Shareholder matters 26 Corporate governance 28 Report of the Board of Directors 32
Storebrand ASA Head office: Filipstad Brygge 1 P O Box 1380 Vika N-0114 Oslo Norway Tel: +47 22 31 50 50 www.storebrand.no
Storebrand Life Insurance offers a wide range of longterm savings and insurance products to companies, public sector entities and private individuals. New areas of focus for Storebrand Life Insurance include defined contribution pensions for the corporate market, pension schemes for Norwegian municipalities and independent public sector entities, and health insurance products. In addition, the company will continue to build on its strong position for traditional group pension schemes in the corporate market and personal pension savings products for the retail market. Storebrand introduced a new group management structure in 2004 to increase its focus on the retail market. Group-wide responsibility for sales and distribution to the retail market was transferred from Storebrand Bank to Storebrand Life Insurance, where it is integrated with product development and front-line customer service.
Storebrand Investments manages assets totalling NOK 165 billion in mutual funds and client portfolios. The company offers a complete asset management concept with a clear socially responsible investment profile for Norwegian and international institutional investors and the Norwegian retail market. Asset management solutions include discretionary management of Norwegian and international securities, global specialist products with a target absolute return and cost-effective management of market risk.
55% of the mutual funds offered by Storebrand produced a better return before management fees than their benchmark in 2004.
> Storebrand bank reported a profit for Q1 2004, representing an important milestone as the first profit for the bank since it was established in 1996.
> Agreements signed with trade associations covering 4,300 companies with over 185,000 employees.
Oslo Reinsurance Company ASA Ruseløkkveien 14 P O Box 1753 Vika N-0122 Oslo Norway www.oslore.no
Storebrand has a leading position in the Norwegian market for long-term savings, principally through its strong position in the pensions market. The group also has a strong position in the life insurance market for companies and private individuals, offering life insurance and insurance in case of disability or illness. Storebrand’s banking activities complete the group’s overall product range and service concept.
> Storebrand ASA announced changes to its group management structure in order to increase the group's market and customer focus, strengthen its commitment to the retail market and improve resource utilisation across the group.
Storebrand shall be the leading and most respected institution in the Norwegian market for long-term savings and life insurance.
> Storebrand was ranked as Europe's best equity manager by Global Investor based on Morningstar ratings.
> New record of NOK 6.2 billion for sales of single premium endowment policies.
No. of employees (full time equivalents) 1 224 1 263 1 337 1 473 1 478
NOK 5 billion Storebrand has been a leading name in the Norwegian life insurance market since 1861, and makes pension payments of NOK 5 billion to its customers every year.
25 of the 50 largest Norwegian companies are customers of Storebrand, and the high standards this customer group expects from our products and services ensures that we are well-equipped to win new customers in all segments of the market.
The increasing debate over the future of pensions and the need for long-term savings is encouraging a number of companies to take advantage of the opportunities offered by this growing market. We see that traditional banks are now positioning themselves to take a larger share of the savings market, and are working on new products and developing their expertise in helping customers with financial advice. At the same time new players are joining the market as advisers and distributors of financial savings products.
Our response to these challenges is to build on our existing strengths and further improve the emphasis on customer-orientation throughout our organisation. 25 of the 50 largest Norwegian companies are customers of Storebrand, and the high standards this customer group expects from our products and services ensures that we are well-equipped to win new customers in all segments of the market.
Our strong position in the corporate market is matched by our ambition to win a larger share of the retail market. We are committed to offering products and solutions that meet changing customer requirements, and so help our customers to plan for the future they expect and protect themselves against the unexpected. A greater focus on the retail market will help to raise our profile, and we intend to strengthen our presence and improve access to our products through both internal and external distribution channels.
The proposals on early retirement will be much more important in encouraging people to work longer. The government proposes that people will be free to choose to retire before 67, but will then receive a lower pension because it will be paid for more years.
This will make it more expensive to take early retirement, encouraging many people to work longer. Storebrand supports the principle that the cost of early retirement should be borne by the individual. This creates greater flexibility for individual choice, without increasing the total cost of the pension system.
The option to choose when to retire is a benefit for everyone.
Employees need to match employers' contributions to their pension. The government's White Paper on pension reform proposes minimum standards for compulsory employers' pensions.
A survey carried out by Storebrand in 2005 found that 6 out of 10 respondents were prepared to sacrifice salary increases in order to join an employer’s pension scheme or improve their pension entitlement. The perception of the value of pension entitlement relative to current salary has increased dramatically over recent years. In 2003, only 41% of respondents were prepared to sacrifice salary increases in order to receive or improve their pension, but this increased to 54% in 2004.
Contributions of 2% will give a pension from age 67 equivalent to 60% of final salary
60% of final salary. Moreover, a working life of 30 years – the current requirement for a full pension for public sector employees – would reduce the combined pension to less than 50% of final salary.
Early retirement hits pension entitlement. Under the terms of the pension reform, early retirement would lead to a significantly lower pension than is provided by the current AFP early retirement scheme. There are two reasons for this: retiring early reduces the number of working years and therefore the period over which pension is accrued, and early retirement increases the expected number of years of pension payment. This means that retiring before 67 causes a significant reduction in annual pension. Choosing to retire at 65 rather than 67 reduces the pension from 65% to 56%. Retiring at 62 causes a reduction to just 45% of salary, and if the employee has not made contributions to the pension this falls further to 41%.
Pensions will be reduced as life expectancy increases. The pension reform proposes limiting the total cost of the state pension scheme by introducing proportional adjustment for life expectancy, and this is key to making the pension system sustainable over the longer term. The proportional adjustment means that the annual pension entitlement reduces proportionately as life expectancy increases, thus avoiding an increase in liability for the state pension scheme as life expectancy increases.
pensions will be today's 20 year olds who will retire around 2050.
If life expectancy continues to increase by around one year every decade, as assumed in the Pension Commission's report, this group will have to work two years and eight months longer if they are to receive the same pension as now. This means that instead of retiring at 67, they will retire at 69 and eight months.
However, if today's 20-year-olds choose to retire at 67 they will suffer a reduction in pension from 65% to 53% of final salary.
This makes it clear how important it is for today's young people to start saving for retirement now so that they can take advantage of the flexibility that the pension system will offer in the future.
Age at retirement: Retiring before age 67 has a marked effect on pension income
Age at retirement: Pension at age 67 highly dependent on number of years of employment
We intend to turn our ambitions into reality in the retail market. Increased and higher profile marketing, continuing growth in all distribution channels and further improvements to customer service are some of the tools we are using to build a leading position within long-term savings and life insurance.
Brand awareness and efficient product distribution are key competitive factors in the retail market. We have paved the way for increased sales both through direct sales channels such as the telephone and Internet and through other internal and external channels. This will be supported by significant brand promotion efforts to make Storebrand the preferred choice for private individuals. We intend to make better use of the potential for cross-selling to our customers while at the same time improving customer satisfaction with measures targeted at specific customer segments.
The current debate on the future for pensions in Norway is creating greater awareness not only of the need to save for retirement but also of the benefits of life and health insurance. Storebrand believes that the take-up of life insurance and health insurance in Norway still falls far short of what is needed, and the company will continue its targeted focus on these areas.
2.75%* THE BEST MORTGAGE RATE Storebrand Bank will continue its focus on mortgage lending by combining competitive pricing with personal service and efficient systems that speed up processing time.
Maalfrid Brath, Executive Vice President, Head of Storebrand Group Retail Distribution
Storebrand is the only insurer to include invalidity insurance in its child insurance products. This is one of the reasons for
Long-term savings – a growing market. Storebrand expects figures for 2004 to show a household savings rate of 10%, and this level is expected to continue. The proportion of new savings going into bank accounts is expected to be relatively lower while interest rates remain at their current low level, encouraging increased inflows into other types of savings.
The perception of mutual funds products is still however affected by the fall in stock markets between 2000 and March 2003. Many savers are relatively risk averse, and low risk products such as life insurance savings and structured products have taken a large part of the overall market. The high level of sales seen for life insurance savings products reflects low interest rates and increased awareness of the need for pension savings. This latter trend is expected to continue to play an important role in future years.
The overall market for structured products (equity linked bonds, hedge fund bonds) is estimated at NOK 30–35 billion. The market for these products is likely to remain strong with interest rates at current low levels.
RETAIL MARKET STRATEGY > STOREBRAND ANNUAL REPORT 2004 9 80% of Norwegians consider it important that their savings are not invested in companies that breach ethical guidelines. Storebrand has offered socially responsible fund investments since 1996. Experience shows that funds using socially responsible investment criteria produced returns as good or better than other funds. Storebrand therefore had no hesitation in introducing basic socially responsible standards for all its investments in 2004.
Life insurance and health insurance are relatively undeveloped markets in Norway. As an example, only 50,000 Norwegians have private health insurance as compared to 200,000 in Sweden. Life insurance and health insurance have seen increasing business over recent years, but growth has been slower than expected. There are many signs that this market will accelerate over the next three years. The driving forces for the health insurance sector include new treatment methods, an ageing population and changing patterns of illness. These trends represent major challenges for the health care sector, which has to prioritise the treatments it offers. Health insurance will increasingly be recognised as a natural complement to the public sector health service.
BEST CUSTOMER PROGRAM IN THE MARKET Storebrand Partner was voted the most attractive customer loyalty program for savers in 2004. (Dagens Næringsliv September 2004)
FUND MANAGER OF THE YEAR Storebrand is keen to take advantage of its recognition by the Swedish financial magazine Sparöversikt as "Fund manager of the year 2004". Swedes can invest in Storebrand funds through the Swedish Premium Pension scheme, which has SEK 130 billion of funds under management and attracts SEK 22 billion of new funds annually, making it one of the largest distributors of Storebrand products to the retail market.
Storebrand's health insurance product is the market leader in the Norwegian retail market. The product ensures excellent treatment and support without delays. Surveys have shown that employees rate health insurance as the second most attractive employee benefit after a pension. 73% would rather have tax efficient health insurance than higher salary. Only 50,000 Norwegians currently have health insurance. We believe this number will increase as people become increasingly demanding users of health services. There is a clear preference for both early treatment and choice of treatment methods and location.
Storebrand is the only insurer to include invalidity insurance in its child insurance products. This is one of the reasons for Storebrand’s child insurance product having been voted the best in the market.
INCREASING INTEREST IN PENSIONS The pensions debate is attracting great interest, and the question of whether employers should be compelled to provide pensions has been a key issue in national wage negotiations. The pensions reform and the shift towards defined contribution employers' pensions increases the need for individuals to save for their own retirement.
> SUCCESSFUL FUND MANAGER Global Investor/Morningstar voted Storebrand Japan the best Japanese fund in Europe in 2005. Storebrand Japan came top of 440 Japanese funds in the Morningstar European database. The fund has been a top performer over the last three years, and has outperformed its reference index by over 30% since it was launched in 1998.
Storebrand has a well-established approach to corporate social responsibility, both for its own activities and as an investment criteria. Researchers such as the Reputation Institute have found that companies with a good reputation generate better earnings, find it easier to attract customers and enjoy better customer loyalty. Storebrand's activities in 2005 will stress its commitment to corporate social responsibility.
In a competetive market, low costs are essential. The Retail Sales unit will continue to work towards increased operational efficiency by reducing complexity in both products and sales.
Storebrand intends to develop its distribution network. Storebrand currently uses three distribution channels, of which the company's financial advisers are the most important. Although Storebrand has a smaller physical distribution network (in terms of number of branches and financial advisers) than some of its competitors, its total distribution network is growing strongly.
SIMPLER PENSIONS PRODUCTS Storebrand has improved its pension products to meet customer requirements for simple pension savings products, and launched two new products for this market in 2004.
Long tradition. Storebrand has a long tradition in the Norwegian occupational pensions market. The company started providing employers' pension schemes in 1917, 50 years before the Norwegian national insurance scheme was established. Storebrand has always been quick to respond with new solutions to meet changing customer requirements in the occupational pensions market . The company has played a central role in influencing the development of the regulatory framework for life insurance and pensions, and will continue to make important contributions in this area.
Storebrand is the only Norwegian financial institution that places occupational pensions right at the top of its product priorities. Storebrand offers the broadest range of products and services for pensions and life insurance of any Norwegian company, and is active in all segments of the pensions market.
A WHITE PAPER ON PENSION REFORM BASED ON THE RECOMMENDATIONS OF THE PENSION
Advice and customer service. The Norwegian pensions market is characterised by strict regulations on pension products and the management of pension funds. This means that companies and public sector bodies feel the need to take professional advice on the complex problems they face. This requires detailed technical understanding and the ability to offer sound advice. Customers’ needs vary and Storebrand has developed experience and expertise over many years to meet the particular needs of each customer for everything from standardised packaged products to complex customised pensions solutions.
Storebrand's highly qualified corporate advisers operate from its head office in Oslo and 15 locations around the country. The company has a separate department to service the broker-mediated segment of the corporate pensions market. Customers have different needs for customer service, and Storebrand has developed customer service solutions to meet the specific needs and expectations of its corporate clients.
The Norwegian occupational pensions market, including funded public sector pension schemes, represents around NOK 420 billion of funds under management by life insurance companies and pension funds. Storebrand has a NOK 87 billion share of this market, representing a market share of around 21%. If public sector pension schemes are excluded from the figures, Storebrand’s share of the occupational pensions market (including private pension funds) is around 34%.
By the close of 2004, Storebrand had signed agreements with 11 trade associations representing 4 300 companies and over 185 000 employees. Storebrand offers attractive pension arrangements to the companies represented by these associations, and it is estimated that around 50% of the employees involved currently have no company pension.
Storebrand’s agreement with the National Association of Private Nursery Schools led to 198 nurseries setting up pension schemes with Storebrand in 2004.
The companies that will be affected by compulsory employers' pensions are generally smaller companies with lower average salaries than companies with established pension schemes. Storebrand has therefore decided to increase its focus on small and medium-sized companies in 2005. This will include distribution, product development and efficient customer service for small companies, delivered either directly or through agreements with trade associations. By the close of 2004, Storebrand had already signed agreements with 11 trade associations representing 4,300 companies and over 185,000 employees.
30% of companies with defined benefit schemes have changed or will consider changing to a defined contribution scheme (MMI/Storebrand 2004). So far only a limited number of companies, typically large companies, have switched to defined contributions, but a significant number of companies are expected to take this decision in the future. Storebrand has worked with a number of large companies on the comprehensive task of switching to defined contributions, and has developed a good advisory framework with efficient internal routines to support companies through the changes needed. Storebrand has the capacity and expertise to assist a large number of companies, whether they are seeking to combine the two types of pension scheme or switch entirely to a defined contribution scheme.
Funded public sector pension schemes represented assets under management at the start of 2005 of around NOK 200 billion. It is still the case that only a limited proportion of these assets is managed by private sector pension suppliers. Storebrand had 30 municipalities and more than 200 other public sector entities as customers at the start of 2005, representing total premium reserves of NOK 7.5 billion. Storebrand has fully adapted its products to meet public sector requirements, and is a competitive supplier to this market. Storebrand attracted 70% of all the pension assets transferred from KLP to the private sector in 2004.
Profitability in the occupational pensions market. The major element of profitability in the occupational pensions market, both for the pension supplier and the customer, lies in generating good results on the pension fund assets under management. Storebrand achieved satisfactory profitability in this market in 2004.
Current regulations for traditional life insurance products require a guaranteed annual return to customers, which currently averages 3.7%. Following a reduction in the official basic interest rate to 3% from 2004, all new premium contributions are based on a guaranteed yield of 3%. Storebrand offers defined contribution pensions through Storebrand Fondsforsikring. The pension assets of defined contribution pension schemes are invested in portfolios managed either by Storebrand or externally. The profitability of defined contribution pension schemes is in line with the profitability of defined benefit schemes over the longer term, and this ensures that the advice given to customers is product neutral.
The Norwegian life insurance industry faces significant changes when new legislation comes into force from 2008. These changes will not affect the basis for Storebrand’s profitable operations, but are expected to reduce the volatility of earnings from year to year, particularly in years of low investment return. The new legislation is described in more detail on page 44.
Maintaining and strengthening Storebrand’s position. Storebrand Life Insurance currently enjoys a very strong position in the market for private sector occupational pensions. If public sector pension schemes and pension funds are excluded, Storebrand has a 43% market share of the defined benefit occupational pensions market. Following the introduction of defined contribution pensions in 2001, Storebrand has demonstrated its ability to build a strong position in this new market. Storebrand now has around 38% of the defined contribution pensions market.
In the public sector pensions market, Storebrand is a challenger to the traditional suppliers and has a clear objective to strengthen its position significantly. The public sector market accounts for around half the total occupational pension sector in Norway. Efficient operations, good customer service and high ethical standards are important competitive parameters in this market. Norwegian municipalities are under pressure to reduce costs, and the savings that can be achieved by moving their pension schemes will be an important factor.
Storebrand expects the occupational pensions market to become even more competitive in future years. Storebrand is well equipped to meet competition, and believes that by specialising in pensions and life insurance for individuals, companies and the public sector it has a demonstrable competitive advantage in this market.
Company pension schemes are most prevalent among medium sized and large companies. This segment of the market demands a significant level of advice and expects high standards of customer service. In the small company market, important features are efficient distribution of products suitably adapted for small companies, setting up new pension schemes and on-going customer service. In addition, the implementation of compulsory employers' pensions will create new demands for simplicity in product design and contribution customers in
Storebrand set up defined contribution pension schemes for a further 442 companies in 2004 bringing the total of new defined contribution schemes to 1,006 since this product was launched in 2001. These companies represent over 25,000 employees.
Expansion in Sweden. In February 2005, Storebrand Life Insurance announced that it was to open a branch in Sweden. Initially, the target group for Storebrand’s pension products in the Swedish market will be senior executives and other high-income individuals who make their own decisions on pensions. Storebrand will sell its products through insurance brokers and pension advisers, giving it access to an attractive sector of the Swedish pensions market. By opening a branch operation and using independent advisers, Storebrand will ensure low costs and a high degree of flexibility.
The asset management market. The Norwegian institutional market for asset management, excluding life insurance company investments, is estimated to be in the order of NOK 400–450 billion. Many institutions have in-house teams to manage their own investments, and it is estimated that fund management companies compete each year for around 10% of the total market volume. The main asset classes under management are bonds and equities. However an increasing proportion is invested in absolute return products that do not depend on financial market conditions.
Storebrand Investments had assets under management of NOK 165 billion at the close of 2004. This included NOK 26 billion of assets under management for external clients. The company manages both client portfolios and mutual funds. All the assets managed by Storebrand are subject to ethical rules that exclude investment in companies that breach international conventions on human rights and working conditions. Storebrand has also introduced criteria for environmental and socially responsible investments. Further information can be found on pages 24–25.
Storebrand Investments' institutional customers include municipalities, private sector and public sector pension funds, foundations, other organisations, public and private companies and private investment companies. The majority of Storebrand Investments' new business in 2004 came from the municipality sector, but the company also expects an increase in business from investment companies in future years.
EXPERIENCE GIVES INSIGHT We are proud that 2 out of 3 employees in Storebrand Life Insurance have more than 5 years experience in long-term savings and life insurance.
Storebrand's commitment to corporate social responsibility continues a long-standing tradition that is firmly anchored in the company's corporate vision and values. Storebrand aims to be a leading player for corporate social responsibility in its industry.
Storebrand uses its CSR action plan to set concrete targets so that progress can be monitored continuously and reported annually. The environmental and CSR criteria Storebrand applies to the companies it invests in is the most effective contribution towards sustainable development the company can make.
Storebrand's Corporate Social Responsibility Action Plan for 2005–2006 provides more detailed information on our current status and future plans in this area (see www.storebrand.no/ir). The CSR Action Plan is approved by the Board of Directors, and enjoys the support of all parts of the group. Storebrand uses the action plan to set concrete targets so that progress can be regularly monitored and reported.
> Storebrand's primary duty is to contribute to value creation for society as a whole through its profitability. There is a clear correlation between creating financial value and the relations we enjoy with customers, employees and other stakeholder groups in society at large. Storebrand strives to be the leading and most respected institution in the Norwegian market for long-term savings and life insurance, and has clear targets for its role as a participant in society.
All investments in shares and corporate bonds are subject to basic social responsibility criteria. In addition, 67% of our investments are subject to more extensive criteria for environmental practices and social responsibility. Storebrand’s Butterfly mark is awarded to companies in the top 30% of their class.
Valuable diversity. Storebrand has for many years implemented targeted measures to improve female representation in its management. Female representation among managers and specialists and on the boards of group subsidiary companies was 38% at the close of 2004. Storebrand will continue to work towards its objective of 40% female representation in its new action plan period. Two new appointments to internal boards in 2004 strengthened female representation at this level.
More inclusive working life. Storebrand strives to create job satisfaction, ethical awareness and a more inclusive working life for its employees. Since the company joined the National Insurance Administration’s "More inclusive working life" scheme in 2002, we have put even greater effort into reducing sick leave and encouraging employees to stay in employment to or beyond the normal pension age. Absence due to illness is now around 4%, and the most recent employee survey shows that 95% of Storebrand’s employees are happy in their work.
Socially responsible investments since 1995. Storebrand believes that applying environmental and CSR criteria to its investment decisions is one of the most important contributions it can make to sustainable development. Storebrand Investments extended its use of CSR criteria to all assets under management in 2004.
The new CSR Action Plan for 2005–2006 aims to enhance the group's ability to reach its overall business targets. The Action Plan represents a continuation of Storebrand’s commitment to CSR. Storebrand recognises its own responsibility to support sustainable development and seeks to play a role in encouraging Norwegian business and industry to support the sustainable development of the society in which it plays an important part.
Through its work on corporate social responsibility, Storebrand has qualified for a number of SRI funds and indices, including Dow Jones Sustainability Indexes and the FTSE4Good Index.
Share capital and shares. Shares in Storebrand ASA are quoted on the Oslo Stock Exchange (OSE). Share capital at the start of 2004 was NOK 1,390.4 million. Following a new issue of shares to employees of NOK 556,800 in March 2004, share capital at 31
Shareholders. Storebrand ASA is the fifth largest company listed on the OSE by number of shareholders. The company has shareholders from almost all the municipalities in Norway and from 40 countries.
State Street Bank & Trust Co (NOM *)) 9 539 934 USA 3.43
State Street Bank & Trust Co (NOM *)) 2 843 852 USA 1.02
Share purchase arrangements for employees. A mandate has been granted by each AGM since 1996 to involve employees more closely in value creation through employee share issues. In March 2004 employees were offered 160 ordinary shares at NOK 37.60 per share. 54% of employees participated purchasing 111,360 shares. Note 17 provides information on shares held by senior management.
Analysis of shareholders by number or shares and ownership at 31 December 2004
On 28 April 2004 the AGM granted a mandate to increase share capital by up to NOK 3 million through one or more issues for cash. This mandate is valid until the 2005 AGM.
Foreign ownership. The EEA Agreement gives Norwegian and foreign investors equal rights to purchase shares. As at 31
Storebrand shares changed hands in 2004, 26.3% more than in 2003 (373 million shares traded). The value of shares traded in 2004 was NOK 22,149 million, up from NOK 12,842 million in 2003. This made Storebrand the 9th most traded share on the
OSE in terms of value, with a turnover rate of 169.5%.
Share price development. Storebrand’s share price increased by 35.1% over the course of 2004. The OSE benchmark index
(OSEBX) rose by 38.4% over the same period. After adjusting for dividend per share, Storebrand shares produced a total return of
Dividend policy. The Board of Storebrand ASA approved a new dividend policy on 11 May 2004 that provides for a higher proportion of profit to be distributed as dividend. The new dividend policy is as follows: ‘The dividend policy shall contribute towards giving shareholders a competitive return and towards optimising the company’s capital structure. The dividend to shareholders will normally represent over 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 2004, the Board of Storebrand ASA recommends that the
Annual General Meeting approve a dividend of NOK 1,840 million for 2004, equivalent to NOK 7 per share.
Maintaining a continuous dialogue with shareholders, investors and analysts both in Norway and internationally is an important priority. The group has a separate investor relations unit responsible for establishing and co-ordinating contact with analysts, the stock exchange, shareholders, investor and others.
All interim reports, press releases and presentations of interim reports are published on the Storebrand website at www.storebrand.no.
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 allowed to attend, but not vote.
Shareholders’ contact with the company. Shareholders should generally contact the administrator of their share account with queries and notice of changes. Storebrand’s own shareholders ’ office can also provide guidance and information
As a large stock exchange listed company and an important member of society, Storebrand is committed to building good relationships with its stakeholders, who include shareholders, corporate bodies, management, employees, customers, lenders, and society as a whole. Corporate governance plays a central role in this objective, and defines the legal and operational framework by which Storebrand directs and controls its activities in order to create value for its stakeholders.
Certain aspects of corporate governance are dealt with elsewhere in this Annual Report. This includes financial risk management
AGM was held on 28 April. All shareholders of known address receive written notice of the AGM by post, sent out no later than 14 days before the AGM. The notice calling the meeting includes supporting papers for all resolutions to be considered by the meeting.
The Chairman of the Board reported on Storebrand’s corporate governance policies to the AGM in both 2003 and 2004.
Board of Representatives. The Board of Representatives has 18 members, of which 12 are elected by the AGM and 6 by the group’s employees. The size of the Board of Representatives was reduced from 30 to 18 in 2004 in order to create a forum better able to take a close interest in Storebrand’s activities.
B us in es s co nn ec ti on s
Director of Storebrand ASA (the “Group CEO”) is not a member of the Board. None of the members elected by the Board of
Representatives have any employment, professional or consultancy relationship with the group other than their appointment to the
The Norwegian Code of Practice on Corporate Governance states that at least half of the shareholder-elected members of the Board should be independent of the company's executive management and material business contacts. At least two of the members of the Board elected by shareholders should be independent of the company's main shareholder(s). The Board of Storebrand ASA
The Board is entitled to appoint external advisers whenever it considers this necessary.
Further information on the fees paid to members of the Board, their shareholdings and any loans from the company can be found in notes 4 and 17 to the accounts.
The Remuneration Committee monitors the remuneration of the group’s senior managers, and assists the Board in setting terms and conditions for the Group CEO. The Remuneration Committee held seven meetings in 2004. The Group CEO and EVP – Human Resources attend the meetings of the Remuneration Committee as required.
H1 2004 on 1 March 2004 and 30 August 2004 respectively.
The Control Committee is entitled to use the resources of the internal audit function as and when required.
Election Committee. Storebrand’s Articles of Association regulate the company’s Election Committee. The Election Committee has four members, and is chaired by the Chairman of the Board of
The Election Committee is required to nominate candidates for the following elections: • The election by the AGM of 12 members and four deputies to the Board of Representatives.
• The election by the Board of Representatives of its Chairman and Deputy Chairman.
• The election by the AGM of members and deputy members to the
• The election by the AGM of three members to the Election
The Election Committee also proposes the fees paid to members of these bodies. The Election Committee applies specific criteria and works in accordance with a formal mandate.
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 responsibilities 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 robustnes of the management model. The internal auditor is appointed by and reports to the Board.
(the Financial Supervisory Authority of Norway). Kredittilsynet is responsible for supervising financial institutions to ensure that they operate in an appropriate and satisfactory manner in accordance with legislation, business objectives and articles of association. Kredittilsynet supervises all of Storebrand’s activities.
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 the internal auditors if it so requires.
Storebrand invited competitive bids for its internal and external audit in 2004. Following careful evaluation, Storebrand appointed
Deloitte as its new external auditor and KPMG as its new internal auditor. Storebrand also made an internal appointment of an audit co-ordinator to act as a contact point for the preparation and approval of audit plans and the audit processes.
Storebrand Investments and Storebrand Bank. The other members of the boards of Storebrand Life Insurance, Storebrand Bank and
Storebrand Investments are members of Storebrand’s executive management together with external members with expertise relevant to the business of the company in question.
The Board has issued policy guidelines for the duties and responsibilities of the Managing Director of Storebrand ASA as the Group
Storebrand Bank, and the executive vice presidents responsible for the retail market, corporate market, life production & service/
Board and is directly responsible for the group's overall profitability and for making optimal use of resources across the entire group.
Each business area carries out an annual strategy and planning process. The results are used to produce a rolling three-year plan for the group, including detailed targets, strategies and budgets.
Storebrand has developed a management reporting system known as Storebrand Compass to provide management and the Board with monthly reports on financial and operational performance relative to approved targets. The system highlights parameters that fall short of targets so that appropriate measures can be implemented. The monthly reports from each business area are consolidated into a monthly report for the group as a whole.
Bonus payments are linked both to the overall level of the company ’s value creation and to individual performance. Storebrand’s remuneration systems follow internationally recognised principles.
Management through group wide policies and internal guidelines. Group wide policies have been approved for the following functions in the Storebrand Group: accounting, finance and risk management, investor relations, corporate communications, branding, IT, human resources and legal services.
Intranet that allows employees to seek advice anonymously. The group's Human Resources director is responsible for the page.
The ethics page also provides information on how employees can refer any concerns directly to the Board's Audit Committee. This includes the following text: "Anyone who wishes to draw attention to a particular matter without going through the management
A Norwegian Code of Practice for Corporate Governance was published on 7 December 2004. Storebrand's policies and procedures for corporate governance meet the standards set out in the
demands for availability, service and quality? SKILLS/GROWTH Do we meet the need for continous improvement?
MAIN FEATURES. The Storebrand group is made up of three business areas: Life Insurance, Asset Management and Banking. The group's head office is in Oslo. Storebrand has a long tradition and a strong position in the Norwegian financial market. The group made important progress in 2004 towards its strategy of focusing on longterm savings and life insurance. This included changes to the management structure of the group to enhance its market and customer orientation, increase efforts in the retail market and improve efficiency in the group. The new model establishes five operational business areas for the Storebrand group: Retail Market, Corporate Market
The conditions stipulated were satisfied by the end of April, and the sale generated an accounting gain for Storebrand ASA of NOK
1.9 billion after taking into account currency hedging and transaction costs. The sale contributed NOK 1.3 billion to group profit. In addition, group profit includes Storebrand's share in If's earnings of NOK 189 million. Accounting figures in this report include the effect of the sale of shares in If Skadeförsäkring.
In view of the company's strength and financial position and changes in the composition of its assets, due in part to the sale of If Skadeförsäkring, the Annual General Meeting granted a mandate for the company to buy back its own shares. During the course of 2004, the company bought back shares equivalent to 5.5% of its share capital. The buy-back mandate is available for up to 10% of the company's shares, and is valid until the Annual
2,711 million for 2003. Group profit before tax and changes to security reserves was NOK 2,415 million as compared to NOK 894 million in 2003. The holding company Storebrand ASA reports a pre-tax profit of NOK 2,358 million as compared to NOK 361 million in 2003. In addition to the gain realised on the sale of If
2.67 in 2003 to NOK 8.49 in 2004 (calculated on the average number of shares outstanding). Risk bearing capacity strengthened in 2004, and the life insurance company adjusted its asset allocation in response to the low level of interest rates and the risk represented by the guaranteed return that applies to life insurance products. The Storebrand group reports a post-tax profit for 2004 of NOK 2,358 million. The tax charge for 2004 is affected by the changes made to the Norwegian Tax Act in December 2004. The new tax regulations mean that dividends received and gains made on shares within the EEA are no longer taxable, and losses and costs in relation to such shares are no longer tax deductible. Storebrand Life Insurance has sizeable investments in shares, and is therefore the company in the group most affected by these changes. Non-recurring items in other parts of the group also significantly affected tax payable for 2004.
Additional statutory reserves were strengthened by NOK 500 million in 2004 to stand at NOK 3,706 million at the start of 2005.
Storebrand Life Insurance achieved a satisfactory investment return in 2004. The booked investment return was 6.4% as compared to 7.2% in 2003. The value-adjusted return for current financial assets was 7.2% as compared to 8.8% in 2003.
2,767 million at the close of 2004, while the equivalent gains on bonds held to maturity totalled NOK 4,213 million. The capital ratio at 31 December 2004 was 14.4%.
NOK 1.6 billion. Storebrand Investments added 39 new institutional clients in 2004.
Banking activities: Storebrand Bank reported positive results, with markedly improved performance in important areas. The bank increased its lending to selected sectors. The cost base continues to fall, and the bank has significantly reduced the volume of non-performing and loss-exposed loans. The bank has made considerable progress in realising synergies from the merger of
Finansbanken ASA and Storebrand Bank AS. Further improvements in operational efficiency are expected. The bank is placing great emphasis on developing its retail market business, and intends to intensify this effort. The bank is also strengthening its commitment to selected sectors of the corporate market. The new management model for the Storebrand group led to the transfer of the Retail Sales unit from Storebrand Bank ASA to Storebrand
Knut G. Heje (54), President and CEO, Agra Group, MBA, member of the Board’s Audit Committee
Nina E. Smeby (39), Principal employee representative, member of the Board’s Remuneration Committee
Leiv L. Nergaard (60), senior adviser, Norsk Hydro ASA, MBA, member of the Board’s Remuneration Committee
Mette K. Johnsen (60), Assistant Vice President Finance, Wallenius Wilhelmsen Lines, MBA
The bank reduced its operating costs in 2004 by improving its operational efficiency and realising merger synergies.
Gross customer lending increased by 6% in 2004. The increase was principally in lending to the retail market, and includes the purchase of a portfolio of around NOK 1.1 billion of retail mortgage lending from Storebrand Life Insurance. Customer deposits fell by 0.9 billion 2004. The bank has a balanced funding structure, basing its funding on customer deposits, issuing securities and borrowing in the Norwegian and international markets.
In order to reduce the interest rate risk on financial assets,
The company follows developments in mortality and invalidity rates very closely, and adjusts its reserves in accordance with these trends.
The identification and management of 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
CAPITAL SITUATION. The sale of Storebrand’s shares in If Skadeförsäkring has strengthened the company's financial situation significantly. In the period since the sale, Storebrand has repurchased 15 million of its own shares equivalent to 5.5% of its share capital, and has reduced the holding company's borrowings by over NOK 1 billion. In order to support continuing growth in life insurance activities, Storebrand ASA strengthened the share
The group’s capital ratio was 15.3% at 31 December 2004, with a core capital ratio of 10.9%.
The group’s capital base, which consists of equity, subordinated loan capital, the market value adjustment reserve and additional statutory reserves, amounted to NOK 19.0 billion at 31 December 2004 as compared to NOK 17.6 billion at the end of 2003.
Storebrand ASA had total liquid assets of NOK 3.8 billion at the close of 2004, and also has available an undrawn long-term credit facility of EUR 225 million.
At the close of 2003 Storebrand ASA was rated BBB- and Baa3 by
The composition of the group’s staff is well balanced, with both experienced and younger members of staff of both sexes. The most recent internal survey of employee satisfaction showed that 95% of employees were happy with their employment.
The group pays particular attention to its older employees, and has implemented a number of measures to support this important element of its workforce. 25% of employees are older than 50, and many of them have more than 30 years of service.
Rune Eikeland (43) Regional manager, Retail Distribution, Norwegian Military Academy and Authorised Financial Adviser, employee representative
John Giverholdt (53), Chief Financial Officer Ferd AS, MBA, State Authorised Public Accountant, member of the Board’s Audit Committee
Halvor Stenstadvold (60), Executive Vice President, Orkla ASA, Master of Political Science, member of the Board’s Audit Committee
Storebrand’s Corporate Social Responsibility. We recognise responsibility for our activities, and will work to ensure that
Eiendom AS plays an active role in Grønn Byggallianse, an environmental alliance between major landlords, and provides the organisation ’s chairman. Storebrand has commissioned an external environmental consultancy to develop procedures and activities in respect of environmental questions relevant for property management in order to ensure even better environmental responsibility in this area. This will include even greater attention to energy consumption and water usage in Storebrand’s properties.
Board of Representatives: In accordance with a resolution passed by the Annual General Meeting on 28 April 2004, the size of the Board of Representatives was reduced from 30 members and 12 deputy members to 18 members and 8 deputy members.
Egelund Valderhaug, formerly a deputy member, was elected as a new full member. Terje R. Venold and Margareth Øvrum, both formerly full members, were elected as deputy members. Lars
Storebrand intends to strengthen the group's brand profile, improve its distribution and make its sales apparatus even more efficient.
IMPLEMENTATION OF IFRS. With effect from the 2005 accounting year, Storebrand will produce its consolidated accounts in accordance with International Financial Reporting Standards (IFRS).
The revised dividend policy the Board approved in 2004 aims for stable year-on-year growth in dividend per share. The revised policy is also intended to contribute towards giving shareholders a competitive return and optimising the company's capital structure.
The dividend to shareholders will normally represent over 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 revised dividend policy is that the Storebrand group should make effective use of a sufficient level of capital relative to its risk profile. The group's financial condition strengthened appreciably in 2004 due in part to the sale of If Skadeförsäkring, and the Board therefore recommends a total dividend of NOK 7 per share (excluding shares bought back in 2004) of which the dividend paid from the year's profit represents NOK 1.20 per share. The Board proposes the following application of the profit for the year: Amounts in NOK million: To other equity: 286.1
This report provides an account of the Storebrand group’s financial performance in 2004 set against the background of historical performance and the trends apparent at the start of 2005. 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.
Summary of key figures (NOK million) 2004 2003 2002 2001 2000
Total premium income (excluding policy transfers) 15 293 9 527 7 083 7 240 7 034
Operating costs as % of policyholders' funds 0.90% 0.96% 0.92% 0.88% 0.94%
Value-adjusted investment return (excl. unrealised gains on hold to maturity bonds) 7.17% 8.82% 1.91% 1.51% 3.12%
Percentage of total funds under management invested in equities 21% 21% 16% 24% 37%
Ratio of retail/institutional clients by value of external funds under management (%) 26 / 74 17 / 83 16 / 84 17 / 83 18 / 82
Total net new business (excl. If) 1 600 800 2 100 1 000 2 900
THE GROUP’S STRATEGIC DEVELOPMENT. Storebrand’s vision is to be the leading and most respected institution in the Norwegian market for long-term savings and life insurance. Following the sale of its ownership interest in If Skadeförsäkring,
The key themes for Storebrand’s strategic development over the next few years will be growth, productivity and capital efficiency.
pensions and the opportunities created by the expected introduction of compulsory employers’ pensions.
Storebrand Bank will continue to develop its role in the corporate market as a niche bank with particular emphasis on real estate financing in the greater Oslo region. Key factors for success in this niche market are specialisation and closeness to customers.
In the retail market, Storebrand intends to strengthen its position through strong growth in sales of long-term savings products.
Storebrand therefore plans to increase its focus on this product area. Storebrand wishes to attract a higher proportion of younger customers, and banking products therefore play an important role in developing the group’s customer base.
To support its objectives for growth in sales and market share in the retail market, Storebrand intends to increase its visibility in the retail market by committing greater resources to branding and sales promotional communication.
The cost target for the life insurance company is to reduce costs as a percentage of policyholders’ funds to 0.70% by the close of 2007 (0.90% in 2004). Over the same period, the bank is to reduce its cost/income ratio to 55% (83% in 2004).
Capital efficiency. Storebrand’s subsidiaries currently have sufficient capital resources for the growth expected over the next few years. Based on Storebrand’s earnings, capital situation and dividend policy, the Board of Directors of Storebrand ASA will recommend that the AGM approve a dividend of NOK 7 per share for 2004. Following this dividend payment, the group will still be soundly capitalised, and work on improving capital efficiency will continue in 2005 through repurchases of own shares. An efficient capital base is essential if the group is to produce annual earnings that give a satisfactory return on group equity.
FINANCIAL OBJECTIVES FOR THE GROUP. Storebrand has clearly defined objectives for the group and for each business area. This provides the basis for setting targets for each department and employee. Storebrand has communicated its financial objectives to the market. The objectives represent a sound and efficient use of capital with growth in profitability and dividends.
Linked and Defined Contribution Insurance) and Storebrand’s interest in Storebrand Helseforsikring AS (Storebrand Health
The banking activities comprise Storebrand Bank ASA and its subsidiaries. The asset management activities include Storebrand
Kapitalforvaltning ASA (Storebrand Investments) and its subsidiaries as well as Storebrand’s interest in Storebrand Alternative
AS, as well as Storebrand ASA’s interest in Fair Forsikring. ‘Other activities’ in the presentation of group profit relates principally to the holding company Storebrand ASA.
Strong group profit. The Storebrand group reported a group profit of NOK 2,415 million for 2004 as compared to NOK 894 million in 2003. The total contribution to group profit from If
Skadeförsäkring (share in operating profit and gain on sale of If shares) was NOK 1,447 million. The three main business areas of life insurance, banking and asset management all reported improved earnings in 2004. In addition Storebrand ASA reported better underlying results after adjusting for the gain on the sale of If. Further information on the business areas can be found on pages 41–44.
The effective tax rate was affected by changes to tax legislation as described below.
RoE of 25.3% for 2004. However, this was significantly affected by the gain from the sale of If. As described above, Storebrand aims to reach its target RoE of 15% after tax in the next three years.
CAPITAL SITUATION. Storebrand pays particular attention to actively managing its equity and borrowings. The composition of its business areas and their growth will be an important driver for the group’s capital requirements. Storebrand ASA sold all its shares in If Skadeförsäkring AB for a total cash payment of NOK 5.2 billion in 2004. A
number of changes were made to the group’s capital structure in 2004.
Storebrand Bank has raised NOK 275 million by issuing a bond on terms that qualify as Tier 1 capital. Storebrand Life Insurance issued a subordinated loan of EUR 175 million that qualifies as Tier 2 capital. This loan replaces an earlier loan of EUR 135 million.
The table on the following page shows the figures for the group’s capital situation for 2000–2004.
Storebrand ASA’s dividend policy seeks to contribute towards giving shareholders a competitive return and optimising the company ’s capital structure. The Board of Directors of Storebrand ASA
The 2004 AGM authorised the Board to buy back up to 10% of the company’s own shares in the period up to the 2005 AGM. The company repurchased 15.3 million shares in 2004 at a total cost of NOK 744 million. The shares were bought in the market, with purchases taking place on 57 trading days.
Change in non life security reserves etc 57 66 199 279 336
Minority interests' share of profit -2 -1 -3 *) Storebrand Bank AS and Finansbanken merged on 1 January 2003. Figures for 2000–2002 are pro forma. The merger was implemented with accounting continuity. Incl. depreciation of group goodwill.
**) Includes NOK 1,296 million of group profit from the sale of shares in If Skadeförsäkring in 2004.
Norwegian shares are subject to RISK adjustments of gains and losses and an effective zero rate of tax on dividends received.
For the Storebrand group, the major impact of the tax reform will fall on Storebrand Life Insurance since it has significant investments in shares. The effect in years with good results and high realised income from shares in the EEA will be a low tax charge for Storebrand Life Insurance, and in certain cases a tax writeback. However, if the company realises net losses on shares, as was the case in 2001 and 2002, the tax charge for the year may be higher since these losses will not be tax deductible. The tax reform has also affected the group’s effective tax rate in 2004, amongst others in respect of tax-free gains realised on shares in the Life company, and exemption from tax for Storebrand ASA’s gain on the sale of shares in If Skadeförsäkring AB.
Further information on this and other effects of the transition can be found in the IFRS note to the accounts on pages 83–85.
The breakdown of the company’s main products in terms of value of policyholders’ funds shows that group pension schemes account for 72%, personal pensions and personal life insurance products account for 27% and group life insurance accounts for 1% as at 31 December 2004. Measured in terms of profit to the owner, group pension schemes contribute 60%, personal pensions and personal life insurance products contribute 33% and group life insurance contributes 7%.
145 million from products not subject to profit sharing with policyholders. The allocation of profit to policyholders also means that pensions currently in payment and fully paid-up pension policies will be entitled to an annual increase. Life insurance activities as a whole (including Storebrand Fondsforsikring and Storebrand
Storebrand Bank ASA **): Capital ratio 13.8% 12.3% 11.4% N/A N/A
**) Storebrand Bank and Finansbanken merged in 2003. Comparable historic figures for the new bank have been produced for 2002 only.
Change in premium reserve/sec. fund -89 -2 -1 -90 -181 -1 010 -241
To(-)/from(+) owner's equity: -net return on share capital b) 409 334 -0.40% of policyholders' funds 455 414 -risk margin earned by owner's equity 46 46
NOK 15,293 million. This represents an increase of 60% from 2003, when total premium income was NOK 9,527 million. Personal endowment policies showed the strongest increase of 157%.
Premium income from group pensions increased by 16% and personal annuity policies saw a 20% increase in premium income.
Additional statutory reserves strengthened. Additional statutory reserves are conditionally allocated policyholders’ funds that act as risk capital to absorb fluctuations in the investment portfolio. These reserves were strengthened by NOK 500 million in 2004 to stand at NOK 3,706 million at the start of 2005.
Storebrand Life Insurance is therefore in sound financial health and can take on additional risks to improve investment returns in 2005. The company’s financial condition, combined with the strength of its risk management system, ensures that Storebrand
NOK 4,213 million. The overall increase in unrealised gains in 2004 was NOK 1,896 million.
Risk result. The risk result for 2004 was NOK 206 million as compared to NOK 198 million in 2003. The increase of NOK 8 million reflects increases of NOK 62 million for individual endowment policies (single payments) and NOK 8 million for group life insurance, whilst group pensions and non life products showed reductions of NOK 53 million and NOK 8 million respectively. The risk result for individual pension business was unchanged from 2003.
1,039 million in 2004 as compared to NOK 995 million in 2003.
Measures have been implemented to improve operational efficiency and so pave the way to achieving the target of costs at 0.7% of average policyholders’ funds by the close of 2007.
Fondsforsikring was NOK 10,209 million at the close of 2004. This represents an increase of NOK 1,852 million from 2003. Dividend paid in 2004 was NOK 539 million, and the owner paid in capital of NOK 800 million. This gives a total Embedded Value result
because of the 35% limit on profit allocation to the owner. The lower margin of 0.25% is assumed to come into effect in 2010 as the benefit of the hold to maturity bond portfolio reduces. These changes cause a reduction of NOK 954 million in Embedded Value.
Other increases in Embedded Value were mainly due to a higher investment return in 2004 than assumed at the start of the year, and favourable changes in tax rules.
In accordance with this policy, the company increased its exposure to equities from 13% to 21% over the course of 2004.
The proportion of the portfolio invested in bonds held as current assets remained low throughout 2004 and into 2005. This reflects the expectation that long-term interest rates will rise over time. The proportion held in money market instruments is consequently relatively high. With effect from mid-2004, part of the money market holdings were hedged against producing a return lower 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 well positioned for any upturn in interest rates.
Act is on the statute book from 1 January 2005, but comes into force as and when specific regulations are issued.
Risk capital as a percentage of policyholders' funds excluding additional statutory reserves
Investments is one of the leading asset management businesses in Norway, offering products that are competitive in both the domestic and international markets.
Investments operates a specialist unit of investment advisers for major institutional customers. This unit works with customers to create customised investment strategies that meet the customer ’s financial objectives, investment horizon and risk profile.
Storebrand Investments won a significant proportion of the new business mandates in the market. Sales of new business generate higher margins thanks to increased sales of specialist products.
Automation. Storebrand Investments pays particular attention to simplifying its procedures and standardising and automating its work processes throughout the entire investment value chain from investment decision through to settlement, control and reporting. This focus has improved the cost effectiveness and scalability of its activities, and Storebrand makes use of this by offering trading and settlement services together with investment control and reporting to other asset management organisations.
A merged asset management company. Storebrand Kapitalforvaltning ASA and Storebrand Kapitalforvaltning Holding AS
changed its name to Storebrand Kapitalforvaltning AS. The merger simplifies corporate administration and contributes to a more efficient management structure.
RESULTS IN 2004. Storebrand’s asset management activities produced an overall pre-tax profit of NOK 47 million in 2004 as compared to NOK 22 million in 2003. The year-on-year improvement of NOK 25 million reflects good investment returns on portfolios with performance-based fees and higher volume-based fees as a result of new business and rising equity markets.
Fixed volume-based revenue grew by NOK 17 million due to rising prices in the Norwegian share and bond markets, as well as a good level of new business at higher margins in the institutional market. Sound investment returns led to performance-based fees of NOK 85 million as compared to NOK 65 million in 2003. A higher level of new business and redemption activity for mutual funds contributed NOK 5 million to the increase in revenue.
on costs led to a reduction of NOK 2 million in operating costs.
Good investment returns for Storebrand Life Insurance. Of the 10 portfolios managed for Storebrand Life Insurance, eight produced a better return than benchmark, representing total additional income of NOK 300 million. The main contribution came from global equity investments and short-term money market placements.
A modern bank. Storebrand Bank is a modern and ambitious commercial bank for private individuals and selected segments of the corporate banking market, and has total assets of NOK 27.2 billion. The bank’s objective is to build a stronger and more visible presence in the Norwegian banking market through closer collaboration with Storebrand’s other business areas.
Competitively priced banking products help to increase customer interest in Storebrand and create opportunities for cross selling.
Selective growth. Storebrand Bank has further intensified its focus on the retail market, while also concentrating on selected segments of the corporate market. In the corporate market,
Storebrand Bank operates as a niche bank for real estate investors and developers in Oslo and the surrounding area, with total corporate banking assets of around NOK 9 billion. The bank offers financial products and services only to companies in its defined geographic area. The focus on real estate financing is based on the bank’s particular expertise in this area and the earnings potential it represents for the bank as a whole.
The bank strives to maintain a balance between lending to the various sectors of the real estate market such as residential developments, offices, warehousing/industrial, housing associations etc. Lending to hotels is only considered when the borrower is extremely strong or the property is occupied by a tenant of undoubted standing on a long lease. The corporate customer base will principally comprise companies in the real estate sector that can offer readily realisable properties as security for their borrowings. Companies in other sectors will be considered to the extent
that they meet the same requirements for security, profitability and cash flow.
Storebrand Bank reported a profit for 2004, with clear improvement in important areas of its operations. The bank has increased its lending portfolio in strategic areas, costs continue to fall and the portfolio of non-performing and loss-exposed loans has been reduced further. The bank has good capital adequacy and liquidity.
FINANCIAL RESULTS IN 2004. The Storebrand Bank Group reported a profit before loan loss provisions of NOK 121 million in 2004
Other income of NOK 274 million was an improvement from 2003, largely as a result of higher sales of life insurance savings products. Storebrand Bank sold the Storebrand group’s joint unit for retail distribution to Storebrand Life Insurance in Q4 2004. This caused a reduction in non-interest income, but gave a sizeable reduction in operating costs in Q4.
Significant reduction in operating expenses. Operating expenses amounted to NOK 581 million in 2004, equivalent to 83% of total operating revenue. This represents a reduction of
Growth in lending was principally to the retail market, including the purchase of a portfolio of loans of approximately NOK 1.1 billion from Storebrand Life Insurance.
The bank’s customer deposits fell by NOK 0.9 billion in 2004.
Loan losses and provisions in 2004 represented a net write-back of
NOK 7.4 million. Specific loan loss provisions totalled NOK 379 million at 31 December 2004. The bank also had general loan loss provisions at that date of NOK 194 million, equivalent to 0.8% of gross lending.
CAPITAL ADEQUACY. Storebrand Bank group’s primary capital amounted to NOK 2,370 million at the close of 2004, and the parent bank had primary capital of NOK 2,385 million. This represents a capital ratio of 13.8% (14.6% for the parent bank) and a core capital ratio of 11.6% (12.2% for the parent bank). The bank issued Tier 1 subordinated bond debt of NOK 275 million in 2004.
BASLE II. Storebrand Bank intends to implement internal rating based methods for the new capital adequacy regime. The bank’s preparations for Basle II will focus on the commercial opportunities that will result from the new regime. The transition to Basle II will require major investments in systems and procedures as well as changes to the bank’s organisation and main business processes, but will also create significant commercial gains.
Company is 100% owned by Storebrand Skadeforsikring, and 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 Skadeförsäkring.
The conditions stipulated were satisfied by the end of April 2004, and the sales proceeds of SEK 5,393 million were received on 6 May 2004. After taking into account currency hedging and transaction costs, the transaction generated an accounting profit of NOK 1.9 billion for Storebrand ASA. After including the writeback of escrow provisions for non life insurance and Storebrand’s share in If’s profit in 2004, the group’s involvement in If represented a positive contribution to group profit of NOK 1.4 billion for 2004 as a whole.
Storebrand ASA reported a sizeable increase in earnings for 2004, largely due to the gain made on the sale of shares in If
The holding company’s operating revenue is the return on capital invested in subsidiaries. For the first time since 1999 Storebrand
NOK 112 million received from Storebrand Skadeforsikring was booked as an equity transaction and is therefore not shown in the profit and loss account. The holding company’s income from subsidiaries is netted in the consolidated accounts.
Storebrand ASA’s operating expenses were 29% higher in 2004 than in 2003. This increase relates to higher salary costs, linked to increased bonus payments and contractual payments to the former managing director of Storebrand Investments. Other operating costs were higher due to project costs, including the comprehensive project to design the group’s new management model.
Financial income was historically high in 2004, with a gain of NOK
Risk management for life insurance. Risk exposure in respect of the group’s life insurance activities is concerned with the balance between investing policyholders’ assets until they are paid as benefits and the contractual commitments that Storebrand has to its policyholders. As an example, all savings-related life insurance policies are guaranteed a minimum annual return, currently 3.7%
Active risk management and hedging transactions reduce the likelihood of the investment return falling below 2%. If investment return is not sufficient to meet the guaranteed interest rate on policyholders’ funds, the shortfall will be met by using risk capital built up from previous surpluses. The guaranteed interest rate is currently 3.7% on average. The owner is responsible for meeting any shortfall that cannot be covered from risk capital. The average guaranteed interest rate is expected to fall in future years. New contracts include a guaranteed interest rate of 3%.
The company’s risk capital is the total of the market value adjustment reserve, statutory additional reserves, core capital in excess of the regulatory minimum and accrued earnings. Risk exposure is monitored by using stress tests that estimate the possible loss in the event of extreme market movements. Storebrand ensures that it meets all the regulatory requirements, such as capital ratio and solvency capital ratio, by a comfortable margin. The Board of
Directors approves limits for these ratios and other measures of risk. The life insurance company monitors its risk exposure and reports to management on a regular basis, daily if required.
Financial markets can fluctuate widely in a short space of time and so affect the company’s risk exposure. Storebrand continually manages its risk exposure to keep it within limits approved by the
Board of Directors. Risk exposure is managed 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 a number of different assets that are not expected to cause similar losses as the same time.
Finally, hedging instruments such as options are used. The combination of all these tools allows a good control of risk exposure.
Mortality, disability and other insurance risks are monitored by using actuarial analyses, including stress testing the existing
Life insurance profits are shared between the owner and policyholders. 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%. Where investment returns are higher,
Storebrand will limit the proportion of surplus allocated to the owner in accordance with the profit-sharing model already communicated to the market. Profit sharing for life insurance will gradually be replaced as the changes in life insurance legislation come into force.
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 shortterm risk of a fall in market values.
Storebrand takes a serious view of the challenge that low interest rates may represent over the longer term, and has implemented a number of measures to limit this risk. Storebrand has invested in bonds to be held to maturity that generate a higher return than current interest rates. These bonds will produce a stable book investment return of 5% to 6% for a number of years. Storebrand has also hedged part of its money market portfolio against low interest rates, and has increased its investment allocation to real estate, expected to provide a good return in future. 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.
Changes to Norwegian insurance legislation. The Norwegian parliament approved extensive changes to the Insurance Activities
Act in autumn 2004. The following changes will be particularly important for the relationship between a life insurance company and its policyholders: • A clearer allocation of risk as policyholders will be charged a premium for investment return risk and personal risks, and will retain any profits generated by these elements. The company will be responsible for any loss after risk capital is depleted.
Norway will set the upper limit for the basic rate, currently 3% for new policies and new rights.
Storebrand actively manages a large portion of its assets. This means that its fund managers are allowed a degree of freedom with the objective of producing a better return than the market.
The group’s asset management activities have been reorganised in order to improve active risk management. A number of specialist teams have been created, each of which works solely in a specific area subject to clearly defined investment criteria and risk limits.
A separate team is responsible for managing market risk. This group’s duties include currency hedging, program trading, hedging transactions, SRI criteria and liquidity transactions. This structure permits more efficient use of resources and greater control over active risk positions in the group’s investment portfolio.
Credit risk in banking. Storebrand places great importance on maintaining close relationships with its corporate customers and monitoring credit risk closely. Storebrand Bank has policies in place for routine reviews of its credit exposure. A significant proportion of the bank’s corporate lending is linked to real estate in Oslo and the surrounding area. Storebrand follows economic conditions and the real estate market in this region closely.
Approximately 70% of lending retail customers is secured by mortgages with loan to value ratios not exceeding 60%.
The Basle Committee has proposed changes to the regulations for calculating minimum capital requirements for banks from 2007.
Storebrand’s value-based management system, and are reflected in Storebrand Compass through the main areas of Finance,
Storebrand Compass uses a range of key figures and value drivers to monitor financial performance, including sales, costs and profitability. The following table shows a selection of the value drivers and key figures that the group routinely monitors: Finance
% of mutual funds ranked among the top 40% (Asset management)
Insurance claims for own account -10 631.2 -8 295.2 -8 803.5
Funds allocated to policyholders – life insurance -1 519.4 -1 368.9
Net claims and benefits paid - direct insurance -7 185.5 -5 982.8 -6 279.7
Interest, commission and fees received from customers 85.2 72.5 84.4 2 094.7 7 322.8 7 894.7
Net disbursements/receipts on loans/claims with other financial institutions -921.5 -269.6 -102.3
Net receipts/payments from Norges Bank and other financial institutions 2.4 -1 079.3 619.3
– Receipts of dividends from the trading portfolio 60.3 14.2 16.7 134.4 608.0 396.8
Net cash flow from investment activities 4 036.8 26.0 18.3 4 866.4 23.3 240.7
Cash and cash equivalent assets held by new companies at start of period -111.1 20.6
We have audited the annual financial statements of Storebrand ASA as of 31 December 2004, showing a profit of NOK 2 126.5 million for the parent company and a profit of NOK 2 358.1 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 financial statements comprise the balance sheet, the statements of income and cash flows, the accompanying notes and the group accounts. These financial statements are the responsibility of the Company’s Board of Directors and Managing Director. 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.
We conducted our audit in accordance with the Norwegian Act on Auditing and Auditors and generally accepted auditing standards in Norway. Generally accepted auditing standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. To the extent required by law and generally accepted auditing standards, an audit also comprises a review of the management of the Company’s financial affairs and its accounting and internal control systems. We believe that our audit provides a reasonable basis for our opinion.
• the information in the Board of Directors’ report concerning the financial statements, as shown on pages 32–37, the going concern assumption, and the proposal for the allocation of the profit is consistent with the financial statements and complies with applicable laws and regulations.
Insurance fund reserves for own account 121 214.8 108 901.6 99 238.9
The full annual report for the Storebrand Livsforsikring Group can be found at: www.storebrand.no.
Note 5: Gain on the sale of shares in If Skadeförsäkring page 64
Note 17: Senior executives, non-executive officers and other related parties page 69
Note 36: Analysis of deposits from customers and liabilities to other financial institutions page 81
Elimination of shares in subsidiaries is based on the acquisition method, where the capitalised value of shares in subsidiaries is eliminated against equity capital in the subsidiaries. Any excess value/deficit at the time of acquisition is allocated to the assets/liabilities in question. Any excess value not directly related to a specific item is classified as goodwill. Goodwill is depreciated in the consolidated accounts over the expected commercial life, which will not normally be longer than 20 years.
Minority interests. Minority interests’ share of profit is stated after tax in the profit and loss account. This means that all items in the profit and loss account include minority interests. Minority interests are shown in the balance sheet as a separate item under the heading of equity capital.
Pension liabilities for own employees. The net pension cost for the period consists of the sum of pension liabilities accrued in the period, the interest charge on the estimated liability and the expected return on the pension funds. 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. For funded schemes, the assets of the pension fund are valued at market value and deducted from the net liability shown in the balance sheet. Deviations from estimates and the effect of changes to assumptions are amortised over the expected remaining period for pension accrual once the cumulative effect exceeds 10% of the higher of either the pension liability or pension funds (the 'corridor approach'). The effects of changes to the rules of the pension scheme are allocated over the remaining period for pension accrual.
Properties and real estate held by other companies in the group. Properties and real estate held by other companies in the group are depreciated over their expected useful life.
Tangible and intangible fixed assets. Tangible and intangible fixed assets are valued at acquisition cost reduced by accumulated depreciation and write-downs. Fixed assets are reviewed in respect of the need to write down their value at the end of each accounting period if indicators suggest there may have been a fall in their value. The value of an asset is written down if realisable value is lower than book value. The realisable value is equivalent to value in use calculated with the help of budget figures and discounted cash flows, unless the net sales value of the asset is higher.
In other cases of default the borrower’s financial situation, including the borrower’s capacity to service indebtedness, and the value of collateral security form the basis for estimating possible losses. A facility is defined as being in default if 90 days have passed since
the facility went into arrears or an unauthorised overdraft arose and the arrears or overdraft have not been remedied, or if the borrower is subject to winding up or a composition with creditors. The possibility of loss is also considered when other factors such as the borrower’s weak liquidity, excessive gearing or weak earnings, or the value of collateral security, suggest that there is a risk of loss, with specific loan loss provisions established accordingly.
When a review of a facility in default identifies the need for a specific loan loss provision to be established and the collateral security available is insufficient to cover interest and commission due, the accrual of interest, commissions and fees in respect of the facility ceases. In addition all interest, commissions and fees in respect of the facility recognised to income for the current year but not paid are reversed. If a specific loan loss provision is established for a facility not in default, consideration is given to whether accrual of interest, commissions and fees should be stopped.
When a loan previously classified as bad or doubtful is brought back into good order, interest which has accrued but not been recognised to profit and loss is recognised as interest income and specific loan loss provisions in respect of the loan are reversed. Properties repossessed in respect of loans in default are valued at their estimated realisable value, but not higher than the principal outstanding plus unpaid interest. Any gains or losses upon sale, or any write-down as a result of a fall in value of such properties, are classified as lending.
SECURITIES Shares held as fixed assets. IInvestments in shares in subsidiaries and associated companies are valued at cost price less any write-down of value. The need for any write-down is assessed at the end of each accounting period in the same way as for other fixed assets. Shares in other companies where the investment is of a long-term and strategic nature are treated in the same way. Storebrand Livsforsikring AS applies the equity method of accounting to investments in subsidiaries and associated companies in accordance with the regulations for the annual accounts of insurance companies.
In the group’s banking and asset management activities, shares held as current assets that are not intended for short-term trading are valued as a single portfolio at the lower of purchase cost and market value.
Bonds held to maturity. Bonds classified as hold to maturity are valued at amortised cost using the effective yield method to the next interest fixing date. Accrued premium/discount is shown in the accounts as part of income from other financial assets.
In the case of securities where no traded price is available, a theoretical price is calculated on the basis of the yield curve for the particular market taking into account the credit standing of the issuer in question.
In the group’s banking and asset management activities, bonds held as current assets not intended for short-term trading are valued as a single portfolio at the lower of purchase cost and market value.
Financial derivatives. Financial derivatives are used as an integrated part of the management of financial instruments in order to achieve the desired risk and return profile.
Equity, foreign exchange and interest rate options. Option premiums are capitalised at market value when an option is purchased or sold. Options are realised when they expire, are exercised or are closed out by a matching and opposite transaction.
Forward foreign exchange contracts, currency swaps and basis swaps. Forward foreign exchange contracts, currency swaps and basis swaps are principally used to hedge holdings of securities, other financial instruments and insurance related entries. As part of the accounting recognition of hedging transactions, contracts entered into for hedging purposes are valued at market price in the financial accounts, and unrealised gains or losses are taken to profit and loss.
Foreign exchange. Assets and liabilities denominated in foreign currencies are to all practical intent hedged against currency fluctuations. Monetary items are translated at the exchange rate on the balance sheet date, while foreign exchange derivative contracts are valued at market value and recognised to the profit and loss account. Any other balance sheet items are recorded at the exchange rate prevailing at the acquisition date.
Claims for own account. Claims for own account comprise claims settlements paid out, including reinsurance assumed, premium reserves transferred from other companies, reinsurance ceded and changes in claims reserves. Claims not settled or paid out are provided for in the premium reserve of the insurance fund.
It is possible to increase the fund by 50% above the minimum allocation. In special situations, the Financial Supervisory Authority of Norway may permit all or part of the fund’s surplus to cover a fall in the value of securities. In the accounts, the entire fund is shown as a mandatory fund.
Group contribution received from Storebrand Livsforsikring AS 200.0 Storebrand Kapitalforvaltning ASA 8.8 20.1
Ordinary wages and salaries 47.7 35.6 51.1 Employer's social security contributions 9.9 8.1 13.9
Total personnel expenses 73.9 56.6 82.1 03 Pension costs and pension liabilities
The following financial assumptions were used when calculating net accrued pension cost: • Return on pension funds 7.0 % • Discount rate 6.5 % • Annual earnings growth 3.0 % • Expected adjustment of Social Security Fund's base amount (G) 3.0 % • Annual pension increase 2.0 %
Expected return on pension funds 140.3 140.3 160.5 168.9 Effect of changed assumptions booked to P&L -2.5 0.5 -2.0 -3.1 -0.1 Provision for employer's social security contributions -2.5 -2.5 -0.2 -0.3
****) Remuneration paid to Deloitte Statsautoriserte revisorer AS and related companies for audit and audit-related services amounted to NOK 1.4 million (excluding value add tax) in 2004.
+/- Changes in temporary timing differences -61.6 37.5 108.5 Tax base for the year 40.7 294.8 -626.8 - Tax losses carried forward -40.7 -294.8 Tax base for calculation of tax payable 0.0 0.0 -626.8 Change in deferred tax -231.5 17.1 318.0
Storebrand Kapitalforvaltning Holding AS *) Oslo 50.0 50 1 000 100.0% 162.4
Fair Financial Ireland plc. ***) Danmark 50.0% 178.8 *) Tax-free group contribution of NOK 22.4 million from Storebrand ASA has been booked directly to equity. **) Dividend for 2004 of NOK 112 million, booked directly to equity. ***) Book value includes a subordinated loan of NOK 146.1 million. ****) 74.9% held by Storebrand Livsforsikring AS. Minority interests amount to 0.2%
Vovi-Beteilungs (Neiv) (Germany) 13 7.5 1.5 Head Insurance Investors L.P. 91 36.4 3.2 Esg Partners 2.7 1.4
In March 2002 Storebrand ASA issued a EUR 160 million exchangeable bond with a fixed EUR coupon of 2.25%. The bond was issued at par. Each EUR 1,000 bond carries the right of conversion to 48.96 shares in Orkla ASA (originally 43.54 shares, but since adjusted for an extraordinary dividend paid by Orkla ASA for 2004). The bonds are repayable on 8 March 2006 at a price of 105.81 assuming the holder has not exercised the right to convert to Orkla shares at an earlier date.
For Storebrand ASA the exchangeable bond represents a combination of a bond and the issue of a call option on Orkla shares. The option is covered partly by Storebrand ASA's own holding of Orkla shares and the balance is covered by the purchase of two call options on Orkla shares from Storebrand Livsforsikring AS and an external third party. Both at the time the bonds were issued and on subsequent reporting dates the value of the call option issued and the bonds issued are calculated separately. The difference between the original value of the bonds issued and the contractual redemption price in March 2006 is amortised as interest expense over the period of the loan. The loan is recognised in the balance sheet at the amortised value.
Both the call option issued and the call options purchased from Storebrand Livsforsikring AS are valued at actual value calculated using generally accepted methods for this type of instrument. A fall in the price of the Orkla share in isolation represents a gain on the call option issued. The accumulated value of any such gain is limited to the value of the option when first issued. The call option does not represent a hedge against losses on the holding of Orkla shares in excess of this amount. An increase in the price of the Orkla share in isolation represents a loss on the call option issued which will be matched by a gain on the company's holding of Orkla shares and on the call options purchased from Storebrand Livsforsikring AS.
Liabilities Option issued: EUR – Orkla shares 1 510.2 475.9 1 510.2 64.3 84.8 194.7 *) Included in the balance sheet under shares, see note 8. **) Currency element of NOK 84.9 million is capitalised in the balance sheet, but interest element of NOK 4.7 million is not capitalised.
Acquisition cost at 01.01. 34.7 288.7 Accumulated depreciation -2.4 -256.5 Book value at 01.01. 32.3 32.2 Additions 0.6
Depreciation for the year -18.8 -1.7 Book value at 31.12. 13.4 24.8
Straight line depreciation periods for operating assets are as follows: Equipment and inventory: 4 years Motor cars: 5 years Computer systems: 3 years 14 Equity capital
Own shares bought back **) -76.3 -668.1 -744.4 Tax on equity transaction 70.0 *) 278 181 882 shares of nominal value NOK 5.
***) No dividend is provided for on own shares bought back. ****) Share capital was increased by 111,360 shares through a private placement with employees. The subscription price was
Control committee Sverre Bjørnstad 2 816 Hanne Harlem Harald Moen 322 Carl Graff-Wang Jon Ansteinsson 4 334
Board of Representatives Sven Ullring 385 Merete Egelund Valderhaug Inger-Johanne Strand 85 Stein Erik Hagen 1 000 000 *)
Eli Sætersmoen Ole Enger Rune Selmar Kjell Jostein Sæther 5 Ann Jeanette Magnussen 1 014 Johan H. Andresen jr. 5 141 895 **)
Arvid Grundekjøn Per Alm Knudsen May Molderhauer 275 Vibeke Hammer Madsen Barbara Rose Milian Thoralfsson Astrid Olive Aanerud 625
No. of employees at 31.12. 9 No. of full time equivalent positions at 31.12. 9 Average number of employees 33 19 Guarantees issued
Non life insurance 186.3 348.2 -242.2 *) Includes NOK 1 296 million of group profit on the sale of shares in If Skadeförsäkring. Information on the gain recorded by Storebrand
Total income from financial assets 15 037.5 16 519.0 20 381.6 15 565.2 17 656.2 20 713.3
Costs arising from properties and real estate *) -95.9 -153.4 -135.6 -90.4 -147.9 -129.8 Valuation adjustments – shares -499.6 -499.6 Valuation adjustments – interest bearing instruments 334.2 -0.4 270.2 Write-down of real estate -34.1 -95.3 -257.1 -34.1 -95.3 -257.1 Loss on sale of shares -4 792.1 -6 188.8 -10 087.8 -4 930.8 -6 503.4 -10 343.0 Loss on sale of interest bearing instruments -1 346.5 -674.1 -6 669.1 -1 383.9 -684.3 -6 679.8
Change in specific loan loss provisions for the period -148.8 23.7 178.3 Change in general loan loss provisions for the period -120.7 0.7 -1.7 Realised losses on loans where specific provision has previously been made 261.4 147.6 90.5 Realised losses on loans where no specific provision has previously been made 3.3 -0.5 145.4 Recovery of loan losses realised previously -2.6 -1.2 -0.7 Losses on short-term debt instruments etc. 3.5 Loan losses and provisions for the period -7.4 173.8 411.8 24 Operating costs
Ordinary wage and salary expense 309,5 240,3 245,0 794,8 776,6 860,2
Pension expense (incl. employers' social security contributions.) 35,8 17,9 13,1 66,8 60,9 59,9 *) Operating expenses of
Pension costs and pension liabilities are treated for accounting purposes in accordance with the accounting standards for pension costs issued by the Norwegian Accounting Standards Board. (see also Accounting principles). Both insured and uninsured schemes are treated as defined benefit plans. In view of lower interest rates, the financial assumptions used were amended with effect from
The changes affect pension liabilities at 31 December 2004. The effect of the changes is shown in the deviation not applied to the profit and loss account at 31 December 2004. However the changes do not affect the pension cost or the amortisation of the deviation booked for the year. The following assumptions were used in the calculations for 2004: The following financial assumptions were used when calculating net accrued pension cost: • Return on pension funds 7.0 % • Discount rate 6.5 % • Annual earnings growth 3.0 % • Expected adjustment of Social Security Fund's base amount (G) 3.0 % • Annual pension increase 2.0 %
Association. • Average employee turnover rate of 2–3% of entire workforce. • Linear earnings profile
Pension liabilities accrued for the year -48.5 -20.0 -68.5 -67.2 -74.2
Provision for employer's social security contributions -0.1 -5.4 -5.5 -8.0 -6.4
Calculated liability Shown below is a reconciliation of the estimated pension liabilities, and the pension funds held in respect of these, to the liability booked in the balance sheet.
Market value of pension funds 2 575.6 0.6 2 576.2 2 619.1 2 655.3 Net estimated pension liability/surplus 39.6 -386.0 -346.4 -127.2 -100.3
The composition of pension fund assets is based on the Storebrand Life Insurance portfolio of financial instruments, which had the following composition at 31.12.: Properties and real estate 10% 9% Hold to maturity bonds 31% 37% Secured and other lending 0% 1% Shares and other equity investments 22% 17%
Short-term debt instruments 10% 15% Other short-term financial assets 3% 3%
Expected tax at nominal rate (28%) -692.3 -268.7 420.5 Tax effect of shares sold 748.1 78.0 42.0 Tax effect on dividends received 163.8 53.3 53.2 Tax effect of associated companies 53.3 4.9 -56.9 Tax effect of permanent differences 5.0 -36.7 153.1 Tax effect of the write-down of deferred tax assets -390.5
Effective tax rate -4.6% -17.6% -40.7% *) The reform of the Norwegian tax system in 2004 affected some aspects of taxable income for the Storebrand group. The tax reform exempts income on shares in the EEA from tax, and similarly losses on such shares are no longer tax deductible. This will cause fluctuations in the annual tax charge depending on how large a proportion of earnings comes from share investments in the EEA. The group had a low effective tax rate in 2004 as a result of income from shares in the EEA. The group has written down deferred tax assets because these changes make it more uncertain future taxable income will be sufficient to utilise all losses carried forward. The company in the group most affected by the new tax reform is Storebrand Livsforsikring AS.
Storebrand ASA 400.4 Storebrand Livsforsikring AS 217.7 Storebrand Fondforsikring AS 143.4 Storebrand Bank ASA 839.3 Storebrand Skadeforsikring AS 1 940.0 Fair Forsikring A/S 47.1 Storebrand Helseforsikring AS 43.8 Storebrand Leieforvaltning AS 12.7 Storebrand Felix kurs og konferanse AS 4.8 27 Goodwill and other intangible assets in subsidiaries
NOK MILLION COST 01.01. ATION 01.01. VALUE 01.01. DISPOSALS FOR THE YEAR VALUE 31.12. PERIOD *)
Other intangible assets *) Depreciation of goodwill over 20 years is based on a long-term earnings perspective and the strategic importance of the companies for Storebrand.
Total for Storebrand Life Insurance 12 864.9 820 841 95.6% Other companies 26.8
Depreciation for the year -19.1 -31.0 Write-downs/revaluations for the year -87.0 -1.3 30 Shares and other equity investments
Shares and other equity investments (fixed assets) Intre AS 36.9 Other shares and participations held long-term 0.7 Total shares and other equity investments (fixed assets) 37.6 Norwegian banking and finance shares Bolig- og Næringsbanken 78 750 0.81% 19.7 26.7
Other holdings in fixed-income funds *) -1 093.1 -1 093.4 1 762.4 1 834.5 669.3 741.1 Forward foreign exchange contracts 26.4 26.4 Total short-term debt instruments and bonds including forward foreign exchange contracts 14 955.3 15 025.5 35 491.7 35 445.5 50 447.0 50 471.0
Analysis by currency: Total short-term debt instruments and bonds excluding forward foreign exchange contracts 14 955.3 15 025.5 35 491.8 35 445.5 50 447.1 50 471.0
*) The columns for bonds include investments in fixed-income funds. Investments in short-term debt instruments through fixedincome funds are shown as short positions in the column for short-term debt instruments and are netted out as other holdings in fixed-income funds.
See note 31 for information on the calculation of effective yield.
Long positions and short positions A long (asset) position in an equity derivative produces a gain in value if the share price increases. For interest rate derivatives, a long position produces a gain if interest rates fall, as is the case for bonds. A long position in a currency derivative produces a gain if the currency strengthens against the NOK. The gap between long and short positions is taken into account in calculating the total net nominal volume, whereas gross total nominal volume takes no account of the result for a particular instrument of a long versus a short position.
Credit equivalent amounts Credit equivalent amounts are intended to give a measure of the credit risk associated with financial derivatives. In general the credit risk is seen as being limited, since only stock exchange listed and cleared contracts or contracts with well known financial institutions are employed. Credit equivalent values represent the weighted volume of currency and interest rate agreements for the purposes of capital adequacy calculations, where gross nominal volume is taken into account.
Liabilities *) Includes financial derivatives in the Storebrand Bank Group at market value NOK 82.3 million, of which NOK 2.9 million is recognised in the accounts.
NOK MILLION UP TO 1 MONTH 1 TO 3 MONTHS TO 1 YEAR 1 TO 5 YEARS OVER 5 YEARS TOTAL
> 1 MONTH > 3 MONTHS > 1 YEAR NO INTEREST INTEREST RATE
Financial derivatives that affect interest rate exposure -717.7 -2 444.7 35.8 -3 126.6 *) Period to interest rate fixing is the period up to the earliest possible date on which the bank can initiate a change in interest rate.
Salary account holders (private individuals) 308.1 16 026.5 16 334.6 15 676.2 15 928.4
Total liabilities created by securities issued 10 233.6 6 853.3 7 895.9 37 Interests in associated companies
NOK MILLION INTEREST COST VALUE 01.01. CAPITAL/ CURRENCY PROFIT VALUE 31.12.
Norben Life and Pension Insurance Co. Ltd. 25% 31.0 58.7 -1.5 4.4 61.6
Paid in capital and retained earnings at 01.01. 9 394.9 8 534.5 9 616.7 Profit for the year 2 358.1 789.6 -892.4 Allocated for dividend -1 840.4 -222.5 Own shares -744.4 Share issue (net proceeds) 5.1 5.5 5.9
NOK MILLION AMOUNT NOK CURRENCY CURRENCY AMOUNT INTEREST RATE IN %
Deposit reserve 112.6 112.6 Premium and pension adjustment reserve 4 867.2 278.1 5 145.3 5 125.3 5 408.8 *) Includes Storebrand Life Insurance, Storebrand Fondsforsikring and Storebrand Helseforsikring.
Book value of assets pledged as security for loans etc. 1 984.7 1 560.8 1 286.5 Residual commitment to subscribe capital to limited partnerships 1 709.6 1 011.4 995.0 Other contingent liabilities 1.3 *) Off-balance sheet derivatives for the Storebrand Bank group are included in note 33.
Storebrand’s consolidated annual accounts are prepared in accordance with the Accounting Act and Norwegian generally accepted accounting principles. With effect from the 2005 accounting year, Storebrand must prepare its consolidated accounts in accordance with the International Financial Reporting Standards (IFRS) approved by the European Union. This change applies to all financial reporting with effect from 1 January 2005, and Storebrand will therefore publish its interim accounts for the first quarter of 2005 in accordance with IFRS.
Storebrand is required to publish comparable accounting information in accordance with the new requirements (except for the application of IAS 39 on financial instruments), and provides below draft consolidated balance sheets at 1 January 2004 and 31 December 2004 in accordance with IFRS. The effects of implementing IAS 39 will be included in the accounts with effect from 1 January 2005, and are included in the draft consolidated balance sheet shown below for 1 January 2005. The effects on the accounts of implementing IFRS have been calculated on the basis of the IFRS standards expected to apply at 31 December 2005 and the current interpretation of these standards. The IFRS standards and their interpretation are subject to continuous development, and Storebrand will take into account any changes and the effects of any alternatives of relevance for the group’s accounts as the year progresses. Storebrand’s consolidated accounts for 2005 will be the group’s first full set of consolidated financial accounts (including notes to the accounts etc.) in accordance with IFRS.
Deferred tax. The changes in book values of assets and liabilities caused by the transition to IFRS make it necessary to recalculate the group’s deferred tax. This caused an increase of NOK 176 million in deferred tax assets at 1 January 2004. However, changes to tax legislation in 2004 limit the extent to which the group can capitalise deferred tax assets at 31 December 2004 (see note 26 on page 74). This limitation has affected the restated tax charge for 2004 and capitalised deferred tax assets at 31 December 2004. Deferred tax assets capitalised to the balance sheet at 31 December 2004 in respect of IFRS amount to NOK 58 million, while the tax charge in 2004 related to the effects of implementing IFRS amounts to NOK 118 million.
Goodwill. Adopting the accounting standard for business combinations has stopped the depreciation of goodwill in the group with effect from the 2004 accounting year. In its place, the standard has introduced an annual write-down test to ensure that any fall in value is charged to the accounts. The group included written-back depreciation of NOK 30 million in its restated pre-tax profit for 2004.
Financial instruments. IAS 39, which deals with the accounting treatment of financial instruments, is of particular importance for the Storebrand group. This standard is obligatory with effect from the 2005 accounting year, and the effects of applying IAS 39 are therefore included in the opening balance sheet as at 1 January 2005 shown
below. The Storebrand group holds significant investments in financial instruments, and these have previously been recognised mainly at actual value or amortised cost. This will largely continue to be the case under IAS 39.
The bank will not be permitted to maintain general loan loss provisions in the way they have been calculated up to and including 2004. However, groups of loans can be valued together for the calculation of loan loss provisions if certain criteria are satisfied. The valuation of groups of loans must also be based on objective evidence. The change from the current general loan loss provisions to provisions for groups of loans based on the criteria required by IAS 39 increases equity by NOK 78 million at 1 January 2005.
Share of earnings in DS and FKV recognised using the equity method 195 195 To (from) market value adjustment reserve -1 078 -1 078
Changes in security reserve etc. – non life insurance 57 58 1 Profit/loss before extraordinary items 2 472 2 603 130 Tax payable -3 -3 Change in deferred tax -110 -228 -118
FURTHER COMMENT ON THE RELATIONSHIP BETWEEN LIFE INSURANCE POLICYHOLDERS AND THE OWNER. A major part of the profit of Storebrand Livsforsikring AS (Storebrand Life Insurance) is shared between policyholders and the company’s owner. Profit sharing is based on the consolidated accounts of Storebrand Life Insurance prepared in accordance with Norwegian generally accepted accounting practice. The effects of the introduction of IFRS described above do not therefore cause any changes to the relationship between Storebrand Life Insurance’s policyholders and owner.
Investments recognised using the equity method 4 045 3 921 -123 70 70 70
Reinsurers' share of technical reserves 3 332 3 332 70 2 766 2 766 2 695 Real estate at market value 8 935 9 024 89 12 138 12 208 12 208 70
Due from customers and other current receivables 3 736 3 736 3 569 3 569 3 568 Financial assets at market value 64 979 65 094 115 84 310 84 350 84 396 86
Deposits from and due to customers 12 363 12 361 -2 11 476 11 463 11 463 -13
Accounts payable and other current liabilities 5 032 4 808 -223 4 076 2 234 2 234 -1 842
GENERAL Duration: The average remaining term of cash flow on interest bearing securities. Modified duration is calculated on the basis of duration and is an expression of sensitivity to changes in underlying interest rates. 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. Equity capital: Equity capital consists of share capital subscribed and accrued earnings. Share capital subscribed is recorded as share capital and share premium reserve. Accrued earnings are recorded as other equity. Subordinated loan capital: Subordinated loan capital is loan capital which ranks after all other debt. Subordinated loan capital is part of Tier 2 capital.
CAPITAL ADEQUACY Capital ratio: Eligible primary capital as a percentage of the riskweighted balance sheet. Individual assets and off-balance sheet items are given a risk weighting based on the estimated credit risk they represent. Primary capital: Primary capital is capital eligible to fulfil the capital requirements under the authorities' regulations. Primary capital may comprise Tier 1 capital and Tier 2 capital. Tier 1 capital: Tier 1 capital is part of primary capital and consists of equity capital less goodwill, other intangible assets and net prepaid pensions. Tier 2 capital: Tier 2 capital is part of primary capital and consists of subordinated loan capital. In order to be eligible as primary capital, Tier 2 capital cannot exceed Tier 1 capital. Perpetual subordinated loan capital, together with other Tier 2 capital, cannot exceed 100% of Tier 1 capital, whilst dated subordinated loan capital cannot exceed 50% of Tier 1 capital. To be fully eligible as primary capital, the remaining term must be at least five years. If the remaining term is less, the eligible portion is reduced by 20% for each year.
Storebrand Leieforvaltning AS 100.0% Storebrand Felix kurs- og konferansesenter AS 100.0% Storebrand ITI AS 100.0%
*) Storebrand ASA owns 24.9% directly and Storebrand’s total interest is 99.8%.
Average yield should be seen as a gross yield before deducting costs, and is accordingly not comparable with the interest return reported by other financial institutions. Average yield is calculated in accordance with rules set by the Financial Supervisory Authority of Norway. Cost ratio: Operating costs as a percentage of average customer funds. Endowment insurance: Individual life insurance where the insured amount is payable on either the expiry of the insurance period or the death of the insured if earlier. Such insurance can be extended to provide disability pensions or disability insurance. Group life insurance: Group life insurance in which an insured sum is payable on the death of a member of the group. Such insurance can be extended to cover disability insurance. 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. Operating profit: Operating profit from the year's operations including the share due to insurance customers. Return on capital: Return on capital shows net realised income from financial assets and changes in the value of real estate, expressed as a percentage of the year's average total assets in accordance with rules set by the Financial Supervisory Authority of Norway. Valueadjusted return on capital shows the total of realised income from financial assets, changes in the value of real estate and the year's change in unrealised gains or losses, expressed as a percentage of the year’s average total assets at market value. Risk result: The result arising from the incidence of mortality and/or disability during a period deviating from the assumptions used 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.
BANKING Annual percentage rate (APR): The true interest rate calculated when all borrowing costs are expressed as an annual payment of interest in arrears. In calculating the APR allowance must be made for whether interest is paid in advance or arrears, the number of interest periods during the year and all fees and commissions. Instalment loan: An instalment loan is a loan on which the borrower makes regular partial repayments of principal in equal amounts throughout the repayment period. The borrower pays the sum of a fixed instalment amount and a reducing interest amount at each instalment date. Payments accordingly reduce over the life of the loan assuming a fixed interest rate. Level repayment loan: Periodic payments (representing both capital and interest) on a level repayment loan remain constant throughout the life of the loan. Net interest income: Total interest income less total interest expense. Often expressed as a percentage of average total assets (net interest margin).
FINANCIAL DERIVATIVES The term financial derivatives embraces a wide range of financial instruments for which the current value and future price movements are determined by equities, bonds, foreign currencies or other traditional financial instruments. Derivatives require less capital than is the case for traditional financial instruments such as equities and bonds, and are used as a flexible and cost effective supplement to traditional instruments in portfolio management. Financial derivatives can be used to hedge against unwanted financial risks, or to create a desired risk exposure in place of using traditional financial instruments. Basis swaps: A basis swap is an agreement to exchange principle and interest rate terms in a foreign currency. At the maturity of the contract, the principal and interest rate terms are exchanged back to the original currency. Basis swaps are used for hedging subordinated loans.
1> ALLAN ÅKERSTEDT *) (54), Managing Director of Storebrand KAPITALFORVALTNING AS MBA, Stockholm School of Economics 1992–1997 Finance Director, Statoil, 1987–1992 Senior Vice President, Finance, Stora Kopparbergs Bergslags AB, 1983–1987 Vice President, Skandinaviska Enskilda Banken, 1974–1983 Atlas Copco Group 2> HANS HENRIK KLOUMAN (42), General Counsel, Executive Vice President Graduate in Law, University of Oslo, 1987 1993–1994 Oslo Stock Exchange, 1990–1993 Lawyer – Thommessen, Krefting, Greve & Lund, 1989–1990 Assistant Judge, 1987–1989 First consultant – Kredittilsynet 3> LARS AA. LØDDESØL (40), Executive Vice President, Corporate Life Insurance Master of General Business, Norwegian School of Management and MBA, Thunderbird (AGSIM), USA 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 (42), Group Chief Executive Officer, Storebrand ASA and Managing Director, Storebrand Livsforsikring 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 (39), 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 (40), 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 (48), 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 (43), 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 (46), 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 (39), Executive Vice President, Chief Financial Controller 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 *) Hans Aasnæs was appointed Managing Director of Storebrand Kapitalforvaltning AS with effect from 1 February 2005, replacing Allan Åkerstedt. Hans Aasnæs joined the executive management team from the same date.
Storebrand Filipstad Brygge 1 P O Box 1380 Vika N-0114 Oslo Norway
FINANCIAL CALENDAR FOR STOREBRAND 2005 20 April 2005: AGM 21 April 2005: Ex dividend 11 May 2005: 1st quarter results 10 August 2005: 2nd quarter results 2 November 2005: 3rd quarter results February 2006: 4th quarter results
Number of employees 1) 916 Funds under management (incl. unit linked products) NOK 125.8 bn Number of group pension schemes 2) 9 100
Individual annuity, savings and insurance policies 5) 306 300 Pension and annuity policies in payment 6) 202 300
> Storebrand Livsforsikring AS acquired part of the Industrifinans Næringseiendom ASA real estate portfolio for NOK 1.9 billion.
Accounts Storebrand ASA 52 Accounts Storebrand Group 54 Cash Flow Analysis 56 Auditors’ report for 2004 57 Storebrand Life Insurance Group 58 Contents – Notes to the accounts 59 Accounting principles 2004 60 Notes to the Accounts of Storebrand ASA 63 Notes to the Accounts of Storebrand Group 70 Transition to IFRS 83 Storebrand Group Companies 86 Terms and Expressions 86 The Management of Storebrand 88