comments really, rather than questions. On the underlying loss ratio that you adjust for, I just wonder, would it not be more accurate to add an allowance for a normal expected level of large losses rather than stripping them out completely.
And then, perhaps just a final request. I find slide 11 to be very helpful. And I know you gave the information in the tables in the report, but I think a version of slide 11 for each one of the main lines of the business would be very useful in the future. Thank you.
Jostein Amdal
Okay. I'm not sure I'm happy to answer questions about the pension numbers. It's difficult. But what constitutes onerous contracts is that, when an occupational pension contract is sold for the typical small contracts, it's more like a tariff base, like in insurance. And if you have untypical or large contracts, it's typically more underwritten, more manual underwritten, based on that the tariffs aren't that good in setting the correct price for these contracts.
When you put that into account, what we have done is, use the tariff to determine from accounting purpose whether that was onerous or not. And we see that, clearly, that there is a miss match there between what we see is the real profitability and how that accounting wise turns out. And what we are doing and are in process of is improving the accounting calculation of the profits or the -- which contracts are onerous and that will lead to some volatility going forward.
And -- so that is -- the IFRS 17 will lead to higher volatility, because everything is mark-to-market and so on. So there is inherently some more volatility, but I think that is, in a way, good, because it gives a clear picture of what's really going in, taking into account the changes in interest rates and so on.
The part that is -- the volatility that is -- that we, in a way, are in our own thought, because we do this model changes, is something that will disappear after the first couple of quarters, I hope.
That's why I'm kind of warning a bit that there is some volatility around the numbers this quarter and maybe next quarter and then we hope that for the year and for the third and fourth probably quarters, there will be a more -- than the volatility will be market induced and based on real volatility and not our model changes. And I apologize that there will be some more difficult to predict numbers this quarter and the next quarter. So on the risk --
Blair Stewart
Just -- was that the main reason just your -- the evolution of your modeling, that led to such big profit numbers in Q1 2022 and Q4 2022 or is that something else going on in those particular quarters?
Geir Holmgren
In Q1 2022, we had a very high interest rate increase, which kind of drove it. So I think the main reason in Q1 2022, was the increase in the interest rates which is kind of because you have a long tail [indiscernible] that was reduced in value and we haven't -- we have a shorter duration of the asset side on the liability side. In Q1, this year during the quarter interest rates fell somewhat, which was a negative impact on the result of the pension business. So, yes.
Blair Stewart
Okay. Okay. That'd be something that's be useful to strip out in the future.
Geir Holmgren
I mean its very slow [ph] move and that changes the value of these insurance contracts, but that's just economic realty. Our model essentially is not the economic realty and we will try to get rid of those during the first two quarters. And then, you asked about, yes.
Jostein Amdal
I'll take that one. This group structure about Sweden. As you know, and as you can see in Denmark we have seen a good growth. We have a solid position. We are number four in the Danish market. The organization both and our operations both in private and commercial area are matured, and that leads to more obvious benefits when integrated with the Norwegian business, I would say. So, I am very happy to look -- going forward to look at what you can achieve within distribution within, how to monitoring and following up and doing repricing within the customer portfolios and how we can strengthen the operations.
When it comes to Sweden, our operations are smaller. We have a weak position dividing the Swedish business into private and commercial, will probably be less cost efficient and less smart to do due to the size we have in the Swedish business today. That said, we will continue following up our measures to improve the performance in the Swedish business.
Geir Holmgren
Including the normal large losses in the underlying frequency loss ratio. I mean, I totally see the point of that. We do provide normalized large losses in a separate slide. So I guess the question if we call it underlying frequency loss ratios, or more normalized loss ratio in the way, which we added the normal expected large losses. I think it's two ways of showing much the same. But we give you the constituents of such a normalized, loss rate ratio you want to do in the -- I don't quite remember the slide number in the appendix, but there is a slide there with normalized large losses Blair.
Blair Stewart
Yes, I know, it's there. I just think intuitively it makes more sense to have some allowance for normal large losses, when you look at the underlying quarter-on-quarter progression, but just the absolute number, just a just a personal preference. Anyway. Thank you
Operator
The next question comes from the line of Thomas Svendsen. Please go ahead.
Thomas Svendsen
Yes, good morning. Question to the solvency on your solvency ratio target. So you pointed out sort of the pro forma solvency is now 174%. So I guess, the question is should we assume that the midpoint of the range is the most likely, or also if you would be comfortable to go much below the mid-range let's say, 160%? Would you be as comfortable to do that as you need to go down 90%? Because in practice, it seems like you are not very keen to lower the solvency ratio towards the low end? What do you think about that?
Geir Holmgren
We have a solvency range of NOK 150 million to NOK 200 million and we're comfortable within that range. If I could choose I'd rather have a high solvency than lower solvency because I have more financial flexibility and the potential for specials. But I mean we are comfortable within that range. We could go to NOK 160 million. We would go to NOK 190 million. I think -- and maybe if we call it pro forma, it's probably a bit misleading for us. We use guiding and telling you that in the third quarter there will be the formal conclusion of a transaction that will have a negative impact on the solvency on the Sonderjysk acquisition. So it's just telling you that in advance I would say.
Thomas Svendsen
Okay. So one of the reason I'm asking is, simply if you're a 174, would it then be on that at all to lower it to, let's say, 160 via special dividend, or would it be so that you will skip the extraordinary dividend, because you don't want to move too much towards the end of the range.
Geir Holmgren
I think the solvency situation will be assessed all the time, and the Board will look at this and the forward-looking perspective on the solvency ratio and deciding on the actual dividends proposed.
Thomas Svendsen
Okay. And then just the final question there on the weather. So I think last quarter you said something about that the weather was what you could expect in the fourth quarter -- the fourth winter quarter, but how will you describe the weather in the Q1? Is it more harsh than one could expect for the future or is it still within sort of around the normal level?
Geir Holmgren
I’m not in the business of predicting future weather. But I would say this has been a slightly -- in terms of from an insurance perspective with slightly more challenging than I would say is normal at least from our statistics. It's been more days with the changing between snow and no snow, not freeze. And we've seen that in our claims number and I answered in the previous question, we can see it kind of in day-to-day volatility or week-to-week volatility in reported numbers especially on the motor side which has been quite large swings in number of claims reported. And this correlates very well with where we've seen these weather events.
Thomas Svendsen
Okay. Thank you.
Operator
The next question comes from the line of Ulrik Zürcher. Please go ahead.
Ulrik Zürcher
Yes. Thank you. Most questions are being answered, but I was wondering are you now currently experience 4% or 7% motor claims inflation on claims paid, or where are you just because you had that guidance for a while and -- or estimate for a while and so do you expect 7% in the short-term?
Jostein Amdal
Yes. I think we are experiencing claims inflation on motor, which is towards the higher end of the interval that we gave you, which is also in line with our pricing at the moment.
Ulrik Zürcher
Okay. So implicitly then in the medium, so you expect this to decline or stay at 7% in the short-term and then decline?
Jostein Amdal
As we said, in the short-term and towards the higher end of that range, and then given the range it will expected to go somewhat on. But this is -- the most important for us is to have visibility 12 to 18 months forward. After that there's plenty of time to reprice, if we change our expectations on the future implication. I mean policies are 12 months, give some lag there 12 to 18 months and we hit the numbers in that perspective we are fine.
Ulrik Zürcher
Got it. Thank you.
Operator
The next question comes from the line of Hans Rettedal.
Hans Rettedal
Good morning. So, just a specific question on the other items in your P&L. And specifically on the Gjensidige Mobility Group, you're stating that there's sort of integration costs and start-up costs related to this. I was wondering how large are these as a share of sort of the total other items? And how long do you expect them to stay elevated before perhaps you start to generate revenue in this business area?
Jostein Amdal
Well, if we look at the other items, it is as typical for other items as a mixture of a lot of things, including the depreciation of intangibles, interest cost on some subordinated and yes, various other parts.
And the mobility part is kind of -- is part of this as well. You can see the mobility group the profits from the group as such whereas the benefits from the synergies in a way that we should create from fleet and Red Go should will hit the underwriting or not underwriting result the insurance service result in the non-life business.
During 2023, we will still have integration costs to get IT systems aligned across the Red Go Group integration of the companies or build up a new and more efficient organization within the road assistance business especially across the countries that we are operating in to be more cost efficient and lean and generate results in the Red Go and fleet area coming years.
That will mean that in 2023, we'll still be from the result from the companies that we call the mobility group will still be negative and then from 2024, we expect it to be positive.
Hans Rettedal
Thank you. And then just another question on the organizational changes that you're making. I was wondering how has this sort of been on the table for a long time regarding the new -- or the integration of the new IT system in Denmark and that sort of the plan all along has been to combine Norway and Denmark on private and commercial after the system finished.
Geir Holmgren
Well, as we have said the IT platform in Denmark is almost finished on the private side. We are planning for spending this year or next year with planning and implementing and migrating the commercial side. And this will absolutely be positive for the Norwegian commercial business as well coming close to that platform.
And we will assess how that will what kind of implications that will have on the Norwegian business going forward. But we have not taken any decision on when we are implementing the new system in Norway.
Hans Rettedal
Okay. Thank you.
Operator
Thank you. The next question comes from Vegard Toverud. Please go ahead.
Vegard Toverud
Thank you and good morning. I have a couple of follow-up questions I would say. First on the other items that's negative NOK148 million in the quarter. When I read the report, it seemed like there were some integration and start-up costs, but your answer indicated that there are not anything there that would go down in the next quarters if I understood you correctly. But to be very specific are there anything in those NOK148 million that you consider one-offs in the quarter?
And then on pension could you repeat the impact of these loss-making contracts in the quarter and provide some details into which kind of public groups these are and also to help us since there are some movements there what we should expect as a contribution from pensions over the next quarter? And finally if the pension area also should deliver on the 20% ROE target? Thank you.
Jostein Amdal
There are -- first on the kind of the premise, there are integration and start-up costs and they are higher than they will be going forward. I wouldn't call it a one-off. But I mean as in the nature of integration costs I mean that's typically highest first and then it will taper off. And when we finished the necessary work to get these operations started to cover especially on the Red Go side which needed quite a lot of streamlining.
And we have a very highly competent team in the [indiscernible] and mobility that works on that and makes it leading roadside -- a leading roadside assistance group I would say. And we have to see clear signs that that will happen that would be a one-off, but at least not for a quarter but it will it's higher now than it will be. There is also some small items within other which is you can consider a one-off. But so there are mixture there.
Then of course depreciation of intangibles and interest rates on subordinate loans that is recurring, but changing depending on the interest rate movements for the sub loans and the depreciation is particularly vulnerable to changes in currency movements, which made it a bit higher this quarter in the first quarter of 2022, since these are deflation of things that are typically outside Norway. That was not a very specific question Vegard, but there is give you some flavor on that upright then. Pension?
Vegard Toverud
Just before we continue on the pension. Is it possible since these are quite specific items that you have grouped together? Is it possible to have amortization, the interest expenses for the subordinated loans and see the mobility group as separate lines in the reporting going forward?
Jostein Amdal
Well, I just note your question Vegard, we see what we do for the coming quarters.
Vegard Toverud
Thank you.
Jostein Amdal
Pension, this is mainly the discussions of the volatility I talk about has been mainly related to occupational pension of that product. It is -- I think your question was about if you give more flavor on -- it is on how -- what makes a loss on this contract. I think I tried to explain that to Blair earlier, it is related to the fact that they have kind of tariffs on these contracts are not good enough when they come to larger or more special accounts and that gives a negative impact which is kind of not real -- it's not -- they are not really onerous. They're not loss making as such. But when you use these simplified models in accounts, it becomes onerous. And we're looking at refining these models that we get a more correct assessment of onerous contracts for the accounting purposes.
Expectations going forward. If you just look away from movements within interest rates and so on, the pension business will be profitable. It will be less profitable under IFRS 17 and under IFRS 4, due to the asymmetry between recognizing on those contracts immediately, but postponing the P&L effect of profitable contracts to this contractual service margin. That's why we say that, you're looking at the profit, plus the change in the contractual service margin gives a better perspective on the profitability within that business. And then of course, it's sensitive to interest rate movements especially on top of that.
As an aside, we reported the pension company as such, the pension accounts of the pension business is still reported under IFRS 4. We're not allowed to use IFRS 17 in the company accounts. And they reported a profit at NOK 59 million for the first quarter which is comparable to what we have reported earlier for our pension business in the group accounts, confusing, but it gives another perspective on the results in the pension business. 20% ROE, more than 20% ROE is the group target. We have communicated specific targets per segment.
Vegard Toverud
Okay. Thank you.
Operator
Next question comes from the line of Faizan Lakhani. Please go ahead.
Faizan Lakhani
Thanks for taking my question. I'm sorry, I'm going to come back to the life business and onerous contracts. When I look at slide 45, I can see that the -- I know this is sort of illustrative, but it shows that the BL is actually larger than the premium even before you sort of add in the risk adjustment. And that would to me suggest that these are actually just unprofitable contracts. Am I missing something on that front?
And I guess in connection with that, if I look at your report on the pension piece, would it be fair to say if I look at the CSN enter, it's grown by that 4% to 5%, is that the right way of thinking about the underlying sort of growth in that life business? Is that how I should be thinking about your development there?
The second question is coming back to some claims inflation. I understand that you have levers that we can pull in terms of that part in procurement contracts. So just assets has moved quite unfavorably over the quarter. Is it a case as we go on across the year actually there can be some upward pressure on that 4% to 7% translation, especially if procurement contracts renewal as they start to buy if you could help me on that one? And the final question is on your solvency ratio on the SCR in particular. Again, it's sort of growing back to 4% to 5%. Q4 was pretty strong on that. Can you break out how much is down to growth versus FX versus the market risk? Thank you.
Mitra Negard
Faizan, your line is very poor but we'll try to answer according to what we think your questions were. In terms of Slide 45, this is just an example of how the workings are around the profitable and the onerous contracts and the effect on CSM. So these are not the numbers included in the reporting, it's just an example illustrating how they work.
Faizan Lakhani
So would it be fair to say that the onerous contracts that you have currently are factoring in the risk adjustment and that's driving it to become onerous, is that the right way of thinking about it.
Jostein Amdal
Yes. That is the right way of thinking about it but the numbers on Slide 45 you should – just a stylized example. But do you think – the principle is correct that you've described. And I think as Mitra said, it's a bit hard to hear your question if we asked about if there's a risk that the 4% to 7% will be increased later this year at some point in the future.
Obviously, there is always a risk that we do change our assumptions based on kind of new estimates of the future. And then yes, we'll tell you. We are very transparent on what we think about claims inflation going forward. The last question was about what's driving. If we understood you correctly, what's driving the increase in the solvency capital requirement if I heard you correctly?
Faizan Lakhani
Yes, that's correct. If you split out the components in there?
Jostein Amdal
I think I'll just pass on that one at the moment. We haven't provided it here. I mean the factories are partly as the strong insurance revenue growth that we talked about and then partly currency effects but moving – I mean the growth is 7.4% in the currency adjusted the premium growth. And then if you take into currency effects we're up at 10%. And this is driving capital requirements – and then in the life business there is assets under management growth to get an increased market risk charge here, which is again met by – on the in the own funds there is a similar positive effect. So it's not a negative on the capital surplus but it's driving the capital requirement as such. I'm sorry for not providing you the…
Faizan Lakhani
I am sorry. I had two parts to the first one. I think it was missed out. In terms of thinking about profitability going forward to the life business should we be thinking about the growth in the CSM that you provide in your report as the best way to monitor that?
Jostein Amdal
As it's the best way, I think to monitor the profitability of the pension business taking into account the change in CSM. The insurance revenue as the number that we look for top line growth will over time reflect the release of the contractual service margin. So we ask kind of contracts mature then you gradually will take into account the CSM into the top line number that the insurance revenue -- insurance service revenue.
Operator
Next question comes from the line of Vinit.
Vinit Malhotra
Good morning.
Mitra Negard
Could you speak up please?
Vinit Malhotra
Yes. Good morning. I hope you can hear me I am Vinit from Mediobanca. Thank you very much. So I'll keep it to one question in the interest of time. Just the – Jostein, we talked about commercial frequency even last quarter and the idea was that its one quarter could be volatile. Now we have references to mid-size claim volatility even now. So my question is, is there a solution you're thinking? Is there a problem yet? Is it a reinsurance solution that you would like to explore or more pricing? Because when I see one of the comments on, I think, Slide 4 it suggests that pricing will improve or increase even to match inflation. I'm just curious if -- and if you have any more thoughts on the commercial insurance underlying trends? Thank you.
Jostein Amdal
Well, Commercial Norway, it wasn't a main driver for this increase in the underlying frequency-loss ratio for Commercial Norway wasn't volatility in midsize, they were medium-sized claims. That was an expectation for Sweden especially. Although, there is some volatility around mid-size claims all over the board, but I think it could easily happen a couple of quarters without that being a trend. There is kind of -- these are claims at a size where reinsurance is not meaningful at all.
So our perspective is to monitor whether there is some kind of trend when this claims picture. And if we believe there is a trend we'll take that into account on pricing. And if you look at the slide we provided today with the effects on our pricing strategies and pricing tactics within the Commercial Norway business you see that we are I would say extremely good at pricing the correct customers' highest so that the remaining customers are much profitable than the ones that we have very strong analytical capabilities within that area and which is the reason why we have such high profitability within commercial insurance business in Norway.
Vinit Malhotra
Okay. Thank you.
Mitra Negard
All right, everyone. I know there are further questions but we need to conclude. So please you can participate in the analyst call that we will be having at 11:00 or you can send your questions to IR and we'll answer you promptly. Thank you very much. Operator?
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Gjensidige Forsikring ASA (GJNSF) Q1 2023 Earnings Call Transcript