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Good day, and welcome to the Gjensidige Q2 2018 results presentation. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Mitra Hagen Negård, Head of IR. Please go ahead, ma'am.
Thank you. Good morning, and welcome to the second quarter presentation of Gjensidige. My name is Mitra Negård, and I am Head of Investor Relations.As always, we will start with our CEO, Helge Leiro Baastad, giving you the highlights of the quarter; before we go on to Jostein Amdal, our CFO, who will run through the numbers in more detail. And of course, we will have plenty of time for Q&As at the end. Helge, please?
Thank you, Mitra. Good morning, and welcome, everyone. 2018 started off with a harsh and long-lasting winter. Both were severely affecting the first part of the second quarter. Luckily, we did not experience severe floodings in Norway, as initially feared, since we had a warm, but also very dry climate in the last part of the quarter.However, all in all, winter effects characterized the second quarter results, together with the continued deterioration in motor profitability in Norway.Our results are summarized on Page 2. Profit before tax amounted to NOK 1.3 billion in the quarter. The underwriting results amounted to NOK 707 million. The combined ratio was 88.2%, and we had a premium growth of 2.8%.The underwriting results was impacted by a significant increase in the frequency claims level of property in Norway, mainly driven by the long and harsh winter, leading to claims being reported long into the second quarter as well.Areas in the South and Southeastern part of Norway were hit to a larger extent than the rest of Norway, and it is in this part of the country Gjensidige has its strongest presence.In addition, this is also an agricultural area, which is an industry where we have a very high market share. Therefore, both private and commercial property portfolios were hit.We estimate the weather-related deviation in the frequency claims level in second quarter compared with historical second quarter average to be in the range of NOK 150 million to NOK 200 million. This means we have had total of NOK 400 million to NOK 500 million in claims during the first half year in 2018 related to the particularly harsh winter in Norway.Large losses were also higher compared to the second quarter last year, partly due to the heavy snow leading to damages on buildings.Aside from weather effects, the underlying inflation trend we have seen in motor insurance in Norway over some quarters now continued into 2018, which I will come back to on the next slide.Outside Norway, we continue to deliver significantly improved results. The financial results came in at NOK 371 million, corresponding to a 0.7% return. Annualized return on equity year-to-date was 14.2%. Jostein will rework with more granular comments on the numbers. Then turning to Page 3, I will comment the Norwegian motor situation in particular. I will start by saying that we are not satisfied with the profitability development we have seen over the past couple of years. As you remember back in 2014, '15, we anticipated a 1% claims inflation. Motor profitability was very high with claims ratios in the 50s. And as we communicated, it was better than we -- than what we could normally expect, partly driven by benign weather situation over several years.From the second half of 2016, we started to see inflation increasing more than anticipated for the reason we have discussed over several quarters now.Given the fact that we came from a situation with a very high motor profitability, the initial price increases were modest. We took a deliberate choice to increase our competitiveness at the same time as we built the leading position in the car dealership channel by delivering a combined product offering on attractive terms, together with Gjensidige Bank.The consequence, as inflation just continued to increase more than the anticipated almost quarter-by-quarter, it is that price increases have been lagging the inflation curve and that the accumulated effects on this has increased over the past 2 years, resulting in a harder hit on profitability than we had foreseen.As previously communicated from the first quarter this year, we have increased prices beyond the expected underlying inflation of around 6%.We are fully committed to stabilize and ultimately also improve the profitability, meaning that we are willing to sacrifice some volume to achieve this.What we see in our numbers, as shown to the right, is that we are reducing our exposure towards customers with low scores and high claims ratio after approaching this with the highest price increases.Consequently, with an adjusted risk exposure in the portfolio, we will have lower realized price increases, but also an improved book of business.This situation is similar to what we experienced back in 2009 and '10, when we increased motor premium significantly and, at the same time, improved the overall quality of the motor book, supported by high-quality tariff.Thus, it is important to remember, general insurance is like a tanker. It takes 12 to 24 months to see full effects from price increases in our P&L.All in all, this means we expect the motor profitability in Norway to marginally decrease further before we will see a turning point during the first half of 2019.You might wonder why we were not able to see the rapid change in the inflation curve being the market leader in Norway. It is a good question. And the best answer I can give is that, in particular, the new situation in Norway, with regards to highly incentivized electrical and hybrid vehicle, is unique leading to totally new experiences, both in portfolio mix, driving habits and claims severity. In June, this year, 62% of all new cars sold or leased were either electric or hybrid in Norway. While we are the market leader overall in the motor market in Norway, we have a #3 position in the market for new EV and hybrids, reflecting a deliberate strategy to actually be more cautious towards these segments, for instance, by pricing Tesla high from day 1.To be honest, I don't think any of our competitors did foresee this rapid structural change either, and I know here competitors confirming they see the same inflation picture as we do.I'm confident we are better informed today to understand and predict inflation going forward. And the last 1.5 to 2 years of experience have been a learning experience for the whole organization, leading to new insights into the interaction of terms, base channels and claims experience.Going forward, we will be even more differentiated and much more agile in our risk selection and risk pricing.And remember that, overall, it is a positive for the insurance industry that the risk volume in the motor segment increases as long as we are able to price the risks correctly, as I know we are.All this said, it is important for me to remind you that motor is still a very profitable product for us, both in absolute terms and relatively to the whole book of business. My ambition is to continue securing a high and also improving profitability in motor going forward.Then looking at Page 4. We continue to see a very high retention among our customers in Norway. High retention means more products for customer and lower distribution costs, which, again, is important for our overall very competitive cost position.In the Private segment in Norway, the retention is as high as 92% among our affinity and loyalty customers, representing 85% of the premium volume. Likewise, in the Commercial segment in Norway, the retention is 90%. So how come we succeed in holding on to our customers to such a great extent? Well, first of all, our brand has a unique standing in Norway. We have the strongest brand awareness in our sector, and the brand awareness is among the highest also independent of any sector.Going forward, we believe brand strength will be even more important than before, given the disruptive focus -- forces we are all facing these days.Secondly, we deliver superior customer experiences throughout the whole value chain every day to advance analytical CRM. We are able to be relevant in all touch points with our customers at the right time with the right customer offering. This, combined with advanced micro-tariffing and advanced digital solutions for self-service creates a win-win situation for our customers and ourselves.Record-high customer satisfaction several years in a row proves we are succeeding. Last, but not least, the customer dividend model is a unique retention tool. Since the IPO in 2010, the Gjensidige Foundation has paid more than NOK 15 billion in customer dividends to our general insurance customers in Norway. These days, our customers have, again, received back more than 14% of the insurance premium they paid in 2017. Almost 80% of our customers say the model contribute to their loyalty with Gjensidige, and more than 1/3 of the noncustomers say that the model could make them become a customer of Gjensidige.Then turning to Page 5, let's spend some time on the bank sale announced on 2nd of July.To understand the rationale for selling the bank, it is important to understand the rationale for having the bank in the first place. I will spend a couple of minutes reminding you. We established a bank back in 2006 simply as a defensive move to secure loyalty among our private insurance customers in Norway. When several banks established their own insurance operations.The bank has grown significantly and contributed to earnings, but not to capital generation. We have therefore said that if we could find other and better solutions supporting our general insurance customers with banking products without owning the bank, we will look into that.And I'm really glad now how we have achieved and excited about what we have achieved with Nordea. It is like [ a candle ] surprise, achieving 3 things in 1. First of all, we can continue the loyalty-enhancing bank offering to our insurance customers and the strong combined foothold in the car dealership channel built through Gjensidige Bank only to an even stronger extent than before through a partnership with the second largest bank in Norway.Secondly, the partnership opens up the opportunity to sell insurance to Nordea's customer base. And last, but not least, capital is freed up and can be put into work in less capital-intensive insurance operations. Even though the Gjensidige Bank has generated earnings, it has not generated capital due to its relatively small size, combined with high growth and the very high capital requirements for banks. Meaning it has been a drag on our dividend capacity so far.Therefore, selling the bank will have an immediate positive effect on capital generation, and increases the robustness of the dividend capacity for the group.Approximately NOK 5 billion of capital will be freed up, and our ambition is to put this capital into work in less capital-consuming insurance assets in the Nordic countries and/or in the Baltics, replacing earnings from the bank and resulting in an even higher dividend capacity than the group would have had by owning the bank.If such assets are not found at a decent price, we will distribute excess capital back to our owners as special dividends over time.And with that, I will leave the word to Jostein to present the Q2 results in more detail.
Thank you, Helge, and good morning, everybody. I will start on Page 7, where you can see that we reported profit before tax of NOK 1.25 billion in the second quarter. This is down compared to the profit we reported for the second quarter last year, driven by lower underwriting and financial results, partly offset by an increase in profits from Gjensidige Bank. The decline in the underwriting results was mainly a consequence of significantly higher claims in the Private and Commercial segments and mainly impacted by the long winter in Norway with large amounts of snow in several of our largest regions.We estimate the weather-related deviation in claims in the second quarter compared to the historical second quarter average in a range of around NOK 150 million to NOK 200 million. The results in Norway were also impacted by the continued deterioration in motor profitability, as Helge has mentioned, affecting both Commercial and Private.Results also in Norway generally improved. The underlying frequency claims development in the Danish operation improved over last year, continuing the positive development we have seen over the past quarters.However, the reported underwriting results was down year-over-year due to more large losses related commercial properties. Sweden generated significantly improved results, also adjusting for higher runoffs and lower large losses, affecting effective pricing and risk selection measures.The Baltics segment also contributed positively to the underwriting results, with the undergoing restructuring programs continuing to show good results.The Pension business recorded the best ever quarterly result. Contributions from the bank were positively impacted by gains of NOK 130 million on sales of nonperforming loans. Results adjusted for this were somewhat down year-over-year. The financial results from our investment portfolio declined, following lower contributions from bonds and current equities.Turning to Page 8. Premiums rose 2.8% compared to the second quarter of 2017 and 2.7% adjusted for currency effects. All the main product lines in the Private segment recorded higher premiums during the quarter.Premiums for the Commercial segment were up compared with last year, reflecting solid renewals.Reported premiums in Denmark were flat, but [ zone ] adjusted for both local currency and more -- which was included in our accounts from May of last year. Decline is a result of the ongoing portfolio we're underwriting and price adjustments in the commercial lines, aiming at improved profitability over time.Current premiums in Sweden declined. Our repricing strategy is on track, with focus on generating enhanced results going forward. The Baltics reported a slight increase in premiums, but the decline measures in local currencies as a consequence of our portfolio restructuring and repricing activities.Turning over to Page 9. We can see that the loss ratio [ rose to date ] to 33% year-on-year. Large losses were up, resulting in a 1.1 percentage point increase in the loss ratio compared with Q2 last year. Run-off gain's somewhat higher than expected had a positive impact of 0.7 percentage point in the loss ratio compared with last year. A higher underwriting frequency claims level was the main driver for the increase in the loss ratio. This was purely related to Norway as our operations in Denmark, Sweden and the Baltics all reported underlying frequency claims development. The situation in Norway was twofold, the first being weather-related. The large amounts of snow in South and Southeastern Norway lasting well into Q2 caused melting and freeze damages for a significant number of commercial and private properties. And finally, with respect to weather-related claims, the settlements of some property claims in Q1 exceeded the provisions made at the end of the first quarter.The second main reason for the rise in the frequency claims is a deterioration in the motor segment, as Helge has discussed, reflecting the change in Norwegian vehicle fleet and related dynamic.Let's turn to Page 10 for an overview of large losses. Total large losses amounted to NOK 210 million, with lower expected long-term average of NOK 295 million. The losses translate into 3.5 percentage points on the combined ratio. And the large losses were mainly related to commercial properties, with the majority in Norway and Denmark.Moving onto Page 11 to commence the run-off gains. Run-off gains for the quarter came to NOK 292 million, which is higher than our planned reserve releases of NOK 250 million. The deviation of NOK 42 million is due to random variation. The run-offs had a positive impact of 4.9 percentage points on the combined ratio. We maintain our estimate of approximately NOK 250 million in run-off gains per quarter for the rest of 2018.Let's turn to Page 12, the cost ratio for the quarter was 15.2%, reflecting continued good cost control across the group segment. Our cost ratio, excluding the Baltics, was 14.4%. It is particularly encouraging to see the positive effects from our restructuring efforts in Sweden and the Baltics.Page 13 illustrates highlights for the bank and pension operations. Gross lending in bank at the end of the quarter was NOK 48 billion. The bank reported a pretax profit of NOK 218 million in the second quarter, the improvement from the same period last year, driven by gains on sales of nonperforming loans. Profit adjusted for this was somewhat down year-over-year, mainly reflecting increased acquisition costs and loan losses as well as lower gains on financial instruments. Annualized return equity was 13.8%.The pension company recorded a profit before tax expense of NOK 38 million. Assets under management in the pension operations amounted to NOK 30 billion, and 69% of the customers in our pension business are general insurance customers as well.Annualized return on equity amounted to 13.9%.Moving onto the investment portfolio on Page 14. The investment portfolio of NOK 52 billion yielded a return of 0.7% in the quarter, which we deemed satisfactory. The match portfolio yielded a return of 0.6% on a portfolio of NOK 35 billion. A large part of the match portfolio consists of bonds and amortized costs, which yielded a return of [ 1.7% ]. The running yield in this portfolio was 3.8% at the end of the quarter, and the average reinvestment rate in the quarter was close to 3%.Annualized excess value amounted to approximately NOK 1 billion. The free portfolio, which amounts to NOK 18 billion, yielded a return of 0.8% in the quarter. The positive return was primarily driven by returns on the investments in property, equities, private equity funds and convertible bonds, while other [ fixings in commencements ] had a small negative return.Last, but not least, looking at our capital position on Page 15. The capital position is still strong. The legal perspective gives us solvency margin of 160%, while our own calibration of the internal model gives us solvency margin of 173%. Solvency margins would be 187% and 203%, respectively, when adjusting the capital position to reflect best estimate reserves, taking the planned runoff gains into account. Changes in the capital position in these 2 perspectives from last quarter are relatively small. Eligible capital increases, mainly driven by retained earnings, contracted somewhat by several other minor changes.There's a stable development in the capital requirements. We will continue to balance our capital structure in a disciplined way in order to support the long-term part of return on equity of about 15%, 1% on supporting our A ratings stabilizing regular dividends over time, ensuring financial flexibility for smaller acquisitions and organic growth as well as providing a buffer for regulatory changes. This means the solvency margin should remain in the upper part of the target range. Given our sale of Gjensidige Bank, the pro forma solvency margin as of June 30 was 236%. As already communicated, we will prioritize exploring M&A opportunities before distributing any excess capital as special dividends.I will then hand the word back to Helge.
Thank you, Jostein. And to sum up on Page 16, our second quarter results were significantly impacted by winter effects. As for the Norwegian motor book, margin deterioration is now mostly behind us, with margins expected to reach a turning point during first half 2019. This, combined with the overall strong franchise in Norway, and continued positive development in results outside Norway make us confident the group is very well positioned for continued solid value creation in the years to come.Balancing cost efficiencies measures with strategic investments into technology, people and brands continue to be high on our agenda also during 2018.Our capital position is strong and supports our ambition to seek value, particularly with M&A opportunities. And if such opportunities do not materialize, we will distribute excess capital over time, in line with our dividend policy.And finally, our long-term financial targets are unchanged. And we are more dedicated than ever to customer [ orientations ], aiming at delivering the best consumer experiences in every customer touch point.Thank you very much. We will now open for the Q&A session.
[Operator Instructions] We will now take our first question from Jonny Urwin from UBS.
Three for me today. So firstly, Gjensidige's deteriorating underlying results have become a bit of an outlier versus listed peers over the last 18 to 24 months. In motor, I think peers are seeing claims inflation, as you guys acknowledge, but they don't see the sharp acceleration in claims inflation that you've seen. In property, Gjensidige's 2Q results look like a bit of an outlier again in what has been a relatively benign period for large losses. I appreciate the commentary around being overweight in Teslas, in motor, in agriculture and property. But I guess, my question is, is Gjensidige's operating underperformance bad luck? Or is it bad underwriting? And how confident are you in your systems and processes? And is more investment needed in the underwriting function? That's the first question. Secondly, I guess, on a related topic, how confident are you in the 86% to 89% combined ratio target for the 2019 and 2020, given the level of underlying deterioration that we've seen in the loss ratios? We've seen 9 quarters in a row now of pressure. And I appreciate you're matching out claims inflation now on motor, but we'll probably still see another 3 or 4 quarters of drift until they earn through. So what's the risk that when the loss ratio stabilizes, it is higher than the 89%? And then finally, how are you thinking about the sustainability of the ordinary dividends? And once the banking earnings are removed, and factoring in further pressure on the loss ratio it looks quite tight the dividend cover. Now you've obviously replenished the capital buffers, so there is money there to pay the dividend, but I'm just wondering about the split we should be expecting between ordinaries and specials. And have you had any change in thought there after the bank disposal?
Okay. I think we've -- on the first question, on the -- is it the [ core the opposite of guilt given they more transact ] on the property development. I think as we have explained, and Helge went into quite details today on the motor side, we have been a bit behind the curve on the pricing of the motor inflation. We are now pricing at least in line with our communicated claims inflation. And as Helge said, a slight deterioration further in 2018 before we reach a turning point in 2019, which means that it's not going to [ develop further down ] from there rather the uplift. That's the motor communication. On the property side, as we stated, weather-related effects, which we regard as one-offs in Q1 and Q2 of 2018. And that means that for the property as such, we think profitability will go back to the previous level once we've taken away these one-off effects. There is -- whether we need to invest more [ than correcting skills ], I think that's ongoing, a [ variation ] that we make whether the results are good or not. Yes. so no specific comments on that. On the second question, about the 86% to 89% for 2019, we are, I would say, very confident that we will be within that range for 2019. We have seen that there are one-offs that could lead us astray. But kind of given the special effects on claims or weather-related large claims or weather-related losses, we keep that target for us for '19. On the sustainability of dividend after the bank sale, remember that the bank hasn't really contributed to dividend capacity ever. We have put more money into it as it has grown as capital requirement for the banking sector has increased. The dividend capacity has always has been within -- come from the insurance part of Gjensidige. I think I'll leave it to that.
Just a comment on -- you commented the competitors and the motor inflation. And we heard a couple of days ago, Tryg referred to 4% increase in repair costs in Norway. And adding to that the structural increases in frequency, they should see just the same overall claims inflation as we do. So we actually see that the competitors that are commenting on this level, they are commenting the same type of picture as we do.
I guess, the difference with Tryg is that they not -- they haven't seen the curve that you've seen. So obviously, 18 months ago, you guys were talking about a 1% claims inflation. And then it was 3% to 4%, then it was 5%, then it was 6%. So that's quite a sharp deterioration, which, I mean, I'm more focused on the actual curve than the overall quantum. And I think that's where you guys are telling quite a different story to the peers.
I can really only comment on our own estimates and not Tryg's. But [indiscernible] as Helge said today, we have underestimated the concession back in 2016, and that's the reason why the loss ratio has deteriorated. And we hope that -- and think that we are now correct with the 6% inflation estimates that we have and are pricing according to that. Our communication and our actual practice has always been to try to price at least in line with the claims inflation and then with this kind of segmented approach. But we don't overprice the attractive segments within the Norwegian market. So that's kind of -- there is no change there. The only thing that's changed is our own claims inflation estimates. [ People remind us ] that when you compare to other companies that have them -- the majority of their operations outside of Norway, and the claims inflation particularly. And they say outside of Norway is very different from what we see in Norway due to the composition of the car fleets in Norway and in Denmark or Sweden.
And it's also important to take into consideration the starting point, what kind of combined ratio have the different competitors if you go 2 years back. As I said, we operated with loss ratios in the 50s. And if you look at our competitors 2 years back. They operated in a completely different area, actually. So that's also important to take into consideration.
We will now take our next question from Vinit Malhotra from Mediobanca.
So just a few questions on motor again, please, if you don't mind. The -- just looking at the 1H '19 turnaround projection, could you just discuss, are there any risks to that as well? Because I mean, could that be that there is some trends in frequency that could surprise? Or just if you could discuss how you thought about that 1H. I appreciate the 12-month cycle, but -- on pricing. But what I don't know is what you assumed on frequency and these habits of [ dry walls ], et cetera. And then, again, just on the Page 3, so thank you for the customer segmentation and churn approach. Could you help us quantify a bit? Because when I look at the weighted average line seems to edge a bit towards the upper end of the chart. Is it that the proportion of the sort of the -- which I have presumed is not the good customers, is the proportions bit very high? And in line with that, are you looking for -- are you willing to give up a lot of market share as well? And just lastly, is there any -- again, and I've asked in the past, do you see the need for any reinsurance solutions on this? And if I can sneak one more, is there any difference in Private and Commercial trends that you're seeing now in the motor area? Sorry, too many questions, but I think there are 4 questions. Sorry about that.
Okay. I'll start. There is, of course, always a risk in the prediction. You might be surprised. But given what we know and the measures we have in place, we are [ very ] confident about this turnaround story as we reach the turnaround this first half of '19. And risk carriers is a 2-way risk. It could be sooner. It could be later. It's not it's the most optimistic estimate that we'll reach in the first half of '19. There's a number of measures we are taking place. It's not just pricing, it's also how we do loss adjustments and the terms of the contract and so on. So it's a comprehensive package of measures, not just pricing that we're putting in place. On the Page 3 and the distribution of customers and the different customer's scores, you're right that there's always on the [ fund ] that just because when you have a new customer, they come in a fee, and then they move either way over time. So there will naturally be a tendency to be a higher share there in the middle of that distribution. And on fee and need of reinsurance, no, we're not thinking about doing a reinsurance on the multi-business as such. We view reinsurance as a capital investment to protect the capital position of the company, and not to kind of either way -- and the lack of underwriting profits. And for the first, between Commercial and Private, there are, of course, differences in the loss ratio. Because in the Commercial segment, we have fleet insurance, and we have the commercial -- sorry, agricultural customers there as well. But I think on balance, there's quite a lower -- a higher loss ratio in the Commercial than in the Private because of the fleet thing and so on. But that's the -- more of a market dynamics thing. It's not a difference in the claims inflation picture as such.
Sorry, I just meant to know Private, Commercial motor, please, sorry.
Yes. But in Private and Commercial motor, most of my comments as well. The claims inflation in Private and Commercial motor is significantly different. It's more of a market dynamics perspective.
We will now take our next question from Matti Ahokas from Danske Bank.
Yes, 2 questions from my side, please. Firstly, could you elaborate a bit more on the agriculture impact? You said that part of the reason why the weather impact was big was also your exposure to agriculture. How big is the exposure to agriculture? And how much of a risk could you also see now with the very, very dry weather, and that impact also impacting Q3 underwriting profits? Then the famous Slide #3 on motor insurance, could you give us some kind of quantification on this? How much are the premiums in the motor side, how much further negative pressure there is in terms of Norwegian kroners for the -- before we see the turnaround in the first half? Some kind of quantification on this, the impact of the motor turnaround and how much further pressure we will see in terms of kroners.
Yes. To start with agriculture, that's the history you're seeing. So in Norway, we have 75% market share for agricultural business. And that's related to buildings, equipment and all kinds of animals. The winter effect was related to buildings, private buildings and also the typical agriculture buildings. That was all the claims related to agricultural business in first and second quarter. The dry weather now, that's more a discussion between the farmers and the government. We do not have any exposure to the situation that they have or hit by the dry weather. And over time, the agricultural business has been quite profitable for us. And we have, as I said, 75% market share.
How much is that of total premiums roughly, the agricultural [ require ]?
It's -- you talk about the agriculture business?
Yes.
Sorry. We don't disclose...
No, we don't. But it's small and medium farms in Norway. You do not have the same structural situation in Norway as we have in Denmark, Germany and other countries. It's small. And lots of these farmers are typically working both on the farm, and they have a second job as well. So it's much also related to Private business, actually, but we do not release the figures for the agriculture business line.
No. But just remember that our agriculture business line is booked under the segment Commercial.
Yes, and motor.
The second on the motor, we don't disclose the effect in kroners or [ return ] comments related to the development in the loss ratio.
Yes.
Well, can you a bit talk about kind of what has been the impact roughly when you talk about the weather impact between NOK 150 million and NOK 200 million in the quarter. So -- but some kind of indication, how much has this motor situation impacted the profitability in the Gjensidige Group negatively?
I'll comment on the NOK 150 million to NOK 200 million but purely related to property.
Exactly. But could you give us a similar kind of comment on the motor situation, some kind of guidance? How much of an impact was this on the figures?
No. Sorry, I don't disclose that, but you have some approximate number [ most around ] -- yes. So that's -- we don't, I mean, the amount, communicate in that.
We will now take our next question from Youdish Chicooree from Autonomous Research.
I've got 2 questions, please. Both are related to the sale of your bank and the capital deployment. Firstly, how much of the capital release of roughly NOK 4.3 billion would you like to inject in the nonlife business to improve the S&P ratio? And how much would be the amount for M&A opportunities? And secondly, I think you mentioned if the M&A opportunities do not arrive at right price, the proceeds will be returned by way of special dividends over time. But can you please help us understand what time frame are you thinking in terms of finding the right M&A targets and replacing the lost earnings before you think about special dividend?
Well, the first question is that we're not going to inject any amount to improve the S&P rating. We have -- we are confident about -- that the capital level we have invested in the nonlife insurance business is sufficient to keep the A rating and the stable outlook. And then maybe Helge will comment on time frame.
Yes, yes. It's a board decision, everything related to dividend. And just to start with M&A opportunities within insurance, we believe size and scale will be increasingly important in our industry to secure the capacity to invest in the right technologies, attracting the right people, et cetera, going forward. And we think we will see more consolidation, observed market dynamics and the need for companies to prioritize their investments going forward to follow the technological and regulatory development, make us believe more opportunities will come. I will not be precise regarding the time frame. But if we do not see opportunities, and we will be patient and rational and disciplined, and I think you also have seen that transactions in our industry, last year, we haven't participated when we think -- to be -- too pricey. But in the medium time frame, meaning, yes, I will not be very -- but we will not, year-after-year, have the same communication to you. We think we will see some in the next couple of the years actually. So...
Okay. I mean -- historically, I mean, there's been lots of M&A activity. And generally speaking, the targets have been very small. So that's why I was wondering whether you believe there will be some major opportunities going forward or probably as you say more will be reinvested in the business on digital, et cetera, as opposed to the investments made in the past.
I think we do invest quite a lot in the digitalization [ organization ] of our businesses, but that will happen within the current ratio target of around 15%. So these amounts are not to be invested in the development of the nonlife insurance business as such. This amount is used for inorganic growth or, if that doesn't materialize over time, hand it back to the shareholders.
We will now take our next question from Steven Haywood from HSBC.
I see that one of your competitors [ predict ] announcing a 106% combined ratio in its Norwegian business, up from about 73% last year. And that is, they say, driven by motor liability health and a lot of other business lines here. And they're also saying that the claims ratio in motor is increasing rapidly as well. So I wonder, if you could tell us about any other peers that you may know about or have heard from that are seeing similar kind of impacts from the motor businesses in Norway as well. Because due to my lack of disclosure in this sector, it will be very, very good if you could tell us other ones that are seeing these sort of problems. Secondly, once you sold the bank, can you state whether your Solvency margin target, the 125% to 175%, will that change? And then thirdly, back on the motor again, sorry about this. The 6% motor inflation now, do you still see that as the peak level going forward?
I can start with the motor. I was rather detailed when I went through the motor business. And as you know, we are a market leader. And I also commented that on EVs and electrical vehicles, we have a #3 position, while we are #1 for motor totally. I think, as I said, that this is not a situation for [indiscernible] the market leader. It's a situation for the total market. And it's completely different compared to what we see in Denmark with very stable inflation for many, many years. And in Norway, we always had the winter effects, as I commented, very benign winters for many years. And then we saw their harsh winter now, and you have to adjust for that. When it comes to our competitors, I commented what Tryg has communicated, and that's the inflation around what we have seen. You saw maybe the DNB yesterday. They have the same type of communication related to property in second quarter due to the harsh winter. Going forward, you have to adjust for the winter effect. We think this is a peak because we had this situation with EVs and hybrid cars for many, many years now. So we do believe this is actually [ a peak ] -- in Norway, you also have the special situation with the bonus [ scheme ]. You saw maybe DNB commented that yesterday. And we have said that the change in the bonus system in Norway, we estimate that that's 1 percentage point for inflation. So this is a market situation. And as I also commented, we have pricing power. We have increased prices over time now, and we do not see that this hurt our market share significantly. And at the end of the day, this is a positive situation when you manage to meet these claims inflation situation with price increases without losing customers. Secondly, Jostein?
On the solvency target?
Yes.
We'll look at the solvency targets again, as we do regularly, both the solvency targets of the margin target and the minimal dividend payout ratio, which needs to be looked at. But we don't kind of prewarn of any changes. So that will be a board decision and an ongoing evaluation by the board.
We will now take our next question from Jan Erik Gjerland from ABG.
Jan Erik Gjerland from ABG in Oslo. Just coming back to your strategic initiative on the expense side, on the IT investments, as you have previously stated, that will be within the 15% total cost ratio range. Is this all that we should expect cost ratio to stay around 15% then for years really so that you can implement your long-term IT investment plans? Or is it so that you continue to be down further as you see the Baltic and -- or the Nordic operation being more efficient going forward?
I guess, during the call, we'll be more detailed regarding the target going forward. But I guess, it's a decent estimate, Jan Erik, regarding cost ratio going forward, yes.
[Operator Instructions] We will now take our next question from Wajahat Rizvi from Deutsche Bank.
Just a question on understanding your comment on turning point for loss ratio during first half of 2019. So are you looking to restore profitability at sort of your, let's say, if you go back to 2017 sort of level? Or are you going to maintain the loss ratio once you get to the 2019 level? So what essentially I'm trying to get to is your price increases, are you just about matching claims inflation or just pricing a bit ahead, so by 2019, you stay flat at that level? Or are your also looking to drive the loss ratio down from that point? That will be the first question. The second one would be, once your Gjensidige Bank earnings have gone away, do you have room to lift the payout ratio? And if you do, when should we expect a decision on that? And then finally, just on the weather losses, I think there was one other comment that there were some 1Q losses, which were effectively not reported then and have fallen into 2Q numbers. So just trying to understand, is there a delay in these kind of claims? Is there a possibility that some of the claims from 2Q may actually now fall into 3Q as well? So a bit more clarification on that would be really helpful.
I can start on the motor side, and Jostein will follow up. But just to comment the market situation in Norway now, we have seen recently more consolidation in Norway. That's positive. We have also seen that some competitors really have the motor business, both bancassurance companies, but also other companies. And we have also released that some of our main competitors communicate around the inflation just as we do. That means that we will see the dynamic in the Norwegian market, which is positive for the situation related to the motor business. As Jostein also said, it's lots of measures implemented. And it's new measures also planned, not only related to price increases, but we have lots of measures ongoing and planned for the fall and going forward. That will help us regarding profitability for motor business. And I was very clear, and I can repeat that. My ambition is to not only turn this point, but it's to improve the profitability going forward. To be more concrete than that, I think it's not right to be. But I also commented, and I think this is important to remind you all that strong pricing power we actually have. So I also commented the retention level. So all in all, I'm quite positive. And we are offensive, and we have the situation around us, which is very positive, to actually bring to all these measures now.
Okay. Moving over to the bank and just to remind you of our dividend policy, which remains firm. It is to have a high and stable nominal dividend, and if we manage to increase underlying profits to also increase the dividend. And as I also said that the dividend capacity as such has actually improved to the sale of the bank. Of course, it has -- capital consuming rather than capital generating for the group. I don't think I will be more specific and offer change to the financial target from the either payout ratio or solvency margin targets than that. On the delayed reporting of weather-related losses, every reporting period, every quarter, the [indiscernible] department makes an estimate of the amount of late reported claims. That is just ordinary realm of the business. And they make a best estimate, but that might be wrong every time. And so we have seen that we have a slight overrun from the first quarter to the second quarter. I do not estimate that, that will happen again for the second quarter to the third quarter. That's a way of business. We do operate with uncertainties there. So there's a potential for either way that it could be lower or higher than the actual estimate.
It's not only overrun, Jostein, because we also had actually winter in April.
Yes. But specifically, we're kind of -- if there are delays. But as we mentioned, we have winter in April, and we also have customers kind of not -- or customers not seeing that they have a loss until the snow melts, for instance, and then you see that there is actually a damage to your home. So that's the natural delay.
We will now take our next question from Claudia Gaspari from Barclays.
Just going back on the sale of the bank and the point on replacing the earnings, I mean, I appreciate there's a lot of different moving parts. But if you're looking at replacing the full earnings or the bulk of it, you'd be looking potentially at a deal between -- of the size between NOK 6 billion and NOK 8 billion. I mean, is that kind of deal something you would consider? And also, again, assuming you wouldn't want to dilute your ROE, you would be stretching your balance sheet quite significantly. So can you just talk to us how you think about M&A, the hurdles, the financials? What are the key considerations here?
And I said Helge already talked about kind of we don't comment specifically on what to think are M&A targets. The balance sheet is very strong, and we have a potential now for larger acquisitions than we have before the sale of the bank. We also always have the possibility of going to the markets if we see a really large transaction coming up, and we have a supporting the shareholder in the Gjensidige Foundation. So I think we have the capacity to do larger deals, and we could continue doing more small to medium-sized [ total ] acquisition. But I won't be more specific on that [ compared ] with M&A going forward.
We will now take a follow-up question from Steven Haywood from HSBC.
Just on the follow-up on the 6% inflation on motor. You said 1 percentage point was for the bonus change. I wonder if you could sort of explicitly tell us what sort of percentage point would come from the falling Norwegian kroner. How much sort of the cost of importing parts has impacted the inflation here as well?
Of the currently remaining 5%, obviously taking 1 percentage points related to the bonus scheme, some part of that is related to more expensive parts. Some part is related to the tax. That's actually electric and hybrid vehicles have more expensive parts current suggested and take longer time as they work when they have a claim. The weakening of the Norwegian kroner is a factor that they actually [ pride among that they require today, which was a total ] of the reasons why we underestimated the inflation back in 2016. But I don't have a specific number for you on how much is due to the weakening of the Norwegian kroner over the last few years, sorry.
There appears to be no further questions at this time. I'd like to turn the conference back to yourselves for any additional or closing remarks.
Thank you. We will be going on roadshow meetings after the holiday. In August, we will start with the roadshow meetings in Oslo, Bergen and Stavanger, moving on to Geneva and Zürich. And later on in September, we'll be visiting Edinburg and Stockholm. So we're looking forward to seeing you there. We would also like to take the opportunity to remind you of our Capital Markets Day, which we'll be holding on the 28th of November. Hope to see you there. Thank you very much for your attention, and have a nice day.
This concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.