Good day and welcome to the Gjensidige Q2 2020 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, everyone, and welcome to this second quarter presentation of Gjensidige. My name is Mitra Negård, and I'm Head of Investor Relations. As always, we will start with our CEO, Helge Leiro Baastad, who will go through the highlights of the quarter, followed by our CFO, Jostein Amdal, who will go through the numbers in further detail, and we will have plenty of time for a Q&A towards the end. Helge, please.
Thank you, Mitra. Good morning and welcome, everyone. I hope you are healthy and well. Since our last earnings call, the pandemic situation has improved in our region. In other parts of the world, the development is worsening, making the path out of the pandemic uncertain and global economic implications still difficult to predict. However, there seems to be some optimism on the economic recovery, at least compared with what many expected a few months ago. Gjensidige has continued to manage well through the pandemic. Let's turn to page two for some comments on our record-high second quarter result. We generated a profit before tax of NOK 2.477 billion, of which NOK 1.344 billion in underwriting result. This is the highest underwriting result we have ever delivered for a quarter when adjusting for run-offs. The record results reflect an 11.2% increase in earned premiums and a very healthy combined ratio of 80.1%.
Large losses were more or less in line with our long-run expectations, and run-off gains were slightly higher than the planned releases. The underlying frequency loss ratio at 64.8% was very good, and our cost discipline remains strong. The pandemic had a slightly positive impact on our results this quarter, primarily due to less driving. The activity picked up towards the end of the second quarter, though, and going forward, we expect an increase in economic and domestic leisure activities to bring claims levels back to a more normal pattern. We generated a financial result of NOK 1.159 billion, reflecting a recovery in the financial markets after the significant turmoil in the first quarter. An annualized return on equity year-to-date was 11.1%, reflecting the weak financial result in the first quarter. Jostein will work with more detailed comments on the results for the quarter.
Then, turning to page three, the pandemic has so far had a limited impact on our non-life business. We continued to maintain strong operations in the second quarter despite the extraordinary situation. Our employees have put in strong efforts to continue providing excellent customer service and maintaining critical corporate functions through this extraordinary situation. Although many aspects of our everyday life are returning to normal, we are still taking necessary precautions to contain the virus. As we gradually return to our way of work before the pandemic, we are very conscious of taking with us the valuable learnings through this period. The pandemic has struck hard on many societies, creating challenges for many companies and high unemployment. We are very conscious about our role in our customers' lives and have put in place additional measures this quarter to help reduce the pressure.
We have recognized the need for flexibility and good advice. In order to meet these new circumstances, we have stepped up our advisory role in the dialogue with our customers, helping them assess and adjust coverages to the new situation. For our private customers, we have introduced several measures, such as adding new mileage intervals for motor insurance and lower mileage limits for certain vehicles. We have expanded sports insurance to also apply to self-training related to the sport covered by the insurance. We have also expanded travel insurance in Norway to cover domestic use of rental cars. Realizing the burden of worries in these uncertain times, we offer our self-help online program to all private customers in Norway through our partner, Braive. It now has more than 2,000 active users. A few words about our operations.
We continued to put through necessary pricing increases in Norway for both segments during the second quarter. At the same time, retention has remained high, and new sales have been strong, generating increased business volumes. This is a strong vote of confidence from our customers, particularly in these extraordinary circumstances, confirming the strength in our brand. We will continue to put through price increases for both segments: for private, in line with claims inflation, for all products, except property, where we need to go beyond this to regain satisfactory profitability. We also see further need for price increases in the commercial segment, and we will continue to address the relevant portfolios, particularly large corporates. For operations outside Norway, we generated mixed results. We are very satisfied with the underlying profit development in Denmark and the Baltics. Lower activity because of the pandemic also contributed to the results in these markets.
However, high large losses, typically random in nature, impacted the results, particularly in Denmark and Sweden this quarter, in addition to COVID-19-related travel insurance losses being recorded as large losses. Implementation of our core IT system in Denmark is progressing according to plan. We will include the first products during the fourth quarter. This is one of several important initiatives to further improve profitability of our operations outside Norway. So, over to slide four. It is very encouraging to see that our customer service and sustainability efforts are valued and highly recognized. We ranked number one among all insurance companies in Norway in the annual Norwegian Customer Survey carried out by the BI Norwegian Business School, and we are very proud to rank among top nine across all sectors in the same survey. These results are supported by our own customer surveys.
Our second quarter review showed satisfaction on sales and service among our Norwegian retail customers, climbing to the highest level in two years, and our defined contribution pension product has once again achieved top ranking in a survey conducted by the pension advisor Gabler. On sustainability, we ranked number six among 149 Norwegian companies in the annual Norwegian Sustainability Barometer. None of this would be possible without competent, committed, and engaged employees. The score in our latest survey measuring employee engagement climbed further from an already high level. Our score is among the top 10% in the financial sector. The feedback also confirmed strong employee satisfaction with Gjensidige's handling of the pandemic, with factors such as access to information, high sense of security, good operative environment, and high work efficiency, then turning to page five, a few words about our new initiatives on sustainability.
We have made several new initiatives this quarter on our path to deliver on Gjensidige's sustainability goals. We strongly believe in encouraging our customers to make sustainable choices. To this end, we have recently expanded the settlement terms for commercial and apartment buildings in Norway. We add 5% to the settlement if the building gets a BREEAM certification when rebuilt. BREEAM is a sustainability assessment method that is used to master plan projects, infrastructure, and buildings. We have entered into a two-year partnership with the renowned annual CICERO conference, giving the opportunity to share knowledge on the consequences of climate change. CICERO is an NGO dedicated to developing and promoting solutions to address climate risks and opportunities. The initiative will strengthen our ability to cooperate with our suppliers, partners, and municipalities in finding risk-reducing solutions.
We have ambitions to become climate neutral for our internal operations and have fast-tracked our timeline to 2020. We will achieve this through less travel and lowering energy consumption, in addition to compensating our emissions through carbon offsets. The latter is an important contribution to reducing emissions globally and creating sustainable development benefits for communities in developing countries. We have decided to become a signatory to the UN Principles for Responsible Investment and the UN Environment Programme Finance Initiative, Principles for Sustainable Insurance, to support the initiatives and provide increased transparency of our insurance and investment activities. Finally, Gjensidige has been included in the FTSE4Good Index Series, confirming our strong environmental, social, and governance practices. 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'll start on page seven. We delivered a profit before tax of NOK 2.477 billion in the second quarter, significantly higher than the same quarter last year. The financial result from our investment portfolio was the main driver of this increase, reflecting the sharp rebound in the financial markets in the second quarter. The underwriting result was also up year on year, reaching the highest quarter level ever in our history when adjusting for runoffs. Effective pricing measures, as well as very strong renewals and portfolio growth, reflecting our strong competitiveness, were the main drivers. We also had a slightly positive impact from the pandemic situation due to lower activity. This was partly offset by higher travel insurance claims recognized in the corporate sector. Large losses were considerably higher than the same quarter of last year.
The private segment was the main driver of the increase in the insurance result. Turning to page eight, earned premiums were up 11.2% or 7.6% adjusted for currency effects. In the private segment, earned premiums rose by almost 5%, mainly due to price increases for motor and property insurance, as well as accident and health insurance. Adjusted for the transfer of our portfolio to segment Denmark, the growth was 5.7%. Our competitiveness remained strong through the quarter, and the number of customers increased. Earned premiums for the commercial segment rose 11.1%, thanks to effective pricing measures, solid renewals, and portfolio growth. All the main product lines recorded higher earned premiums. Earned premiums in Denmark were up 8.3% in local currency and 3.9% adjusted for the discontinuation of a quota share reinsurance contract and transfer of the portfolio from the private segment.
The increase was mainly due to portfolio growth in the commercial lines, partly offset by lower premiums for travel insurance due to travel restrictions. Earned premiums for our Swedish operation were up 2.4% in local currency, reflecting price and volume growth in the commercial lines, partly offset by lower volumes in the private lines. For the Baltics, we reported a decrease of 5.3% in local currency. This reflects lower volume for both motor and travel insurance due to the pandemic restrictions, as well as the fierce competition for motor insurance. Turning over to page nine, the loss ratio for the second quarter rose 1.2 percentage points to 65.6%. Large losses were in line with our expectations for a quarterly average, although considerably higher than the same quarter last year.
The increase included COVID-related travel insurance claims of NOK 72 million, as well as other large claims in the Danish and Swedish segments. Run-off gains were somewhat lower than last year, although slightly higher than the planned reserves. The underlying frequency loss ratio improved by 3 percentage points to a very healthy 64.8% due to effective pricing measures and lower claims because of the pandemic. But also bear in mind there are always random variations in frequency developments from quarter to quarter in insurance. As restrictions were lifted, life in our part of the world has returned more to normality. This is evident, among others, in more driving, which started picking up towards the end of the second quarter.
Moving into the second half of 2020, we expect an increase in economic activity and domestic leisure activities to result in above-average claims for motor and leisure boats and possibly less travel insurance claims during the summer vacation months of July and half of August. We expect normal claims patterns for all lines of business after this period. In terms of segments, I'm particularly pleased with the improvement in private in Denmark this quarter. Profitability for the commercial segment is good, but there's further improvement potential, which we will seek to attain, among others, by continuing to raise prices where necessary. In Sweden, the underlying frequency loss ratio was in line with the same quarter of last year. The pandemic had a negative impact, with higher claims related to Payment Protection Insurance, partly offset by lower motor claims.
The Baltics showed 7 percentage points improvement in the underlying frequency loss ratio, mainly due to the pandemic, with lower claims for the motor and health insurance lines. We will continue our efforts on improving operations, particularly in Sweden and the Baltics, with a close focus on cost efficiency. Now let's turn to page 10. We recorded NOK 981 million in operating expenses in the quarter, corresponding to a cost ratio of 14.5% and 13.9% excluding the Baltics. The cost ratio for our combined Norwegian business was at a very good level, down 0.7 percentage points to 11.5%. Denmark recorded a good cost ratio with a stable underlying cost base. The restructuring of our Swedish business drove IT, marketing, and commission costs, resulting in a higher cost ratio.
The cost ratio in the Baltics benefited from lower sales commissions as sales were hit by the pandemic, but we also saw positive results from our ongoing cost savings initiatives. We will continue our focus on simplification of processes, automation of internal operations, and further digitization in all our markets, and expect further efficiency gains across the entire organization. A few comments on our pension operation on slide 11. The pre-tax profit came to NOK 34 million, down year on year due to higher operating expenses. A shortened depreciation timeframe for IT investments and higher headcounts in response to the growth in business volume drove the increase in operating expenses. Good returns on real estate investments and the recovery of the financial markets generated higher financial income on the pension portfolios. Our pension operations managed NOK 37 billion in assets at the end of the quarter.
This is on par with the level at year-end 2019, with a loss of one large account and a negative development in the financial markets in the first quarter, offset by growth in our customer base and a reversal in the financial markets during the second quarter. Annualized return on equity came to 11.2%. The solvency margin at the end of the second quarter was 148%. The rate of shared customers with our general insurance business is high. As of the end of the second quarter, 66% of the customers in our pension business were general insurance customers as well. Moving on to the investment portfolio on page 12. After a market crunch in the first quarter, global financial markets took a significant positive turn in the second quarter. We re-risked our portfolio somewhat during the quarter and generated a return of almost NOK 1.2 billion, corresponding to 1.9%.
All asset classes contributed positively, reflecting lower interest rates and narrowing credit spreads in combination with strong equity markets. The commercial real estate market in Norway continued to hold up well. At the end of the quarter, the total investment portfolio amounted to NOK 63 billion. The matched portfolio yielded 0.9% return, excluding changes in the value of the portfolio valued at the amortized cost. The portfolio amounted to NOK 36.6 billion at the end of the quarter. Bonds at amortized cost had a positive return of 0.9%. This portfolio's running yield at the end of the quarter, as well as the reinvestment rate for the quarter, was 3.4%. An annualized excess value amounted to approximately NOK 1.1 billion. The free portfolio yielded a return of 3.2% in the quarter. At the end of the quarter, this portfolio amounted to approximately NOK 26 billion . The quality of assets in our portfolios is good.
We have a solid fixed income portfolio, with a large majority having an investment-grade rating. We have a good share of property investments, mainly in CBD offices in the Oslo area, and with negligible vacancies in the portfolio. Looking at our capital position on page 13, our capital position is extremely strong, with a solvency ratio of 283% at the end of the quarter. This is far above the upper end of our target range of 150%-200%, which is what we deem necessary to run the business, with a sufficient buffer for volatility. This, combined with a weak financial result in the first quarter, implies that we do not expect to meet our ROE target of about 20% this year. The reported solvency margin is 283%, assuming a formulaic dividend of 80% on the first half result.
If we do not assume dividends for 2020, the solvency margin comes to 295% at the end of Q2. And if we had maintained the dividend proposal of NOK 7.25 per share, the solvency margin would have been 247%. And if we had maintained the initial dividend proposal made by the board back in January, the margin as of now would have been 221%, still well above the upper end of our target range. It's not in our interest to retain this level of capital. We have noted the different regulatory views on this in Europe, and we will follow the situation closely. It's still our board's intention to distribute dividends to shareholders as soon as the situation allows. Turning to page 14, capital generation is strong, and the reported solvency margin increased to 283%, up 14 percentage points from the end of the first quarter.
Solvency to earnings and returns on the free portfolio generated NOK 2.5 billion in available capital, including a NOK 0.9 billion increase in the fair value adjustment of assets, thus further increasing our dividend capacity. The capital requirement is more or less unchanged from the last quarter, although there are several underlying changes which drive the capital requirement in different directions. Market risk increased because of higher exposure to equities and high-yield bonds. The underwriting risk decreased following changes in currency rates and improvements made in the calculation of lapse risk. Counterparty risk is also down this quarter. Finally, a few words on the latest development of our operational targets on slide 15. We can report mixed progress on the operational targets this quarter, with some of the metrics affected by the pandemic situation. Both customer satisfaction and retention in Norway remain very high.
The retention level outside Norway is slightly down this quarter, primarily driven by temporary market contraction due to the pandemic in the Baltics. Sales effectiveness based on running 12 months is currently at 6.6% compared with our baseline year 2017. The decrease this quarter is mainly driven by what we expect to be temporary lower sales in some markets and some increase in distribution costs, both as a result of the ongoing pandemic. The share of automated tariffs continued to increase. We stand at around 48% currently, and we continue to include more product lines going forward, in addition to further refining tariffs already included. On the claims handling side, we have now reached our target on digital claims reporting. The share of claims handled fully automatically was slightly down compared with Q1 due to less travel claims in general and more manual handling of COVID-related claims.
We have reduced claims costs further, most recently through a reduction related to insurance fraud and process optimization. We are currently well positioned for reaching our target of reducing it by NOK 500 million in 2022. And in terms of our CO2 intensity, we will continue to develop our framework and to continuously reduce the carbon footprint of our claims process. I'll then hand the word back to Helge.
Thank you, Jostein. To sum up on page 16, we have delivered a very solid quarterly result, thanks to the quality of our operations and strong competitiveness. Naturally, with the society's opening up and activities gradually returning to normal, combined with a high share of domestic vacations, it is prudent to expect above-average claims for motor and leisure boats in July and August, whereas we might see less travel insurance claims than normal.
After the summer holidays, we expect a normal claims pattern for all lines of business, but we are aware that changes in the development of the pandemic situation might take us by surprise again. We appreciate the turnaround in the financial markets and are pleased with the returns on our investment portfolio. Our risk appetite remains unchanged, and balanced and high asset quality will help us through any potential further turmoil. Gjensidige has a very strong solvency position, significantly above our board's target range for solvency margin and what is needed to run our business in a prudent manner. It's our board's intention to distribute dividends to shareholders as soon as the situation allows. Our financial targets remain unchanged.
As a reminder, given the negative return on the investment portfolio for the first quarter of 2020 and the solvency ratio being significantly above what is needed, the group's return on equity target is not expected to be achieved for the 2020 fiscal year, and with that, we will open the Q&A session. Thank you.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please ensure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one to ask a question. We will now take our first question from Alexander Evans from Credit Suisse. Please go ahead.
Hi, Helge there. Hi, Jostein. Hi, Mitra. Thanks for taking my question.
Just firstly, on motor and property, I think you mentioned about the need to continue the price increases there. What's your sort of level of expectations of claims inflations there at the moment, and have those changed at all recently?
To comment, if I comment on motor portfolio in Norway, we expect claims inflation to remain stable at around 3%-4%. Yeah. You also asked for property, and that's the same as it has been for several quarters. We expect around 4% going forward, but volatile.
Okay. So just a continuation of pricing. And then just maybe quickly on the dividend. Sorry.
Just to add something on the pricing. The 4% that Helge mentioned, that is the expected claims inflation, and we will be pricing significantly above that going forward.
On property. In line with claims inflation for motor insurance. Yeah. Sorry.
On the dividend as well, and correct me if I'm wrong, but it's my understanding that the expectation not to pay a dividend is a guideline from the regulator, and we've seen some insurance companies go against their wishes, perhaps. If there was to be sort of no evidence of change later, is that a standard that you might, in fact, take, or is it a government rule with the regulator?
You got the question?
It was somewhat unclear line, I expect. I'll try to answer what I think you asked. The latest on the dividend regulation is that the European Systemic Risk Board issued an advice for insurance and/or financial sector companies in general not to pay even the dividends.
The Norwegian response from the Ministry of Finance was to refer to a letter they sent out. I think it was 25th of March, where they said that they advised every company to look carefully at the situation, but did not specifically say that they shouldn't pay any dividends. As we told you in the first quarter, the Financial Services Authority kind of specifically heavily advised us not to do anything, and we followed up on that advice during the second and the first quarter to see how the situation in the economy developed. As we see it now, this economic situation is clearer for Norway, at least, or for Scandinavia, but we haven't had any further discussions with the FSA on this topic.
I also think we got a sign regarding economic yield going forward when you saw DNB release their figures yesterday also.
So the situation is much clearer compared to what it was in March.
Okay. Perfect. Thank you very much.
We will now take our next question from Jonny Urwin from UBS. Please go ahead.
Hi. Good morning. Thanks for taking the question. I hope you're doing well. So two for me, please. So firstly, I just wondered if you could please help us isolate the underlying loss ratio change year on year if we exclude the COVID frequency benefits. So how much of that three-point year-on-year improvement was driven by COVID frequency? And then secondly, premium growth was strong in the quarter. The majority was driven by commercial Sweden and Denmark. Could you remind us what measures you're taking to control the firstly, potential margin dilution from this growth, and secondly, the large loss volatility that commercial growth could bring? Obviously, large losses were a bit elevated in the quarter.
Thank you.
Thank you, Jonny. First, if you haven't been very specific on the amounts to isolate COVID-19 effects from other effects, and I don't think really anyone can do that with a large degree of confidence. What we've said is that there was a slightly positive impact on the underlying frequency results in the second quarter, and by that means, it's a slightly positive. It's not big, but it's positive. It's different between different segments as well. Whereas we see more or less no effect on the commercial segment, we do see that there is a slightly positive effect from reduced, especially on motor activity in the first two months of the second quarter in the private segments, both in Norway, Denmark, and Sweden.
And as the economic activity came to, in a way, more abrupt halt in the Baltics, we see a larger effect there than in the other segments. But in total, slightly positive, meaning not big. Sorry not to be more precise, but I think that reflects the status of what anyone can really do because there are weather volatility and other things also affecting these numbers. So it's a bit hard to break out the COVID-19 effects.
And the second.
The second question was growth. We do see, I mean, as I told you in my presentation, we do see a 5.7% growth in earned premiums in the private segment in Norway when you adjust for this one portfolio moved to the Danish segment, which I think 5.7% isn't bad.
And if you look at the other segments, it's correct that we do see a higher growth in commercial at 11%, but that reflects growth at a very high margin, in my view. We have managed to get through quite high price increases in the last two January one renewals, and it's a combination of price and volume growth for the commercial segment. We do have a lower combined ratio in Norway than outside of Norway. So if we grow more outside of Norway than within Norway, the average combined ratio will increase, obviously. But as long as we meet the profit targets for each segment, I think this will still be value-enhancing for Gjensidige.
Just to add a short comment on the private segment in Norway. While commercial and Denmark is both price and volume-driven, the growth, it's mainly price-driven in the private segment.
But during the quarter, we see increased competitiveness and also increased volume growth. So we end the quarter with stronger volume day after day compared to the beginning of the quarter. So it's partly volume-driven also for private, but mainly price-driven.
Thanks so much. We will now move to our next question from Jon Hocking from Morgan Stanley. Please go ahead.
Good morning. Thank you for taking my questions. Firstly, what do you expect the financial impact of the termination of the agreement to look for mutual fire insurers to be? And secondly, you mentioned higher claims in Sweden to do with Payment Protection Insurance. Just wondering what you thought about how losses will develop in this line going forward. Thanks.
I can just give you some comments regarding the fire mutual. This is our history.
Gjensidige, it was several hundred fire mutuals, and the majority of them merged, created an integrated mutual group back in 1990. Today, we have 11 renewed multi-year contracts with 11 fire mutuals. The premium for these 11 fire mutuals, where we continue to cooperate with, is NOK 1.2 billion. That's the total premium, of which around NOK 200 million is fire premium, 16%. The mutual fire insurers are agents for us in specific regions all over Norway, in addition to underwriting by themselves the fire policy. The fire premium is a very limited share of the total premium. Gjensidige underwrites the rest of the policy. The four mutuals terminating, the total premium of these four is NOK 650 million, of which 15% is fire coverage. What we are doing now, this termination is from 1st of January 2021.
We are in the process of establishing internal distribution setups for private and commercial customers in the affected regions. We are setting up branches alone and together with Nordea. It's important to also remember that a significant part of this portfolio in the fire mutuals is agricultural business, where we have a very strong position. We think we will continue with strong presence in these areas. It's a limited we will be limited affected.
You're saying kind of NOK 90 million lost premium and then some higher expenses?
Yeah. The fire, it's a part of a product. It's not a product. As I said, it's around NOK 90 million, yes. It's hard to take off that part of a product and to continue alone with that coverage. Of course, we will fight with the fire mutuals.
They have strong people, and Frende will take over as partner. But the brand is very tied to the Norges Bondelag and the Gjensidige brand is very strong in these areas. Our relationship with the agricultural customers is very strong, and we will use lots of resources to defend ourselves in these areas. So we are rather calm regarding the situation, actually.
And the second question was on the PPI in Sweden. It's a very small nominal amount we're talking about. Remember that the Swedish premium volume is approximately NOK 400 million per quarter. So it's not large, but there is a negative impact for that product due to the increased unemployment. And we're taking necessary measures so that the terms of that product are somewhat trickier now than they were half a year ago. And it's a very limited downside, in our view, in that product for us in Sweden.
We will now move to our next question from Blair Stewart from Bank of America. Please go ahead.
Hi. Good morning, all. I hope you're all well. I've got two questions. First one, just on COVID. You said there was no impact on the commercial side. I was just slightly surprised by that, given I would have thought there was less activity in the quarter. I know that the Nordic region has not had the level of restrictions and lockdowns that others have had, but I would have thought there would be some effects. I wonder if you could clarify what's been going on there. Is it completely normal? And secondly, on the dividend, I appreciate the comments around the economic situation becoming clearer and that you've not had any further discussions with the FSA.
I would have thought, given its importance, you would have been quite keen to have those discussions with the FSA sooner rather than later. So if you're able to comment, when are you planning to have discussions with the FSA? And is it still your intention? I think you mentioned earlier this year that you would hope to pay the missing FY 2019 dividend by the end of this year. Is that still your intention if you're able to do so? Thank you.
Hi. Good morning, there. To the latter, Jostein gave you some flavor on the COVID-19. After this day, we will have some nice days in the Norwegian rain, summer holiday, and directly after that, we will meet with the FSA. Just there.
Yeah. And is it still your intention? I mean, is it still your intention to pay that dividend by the end of the year?
Absolutely. Absolutely. I think I was clear. Gjensidige was clear. We will have a meeting with the FSA directly after the summer holiday. And our intention is very clear.
And just thinking, sorry to interrupt again. Just thinking about the logistics of that, would that then mean that you would pay a special dividend in respect to the FY 2019 dividend because that was canceled? What would the mechanics of that be if and when you're able to pay it?
Yeah. I think we will come back to the mechanics and timing. What's absolutely clear now, our ambition is to pay our dividend. And we will meet with the FSA directly after our relatively short summer holiday. And we will come then back with timing and more details.
Okay. Thank you.
On the commercial COVID-19 question, I mean, there are pluses and minuses if you go through the different products, and the point about commercial is that these pluses and minuses more or less cancel each other out. We do see some positive effect also on the commercial motor book, but on the other hand, there are some negative impacts we've estimated on the disability group life products in the commercial book. These are more or less equal in size, so it's a negligible impact on the commercial net underwriting result.
Okay. Great. Thank you very much. Enjoy the holiday.
We will now take our next question from Jan Erik Gjerland from ABG. Please go ahead.
Good morning, Jan. From ABG.
On the competition side, could you elaborate a little bit on the competition in Norway, both on private and commercial, as well as in the rest of the Nordic countries where you have portfolios? It seems like your price increases are flowing through and your retention is very high. So I'm just curious to understand where the competition is heading these days.
Yeah. Just to start with private Norway, I think it was commented also after first quarter. The competition is intense. It's relatively strong. As I commented, we have increased our competitiveness during the quarter, and it's positive volume development also during the quarter. The main competitors are as follows. It's number one Tryg. And then it's If and Fremtind number two and three. The small ones, Jan Erik, we do not actually see them. Sorry. Storebrand is also in this second basket of competitors.
So it's number one Tryg, and then it's If and Fremtind and Storebrand. Quite equal, actually. And beside that, we do not see the small ones at all. In the commercial segment, it's number one Tryg. Now, If and Tryg and Fremtind somewhat, but not so much yet. And as you know, for the municipality segment, it's KLP and Protector. So competitors seem to be implementing flat price increases across the board when it comes to the commercial segment. And we have managed during second quarter to combine both strong renewals and volume growth in the commercial segment. So it seems like the competitors are increasing prices also above normal for the commercial segment.
Perfect. Thank you. And on the Nordics?
Yeah. In Denmark, the market leader Tryg. And then it's Top and Codan. That's the main competitors in the commercial processes. In the private segment, it's number one Tryg.
It's Alka, actually, and the mutual company GF and Alm. Brand. For years, competition in the private lines also in Denmark. In Sweden, we have a very small position. It's Trygg-Hansa, LF, and If. It's the main competitors in the Swedish we are competing with in Sweden. First and foremost, Trygg-Hansa, LF, and If.
Is there any increased intention in the competition, or is it like the same as you have seen the last half year or year? Or is there any changes that you have seen in Baltics?
No, actually.
Either in Norway or in Nordic?
No. I think what surprises a bit is that it seems like some of the players need to increase prices in the commercial segment, and we have been quite early. We managed to combine price increases and volume growth and new customers in the commercial segment.
We still do that after almost two years with the same recipe. In the private segment, it's relatively stable. We expected maybe to see Fremtind more aggressive, and it hasn't been like that first half. So it's quite stable from first quarter to second quarter, and Tryg has been the major competitor in this first half of 2020. Relative stability on the competition side in private.
Okay. Perfect. Just on the large losses in Denmark and Sweden, you said it was more random. What type of business is it? Is it fire? Is it big crash? Or could you just elaborate a little bit what it is?
Yeah. These are mainly fires. We do not see a specific pattern or anything here. It is random. It will continue to be. That's the nature of large losses.
Okay.
Finally, then on your loss ratio, which is below 55 now in the second quarter in private Norway, would you not start to sort of take volume rather than price increases in that area just to grab some market share at season prices? Or would you continue to sort of price in line with claims inflation, as you said, on motor and above on property?
I think.
Which areas is sort of which part is still on the product side, which is not profitable enough on the private side?
Yeah. Jan Erik, it's the same people as always, and what we have said is profitability before market share, but what we have actually gained this first half of 2020 is market shares in Norway. We have increased market share for private lines, and we have increased market shares above normal for commercial lines. And our market share is now 26%.
And I think I just said that I think we will continue to gain market shares for the next period because we see increased competitiveness in the private segment. But you also had the question, what about competition, new activities? It's relatively stable. So given that it continues with the same type of competitiveness as we see today, same type of activities from our main players, I think we will gain some market shares going forward, actually.
That's at least your appetite, and you have capital to do it, so.
Yeah. Our appetite is profitability, stability. And if we can gain market share, that's a good bonus.
Very good. Thanks a lot. Have a good summer.
We will now take our next question from Johan Ström from Carnegie. Please go ahead.
Thank you very much. All my questions have already been answered.
But given the strong results in Denmark now, do you feel that you're on track or maybe even a little bit ahead of the plan and the target of generating NOK 750 million in underwriting results outside of Norway by 2022? Is that right?
My comment is a bit the same as the first quarter. I mean, we are on track with all the measures we are taking. And actually, results are maybe slightly better than they had anticipated at this point of time. If you look at the last 12 months, the number is NOK 600 million.
NOK 635 million and so forth.
NOK 635 million. It is, I mean, we said NOK 750 million by 2022. But if we look below that, you see that, for instance, in Sweden, we have no reason to be satisfied with the results as such in Sweden. So it's a mixed picture.
And as I also mentioned in the presentation, the result in the combined ratio in the Baltics is quite good, but we do have a negative top line growth. Not due to us. I think it's the overall market which is down, but still, it shows that we're not kind of through with everything we want to do in the Baltics. And the cost ratio is still too high there. So there's a number of things we still need to do, but we are according to plan in terms of measures, and maybe results are running slightly ahead of us. But yeah, I think the situation is under control towards the NOK 750 million .
Okay. Thank you very much.
We will now take our next question from Vegard Toverud from Pareto. Please go ahead.
Yes. Good morning. I have three questions, if I may.
If your meeting with the FSA after the summer ends with a timeline where you decide on a dividend in Q4, but actually pay it out in 2021, how will that impact the cost of a dividend for 2020? And number two, if we find a cure for COVID-19 or for some other reason, the situation is very much normalized next year, how long will you take to get down to your targeted 200% solvency ratio? And number three, why do you expect normal claims for July? Shouldn't the increased potential frequency from domestic travel be offset by lower individual travel claims?
Thank you for good questions, Vegard. Jostein is writing down now.
On the first question on whether there will be a customer dividend in the year 2020, if we are not able to pay out the dividend until 2021, if I understood your question correctly, Vegard, I mean, you remember that the customer dividend will be paid out by the Foundation and not by us. So it will, in reality, be up to them to state what they will do in that matter. But yeah, I think I won't foreclose what they will actually decide upon in that case. We'd still hope to pay out the dividend in 2020. But that, of course, as we already stated, depends on our dialogue with the FSA. There is nothing in our numbers, as you've seen, both in what they actually are in terms of solvency, in terms of running profitability, and our own internal projections of how solvency should develop going forward.
Even if there is a second wave of COVID-19, I think that shouldn't stop us from paying the 2019 dividends or even the 2020, and even more maybe. But this is a situation that we will need to follow and base our decisions upon a dialogue with the FSA. On the second question, how long.
Just my question is really if there's any regulatory part or any part of the charter of the Foundation or anything else that hinders it in a way of paying out the customer dividend based on its own capital or the expectation of a dividend in a few weeks or months into the new year.
No, I think that's entirely possible. It's nothing regulatory that stops it as such. Yeah.
This is an unprecedented situation, of course, so it will need to be evaluated when we get there, if we get there. Second on the how long it will take us to reach the 200, that's guiding on the situation forward, and I probably just stop answering it. But you have our financial targets and our stated dividend policy and what we said. We want to pay out and intend to pay out the 2019 accounting year dividends, hopefully during the second half of this year. And as you see, we still continue to take out a formulaic dividend of 80% of the results when we report our solvency targets for 2020 as well. That's a clear indication of where we think we're going. And further speculation on our future solvency margin will drop, I think.
On the third question on the loss pattern, I think we said that we do expect that the increased, what do you call it? I don't know. Maybe stay.
Leisure activities.
Yeah. Leisure activities. That people actually stay in Norway and drive around for summer holidays. We see a sharp increase in boat sales and so on. It's something that we expect to have above average claims effect in July. On the other hand, people won't travel abroad, I suspect at least, but this is speculation, will have a positive effect on the travel insurance claims. And then we'll see where that brings us when we come to the third quarter reporting. But I think we said that we do expect above average claims in motor and leisure boats in July and the first half of August.
Yes.
My thought was more that if an elderly person has the need to be transported home, it's cheaper to do it by bus in Norway than to refit the plane to take them home from Kosovo themselves.
That's right.
Yeah. So there should be a positive effect on travel insurance.
Well, thank you. And yeah. Thank you and good summer.
Thank you, Vegard. Good summer.
We will now take our next question from Håkon Astrup from DNB Markets. Please go ahead.
Good morning. Two questions from me. The first one on Sweden. Can you remind us of what you're doing to improve profitability here and how to develop them during the first six months ready to implement any new machines? That was the first question. And the second question.
Hold on. Hold on a sec. Yes. It's Helge. You fell out, so we didn't actually got your first question.
Can you repeat that?
I can. Do you hear me better now?
Better now. Yes.
Perfect. Okay. So the first question is on Sweden. And can you remind us what you're doing to improve profitability here and how to develop them during the first six months ready to implement any new measures? That was the first question. And the second question is on the pension business. We have seen some consolidation in this space recently on the defined contribution. And you reported lower profitability or profits in your pension business due to higher costs this quarter. And do you feel that you have sufficient scale in your pension business? That was the second question.
Yeah. I mean, as I already said, I'm not happy with the profits in Sweden, but that's also to a large extent due to a higher than normal impact from large claims, actually.
If you look at the underlying claims frequency in Sweden, it's more or less where it was last year. So it has been somewhat more volatile. And being a smaller business, it is more exposed to short-term volatility. That said, cost ratios are still up and it's still too high. We do invest somewhat more now in IT and marketing spend there to, and that's according to plan, to prepare that organization to be more digital and more well-known in the market and thus creating the room for better competitiveness a bit further down the road. The development these six months hasn't particularly led us to do any changes in the strategy here. On the pension business. We noted both KLP and Frende transactions. We are of a sufficient scale on our own to be profitable. I think we reported 11 point something return on equity.
Now, it's not where it was previous year, but that's more or less due to two factors. One is the negative development in the financial markets in the first quarter, and the second is that we do have shortened the timeframe for depreciation for some IT part, plus some other costs related to, and this is both related to the preparations for the new pension arrangement with your Own Pension Account. The English correct term, just I missed that one yesterday morning, but the pension reform in Norway in that respect, which requires some IT investments, and also, when we change the core system, which we plan to do in the pension system, the remaining lifespan of the existing system is shorter, so we depreciate it a bit faster. I think that's the main reasons why we have a somewhat lower profitability there than we had a year ago.
Perfect.
That was very clear. Thank you so much.
We will now take our next question from Gerald Goh from Citi. Please go ahead.
Hi. Morning, everyone. I've got three questions to you. The first one is just a clarification on Sweden. So you've noted that there was a negative COVID impact. Is that entirely related to the Payment Protection Insurance, or was that something else? The second question is on the higher frequency of motor and leisure boating in July and August that you mentioned. What have you seen so far? Could you help quantify maybe some of the increase in frequency that you're seeing? And the third question is going back to the customer bonus. Is my understanding right that it's normally paid in Q2, which would mean that it hasn't been paid now, and it would have been communicated to customers already?
How has it been received so far? Thank you.
The latter. That's right. It's normally paid out in connection with AGM in the Foundation in, yeah, May. And it hasn't been paid out. Of course, that has been we have had some reactions from customers. I think we have managed to handle that in a good way. The retention is strong, and they understand that this will come on a later in later, hopefully this year. So that has been communication between our organization and the corporate customers, and we have also communicated with the private customer in different kind of channels.
Yeah. On the first question on Sweden, the negative effect is the PPI solely. So that's a yes. On the second question, what we've seen, I mean, we are only at July 14th so far.
So I mean, what we say about July and August is our speculation based on what we've seen. We saw motor traffic or car usage pick up in the special second half of June. We've seen all through the spring that the sale of leisure boats has been record highs, which probably bodes for a lot of new people with boats. And not every one of them as well versed in handling their boats as the old-timers. We also see rentals of what you called camping. Mobile homes. Mobile homes, yeah. The rental of mobile homes has kind of been peaked, really. So people plan to drive around somewhat in the summer in Norway, at least. And we think that should probably mean that we will see some increased claims during the summer holiday. But still, this is our speculation.
We'll report specifically back on that when we do the third quarter results.
Just to give you some flavor, in June, we saw actually increased frequency for leisure boats. It was a very hot June. It was sunny and nice weather. Today, I said I came in with a car along the seaside. I didn't see any boats at all out in the fjords. It was raining. So this depends on weather. It could be a wet and cold July, and then you will not have that leisure boat frequency problem. So it's hard for us, actually, to give any specific estimates based on this. I really hope some sun for my own summer holiday. But from an insurance point of view, maybe 15 degrees and cloudy and rain is good. Let's see.
Yeah. Yeah. Thank you. Thank you very much, and have a good break.
Thanks.
We will now move to our next question from Youdish Chicooree from Autonomous Research. Please go ahead.
Good morning, everyone. I've just got two questions left here. The first one is really on the underlying loss ratio, which improved 3 percentage points in the quarter. I think in the beginning, you mentioned the benefit from lower activity due to the pandemic was a small positive. So that would imply that the improvement is mostly driven by your pricing measures. So when we think of the trajectory ahead, should we expect? I mean, is your target to improve it further? Because I can see that across your portfolio, on average, you're still raising prices slightly ahead of inflation. So that's my first question. And the second one is on your own partial internal model.
So I was wondering whether you had some sort of timetable of when you will try to get that approved. I appreciate the effort. You and yourself, I've been busy with other things in the past in this half year. But is there a formal timetable for getting it approved? Thank you.
As I think we said in the report, we mentioned two main drivers for the improvement in the underlying frequency loss ratio. One is our own pricing measures, which have been successful, managed to get price increases through, as witnessed by the stable retention levels. And the second one is the benefit from reduced economic activity on the underlying loss ratio, and in that order. Please also remember that the travel-related COVID-19 claims is booked as one event as included in the large losses number that we report. We haven't changed our targets.
These are long-term financial targets, and we do not communicate in the short-term targets to the market. On the second question on the partial internal model, there is no official timetable for that. We continuously work with FSA to get our view of what is the correct model through. And yeah, I can't give you a really much clearer view than that on when we should expect anything. But we are still of the view that our own model best reflects our own risk situation and continue our work to document that towards the FSA.
We will now take our next question from Jan Erik Gjerland from ABG. Please go ahead.
Hello. Yeah, I'm Jan Erik from ABG once again. Just a follow-up.
The customer dividend, as previously asked about, do you need to be a customer throughout this period and into later of the year to receive the customer dividend for 2019? How does that really work? If you could shed some light on that. Thank you.
As we said, it's a bit of an unprecedented situation, but we think that it will be so that they need to be a customer at the Foundation's AGM to get whenever that will be.
Okay.
Sorry. In May.
So you're not taking place?
Sorry. I'm ready.
Yeah. When?
Yeah. Sorry. And that was in May.
It was in May. Okay.
Because this is a very difficult thing because if you don't want to leave, do you then get to the customer dividend for 2019? For some reason or not.
Do you know anything about that?
I mean, I think it is a bit of an unclear situation, the whole thing, because we should have been able to pay out the dividend as planned. But yeah, we'll see when we can get the dividend and when the Foundation pays out. That's all I can say now.
Okay. Perfect. Thank you.
We will now take our next question from Steven Haywood from HSBC. Please go ahead.
Good morning, everyone. Just a couple of quick questions. I wonder if you could tell us your market share of leisure boat insurance sector.
The second question, if you can give us an indication of if you see a shift into commuting to work via motor vehicles rather than public transport, and how this could potentially impact claims in the second half of the year, and also potentially impact the increase in electric vehicles and hybrids being bought over the medium to long term.
A difficult question, Steven. None of us really wants to answer it because it's too difficult. No, but I'll start with the leisure boat question first. I don't have the figure off the top of my head, but our market share in leisure boats, I think it's around kind of the normal 20%-25% type market share. Leisure boats is not a big insurance product as such.
And we're struggling to dig into the Norwegian Association's market numbers right now as we speak, but we'll try to get back to you in a short while on that one. So I don't guess too much there. If I understand your second question correctly, is whether we turn to a situation where we work more from home, was that what you said in the second half or after the restrictions are lifted and the consequences of that? Was that correctly understood?
Yeah. So essentially, some people working from home, but then if people start to return to the office, how are they going to be commuting to the office? Is it going to be more by motor vehicles and therefore EVs and hybrids go up, or is it still going to be public transport as well?
As of now, the capacity on public transportation in Oslo, where at least, which I know best, is limited to typically half the normal capacity, but also that kind of reflects well with the typical capacity at the workspaces also because there are the distance requirements at workplaces means that we can't be fully the offices can't be fully occupied either, so in May it matches quite nicely at the moment. When we get back after summer holidays, we think for our sake at least that we will be to a large extent working from offices, and that will challenge somewhat the public transportation system, but it could also be that we see changes in the distance requirements on the public transportation system, so the capacity there will also be changed when we get back after the summer holidays.
So it's a bit hard for us to speculate on how that will develop, really. I don't see any specific effect on the EV hybrid situation as such. I guess I see it very dependent on that they keep up the lower subsidies on these kind of vehicles. I think that's probably more important than the working from home or not situation.
Okay. Excellent. Thanks very much for your feedback.
We will now take our next.
Sorry.
Please go ahead, sir.
Oh, yeah, yeah, yeah. Forget it. You go on.
We will now take our next question from Phil Ross from Mediobanca. Please go ahead.
Hi, there. Thanks for taking my question. Just one left from me. On the cost ratio, it looked pretty good this quarter, where I guess we might have expected some increased costs from home working.
You also talked about the balance of COVID claims being less automated, more manual. I just wondered whether there's anything specific in your cost control that's helping you to be more efficient or just to save money. Anything you can add or expand on that would be helpful, please. Thanks.
Yeah. Please remember that when we do have more manual handling of the claims, the claims handling cost-related, that is into the loss ratio and not the cost ratio. So you won't see it in the cost ratio figures. On the operating costs, there might be some marginal costs here and there and somewhat increased, I mean, IT-related spend and so on, but that's really marginal. We haven't chosen to disclose anything there. As you see from the cost ratio we do report, it's actually developing quite nicely.
So no increased cost as such to any significance, at least due to COVID-19 so far. We have some slight increase in losses on premiums overdue in Denmark. But again, it's a very small number in the overall picture, so we haven't disclosed it.
As there are no further questions, I'd like to hand the call back to our speakers for any additional or closing remarks.
Thank you. Everyone, thanks for your good questions. We'll be participating in a number of roadshow meetings and conferences starting from August, also this time over the phone due to the pandemic. The meetings will be held with investors in Norway, London, Helsinki, and Munich. Please see our financial calendar on our website for more details. Thank you very much for your attention. Have a lovely summer and stay healthy.