Storebrand Kapitalforvaltning AS Norge, Swedish branch office Kungsgatan 12-14, plan 7 P O Box 5541 S-114 85 Stockholm Sweden www.storebrand.se
April • The Annual General Meeting passes resolution to pay dividend and write down capital through cancellation of own shares.
December • Storebrand sells its 50% stake in Danish non-life insurance company Fair Forsikring to Gjensidige Forsikring. The transaction will contribute NOK 40 million to group profit before tax.
Storebrand can trace its history back to 1767. The group has offered occupational pensions since 1917, some 50 years before the Norwegian state pension scheme was established.
Retail market customers 59,000 - of which customers with both accounts and loans 17,600
Storebrand Livsforsikring Sverige Swedish branch office Kungsgatan 12-14, level 7 P O Box 5541 S-114 85 Stockholm Sweden www.storebrand.se
May •Storebrand bank introduces free banking • Storebrand offers all shareholders owning less than 200 shares (one round lot) to sell their shares or increase holding to 200 shares without incurring transaction costs.
The Storebrand group is a leading player in the markets for long-term savings and life insurance. The group’s business areas are life insurance, asset management and banking, representing a comprehensive product range for private individuals, companies, municipalities and independent public sector entities. Storebrand’s objective is to be the leading and most respected institution in the Norwegian market for long-term savings and life insurance.
CONTENT 56 Accounts Storebrand Group 59 – Cash flow analysis 60 – Contents Notes 61 – Accounting principles 2005 67 – Notes Storebrand Group 88 Accounts Storebrand ASA 90 – Cash flow analysis 91 – Contents Notes 92 – Accounting principles 2005 94 – Notes Storebrand ASA
Our plans for Storebrand’s development will make considerable demands on our organisation. We are therefore very dependent on ensuring that our employees enjoy their work and have the experience and skills needed to meet our customers’ needs. Through management development programs and even greater emphasis on training, we will continue to recruit, develop and retain the right people for our business. Our expertise and willingness to learn is the key to Storebrand’s future success.
Idar Kreutzer, Group Chief Executive Officer 2005 was a good year for Storebrand’s customers and shareholders. The group’s financial condition strengthened, and a strong inflow of new customers confirmed
No. of employees (full time equivalents) 1 327 1 224 1 263 1 337 1 473
Figures for 2001 – 2003 are historic NGAAP figures, while the figures for 2004 and 2005 are prepared in accordance with IFRS.
Key figures per share Average number of ordinary shares (000) 258 576 272 933 277 927 277 715 277 554 Earnings per ordinary share *) 5.41 8.53 2.67 –3.73 –4.15 Dividend per ordinary share (NOK) 4.00 7.00 0.80 *) Calculation is based on profit for the year adjusted for the year’s legally required post-tax allocations to security reserves etc. for non-life insurance.
Strong starting point. Storebrand starts 2006 with a strong position in occupational pensions. In terms of pension assets managed, Storebrand has a market share of around 40% for defined contribution and defined benefit occupational pensions
Norsk Kundebarometer survey of customer satisfaction and customer loyalty. This independent survey shows that, relative to competitors, Storebrand’s customers are particularly well satisfied with financial return.
A key element of pension products is the long-term management of pension assets. Storebrand Investments (100% owned by
Storebrand Life Insurance has been a specialist in occupational pensions for many generations. Norske Folk, a company that later became part of Storebrand, first launched group pension insurance products in Norway in 1917 – some 50 years before the Norwegian national social security scheme was established. In the corporate market, 2005 was one of the best years for sales of occupational pensions products since their introduction 79 years ago.
Customer-adapted solutions, good customer service and a commitment to the quality of its products and asset management are important reasons for Storebrand’s success in 2005.
Financial markets have fluctuated widely since 2001, with sharp falls in share prices for the first two years followed by stock market upturn and sizeable interest rate cuts. Companies that offer defined benefit pensions have also had to adapt to new rules for how pension benefit is accrued (linear accrual) and new accounting rules, increasing the proportion of total pension costs recognised earlier in an employee ’s working life and making annual pension costs more volatile. Companies and employees’ need for pension arrangements better suited to today’s labour market, together with the need for greater financial predictability has led many larger companies to close their defined benefit schemes and replace them with defined contribution arrangements.
Companies setting up pension schemes for the first time mainly choose the defined contribution alternative, and this trend looks set to continue. All
Norwegian companies with two employees or more are now required to set up an occupational pension scheme by the close of 2006. This means that in terms of the number of companies with pension schemes, the occupational pensions market is set to change from a market dominated by defined benefit schemes to a market dominated by defined contribution schemes. However, in terms of the value of accumulated pension assets, defined benefit schemes will continue to dominate for many years to come.
LISHES A WHITE PAPER ON PENSION REFORM BASED ON THE RECOMMENDA-
Folkepensjon product. In addition, Storebrand has significantly strengthened its competitive position through agreements with trade associations and external distributors. By the close of 2005, Storebrand had signed agreements with 20 trade associations representing over 22,000 companies and 440,000 employees. These agreements pave the way for effective distribution of Storebrand Folkepensjon, and serve to strengthen the company’s competitive position. Storebrand has also signed distribution agreements for occupational pension products with a number of savings banks and commercial banks.
The introduction of mandatory employers’ pensions has caused a sharp increase in the number of suppliers of pension products, and there is intense competition for this new business. Many companies had not made decision on pension supplier at the start of 2006. Although the final deadline for establishing a pension scheme is the end of 2006, contributions must start with effect from 1 July. The level of activity in this market is therefore expected to increase as the summer approaches.
From 2007, the occupational pensions market will largely be a transfer market, as various suppliers compete to attract established occupational pension schemes. As one of the most experienced players in the market, Storebrand takes a long-term view. Focus on attracting business volume in 2006 will create a significant new customer portfolio that can be developed over time. This will give Storebrand a strong basis for sales of supplementary financial products to employees of companies with
New insurance legislation will create major changes for defined benefit pensions. The new
Further information on the new legislation can be found on pages 48–49.
Greater scope for growth in the public sector. The market for public sector pensions amounts to over
In addition to this, unfunded public sector pension liabilities are equivalent to approximately NOK 250 billion.
Fewer municipalities than expected decided to transfer their occupational pension schemes in 2005.
Storebrand Life Insurance’s public sector portfolio grew by 40% in 2005, with total assets under management of NOK 13 billion at year-end.
Public sector occupational pension schemes remain one of the most exciting market areas for Storebrand, based on its size, the current volume of transfers and the fact that public sector pensions are subject to compulsory increases in line with salary growth and the basic state pension.
Service Pension Fund will be allowed to invite competitive bidding for their pension arrangements.
(HSE). Focus on HSE improves quality of life and reduces absence due to illness. For employers, focus on HSE reduces the cost of absenteeism and contributes to value creation as well as reducing insurance premiums. Moreover, both society at large and the employer’s insurance company benefit from a reduction in absenteeism and a lower incidence of disability pensions.
“More inclusive working life” agreement with the National Insurance Administration. For the public sector,
The branch will continue to build its position with brokers, advisers and key customers in 2006.
Storebrand intends to build a position in the Swedish market as a respected and preferred business partner by offering attractive and easily understood solutions, efficient administration and rapid response to changing customer requirements.
In December 2005, the Swedish government announced a proposal to allow unrestricted transfers
Norwegian companies that believe the premiums they pay are too high and that want to gain better understanding and control over the costs involved. A number of Storebrand’s customers are involved in developing this company, which is unique in the market.
of pension fund transfers in the municipal market growth in assets under management for the public sector new municipal customers
NOK 13 bn of total public sector customers’ funds 0 06*05040302
– Do I have to start saving for a pension now?
wine tasting in Italy than sitting in an old people’s home.
People expect more of their retirement years, and this makes the market for long-term pension saving, mutual funds and health insurance extremely attractive. We are positioning Storebrand to take full advantage of these opportunities by offering our customers a broad range of products, expanding our distribution network and continuing to improve efficiency to keep our costs down.
The market for long-term savings and life insurance is growing as people recognise the increasing need to arrange savings and insurance for their retirement, life and health. Storebrand’s ambition is to be the leading and most respected institution in this market. Storebrand’s long history and strong traditions provide a sound foundation for a strong and prominent position, and provide a good basis for the group to achieve its objectives.
Storebrand’s marketing and publicity. The first has been to build better awareness and knowledge of
Storebrand as a supplier of long-term savings and life insurance. The second has been to encourage existing and new customers to buy Storebrand’s products through targeted marketing of specific products. A
new communication concept has been developed to achieve these objectives, principally using TV advertising. The concept uses some of Norway’s best-known actors to deliver monologues on a variety of themes, including life insurance, pensions, investments, health insurance, disability insurance and free banking, as well as the Norwegian population's inherent but perhaps unjustified loyalty to their bank.
Awareness of Storebrand and its products increased by more than 30% in 2005 (source: TNS
Gallup/market tracker), and the proportion of respondents that said they would contact
Sound growth for free banking. Storebrand Bank plays a central role in the group's focus on the
*) Assets under management (NOK bn.) **) Provisional figures for 2005
Life insurance ** Health insurance ** *) Annual premiums written (NOK mill.) **) Provisional figures for 2005
retail market, and is particularly important for attracting new customers. The bank has succeeded in improving its market position through its clear and simple profile of free banking and competitive mortgage lending. Increased media visibility, including television advertising, has built public awareness of the bank, helping the bank to achieve significant customer growth in 2005. Storebrand Bank has a strong track record for customer satisfaction and loyalty, and customer surveys carried out in 2005 showed a further improvement. The survey also showed increasing interest from banking customers in buying long-term savings and life insurance products from Storebrand.
Storebrand’s retail market unit had around 311,000 customers. In addition to this around 312,000 private individuals hold paid-up policies from Storebrand and over 240,000 Norwegians are members of occupational pension schemes run by
Stronger distribution capacity. Storebrand’s distribution network consists of three channels; financial advisers, direct sales and external distribution. All three channels are under continual development. Results achieved in 2005 demonstrate that this distribution model works well as
The direct sales channel offers customer service through a call centre and Storebrand’s web site.
This channel is important both for sales and customer service. The number of calls received by the customer centre increased in 2005, particularly in the last months of the year, indicating a response
Ring Eiendomsmegling grew strongly in 2005, and added over 20 new offices. By the close of 2005,
Ring Eiendomsmegling was well represented throughout Norway with over 30 offices.
Insurance agencies are independent businesses that have an exclusive distribution agreement with
Storebrand doubled its sales of structured products from 2004 to 2005
Sales of funds-based products increased by 32% from 2004 32% increase 100% increase *) Annual premiums for Life insurance and health insurance and assets under management for savings products **) Includes both retail and corporate market
advisers. Three of these agencies were appointed in 2005, and 10 new financial advisers were recruited. The largest agencies are in Oslo and the surrounding area, but Storebrand has agents in most larger towns and cities around Norway. Sales through insurance agencies were satisfactory for all product areas in 2005.
New products well received. Storebrand is committed to launching new products in quick response to changing customer needs, new trends and changes in the regulatory environment. Market demand for real estate investment led Storebrand to launch a real estate investment fund in September 2005 in collaboration with Union Eiendomsinvest.
Rente+. The new fund has attracted great interest and had total assets of a NOK 1.6 billion by the close of 2005, primarily from retail customers.
There is every reason to expect increasing retail market interest in equity funds over the next few years, not least because a large proportion of the population will be introduced to funds selection through mandatory pensions. Market research carried out by MMI shows that
Norwegians see mutual funds as the savings alternative likely to produce the best return. In view of the very wide choice of funds available in the market, Storebrand is working to simplify and improve its products and processes to better meet customer requirements, and plans to launch a new mutual funds concept early in 2006. Interest in products where Storebrand manages the allocation between fixed-income and equity markets is strong, and this is expected to continue.
Extensive projects are also underway to improve sales support and banking services, including measures to make it easier for customers to change bank. Further work is planned to realise efficiency gains in a number of areas in 2006.
Successful focus on external distribution channels led to higher sales and improved distribution capacity.
Tromsø Finnsnes Harstad Narvik Bodø Mo i Rana Namsos Steinkjer Trondheim Tiller
When I started to invest in international funds, I wanted to have some control over where my money was invested. How else could I be sure that my money wasn’t encouraging child labour?
responsibility for over 10 years. Socially responsible investment has always been an important part of this commitment. We now have a leading specialist team in this area, and are one of the world’s foremost life insurance companies for socially responsible investment. All the company’s funds and pension assets are subject to a detailed minimum standard for social responsibility. This is Storebrand’s most important contribution to sustainable development, and reflects our objective to be the leading and most respected institution in the Norwegian market for long-term savings and life insurance.
Storebrand has been actively committed to corporate responsibility (CR) for over 10 years. Work in this area is firmly anchored in the company’s overall plans and strategies and contributes to the group’s value creation. CR objectives are formalised in a two-year action plan, most recently set for 2005 and 2006. Targets defined in the action plan are monitored continuously and progress is reported internally every six months and externally once a year. Responsibility for reaching each target lies with the line management of the business unit affected. This makes CR an integrated part of daily operations. Storebrand’s head of CR co-ordinates work on the program and reports to the executive management and the board of directors, ensuring integration both at the management level and throughout the organisation.
The results achieved in 2005 are considered satisfactory, and show that 28 of the 38 targets set in the current two-year action plan have already been achieved. This article describes a number of important areas of our CR work in 2005. A number of the measures described are new since the 20052006 action plan was launched, and are the result of the group’s continuous commitment to developing
CR. Information on the status of the action plan targets can be found in a separate table.
Socially responsible investment is Storebrand’s most important contribution to sustainable development. In October 2005, Storebrand introduced a new policy to apply socially responsible investment (SRI) criteria to all
Storebrand’s funds and pension assets. This prohibits investment in companies involved in violation of human rights, corruption or serious environmental damage, or that produces landmines, cluster munitions, nuclear weapons or tobacco products. In addition, Storebrand will not invest in companies that are among the worst 10%
on environmental and social criteria in high-risk industries. As a result of this policy, Storebrand excluded 70 companies in total at the close of 2005.
Storebrand introduced a new group policy on socially responsible investment in October 2005
Percentage of post-tax group profit distributed as dividend 78% 71% > 30%
Customer satisfaction – corporate market No.1 in the sector No.1 in the sector No.1 in the sector
Percentage of employees satisfied with opportunities for development in Storebrand 80.3% 62%* 80%
Mix of women/men on management training programs 48/52% 53/47% Min. 40/60%
Avoid investing in companies involved in corruption Criteria introduced Follow up Follow up
SRI criteria for investment in Emerging Market Debt New target Implemented Monitoring
‘Living forest’ certification for Værdalsbruket Certified Certified Certified * Figures for 2004 and 2005 are not comparable since a new questionnaire format was used. ** To be measured spring 2006. *** Updated due to measurement error.
Consortium is headed by Deutsche Bank, and includes a number of leading companies such as
Competence development is important for employees and is essential for Storebrand’s commercial progress. Each employee’s training requirements are agreed and documented through the performance appraisal process, and managers are committed to actively monitoring the development of their employees. In addition, Storebrand offers a number of development programs for both younger and more experienced managers, female staff and recent graduates. As part of this,
companies excluded from investments in accordance with new group policy on socially responsible investments Storebrand’s main charity partners
company since 2002. The company has a systematic program of work to reduce absence due to illness, which was 4.8% in 2005. The group also pays particular attention to its policy on senior employees, and a number of measures have been implemented to cater for this important group. Employees over 50 years of age account for 26.9% of Storebrand’s staff.
Storebrand launched a new Health and Safety product in December 2005. The new product has two elements: an extended health insurance, and
The product is available to companies that have entered into an “Inclusive workplace” agreement with the National Insurance Administration. The customer ’s employees benefit from quicker access to medical treatment leading to a better quality of life and less absence due to illness. For their employer, the product reduces the cost of absence due to illness and contributes to value creation as well as reducing insurance premiums. The extended health insurance element includes longterm and complicated musculature illness as well as minor mental health problems – currently the most common causes of long-term sick leave and disability in Norway.
Storebrand in 2005. We competed with 17 other large Norwegian companies. The prize was awarded by a group of major Norwegian business organisations. Storebrand won this prize in 2003 as well.
Life insurance and Banking both reported improved profits in 2005. Investment return achieved represented a good result for both the life company and its policyholders, and served to strengthen the company’s risk capital. The improvement in earnings reported by Storebrand Bank reflects both stronger profit from operations and lower provisions for loan losses. Storebrand Investments reported a fall in earnings due to lower revenue from performance-based and volume-dependent fees. Norwegian equities and shortterm Norwegian fixed-income securities in particular generated investment returns better than benchmark indices, but the return from North American and Asian equity portfolios fell short of these benchmarks and held back overall investment return.
BUSINESS AREAS Life Insurance. Storebrand’s life insurance activities reported good results for 2005 in many areas. Storebrand Life Insurance maintained its market share as measured in terms of average policyholders’ funds at 28%. Sales to the corporate market were very strong in 2005. A number of major companies decided to transfer their pension schemes to Storebrand, and the company also won most of the mandates from municipalities seeking to transfer their pension schemes. The pension reserves to be trans-
ferred by these municipalities will be recognised in the 2006 accounts. Total premium income for Storebrand Life Insurance in 2005 (excluding pension transfers) was NOK 16,000 million, an increase of 5%. Pension transfers represented a net inflow of NOK 546 million. The need to adapt pension arrangements to the labour market of today and the attraction of more predictable costs have led many companies to switch from defined benefit to defined contribution pension schemes. The introduction of mandatory employers’ pensions will lead to a sharp increase in the number of defined contribution pension schemes over the course of 2006. Storebrand is well positioned to win its share of this market. Storebrand produced good results from its retail market business in 2005 and strengthened its position in this market. This was particularly the case for individual endowment business. The Norwegian population is recognising the need to make better arrangements for retirement and to protect their life and health, and this is reflected in the growth of the market for longterm savings and life insurance.
Storebrand Fondsforsikring reported a 60% increase in premium income for 2005 to NOK 992 million. Both unit linked products and defined contribution pension products contributed to this growth. The company made a loss of NOK 9 billion in 2005, an improvement from the loss of NOK 15 million reported for 2004. The introduction of mandatory employers’ pensions is expected to lead to sizeable growth in premium income in 2006. However, investment in this new product area will also cause an increase in costs.
Nina E. Smeby (40), Principal employee representative, member of the Board’s Remuneration Committee
Knut G. Heje (55), President and CEO, Agra Group, MBA, member of the Board’s Audit Committee
Assets under management increased by over NOK 40 billion in 2005, to stand at NOK 205 billion at year-end. The increase reflects Gjensidige’s decision to award Storebrand the major part of its asset management mandate, as well as good sales of pension and insurance products and rising equity markets.
Other activities, including Storebrand ASA (holding company). Other activities principally comprise Storebrand ASA, Fair Forsikring and the run-off activities of Storebrand Skadeforsikring.
Storebrand ASA has entered into an agreement to sell its 50% interest in the Danish non-life insurance company Fair Forsikring to Gjensidige Forsikring. The transaction is conditional on approval by the relevant authorities. The transaction will give Storebrand a pre-tax gain in its consolidated accounts of around NOK 40 million, and is expected to complete in the first half of 2006.
Storebrand’s pre-tax share in Fair’s profits amounted to NOK 22 million in 2005. The run-off activities of Storebrand Skadeforsikring and Oslo Reinsurance Company produced operating profit of NOK 19 million in 2005 as compared to NOK 21 million in 2004. In addition to operating profit, the
RISK MANAGEMENT Storebrand is exposed to various categories of risk through its business areas: insurance risk in respect of its insurance activities, investment risk in respect of its financial assets and credit risk in respect of its banking activities, as well as liquidity risk and operational risk. Continuous monitoring and active management of risk is therefore a central and integrated feature of the group’s activities and organisation.
Life insurance activities: The majority of savings-related life insurance products incorporate a guaranteed minimum annual return, currently 3.6% on average. The average guaranteed return will fall over time since the return guaranteed on new policies cannot exceed 2.75%. The life company’s financial risk principally relates to its ability to generate an investment return at least equal to the guaranteed minimum. This places particular demands on how the life insurance company allocates its investments between asset classes such as shares, bonds and other assets, not least when interest rates are at their current low level, and on the quality of the company’s risk management.
In order to reduce financial risk, Storebrand has fixed the future rate of return on part of its money market investments. In addition, a significant proportion of the investment portfolio is invested in hold to maturity bonds with a running yield in excess of 5.5%. However, if interest rates remain at their current low level over the longer term, this will make it challenging to produce a return on the company’s assets that represents a good margin over the guaranteed minimum return. In early 2004, the Norwegian parliament approved a number of significant changes to the Insurance Activities Act. One important change for some products is that insurance companies will charge policyholders in advance for the cost of guaranteeing the minimum return.
The allocation of financial assets follows the company’s approved investment policy. The investment policy establishes guidelines for the composition of financial assets by setting limits and guidelines for the company’s risk management. The policy also includes limits and guidelines for credit and counterparty exposure, foreign exchange risk and the use of derivatives. The objective of active risk management is to maintain sound risk bearing capacity and to continuously adjust financial risk exposure to the company’s solidity, while at the same time creating the potential for a good investment return.
Total risk capital of the life insurance company increased by NOK 2.5 billion in 2005, of which additional statutory reserves accounted for NOK 0.8 billion and the market value adjustment reserve accounted for NOK 1.1 billion.
Rune Eikeland (44) Regional manager, Retail Distribution, Norwegian Military Academy and Authorised Financial Adviser, employee representative
Halvor Stenstadvold (61), Executive Vice President, Orkla ASA, Master of Political Science, member of the Board’s Audit Committee
The volume of loss exposed and defaulted exposures totalled NOK 754 million following a reduction of NOK 236 million over the course of 2005, and is equivalent to 2.8% of gross lending.
Storebrand has established sound liquidity buffers in Storebrand Bank and other group companies, and continuously monitors liquidity relative to internal limits. Committed credit facilities with other banks have also been established which the group companies can draw on if necessary.
Identifying and managing operational risk is an integrated part of management responsibility throughout the organisation. In addition, the management groups in each business area carry out an annual risk evaluation in order to produce an overall risk summary and recommendations for improvement. The Board reviews this summary.
CAPITAL SITUATION The level of equity and debt in the company is managed relative to financial risk exposure and regulatory requirements. The group has set long-term targets for its capital ratio to be 10% and for the life insurance solvency margin to be at least 150%. Storebrand Life Insurance is rated at the A level. The level of indebtedness is managed in relation to the company’s commercial risk and capital requirements. The holding company aims to have a net debt ratio of zero over the longer term.
Storebrand ASA redeemed the remaining bonds outstanding under its Exchangeable Bond issue in 2005 by delivering Orkla shares in accordance with the bond agreement. Two new bond issues were made in September 2005 with maturities of four and six years respectively for a total amount of NOK 1.5 billion.
Storebrand ASA repurchased 10.3 million of its own shares in 2005 at a total cost of NOK 618 million. The company reduced its share capital in November by 19.6 million shares to 258.5 million shares by cancelling own shares.
Storebrand ASA had total liquid assets of NOK 2.5 billion at the close of 2005, and also has available an undrawn long-term credit facility of EUR 225 million, refinanced in December 2005 for a further five year period. Both Standard & Poor’s and Moody’s upgraded their ratings for Storebrand ASA and Storebrand Livsforsikring AS in 2005. At the close of 2005, Storebrand ASA was rated BBB+ and Baa2 by Standard & Poor’s and Moody’s respectively, both with “Stable outlook”. Storebrand Livsforsikring AS was rated A by Standard & Poor’s and A2 by Moody’s, both with “Stable outlook”. Moody’s rating for Storebrand Bank ASA is Baa2 with “Stable outlook”.
Measures are in place to ensure equal participation of male and female staff on internal management development programs and to encourage female staff to participate in external mentoring programs. In addition, 11 of Storebrand’s female staff participated in the ‘Female Future’ training programme for potential board members organised by NHO. Storebrand will participate in the Norwegian Financial Services Association’s management training programme for women in 2006.
Senior policy: The group pays particular attention to its older employees, and has implemented a number of measures to support this important element of its workforce. 26.9% of employees are older than 50, and many of them have more than 30 years of service. Employees over 60 years are able to reduce their working hours to 80% on 90% of salary, and employees are encouraged to work beyond the normal retirement age. Storebrand received the “Senior Initiative” award in 2005 from the Centre for Senior Policy, which works to promote the role of seniors in working life and society.
Ethical guidelines: Storebrand reviewed and updated its ethical guidelines in 2005, and distributed new ethical rulebooks to all employees. In addition, ethical issues were a standard agenda item at a number of employee gatherings. Employees can seek advice anonymously from an ethics page on the Storebrand Intranet, and the company publishes its replies for all employees to see.
Storebrand has assisted the Norwegian Financial Services Association in producing ethical guidelines for financial advisers, and these have been distributed to and reviewed by all Storebrand’s advisers.
A revised version of the Norwegian Code of Practice for Corporate Governance was issued on 8 December 2005. Storebrand will consider whether the changes should be reflected in any amendments to the company’s policy on corporate governance.
The Board carried out an evaluation of its work in 2005 where the executive management team also participated. The Board held 11 meetings and one Board Conference in 2005. The work of the Board is subject to a specific mandate. The Board has established advisory committees on remuneration and internal audit. The question of whether to elect a deputy chairman for the Board of Storebrand ASA is currently under consideration by the Board and the Election Committee.
Board of Representatives: Finn Jebsen retired from the Board of Representatives. Deputy member Roar Engeland was elected as a full member, and Anders Berggren was elected as a new deputy member.
The Board wishes to thank the retiring members of the Board of Directors, Board of Representatives and the Election Committee for the valuable contribution they have made to the company.
FUTURE PROSPECTS Storebrand further strengthened the group’s financial solidity and competitiveness in 2005. The risk-bearing capacity of Storebrand Life Insurance is satisfactory, while Storebrand Bank has satisfactory capital adequacy and reserves against loan losses. The financial condition of the holding company, Storebrand ASA, is very strong.
The life insurance, banking and asset management business areas were all very successful in attracting new customers in 2005, and this serves to demonstrate the group’s competitiveness.
Storebrand expects sizeable growth in business volume in future years. The introduction of mandatory employer’s pensions in 2006 will lead to around 500,000 employees becoming members of a pension scheme for the first time. In the public sector, Storebrand expects an increasing number of municipalities and other public sector entities to invite competitive bidding for their occupational pension schemes. Storebrand intends to continue to be a winning player in this market.
The introduction of mandatory employer’s pensions is also expected to encourage increasing volumes in the retail market. Changes to state and private pensions in Norway have had a positive effect on the general level of public interest in pensions and other welfare benefits. In addition, demographic changes are having a positive effect on sales. Increasing life expectancy, combined with expectations for a high standard of living in retirement, is creating increasing demand for personal risk and savings products.
Storebrand maintains the financial objectives it has previously announced, and will continue to pursue its commitment to being the leading and most respected institution in the Norwegian market for long-term savings and life insurance.
At the start of 2006, Storebrand looks forward to particularly promising and exciting market conditions, both in terms of growth in business volumes and the pace of change. In terms of the financial markets, Storebrand’s risk management system will ensure that the group is fully prepared for any turbulence. Through its long traditions and the expertise and motivation of its employees, Storebrand is well positioned to reach its financial and market objectives.
The dividend to shareholders will normally represent above 30% of the full-year profit after tax. The Board wishes to have a dividend policy with a long-term horizon. The objective of the dividend policy is that the Storebrand group should make effective use of a sufficient level of capital relative to its risk profile.
The Board is of the view that the group’s capital situation is sound relative to Storebrand’s risk profile and rating, and the Board therefore recommends a total dividend of NOK 4 per share (excluding shares bought back), equivalent to NOK 1,010.6 million. Of this dividend, NOK 1.50 represents ordinary dividend, while NOK 2.50 represents an extraordinary dividend as a result of the sound capital situation. The Board proposes the following application of the profit for the year: Amounts in NOK million: From other equity: – 1.9 Dividend: 1,010.6
December 2005 amounted to NOK 1,292.6 million, made up of 258,526,245 shares each with a par value of NOK 5.
Storebrand offered all shareholders holding fewer than 200 shares in 2005 the opportunity to either sell their shares or purchase additional shares up to a round lot without incurring transaction charges.
The offer was well received, and accepted by 51% of the 26,744 shareholders eligible. Around two thirds sold their shares for cash while the remaining one third increased their holding to one round lot.
SHAREHOLDERS BY NUMBER OR SHARES AND OWNERSHIP AT 31 DECEMBER 2005
LARGEST SHAREHOLDERS AT 31.12.05: Shareholder Account type No. of shares % Country
Storebrand shares changed hands in 2005, 10% more than 2004 (471 million shares traded). The value of shares traded in 2005 was NOK 30,318 million, up from NOK 22,149 million in 2004. This made Storebrand the 10th most traded share on
Oslo Børs in terms of value, with a turnover rate of 186.6%.
The Oslo Børs benchmark index (OSEBX) rose by 40% over the same period. Over the last three years, the Storebrand share has produced a total return of 159%, while the OSEBX index showed a return of 189% for the same period.
Dividend policy. Storebrand’s dividend policy shall contribute towards giving shareholders a competitive return and optimising the company’s capital structure. The dividend to will normally represent above 30% of the full-year profit after tax. The Board wishes to have a dividend policy with a long-term horizon, and will aim for stable year-on-year growth in dividend per share.
Based on the company’s dividend policy and earnings reported for 2005, the Board of Storebrand ASA recommends that the
Annual General Meeting approve a dividend of NOK 1,011 million for 2005, equivalent to NOK 4 per share, of which NOK 1.50 represents ordinary dividend.
RISK amounts for shares in Storebrand ASA: As at RISK amount NOK As at RISK amount NOK
Storebrand is dependent on maintaining an orderly relationship with the financial markets and supervisory authorities. The company therefore places particular emphasis on ensuring that its routines and guidelines satisfy the formal requirements imposed by the authorities on securities trading. In this connection the company has produced internal guidelines for trading in the company’s shares by insiders based on current legislation and regulations. The company has its own compliance system to ensure that the guidelines are followed.
All interim reports, press releases and presentations of interim reports are published on the Storebrand website at: www.storebrand.no/ir.
General meetings. Storebrand has one class of shares, each carrying one vote. The company holds its AGM each year before the end of June. Shareholders who wish to participate in a general meeting must notify the company no later than 16.00 hours 3 business days before the meeting. Shareholders who do not give notice of attendance will be able to attend, but not vote.
Storebrand has been actively involved in the process of developing the Norwegian Code of Practice.
The Articles of Association of Storebrand ASA stipulate its role as the holding company of a financial business group, managing its equity interests in the Group in compliance with the relevant legislation. Further information on the company's objectives and strategies can be found on pages 40-42. In addition, Storebrand keeps the market advised of its objectives and strategies through investor presentations held in connection with account presentations and other specialised presentations.
Storebrand ASA has only one class of shares. All shareholders are entitled to attend general meetings, and arrangements are also made for proxy voting. In order to ensure a high level of participation, Storebrand is currently considering a system for future use that will allow shareholders to vote over the Internet.
Storebrand has no specific restrictions on ownership of shares or voting rights in the company other than the restrictions imposed by the Financial Institutions Act.
Storebrand ASA is a legal requirement, and has 18 members, of which 12 are elected by the AGM and six by the group’s employees.
Directors, determining the fees paid to the directors, issuing the mandate for the work of the Control Committee and considering reports from the Control Committee. The Board of
The Board meets at least nine times each year. In 2005 the
The Audit Committee assists the Board by reviewing, evaluating and where necessary proposing appropriate measures in respect of the group’s overall controls, financial and operational reporting, risk management and internal and external auditing.
reports directly to the Audit Committee, and attends meetings as the committee requires.
The committees assist the Board by preparing matters for consideration, but decisions are taken by the entire Board. Both committees are able to carry out meetings and consider matters without involvement from the company's management.
is a legal requirement, and has five members elected by the
Association and resolutions passed by the group’s corporate bodies. The committee is entitled to look into any matter, and has access to all relevant documentation and information. The committee has the power to demand information from any employee and any member of the company's corporate bodies.
The Control Committee met nine times in 2005 and submitted reports to the Board of Representatives for 2004 and the first six months of 2005 on 3 May 2005 and 30 August 2005 respectively. The control committee for Storebrand Life Insurance is identical to the Storebrand ASA Control Committee. Storebrand
Election Committee. Storebrand ASA’s Articles of Association regulate the company’s Election Committee, which has four members and is chaired by the Chairman of the Board of
Election Committee is independent of the company's Board and management, and its composition ensures a broad representation of shareholder interests. The Election Committee reviews the annual appraisal of the work of the board, and is responsible for proposing candidates to the Board of Representatives, the Board of Directors, the Control Committee and the Election
Relationship between Storebrand’s corporate bodies and control functions. The internal audit function in Storebrand is founded on a corporate governance model, whereby management is based on group wide policies and internal regulations in areas such as ethics, corporate social responsibility and information security, as well as a value based system for managing financial and operational risk. The group has a common internal audit function which carries out an independent review of the robustness of the management model. The internal auditor is appointed by and reports to the boards of the respective group companies.
Financial Supervisory Authority of Norway). Kredittilsynet is responsible for supervising financial institutions to ensure that they operate in a prudent and proper manner in accordance with legislation, business objectives and the Articles of Association.
The external auditor is elected by the AGM, and is responsible for the financial audit of the group. The external auditor issues the audit opinion on the annual accounts, undertakes a limited scope review of the interim accounts, attends the board meetings that approve the quarterly interim accounts, and attends meetings of the Audit Committee as appropriate.
Audit Committee and the Group CEO with copies to the heads of Legal Services and Human Resources. Internal audit is subject to a formal mandate in accordance with current legislation, regulations and international standards. The Control Committee is entitled to use the resources of internal audit as required.
Storebrand Investments and Storebrand Bank. The other members of the boards of Storebrand Life Insurance, Storebrand
Bank and Storebrand Investments are drawn from the group’s senior employees, together with employee representatives, as well as external members with expertise relevant to the business of the company in question.
Storebrand’s executive management is charged with implementing the strategies approved by the Board, and is directly responsible for the group's overall profitability and for making optimal use of resources across the entire group. Information on the executive management team can be found on page 104.
The appraisal and remuneration of Storebrand employees forms an integral part of the value-based management system, and is designed to ensure that the group's strategies are implemented. Bonus payments are linked both to the overall level of value creation and to individual performance. Storebrand’s remuneration systems follow internationally recognised principles.
Internal guidelines have been established for share trading by employees and insiders. Storebrand’s Intranet also provides both rules and practical guidance on security of information, catastrophe planning, money laundering and financial crime.
Business ethics and “whistle blowing”. Storebrand has established ethical rules for the group and its employees.
Seminars for new employees address business ethics and ethical dilemmas. Employees can seek advice anonymously from a business ethics page on the Storebrand Intranet, and can refer any concerns directly to Storebrand ASA’s Audit Committee.
Association make a deputy chairman compulsory. The Board may elect a deputy chairman if it wishes, and this was discussed in 2005. The Board's initial view is that it sees no need to appoint a deputy chairman, particularly since this could lead to undesirable differentiation between members of the Board. In the occasional absence of the Chairman, the Board sees it as more appropriate to appoint a chairman for the meeting in question.
Storebrand has considerable potential influence over listed companies, and pays great attention to exercising its ownership on the basis of straightforward and consistent ownership principles. Storebrand applies the Norwegian Code of Practice for
Corporate Governance in this role, a natural extension of the principles it first established in 1998.
Articles of Association and further information on its ownership principles as an investor.
Members (shareholder elected): Eli Sætersmoen, Johan H. Andresen jr., Rune Selmar, Vibeke Hammer Madsen, Merete Egelund Valderhaug,
The upturn also impacts employment, and unemployment fell over the course of 2005. The fall in interest rates since 2003, combined with low inflation, has boosted household disposable income. This positive picture is very favourable for the products and services in which Storebrand specialises.
This report provides an account of the Storebrand group’s financial performance in 2005 set against the background of historical performance and the trends apparent at the start of 2006. Further information on Storebrand’s strategy for the markets in which it operates can be found in the articles earlier in this Annual Report on the group’s activities in the retail and corporate markets.
Life Insurance Total policyholders’ funds (traditional life insurance) 134 463 121 066 108 760 99 108 99 201
Total premium income (excluding policy transfers) 16 000 15 293 9 527 7 083 7 240
Net transfers (traditional life insurance) 546 –588 1 471 –381 –1 222
Risk capital in excess of minimum (excl. unrealised gains on hold to maturity bonds) 13 529 10 950 8 854 4 724 5 823
Total policyholders’ funds (unit linked and defined contribution) 5 719 4 476 3 975 3 259 3 213
Retail mortgages as proportion of total lending 55% 55% 48% 43%
Storebrand Total funds under management 204 800 165 000 158 800 139 700 144 600
Investments Of which funds under management for external clients 49 700 25 400 38 500 32 300 35 500
Percentage of total funds under management invested in equities 23% 21% 17% 16% 24%
*) Profit after tax/(Opening equity – provision for dividend – 50% of own shares purchased during the year)
**) 2005 includes 10 basis points in one-off costs relating to pensions.
institution in the Norwegian market for long-term savings and life insurance. Storebrand is the only large financial institution in the Norwegian market that has long-term savings and life insurance as its core activity, and the company works to make the best use of this unique position in the interests of its customers, owners, employees and other stakeholders.
Growth. In addition to maintaining its strong position in the corporate market for pensions and personal risk insurance,
Storebrand strengthened its position in the market for public sector occupational pension schemes in 2005. A number of municipalities put their pension schemes out to competitive bidding in 2005, and Storebrand won most of this business resulting in an inflow of almost NOK 4.4 billion of public sector occupational pension reserves in 2006. In addition, the introduction of mandatory employers’ pensions in Norway will lead to a sharp increase in the number of defined contribution pension schemes over the course of 2006. Storebrand is focusing its resources on this market.
Storebrand is also targeting the Swedish corporate market for pensions and life insurance products, and opened its Swedish branch in 2005. In addition, Storebrand incorporated UNI Norden
Storebrand Bank continues to target selected segments of the corporate market, where the bank operates as a niche bank for real estate investors and developers in the greater Oslo area.
In addition to its activities in the corporate market, Storebrand will continue to focus on long-term savings and life insurance products for the retail market. The markets for life insurance and long-term saving are both growing, and Storebrand has ambitious product development plans. Lending products, principally residential mortgages, are important for attracting new customers, and banking products play an important role in developing the group’s customer base. The introduction of free banking, together with significantly more competitive mortgages, had a very positive impact on Storebrand's banking activities in 2005, with over 8,000 new account customers in the second half of 2005.
Storebrand announced a number of efficiency targets to be achieved by the close of 2007 covering all the most important business areas in the group, namely life insurance, banking, asset management and the holding company.
Capital efficiency. Storebrand’s subsidiaries currently have sufficient capital resources for the growth expected over the next few years. Storebrand ASA (the holding company) aims to achieve zero net indebtedness over time. At the close of 2005, the holding company's holdings of liquid assets exceeded its borrowings, and this will continue to be the case after distributing the proposed dividend. Maintaining an efficient capital base is one of the essential factors in ensuring that the company is able to generate a satisfactory annual profit relative to the group's equity (return on equity), and the board intends to ask
GROUP PROFIT IN 2005 Strong group profit. The Storebrand group reported a group profit of NOK 1,442 million for 2005 as compared to NOK 2,545 million in 2004. Excluding the contribution to group profit from If
CAPITAL SITUATION Storebrand pays particular attention to the active management of its equity and borrowings. The composition of its business areas and their growth will be an important driver for the group’s capital requirements. The level of indebtedness is managed in relation to the company's commercial risk and capital requirements. The group has set long-term targets for capital ratio to be 10% and the life insurance solvency margin to be at least 150%. Storebrand Life
Insurance is rated at the A level. The holding company aims to have a net debt ratio of zero over the longer term. Storebrand ASA
Exchangeable Bond issue in 2005 by delivering Orkla shares in accordance with the bond agreement. Two new bond loans were issued in September 2005 with maturities of four and six years respectively for a total amount of NOK 1.5 billion.
Change in non-life security reserves etc 3 12 66 199 279
Storebrand ASA held liquid assets of NOK 2.5 billion at the close of 2005 and also has an undrawn long-term committed credit facility of EUR 225 million. The credit facility was renewed for a new five-year period in December 2005.
Storebrand ASA repurchased 10.3 million of its shares in 2005 at an average price of NOK 59,95 per share, representing a total cost of NOK 618 million. The shares were bought in the market, with purchases taking place on 58 trading days. The company reduced its share capital in November by 19.6 million shares to 258.5 million shares by cancelling own shares.
Life Insurance. Investments in shares in the EEA area held by
Storebrand Life Insurance have caused sizable permanent differences in the accounts. On the taxation exemption principle, gains and losses on such shares are not taxable, and similarly losses on such shares are not tax deductible.
6.4 billion that provide the basis for a deferred tax asset of NOK
1.4 billion. The basis figure used for recognising deferred tax asset in the balance sheet has been written-down by NOK 6.1 million to
0.1 billion. The basis figure has been written down as a result of uncertainty over whether future taxable income will reach a level that will allow all the tax losses carried forward to be used.
Insurance intends to build on its strong position in this market by offering customer oriented and attractive product solutions.
Kundebarometer surveys. Group pension insurance represents the major part of activities as measured in terms of both policyholders ’ funds and profit to the owner. Group pension insur-
Storebrand adapted its organisation to meet the requirements of the new market for mandatory occupational pensions in autumn 2005. This new market will increase annual premiums in the occupational pensions market by at least NOK 3 billion.
FINANCIAL RESULTS FOR 2005 The total contribution of profit from the life insurance activities to group profit in accordance with IFRS amounted to NOK 1,217 million in 2005 as compared to NOK 931 million in 2004. The following table shows the breakdown of this profit contribution between the life insurance business areas.
Good operating result and profit to owner. Operating profit for 2005 was NOK 4,381 million, as compared to NOK 2,982 million in 2004. The profit allocated to policyholders for 2005 was NOK 3,215 million (including NOK 950 million allocated to additional statutory reserves) and the profit to the owner was
Good net pension inflows. Storebrand Life Insurance saw net inflows of pension reserves of NOK 546 million in 2005, compared to a net outflow of NOK 588 million in 2004. In addition, a number of major pension mandates won in 2005 will be booked in 2006.
The life insurance company’s risk bearing capacity was satisfactory at the close of 2005. The solvency margin was 175% as compared to 169% at the close of 2004. The company’s capital ratio was 10.9% in 2005 while the minimum required is 8%.
million for non-life insurance. The risk result for individual endowment policies (single payments) and individual pensions business fell by NOK 31 million and NOK 55 million respectively.
NOK 1,354 million in 2005 as compared to NOK 1,039 million in 2004. The increase of NOK 315 million was caused mainly by increased commission payments on higher sales volumes, experience adjustments for the in-house pension scheme charged to profit and loss and increased headcount from the new venture in Sweden and work on mandatory occupational pensions. As a result, costs relative to average policyholders’ funds increased from 0.90% in 2004 to 1.06% in 2005. Asset management fees paid to Storebrand Investments were lower in 2005 due to the weaker performance relative to the benchmark indices
Additional statutory reserves strengthened. Additional statutory reserves are conditionally allocated policyholders’
– of which transferred to premium reserve –110 –8 –8 –125 –134 –127
Risk bonus –104 –79 –289 –293 21 –54 –798 –968 –907
Change in premium reserve/security fund –6 4 0 -1 0 –11 –181 –1 010
The proportion of the portfolio invested in bonds held as current assets remained low throughout 2005, reflecting expectations that long-term interest rates will rise over time. The proportion held in money market instruments is consequently relatively high. From mid-2004, part of the money market holdings have been hedged against producing a lower return than the minimum guaranteed to policyholders. The money market portfolio will respond relatively quickly if short-term interest rates begin to rise. In total, the company ’s money market and bond investments are robust to changes in interest rates.
The loss derives from the company’s defined contribution pension activities, where the company is still building business. The significant investment Storebrand is making in mandatory occupational pension products will also affect results in 2006. Premiums written for defined contribution pensions increased by 59% from NOK 259 million in 2004 to NOK 413 million in 2005, while premiums written for unit linked products increased by 46% from NOK 270 million in 2004 to NOK 393 million in 2005. Storebrand Fondsforsikring set up approximately 500 new defined contribution pension schemes in 2005, making a total of 1,530 schemes since the launch in 2001.
Asset allocation is based on asset management principles and will deviate from the accounts..
Storebrand has calculated Embedded Value for 2005 in accordance with the new principles, and has also restated Embedded
Development in Embedded Value 2005. Interest on the opening balance based on the economic assumptions in the model amounted to NOK 649 million. The value of new business written in 2005 increased Embedded Value by NOK 377 million. Operating variances from lower outward transfers of business and better than expected claims experience caused an increase in Embedded Value of NOK
MOVEMENT ANALYSIS 2004–2005 STOREBRAND LIFE INSURANCE AND STOREBRAND FONDSFORSIKRING (NOK MILLION)
EV 2004 EEV 2004 EEV 2005 NOK million (TEV) restated of which
Value of business in-force 5 765 7 252 8 614 of which
NEW NORWEGIAN LIFE INSURANCE LEGISLATION The new Insurance Activities Act (implementation planned 2008)
Storebrand's preparations are well underway. The overall objective of the new legislation is to make pricing more predictable and transparent and to make a clearer distinction between the assets of the insurance company and its policyholders. Regulations relating to the new act have not yet been finalised, so the following commentary is based on Storebrand's provisional evaluation.
• Premium for pension scheme administration: Administration costs must be charged in advance and represent the final cost for the customer. The insurance company must then meet any deficit in the administration result, and similarly retains any surplus.
Additional statutory reserves are an important part of a policy 's risk capital, and the new regulations permit greater flexibility in building these. Customers with high reserves will be able to increase the equity exposure to achieve a higher expected return. Alternatively, higher reserves can be used to reduce the cost of the interest rate guarantee. The new legislation stipulates that additional statutory reserves can only be used to meet a shortfall in return within the policy to which they relate.
Exciting fixed-income products. Storebrand Investments offers a full range of savings and investment products, from equity and bond funds for personal saving to advanced specialist funds for professional investors. Steps were taken in 2005 to revitalise the fixed-income products offered by Storebrand
NOK 8 billion, bringing the total mandate to over NOK 30 billion.
The group recognises its corporate responsibility by avoiding investment in companies involved in breaches of human rights, corruption, land mines, cluster bombs, tobacco or serious environmental damage, as well as companies that are among the worst 10% in high-risk industries.
Norwegian and international equity markets and new business in 2005 helped to outweigh the loss of revenue from the termination of the If mandate in 2004. Weak investment returns from international equities led to lower performance-based fees in 2005. Storebrand Alternative Investments reported a profit of NOK
11 million for 2005, up from NOK 5 million in 2004.
Increase in assets under management. Assets under management increased by NOK 40 billion to NOK 205 billion at the close of 2005. The increase reflects Gjensidige’s asset management mandate, as well as good sales of pension and insurance products and rising equity markets.
Mixed investment returns for Storebrand Life Insurance. Of the 11 portfolios managed for Storebrand Life Insurance, five produced a better return than benchmark. However weak performance from the international equity portfolio caused the overall return to fall short of benchmark. The major positive contributions came from the Norwegian equity and bond portfolios.
Among the mutual funds offered by Storebrand, Norwegian equity funds consistently outperformed the benchmark index for Oslo Børs. International equity funds also produced a good return in 2005, but did not outperform their benchmark indices.
Profitable growth. Storebrand Investments continued work on improving cost efficiency and simplifying its asset management products in 2005. The Gjensidige mandate confirms the quality at all stages of the Storebrand Investments asset management process, and provides a sound foundation for winning new mandates in future years.
Selective growth. Storebrand Bank implemented a number of measures to further the bank's growth objectives in 2005. The introduction of free banking together with significantly more competitive terms and conditions for mortgage lending played an important role in promoting this growth. The lending portfolio grew from NOK 24 billion to NOK 27 billion in 2005. The bank also saw very strong growth in the number of new accounts with almost 12,000 accounts opened in 2005 as compared to 6,100 in 2004. The bank continued its focus on selected sectors of the corporate market. Storebrand
NOK 47.0 million, the bank group reported a profit for the year of NOK 194.1 million.
Life Insurance of the Retail Market unit, which is responsible for the
Significant reduction in operating expenses. Operating expenses totalled NOK 346.3 million, equivalent to 63% of operating income. This represents a reduction of NOK 227 million, or 40%, from 2004. The main reason for this is the sale of the Retail Market unit as mentioned above. Operating expenses for the banking activities in isolation have shown a positive trend expected to continue.
The bank’s customer deposits fell by NOK 276 million in 2005.
The deposit-to-loan ratio was 42% at year-end, a decline of 6 percentage points in the year. The bank has a balanced and welladapted funding structure, basing its funding on customer deposits, issuing securities and borrowing in the Norwegian and international markets. At the close of 2005 the bank had available undrawn committed credit facilities totalling NOK 2.4 billion.
Losses on loans and guarantees represented a net write-back in 2005 of NOK 34.4 million, and write-downs of individual loans totalled NOK 389.6 million at 31 December 2005. The bank has also made grouped provisions of NOK 89.2 million, equivalent to 0.3% of gross lending.
Provisions to non-performing and loss exposed loans % (excl. grouped provisions)
reported profit before tax in accordance with IFRS of NOK 599 million for 2005 as compared to NOK 2,280 million for 2004.
Net financial items were positive in 2005, principally due to three factors: Firstly, the sale of Fair had a positive effect of NOK
Storebrand ASA’s operating costs were 15% lower in 2005 than in 2004. The company continues to target a reduction in annual operating costs of NOK 50 million from the 2003 level to NOK 60 million in 2007.
Storebrand’s interest in If in 2005, the group’s non-life insurance activities now consist of Fair Forsikring (50% ownership interest),
Skadeforsikring, is principally involved in the run-off of its own reinsurance business and managing other companies’ run-off business. The other activities of Storebrand Skadeforsikring presently comprise the run-off of its gross insurance commitments (fronting responsibility) which are reinsured with If
Profit before tax –41 1 446 *) Including dividends/group contributions from subsidiaries.
FINANCIAL RISK MANAGEMENT Storebrand assumes financial risk in the ordinary course of its core business activities. Good risk management and control of risk exposure is essential to the group’s profitability and to ensuring that the group has the financial strength to withstand adverse developments and limit the losses these may cause.
Storebrand uses ‘Conditional Value at Risk’ as a method for calculating the potential for loss on a one-year horizon for a given probability, including worst-case losses. This is evaluated in the light of the guaranteed annual return and the company’s risk capital financed by policyholders and the owner.
Ranking life company's investment return relative to selected competitors (1-5) 1 5 Room for improvement
Growth in life insurance premium income excluding transfers last year (NOK million) 984 Very good
Growth in net interest income last year (Storebrand Bank) (NOK million) 7 Satisfactory
– Long-term pension savings and mutual funds 3 6% Room for improvement
Brand awareness 7 55% Room for improvement 1) Investment return III. Storebrand's ranking in terms of Investment return III vs. Sparebank 1, Nordea, Vital and KLP as at Q4 2005. 2) Storebrand's market share for corporate group life business as at Q3 was 40.2%. 3) Equity/combination funds, Unit Linked and Annuity/IPA weighted by total market sales volumes. 4) Norwegian Financial Services Association statistics, which exclude disability pensions amongst others 5) Scale from 0-100 showing whether corporate customers are satisfied with product delivery, whether we meet their expectations and their experience of Storebrand relative to our competitors.
Board of Directors approves limits for these and other risk measures. The life insurance company monitors risk exposure and reports to management regularly (daily if required).
Financial markets can fluctuate widely in a short space of time, affecting the company’s risk exposure. Storebrand continually manages its risk exposure to keep it within limits approved by the
Board of Directors in several ways: Firstly, considerable importance is attached to building sufficient risk capital to absorb losses. Secondly, risk exposure is diversified as much as possible by investing in assets that are not expected to cause losses as the same time. Thirdly, securities with different risk levels are bought and sold. Finally, hedging instruments such as options are used.
Life insurance profits are shared between the owner and policyholders (except products without profit-sharing). The profit allocated to the owner is subject to an upper limit of 35% of the year’s profit for investment returns up to between 5% and 6%.
European capital adequacy regulations known as Solvency II that will come into force in 2010 at the earliest. Kredittilsynet's recommendation to the Ministry of Finance is to introduce regulations similar to the future Solvency II regulations, following the example of Denmark, Sweden, Holland and the United Kingdom.
Consequences of a low interest rate level. The current low level of interest rates causes various problems for the company. In the short term, the most apparent risk is that the company’s investments will fall in value if bond prices are reduced by an unexpected increase in interest rates. At the close of 2005, Storebrand had sufficient risk capital to absorb a fall in market values equivalent to the company’s stress test, which assumes an unexpected simultaneous increase in interest rates of one percentage point internationally and two percentage points in Norway combined with a sharp fall in equity and property values.
In the longer term, a persistently low level of interest rates could cause weaker earnings for the company if investment returns are close to the return guaranteed to policyholders. Over time this would weaken the company’s ability to build up risk capital and this would, in isolation, increase the possible impact of the short-term risk of a fall in market values.
Storebrand has also hedged part of its money market portfolio against low interest rates. Investment opportunities that offer a
higher return are closely evaluated, but the prospects for higher return are balanced against the risk of losses and falls in value.
exposure is monitored to ensure the greatest possible independence in order to achieve the highest possible risk-adjusted return.
significant proportion of the bank’s corporate lending is linked to real estate in the greater Oslo area. Storebrand follows economic conditions and the real estate market in this region closely.
The risk classification system estimates the likelihood of a borrower defaulting (ability to pay/financial condition) and the likely loss given default (collateral). All loans on the bank’s watch list are reviewed at least quarterly in respect of the condition of the borrower and collateral, and of the steps being taken to protect the bank’s position.
Over the last two years the bank has significantly upgraded its lending policies and credit approval procedures. Separate credit approval processes are now used for retail lending on the basis of credit scoring, combined with case-by-case evaluation of the borrower’s ability to repay. Approximately 70% of lending to retail customers is secured by mortgages with loan to value ratios not exceeding 60%.
Storebrand Bank and other group companies, and continuously monitors liquidity reserves against internal limits. Committed credit lines from other banks are also available if necessary.
Overall risk management for the group. Storebrand invested in building a system for risk management reporting based on integrated balance sheet management of its life insurance activities in 2005. This allows the liabilities and assets of the life insurance company to be evaluated in relation to changes in exogenous variables such as interest rate levels. The system also incorporates established management principles for handling financial risk.
Value, and will be further developed in 2006 to cover economic capital and its return. The system will in due course be extended to companies in the group. The group Accounting and Finance function is responsible for the group's financial risk management.
Organisational changes have been made so that the risk management functions in Storebrand Bank and Storebrand Investments are now integrated with the group Accounting and Finance function, ensuring more efficient control and management of the group's overall financial risk exposure.
Funds allocated to policyholders – life insurance –2 336.8 –1 496.0
– Bonds and other fixed-income securities 19,24 57 539.3 51 262.8
PAID-IN VALUE ADJUSTMENT OTHER MINORITY TOTAL SHARE CAPITAL FUND EQUITY INTERESTS EQUITY
Net claims and benefits paid – direct insurance –8 629.9 –7 185.5
Interest, commission and fees received from customers 1 229.9 2 094.7
Net receipts/payments – customer deposits with the banking activities 84.2 –788.2
Payments to third parties for goods and services 1 713.3 –1 801.2
Note 17: Net income analysed by class of financial instrument page 75
The accounting principles used for the preparation of the consolidated accounts are described below. The principles are applied consistently to similar transactions and to other events under similar circumstances.
Reporting Standards (IFRS). The accounts are prepared in accordance with the historic cost principle, with the exception of: • Investment properties valued at fair value
The preparation of the accounts has involved the use of estimates and assumptions that have an effect on assets, liabilities, revenue, costs, the note to the accounts and information on potential liabilities. The final values realised may differ from these estimates.
Presentation currency and currency translation of foreign companies. The group’s presentation currency and functional currency is the Norwegian krone (NOK). Foreign companies included in the group that use a different functional currency are translated to NOK by translating the profit and loss account at the average exchange rate for the accounting year and translating the balance sheet at the exchange rate at close of the accounting year. Any translation differences are booked directly to equity.
Elimination of internal transactions. Internal receivables and payables, internal profits and losses, interest and dividends, etc.
Consolidation of fund investments. In the consolidated accounts, fund investments are consolidated if they are considered to be of particular importance for Storebrand’s investment needs, Storebrand holds a high proportion of the fund, and
The group is organised into life insurance activities, banking activities, asset management activities and other activities in accordance with the range of products/services offered. Business areas are the group’s primary reporting segments. Financial information in respect of these segments is presented in note 3. No geographic segment information is produced since there are no material differences in risk or yield profile between different geographic areas within Norway, and the group’s foreign activities are immaterial in relation to the activities in Norway.
The group’s tangible fixed assets comprise equipment, fixtures and fittings, vehicles, IT systems and properties used by the group for its own activities.
Properties used for the group’s own activities are valued at written-up value less accumulated depreciation and writedowns. The fair value of these properties is tested annually in the same way as described for investment properties. Increases in the value of properties used for the group’s own activities are not recognised to profit and loss but are recognised as a change in the revaluation reserve that forms part of equity. Any writedown of the value of such a property is first applied to the revaluation reserve for increases in the value of the property in question. If the write-down exceeds the revaluation reserve for the property, the excess is recognised to profit and loss.
Properties leased to tenants outside the group are classified as investment properties. In the case of properties occupied partly by the group for its own use and partly let out to tenants, the identifiable tenanted portion is treated as an investment property.
If an investment property becomes a property used by the group for its own activities, the cost price for the property in own use is deemed to be fair value at the time of reclassification. If a property previously used by the group for its own activities is rented to external tenants, the property is reclassified as an investment property and any difference between book value and fair value at the time of reclassification is recognised as a valuation change to properties carried at written-up value. (See the description for properties held as fixed assets). Changes in fair value that arise following the reclassification are applied to profit and loss.
Write-downs of goodwill are never reversed, even if there is information in future periods that the impairment no longer exists or is of a lesser amount. Gains or losses on the sales of companies in the group include the goodwill related to the company in question
Storebrand’s pension scheme for its own employees is a defined benefit pension scheme. Pension costs and pension liabilities for defined benefit pension schemes are calculated using a linear accrual of entitlement to pension and expected final salary, based on assumptions for discount rate, future salary increases, pensions and benefits from the national insurance fund, the future return on pension assets and actuarial assumptions on mortality, early leavers etc. The discount rate is equivalent to the risk-free interest rate taking into account the average remaining period for accrual of pension entitlement. The net pension cost for the period is made up of the sum of pension entitlement accrued in the period, interest cost on the calculated pension liability and the expected return on pension assets.
The tax charge in the profit and loss account consists of tax payable for the accounting year and changes in deferred tax.
Claims paid. Claims for own account comprise claims settlements paid out less reinsurance received, premium reserves transferred to other companies, reinsurance ceded and changes in claims reserves. Claims not settled or paid out are provided for by allocation to the claims reserve as part of allocations to technical insurance reserves.
Transfers of premium reserves etc. Transfers of premium reserves resulting from transfers of policies between insurance companies are booked to profit and loss as premiums for own account in the case of reserves received and claims for own account in the case of reserves paid out. The recognition of cost/income takes place at the date the insured risk is transferred.
Premium reserve. Premium reserve represents the present value (discounted at a rate equivalent to the guaranteed interest rate) of the company’s total insurance obligations including administration costs in accordance with the individual insurance policies, after deducting the present value of future premiums.
Kredittilsynet (the Financial Supervisory Authority of Norway) has specified a limit for the additional statutory reserves that apply to each policy defined as the premium reserve for the policy multiplied by twice the basic interest rate for the policy. The company is permitted to apply a higher multiple of the basic interest rate than that defined by Kredittilsynet. The allocation to additional statutory reserves is a conditional allocation to policyholders that is recognised in the profit and loss account as a statutory reserve and accordingly reduces net profit. Additional statutory reserves can be used to meet a shortfall in the guaranteed return. This is shown in the profit and loss account after the technical (insurance) result as amounts released from additional statutory reserves to meet the shortfall in guaranteed return. The amount released cannot exceed the equivalent of one year’s interest rate guarantee.
Claims reserve. Amount reserved for claims either not yet reported or not yet settled (IBNR and RBNS). The reserve only covers amounts which might have been paid in the accounting year had the claim been settled.
Kredittilsynet may permit all or part of the reserve be used to cover a fall in the value of in the value of bonds or of shares classified as current assets. In the accounts the entire reserve is shown as a mandatory reserve.
Unit Linked/defined contribution pensions. Unit linked products and defined contribution pension products are sold through Storebrand Fondsforsikring AS. Financial assets are valued at market value. The level of technical reserves required in respect of such policies is determined by the market value of the financial assets. The company is not exposed to any investment risk on customers’ funds since it does not guarantee any minimum return. The sole exception is in the event of death, when the deceased’s estate is entitled to a refund of premiums paid for annuity insurance.
Definition of fair value. “Fair value” is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
For financial assets that are listed on a stock exchange or another regulated market place, fair value is determined as the bid price on the last trading day up to and including the balance sheet date, and in the case of an asset that is to be acquired or a liability that is held, the offer price.
The fair value of loans recognised at amortised cost is estimated on the basis of the current market rate of interest on similar lending. Write-downs of loans are taken into account both in the
amortised cost and when estimating fair value. When estimating the fair value of a loan, consideration is also given to the development of the associated credit risk in general.
Losses that are expected to occur as a result of future events are not included in the accounts, regardless of how likely it is that the loss will occur.
Financial assets are classified into one of the following categories: • available for sale,
Available for sale. A financial asset is classified as available for sale if it is: – acquired or incurred principally for the purpose of selling or repurchasing it in the near term, is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking, or
– is a derivative (except for a derivative that is a designated as an effective hedging instrument).
Available for sale financial assets are measured at fair value at the balance sheet date. Changes in fair value are recognised to profit and loss.
At fair value through profit and loss in accordance with the fair value option. At the time of implementing IFRS and upon subsequent inception, any financial asset or liability can be classified at fair value through profit and loss if it is the case that: – such a classification reduces a mismatch that would otherwise have occurred in measurement or recognition as a result of different rules for measurement of assets and liabilities
Derivatives are defined as follows: A “derivative” is a financial instrument or other contract within the scope of IAS 39 with all three of the following characteristics: - its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable (sometimes called the ‘underlying’), - it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors - it is settled at a future date.
Storebrand uses only fair value hedging where the items hedged are financial assets and financial liabilities measured at amortised cost. Derivatives that fall within this category are recognised at fair value through profit and loss, while changes in the value of the hedged item that relate to the risk hedged are applied to the book value of the item and are recognised through profit and loss.
Financial liabilities. Subsequent to inception, all financial liabilities are measured at amortised cost using the effective interest method.
Income recognition for asset management activities. Asset management fees are recognised to profit and loss when they are earned. Commissions paid to distributors of securities funds are reported in the profit and loss account as a reduction in revenue.
02 Profit and loss account Storebrand group 2004 and 2003 in accordance with NGAAP
Insurance premiums for own account 18 740.6 13 805.6 Net interest and other income – banking 1 171.8 1 803.9
Financial income – other activities 1 489.4 238.6 Share in profit of If Skadeförsäkring 189.0 324.3 Other income 452.1 406.5
Claims and benefits paid for own account – insurance –10 631.2 –8 295.2 Change in insurance reserves – life insurance –11 626.5 –9 862.0 Interest and similar costs – banking –744.7 –1 311.2 Losses on loans, guarantees etc. – banking 7.4 –173.8 Financial expense – insurance –6 538.1 –7 540.0 Financial expense – other activities –237.1 –284.8 Operating costs –2 011.0 –2 041.7 Other costs –314.7 –325.4 Total costs –32 095.9 –29 834.1
Tax payable –112.6 –169.2 Minority interests' share of profit –1.7 –0.9 Profit/loss for the period 2 358.1 789.6
Reconciliation of expected and actual tax charge NOK MILLION 2005 2004
Losses carried forward –5 680.6 –3 479.4 Allowances carried forward –1 358.4 –1 139.8 Basis for net deferred tax/tax assets –6 441.1 –2 568.0 Write-down of basis for deferred tax assets 6 050.6 1 903.0 Net basis for deferred tax/tax assets –390.5 –665.0 Net deferred tax asset/tax liability in the balance sheet –109.5 –186.2
Deferred tax assets have been written down as a result of uncertainty as to whether future taxable income will be sufficient for all losses carried forward to be used. The 2004 tax reform introduced exemption from taxation for dividends and gains/losses on shares in the EEA area, and it is expected that the group will continued to derive income from such investments in future years.
Intangible assets are depreciated on a straight line basis over 3-6 years. OTHER
Accumulated depreciation and write-downs opening balance –292.6 –2.0 –66.6 –46.6 –407.7 –582.8 Accumulated depreciation and write-downs closing balance –73.0 –1.9 –24.7 –77.7 –177.4 –609.5 Revaluation fund opening balance 7.3 Changes in the period 4.7 Revaluation fund closing balance 12.0 *) Properties for own use
Depreciation on a straight line basis over the following periods: Equipment 4 years Vehicles 5 years Fixtures and fittings 4 years
Pension assets are based on the financial investments held by Storebrand Livsforsikring, which had the following composition at 31.12: Properties and real estate 10% 9% Bonds held to maturity 28% 37% Secured and other lending 1% 1% Shares and other equity participations 27% 17%
Booked in the balance sheet: Pension assets 183.2 148.2 Pension liabilities 624.9 634.6
Main assumptions used when calculating net pension liability at 31.12: Discount rate 4.7% 4.7% Expected return on pension fund assets in the period 6.0% 6.0% Expected earnings growth 3.0% 3.0% Expected annual increase in social security pensions 3.0% 3.0% Expected annual increase in pensions in payment 2.0% 2.0% Standardised assumptions on mortality/disability and other demographic factors as produced by the Norwegian Financial Services Association. Average employee turnover rate of 2-3% of entire workforce.
POST-TERMINATION NO. OF SHARES LOAN INTEREST RATE REPAYMT. SALARY (MONTHS) OWNED '*) NOK 1.000 AT 31.12.05 BASIS **)
**) AN = Level payment loan, SE – Instalment loan, final payment ***) Senior executives are contractually entitled to performance related bonuses related to the group's value-based management system and divided into three. The group’s value creation finances the overall amount of the bonus, but individual performance determines what proportion of the bonus is allocated. The bonus allocated to an individual is credited to a bonus account, and 1/3 of the balance on the bonus account is paid each year. If the employee leaves the company, the balance on the bonus account is not paid out, unless the employee leaves after 5 five years as a member of the bonus scheme or more than 10 years' service. Salary and other remuneration of senior executives totalled NOK 44.2 million. Senior executives have in total NOK 11 million in bonus accounts before allocations have been made in 2006 for the year 2005, and the discounted present value of their pensions is NOK 41.9 million. Senior executives are members of the Storebrand pension scheme on normal terms and conditions.
****) The remuneration of the Chairman of the Board was NOK 0.5 million and total remuneration paid to the members of the Board was NOK 2.1 million. Loans to employees of the group total NOK 1,327 million.
Shares in Storebrand ASA held by non-executive officers *) Corporate shareholder Ferd Invest AS
Ann Jeanette Magnussen 1 132 Lars Tronsgaard 0 Johan H. Andresen jr. *) 2 020 800 Roar Engeland 0 Arvid Grundekjøn 0 Per Alm Knudsen 0 Paul Eggen jr. 1 653 Inger Lise Gjørv 0 Margrethe Øvrum 0 Marius Steen 0 Vibeke Hammer Madsen 0 Barbara Rose Milian Thoralfsson 0 Astrid Olive Aanerud 625 Ann-Mari Gjøstein 140 Rune Pedersen 0 Anders Berggren 0
Main accounting figures for associated companies – figures shown are for 100% of the company/companies. NOK MILLION 2005 2004
Assets Nordben Life and Pension Insurance Co. Ltd. 6 417.0 6 013.2
Liabilities Nordben Life and Pension Insurance Co. Ltd. 6 165.1 5 766.6
Norben Life & Pension Insurance Co. Ltd. 25% 29.5 61.6 0.4 62.0 11 Jointly controlled businesses
Jointly controlled businesses are businesses the group operates in partnership with external parties.
The consolidated accounts include the following companies with the amounts shown: NOK MILLION 2005 2004
Revenue Storebrand Helseforsikring AS 70.8 57.4 Fair Financial Ireland plc. *) 182.7 168.1 Sjølyst Eiendom AS Group profit Storebrand Helseforsikring AS 5.3 3.2 Fair Financial Ireland plc. 10.4 2.5 Sjølyst Eiendom AS Assets Storebrand Helseforsikring AS 99.0 83.0 Fair Financial Ireland plc. 326.2 297.9 Sjølyst Eiendom AS 330.0 Liabilities Storebrand Helseforsikring AS 72.9 59.1 Fair Financial Ireland plc. 307.0 286.0 Sjølyst Eiendom AS *) An agreement was entered into in December 2005 for the sale of these shares. The sale transaction is expected to be completed in the first half of 2006 following approval by the relevant authorities.
Rental income from investment properties 977.4 825.0 Operating costs (including maintenance and repairs) for investment properties that produced rental income in the period –128.3 –110.3
Additions from new purchases 962.3 2 910.1 Additions caused by supplementary expenditure 264.0 129.8 Net revaluation/write-downs 36.6 163.9
Number of employees at 31.12 *) 1 321 Average number of employees 1 305 Full time equivalent positions at 31.12 *) 1 295 Average number of FTEs 1 260 *) Excluding employees of Storebrand Helseforsikring and Fair Forsikring.
Net income and gains from financial assets at fair value NOK MILLION 2005
Interest income from bonds held to maturity 1 879.8 Interest income from other bonds at amortised cost 530.1 Net income from bonds at amortised cost 2 409.9
Interest expense – subordinated loans –142.0 Interest expense – funding –50.6 Interest expense on other financial indebtedness –9.7 Total interest expense –202.3 18 Lending write-downs
Write-downs of lending, guarantees etc. for the period Change in specific loan write-downs for the period 107.5 Change in grouped loan write-downs for the period 26.5 Other corrections to write-downs –19.3 Realised losses on loans where provisions have previously been made –81.9 Realised losses on loans where no provisions have previously been made –0.9 Recovery of loan losses previously realised 2.5 Write-downs of lending, guarantees etc. for the period 34.4
Write-downs of individual loans at 01.01 501.0 Losses realised in the period for which individual write-downs have previously been made –81.9 Write-downs of individual loans in the period 66.8 Reversals of write-downs of individual loans in the period –103.4 Other corrections to write-downs 7.1 Write-downs of individual loans at 31.12 389.6
Financial assets at fair value. FVO* 46 765.2 46 765.2 Financial assets at fair value. Trading 10 774.1 10 774.1 Financial assets Hold to maturity 31 412.1 34 346.1 Financial assets Loans and Receivables, FVO* 252.8 252.8 Financial assets Loans and Receivables 35 983.3 36 622.7
Total bonds and other fixed-income securities 125 187.5 128 760.9 Derivatives
Subordinated loan capital Subordinated loan capital at amortised cost 3 524.7 3 615.0
Total subordinated loan capital 3 524.7 3 615.0 Other financial liabilities
Guarantees 237.1 Book value of assets pledged as security for lending etc. *) 1 703.1 Undrawn amounts of committed lending facilities 1 285.7 Security pledged for Futures trading 1 429.5 Total contingent liabilities 4 655.4 *) Security pledged and charges
Book value of bonds pledged as security for Storebrand Bank's D-facility at Norges Bank 1 703.1
Hedge accounting is used only by Storebrand Bank. Fair value of items to be hedged is hedged against interest rate movements (fair value hedging), i.e. it is the interest rate exposure that is hedged. Credit spread is held constant in calculating hedging effectiveness. The items hedged for interest rate risk are three fixed rate bond issues, a fixed rate subordinated bond issue, a zero coupon bond issue (structured loan) and a fixed rate commercial loan. The effectiveness of hedging is monitored in accordance with the requirements of IAS 39 Financial Instruments: Recognition and Measurement.
TOTAL INCLUDING NOK MILLION COMMERCIAL PAPER BONDS TOTAL BOND FUNDS BOND FUNDS
Commercial paper, bonds and bond funds, fair value 10 545.5 45 918.2 56 463.7 1 075.6 57 539.3 Of which listed 4 962.0 27 393.3 32 355.3 32 355.3
Direct investments in bonds and commercial paper 10 545.5 45 918.2 56 463.7 Indirect investments in commercial paper and bonds through funds managed by Storebrand 461.4 –894.4 –433.0 Base amount for analysis by sector and currency 11 006.8 45 024.0 56 030.8
Modified duration 0.44 2.23 1.89 Average effective yield 2.73 3.70 3.66 Short positions in indirect investments are included in the note. Effective yield on the individual security has been calculated based on the security’s market value. Average effective yield is calculated using the individual security’s share of total interest rate sensitivity as weight.
Equity funds 2 601.3 Bond funds 119.1 Money market funds 1 098.4 Combination funds 1.6 Participations in investment portfolios 1 492.2 Bank deposits 406.8
GROSS AVERAGE NOM. NET NOM. FAIR VALUE FAIR VALUE – HEDGING NOK MILLION NOM. VOLUME VOLUME VOLUME ASSET LIABILITY ASSET LIABILITY
Perpetual subordinated bond issue 2004 166.4 NOK NIBOR + 1.5% Perpetual subordinated bond issue 2004 108.1 NOK 5.9% Subordinated loan 2002-2012, call 2007 100.0 NOK NIBOR + 2.0% Subordinated loan 2003-2013, call 2008 100.0 NOK NIBOR + 2.25% Subordinated loan 2005-2015, call 2010 175.0 NOK NIBOR + 0.7% Subordinated loan 2003-2023, call 2008 1 481.1 EUR EURIBOR + 2.2% Subordinated loan 2004-2014, call 2009 1 394.1 EUR EURIBOR + 0.9%
It is Storebrand's policy to fully hedge currency risks. Currency position limits are set for investment management to ensure effective practical implementation of currency hedging. Currency hedging is mainly carried out through rolling short-term forward foreign exchange contracts.
All credit approvals by Storebrand Bank over a certain limit require the approval of a credit committee chaired by the bank’s managing director, or by the bank’s board of directors. Credit risk is monitored through a risk classification system that ranks each customer by ability to pay, financial condition and collateral. The risk classification system estimates the likelihood of a borrower defaulting (ability to pay/financial condition) and the likely loss given default (collateral). All loans on the bank’s watch list are reviewed at least quarterly in respect of the condition of the borrower and collateral, and of the steps being taken to protect the bank’s position. Retail lending is assessed on the basis of credit scoring, combined with case-by-case evaluation of the borrower’s ability to repay.
SHORT-TERM HOLDINGS OF INTEREST-BEARING SECURITIES AAA AA A BBB NIG TOTAL
LONG-TERM HOLDINGS OF INTEREST-BEARING SECURITIES AAA AA A BBB NIG TOTAL
Loans in default Loans in default without identified impairment 112.9 55.7 Loans in default and loss-exposed loans with identified impairment 641.1 853.8 Gross loans in default 754.0 909.5
Residual contractual period provides only limited information on the company's liquidity risk since the majority of investment assets can be realised in the secondary market earlier than expiry of the contractual period.
*) Lending is presented excluding write-downs **) In this note, bonds and other fixed-income securities includes short positions ***) In this note, derivatives are presented net and excluding short positions
Short-term holdings of financial assets AUD 0.4 –0.1 –0.2 –1.8 –1.8 CAD 1.1 –2.3 –16.8 –18.0 CHF 0.5 –0.1 –0.4 –2.8 –2.9 DKK 0.3 –2.2 –3.4 –5.2
JPY 2.0 –12.3 –41.2 –51.5 NOK –10.2 –63.6 –83.5 –85.6 –531.3 –774.2
Interest sensitivity is a measure of interest rate risk based on how changes in interest rates will affect the market value of bonds, interest rate derivatives and other interest rate sensitive financial items. This summary shows how the values of financial current assets and financial fixed assets (bonds held to maturity) at 31 December 2005 would be affected by an increase of 1 percentage point in all interest rates. Storebrand creates interest rate positions through its assets in order to partly offset the interest rate risk implicit in the company's insurance obligations. However, the interest rate risk represented by insurance policies cannot be calculated and quantified in the same way as interest rate risk for financial items.
Interest-rate risk: Storebrand Bank: An interest rate shock of 2 percentage points would cause a net change in the fair value of the bank's financial instruments of approximately NOK 18 million.
FINANCIAL ASSETS AND BALANCE SHEET ITEMS CURRENCY LIABILITIES IN FOREIGN CURRENCY EXCL. CURRENCY DERIVATES FORWARDS NET POSITION
Life Insurance: The item Reserves – life insurance includes NOK 6.4 billion that the company assumes will be paid as claims or benefits in 2006.
Non-life insurance: The item Reinsurers’ share of technical insurance reserves includes NOK 420 million that the company assumes will fall due/be recognised to income in 2006. The item Reserves – non-life insurance includes NOK 450 million that the company assumes will fall due/be recognised to income in 2006.
+ G’teed interest rate/unit linked return 4 584.7 719.4 142.9 5 447.0 4 648.7 – Administration contribution –1 017.9 –1 017.9 –911.5 – Risk result –440.1 –13.3 –453.4 –324.6 +/– Transfers and additions to reserves –46.1 121.4 –75.3 0.0 174.0
Interest-bearing 223.5 –352.1 347.7 Gains/losses/write-downs – current assets 3 862.5 1 150.1 1 077.6 Gains/losses – bonds at amortised cost *) 3 573.4 –639.3 818.6 *) Unrealised gains on hold to maturity bonds are not included in the accounts.
Change in claims reserve –459.9 –583.1 Change in security reserve 7.7 –1.3 Currency movements 54.5 –58.6 Other changes 0.6 0.7
Life insurance – profit sharing between policyholders and the owner Storebrand Life Insurance offers both products subject to profit sharing with policyholders and products not subject to profit sharing. Products not subject to profit-sharing are group life insurance, annual risk policies (including non-life cover) in the life account, and annual policies in connection with group pension insurance that do not include entitlement to paid-up value. The profit or loss earned on these products is entirely for the account of the owner.
The proportion of profit allocated to each customer is determined on the basis of the contribution the customer’s policies have made to the total profit available for sharing. The amount allocated to the individual customer therefore depends on the product group(s) to which the customer’s policy/policies belongs.
Profit-sharing model -net return on equity *) 491.3 408.7 -0.40% of policyholders' funds 520.9 454.8 -risk margin earned by owner 47.1 46.2 -products without profit sharing 122.2 144.5 -other –15.0 –91.6 Profit allocated to the owner 1 166.5 962.6 *) Includes security reserve, subordinated loan capital, book equity and liability items
MALE FEMALE 30 YEARS 45 YEARS 60 YEARS 30 YEARS 45 YEARS 60 YEARS
Basic interest rate Kredittilsynet sets the highest basic interest rate permitted for new policies and for new members/new accrual of benefits in group pension insurance. The highest basic interest rate for new policies was set at 3% in 1993 and subsequently reduced in 2005 to 2.75% for policies entered into after 1 January 2006. The highest basic interest rate for new members/new accrual of benefits in group pension insurance was reduced from 4% to 3% with effect from renewals in 2004.
The total average guaranteed interest rate for all lines of insurance has reduced from 3.83% in 2000 to 3.64% in 2005. The guaranteed interest rate must be delivered on an annual basis. If the company’s investment return in a year is lower than the guaranteed interest rate, current legislation permits the equivalent of up to one year’s guaranteed return to be met by transfer from additional statutory reserves. Any negative return must be met from the company’s equity.
New business written in 2005 is subject to a 3% basic interest rate. In the case of policies transferred to the company, the basic interest rate is determined by the rate applied to the policy by the insurance company from which the business is transferred, subject to a maximum of 4%.
Insurance risk: Most of the company’s lines of insurance include cover for disability through either disability pension, exemptions from premiums or one-off payments. Individual policies and group life policies also include life cover. Group pension insurance also provides widow or widower’s pensions with payment commencing on the death of the insured.
Non-life insurance Risk exposure and insurance risk – Storebrand Skadeforsikring AS In 2000, Storebrand Skadeforsikring transferred all its land-based Norwegian non-life insurance and all direct marine insurance to If through a 100% reinsurance arrangement. The result is that Storebrand Skadeforsikring has retained fronting responsibility, but has no commercial responsibility for the business transferred.
Actual claims experience compared with earlier forecasts Storebrand Skadeforsikring AS has reinsured all its insurance risk, and its claims performance is therefore largely dependent on the requirements imposed by Kredittilsynet for the minimum level of claims reserves that must be held for the various lines of insurance.
Comparable figures for 2004 are restated to reflect the new pension accounting standard.
Net receipts/payments – securities in the trading portfolio: Shares and other equity investments –933.0 95.8
Cash and cash equivalent assets at start of the period 119.4 109.1
Note 6: Holding company's shares in subsidiaries and associated companies page 96
Note 14: Holdings of shares in Storebrand ASA by executive management and members of corporate bodies page 99
The accounts of Storebrand ASA have been prepared in accordance with the Accounting Act and Norwegian generally accepted accounting principles. The Accounting Act does permit the use of IFRS for the company’s unconsolidated accounts for 2005, but Storebrand ASA has elected to follow the Norwegian standards.
The preparation of the annual accounts has involved the use of estimates and assumptions that have affected assets, liabilities, revenue, costs and information on potential liabilities. Future events may cause these estimates to change. Such changes will be recognised in the accounts when there is sufficient basis to use new estimates.
Assets and liabilities had been valued in accordance with the general valuation rules of the Accounting Act. Assets intended for permanent ownership and use are classified as fixed assets, while assets and receivables due for payment within one year are classified as current assets. Equivalent principles have been applied to liability items.
In the company’s unconsolidated accounts, investments in subsidiaries and associated companies are valued at acquisition cost as reduced by any write-downs. The main income of
Proposed and approved dividends and group contributions from subsidiaries are recognised in the unconsolidated accounts of
Deferred tax and deferred tax assets are calculated on the basis of timing differences between accounting and tax values of assets and liabilities. Deferred tax assets are recorded in the balance sheet to the extent it is considered likely that the group will have sufficient taxable profit in the future to make use of the tax asset. Deferred tax is applied directly to equity to the extent that it relates to items that are themselves directly applied to equity.
Shares and other equity investments. Investments in shares in subsidiaries and associated companies are valued at cost price less any write-down of value. The need for any writedown is assessed at the end of each accounting period in the same way as for other fixed assets.
Where the share or participation in question is listed on a stock exchange or other regulated market, fair value is determined as the closing price on the last trading day immediately prior to or on the date of the balance sheet.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. For financial assets that are listed on a stock exchange or another regulated market place, fair value is determined as the bid price on the last trading day up to and including the balance sheet date, and in the case of an asset that is to be acquired or a liability that is held, the offer price.
Bond loans. Bond loans are valued at amortised cost using the effective yield method. Amortised cost includes transaction costs at the date of issue.
Ordinary wages and salaries 18.6 47.7 35.6 Employer's social security contributions 4.8 9.9 8.1 Pension costs –13.5 –3.2 –1.9
Reconciliation of pension assets and liabilities in the balance sheet: NOK MILLION 2005 2004
Net pension liabilities in the balance sheet including employment taxes 28.8 88.2
Booked in the balance sheet: Pension assets 183.2 147.3 Pension liabilities 212.0 235.5
Actual return on pension assets 81.3 110.1 04 Remuneration of the Chief Executive Officer and elected officers of the company
Total remuneration 4 893 6 575 3 335 Other taxable benefits 207 152 181 Pension cost *) 706 414 380
Board of Representatives 436 509 572 Control Committee **) 872 999 793 Chairman of the Board 480 404 330 Board of Directors including the Chairman 2 075 1 707 1 715 Remuneration to Deloitte Statsautoriserte Revisorer AS and associated companies Statutory audit 2 167 Other reporting services 61 Taxation advice 52 Other services not audit-related ***) 2 660 *) Pension cost relates to accrual for the year.
Idar Kreutzer is Chief Executive Officer of Storebrand ASA and Managing Director of Storebrand Livsforsikring AS. He is entitled to 24 months' salary following the expiry of the normal notice period. All forms of work-related income from other sources, including consultancy assignments, will be deducted from such payments. Kreutzer is entitled to a performance-related bonus based on the group’s ordinary bonus scheme, which has three aspects. The group’s value creation finances the overall amount of the bonus, but individual performance determines allocation. Kreutzer's individual bonus entitlement is credited to a bonus account, and 1/3 of the balance on the bonus account is paid each year. The balance on Kreutzer's bonus account is NOK 3 million, prior to the amount to be credited for 2005. Kreutzer is a member of the Storebrand pension scheme on normal terms. The discounted present value of the pension entitlement is NOK 9.2 million, made up of NOK 1.2 million in the insured scheme and NOK 8.0 million in the uninsured scheme. These amounts represent the liability of the insured and uninsured scheme calculated on a linear basis using the financial assumptions specified in the accounts.
Calculation of deferred tax assets and deferred tax Tax increasing timing differences Securities Pre-paid pensions 182.6 147.3 551.8 Gains/loss account 6.4 8.0 10.0 Total tax increasing timing differences 189.0 155.3 561.8
Tax reducing timing differences Securities –31.8 –146.5 –6.3 Operating assets –58.2 –75.9 –57.9 Provisions –13.0 –24.8 –45.3 Accrued pension liabilities –212.1 –235.5 –251.0 Total tax reducing the timing differences –315.1 –482.7 –360.5 Net timing differences before losses carried forward –126.1 –327.4 201.3 Losses carried forward –1 034.9 –400.4 –366.7 Allowances carried forward –661.3 –661.3 –661.3 Write-down of deferred tax assets *) 1 822.3 1 389.1 Net tax increasing/reducing timing differences –826.7 Deferred tax/Deferred tax assets 231.5 *) The balance sheet value of deferred tax assets has been written down. This is because future income from subsidiaries will principally be in the form of dividends rather than taxable group contribution.
Comparable figures for 2004 have been restated in respect of the new pensions accounting standard.
Reconciliation of tax charge and ordinary profit Pre-tax profit 1 008.7 2 360.3 361.2 Expected tax at nominal rate (28%) –282.4 –660.9 –101.1 Tax effect of dividends received 283.5 194.7 92.4 Tax effect of gains on shares 131.7 446.1 17.6 Tax effect of permanent differences –11.9 30.1 –1.4 Tax effect of the write-down of deferred tax assets –120.9 –262.3 Tax adjustment for previous years 20.9 9.7 Tax charge –231.5 17.1 Effective tax rate 10% –5%
REGISTERED SHARE NO. OF SHARES PAR VALUE INTEREST/ BOOK CONT. OFFICE CAPITAL (1.000) NOK VOTING IN % VALUE
Storebrand Alternative Investment ASA Oslo 2.0 101 11 56.0% 1.1 Associated/jointly-controlled companies
The sale is expected to take place in the first half of 2006 **) 74.9% held by Storebrand Livsforsikring AS. Minority interests amount to 0.2%
Bonds, bond funds, and other fixed-income securities NOK MILLION COMMERCIAL PAPER BONDS TOTAL
Direct investments in bonds and commercial paper 1 346.1 1 048.5 2 394.6 Base figure for allocation by sector and currency 1 346.1 1 048.5 2 394.6
**) Share capital reduced by NOK 98.3 million in 2005 by cancellation of 19.655.637 shares. 10.268.637 own shares were bought back in 2005. The company held 5.878.000 own shares at 31.12.05. Shares have been bought back to help maintain an appropriate capital structure for the group and to benefit shareholders.
Folketrygdfondet 10.78 Orkla ASA 7.60 State Street Bank Trust (NOM*) 5.09 Fidelity Funds-Europe 4.18 State Street Bank & Trust (NOM*) 4.12 Euroclear Bank S.A. (NOM*) 3.70 JPMorgan Chase Bank (NOM*) 3.38 Arion Custody (NOM*) 2.76 Goldman Sachs International (NOM*) 2.66 JPMorgan Chase Bank 2.32 Storebrand ASA 2.27
Banca Intresa S.P.A (NOM*) 2.24 Morgan Stanley & Co (NOM*) 1.65 Deutsche Bank AG (NOM*) 1.61 Bank of New York, Brussels 1.55 Mellon Bank AS (NOM*) 1.17 Capitalia S.P.A (NOM*) 1.14 Mellon Bank AS (NOM*) 1.10 Citibank, N.A. (NOM) 0.90 Cais Bank Paris (NOM*) 0.87
With reference to the auditor’s report of 14 February 2006, the
Control Committee recommends that the Annual Report and Accounts proposed be adopted as the Annual Report and Accounts of
The Board of Directors’ proposal for the Annual Report and Accounts, together with the Auditor’s report and the Control Committee’s statement have, in the manner required by law, been presented to the Board of
We have audited the annual financial statements of Storebrand ASA as of 31 December 2005, showing a profit of NOK 1,008.7 million for the parent company and a profit of NOK 1,400.1 million for the group. We have also audited the information in the Board of Directors’ report concerning the financial statements, the going concern assumption, and the proposal for the allocation of the profit. The annual financial statements comprise the parent company’s financial statements and the group accounts. The parent company’s financial statements comprise the balance sheet, the statements of income and cash flows and the accompanying notes. The group accounts comprise the balance sheet, the statements of income and cash flows, the statement of changes in equity and the accompanying notes. The rules of the Norwegian accounting act and good accounting practice in Norway have been applied to produce the parent company’s financial statements. International
Financial Reporting Standards as adopted by the EU have been applied to produce the group accounts. These financial statements are the responsibility of the Company’s Board of Directors and Chief Executive Officer. Our responsibility is to express an opinion on these financial statements and on the other information according to the requirements of the Norwegian Act on Auditing and Auditors.
• the group accounts are prepared in accordance with the law and regulations and give a true and fair view of the financial position of the
Group as of 31 December 2005, and the results of its operations and its cash flows and the changes in equity for the year then ended, in accordance with the International Financial Reporting Standards as adopted by the EU
• the Company’s management has fulfilled its duty to produce a proper and clearly set out registration and documentation of accounting information in accordance with the law and good bookkeeping practice in Norway
Earnings per ordinary share: The calculation of earnings per ordinary share is based on profit after tax adjusted for changes in statutory security reserves after tax in respect of non-life insurance. These statutory reserves include security. reinsurance and administration reserves, as well as the guarantee reserve. The number of shares used in the calculation is taken as the average number of ordinary shares outstanding over the course of the year. In case of new issues of shares, the new shares are included from the date of subscription.
Group pension insurance: A group pension insurance scheme where pensions are paid in instalments from an agreed age, during the life of the insured. Such insurance normally includes spouse, child and disability pensions.
Interest result: The result arising from financial income deviating from that assumed for the premium tariffs.
Unit Linked: Life insurance offering investment choice whereby the customer can influence the level of risk and return by selecting in which funds assets are to be invested.
Forward Rate Agreements (FRA): FRAs are agreements to pay or receive the difference between an agreed fixed rate of interest and the actual rate for a fixed amount and period of time. This difference is settled at the start of the future interest period. FRA contracts are particularly appropriate to the management of short-term interest rate exposure.
Interest rate futures: Interest rate futures contracts are related to government bond rates or short-term reference interest rates. Interest rate futures are standardised contracts which are exchange traded and are subject to established clearing arrangements. Profits and losses on futures contracts are recognised daily, and are settled on the following day.
Interest rate options: Interest rate options can be related to either bond yields or money market rates. The purchase of interest rate options related to bonds (also known as bond options) confers a right (but not an obligation) to buy or sell bonds at a pre-determined price. Interest rate options can be used as a flexible instrument for the management of both long and short-term interest rate exposure.
Share options: The purchase of share options confers a right (but not an obligation) to buy or sell shares at a pre-determined price. Share options may be related to stock market indices as well as to specific individual stocks. The sale of share options implies the equivalent one-sided obligation. In the main, exchange traded and cleared options are used.
2001–2004 Executive Vice President, Finance Director Storebrand ASA, 1994–2001 Vice President/ Relationship Manager, Citibank International plc, 1990–1994 Assistant Treasurer, Scandinavian Airlines Systems 4> IDAR KREUTZER (43), Group Chief Executive Officer, Storebrand ASA and Managing Director, Storebrand Life Insurance AS Norwegian School of Economics and Business Administration (NHH) 1995–2000 Storebrand – Chief Financial Officer, 1992–1995 Storebrand – Various positions in treasury and business development, 1988–1991 Medinor Project – Consultant, 1986–1987 The Municipality of Oslo – Political Secretary & Advisor to the City Council 5> MAALFRID BRATH (40), Executive Vice President, Retail Market State Authorised Accountant, Norwegian School of Economics and Business Administration (NHH) and Master of General Business, Norwegian School of Management (BI)
2002–2004 Head of Storebrand Group Private Sector Distribution, 1999–2002 Senior Vice President, Storebrand Livsforsikring AS, 1997–2002 Managing Director, Storebrand Fondsforsikring AS, 1995–1996 Vice President, Internal Audit, Storebrand ASA, 1989–1995 Arthur Andersen & Co 6> EGIL THOMPSON (41), Executive Vice President, Corporate Communications and Brands Degree in political science, University of Oslo, 1990 1999–2000 Deputy Director, Corporate Communications, Storebrand ASA, 1994–1999 Journalist and head of editorial staff, Aftenposten, 1990–1994 Journalist with the Norwegian News Agency (NTB)
7> ROLF CORNELIUSSEN (49), Executive Vice President, Life Production & Service/IT Norwegian School of Economics and Business Administration (NHH) 1981 1997–2000 Chief IT Officer, Storebrand ASA, 1988–1997 Associate Partner, Andersen Consulting, 1982–1988 Advisor/ accountant, Arthur Young 8> ERIK RÅD HERLOFSEN (44), Executive Vice President, Human Resources Graduate in Law, University of Oslo, 1987. Admitted to the Supreme Court, 1997 1996–2000 Managing Director, Storebrand Finans AS, 1990–1996 Attorney, Storebrand Finans AS, 1988–1990 First consultant, Kristiansand tax office 9> PER KUMLE (47), Managing Director, Storebrand Bank ASA MSc in Chemical Engineering, Norwegian Institute of Technology, Trondheim 1989–2001 Managing Director, Citibank International Plc, Norway Branch and Head of Northern European Shipping, Citibank, 1986–1989 Christiania Bank og Kreditkasse, 1984–1986 Saga Petroleum 10> ODD ARILD GREFSTAD (40), Executive Vice President, Chief Finance Officer State Authorised Public Accountant, Authorised Financial Analyst (AFA) 1998–2002 Head of Business Control, Storebrand ASA, 1997–1998 Group Controller, Life Insurance, Storebrand ASA, 1994–1997 Vice President, Internal Audit, Storebrand ASA, 1989–1994 Arthur Andersen & Co
February • Storebrand announces plans to enter Swedish pensions market. • Hans Aasnæs appointed managing director of Storebrand Investments from 1 February 2005. Aasnæs came from the position of Chief Investment Officer.
August • Rating agency Moody’s upgrades Storebrand Livsforsikring and Storebrand ASA. Storebrand Livsforsikring is upgradet from A3 (positive outlook) to A2 (stable outlook ). Storebrand ASA is upgraded from Baa3 (positive outlook) to Baa2 (stable outlook ).
October • Storebrand celebrates the 10th anniversary of its commitment to socially responsible investments. The Group expands its minimum standards with four new criteria.
• Storebrand’s commitment to the municipal pension market results in many new customers and growth of NOK 4.5 billion in public sector pension assets.
Storebrand Life Insurance offers a wide range of products for occupational pensions, individual pension savings, life insurance and health insurance for companies, public sector entities and private individuals.
1) Companies with occupational pension, group life insurance or health insurance policies 2) Employees who are members of group pension schemes or have a paid-up policy from previous membership 3) Individual customers for savings or insurance products
Storebrand Bank’s objective is to be a modern and reliable bank for private individuals and selected segments of the corporate market. The bank shall be easy to relate to, with attractive products and prices. By offering free banking for routine banking services, the bank will actively recruit new customers to Storebrand.
Storebrand Investments offers a complete asset management concept with a clear socially responsible investment profile for institutional investors and the retail market.
Storebrand ASA Head office: Filipstad Brygge 1 P O Box 1380 Vika No-0114 Oslo Norway Tel: +47 22 31 50 50 www.storebrand.no
P ro d u ctio n : N etw o rk