9 March 2010 Announcement No. 02/2010 2009 Key features • Topdanmark’s post-tax result for 2009 increased to a
DKK 1,446m profit from a DKK 189m loss in 2008 representing a profit per share of DKK 91.7.
DKK 200m on the DKK 1,200 - 1,300m assumed in the most recent profit forecast model.
800 - 900m. Premium growth for 2010 is assumed to be 1 - 2% and the combined ratio 95 - 96% (2009: 93.6%).
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Contents Management’s review 1 2009 key features 3 Financial highlights Focus on 2009 and prospects for 2010 4 Profit of DKK 1,446m in 2009 4 Non-life insurance 12 Life insurance 16 Investment activities 19 Parent company 19 Taxation 19 Prospects for 2010 23 Share buy-back 24 Risk management 33 Solvency 34 Capital model 35 The process of accounts preparation 37 Corporate Governance 41 Remuneration structure 42 CSR policy 44 Investor Relations 45 Annual General Meeting 45 Financial calendar 46 Company announcements and trading reports 47 Board of Directors and Board of Management 51 Five-year summary - Group
Management’s statement and auditors' reports 105 Management’s statement Auditors' reports 106 Internal auditors 107 Independent auditor 108 Group Structure
Topdanmark A/S Borupvang 4 DK - 2750 Ballerup Tel +45 44 68 33 11 Fax +45 44 68 19 06 R eg.No. 78040017 E-mail: topdanmark@topdanmark.dk Web: www.topdanmark.com
Provisions for insurance and investment contracts: Financial ratios (parent company) Post-tax profit / (loss) as a % of
Post-tax profit / (loss) per share (DKK) 59.1 90.9 75.0 (12.1) 92.2 (1.7) 21.8 Post-tax profit / (loss) per share, diluted (DKK) 57.7 88.3 73.3 (12.1) 91.7 (1.7) 21.7 Net asset value per share (DKK) 207.1 244.0 232.3 207.1 288.1 207.1 288.1 Share buy-back per share (DKK) 33.6 74.6 116.8 23.4 23.8 0.3 10.0 Listed share price end of period 547 934 734 687 703 687 703
Average number of shares, diluted ('000) 20,116 19,171 17,351 15,640 15,769 15,620 15,565
Non-life insurance - Investment return after transfer to technical result etc. (1,705) 723 Profit on non-life insurance 91 1,592 Life insurance (57) 292 Parent company etc. (58) (21) Pre-tax profit / (loss) (24) 1,863
Profit of DKK 1,446m in 2009 Topdanmark’s post-tax result for 2009 was a profit of DKK 1,446m (2008: DKK 189m loss) representing a profit per share of DKK 91.7 and a return on shareholders’ equity of 36.6%.
The pre-tax result was turned around from a DKK 24m loss to a DKK 1,863m profit. Profit on non-life insurance increased to DKK 1,592m from DKK 91m primarily due to a DKK 2,428m improvement in the investment return. However, the technical result was DKK 927m lower than in 2008 due to lower gains on the claims provisions and an increase in fire and theft claims, lower interest rates as well as price cuts in motor and workers’ compensation insurance. The result of life insurance improved to a DKK 292m profit from a DKK 57m loss due to, among other factors, and in contrast to 2008, the investment return being sufficiently high for Topdanmark to include in income both the risk allowance for the year and the shadow account from previous years in Life V. For further details see: ”Non-life insurance”, "Investment activities” and “Life insurance”.
In its Q1 - Q3 2009 interim report, Topdanmark's post-tax profit forecast model for 2009 was quoted as DKK 1,200 - 1,300m. Consequently the actual result of DKK 1,446m was around DKK 200m better than assumed in the most recent interim report due to a combination of a better investment return (just over DKK 100m) and a better technical result thanks to fewer than assumed weather and theft claims (DKK 47m and DKK 25m respectively). Furthermore it was assumed that there would be no gains on claims provisions in Q4 (DKK 67m).
The expense ratio was also under pressure in 2009. There was a general 4.0% pay increase in the insurance sector, obtained through collective agreements, as well as salary drift of around 1%. A number of companies have introduced an employment freeze or made redundancies in order to reduce the increase in payroll costs which represent almost 75% of those expenses included in the expense ratio. It is estimated that the increase in payroll costs exceeded the expected 0.5 - 1% growth in premiums earned. The overall market expense ratio is estimated to have increased to just under 18% from around 17.6%.
On the basis of the first three quarters of 2009 the combined ratio including gains on the claims provisions is estimated to have increased to around 95% from 92.5%. In particular a number of small and medium-sized insurance companies have seen increasing combined ratios in 2009 and are operating with combined ratios over 100.
The pressure on the combined ratio and the low interest rates on the premium reserves have resulted in a more disciplined market in 2009. Accordingly most companies have given notice of price increases on house and contents insurance policies and some of the companies have also given notice of price increases on accident, SME, agricultural and health insurance policies.
To improve competitiveness Topdanmark has implemented price cuts causing a negative effect of DKK 160m on premiums earned in 2009. Since 2006 overall price cuts have totalled DKK 600 - 700m, primarily within motor and workers’ compensation insurance. They will have no effect on premium growth in 2010.
Total gains on claims provisions on own account 92 67 506 214
Theft claims increased DKK 85m or 20.0% to DKK 507m in 2009 from DKK 422m in 2008 corresponding to a 1.0pp adverse effect on the claims trend. Theft claims increased 27.7% in the first three quarters of 2009 but slowed down in Q4 when the increase reduced to 2.8% from the level during Q4 2008. Theft claims have increased 79% since 2006 and therefore in its H1 report for 2009 Topdanmark announced that it would implement price increases of an average of 9% for property polices for businesses and 12% for contents policies for individual households.
Claims in workers' compensation insurance increased in 2009 due to lower gains on the claims provisions and declining real interest rates. Furthermore the tax reform increased the level of claims by 3.8%, and a Danish Supreme Court decision increased the level of claims by 1.7%. In isolation the effect of the tax reform and the court decision had an effect corresponding to a 0.5pp increase in the overall claims trend.
The claims trend was adversely impacted by price cuts of DKK 140m in workers’ compensation and motor insurance generating a 1.1pp negative effect.
Overall expenses on claims, reinsurance, sales and administration as a percentage of gross premiums earned (combined ratio) increased from 82.4% to 91.1%, which was better than the 92 - 93% assumed in the Q1 - Q3 interim report for 2009. The improvement was due to both gains on claims provisions of DKK 67m in Q4 and lower weather-related claims of DKK 31m in Q4 as compared with the assumption of DKK 75m.
Gains on claims provisions on own account 92 67 506 214
Developments in Q4 The result of non-life insurance increased to DKK 323m in Q4 2009 from DKK 42m in Q4 2008 due to a DKK 490m improvement in the investment return to DKK 115m while the technical result declined DKK 213m to DKK 204m.
Premiums earned in Q4 declined 1.3% from the Q4 2008 level although this reflected a slowing down of the previous three quarters' decline primarily due to the continued growth in sales in the personal market in Q3 and Q4 by Topdanmark's own sales channels. However, premiums earned were adversely impacted by price cuts (minus 1.6pp), lost business in workers' compensation insurance, the recessionary effect and lower sales by banks.
Consequently the combined ratio increased to 91.1% from 83.3%. Excluding the gains on claims provisions the combined ratio increased to 94.3% from 87.5%.
The retention percentage, calculated as the number of people who were customers on both 31 December 2008 and 2009, was unchanged at 91%.
The claims trend increased 5.0pp to 76.2% due to a significant increase in compensation on theft and fire claims and the price cuts implemented in motor insurance. Due to Topdanmark's introduction of micro rating with a more risk-based and individual pricing structure, the claims frequency in motor insurance declined 3% which was significantly better than the market which saw a 1% increase. Thanks to this fall in frequency the claims trend in motor insurance declined 0.3pp in spite of a 2.0% decline in average premiums following the price cuts.
One of the measures taken to improve the claims trend was the implementation of price increases in house and contents insurance which will have an effect in both 2010 and 2011. At the same time the pricing structure of house and contents insurance is being adjusted which will link the price of insurance closer to the claims risk.
The expense ratio declined to 15.3% from 15.9% as a result of the increased focus on cutting expenditure, implementation of an employment freeze and lower commission due to lower sales through banks.
Gains on claims provisions on own account 2 26 114 111
The SME segment offers policies to commercial and agricultural businesses with fewer than 50 employees sold by Topdanmark's sales organisation and alliance partners.
The technical result declined DKK 504m to DKK 379m in 2009 mainly due to a deteriorated claims trend.
The combined ratio increased to 89.6% in 2009 from 77.8% in 2008. Excluding the gains on claims provisions it increased to 92.0% from 85.3%.
Gains on claims provisions on own account 34 25 266 76
Industrial In 2009 the industrial market was characterised by the establishment of several large international insurance companies in the Danish market particularly focusing on the large and international Danish industrial companies. As a result, many of those insurance companies already established in the market increased their focus on small and medium-sized businesses, Topdanmark's primary base of operations. This intensified competition in the industrial market particularly within workers' compensation insurance. At the same time, due to the recession, there was a general decline in the market base particularly in workers' compensation insurance.
The Industrial segment offers policies for Danish based businesses with more than 50 employees as well as captive-based policies.
The claims trend increased 18pp to 82.2% from 64.2% mostly due to lower gains on the claims provisions (12.3pp). Furthermore the trend in workers' compensation insurance deteriorated due to the lower interest rates, a change in the assumed wage and salary indexation, the tax reform and a Danish Supreme Court decision.
Gains on claims provisions on own account 57 16 126 27
One of the results of the financial crisis in 2008 was a significant increase in the yield spread between swaps and mortgage bonds. The life insurance and pension fund companies had previously made provisions for liabilities using an interest rate curve based on swaps. To hedge these liabilities they mostly invested in mortgage bonds. The significant increase in the yield spread between swaps and mortgage bonds resulted in disproportionately large withdrawals from the companies’ bonus potential. To offset this and give a truer picture, the Danish Insurance Association came to an agreement on financial stability in the pension sector with the Danish Ministry of Economic and Business Affairs. One of the main points of the agreement was that for the period until 2010 the companies were allowed to include some of the interest rate curve on mortgage bonds in the curve used to calculate the companies’ liabilities. Furthermore the bonus policy and the decision on bonus rates should ensure that generally the companies do not accept
liabilities other than the guaranteed pension benefits. This agreement on financial stability was extended in 2009 until 2011.
Result of life insurance The result of life insurance was a profit of DKK 292m in 2009 (2008: DKK 57m loss).
(DKKm) Life I Life V Group Life I Life V Group
Transferred to / from shadow account (60) (52) (112) (73) 113 40 Profit / (loss) in Topdanmark Link (26) 38 Financing charges Liv Holding (14) (8)
38m profit in 2009 from a DKK 26m loss in 2008 primarily due to a DKK 30m investment return on shareholders’ equity in 2009 (2008: DKK 30m loss) and an improvement in the technical result to a DKK 4m profit in 2009 from a DKK 1m loss in 2008.
Excluding the return on equities and instruments used to hedge the guaranteed benefits, the investment return on shareholders’ equity was 6.5% in Life I and 9.5% in Life V.
Regular premiums increased 3.8% to DKK 2,705m in 2009 from 2,605m in 2008, which is slightly lower than the 5% growth expected in the interim report for Q1 - Q3
2009. The lower than expected growth was due to a decline in customers' premium payments following the general recession and increasing unemployment in society.
Single premiums decreased 63.4% to DKK 503m in 2009 from DKK 1,375 in 2008. Part of this decline was due to the slowing down of the market of single premiums in the wake of the financial crisis but primarily it was due to a number of pension fund companies’ introducing loss participation schemes in 2008 and their retention of them during most of 2009. As a result of these schemes the companies' corporate customers were incentivised to not change to another pension supplier. The decline in transfers of schemes to Topdanmark would be registered as a fall in single premiums while the corresponding decline in transfers from Topdanmark has no impact on premium income. Topdanmark saw a net increase in these schemes in 2009.
Investment contracts with regular payments, where payments are taken directly to the balance sheet, increased 7.2% to DKK 78m in 2009 from DKK 73m in 2008. Investment contracts with single payments declined 44.9% to DKK 86m in 2009 from DKK 155m in 2008.
Overall premiums declined 13.5% to DKK 866m in Q4 while regular premiums declined 2.6% to DKK 679m.
Reduction in loss participation scheme Loss participation is a temporary measure introduced in periods where the market value of the customers' assets is lower than the sum of their savings and only serves a purpose whereby the savings of those customers who want to leave the scheme prematurely are calculated correctly.
Should customers choose to leave their schemes prematurely, the loss participation is taken into account in the calculation of their savings in order to ensure that those customers who leave do not take with them funds owned by those who stay.
Rate of interest on policyholders’ savings in 2010 On 31 October the Danish Ministry of Economic and Business Affairs and the Danish Insurance Association agreed to ensure financial stability in the pension sector. A key element of the agreement is that the bonus policy and the decision on bonus rates should ensure that generally companies do not accept liabilities other than the guaranteed pension benefits. On this basis the rate of interest on policyholders’ savings before pension return tax was fixed at 2.35% in Life I and 3.5% in Life V for 2009.
At 31 December 2009 associated companies accounted for DKK 56m of the total equity investment of DKK 1,184m. The equity exposure was DKK 856m excluding associated companies but including the impact of derivatives.
weighting of the swap rate and the option-adjusted Danish mortgage credit rate. The portfolio is dominated by high-quality mortgage bonds, which ensures consistency between the investment return and the discount rate.
Currently Topdanmark invests no further in CDOs. The table above shows the Group's CDO return at 31 December 2009 and the market value of the portfolios at the same date. The maturity of the CDO investments is dependent on any changes in the payments made by the underlying assets which in turn are dependent on developments in the general economy and therefore it is not possible to outline an actual plan for settlement of the portfolio. Topdanmark expects repayments in 2010 of primarily AAA and AA tranches of around DKK 250m in 2010.
"Money market etc." comprises primarily money market deposits and intra-group balances while "Interest-bearing debt" comprises money market loans, negative intragroup balances, subordinated loans and issued hybrid capital.
Topdanmark has a separate investment policy for funds owned by shareholders (the shareholders' equity of the life insurance group) which is different from the investment policy for the life insurance provisions (funds owned by life insurance customers).
Prospects for 2010 Expected trend in non-life insurance market • Continued financial recession • Price increases implemented in house and contents insurance • Premium growth of around 2 - 3% • Slowdown in claims inflation • Increasing expense ratio • Increasing claims frequency in motor insurance • Potential increase in interest rates • Tightened capital requirements • Combined ratios benefiting from price increases but suffering from bad winter weather
also increased prices in accident, SME, agricultural, health and unemployment insurance.
In the personal and SME markets automatic price indexation, which allows for claims inflation, is 4.1% while in workers' compensation insurance it is 3.0%. Prices particularly in the upper end of the industrial market are under pressure due to intensified competition from, among others, Chartis (AIG), Allianz, Zurich and ACE. It is estimated that price indexation will increase premiums for the entire market by an average of around 3%. In addition to this price increases and the recession will also have an impact on the market.
The pay increase in the insurance sector obtained through collective agreements will be around 3.9% in 2010. In spite of general cost alignment in the sector, the increase in administrative expenses is expected to be somewhat higher than the expected 2 - 3% premium growth. The expense ratio is expected to increase from the 2009 level.
The claims frequency in motor insurance declined 3% in 2009 due to fewer vehicles on the roads and lower traffic intensity. However, the decline levelled out during 2009 to increase above the 2008 level by the end of the year. 2010 has started out with more rough winter weather than in 2008 and accordingly this is expected to increase the claims frequency in motor insurance above the 2009 level.
The forward interest rate curves for, for example, 3-month and 10-year rates are increasing. The non-life insurance companies will benefit from an increase in interest rates as most companies in the Danish market discount their provisions for outstanding claims to present value and consequently an increase in interest rates will reduce the loss ratio.
Due to the changes in the financial markets in 2009 a number of companies have reinstated their individual bonus potential or a substantial proportion of it. It is expected that most companies will have removed their loss participation schemes by the end of 2010. The competitive situation is expected to normalise in line with the cessation of the loss participation schemes.
such that payment must be life-long in order to keep the deductibility exceeding DKK 100,000. These annuity schemes cannot be taken out through banks and savings banks but only through life insurance and pension fund companies licensed to write annuities. It is expected that in future a proportion of the banks and savings banks' market share of term life insurance exceeding DKK 100,000 will be moved to the pension fund companies.
The DFSA is expected to issue a new Contribution Order in the spring of 2010. This Order is expected to significantly increase the requirements on how companies allocate their profit to various groups of policyholders. The development resources needed to meet the requirements of the Order will be considerable in 2010. The preliminary drafts of the Order indicate a shift from a high degree of solidarity between policyholders to a significantly higher degree of individualisation i.e. homogenous policyholder groups.
Topdanmark's profit forecast model for 2010 Traditionally Topdanmark does not publish actual profit forecasts but the expected level of the result if a number of assumptions of the return in the financial markets are met. As the return in the financial markets changes on a daily basis, Topdanmark's profit forecast model will already deviate from actual expectations by the time it is published. Therefore set out in www.topdanmark.com → Risk management → Risk factors → Risk scenarios is additional information on how changes in the assumptions of the profit forecast model will affect the level of results.
The readers of Topdanmark's annual and interim reports may make forecast assumptions other than those chosen by Topdanmark and therefore Topdanmark gives any interested readers the opportunity to calculate their own profit expectations for Topdanmark by using Topdanmark's result simulation model on www.topdanmark.com → Shares → Result and share price simulation model.
As can be seen, the investment return forecast model is not based on a specific estimate of the expected investment return for the entire year but solely on a longterm standard assumption of the return.
Non-life insurance In the interim report for Q1 - Q3 2009 Topdanmark expected premium growth of 2 - 3% and a combined ratio of 91 - 92% for 2010.
markets will be 4.1%. For Topdanmark's overall portfolio the indexation is expected to correspond to a 3% growth in premiums
Since the Q1 - Q3 2009 interim report was published, the following assumptions have changed for premium growth: • The recessionary effect has been adjusted from 1 2 % to 2% for both 2009 and 2010 • Topdanmark has lost business in workers'
Therefore the assumed growth in premiums in 2010 is being revised from 2 - 3% to 1 - 2%.
150m • No gains on / strengthening of claims provisions in 2010 in accordance with usual practice • Impact of DKK 150m from price increases • More efficient claims handling and improved purchasing power corresponding to DKK 90m improvement
• Unchanged interest rates from the level on 13 November 2009
• At H1 report for current financial year: DKK 50m (50% normal storm claims and no normal cloudburst claims)
Since the announcement of the interim report for Q1 - Q3 2009, on the one hand the assumed combined ratio for 2010 has improved as, in accordance with the above standard for weather-related claims the assumed normal weather-related claims have reduced to DKK 100m from DKK 150m, corresponding to 0.6pp
On the other hand the assumed combined ratio for 2010 has increased due to: • Weather-related claims due to the severe winter weather in Denmark in January and February, (motor incidents, and consequences of excess snow loading, snow drifts, frost, snow thawing etc.) corresponding to 4pp
Therefore excluding any gains on /strengthening of claims provisions, the assumed combined ratio for 2010 is being revised to 95 - 96% from 91 - 92% (2009: 93.6%).
It continues to be Topdanmark's goal to operate its nonlife business with a profit margin of 10%, which given the current level of interest rates corresponds to a combined ratio of 91% (excluding any gains on / strengthening of claims provisions). Topdanmark expects to achieve this goal in 2011.
Life insurance Regular premiums increased 3.8% in 2009 whereas single premiums declined 63.4%.
It is important to note that the profit forecast model is highly sensitive to fluctuations in "the insurance technical result before bonus contribution" in both Life I and Life V.
Overall the result of life insurance is assumed to be DKK 320 - 340m.
The overall profit forecast model in the parent company including subsidiaries outside of the insurance group is expected to be a loss of DKK 20 - 30m.
Taxation in 2010 representing a profit per share of DKK 57. This profit forecast is subject to an annual 7.0% return on equities and unchanged foreign exchange rates from the level on 26 February 2010. Furthermore it is assumed that the return on interest-bearing assets hedging the discounted provisions is just sufficient to cover discounting and revaluation of the provisions while the return on the remaining interest-bearings assets will be 3.4% (risk-free interest rate plus 2.0pp). This last assumption is a change of principle from previous years.
Topdanmark has chosen to change its share buy-back model from being based on the principles of Solvency I to being based on the expected requirements of Solvency II, see "Capital model" in this annual report.
As the 2009 profit was DKK 200m better than assumed in the profit forecast for 2009 in the Q1 - Q3 2009 interim report, this amount of DKK 200m has also been transferred to the programme for 2010.
Based on the calculated buy-back potential and a specific estimate Topdanmark has decided on a share buy-back of DKK 900m for 2010 which broadly is expected to be effected in the remainder of the year. It represents a buyback yield of 8.3%.
Periodically there may be a temporary halt in Topdanmark's share buy-back programme if it is investigating a potential acquisition as an alternative to its share buy-back. For this reason Topdanmark has not bought own shares in the window following the announcement of the interim report for Q1 - Q3 2009. Those shares which Topdanmark had announced it would buy back in that window will now be bought back in the window following the announcement of the 2009 Annual Report.
Topdanmark does not buy back own shares in those periods where the Company would be considered an insider and during the three weeks immediately preceding interim and annual reports. Furthermore it does not buy back own shares during the period of eight banking days after the announcement of a quarterly report as this is the period in which the executives may exercise their share options or warrants. Below is a list of the periods when the share buy-back is and is not allowable.
The maximum acceptable level of risk is a function of Topdanmark's risk capacity, which is dependent both on the current size of its capital base and on the size of the future profit. Up to now Topdanmark has been able to compensate for any changes in risk capacity by adjusting the size of the capital base or adjusting the level of risk. However, the level of capital required by Solvency II is expected to be high without taking into account future earnings. Looking forward it is therefore expected that the size of the capital base could not be used to control the risk capacity as typically the capital base required by Solvency II would exceed the level Topdanmark considers to be reasonable.
The Board of Directors determines the overall risk policies and limits. Overall management is co-ordinated by the risk management units responsible for insurance risks and market risks respectively who both report to the Board of Management. Operational risks are managed by the relevant responsible business sectors, who also report to the Board of Management.
Insurance risk Acceptance policy Topdanmark's acceptance policy is based on a desire to make a profit from both products and customers. In order to manage its acceptance policy on the basis of pricing, Topdanmark varies the pricing of its products depending
on the relevant risk criteria and the costs of administering those products.
General insurance rates are re-calculated at least every three years and, for example, in motor and workers' compensation they are reviewed annually.
Topdanmark continues to improve its administration systems to achieve more finely meshed data capture which in turn enables it to identify the claims trends at an earlier point in time and compile information on the constituent parts of the various types of claims. An example of this is the new claims system which was implemented in 2007 and which will manage all claims handling from 2011.
Topdanmark is continuously focusing on making its claims handling processes more efficient under the following three main headings: Promptness • Better replacement purchasing power • Quality
The overall professionalism is controlled by regular quality assessment of a random sample of claims. For example, it is investigated whether the cover, reason for the claim and provisioning are correct, the recourse possibilities have been tested and that the excess, VAT etc. have all been charged.
The claims administration is implementing the Lean / Trim concept in several areas where it has already improved the time it takes to handle a claim, the quality of the claims handling and employee satisfaction.
Customers’ satisfaction with telephone and internet contact is monitored daily to act immediately on unsatisfied customers.
The much higher provision risk in long-tail than in shorttail lines is due to the longer period of claims settlement. It is not unusual that claims in long-tail lines are settled three to five years after notification and in rare cases up to 10 - 15 years.
The actuarial team is in constant dialogue with the claims departments on any changes in the practices flowing from new legislation, case law or compensation awards as well as the impact of such changes on the routines used to calculate individual provisions.
Reinsurance Topdanmark has a restrictive acceptance policy in its choice of reinsurance companies. Primarily it uses insurance companies with a minimum S&P rating of A-. If the reinsurance company does not have an S&P rating, the corresponding minimum rating from AM Best is used.
Weather The reinsurance contracts for storm cover claims up to DKK 5.1bn with a retention of DKK 100m (DKK 75m after tax). However, Topdanmark will have to pay a reinstatement premium proportional to the amount of the reinsurance programme that has been utilised.
In the event of another storm within the same year the reinsurance contracts will cover further storm claims up to DKK 5.1bn with a retention of DKK 100m.
Fire Topdanmark has a proportional reinsurance programme for fire with a maximum retention of DKK 25m per claim on any one business (DKK 19m after tax).
Terror Until the end of 2001 reinsurance cover included terror. Since 11 September reinsurance companies have particularly focused on the cover of terrorist attacks. Generally, losses resulting from acts of terror are covered by reinsurance contracts with certain restrictions as to the size of cover and the number of terror attacks covered.
The terror pool is intended to cover a retention, the quantum of which has not yet been fixed, before the national guarantee scheme takes effect.
The Workers' Compensation Act has been changed such that the cover of industrial injuries caused by any type of terror is taken over by the Government, however, with the exception of injured persons whose job is to hinder, prevent or avert acts of terror and rescuers deployed in the event of terror attacks. This also applies to people sent out to work in countries where there is a particular risk of terror.
DKK 1.0bn of all claims with a retention of DKK 30m (DKK 23m after tax).
Insurance against industrial disease can not be taken out with insurance companies but only with the public institution AES, a self-funding institution financed by compulsory payments from employers.
War, earthquake and nuclear perils Danish insurance companies do not cover claims directly or indirectly relating to the following: • War, warlike acts, neutrality violence, civil war, rebellion or civil commotion • Earthquake or other natural disasters • Release of nuclear energy or radioactive power unless the damage is due to nuclear reactions for specific industrial, medical or scientific purposes
Interest rate risk Topdanmark's provisions for outstanding claims are recorded net of discount using the DFSA's current adjusted discounting rates. The resulting interest rate exposure is alleviated by investing in interest-bearing assets in order to reduce the overall interest rate exposure of the assets and liabilities to the desired level. The Group's debt either carries floating interest rates where the rate is adjusted every three months or it has a maturity of less than one year.
In order to reduce the risk of inflation within workers' compensation and illness / accident insurance Topdanmark has written inflation swap contracts and bought index-linked bonds hedging a significant
proportion of the expected cash flows if the trend in real earnings remains stable. Consequently, any changes in the expected future inflation rate will have a relatively limited effect on the result from these lines of business.
Topdanmark Forsikring raised a subordinated loan of DKK 250m expiring in 2013, however, the loan may be terminated by Topdanmark Forsikring in 2010.
Hedging / guaranteed benefits The Group has guaranteed that policyholders will receive a pension benefit of 1.5%, 2.5% or 4.5%, according to when the policy was written. These benefit guarantees
Money market etc are linked to the risk of a downturn in the financial markets.
The assets of the CDO are financed by investors in loan and equity tranches. The top tranche has an AAA-rating, the intermediary tranches have ratings typically decreasing to BB while the lower tranche (or tranches) are not rated. The rated tranches usually bear interest at LIBOR plus a margin. The bottom tranche, referred to as the equity or sub-tranche, receives the residual return after payment of the return promised to the higher ranking tranches.
of Association. Normally the tests will include factors such as excess cover, rating quality, diversification and liquidity security.
Topdanmark’s IT security policy is reviewed once a year and accepted by the Board of Directors.
The routines and procedures in all critical areas are regularly checked by the auditors in order to assess the risks and recommend measures to limit each individual risk.
It is Topdanmark's goal that the accessibility of its main systems is no less than 99.5%. For many years it has been better for the central applications.
Risk scenarios The Group's risk factors are illustrated in the table overleaf. This table is an illustration of the impact of various assumptions on the most significant risk factors. The given assumptions do not reflect Topdanmark's expected risks, but are shown only as examples used for, among other things, updating Topdanmark's profit forecast model.
In the column "Overall effect on Group results" and the two following columns it is assumed that the bonus reserves and the individual bonus potential in the life insurance group could offset adverse fluctuations at the levels described as the overall collective bonus potential was DKK 184m and the individual bonus potential DKK 4,696 at 31 December 2009.
Risk group Group results ers' equity per share scenario (DKKm) (DKKm) (DKKm) (%) (DKK)
Provisions for claims and benefits a 67.7 277.1 287.8 8.9 18.4
a: One percentage point increase in effective interest rate b: 5% decline in market price c: Annual loss on foreign exchange, with a 2.5% probability or less d: 10% loss on equity portfolios e: 10% loss on CDOs with ratings lower than AA f: 10% decline in market value of properties g: 1% increase in expenditure h: 1% increase in claims i: Storms generating claims on own account of up to DKK 100m
Solvency Besides the European solvency rules, Danish insurance companies are subject to a number of Danish rules. For 2009 they were to report three solvency calculations to the DFSA: • Current European solvency rules - Solvency I • Traffic light rule • Individual solvency requirement
The traffic light rule is a Danish scenario calculation which demonstrates for example, to be in the green light, a company should have the capital resources to withstand a 12% decline in equity prices simultaneous with a 0.7% adverse change in interest rates and an 8% decline in property prices. The traffic light calculation was changed in October 2008 as the yellow light was suspended. At the end of 2009 all of Topdanmark's insurance companies were in the green light.
The new European solvency rules, Solvency II, are currently being prepared and are expected to take effect from 2012.
The framework of Solvency II is being outlined but there continue to be many separate issues which will need to be settled and parameters to be calibrated before the rules will be finally available. Topdanmark has regularly participated in the Solvency II preparation with the Danish Insurance Association. It has also been part of the EU's
Solvency II test calculations and worked with the information received from the EU. Topdanmark will continue to follow the process to adapt to the expected future rules, including participation in the future EU test calculation QIS5. Topdanmark will, in good time, implement those measures that are necessary to meet the rules before they take effect in November 2012.
Capital model Generally Topdanmark believes that its capital base (shareholders' equity or substitutes thereof such as hybrid capital or subordinated loans) is suitable for protection against fluctuations in the result on ordinary operations. However, the price of this type of capital is so high that the capital base is unsuitable for covering the risk of rarely occurring isolated events. Therefore this type of risk should be transferred to other risk bearers by using reinsurance or derivatives.
Normally, Topdanmark's operations would generate a fairly stable cash flow. To protect against rarely occurring isolated events Topdanmark has bought significant reinsurance cover of disaster risks, i.e. both major isolated events and combinations of isolated events that would threaten Topdanmark's ability to continue operating at its chosen level of shareholders' equity. Additionally, Topdanmark has invested in derivatives reducing the danger of sharp falls in equity markets and also in instruments protecting the life insurance group against any adverse consequences of marked reductions in interest rates, see "Risk management".
At the same time Topdanmark believes it is normal to manage shareholders' equity only up to the amount which is deemed necessary to support its primary business. It also believes that most of the Company's shareholders will obtain a tax advantage by owning securities directly
Taking these matters into account Topdanmark wishes to pursue a policy of keeping its capital base at a relatively low level and pay out to shareholders any amounts in excess of the conservatively estimated level of shareholders' equity necessary to support the underlying business.
The externally imposed prudence following the financial crisis has forced Topdanmark to operate with a higher solvency capital than what is required by its risk base. Against this background Topdanmark needs to meet the regulatory requirements in the most cost efficient way through the composition of tier 1, tier 2 and tier 3 solvency capital. The immediate consequence of this is that much of the financing should be effected by tier 2 and tier 3 solvency capital but Topdanmark believes that the uncertainty of the refinancing of such supplementary capital requires some prudence.
In this light Topdanmark has decided on a capital model that has a relatively high proportion of shareholders' equity, see below. Topdanmark expects that this model provides adequate solvency capital to meet the requirements of Solvency II when it is implemented. At the same time the amount of equity within the solvency capital will be sufficient to cover any further regulatory requirements solely by issuing further supplementary capital.
Detailed information on, among other subjects, Topdanmark's capital structure model and model for calculation of share buy-back potential is available on www.topdanmark.com → Corp. Gov. → Value Creation → Capital Model.
Furthermore, the Board of Directors is authorised to issue up to 100,000 employee shares. This authorisation also expires on 15 April 2013.
As part of the risk assessment the Board of Directors decides on the risk of fraud annually and discusses: Potential incentives / motives for management to manipulate the accounts or other types of fraud • Management reporting in order to prevent / identify and respond to any accounting manipulation
The risk management is coordinated by a risk committee comprising the responsible executives of Statistical Services (claims actuarial services) Group Finance and Asset Management. The risk committee reports to the Board of Management who reports to the Board of Directors.
The Group's internal control and risk management systems are regularly updated and have been established in order to eliminate misstatement and omissions in the accounts. The internal control and risk management systems do not absolutely ensure that all material misstatement and omissions are found and corrected.
Prior to each quarterly report being published the report is discussed at a Board of Management / Audit meeting also attended by the IR and accounting departments.
The regular audit reviews made by internal auditors are proved in audit reports, management letters and an audit database to ensure that the recommendations given are regularly acted upon.
General meetings The general meeting is Topdanmark's supreme decisionmaking vehicle. About four weeks before the Annual General Meeting all shareholders registered by name are invited by letter to attend the meeting.
Topdanmark has only one class of shares and each share entitles the holder to one vote.
Topdanmark has no fixed general selection criteria. It believes that by imposing very specific requirements on the Board of Directors it may prevent the election of an obviously qualified Board candidate who does not fully meet the requirements. Instead an individual decision will be made on each Board candidate based upon an overall consideration of their qualifications, the Company's present needs and the composition of the rest of the Board of Directors.
The age limit for Board members is 70 and the term of office for members elected by shareholders in general meeting is one year, while in accordance with legislation, it is four years for members elected by employees.
Board members are elected individually, and no Board member may be appointed by any individual shareholder. Except from the Chairman of the Board, who is a former CEO of Topdanmark, all Board members elected by the shareholders in general meeting meet the definition of independence set out by the Committee on Corporate Governance.
The Board of Directors evaluates its work and its cooperation with the Board of Management as required, without the participation of the Board of Management. Taking this evaluation into account, the Board of Directors assesses itself during the annual Board seminar. Selfassessment is included in the rules of procedure and the working plan of the Board of Directors. The Board of Directors also evaluates the co-operation between the Board of Management and itself at the annual Board seminar.
As CEO of Topdanmark until 2006 Michael Pram Rasmussen is not considered to be independent whereas both Anders Knutsen and Annette Sadolin meet all the criteria of independence set out in EU recommendation 2005/161/EC and the "Recommendations for Corporate Governance" of 10 December 2008 by the Committee on Corporate Governance.
• Annette Sadolin graduated as a lawyer and she too has experience of the preparation and presentation of accounts from directorships in a number of Danish and foreign companies, many of which are listed. For example Annette Sadolin is member of the audit committee of the Swedish listed company, Ratos AB. This company presents its accounts in accordance with IFRS, with certain modifications. For many years, until she retired in 2003, Annette Sadolin was employed by General Electric Company Employers Reinsurance Corporation. From 1996 to 2003 she was member of the Board of Management of GE Frankona Rückversicherungs-Aktiengesellschaft and for many years she was chairman of the GE Group's UK company. During these years Annette Sadolin gained specific experience in the preparation of accounts in accordance with IFRS
In this light the Board of Directors firmly believes that both Anders Knutsen and Annette Sadolin posses the qualifications and experience which enable them to make an independent assessment of whether the Topdanmark Group's accounts, internal control, risk management and
The Board of Directors has no pension scheme. Individual pension schemes have been agreed with each member of the Board of Management and the Company's liabilities for these schemes are fully hedged in Topdanmark Livsforsikring. In this light Topdanmark does not believe that the market will receive further relevant information by publishing information on each executive's pension scheme at an individual level.
Detailed information on Topdanmark's initiatives on Corporate Governance, including a review of its response to each item of the "Revised Recommendations for Corporate Governance in Denmark 2005" by the Copenhagen Stock Exchange Committee on Corporate Governance, is available on www.topdanmark.com → Corp. Gov. → Legislation, Articles of Association and regulations. This information is regularly updated. Topdanmark's response to the new future recommendations for good Corporate Governance will be published on this website when they are available and the Board of Directors has had an opportunity to formulate a response. Topdanmark believes that such updated information published on its website is more valuable to the market than a review included in the Annual Report of its adherence to each recommendation.
Topdanmark publishes information on the basic and performance-related pay at a Group level for the entire Board of Directors and the entire Board of Management. Topdanmark believes that the market will receive no further relevant information by publishing this information at an individual level.
The remuneration package of the Board of Management and a number of the heads of business sectors and administrative departments is based upon a fixed basic salary which, depending on the executive’s expected contribution to value creation in Topdanmark in the year of granting, can be supplemented by the right to purchase options. Individual pension schemes have been agreed with each member of the Board of Management and the Company's liabilities for these schemes are fully hedged in Topdanmark Livsforsikring. Individual bonuses are not paid.
Besides the revolving scheme for the Board of Management and a number of the heads of the business sectors and administrative departments, the Board of Management may grant a number of options, free of charge, to employees who are expected to make a special effort or otherwise contribute extraordinarily to value creation in the Company in the year of granting.
Employee shares and bonds In order to ensure that all employees focus on value creating activities, Topdanmark issued employee shares and bonds in 2009. The allocation was effected simultaneous with a reduction in the recipient's cash salary.
As from 2010 and beyond the tax advantages of issuing employee bonds have been cancelled and therefore no employee bonds but only employee shares will be issued in 2010. The issue of employee shares will continue to be effected simultaneous with a reduction in the recipient's cash salary.
Options Besides the revolving scheme above a further 20,000 share options have been granted for 2010, free of charge, to a number of other executives who are expected to make a special effort or otherwise contribute extraordinarily to value creation in the Company.
On www.topdanmark.com → Corp. Gov. → Remuneration Structure detailed information is available on Topdanmark's option scheme.
CSR policy 2009 was the year when Topdanmark coordinated its CSR activities. This included the preparation of the first voluntary CSR report and Topdanmark joining the Carbon Disclosure Project (CDP).
The market value of the options for 2010 has been calculated to be DKK 16m at the time of granting.
Topdanmark’s CSR policy arises from its intention to create value for shareholders, customers and employees in a sustainable and responsible manner towards society and environment.
Topdanmark believes that basically social responsibility and the insurance concept are well interrelated. Insurance is an instrument to ensure financial “equalisation” in case of an insurance event. As an insurance company Topdanmark helps to ensure that unforeseen events do not cause unnecessary social imbalance - in terms of individuals, businesses and society.
During 2010 Topdanmark will organise the existing loss protection measures and increase its focus on this area.
Topdanmark’s contribution to CDP is available on www.topdanmark.com → Corp. Gov. → CSR.
Reporting Topdanmark intends to follow up on the CSR activities in its future annual reports. See detailed description of Topdanmark's CSR activities in the voluntary CSR report on www.topdanmark.com → Corp. Gov. → CSR.
Since mid-2001 (from which point in time comparable data has been available) monthly share trading has increased from about DKK 50m to an average of DKK 650m in 2009.
As the Danish institutional investors have increased the foreign proportion of their equity portfolios for a number of years, Topdanmark has increased its proportion of foreign shareholders registered by name. Since 1997 until the beginning of 2009 the proportion of foreign shareholders has increased from 2% to 36%.
Further information is available on www.topdanmark.com → Corp. Gov. → Value creation → Investor Relations.
AGM Q1 2010 Interim Report 2010 Half-year Report Q1-Q3 2010 Interim Report 2010 Annual Report 08 Mar 2011
The following shareholder owns between 10 and 15% of the share capital. • Sampo Plc.
All of Topdanmark's Board members elected by the AGM are up for election, but Jørgen Ajslev does not offer himself for re-election. It is proposed to elect Søren Thorup Sørensen, CEO, as a new member of the Board of Directors. It is proposed to re-elect the other members of the Board.
Proposals to be transacted at the AGM must be received by Topdanmark no later than 9 March 2010. It is expected that the agenda for the AGM will be published on 23 March 2010.
Offices held: Member of the Boards of Directors of: • A.P. Møller - Mærsk A/S (Chairman)
- and one subsidiary • Coloplast A/S (Chairman) • Semler Holding A/S (Chairman) • Louisiana Museum of Modern Art
Previous positions held: 1977 - 1983: Factory Manager, Bang & Olufsen A/S 1983 - 1986: Production Manager, Alcatel Danmark A/S 1986 - 1991: Technical Manager, Bang & Olufsen A/S 1991 - 2001: CEO, Bang & Olufsen Holding A/S
Previous positions held: 1973 - 1987: CEO, Islef + Hagen A/S 1982 - 1985: Divisional Director, Sophus Berendsen A/S 1985 - 1989: Group Managing Director, Sophus Berendsen A/S 1989 - 1995: Deputy CEO, Sophus Berendsen A/S 1996 - 1998: Group Managing Director, F. Schur & Co. A/S 1998 - 2004: CEO, H + H International A/S 2005 - 2006: CEO, Stenqvist International AB and Stenqvist Holding AB
Management) Offices held Member of the Boards of Directors of: • Fritz Schur Technical Group A/S (Chairman) • Anhydro Holding A/S (Chairman)
Previous positions held: 1983 - 1990: Development / Sales Manager, NKT Elektronik A/S 1991 - 1993: CEO, NKT Dedicom A/S 1994 - 1995: Managing Director, DSC Communications A/S 1995 - 1997: Regional Manager, TeleDanmark A/S 1997 - 2002: CEO, NetTest Danmark as
Previous positions held: 1980 - 1986: Assistant to management and subsequently Divisional Manager, Baltica Re / Baltica-Nordisk Re 1986 - 1989: Ass. General Manager, Baltica-Nordisk Re 1989 - 1993: Deputy General Manager, Employers Reinsurance International, Copenhagen 1993 - 1996: CEO, Employers Reinsurance International, Copenhagen 1996 - 2003: Member of Board of Management, GE Frankona Rückversicherungs-Aktiengesellschaft, Munich
Other activities: Member of: Agricultural Council of Denmark * Elected by shareholders in general meeting ** Elected by employees *** Member of Topdanmark’s Audit Committee
Managerial responsibilities: • Personal • SME • Partners • Agricultural • Industrial • Marketing • Claims Administration
Member of the Boards of Directors of: • Forsikringsakademiet A/S • Bornholms Brandforsikring A/S
Allocated investment return on own account 2,149 1,358 191 (2,143) 2,443
Change in the life insurance provisions (2,183) (1,926) (1,418) (1,223) (2,829)
Change in the provisions for unit-linked contracts (79) (250) (529) (61) (851)
Provisions for insurance and investment contracts: Relative strengthening of / gains on claims provisions (%) (0.6) 0.4 3.4 5.0 2.1 * Before deducting bonuses and rebates
Gross premiums written 1 9,010 8,671 Reinsurance ceded (677) (624) Change in the provisions for unearned premiums, gross 1 19 36 Change in the reinsurers' share of the provisions for unearned premiums (2) (28) Premiums earned on own account 8,350 8,055
Gross claims paid (6,116) (6,250) Reinsurance cover received 357 321 Change in the provisions for claims, gross 346 (74) Change in the reinsurers' share of the provisions for claims (30) (5) Claims incurred on own account 3 (5,443) (6,008)
Change in the life insurance provisions 7 (1,223) (2,829) Change in the reinsurers' share 3 1 Change in the life insurance provisions on own account (1,220) (2,828)
Acquisition costs (140) (125) Administrative expenses (180) (180) Reinsurance commission and share of profits 0 1 Total operating expenses on own account (320) (304) TECHNICAL PROFIT / (LOSS) ON LIFE INSURANCE (41) 123
Interest charges (203) (224) Expenses on investment business (43) (45) Total investment return (3,647) 4,182
Machinery and equipment 190 178 Owner-occupied properties 737 739 TOTAL TANGIBLE ASSETS 15 927 917
Shares in associated companies 17 352 339 Loans to associated companies 18 286 460 Total investment in associated companies 638 799
Loans guaranteed by mortgages 20 18 Other loans 3 2 Deposits with credit institutions 8,827 6,830
Total other financial investment assets 41,937 44,754 TOTAL INVESTMENT ASSETS 46,599 49,639 INVESTMENT ASSETS RELATED TO UNIT-LINKED CONTRACTS 19 891 2,486
Amounts due from policyholders 416 407 Amounts due from insurance companies 152 193 Amounts due from associated companies 3 9 Other debtors 88 100 TOTAL DEBTORS 1,310 1,365
Share capital 167 169 Revaluation reserve 13 15 Security fund 1,104 1,104 Other reserves 13 16 Total reserves 1,117 1,120 Profit carried forward 1,598 2,813 TOTAL SHAREHOLDERS' EQUITY 2,895 4,117 SUBORDINATED LOAN CAPITAL 23 652 653
Guaranteed pension benefits 13,495 13,797 Bonus potential on future premiums 6,424 7,298 Bonus potential on paid-up benefits 3,043 4,696 Total life insurance provisions 25 22,962 25,791
Creditors arising out of direct insurance operations 98 104 Creditors arising out of reinsurance operations 19 19 Bond loans 43 70 Amounts due to credit institutions 7,790 6,575 Amounts due to associated companies 4 0
Other creditors 697 743 TOTAL CREDITORS 9,137 7,626 ACCRUALS AND DEFERRED INCOME 117 87 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 52,035 56,554
Cash flow from operations Gross premiums written 8,985 8,572 Claims paid (6,086) (6,262) Expenses paid (1,254) (1,083) Reinsurance ceded (254) (297) Cash flow from non-life insurance 1,391 930
Investment assets related to unit-linked contracts (377) (1,116) Balances with associated companies (97) (184)
Financing Shares bought back (371) (376) Share-based payments 37 105 Employee bonds 27 26 Amounts due to credit institutions 7,255 (1,216)
Cash and cash equivalents comprise: Liquid funds 174 259 Deposits with credit institutions 8,827 6,830
Segment information Gross premiums earned - non-life insurance 1 Technical interest on own account - non-life insurance 2 Claims incurred on own account - non-life insurance 3 Technical result - non-life insurance 4 Gross premiums written - life insurance 5 Claims and benefits paid - life insurance 6 Change in life insurance provisions 7 Income from investment properties 8 Revaluations 9 Pension return tax 10 Other expenses 11 Taxation 12 Profit / (loss) per share 13 Intangible assets 14 Tangible assets 15 Investment properties 16 Shares in associated companies 17 Loans to associated companies 18 Investment assets related to unit-linked contracts 19 Reinsurers' share of provisions for unearned premiums 20 Reinsurers' share of provisions for claims 21 Deferred tax 22 Subordinated loan capital 23 Provisions for unearned premiums 24 Life insurance provisions 25 Provisions for claims 26 Collective bonus potential 27 Provisions for unit-linked contracts 28 Pensions and similar commitments 29 Expenses 30 Staff costs 31 Auditors' fee 32 Financial assets 33 Financial liabilities 34 Settlement of assets and liabilities 35 Analysis of assets and their return - life insurance 36 Shares analysed by industry and region - life insurance 37 Profit on life insurance 38 Effect of adjusted interest rate curve 39 Exposure information 40 Pension return tax compensation 41 Leasing 42 Solvency 43 Number of shares 44 Own shares 45 Credit risk 46 Liquidity risk 47 Related parties 48 Provision of security 49 Contingent liabilities 50 Other note disclosures 51 Companies 52 Accounting policies 53
Technical profit on non-life insurance 448 379 37 5 869 36 905
Life insurance Gross premiums written 3,208 3,208 Allocated investment return 2,443 2,443 Benefits and change in provisions (5,221) (5,221)
Taxation (417) Profit for the year 1,446 Impairment and amortisation: * After discounting DKK 364m (2008: DKK 463m)
Technical profit on non-life insurance 701 883 202 10 1,796 28 1,824
Pension return tax 424 424 Transferred to technical result (685) 2,138 5 1,458
Shares in associated companies 53 299 0 352 Loans to associated companies 0 286 0 286 Other financial investment assets 16,309 25,620 8 41,937 Investment assets related to unit-linked contracts 0 891 0 891 Reinsurers' share of provisions 619 32 0 651 Amounts due from affiliated companies 424 325 21 (770) 0
Technical provisions on own account of DKK 1,369m (2008: DKK 1,268m) relating to illness / accident insurance, administered by life insurance, are included in non-life insurance. As Topdanmark Livsforsikring has not allocated assets specifically to illness / accident insurance, assets supporting these liabilities are included in life insurance.
Claims incurred include revaluation of inflation swaps hedging the inflation risk in workers' compensation and illness / accident insurance (81) 107
Technical interest on own account 24 12 34 13 22 10
Motor Marine, aviation Fire and property own damage and transport Personal
Technical interest on own account 38 17 1 1 43 21
Strengthening of / gains on claims provisions on own account (28) (1) 6 10 (117) (119) Claims provisions on own account 104 111 29 25 495 649
Average value of claim (DKK '000) 9 9 23 27 11 12
The annual frequency of claims has been calculated as a per thousand value. The loss ratio and the combined ratio have been calculated before elimination of internal rent. As from 2009 expenses have been allocated between the lines of business on a more exact basis than in the model previously used. The comparatives have been restated.
Technical interest on own account 32 15 10 4 8 3
Strengthening of / gains on claims provisions on own account 37 44 (20) 1 11 14 Claims provisions on own account 536 567 99 99 501 523
Average value of claim (DKK '000) 40 38 30 29 28 32
Technical interest on own account 10 6 0 0 222 102
Gains on claims provisions on own account 13 39 0 0 506 214
Individual policies 423 415 Policies which are part of a tenure 1,804 1,892 Group life 378 398 Regular premiums 2,605 2,705 Individual policies 150 87 Policies which are part of a tenure 1,225 416 Single premiums 1,375 503 Gross premiums 3,980 3,208 Gross premiums written, direct business, by the policyholders' location: Other EU-countries 62 25 Other countries 9 8
Premiums related to unit-linked contracts not eligible for bonus 764 570 Investment risk is taken by the policyholder. All other gross premiums relate to bonus eligible insurance contracts. Number of policyholders at 31 December ('000): Individual policies 66 64 Policies which are part of a tenure 90 98 Group life 194 198
Designated at fair value: Deposits with credit institutions (8) 14 Investment assets related to unit-linked contracts: Unit trusts (241) 148
Calculated tax on profit / (loss) for the year (25%) (6) 466 Adjusted for the tax effect of: Returns on shares etc. not liable to tax 171 (69) Non-deductible expenses / income not liable to tax 8 2 Prior year adjustment (8) 18
Note 14. Intangible assets Com- Developm't pleted projects IT developm't under con2008 Goodwill software projects struction Total
Impairment and amortisation at 1 January (12) (84) (49) 0 (145)
The discounted value of future cash flows is compared with its carrying value. The future cash flows are based on three years' expected technical result and a terminal value of the personal segment, to which goodwill and development projects under constructions relate. The pre-tax discount rate used is 12% (2008: 13%) corresponding to 9% (2008: 10%) post-tax.
Cost / revaluation at 1 January 420 620 1,040 Additions, including improvements 108 0 108
Revaluations taken to shareholders' equity 0 118 118 Cost / revaluation at 31 December 521 737 1,258
Revaluations taken to shareholders' equity 0 3 3 Revaluations recorded in the profit and loss account 0 (1) (1) Cost / revaluation at 31 December 543 739 1,282
Impairment and amortisation at 1 January (331) 0 (331) Amortisation for the year (69) (1) (70) Transferred on revaluation 0 1 1 Reversal of total impairment and amortisation of assets sold or withdrawn from operations during the year 35 0 35 Impairment and amortisation at 31 December (365) 0 (365)
Note 18. Loans to associated companies Average effective interest rate 2.3% 0.8%
Note 20. Reinsurers' share of the provisions for unearned premiums Reinsurers' share at 1 January 97 85 Reinsurance ceded 677 624 Reinsurance earned (679) (652) Other changes (10) 16 Reinsurers' share of the provisions for unearned premiums at 31 December 85 73
Reimbursement of claims relating to this year (105) (119) Expected income relating to this year 318 333
Share of loan included in capital base 235 235 Interest charges 16 10
Note 24. Provisions for unearned premiums Provisions for unearned premiums at 1 January 2,655 2,637 Gross premiums written 9,010 8,671 Premiums earned (9,028) (8,707) Provisions for unearned premiums at 31 December 2,637 2,601
Note 25. Life insurance provisions Life insurance provisions at 1 January 21,719 22,962 Accumulated revaluation at 1 January (243) 732 Retrospective provisions at 1 January 21,476 23,694 Gross premiums written 3,216 2,638 Accrued interest 1,140 638 Claims and benefits (1,917) (1,353) Expense loading inclusive of expense bonus (206) (199) Risk gain after allocating policyholders' risk bonus (51) (77) Compensation for pension return tax (gross) 19 0 Less administration of pension return tax compensation (3) 0
Retrospective provisions at 31 December 23,694 25,399 Accumulated revaluation at 31 December (732) 392 Life insurance provisions at 31 December 22,962 25,791
Reduction in bonus potential on paid-up benefits when allocating "the insurance technical result before bonus contribution" in Topdanmark Livsforsikring A/S 1,247 185
Bonus potential utilised on paid-up benefits 0 0 (869) Bonus potential utilised on paid-up benefits 0 0 (378)
Non-life insurance on own account at 31 December 10,406 11,226 Life insurance 90 86 Provisions for claims on own account 10,496 11,312
Note 25. Life insurance provisions - continued Portfolios analysed by capitalisation rates Guaranteed future paid-up 2009 benefits premiums benefits
Note 26. Provisions for claims - continued Claims liabilities analysed by claims year
Less paid incl. inflation swaps (3,089) (4,338) (4,588) (4,363) (4,448) (4,358) (4,215) (4,364) (3,986) (3,806) (41,555) Provisions before discounting
Note 28. Provisions for unit-linked contracts Insurance Investment 2008 contracts contracts Total Gross provisions at 1 January 1,175 381 1,556 Retrospective provisions at 1 January 1,175 381 1,556
Claims and benefits (120) (25) (145) Expense loading inclusive of expense bonus (25) (6) (31) Risk gain after addition of risk bonus (5) 0 (5) Retrospective provisions at 31 December 1,398 422 1,820 Provisions for unit-linked contracts 2008 1,398 422 1,820
Other pension commitments 5 3 Pensions and similar commitments 52 46
Other pension commitments cover former senior executives and their widows. The provision has been calculated on the basis of G82 and subsequently strengthened. The scheme comprises two individuals with an average age of 89.
Social security costs 38 38 Payroll tax 125 129 Share options 13 11 Employee shares 22 26 Employee bonds 36 36
Board of Directors Directors' fees for 2009 were DKK 3,781,000 (2008: DKK 3,505,000) of which DKK 206,000 (2008: 205,000) related to tasks in subsidiaries.
Board of Management Salaries and emoluments 10 12 Employee bonds 1 1 Share options 4 4
The scheme is settled by shares (equity instruments). Up to and including 2003 the share option scheme was also for the Board of Directors. These options were paid for in cash and the liability has been recorded at fair value in the balance sheet. At 31 December 2008 the accounting liability was DKK 2m corresponding to the net asset value. The options were settled in 2009. The table below is categorised by the option holders' current standing.
Average strike price at 31 December 2008 502 669 651 500
The fair value of the granting for the year has been calculated using the Black and Scholes model assuming a price of DKK 705.72 per share (2008: DKK 729.47), an interest rate corresponding to the zero coupon rate based on the swap curve on 31 December the previous year, future volatility of 22% (2008: 20%), corporate tax rate of 25% (2008: 25%) and a pattern of exercise similar to Topdanmark's previous granting of share options. The volatility has been calculated on the basis of previous years' volatility, which continues to be Management's best estimate of future volatility.
Employee shares In 2009 Topdanmark issued 47,395 employee shares (2008: 43,022) offset by a reduction in their respective cash salaries. The costs have been calculated to be DKK 26m in accordance with IFRS 2 (2008: DKK 22m).
Employee bonds In 2009 Topdanmark issued employee bonds with a nominal value of DKK 29m (2008: DKK 30m) offset by a reduction in their respective cash salaries. The market value, including state tax, was DKK 37m (2008: DKK 37m).
Note 32. Auditors' fee Emoluments paid to the auditors elected by the AGM Deloitte: Audit work 4.3 4.7 Other services 0.8 0.2
Designated at fair value: Deposits with credit institutions 8,827 6,830 Investment assets related to unit-linked contracts 891 2,486
Total financial assets at fair value where the revaluation is taken to profit and loss account 42,828 47,240
Note 33. Financial assets - continued Inputs based Inputs not based 2009 Quoted on observable on observable Financial assets recorded at fair value prices market data market data Total Designated at fair value: Non-life insurance: Deposits with credit institutions 2.3 2.3 Life insurance: Deposits with credit institutions 4.5 4.5
Assumptions: Proportion of defaulted loans and credit bonds: Recovery: Subsequently 3% p.a.
The discount rate is 10% irrespective of the currency. The portfolio is screened for assets where the risk of a loss seems to be high as compared to the model values. These assets are recorded at a lower value at Topdanmark's estimate. In a few cases where the assumptions obviously result in too low a value, Topdanmark may also increase the value. A sensitivity analysis of the valuation with focus on the parameters of recovery and default rates gives the following result in a best and worse case scenario: Best case: Recovery rates (senior 70%, subordinated 30%); Default rate Q1 2010 - Q3 2011 = 8% p.a., gives unrealised gains of about DKK 20m.
Worst case: Recovery rates (senior 50%, subordinated 10%); Default rate Q1 2010 - Q3 2011 = 12% p.a., gives unrealised losses of about DKK 54m.
Bonds measured by reference to inputs not based on observable market data Portfolio at 1 January 3.2 Gains and losses (0.1) Repayments and redemptions (0.1) Transfers to another category (1.4) Portfolio at 31 December 1.6 Gains and losses on bonds held at 31 December (0.2) Group companies have agreed to lend equities against security. The accounting value of lent equities is DKK 1,749m. The fair value of bonds received as security for the loan is DKK 1,959m.
Financial liabilities measured at amortised cost Subordinated loan capital 652 653 Deposits with ceding undertakings 49 68 Creditors arising out of direct insurance operations 98 104 Creditors arising out of reinsurance operations 19 19 Bond loans 43 70 Amounts due to associated companies 4 0 Other creditors 697 743 Total financial liabilities measured at amortised cost 1,562 1,657 Total financial liabilities 9,838 8,347
Financial liabilities payable after 5 years or more: Subordinated loan capital 402 403 Bond loans 27 26 Amounts due to credit institutions 7 6
Note 35. Settlement of assets and liabilities Except for tangible and intangible assets, investment properties, investments in associated companies and CDOs most other assets are expected to be settled within a year. See Management's Review on CDOs for details of the expected settlement of CDOs.
It is expected that the following significant liabilities will be settled 12 months or more after the balance sheet date: Subordinated loan capital 652 653 Provisions for unearned premiums 119 149 Guaranteed benefits 12,434 12,567 Bonus potential on future premiums 5,929 6,737 Bonus potential on paid-up benefits 2,810 4,334 Provisions for claims and benefits 7,753 8,435 Collective bonus potential 66 184 Provisions for unit-linked contracts 1,599 2,544 Deferred tax on security funds 348 348
Note 36. Analysis of assets and their return - life insurance Net Return 1 January 31 December investment (%)* Land and buildings, directly owned 3,473 3,528 (26) 8.9
Credit bonds investment grade 2,254 1,841 (395) 8.0 Credit bonds non-investment grade and emerging market bonds 1,863 1,875 (224) 3.0
Allocated to: Composition of result: Transferred to/from shadow account (60) (52) (112) (73) 113 40 Pre-tax profil / (loss) Topdanmark Link (26) (26) 38 38 Share of insurance technical result
Note 39. Effect of adjusted interest rate curve According to the agreement of 31 October 2008 made between the Danish Ministry of Economic and Business Affairs and the Danish Insurance Association the interest rate curve used for discounting technical provisions has been adjusted to include mortgage credit rates in its structure.
Using the adjusted interest rate curve had the following effect on the Group's capital base and solvency ratio.
Event Effect on shareholders' equity 0.7-1.0 pp increase in interest rates (26) (53) 0.7-1.0 pp decline in interest rates 3 27 12% decline in equity prices (105) (133) 8% decline in property prices (95) (100) Exchange rate exposure (VaR 99.0%) (15) (16) Loss on counterparties of 8% (231) (217)
Max. effect on before change bonus potential collective in bonus poten- used for 2008 Min. effect on bonus tial used for benefits on Event capital base potential such benefits paid-up policies 0.7-1.0 pp increase in interest rates (21) (67) 993 (121) 0.7-1.0 pp decline in interest rates 21 103 (1,025) 40
Shares bought back (468) (506) Shares issued 46 221 Shares sold 90 118
Note 45. Own shares Number of Nominal Percentage Bought shares value of share /sold '000 DKKm capital DKKm
Number of shares held to cover the granting of options: 767,000 (2008: 900,000)
Reinsurers' share: Life insurance provisions 0 32 32 Provisions for claims 534 0 534
The Group has no related parties who hold a controlling influence.
Related parties with substantial influence comprise the Board of Directors, the Board of Management and their families.
Associated companies: Premiums ceded 146 151 Commission received (9) (2) Reimbursed claims (104) (111)
Taking this into account Topdanmark's management, the Group's legal advisors and its external auditor elected by the AGM do not agree with SKAT's interpretation and therefore the tax resulting from this interpretation has not been provided for. The assessment made by SKAT has been appealed against to the Danish National Tax Tribunal. In December 2007 the Tribunal decided a similar case in favour of the complaining company. This decision was in accordance with Topdanmark's interpretation. SKAT has not referred the Tribunal's decision to the courts.
Life: Topdanmark Liv Holding A/S Ballerup Holding Topdanmark Livsforsikring A/S Ballerup Insurance Topdanmark Livsforsikring V A/S Ballerup Insurance Topdanmark Link Livsforsikring A/S Ballerup Insurance Topdanmark Livsforsikring II A/S Ballerup Insurance Topdanmark Livsforsikring III A/S Ballerup Insurance Nykredit Livsforsikring A/S Ballerup Insurance TDLII.0018 ApS Ballerup Holding Topdanmark Ejendom A/S Ballerup Property TDE.100 ApS Ballerup Property TDE.200 ApS Ballerup Property TDE.201 ApS Ballerup Property TDE.300 ApS Ballerup Property TDE.400 ApS Ballerup Property TDE.500 A/S Ballerup Property TDE.600 ApS Ballerup Property TDE.700 P/S Ballerup Property TDP Århus ApS Ballerup Property TDP Svendborg ApS Ballerup Property TDP Herning ApS Ballerup Property TDP Aalborg ApS Ballerup Property TDP Fåborg ApS Ballerup Property
One dormant company was wound up by notification to the relevant authorities
There have been no changes in accounting policies from those adopted in the 2008 Annual Report.
Statements” relating to the presentation of a separate statement of comprehensive income etc.
The DFSA has updated its executive order on financial reports for insurance companies and lateral pension funds (nationwide, occupational pension funds specific to Denmark). It has not resulted in any material changes.
Over the period of settlement the levels of compensation could be significantly affected by changes in legislation, case-law or the practice in the award of damages adopted by, for example, the Danish National Board of Industrial Injuries. Consequently the historical record applied in the statistical models is not applicable for estimating future payments. In such cases the effect is estimated and the models applied are adjusted to reflect this estimate.
For further details see Management’s review on page 16 and Note 33 on financial assets.
Announcement No. 02/2010 from Topdanmark A/S Page 88 of 108 or when it can have or has an otherwise controlling influence.
Consolidation The consolidated accounts have been prepared by aggregating items within the accounts of the parent company and the subsidiaries on a line-by-line basis. The same accounting policies are applied by the subsidiaries as by the parent company.
An insurance contract is a contract under which the insurer accepts significant insurance risk from the policyholder by agreeing to compensation if a specified uncertain future event adversely affects the policyholder. Insurance risk is always considered to be material in nonlife insurance. In life insurance it is considered to be material when it covers the effect of disability (including the effect of premiums waived) and mortality (where the benefit exceeds the total savings of the policy).
Income and expenses of foreign companies which prepare their accounts in functional currencies other than
DKK are translated at average exchange rates for the year while balance sheet items are translated at the closing exchange rates on 31 December. Any translation differences are included in the shareholders' equity's reserve for currency translation of foreign companies.
Exchange rate differences on the translation of foreign associated companies are taken to shareholders' equity.
Expenses Expenses are recognised in the Group’s profit and loss account and disclosed classified by function: Claims incurred (claims handling), acquisition and administrative expenses, investment return and other expenses. Expenses which do not directly relate to a function are allocated proportionally on the basis of the size of the direct expenses.
Share-based payments Share options/warrants The Board of Management and Senior Management participate in a share option / warrant scheme. The fair value, on the date the option / warrant is granted less the subscription proceeds, is included in staff costs in the profit and loss account. The fair value is calculated using the Black & Scholes model and in accordance with IFRS 2 on share-based payments.
Industrial includes policies for Danish based businesses with more than 50 employees, including captive-based policies.
Ratios The financial ratios have been calculated in accordance with the definitions of ratios issued by the Danish Society of Investment Professionals, except for profit per share and diluted profit per share which have been calculated in accordance with IAS 33 Earnings per share. These calculations, which have been made before elimination of intra-group rent, are disclosed in segment information. Topdanmark has not calculated consolidated ratios for life insurance, as it does not believe that a true and fair view would be achieved by presenting ratios based on an
Cash flow analysis The cash flow analysis for the Group has been prepared in accordance with the direct method disclosing cash flow from operations, investments and financing as well as the changes in the Group’s liquid funds between the beginning and the end of the financial year. Cash flows from the sale and purchase of companies have been disclosed separately under the heading of cash flows from investment activities. Investment activities also include amounts received and paid on the purchase and sale of investment, intangible and tangible assets. Cash flows from financing comprise changes in capital, including the purchase and sale of own shares. Furthermore it includes the raising of loans and repayments on interest-bearing debt. Cash and cash equivalents comprise liquid funds as well as deposits with credit institutions.
Operating expenses Technical operating expenses which relate, either directly or indirectly, to the acquisition and renewal of the portfolios are included in acquisition costs. New business commission is generally recorded in the profit and loss account on the date the insurance takes effect. Administrative expenses comprise other costs incurred in the administration of the portfolios which relate to the financial year and which have been accounted for on an accruals basis. Commission received from reinsurers has been accounted for on an accruals basis over the policies’ period of cover.
Investment activities Income from associated companies comprises a share of the post-tax results of the associated companies calculated in accordance with the Group's accounting policies. Income from investment properties comprises the operating results excluding interest charges and revaluations that have been disclosed separately in the accounts. Interest, dividends etc. comprise all interest, dividends etc. earned in the financial year. Realised and unrealised gains and losses on investment assets and changes in the provisions for outstanding claims on own account due to changes in the interest rate structure are included in revaluations, which also includes exchange rate adjustments and realised gains and losses on owneroccupied properties. Administrative expenses on investment activities comprise the cost of asset management including transaction costs.
Acquired software licences are measured at cost and amortised on a straight-line basis over the expected useful life of a maximum of three years. Development projects which are clearly defined and definable are measured at cost at the amount of external costs incurred and written off over the expected useful life of a maximum of five years. If there is an indication of impairment, the book value is written down to its recoverable amount.
Owner-occupied properties Owner-occupied properties are those properties used for the Group's own operations. The properties are measured at a revalued amount being the fair value on the date of revaluation less accumulated depreciation. The properties are assessed annually at the end of September by the Group's own valuation experts. The buildings are depreciated on a straight-line basis over their expected life of 50 years, although land is not depreciated. The fair value of the revaluation of owner-occupied properties is assessed on the same basis as investment properties. Any revaluation surplus is taken to shareholders' equity unless the revaluation is a reversal of a previous impairment. Impairments are included in the profit and loss account unless the impairment is a reversal of previous revaluation included in the shareholders' equity.
Investment properties The initial recognition of investment properties is made at cost and subsequent recognitions are made at fair value. A value has been calculated for each property on the basis of an expected future return on its operations and a rate of return (required yield). This value is adjusted for any special conditions having a temporary effect on the earning capacity of the property as well as the level of maintenance required on each property. The yield has been fixed taking into account the relevant market conditions for each type of property, its position, use, tenure of lease etc. The properties are assessed annually by the Group's own valuation experts.
The disability risk has been fixed at 90% of G82 allowing for both disability and resumption of work. Provisions for claims incurred are calculated using an in-house statistical model that is based on the relationship between the possibility of resumption of work and the period passed since the occurrence of the claim. The provisions include amounts to cover the expected expenses on the future administration of the insurance contracts written. These expenses have been calculated using an annual indexation of 2%.
The provisions include an allowance for risk corresponding to the percentage which would be
Bonus potential on future premiums Where a policy has been converted to a paid-up policy, the benefit guaranteed under the paid-up policy is the net present value of the company's liabilities. The bonus potential on future premiums is the amount for each policy by which the guaranteed paid-up benefits exceeds the guaranteed benefits.
Deposits received from reinsurers Deposits received from reinsurers represent amounts deposited to cover reinsurers' liabilities to the Company.
Income from affiliated companies 1 (112) 1,519 Interest income and dividends etc. 1 3
Shares in affiliated companies 6 4,415 5,126 Total investment in affiliated companies 4,415 5,126
Total other financial investment assets 2 2 TOTAL INVESTMENT ASSETS 4,417 5,128
Amounts due from affiliated companies 55 70 TOTAL DEBTORS 55 70
Topdanmark Forsikring A/S (157) 1,483 web-postkassen.dk ApS (4) (9) Topdanmark Invest A/S 15 6 Topdanmark Kapitalforvaltning A/S 29 40 TD.0151 ApS (3) (7)
The same accounting policies are applied by the subsidiaries as by the parent company. However, properties owned by the subsidiaries and used by the Group have been re-classified from investment properties to owner-occupied properties, and shares in Topdanmark A/S and liabilities on management share options based on shares in Topdanmark A/S have been re-classified to equity instruments.
Current tax 19 (59) Change in deferred tax (43) 43 Prior year adjustment 0 1 Tax for the year (24) 2 Tax taken to shareholders' equity 2 0
Topdanmark Invest A/S (investment) 160 167 web-postkassen.dk ApS (Consumer service) 0 (2)
Each of Topdanmark's 16,906,493 shares has a nominal value of DKK 10. No share enjoys any special rights. The shares are freely tradeable. Each share has one vote.
Directors' fees for 2009 were DKK 3,781,000 (2008: DKK 3,505,000) of which DKK 206,000 (2008: 205,000) related to tasks in subsidiaries.
Topdanmark A/S has no related parties who hold a controlling influence. Related parties with substantial influence comprise the Board of Directors, the Board of Management and their families.
Number of shares in Topdanmark A/S held by the Board of Directors 5,038 5,131 Nominal value in DKK '000 of 4% Topdanmark bonds held by the Board of Directors expiring in 2012 50 50 Nominal value in DKK '000 of 4% Topdanmark bonds held by the Board of Directors expiring in 2013 103 103 Nominal value in DKK '000 of 2% Topdanmark bonds held by the Board of Directors expiring in 2014 101
Number of shares in Topdanmark A/S held by the Board of Management 8,618 28,260 Nominal value in DKK '000 of 4% Topdanmark bonds held by the Board of Management
Nominal value in DKK '000 of 2% Topdanmark bonds held by the Board of Management expiring in 2014 691
Affiliated companies: Expenses on investment business - 1 Expenses charged 23 23 Dividends received 548 829 Capital injection 503 7 Interest income 1 0 Interest charged 15 5
Average effective interest rate on balances is 1.79% (2008: 4.45%). Shares are disclosed in the balance sheet and specified in the note on Shares in affiliated companies. Balances are disclosed in the balance sheet.
Note 15. Other disclosures The five-year summary in accordance with Section 91(a) of the Danish executive order on financial reports for insurance companies and lateral pension funds is included in financial highlights on page 3. Risk disclosures in accordance with Section 91(b) are included in Management's review for the Group in "Risk management".
We have today presented the Annual Report for 1 January - 31 December 2009 for Topdanmark A/S.
The consolidated annual accounts have been prepared in accordance with International Financial Reporting Standards as adopted by the EU, and the annual accounts for the parent company have been prepared in accordance with the Danish Financial Business Act including the executive order on financial reports for insurance companies. Furthermore, the Annual Report has been prepared in compliance with the additional Danish disclosure requirements on annual reports prepared by listed financial services companies.
The management of the Company is responsible for the annual report. Our responsibility is to express an opinion on this nnual report based on our audit. a
Furthermore, in our opinion, the Management’s review gives a true and fair view in accordance with the Danish Financial usiness Act. b
Independent auditor’s report To the shareholders of Topdanmark A/S We have audited the consolidated accounts and the annual accounts for Topdanmark A/S for the financial year 1 January to 31 December 2009, which comprises the profit and loss account, the balance sheet, the movements in shareholders’ equity and the notes to the accounts, including accounting policies, as well as Management’s review for both the Group and the Parent and the consolidated statement of comprehensive income and cash flow. The consolidated accounts have been prepared in accordance with International Financial Reporting Standards as adopted by the EU, and the Parent’s annual accounts and Management’s review have been prepared in accordance with the Danish Financial Business Act. In addition, the consolidated accounts and the annual accounts have been prepared in ccordance with additional Danish disclosure requirements for listed financial services companies. a
Auditor’s responsibility and basis of opinion Our responsibility is to express an opinion on the consolidated accounts, the annual accounts and Management’s review based on our audit. We have conducted our audit in accordance with Danish and international auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain a high degree of assurance whether the consolidated accounts, the annual accounts and Management’s review are free from material isstatement. m
e believe that the audit evidence we have obtained is sufficient and appropriate to provide basis for our audit opinion.