10 Topdanmark in brief y Nation-wide, Danish non-life, life and pension fund business.
y Focus is on value creation for shareholders, customers and employees on the basis that satisfied customers and well-qualified employees are key to ensuring satisfied shareholders.
y The business model is based on efficiency, risk-based prices and a strong sales network.
y One of Europe’s most efficient non-life insurance companies: low expense ratio and efficient claims handling allows for a combination of competitive prices to customers with a competitive return to shareholders.
y Relatively low volatility in earnings due to high exposure in the personal, agricultural and SME markets which have many but relatively low value claims, a pricing strategy based on the underlying risks (micro rating) and a significant reinsurance programme.
y Multi distribution strategy focusing on targeted sales for each customer segment through its own sales channels and distribution partners, including Danske Bank, with their independent brands.
y Strong business model and relatively limited financial risk substantially ensures a profit is made even in years with devastating financial markets.
y Articles of Association show no restrictions on ownership and voting rights or any other limitations to shares.
• Premiums declined 0.9% in non-life insurance and 4.1% in life insurance.
• Combined ratio increased to 93.3% (2009: 91.1%); excluding run-off profits it increased to 95.7% (2009: 93.6%). Weather-related claims were 3.0pp above a normal level.
Steffen Heegaard Head of IR and Group Communications Direct tel.: +45 4474 4017, mobile: +45 4025 3524
Contents Management’s review 1 2010 key features 3 Financial highlights Focus on 2010 and prospects for 2011 4 Profit of DKK 1,168m in 2010 5 Non-life insurance 11 Life insurance 14 Investment activities 17 Parent company etc. 17 Taxation 18 Financial goals 18 Prospects for 2011 21 Share buy-back 22 Risk management 32 Solvency 33 Capital model 34 The process of accounts preparation 36 Corporate Governance 41 Remuneration structure 42 CSR 44 Investor Relations 46 Annual General Meeting 46 Financial calendar 47 List of company announcements and trading reports 48 Board of Directors and Board of Management 52 Five-year summary - Group
Annual accounts - Group 53 Profit and loss account 54 Statement of comprehensive income 55 Assets 56 Shareholders' equity and liabilities 57 Cash flow statement 58 Movements in shareholders' equity 59 Notes to the accounts 87 Accounting policies 96 Annual accounts - Parent company 104 Management’s statement
Deferred tax on security funds (389) (348) (348) (348) (348) (348) (348) Shareholders' equity of Group end of period 3,977 3,368 2,895 4,117 4,553 4,117 4,553
Average number of shares, diluted ('000) 19,171 17,351 15,640 15,769 15,159 15,565 14,583
The result of the parent company Topdanmark A/S increased to a DKK 31m profit in 2010 (2009: DKK 21m loss) due to higher earnings in subsidiaries outside of the insurance group and recognition as income of net interest compensation of DKK 25m relating to tax cases.
DKK 151m improvement in results in Q4 2010 Post-tax profit improved to DKK 488m in Q4 2010 (Q4 2009: DKK 337m).
The technical result increased to DKK 240m in Q4 2010 (Q4 2009: DKK 204m). Run-off profits were DKK 86m (Q4 2009: DKK 67m) with severe winter weather in Q4 2010 affecting the result by around DKK 30m, in line with weather-related claims in Q4 2009.
The result of the parent company etc. increased to DKK 38m (Q4 2009: DKK 16m) due to the net interest compensation of DKK 25m in Q4 2010 referred to above.
Most of the insurance companies in the Danish market have given notice of price increases, taking effect in 2010 and 2011, particularly for house and contents polices due to recent years' growth in theft, fire and weather-related claims. Towards the end of the year several companies also increased prices in the SME market. A number of companies have also given notice of price increases on accident, agricultural and health policies and for new business in change of ownership insurance.
Automatic price indexation in the personal and SME market was 4.1% which is estimated to have an overall effect of 2.5-3.0% on all insurance products. The recession has caused an increase in the number of business liquidations and reduced insurance needs due to fewer employees (workers' compensation insurance policies), fewer vans, lower stock levels, (reduced values insured) and lower risk cover of consequential losses. In 2010 it also caused negative premium adjustments relating to 2009 (premium refunds), particularly in workers' compensation insurance due to fewer employees than assumed when the insurance premiums were paid. Furthermore price pressure in the industrial market increased. In spite of an initial effect of the implementation of price increases there was an overall modest increase in gross premiums earned of around 1%.
The claims trend in workers' compensation insurance was adversely impacted by two Danish Supreme Court decisions (one in 2009 on the presentation of evidence
to the contrary and one in 2010 on part-time employees), the tax reform and the declining level of interest rates. In spite of this, competition intensified in the upper part of the industrial market in 2010.
The lower interest rates as compared with 2009 had an adverse effect on the combined ratio. As provisions for outstanding claims are discounted to present value, a declining interest rate will increase the loss ratio. For example the interest rate level for a Danish government bond with a nominal interest rate of 4%, expiry in 2015 and a duration of 4 years has declined 0.8pp which, depending on the composition of the portfolio, causes just over a 1pp increase in the combined ratio.
It is estimated that the combined ratio including run-off profits increased to around 98% in 2010 (2009: 94%). In particular a number of small and medium-sized insurance companies have seen increasing combined ratios and are now operating with combined ratios over 100.
As reported in the interim reports for 2010, premium adjustments in workers' compensation, SME liability and property insurance relating to 2009 had a combined negative effect of 0.7pp on premiums earned in 2010. At the same time the claims trend for 2010 increased 0.4pp due to the higher premium adjustments.
Winter claims were DKK 300m in Q1 and DKK 30m in Q4, i.e. DKK 330m in total. The cloudbursts in Q3 generated claims of just under DKK 200 (adjusted from DKK 228m in the Q1-Q3 2010 interim report), DKK 68m net of reinsurance.
The lower interest rates in 2010 increased the claims trend by 1.1pp.
Investment return after transfer to technical result 115 131 704 445
The price increases of DKK 161m improved the claims trend by 1.9pp.
Overall expenses on claims, reinsurance, sales and administration as a percentage of gross premiums earned (combined ratio) increased to 93.3% in 2010 (2009: 91.1%). Excluding run-off profits in Q4 2010 it was 94.3% in 2010. This was in line with the assumption in the Q1Q3 report for 2010 of a combined ratio of 94-95% for the full year 2010, excluding run-off profits in Q4 2010.
The expense ratio increased to 16.3% (Q4 2009: 15.6%) affected by the decline in premiums earned, an increase in development expenses on a new IT system and a higher proportion of holiday pay being provided for in Q4.
Consequently the combined ratio improved to 89.2% (Q4 2009: 91.1%). Excluding run-off profits the combined ratio improved to 93.2% (Q4 2009: 94.3%).
Segment reporting Until 1 November 2010 Topdanmark's non-life business was divided into the segments of Personal, SME and Industrial. From 1 November 2010 the business areas of SME and Industrial were organisationally merged and therefore the segments are now shown as "Personal" and "SME and Industrial" in internal management reporting and segment reporting. This segmentation takes accounting effect from this 2010 Annual Report, where the comparatives for 2009 have been restated.
Personal The Personal segment sells policies for individual households in Denmark.
The retention percentage, calculated as the number of people who were customers on both 31 December 2009 and 2010, was unchanged at 91%.
The claims trend declined 0.5pp to 75.7%. The gross claims trend in fire / theft insurance improved 1.2pp from last year. Run-off profits were DKK 173m in 2010 which had a 1.3 pp positive effect on the claims trend as compared to 2009. However, reinsurers' share improved 1.5pp particularly reflecting the cloudburst claims in August.
The combined ratio improved to 90.7% from 91.5%; excluding run-off profits it increased to 94.3% from 93.9%.
Expenses (142) (160) (587) (613) Net reinsurance (77) (67) (212) (217) Technical profit 86 88 416 154
The combined ratio increased to 96.7% in 2010 (2009: 90.9%); excluding run-off profits it increased to 97.5% (2009: 93.5%).
Life insurance Danish life insurance and pension fund market In 2010 the Danish life and pension fund market was characterised by: • Decline in overall payments into pension savings • Loss participation schemes previously introduced by all companies were practically removed due to the improved situation in the financial markets
Profit on life insurance activities comprises primarily the profits generated by Life I and Life V. These profits were calculated in accordance with the stated policy on the calculation of profit for the life insurance companies, see Policy for the calculation of profit on → Business → Life insurance.
Customers are divided primarily between the two companies, Life I and Life V, on the basis of when the policies are written: those written since 1 July 1994 with guaranteed pension benefits of 2.5% and 1.5% are placed in Life I which is also the company for new withprofits customers. Unit-linked schemes are written by Topdanmark Link. Schemes written before 1 July 1994 with guaranteed pension benefits of 4.5% have been placed in Life V.
The investment return on shareholders' equity was 4.9% in Life I and 6.3% in Life V in 2010. The investment return on shareholders' equity deviates from that on customers' funds due to shareholders' equity not being allocated any return on those equities and instruments used to hedge the guaranteed benefits.
Investment contracts with regular payments, where payments are taken directly to the balance sheet, declined 31.4% to DKK 53m in 2010 (2009: DKK 78m). Investment contracts with single payments declined 19.0% to DKK 69m in 2010 (2009: DKK 86m).
Overall premiums declined 4.1% to DKK 831m in Q4 while regular premiums declined 5.5% to DKK 642m.
Investment activities Topdanmark Group excluding life insurance The investment return in the Topdanmark Group excluding life insurance was DKK 879m in 2010 including revaluation of provisions and income from associated companies but before the transfer to the technical result (2009: DKK 1,192m).
The exposure in foreign equities has been adjusted by the use of derivatives. The return percentages are calculated as the ratio between the return on financial instruments and the size of the exposure of the underlying asset. The return on government and mortgage bonds and assets related to I/A (illness/accident) includes revaluations of claims provisions.
The Group's investments have no significant concentration of credit risk except for AAA-rated Danish mortgage bonds which are considered to be particularly safe assets according to the Danish Financial Business Act.
Since 31 October 2008 Danish insurance companies and pension funds have calculated the value of provisions by using a discount rate representing the combined weighting of the swap rate and the option-adjusted Danish mortgage credit rate. The portfolio is dominated by high-quality mortgage bonds, which ensures a significant degree of consistency between the investment return and the discount rate.
Credit bonds with a rating lower than BBB (DKK 340m) comprise senior secured bank loans and high yield bonds, part of which are convertible, and subordinated bank capital issued by EU banks (tier 1: DKK 47m). Credit bonds with a rating of BBB and A (DKK 336m) are ordinary and convertible corporate bonds, annuity policies and subordinated bank capital issued by EU banks (tier 1: DKK 25m, tier 2: DKK 21m). Credit bonds with a rating higher than A (DKK 23m) are corporate bonds.
The underlying assets of CDOs with a rating lower than AA (DKK 628m) are mostly leveraged loans (DKK 531m) while the remainder are primarily CDOs with investment grade investments as the underlying assets. The underlying assets in CDOs with ratings of AA and AAA (DKK 91m) comprise leveraged loans (DKK 87m) and investment grade bonds etc. (DKK 4m).
The table shows the Group's CDO return at 31 December 2010 and the market value of the portfolios at the same date. The maturity of the CDO investments is dependent on any changes in the payments made by the underlying assets which in turn are dependent on changes in the general economy and, therefore, it is not possible to outline the distribution of maturity for the portfolio.
The assets are only valued by means of the mark-tomodel method if it is specifically considered that there continues to be no strong market pricing for the specific asset. In line with the improved market of credits since the beginning of H2 2009, a significant proportion of those
At 31 December 2010 in the Group excluding life insurance, assets valued at mark-to-model were DKK 160m (2009: DKK 554m) much of which is expected to be recorded at a publicly available value by the end of 2011.
Topdanmark Kapitalforvaltning manages the Group's financial assets and liabilities and its result is dependent on the investment performance.
Taxation The tax charge was DKK 338m on a pre-tax profit of DKK 1,506m. The actual tax rate of 22.5% deviates from the official tax rate of 25% mainly due to a set-off of capital gains against non-capitalised losses on equities carried forward.
As described in, inter alia, the 2009 Annual Report, following a change in the Group's taxable income for 2001, the Danish tax authority's (SKAT) interpretation of Section 13 of the Danish Corporation Tax Act was different from that which Topdanmark had used. The case was heard by the Danish National Tax Tribunal and on 17 June 2010 the case was decided in favour of Topdanmark. SKAT accepted the decision.
Financial goals Topdanmark's operational goals in non-life insurance: Premium growth • To ensure that growth in gross premiums earned is 1pp higher than ordinary indexation, adjusted for any price changes
Expense ratio • To ensure that the expense ratio is lower than the general Danish market level
Earnings • To ensure a profit margin of 10% which, given the current level of interest rates, corresponds to a combined ratio of around 91% excluding run-off profits / losses
Prospects for 2011 Expected trend in Danish non-life insurance market It is expected that in 2011 the Danish non-life insurance market will be characterised by: • Improved macroeconomic conditions • Positive result of price increases • 3% growth in premiums • Reduced claims inflation • Higher interest rates • More disciplined market • Increase in expenses on payroll tax and terror pool and in motor insurance • Prospects of improved combined ratio
It is expected that GNP growth in the Danish economy will be around 2% in 2011. Therefore the negative effect of the recession on premiums earned is expected to decrease in 2011.
Most insurance companies in the Danish market have given notice of price increases taking effect in 2010 and 2011. These increases differ from company to company but are primarily on house, contents and SME policies. The estimated effect on gross premiums earned is around 1pp.
In recent years claims inflation has been higher than automatic indexation due to, among other factors, an increase in theft and fire claims and significant increases in wages and the cost of materials. It is estimated that claims inflation will decline in 2011. For example, it is expected that the recession has enabled insurance companies to negotiate better conditions for wages and the cost of materials. Moreover the police have allocated more resources to fight so-called home crimes. It is therefore estimated that claims inflation will fall to a level below automatic indexation in 2011.
More disciplined competition is expected in the Danish market. Following Gjensidige's purchase of Nykredit Forsikring and the subsequent stock market floatation in 2010, the six largest non-life insurance companies on the Danish market are listed on the stock exchange or owned by a listed company. These six companies represent a total market share of 75%. Furthermore it is expected that the increased capital requirements of Solvency II will increase the focus on profitability.
However, including the positive effects such as an assumed normal level of weather-related claims, fewer recession-related claims (fire and theft claims), the effect of already notified price increases and the relatively disciplined competitive environment, it is expected that overall the companies' combined ratios will improve from the level in 2010. Any increase in interest rates will further help this.
Expected trend in Danish life insurance and pension fund market It is expected that in 2011 the Danish life insurance and pension fund market will be characterised by: • Contribution order taking effect • Termination of insurance brokers' opportunity to receive commission on small schemes • Rules for publication of indirect costs • Overall payments into pension savings back to 2009 level • Continued major regulatory measures • New capitalisation rate of 1%
The old contribution order treated the elements of interest rates, risk and cost result as one single item in the "insurance technical result before bonus". The new contribution order requires that the "insurance technical result before bonus" be distributed on the basis of the Company's contribution groups and consequently transferred to the policies within those groups. In the event of losses in one of the groups, these losses must be transferred to a shadow account which can only be recognised as income when that group returns to being in profit.
Topdanmark's profit forecast model for 2011 Traditionally Topdanmark does not publish actual profit forecasts but the expected level of results if a number of assumptions of the return in the financial markets are met. As the return in the financial markets changes on a daily basis, Topdanmark's profit forecast model will already deviate from actual expectations by the time it is published. Therefore set out in Risk scenarios is additional information on how changes in the assumptions underlying the profit forecast model will affect the results.
investment return for the rest of the year but solely on a long-term standard assumption of the return.
The premium growth for 2011 was based on the following assumptions: • Automatic price indexation in the personal and SME
markets will be 2.6%. Around 70% of Topdanmark's gross premiums will be affected by this indexation, giving a net effect of just under 2%
• Topdanmark will implement price increases, besides automatic indexation, of DKK 99m corresponding to a 1.1pp growth in premiums. However as a consequence of these price increases, some customers are expected to leave, giving an assumed net improvement in premiums of 0.8pp
• During the year there will be a positive impact from those measures implemented to improve growth
• Topdanmark has sold the workers' compensation insurance portfolio of Nykredit Arbejdsskadeforsikring, to Gjensidige with effect from 1 January 2011, representing a 0.5pp adverse effect on premiums earned
• One large customer has given notice to terminate their relationship with the life insurance company which will also reduce the portfolio of illness / accident policies in non-life insurance, having a 0.5pp adverse effect on premiums
• The net adjustment of previous years' premiums will be around zero
• Increase in payroll tax, increase in expenses on the terror pool and increase in motor claims due to changed rules for the vehicle registration fee on written-off cars (0.5pp effect on the combined ratio)
• Weather-related expenses of DKK 170m • No run-off profit / losses in 2011 in accordance with usual practice • Increase in the expense ratio to close to 16% from 15.4% due to increases in payroll tax, the costs of the Solvency II project and selling expenses (0.4pp effect on the combined ratio)
DKK 100m of the assumed normal annual weatherrelated expenses of DKK 170m relates to storm claims while DKK 70m relates to lightning and cloudbursts. Typically the storm season is from November into February while cloudburst claims are primarily in June, July and August. In its future forecast models Topdanmark will assume the following distribution on each quarter of normal annual weather-related claims: • Q1: DKK 50m • Q2: DKK 25m • Q3: DKK 45m • Q4: DKK 50m
In this light the assumed combined ratio is being revised from around 92% to around 91%. Overall the pre-tax result of non-life insurance is assumed to be DKK 1,140-1,250m.
As a result of the new contribution order, unallocated means (collective bonus potential) in Life I and Life V were allocated to the contribution groups (interest rate, risk and cost groups) with effect on 1 January 2011. In accordance with notification made to the DFSA, the
Announcement No. 05/2011 from Topdanmark A/S Page 21 of 107 contribution allocation, based on a calculation period of five years, was reasonable. As all the groups made either a profit or break-even following the allocation, shareholders' equity needed not finance any losses via shadow accounts in the opening balance sheet at 1 January 2011.
Parent company etc. The profit forecast model for the parent company including subsidiaries outside of the insurance group is expected to show a profit of DKK 10-20m. The calculation of the risk allowance has been changed to be calculated for each contribution group on the basis of the assumed risk in each group. The size of the risk allowance has been increased by 0.1pp because the split into contribution groups increases the risk of some of the profit not being recognised as income. As a consequence, the assumptions for 2011 include that DKK 25m of the potential profit cannot be recognised as income in the financial year.
Taxation Given a corporation tax rate of 25%, the tax charge is expected to be DKK 330-380m.
It is important to note that any recognition as income of the risk allowance will not be finally considered until the finalisation of the 2011 Annual Report. The profit forecast model is highly sensitive to fluctuations in the investment return of Life I during the remainder of 2011.
Non-life insurance - Investment return after transfer to technical result etc. 465 320 – 380 Profit on non-life insurance 1,092 1,140 – 1,250
Share buy-back In 2011 it is intended to buy back own shares of DKK
In the Q1-Q3 interim report for 2010 it was announced that the share buy-back for the year had been increased by DKK 100m to DKK 1,000m.
The share buy-back programme for 2011 represents a buy-back yield of 11.8% (calculated on the basis of the price of Topdanmark's shares on 25 February 2011).
Topdanmark's share capital amounts to 15,526,750 shares on 8 March 2011 of which 649,371 shares are held by Topdanmark to cover Management's share option scheme. Furthermore, at present Topdanmark holds 840,654 of own shares to be written down at the AGM on 12 April 2011. If before the AGM, contrary to expectation, no further shares to be written down are bought back, the number of voting shares will be 14,036,725 shares at 12 April.
Since 1998 when Topdanmark started buying back own shares, it has made decisions to cancel DKK 8.8bn of shares representing a 62.3% write-down of the share capital, with an average price of DKK 345 per share that has been written down.
In order to ensure strict control of the overall risk, the exposures are calculated as often as deemed necessary, i.e. daily, monthly or in a few cases more rarely according to the nature of the exposure.
The Board of Directors determines the overall risk policies and limits. The internal auditors report to the Board of Directors on, among other things, the observance of the risk policies and limits set within them.
Insurance risk Acceptance policy Topdanmark's acceptance policy is based on a desire to make a profit from both products and customers. Topdanmark varies the pricing of its products depending on the relevant risk criteria and the costs of administering those products.
Topdanmark continues to improve its administration systems to achieve more finely meshed data capture which in turn enables it to identify the claims trends at an earlier point in time and compile information on the constituent parts of the various types of claims. An example of this is the new claims system which was first
The claims organisation is implementing the Lean / Trim concept in several areas where it has already improved the time it takes to handle a claim, the quality of the claims handling and employee satisfaction.
Emergency plan Topdanmark has an emergency plan to ensure that prompt, correct and targeted action is taken on a major weather event such as storm, hurricane, cloudburst or flood. The emergency programme is on several levels which enables a proportional response depending on the size of the event. Topdanmark has appointed emergency helpers throughout the company whose claims handling knowledge is regularly kept up-to-date. Furthermore alert drills are held twice a year in order to prepare the employees and improve the emergency programme.
The provisioning risk represents mostly the ordinary uncertainty of calculation and claims inflation, i.e. an increase in the level of compensation due to the annual increase in compensation per policy being higher than the level of general indexation or due to a change in judicial practice / legislation.
In the event of a third or fourth storm in the same year there is cover up to DKK 807.5m with a retention of DKK 20m. Most of the cover of the third and fourth storm is dependent on it not having been hit previously by two individual storms each exceeding DKK 3.8bn.
Terror Until the end of 2001 reinsurance cover included terror. Since 11 September 2001 reinsurance companies have particularly focused on the cover of terrorist attacks. Generally, losses resulting from acts of terror are covered by reinsurance contracts with certain restrictions as to the size of cover and the number of terror attacks covered.
In personal lines Topdanmark's retention on known cumulative risk is DKK 15m for the first claim and / or event, DKK 5m for the second and DKK 15m for any third or subsequent risk. The retention is a maximum of DKK 25m in SME and industrial lines and on unknown cumulative risk it is a maximum of DKK 50m.
Industrial accident and disease Industrial accident insurance is a compulsory policy paid by employers by taking out workers' compensation policies with Danish insurance companies. In workers' compensation the reinsurance companies cover up to DKK 1bn of all claims with a retention of DKK 30m.
Interest rate risk Topdanmark's provisions for outstanding claims are recorded net of discount using the DFSA's current adjusted discounting rates. The resulting interest rate exposure is alleviated by investing in interest-bearing assets in order to reduce the overall interest rate exposure of the assets and liabilities to the desired level. When calculating the interest rate exposure the Group's debt is included on the same basis as the calculation of the assets.
Property risk Topdanmark is exposed to property risk from investments in properties rented out for business or private residence. The property risk is calculated as the loss arising if there was a 10% decline in the value of all properties.
Inflation risk Future inflation is implicitly included in a number of the models Topdanmark uses to calculate its provisions. An expected higher future inflation rate would generally be included in the provisions with a certain time delay while at the same time the result would be impacted by higher future indexation of premiums. Therefore a change in the expected future inflation rate would only have a marginal impact on the profit for the year. However, as a cautious estimate, provisions for outstanding claims, excluding workers' compensation and illness / accident claims would have to be increased by about DKK 35m if the expected future inflation rate rose by an annual 1%.
In order to reduce the risk of inflation within workers' compensation and illness / accident insurance Topdanmark has written inflation swap contracts and bought index-linked bonds hedging a significant proportion of the expected cash flows if the trend in real earnings remains stable. Consequently, any changes in the expected future inflation rate will have a relatively limited effect on the result from these lines of business.
In June 2010 Topdanmark Forsikring redeemed a subordinated loan of DKK 250m and issued a new subordinated loan of DKK 350m expiring in 2018, however, the loan may be terminated by Topdanmark Forsikring in 2015.
market loans will be repaid from the cash generated from operations.
Furthermore, the Group has a significant liquidity base of high-quality liquid bonds.
Risk of investments in the life insurance group The goal and risk profile for those customers who are saving in the life insurance companies is fundamentally different from the profile for Topdanmark's investment in the shareholders' equity of the life insurance group.
Bonus potential A proportion of the customers’ accumulated value comprises both collective and individual bonus potential. The collective bonus potential is an undistributed reserve acting as a buffer against fluctuations in the value of the customers’ share of assets and liabilities. At 31 December 2010 the collective bonus potential was DKK 117m in Life I and DKK 437m in Life V. If the adverse fluctuations exceed the value of the collective bonus potential, the individual bonus potential would be affected. Looking at it simply, the individual bonus potential is calculated as the difference between the customer’s savings and the market value of the accrued commitment earned by the customers at the time of the calculation. If the market value of the customers’ share of the assets is lower than their savings, the individual bonus potential will be reduced. Thus the individual bonus potential also acts as a buffer against fluctuations in the value of the customers’ share of assets and liabilities. A significant proportion of the individual bonus potential in Life I can be used before its shareholders' equity would be affected. In Life V the adverse fluctuations exceeding the value of the collective bonus potential will be partially covered by a reduction in the individual bonus potential. The remainder will be covered by shareholders’ equity. As the total individual bonus potential was DKK 4,132m in Life I and DKK 128m in Life V at 31 December 2010, together they represent considerable protection of shareholders’ equity.
On 6 April 2010 the DFSA issued a new contribution order taking effect on 1 January 2011. As a result of the new order, from this date all insurance policies are to be split into interest rate, risk and cost groups of homogeneous characteristics. The interval between the interest rate groups must not exceed 1 pp. Accordingly, each policy will belong to one interest rate group, one / more risk groups and one cost group.
Topdanmark already changed its bonus rules in 1998 with the effect that any bonus added to the individual policy would be included to cover the overall pension benefits until expiry. Previously the bonus was used for an annual improvement of the guaranteed pension benefits.
Risk of increase in life expectancy Topdanmark's best estimate of the rate of mortality used for the calculation of the life insurance provisions is the Company’s assessment of the existing actual rate of
On 9 December 2010 the DFSA published a benchmark for assumptions for life expectancy which, as a general rule, are to be used by the life insurance and pension fund companies in their provisioning. Topdanmark has previously strengthened its assumptions for life expectancy and comfortably meets the requirements of the DFSA.
Credit risk Credit risk is the risk of losses caused by one or more counter-parties' full or partial breach of their payment obligations.
Topdanmark is exposed to credit risk in both its insurance and investment business. Within insurance the reinsurance companies' ability to pay is the most important risk factor. Topdanmark minimises this risk by spreading and primarily buying reinsurance cover from reinsurance companies with a minimum rating of A-. Accordingly almost all of its storm cover has been placed with such reinsurance companies.
Topdanmark's investment risk is the inability of bond, loan or financial contract counter-parties to meet their obligations. To limit the risk on bond and loan debtors most of the investments are made in bonds of high credit rating and the remaining portfolio is well diversified both geographically and with regard to the type of debtor - and therefore the exposure to the concentration of risks is insignificant. To limit the counter-party risk of financial contracts the choice of counter-parties is restrictive and security is required when the value of the financial contracts exceeds the predetermined limits. The size of the limits depends on the counter-party's credit rating and the term of the contract.
The return on the assets is allocated periodically to the investors according to their position in the subordination order, the so-called "waterfall". The Articles of Association of the CDO provide a set of rules and tests on how far down in the subordination order the return will be allocated. If all the tests have been met, the return will be allocated to all the tranches.
Topdanmark’s IT security policy is reviewed once a year by the Board of Management and accepted by the Board of Directors.
In the column "Overall effect on Group results" and the two following columns it is assumed that the bonus reserves and the individual bonus potential in the life insurance group could offset adverse fluctuations at the levels described as the overall collective bonus potential was DKK 554m (2009: DKK 184m) and the individual bonus potential DKK 4,260m at 31 December 2010.
If all the events of the table occurred at the same time, the losses would to a great extent be covered by the collective and individual bonus potential. The overall effect for Topdanmark would be a loss of DKK 592.0m (2009: DKK 525.4m) representing 12.1% (2009: 11.8%) of the parent company's shareholders' equity.
Assuming a 1pp increase in interest rates from one day to the next and unchanged inflation, the first year's effect of the increase in interest rates is illustrated as follows:
Excess return on interest-bearing assets 30 1.2 percentage point decline in loss ratio 82
Solvency Besides the European solvency rules, Danish insurance companies are subject to a number of Danish rules. For 2010 they were all required to report three solvency calculations to the DFSA: • Individual solvency requirement • Current European solvency rules - Solvency I • Traffic light rule
The traffic light rule is a Danish scenario calculation which demonstrates for example, to be in the green light, a company should have the capital resources to withstand a 12% decline in equity prices simultaneous with a 0.7% adverse change in interest rates and an 8% decline in property prices. The traffic light calculation was changed in October 2008 as the yellow light was suspended. At the end of 2010 all of Topdanmark's insurance companies were in the green light.
The DFSA's guidance on individual solvency requirement prescribes no specific methods to be used to calculate the risk or capital. Companies may choose their own calculation methods but are to address all significant risks.
In its H1 2010 and Q1-Q3 2010 interim reports Topdanmark said that it intended to accumulate solvency capital of DKK 4,500m by the end of 2012 (before allocating solvency capital for growth). The necessary solvency capital is assumed to comprise shareholders' equity (DKK 3,850m), hybrid capital (DKK 400m) and subordinated loan capital (DKK 250m), see www.topdanmark.com → Corp. Gov. → Value creation → Capital model. It also said that if the capital requirement was higher than expected, the difference would be covered by issuing supplementary loan capital. In June 2010 Topdanmark redeemed a subordinated loan of DKK
Topdanmark has previously estimated that the solvency capital requirement will increase by around DKK 1bn if its internal model to calculate the non-life insurance risk is not approved but instead it must use the standard model. On the basis of the QIS5 calculations Topdanmark believes that the capital requirement will only increase DKK 600-800m if the capital requirement is calculated using the standard model. Topdanmark continues to expect that its internal model will be approved but considers it right to increase the existing safety margin of DKK 100m in case expectations are not met. Therefore in order to ensure sufficient solvency capital in this situation, Topdanmark intends to issue additional supplementary loan capital by 2013.
It is expected that the Solvency II principles of the effect of risk management and risk control on the size of the solvency capital requirement will be similar to those of individual solvency requirement. These principles aim to promote good risk management and a high degree of risk control as the requirements on the size of the solvency capital increase in line with bad risk management and reduced risk control. Topdanmark's current spread of risk, risk management, risk control and risk measurement already provide a basis for a relatively low solvency under individual solvency requirements. Therefore Topdanmark feels well prepared to meet the expected requirement of Solvency II in 2013.
The EU rules on Solvency II have been divided into three levels. Level 1 is a directive which was adopted in 2009. The level 2 regulations to be adopted by the EU by the end of 2011 are available as exposure drafts to which a number of changes are expected. The final version of the level 3 regulations as guidelines is expected in the first half of 2012 implying that the complete rules will not be available until during the first half of that year.
Capital model Generally Topdanmark believes that its capital base (shareholders' equity or substitutes thereof such as hybrid capital or subordinated loans) is suitable for protection against fluctuations in the result on ordinary operations. However, the price of this type of capital is so high that the capital base is unsuitable for covering the risk of rarely occurring isolated events, in which case this type of risk should be transferred to other risk bearers by using reinsurance or derivatives.
reducing the danger of sharp falls in equity markets and also in instruments protecting the life insurance group against any adverse consequences of marked reductions in interest rates, see "Risk management".
Taking these matters into account Topdanmark wishes to pursue a policy of keeping its shareholders' equity at a relatively low level and pay out to shareholders any amounts in excess of the conservatively estimated shareholders' equity necessary to support the underlying business.
The working plans adopted for the audit committees include: • Monitoring of the process of accounts preparation including regular checks and assessment of annual and interim reports, schedules for closing of interim accounts, the organisation of and abilities within the accounting function as well as material accounting policies and accounting estimates
Furthermore, the Company has internal auditors who refer and report to the Board of Directors and, in accordance with an audit plan adopted by the Board of Directors, randomly select and audit certain routines and internal controls in significant and high risk areas which include the Annual Report and preparation of the accounts.
Control activities The control activities are based on the risk assessment. They are intended to ensure that the policies, manuals, procedures etc. decided by the Boards of Directors and Management are observed and errors and faults are prevented / found and corrected in time.
The Board of Management and Group Finance hold quarterly forecast meetings with each segment and business sector to review developments in their portfolios, the results of the past period and the forecast for the year.
Shareholders who are not associated with the Company by their employment or who are not employed by a competing company are eligible for election to the Board of Directors by shareholders in general meeting.
More than half of the Board members elected by the shareholders in general meeting meet the definition of independence set out by the Committee on Corporate Governance.
The Board of Directors has elected Michael Pram Rasmussen, Chairman of the Board, Anders Knutsen, Deputy Chairman of the Board and Annette Sadolin, Board member, to be members of the audit committee. The Board of Directors has elected Michael Pram Rasmussen to be chairman of the audit committee.
As CEO of Topdanmark until 2006 Michael Pram Rasmussen is not considered to be independent whereas both Anders Knutsen and Annette Sadolin meet all the criteria of independence set out in EU recommendation 2005/161/EC and the "Recommendations for Corporate Governance" of April 2010 by the Committee on Corporate Governance.
• Annette Sadolin graduated as a lawyer and she too has experience of the preparation and presentation of accounts from directorships in a number of Danish and foreign companies, many of which are listed. For
Remuneration Committee In accordance with the new provisions of the Danish Financial Business Act, the Board of Directors will set up a remuneration committee at Topdanmark's annual general meeting in 2011.
On 8 April 2010 the Committee on Corporate Governance published new recommendations for Corporate Governance in Denmark. They are available to the public on the Committee's website www.corporategovernance.dk.
In accordance with Clause 131 of the executive order on financial reporting for insurance companies and lateral pension funds, Topdanmark is liable to outline in its annual report its approach to the recommendations. The outline should follow the "comply-or-explain" principle which has been decided at EU level and follows from Provision 4.3 of Rules for issuers of shares issued by Nasdaq OMX Copenhagen.
The Board of Directors believes that Topdanmark meets all the recommendations which are important and relevant to a company like Topdanmark.
However, Topdanmark does not fully meet the following recommendations: • The Committee recommends that the annual report contain the following information about the members of the supreme governing body: • "… The number of shares, options, warrants, etc. that the member holds in the company and its consolidated companies and any changes in such holdings during the financial year"
• The Committee recommends that the following be taken into account in composing the audit committee: • "The chairman of the supreme governing body should not be chairman of the audit committee. …"
In spite of this recommendation Topdanmark's Board of Directors has re-elected its chairman Michael Pram Rasmussen to be chairman of the audit committee. The Board of Directors finds it natural and appropriate that the Chairman of the Board is responsible for the planning and formal moderation of the meetings of also the board committee in order to ensure, among other things, consistency with the Board work.
Topdanmark sees no reason why the Chairman of the Board should not be chairman of the audit committee and it requires, and has unsuccessfully called for, a reason for this provision to be included in" Recommendations on Corporate Governance, April 2010".
• The Committee recommends that the supreme governing body establish a nomination committee with at least the following preparatory tasks: • Describe the qualifications required in the two governing bodies and for a given position, state the expected time commitment for a position and evaluate the balance of skills, knowledge and experience available in the two governing bodies.
• Consider proposals submitted by relevant persons, including shareholders and members of the governing bodies, for candidates for executive positions.
• Identify and recommend to the supreme governing body candidates for the governing bodies.
Topdanmark's governing bodies, to hold a given position, the estimated time commitment for a position and skills, knowledge and experience available in Topdanmark's governing bodies.
Information on the remuneration of each individual member of the Board of Management is confidential. Topdanmark believes that the market will receive no further relevant information by publishing this information at an individual level. According to the Danish Financial Business Act, from the 2011 Annual Report Topdanmark will have to disclose information on the remuneration of the Board of Directors and the Board of Management at an individual level. Topdanmark will of course observe the relevant disclosure requirements.
Detailed information on Topdanmark's initiatives on Corporate Governance, including a review of its response to each item of the Committee on Corporate Governance's "Recommendations for Corporate Governance, April 2010" is available on www.topdanmark.com → Corp. Gov. → Legislation, Articles of Association and regulations. This information is regularly updated.
Remuneration structure Topdanmark's salary policy is intended to optimise longterm value creation at a group level. The General Meeting has adopted general guidelines for performance-related pay in accordance with the relevant provisions of the Danish Companies Act.
The share price reflects expected value creation potential at group level. This is one of the reasons why Topdanmark believes that share options rather than the receipt of individual bonuses encourages the executives to be more holistic in their approach to value creation.
Employee shares In order to ensure that all employees focus on value creating activities, Topdanmark issued employee shares in 2010. The allocation was effected simultaneous with a reduction in the recipient's cash salary.
In 2010 Topdanmark allocated 48,248 free employee shares and sold 35,550 employee shares at an advantageous price.
The cost of the issue of employee shares was DKK 46m in 2010 compensated by a corresponding reduction in salaries. The cost has been calculated at fair value according to the IFRS 2 on share-based payments.
Besides the revolving scheme above a further 20,225 share options have been granted for 2011, free of charge, to a number of other executives who are expected to make a special effort or otherwise contribute extraordinarily to value creation in the Company.
Severance pay The options granted for 2011 may not be exercised any earlier than subsequent to the publication of the 2013 Annual Report in 2014 and no later than subsequent to the publication of the 2015 Annual Report in 2016. In the intervening period the options can only be exercised up to three banking days subsequent to Topdanmark's publication of annual and interim reports.
The value was calculated using the Black and Scholes model assuming a share price of DKK 734.73, an interest rate corresponding to the zero coupon rate based on the swap curve on 30 December 2010, future annual volatility of 22%, corporation tax rate of 25% and a pattern of exercise similar to Topdanmark's previous granting of share options, see IFRS 2 on share-based payments.
CSR In 2008 the Danish Parliament adopted an Act requiring Denmark's 1,100 largest companies to explain their CSR policy, activities and results. The following is Topdanmark's statutory explanation of its corporate social responsibility. On www.topdanmark.com Topdanmark will also publish a voluntary report with a further description of the Group's CSR activities.
Background CSR is an element of Topdanmark's value creation model: it wishes to minimise non-life insurance risks which would otherwise have an adverse impact on its share price. Therefore, in 2010 it initiated a process intended to identify CSR-related risks and opportunities.
Employees Every second year Topdanmark conducts a job satisfaction survey among all its employees. The most recent was conducted in 2009 with a response rate of 96%. The result of the survey showed that job satisfaction in Topdanmark was above the average for the financial sector in Denmark.
Society Rather than only focusing on financial cover after the occurrence of an injury or damage, Topdanmark also considers loss prevention. For Topdanmark prevention is vital in its work on responsibility. Therefore a loss prevention committee was set up in 2010 intended to organise and prioritise this work during 2011.
Responsible procurement policy As part of joining UN Global Compact, in 2010 Topdanmark formulated a procurement policy aiming to ensure that suppliers and alliance partners observe widely recognised, international conventions, including the UN Global Compact. Topdanmark's specific requirements and expectations will be implemented when renewing contracts with new and existing alliance partners.
Environment As Topdanmark is an insurance company, the environmental impact on its daily operations is relatively modest. However, it endeavours to reduce its environmental footprint. Topdanmark considers both the environmental consequences of daily operations and the indirect effect of purchasing and making investments.
Resource consumption • Conference calls Since 2009 Topdanmark has reported its CO2 emission to the Carbon Disclosure Project. The project assigns points to the submitted responses and in 2009 Topdanmark scored 56 points which improved to 62 in 2010.
Topdanmark is followed by 19 analysts. Share analysts' recommendations of Topdanmark's shares are available on Topdanmark's investor site www.topdanmark.com → Shares → Analyses.
Annual General Meeting The AGM will be held on Tuesday 12 April 2011, 15:00 (CET) at: Radisson Blu Scandinavia Hotel Amager Boulevard 70 2300 Copenhagen S
All of Topdanmark's Board members elected by the AGM are up for election and re-election is proposed.
Independence: As Michael Pram Rasmussen has been member of Topdanmark's Board of Management within the most recent five years, he does not meet the definition of independence set out by the Committee on Corporate Governance
1983-1986: Production Manager, Alcatel Danmark A/S 1986-1991: Technical Manager, Bang & Olufsen A/S 1991-2001: CEO, Bang & Olufsen Holding A/S
Education: MSc (Economics) Offices held: Member of the Boards of Directors of: • Rossini Caviar A/S (Chairman) • Copenhagen Business School (Chairman) • Hersild & Heggov (Chairman) • Fritz Hansen A/S • Augustinus Fabrikker A/S • kk-group A/S • Pure Mobility A/S
Independence: Anders Knutsen meets the definition of independence set out by the Committee on Corporate Governance
Ole Døssing Christensen** DOB: 1952 Joined Topdanmark’s Board of Directors: 1999 Current position held: Certified Insurance Sales Representative
Charlotte Hougaard** DOB: 1964 Joined Topdanmark’s Board of Directors: 2007 Current position held: System developer
Jens Maaløe* DOB: 10 January 1955 Joined Topdanmark’s Board of Directors: 2003 Current position held: CEO of TERMA A/S Previous positions held: 1983-1990: Development / Sales Manager, NKT Elektronik A/S
1991-1993: CEO, NKT Dedicom A/S 1994-1995: Managing Director, DSC Communications A/S 1995-1997: Regional Manager, TeleDanmark A/S 1997-2002: CEO, NetTest Danmark as
Independence: Jens Maaløe meets the definition of independence set out by the Committee on Corporate Governance
Manager, Baltica Re / Baltica-Nordisk Re 1986-1989: Ass. General Manager, Baltica-Nordisk Re 1989-1993: Deputy General Manager, Employers Reinsurance International, Copenhagen 1993-1996: CEO, Employers Reinsurance International, Copenhagen 1996-2003: Member of Board of Management, GE Frankona Rückversicherungs-Aktiengesellschaft, Munich
Education: Law degree, University of Copenhagen Special law programme, Columbia University, NY, USA GE training programmes incl. Six Sigma GB Certificate
Søren Thorup Sørensen* DOB: 29 September 1965 Joined Topdanmark’s Board of Directors: 2010 Current position held: CEO of KIRKBI A/S Previous positions held: 1987-2006: KPMG Denmark and UK
Knud J. Vest* DOB 6 July 1946 Joined Topdanmark’s Board of Directors: 1994 Current position held: Fur breeder, Farmer Education: Farmer Offices held: Member of the Boards of Directors of: • EFBA (Chairman) • Danish Agro • Dansk Pelsdyravlerforening/Danske Pelsauktioner (Danish Fur Breeders Association / Danish Fur Auctions) Member of: • Landbrug og Fødevarers Virksomhedsbestyrelse (Company Board of Danish Agriculture and Food Council) • Landbrug og Fødevarers Fællesbestyrelse (Common Board of Danish Agriculture and Food Council)
Kim Bruhn-Petersen Group Managing Director of Topdanmark A/S DOB. 1956, joined Topdanmark in 1989, joined Topdanmark's Board of Management on 1 January 2006
Lars Thykier CFO of Topdanmark A/S DOB. 1955, joined Topdanmark in 1986, joined Topdanmark's Board of Management on 1 June 2009
Allocated investment return, net of reinsurance 1,358 191 (2,143) 2,443 2,233
Change in the life insurance provisions (1,926) (1,418) (1,223) (2,829) (900)
Change in the provisions for unit-linked contracts (250) (529) (61) (851) (968)
TECHNICAL PROFIT / (LOSS) ON LIFE INSURANCE 41 21 (41) 123 214 Profit / (loss) on investment activities after transfer to technical results 775 67 (1,765) 878 668
PROFIT / (LOSS) FOR THE YEAR 1,692 1,271 (189) 1,446 1,168
Acquisition costs (738) (748) Administrative expenses (534) (550) Reinsurance commission and share of profits 70 80 Total operating expenses, net of reinsurance (1,202) (1,218) TECHNICAL PROFIT ON NON-LIFE INSURANCE 4 905 660
Claims and benefits paid 6 (1,428) (2,866) Reinsurance cover received 6 4 Change in the provisions for claims and benefits 5 (9) Claims and benefits paid, net of reinsurance (1,417) (2,871)
Interest charges (224) (81) Expenses on investment business (45) (41) Total investment return 4,182 3,607
Profit per share, DKK 13 92.2 77.2 Profit per share, diluted DKK 13 91.7 77.0
Machinery and equipment 178 148 Owner-occupied properties 739 757 TOTAL TANGIBLE ASSETS 15 917 905
Loans guaranteed by mortgages 18 11 Other loans 2 2 Deposits with credit institutions 6,830 1,011
Reinsurers' share of the provisions for unearned premiums 20 73 65 Reinsurers' share of the life insurance provisions 32 36 Reinsurers' share of the provisions for claims and benefits 21 551 667 Total reinsurers' share of provisions 656 768
Amounts due from policyholders 407 417 Amounts due from insurance companies 193 184 Amounts due from associated companies 9 18 Other debtors 100 101 TOTAL DEBTORS 1,365 1,487
Accrued interest and rent 435 501 Other prepayments and accrued income 197 150 TOTAL PREPAYMENTS AND ACCRUED INCOME 632 651 TOTAL ASSETS 56,554 57,542
Guaranteed pension benefits 13,797 16,601 Bonus potential on future premiums 7,298 5,831 Bonus potential on paid-up benefits 4,696 4,260 Total life insurance provisions 25 25,791 26,692
Pensions and similar commitments 28 46 42 Deferred tax liabilities 22 249 94 Deferred tax on security funds 348 348 TOTAL LIABILITIES PROVIDED 643 485 DEPOSITS RECEIVED FROM REINSURERS 68 90
Gross premiums written 3,229 3,366 Claims and benefits (1,413) (2,891) Expenses paid (304) (282) Reinsurance ceded 23 19 Cash flow from life insurance 1,535 212
Payments made and received on investment contracts 132 37 Interest income and dividends etc. 2,395 2,065 Interest charges (317) (108) Pension return tax (121) 181 Corporation tax (259) (261) Other income and expenses (39) (28) Total cash flow from operations 4,256 3,003
Investment assets related to unit-linked contracts (1,116) (396) Balances with associated companies (184) (300)
Financing Shares bought back (376) (892) Share-based payments 105 94 Employee bonds 26 (0) Subordinated loan capital 0 98 Amounts due to credit institutions (1,216) (2,735)
Cash and cash equivalents at 1 January 9,001 7,089 Revaluation of cash and cash equivalents 14 (4) Cash and cash equivalents at 31 December 7,089 1,205
Cash and cash equivalents comprise: Liquid funds 259 194 Deposits with credit institutions 6,830 1,011
Total comprehensive income for the year 2 0 3 1,443 1,448
Share buy-back (376) (376) Sale of employee shares 26 26 Issue of share options 15 15 Exercise of share options / warrants 2 103 105 Pension return tax 1 1
Technical profit on non-life insurance 448 416 5 869 36 905
Technical profit on non-life insurance 470 154 3 626 34 660
Purchase of tangible and intangible assets 247 3 1 251 Results from associated companies 5 (16) 0 (11)
Purchase of tangible and intangible assets 173 3 1 177 Results from associated companies 8 52 0 59
Technical provisions, net of reinsurance, of DKK 1,577m (2009: DKK 1,369m) relating to illness / accident insurance, administered by life insurance, are included in non-life insurance. As Topdanmark Livsforsikring has not allocated assets specifically to illness / accident insurance, assets supporting these liabilities are included in life insurance.
Note 4. Technical result - non-life 2009 2010 2009 2010 2009 2010
Technical interest, net of reinsurance 12 7 13 7 10 6
Average value of claim (DKK '000) 9 10 27 30 12 13
Announcement No. 05/2011 from Topdanmark A/S Page 63 of 107 y
Run-off profits, net of reinsurance 39 27 214 204 Claims provisions, net of reinsurance 144 133 11,226 11,697 Number of claims incurred ('000) 97 112 415 422 Average value of claim (DKK '000) 4 3 16 16 Annual frequency of claims 166 193 111 115 The annual frequency of claims has been calculated as a per thousand value. The loss ratio and the combined ratio have been calculated before elimination of internal rent.
Claims payable on death 130 124 Claims payable on maturity 288 245 Pension and annuity payments 512 538
Guaranteed benefits 302 2,804 Bonus potential on future premiums 874 (1,468) Bonus potential on paid-up benefits 1,653 (436) Change in life insurance provisions 2,829 900
Rental income 300 279 Operating expenses from properties rented out (32) (35) Operating expenses from properties not rented out (2) (4) Gross profit 266 241 Administrative expenses (11) (11) Income from investment properties 255 229
Designated at fair value: Deposits with credit institutions 14 2 Investment assets related to unit-linked contracts: Unit trusts 148 113
Average number of shares ('000) 15,688 15,131 Diluting impact of options ('000) 81 28
Completed projects IT developm't under con2009 Goodwill software projects struction Total
Impairment and amortisation at 1 January (12) (99) (80) 0 (191)
The discounted value of future cash flows is compared with its carrying value. The future cash flows are based on three years' expected technical result and a terminal value of the personal segment, to which goodwill and development projects under constructions relate. The pre-tax discount rate used is 12% (2009: 12%) corresponding to 9% (2009: 9%) post-tax.
Note 18. Loans to associated companies Average effective interest rate 0.8% 0.3%
The return on the above assets and derivatives is allocated to customers.
Reimbursement of claims relating to this year (119) (98) Expected income relating to this year 333 421
Restriction on deductability 189 98 11 Restriction on deductible interest 43 0 0 Deferred pension return tax (116) (28) 0
Recognised as: Deferred tax assets 73 40 19 Deferred tax liabilities (162) (249) (94)
Non-capitalised balance of equity losses that can be carried forward 576 408
Share of loan included in capital base 241 Interest charges 13
Note 25. Life insurance provisions - continued Portfolios analysed by capitalisation rates Guaranteed future paid-up 2010 benefits premiums benefits
Net of reinsurance Provisions at 1 January 10,406 11,226 Claims paid relating to previous years (2,843) (2,852) Change in expected claims payments relating to previous years (214) (204) Claims paid relating to this year (3,086) (3,239) Expected claims payments relating to this year 6,223 6,281 Inflation swaps 107 (44) Discounting (annual amortisation) 364 300
Non-life insurance, net of reinsurance, at 31 December 11,226 11,697 Life insurance 86 95 Provisions for claims, net of reinsurance 11,312 11,792
Less paid incl. inflation swaps 3,239 4,444 4,750 4,886 4,610 4,609 4,458 4,289 4,430 4,028 43,743 Provisions before discounting
The table shows the historical development in the estimated final liability (the sum of claims payments and provisions) for each claims year from 2001. Significant proportions of the liabilities shown have been calculated without discounting which to a great extent eliminates changes in discounting rates and methods after the change to IFRS. However, workers' compensation and illness / accident administered by the life insurance business are included at discounted values.
The claims handling expenses for the claims years 2001-2003 have been included on an on-going basis at the amounts provided in the opening balance sheet at 1 January 2004 on the change to IFRS.
Retrospective provisions at 31 December 2,128 693 2,821 Provisions for unit-linked contracts 2009 2,128 693 2,821
Gross provisions at 1 January 2,128 693 2,821 Retrospective provisions at 1 January 2,128 693 2,821
Claims and benefits (253) (86) (338) Expense loading inclusive of expense bonus (32) (8) (39) Risk gain after addition of risk bonus 1 0 1 Premiums waived transferred to life insurance provisions (14) 0 (14) Retrospective provisions at 31 December 2,997 829 3,826 Provisions for unit-linked contracts 2010 2,997 829 3,826 The Group has 3,660 customers with investment contracts (2009: 3,136) The contracts written do not have guarantees.
Other pension commitments cover former senior executives and their widows. The provision has been calculated on the basis of G82 and subsequently strengthened.
Expenses by their nature: Commission - non-life insurance 257 249 Commission - life insurance 66 61 Staff costs (excl. commission) 1,456 1,555 Other staff costs 119 111 Premises costs 176 173 IT operations and maintenance 130 132 Impairment and amortisation 116 147 Other expenses 107 112 Total expenses 2,427 2,541 These expenses have been disclosed in: Non-life insurance: Acquisition costs 738 748 Administrative expenses 534 550 Claims paid (claims handling and assessment) 712 803
Social security costs 38 36 Payroll tax 129 137 Share options 11 12 Employee shares and employee bonds 62 45
Board of Management Salaries and emoluments 11 11 Employee shares and employee bonds 1 1 Share options 4 4
Share options Topdanmark's share option scheme is for its Board of Management and senior executives. The strike price has been fixed at 110% of the market price on 31 December the prior year. The options can be exercised 3 - 5 years subsequent to the granting.
The scheme is settled by shares (equity instruments). The table below is categorised by the option holders' current standing.
Average strike price at 31 December 2009 608 756 757 688
Per granting: Fair value of granting 2009 4 11 15 Fair value of granting 2010 4 12 16
Note 31. Auditors' fee Fee to the auditors elected by the annual general meeting Deloitte: Fee for statutory audit of the annual accounts 5 5 Fee for other assurance engagements 0 0 Fee for services, other than audit work 0 0
Loans and receivables at amortised cost Loans to associated companies 460 762 Amounts due from policyholders 407 417 Amounts due from insurance companies 193 184 Other debtors 100 101 Liquid funds 259 194
Valuation based on this scenario will lead to a loss of about DKK 14m in the Group excluding life insurance (in 2009 the sensitivity analysis was based on another method and therefore not directly comparable).
Bonds measured by reference to inputs not based on observable market data Portfolio at 1 January 3.2 1.6 Gains and losses (0.1) 0.3 Repayments and redemptions (0.1) (0.0) Transfers to another category (1.4) (1.3) Portfolio at 31 December 1.6 0.6 Gains and losses on bonds included in revaluations held at 31 December (0.2) 0.0
Financial liabilities payable after 5 years or more: Subordinated loan capital 403 404 Bond loans 26 0 Amounts due to credit institutions 6 6
Financial liabilities recorded at fair value Observable inputs Held for trading: Derivatives: Group excl. life 31 78 Life insurance 84 89 Total derivatives 115 167 Designated at fair value: Amounts due to credit institutions: Group excl. life 2,970 1,413 Life insurance 3,605 2,427 Total amounts due to credit institutions 6,575 3,840 Total financial liabilities recorded at fair value 6,690 4,007
Note 34. Settlement of assets and liabilities Except for tangible and intangible assets, investment properties, investments in associated companies and CDOs most other assets are expected to be settled within a year. See Management's Review on CDOs for details of the expected settlement of CDOs.
It is expected that the following significant liabilities will be settled 12 months or more after the balance sheet date: Subordinated loan capital 653 752 Provisions for unearned premiums 149 157 Guaranteed benefits 12,567 14,870 Bonus potential on future premiums 6,737 5,244 Bonus potential on paid-up benefits 4,334 3,830 Provisions for claims and benefits 8,435 9,334 Collective bonus potential 184 554 Provisions for unit-linked contracts 2,544 3,426 Deferred tax on security funds 348 348
Note 36. Shares analysed by industry and region(%) - life insurance Other North Other Other Not 2010 Denmark Europe America Japan Far East countries analysed Total
A risk allowance and share of the expense result relating to acquisition are only transferred to the shareholders' equity to the extent to which the amounts can be covered by the "insurance technical result" net of the investment return.
Event Effect on shareholders' equity 0.7-1.0 pp increase in interest rates (53) (86) 0.7-1.0 pp decline in interest rates 27 59 12% decline in equity prices (133) (140) 8% decline in property prices (100) (94) Exchange rate exposure (VaR 99.0%) (16) (13) Loss on counterparties of 8% (217) (197)
Event 0.7-1.0 pp increase in interest rates (58) (183) 1,072 (25) 0.7-1.0 pp decline in interest rates 57 174 (1,143) 0
Note 41. Number of shares Reconciliation of the number of shares ('000)
Note 42. Own shares Number of Nominal Percentage Bought shares value of share /sold '000 DKKm capital DKKm
Note 43. Credit risk Group 2009 excl. Life Life Group Financial assets measured at fair value: Loans guaranteed by mortgages and other loans 18 2 20 Deposits with credit institutions 2,333 4,497 6,830
Bonds provided as security for loans in accordance with standard repo-contracts for Danish mortgage and government bonds 6,006 3,065
Emoluments paid to the Boards of Directors and Management are disclosed in the note on staff costs.
The companies are also jointly liable for A-tax and payroll tax etc. and VAT chargeable to the jointly registered companies.
Topdanmark A/S Ballerup Holding Non-life: Topdanmark Forsikring A/S Ballerup Insurance Danske Forsikring A/S Ballerup Insurance TDP.0007 A/S Ballerup Property Topdanmark EDB A/S Ballerup Internal IT services Komplementarselskabet TDE.700 ApS Ballerup Investment E. & G. Business Holding A/S Ballerup Holding Topdanmark Holding S.A. Luxembourg Holding Risk & Insurance Services S.A. Luxembourg Administration TDLII.0087 A/S Ballerup Investment TDF.0141 ApS Ballerup Investment Life: Topdanmark Liv Holding A/S Ballerup Holding Topdanmark Livsforsikring A/S Ballerup Insurance Topdanmark Livsforsikring V A/S Ballerup Insurance Topdanmark Link Livsforsikring A/S Ballerup Insurance Topdanmark Livsforsikring II A/S Ballerup Insurance Topdanmark Livsforsikring III A/S Ballerup Insurance Nykredit Livsforsikring A/S Ballerup Insurance TDLII.0018 ApS Ballerup Holding Topdanmark Ejendom A/S Ballerup Property TDE.200 ApS Ballerup Property TDE.201 ApS Ballerup Property TDE.700 P/S Ballerup Property Other companies: Topdanmark Kapitalforvaltning A/S Ballerup Asset management Topdanmark Invest A/S Ballerup Investment Hotel Kongens Ege ApS Ballerup Property Topdanmark Ejendomsadministration A/S Ballerup Property TDLII.0132 ApS Ballerup Investment TD.0151 ApS Ballerup Investment TDL.0139 ApS Ballerup Investment web-postkassen.dk ApS Ballerup Consumer service
A number of property companies have merged during the financial year.
The DFSA has updated its Executive Order on financial reporting to take effect in 2011, giving the opportunity for full or partial implementation for 2010. In these accounts for 2010 the Topdanmark Group implemented Section 125.
Estimates and judgements are most material to the following sections of the accounts: • Provisions for outstanding claims • Fair value of financial instruments
For further details see Management’s review, Notes 32 on financial assets and 33 on financial liabilities.
General Consolidated accounts The consolidated accounts include the parent company Topdanmark and all of the companies that are controlled by the parent company. The parent company is considered to control the companies through direct or indirect ownership of more than 50% of the voting rights or when it can have or has an otherwise controlling influence.
Share-based payments Share options/warrants The Board of Management and Senior Management participate in a share option / warrant scheme. The fair value, on the date the option / warrant is granted less the subscription proceeds, is included in staff costs in the profit and loss account, with the relevant credit shown as a movement in shareholders' equity. The fair value is calculated using the Black & Scholes model and in accordance with IFRS 2 on share-based payments.
SME and Industrial includes policies for commercial and industrial businesses, sold by Topdanmark's sales organisation and its distribution partners, as well as captive-based policies.
Management reporting at this segment level comprises only reporting on the technical result but no reporting on assets and liabilities.
Operating expenses Technical operating expenses which relate, either directly or indirectly, to the acquisition and renewal of the portfolios are included in acquisition costs. New business commission is generally recorded in the profit and loss account on the date the insurance takes effect. Administrative expenses comprise other costs incurred in the administration of the portfolios which relate to the financial year and which have been accounted for on an accruals basis. Commission received from reinsurers has
Announcement No. 05/2011 from Topdanmark A/S Page 91 of 107 been accounted for on an accruals basis over the policies’ period of cover.
Taxation The tax charge for the year comprises the current corporation tax for the year and any changes in deferred tax. The share of the tax charge that relates to the profit for the year is included in the profit and loss account and the share that relates to shareholders' equity items is taken to shareholders' equity. The current tax for the year is calculated using the tax rates and rules applicable on 31 December. Topdanmark A/S is jointly taxed with all the Danish companies of the Group. As the management company of the joint taxation Topdanmark A/S settles all corporation tax payments with the tax authorities.
Finance leases for machinery and equipment are those leases where the Company substantially bears all the risks and benefits of ownership: the relevant assets are shown in the balance sheet at the lower of their fair value and the present value of future lease payments. Once recognised as a finance lease, the assets are treated as any other type of machinery and equipment. Machinery and equipment comprising IT equipment, cars and other equipment as well as improvements of rental properties are depreciated over their expected useful life of up to five years.
Provisions for outstanding claims in workers' compensation insurance comprise provisions for annuities and other provisions for outstanding claims. The assessment of the future annuities is based on the present annuities including the expected wage and salary indexation fixed as the forward inflation rates plus 1.16% p.a. and a rate of mortality corresponding to G82 with monthly age write-downs. Workers’ compensation claims are often paid as the capitalised value of an annuity. The capitalisation rate at the time of capitalisation is to be calculated as a moving average of the most recent five years’ interest rate on leading mortgage bonds less tax. The capitalisation rate is calculated as the forward swap rates plus 0.85% p.a. and less a deduction for tax corresponding to the base tax rate.
Shares in affiliated companies 6 5,126 5,567 Total investment in affiliated companies 5,126 5,567
Current tax assets 260 58 Deferred tax assets 7 1 1 Liquid funds 4 3 TOTAL OTHER ASSETS 265 62 TOTAL ASSETS 5,467 5,712
Staff costs 10 Solvency 11 Own shares 12 Related parties 13 Other note disclosures 14 Accountin g policies 15
Dividends received from subsidiaries (740) 740 0 Other movements in capital of subsidiaries (9) 14 5 Share buy-back (892) (892) Sale of employee shares 46 46 Issue of share options 16 16 Exercise of share options / warrants 2 92 94
Adjusted for the tax effect of: Non-deductible expenses / income not liable to tax 0 (6) Prior year adjustment 20 1
Cost at 31 December 5 5 Impairment and amortisation at 1 January (2) (1) Reversal of total impairment and amortisation of assets sold or withdrawn from operations during the year 1 0 Impairment and amortisation at 31 December (1) (1) Machinery and equipment 4 4
Topdanmark Forsikring A/S 4,877 5,308 Topdanmark Kapitalforvaltning A/S 51 52 TD.0151 ApS (Investment) 31 31 Topdanmark Invest A/S (investment) 167 175 web-postkassen.dk ApS (consumer service) (2) 0
Deferred tax assets 44 1 1 Changes relating to the year (43) (0)
DKK Share capital at 1 January 166,859,030 169,064,930 Increase in capital 2,205,900 1,804,600 Share capital 169,064,930 170,869,530 Each of Topdanmark's 17,086,953 (2009: 16,906,493) shares has a nominal value of DKK 10. No share enjoys any special rights. The shares are freely tradeable. Each share has one vote.
In 2007 Topdanmark A/S issued EUR 55m of hybrid core capital. This bullet loan has no final maturity date but if permitted by the DFSA, the debtor can give notice of termination as from 15 September 2017 at par. The loan carries a floating interest rate determined as EURIBOR 3 months + 1.90%, currently 2.926% (2009: 2.614%), and as from 15 September 2017 increased to EURIBOR 3 months + 2.90%.
Board of Directors Directors' fees for 2010 were DKK 4,275,000 (2009: DKK 3,781,000) of which DKK 225,000 (2009: 206,000) related to tasks in subsidiaries.
The scheme is settled by shares (equity instruments). The Group's overall option scheme is disclosed in the Group note on staff costs.
Note 11. Solvency Shareholders' equity 4,465 4,900 Deferred tax assets (1) (1) Hybrid core capital 403 404 Capital adequacy requirements for insurance companies – 50% (1,535) (1,549) Core capital 3,332 3,754 Capital adequacy requirements for insurance companies – 50% (1,535) (1,549) Capital base 1,797 2,205
Note 13. Related parties - continued Affiliated companies: Expenses on investment business 1 0 Expenses charged 23 23 Dividends received 829 740 Capital injection 7 9 Interest charged 5 2
Expenses on investmentment business are settled at arm's length. Other expenses are charged to cover costs incurred.
Note 14. Other disclosures The five-year summary in accordance with Section 91(a) of the Danish executive order on financial reports for insurance companies and lateral pension funds is included in financial highlights on page 3. Risk disclosures in accordance with Section 91(b) are included in Management's review for the Group in "Risk management".
There have been no other changes in accounting policies from those adopted in the 2009 Annual Report.
We have today presented the Annual Report for 1 January to 31 December 2010 for Topdanmark A/S.
The Annual Report is recommended to the Annual General Meeting for adoption.
Michael Pram Rasmussen Anders Knutsen Ole Døssing Christensen (Chairman) (Deputy Chairman)
Internal auditors' report We have audited the consolidated accounts and the annual accounts for Topdanmark A/S for the financial year 1 January to 31 December 2010, which comprises the profit and loss account, the balance sheet, the movements in shareholders’ equity and the notes to the accounts, including accounting policies, as well as Management’s review for both the Group and the Parent and the consolidated statement of comprehensive income and cash flow for the Group. The consolidated accounts have been prepared in accordance with International Financial Reporting Standards as adopted by the EU, and the Parent’s annual accounts and Management’s review have been prepared in accordance with the Danish Financial Business Act. In addition, the consolidated accounts and the annual accounts have been prepared in accordance with additional Danish disclosure requirements for listed financial services companies.
Basis of opinion We have conducted our audit on the basis of the executive order issued by the Danish Financial Supervisory Authority on an audit in financial services companies etc. and financial services groups and in accordance with Danish and international auditing standards. Those standards require that we plan and perform the audit to obtain a high degree of assurance whether the consolidated accounts, the annual accounts and Management’s review are free from material misstatement. We have participated in the audit of the material and risky areas.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated accounts, the annual accounts and Management’s review. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated accounts, the annual accounts and Management’s review, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation and fair presentation of the consolidated accounts and the annual accounts and the preparation of a Management’s review which gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal controls. An audit also includes evaluating the appropriateness of the accounting policies chosen by and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the consolidated accounts, the annual accounts and Management’s review.
Opinion In our opinion, the consolidated accounts give a true and fair view of the Group’s assets, liabilities and financial position at 31 December 2010 and of its financial performance and its cash flows for the financial year 1 January to 31 December 2010 in accordance with International Financial Reporting Standards as adopted by the EU and additional Danish disclosure requirements for listed financial services companies.
Furthermore, in our opinion, the Management’s review gives a true and fair view in accordance with the Danish Financial Business Act.
Management’s responsibility for the consolidated accounts, the annual accounts and the Management’s review Management is responsible for the preparation and fair presentation of the consolidated accounts and the annual accounts in accordance with International Financial Reporting Standards as adopted by the EU in respect of the consolidated accounts, in accordance with the Danish Financial Business Act in respect of the Parent’s accounts, and additional Danish disclosure requirements for listed financial services companies, and Management’s review which gives a true and fair view in accordance with the Danish Financial Business Act. This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation and presentation of the consolidated accounts, the annual accounts and Management’s review that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide basis for our audit opinion.
In addition, in our opinion, the consolidated accounts give a true and fair view of the Parent’s assets, liabilities and financial position at 31 December 2010 and of its financial performance for the financial year 1 January to 31 December 2010 in accordance with the Danish Financial Business Act and additional Danish disclosure requirements for listed nancial services companies. fi
Furthermore, in our opinion, the Management’s review gives a true and fair view in accordance with the Danish Financial usiness Act. B