ShAre profile The Topdanmark share is a value case – not a growth case
} no protection against a take-over in the articles of association read more about Topdanmark’s equity story on www.topdanmark.com ¬ Share profile.
78.2% increase • Better than assumed result in Q1-Q3 2012 interim report • Profit per share increase 91.0% to DKK 142.1 • Combined ratio improved to 88.0% (2011: 90.3%)
(2011: DKK 187m) • Topdanmark bought back own shares of DKK
Share buy-back • In its Q1-Q3 2012 interim report Topdanmark announced that DKK 500m of the share buy-back programme had been postponed because it wanted to develop a new model for calculation of individual solvency in life insurance before the amount was paid out.
• As this model is now in place, the DKK 500m from 2012 has been included in the share buy-back programme for 2013
• Consequently, the share buy-back programme for 2013 is now DKK 2,000m including the DKK 500m transferred from the 2012 buy-back programme. The buy-back of DKK 2,000m represents a yield of 12.4%.
Premiums earned: Results: Run-off profits, net of reinsurance 506 214 204 148 201 41 77
Other movements in shareholders' equity 10 2 1 1 2 0 1 Shareholders' equity of parent company
Average number of shares, diluted ('000) 15,640 15,769 15,159 13,746 12,828 13,448 12,461
Number of shares end of period ('000) 15,663 15,496 14,472 13,332 12,394 13,332 12,394
Combined ratio excl. run-off profits 88.1 93.6 95.7 92.0 90.3 91.5 91.7 *) Shareholders' equity and loan capital
Non-life insurance - Investment return after transfer to technical result etc. 179 820 – 870 1,036 Profit on non-life insurance 1,086 1,770 – 1,870 2,103
This profit of DKK 1,823m was better than the DKK 1,5501, 650m assumed in the most recent profit forecast model for 2012 in the Q1-Q3 2012 interim report due to a combination of a better investment return and a better than assumed technical result in Q4 2012.
Pre-tax profit increased DKK 986m to DKK 2,335m from 2011 to 2012.
Non-life insurance - Investment return after transfer to technical result etc. 138 266 Profit on non-life insurance 374 529 Life insurance 69 46 Parent company etc. 13 18 Pre-tax profit 457 593
The technical result increased DKK 27m to DKK 263m due to lower weather-related claims and higher run-off profits.
• Increase in claims level of policies covering loss of earnings potential due to a reform of early retirement pension
• Overall, it is believed that the combined ratio for 2012 was around 92% excluding run-off profits
• Run-off profits had a positive effect on the combined ratio of around 3pp.
The general price increases from most of the insurance companies in the Danish market in 2011 were replaced by more selective price increases in 2012. The price increases were mainly effected in house, contents, SME insurance and workers' compensation insurance. In 2012 a new house inspection scheme took effect providing new minimum conditions for change of ownership policies. Due to the new conditions the cover of the policy has been increased, and consequently the price of change of ownership policies has also been increased. Overall, the price increases are estimated to have had a 0.3-0.5% positive effect on gross premiums earned.
In contents insurance recent years' trend of declining claims frequency but increasing average claims continued into 2012. Efforts by the police to get closer to the public seem to have helped reduce the number of thefts. On the other hand, the size of average claims increased due to, among other factors, more organised burglary behaviour and an increase in the value of theft attracting items. Overall, it is believed that the claims trend in contents insurance has increased in 2012.
Announcement No. 03/2013 from Topdanmark A/S Page 6 of 101 insurance policy. Furthermore, the reform provides that temporary annuities in workers' compensation will be paid for a longer period than today which, other things being equal, will have an adverse effect on the claims. The Danish National Board of Industrial Injuries has estimated that Danish workers' compensation insurance companies alone will incur a retrospective loss of about DKK 250m on the private companies, while in the future the annual claims will increase around DKK 90m, representing about 2% of premiums earned on workers' compensation insurance policies. Additionally, there will be an increase in expenses on other policies covering loss of earnings potential.
As provisions for outstanding claims are discounted to present value, lower interest rates will increase the payments on claims. Interest rates were lower in 2012 than in 2011 which, depending on the composition of the portfolio, increased the combined ratio by 1-2pp.
Result of non-life insurance in Topdanmark Premiums earned Premiums earned increased 1.1% to DKK 8,759m in 2012, which was slightly lower than the assumed premium growth of 1-2% (as in the Q1-Q3 2011 interim report). The growth in premiums was affected by a run-off profit in a captive, administered by Topdanmark, releasing a premium bonus of DKK 19m. Premium bonuses are deducted from premiums earned.
Typically, profitability for major businesses does not meet Topdanmark's return requirements, leading to a loss of some major unprofitable customers in 2012.
Claims trend The claims trend improved to 72.2% in 2012 (2011: 74.6%) This 2.4pp improvement was mostly due to a decline in weather-related claims to DKK 48m net of reinsurance (2011: DKK 285m net of reinsurance), representing a 2.7pp improvement of the claims trend at group level. Topdanmark assumes DKK 170m net of reinsurance as a normal level of weather-related claims. Weather-related claims were DKK 122m lower than this level in 2012, corresponding to a 1.4pp effect on the claims trend.
The reform on the rules on early retirement pension increased the claims level for those policies covering loss of earnings potential, with a 0.4pp adverse effect on the claims trend.
Excluding run-off profits the combined ratio improved to 90.3% (2011: 92.0%).
Developments in Q4 Premiums earned in Q4 2012 increased 0.3% to DKK 2,209m. This moderate premium growth was due to the DKK 19m payment of bonus in a captive, referred to previously, corresponding to an adverse effect of 0.8pp on premium growth.
The expense ratio increased to 16.0% in Q4 2012 (Q4 2011: 15.9%).
Sales through Topdanmark's own sales channels increased 6.4%. Topdanmark has changed its decentralised sales organisation from insurance outlets to larger sales centres and has expanded its sales team. The new sales organisation was in place at the end of 2012.
Run-off profits were DKK 31m in 2012 (2011: DKK 23m) which had a 0.2pp positive effect on the claims trend as compared to 2011. The run-off result in 2012 was a combination of a loss on I/A and profits on, among others, accident and motor liability insurance.
Run-off profits / (losses), net of reinsurance 14 (5) 23 31
The claims trend improved 3.7pp to 71.2% primarily due to a favourable agricultural claims trend caused by, among other factors, a low level of weather-related claims. In Q4 fire claims net of reinsurance were DKK 21m higher than the level of Q4 2011, which had a 0.5pp adverse effect on the claims trend.
Run-off profits increased to DKK 170m in 2012 (2011: DKK 125m) giving a 1.1pp positive impact on the claims trend. This run-off profit related mainly to workers' compensation insurance.
The combined ratio improved to 86.5% in 2012 (2011: 90.5%). Excluding run-off profits it declined to 90.8% (2011: 93.7%).
Life insurance Danish life and pension market In 2012 the Danish life and pension market was characterised as follows: • Reduction in deductibility of term life premiums • Pension return tax increased from 15.0% to 15.3% • It is believed that the level of overall payments into regular premiums was relatively unchanged.
With effect from 1 January 2012 the tax rate for pension returns was increased from 15.0% to 15.3%.
The return on funds owned by customers, before pension return tax, was 6.0% in Life I and 12.0% in Life V.
The investment return on shareholders' equity increased from DKK 105m in 2011 to DKK 129m in 2012 representing 5.2% in Life I and 5.8% in Life V. The investment return on shareholders' equity is different from that on customers' funds due to different investment strategies and separate portfolios for each; for example, at present shareholders' equity does not invest in equities nor does it use instruments to hedge the guaranteed benefits.
The amount in the shadow account will be recognised as income in line with profits being generated in those contribution groups which have made transfers to the shadow account.
Regular premiums declined 6.7% to DKK 2,157m in 2012 as per the forecast set out in the Q1-Q3 2012 interim report.
Single premiums increased 1.4% to DKK 1,004m in 2012 (2011: DKK 991m).
Overall premiums declined 21.7% to DKK 757m in Q4 due to a 46.2% decline in single premiums to DKK 218m while regular premiums declined 4.1% to DKK 539m.
Loss participation scheme Loss participation is a temporary measure introduced in periods where the market value of the customers' assets is lower than the sum of their savings and only serves a purpose when customers who want to leave the scheme prematurely need to have their surrender value calculated correctly. Should customers choose to leave their schemes prematurely, the loss participation is taken into account in the calculation of the surrender value of their policies in order to ensure that those customers who leave do not take with them funds owned by those who stay. Loss participation only applies to with-profits products and it is not deductible in the event of retirement, death and disability.
Investment activities Topdanmark Group excluding life insurance The investment return in the Topdanmark Group excluding life insurance was DKK 1,336m in 2012 including a revaluation of provisions and income from associated companies but before the transfer to the technical result (2011: DKK 652m).
The exposure in foreign equities and credit bonds have been adjusted by the use of derivatives. The return percentages are calculated as the ratio between the return on financial instruments and the size of the exposure of the underlying asset. The return on government and mortgage bonds and assets related to I/A (illness/accident) includes revaluations of claims provisions. From 2012 the return related to I/A has been calculated before pension return tax whereas in 2011 it was calculated after pension return tax. The comparatives for 2011 have been restated.
The investment return after the transfer to the technical result was DKK 1,099m, which generated an exceptionally large deviation from the expected return given Topdanmark's current risk profile. This high deviation should be viewed in the light of the highly positive investment year 2012 when the returns on both equities and bonds were high. Furthermore, Topdanmark's relatively high exposure in credit products, including CLOs, contributed to a significant excess return. Danish mortgage bonds, in which Topdanmark's exposure is high, performed well in 2012. Also a fortunate positioning in European government bonds, primarily from the core countries, contributed to the excess return. Finally, a change in the discount curve used by Danish insurance companies to value liabilities (see below) generated a gain of DKK 76m.
The equity portfolios are well diversified with no large individual positions. The composition of the portfolios is based on OMXCCAP for Danish equities (representing around 30% of the portfolio at 31 December 2012) and MSCI World in the original currency for foreign equities.
Credit bonds with a rating lower than BBB (DKK 209m) comprise senior secured bank loans and high yield bonds, part of which are convertible, and subordinated bank capital issued by EU banks. Credit bonds with a rating of BBB and A (DKK 344m) are ordinary and convertible corporate bonds, annuity policies and subordinated bank capital issued by EU banks. Credit bonds with a rating higher than A (DKK 11m) are corporate bonds.
The maturity of the CDO investments is dependent on any changes in the payments made by the underlying assets which in turn are dependent on changes in the general economy and, therefore, it is not possible to outline the maturity distribution for the portfolio.
In accordance with the relevant rules Topdanmark is only allowed to use, for solvency cover, a small portion of the tier 2 capital issued as solvency resources in relation to Solvency II. As a consequence, some of the planned distribution of dividend from the insurance group to the holding company needs to be postponed until the rules are changed. In the meantime, the parent company Topdanmark continues to have some loan financing via intergroup accounts with the insurance group or in the money market.
Parent company etc. The parent company Topdanmark A/S does not perform any independent activities. The result of the parent company etc. includes the results of subsidiaries excluding insurance business (primarily Topdanmark Kapitalforvaltning, the asset management company) and financing costs.
Profit declined to DKK 22m in 2012 (2011: DKK 76m) due to the DKK 25m write-down of a property and particularly high earnings in Topdanmark Kapitalforvaltning in 2011.
Taxation The tax charge was DKK 512m on a pre-tax profit of DKK 2,335m corresponding to an effective tax rate of 21.9% (2011: 24.2%). The deviation from the nominal tax rate of 25% was primarily due to Topdanmark's utilisation of an uncapitalised equity loss carried forward and adjustment of previous years. Mostly all of the tax charge is paid in Denmark: www.topdanmark.com → About Topdanmark → CSR → Society → Social accounting.
Prospects for 2013 Expected trend in Danish non-life insurance market It is expected that in 2013 the Danish non-life insurance market will be characterised as follows: • Continued low economic growth • Most of the insurance companies have completed their general price increases • 1-2% growth in premiums • Increase in claims level of policies covering loss of earnings potential due to a reform of the early retirement pension
• Continued disciplined market • The level of weather-related claims was exceptionally low in 2012. If the level of weather-related claims is normal in 2013, the combined ratio will deteriorate around 1.5pp from the 2012 level
• Overall, excluding any run-off profits / losses, the combined ratio is expected to be around 95%
In the personal and SME markets automatic price indexation, allowing for claims inflation, is 1.8% (though 5.6% for workers' compensation insurance) which, in turn, is estimated to have an effect of around 1.3% on the overall market. As in 2012, the average premium in motor insurance is expected to decline in 2013, primarily due to the sale of new cars, to a greater extent than previously, being smaller and cheaper cars, i.e. cars with a lower average insurance premium than bigger and more expensive cars. In addition, generally the claims trend in motor insurance has declined in recent years. Prices in the industrial market are expected to be under pressure also in 2013 due to competition from, among others, foreign insurance companies. Overall growth in gross premiums earned is estimated to be 1-2%.
Announcement No. 03/2013 from Topdanmark A/S Page 17 of 101 increase claims paid on policies covering loss of earnings potential.
A continued disciplined market is expected in Denmark. All of the six largest insurance companies, representing a market share of 71%, are quoted on the stock exchange or owned by a quoted company. Additionally, the low interest rates will continue to influence the companies to ensure profitability of their primary operations.
Run-off profits improved the combined ratio by around 3pp in 2012 which is estimated to be higher than the normal level. A more normal level of run-off profits is expected in 2013.
Expected trend in Danish life and pension market It is expected that in 2013 the life and pension market will be characterised by: • Tax reform • Increased need for pension saving • Movement from with-profits to unit-linked schemes • Decline in regular premiums • New rules for calculation of individual solvency.
Due to the tax reform, which took effect on 1 January 2013, the deductibility of payments into capital pension schemes has been removed. Furthermore, the opportunity has been given to prepay the tax on capital pension schemes which otherwise should be paid when the capital pension is paid out. The tax will be 37.3% in 2013 and 2014 while normally 40%. It is believed that most of the payments previously made into capital pension schemes will be paid into annuity schemes with full deductibility in the future.
The trend towards customers moving their pension savings from with-profits to unit-linked schemes is expected to continue. For example, more pension fund companies are offering their customers a grant or a share of unallocated resources if they choose to move their pension schemes from with-profits to unit-linked schemes.
The DFSA has announced that in 2013 it will prepare new rules for the calculation of individual solvency: Individual solvency requirement.
Non-life insurance In the interim report for Q1-Q3 2012 Topdanmark expected, for 2013, premium growth of 1-2% and a combined ratio of 91%, excluding any run-off profits / losses, based on the following assumptions: • Premium growth in personal lines is expected to be higher than the assumed 1-2% overall premium growth for Topdanmark. Correspondingly, premium growth in the SME and industrial segment is expected to be lower than 1-2%
• Topdanmark has increased market pressure in the personal segment, SME businesses and farms. This helped to gradually improve the customer exchange ratio in the personal segment during 2012 and is assumed to have a favourable effect on premiums earned in 2013
• Topdanmark has no wish to participate in unprofitable competition, which is mostly seen in the market of major industrial businesses. Topdanmark's return requirements are expected to generate some loss of large businesses
Overall the pre-tax result of non-life insurance is assumed to be DKK 960-1,060m.
Assuming that interest rates do not change and the total return for 2013 exceeds 4.1% and 6.3% respectively, the shadow account relating to interest rate group 1 (shadow account: DKK 150m) and interest rate group 2 (shadow account: DKK 53m) will be recognised as income in 2013.
The results are highly sensitive to fluctuations in the investment return. The risk allowance and shadow account are not finally calculated until the preparation of the 2013 Annual Report.
Total Group profit The overall post-tax profit forecast model is assumed to be DKK 1,050-1,150m in 2013 representing a profit per share of DKK 95.
This profit forecast model is subject to an annual 7.0% return on equities and unchanged foreign exchange rates from the level on 22 February 2013. Furthermore it is assumed that the return on interest-bearing assets hedging the discounted provisions is just sufficient to cover discounting and revaluation of the provisions, while the return on the remaining interest-bearing assets will be 2.48% (risk-free interest rate plus 2.0pp).
Non-life insurance - Investment return after transfer to technical result etc. 1,036 220 – 270 Profit on non-life insurance 2,103 960 – 1,060
Parent company etc. 22 30 – 40 Pre-tax profit 2,335 1,380 – 1,520
The postponement of the buy-back of DKK 500m was due to a general notification from the DFSA to the industry which provided that the model which Topdanmark, among other companies, used to calculate solvency requirements in life insurance cannot be used until Solvency II has taken effect. At the time of the presentation of the interim report it was not clear whether Topdanmark had time to prepare an alternative solvency calculation by the end of the year. Therefore, assuming that it would not be the case Topdanmark chose to allocate capital.
To date in 2013 Topdanmark has bought back own shares of DKK 294m which leaves a balance of DKK 1,706m of the 2013 programme. If Topdanmark buys back own shares for less than DKK 2,000m in 2013, the balance will be transferred to the ordinary buy-back for 2014.
On 22 February 2013 Topdanmark's share capital comprised 13,750,000 shares, of which Topdanmark held 1,595,000 own shares. If before the AGM on 17 April 2013, contrary to expectation no further shares are bought back, the number of voting shares will be 12,155,000 shares.
Share split In order to increase the liquidity of its shares Topdanmark intends to reduce the denomination from DKK 10 per share to DKK 1 per share with effect from 13 March 2013.
This is the second time Topdanmark has effected a share split. The previous time was on 20 October 1999 when the share was split from DKK 100 per share to DKK 10 per share. On 20 October 1999 the price of the new 10 kroner share was DKK 138.5.
Cash flow Topdanmark believes that success in the Danish insurance market is best achieved by combining distribution power with risk-appropriate prices, an efficient organisation and satisfied customers.
Announcement No. 03/2013 from Topdanmark A/S Page 21 of 101 organisation. This new distribution agreement is expected to improve growth from 2013
• Typically, profitability for major industrial businesses does not meet Topdanmark's return requirements. Therefore Topdanmark has chosen to let other insurance companies win some major unprofitable schemes.
Pricing Topdanmark works with differentiated pricing based on risk-appropriate prices, i.e. micro rating. This makes Topdanmark an attractive insurance company to customers with relatively favourable claims trends while customers with less favourable claims trends are incentivised to change to other insurance companies with a less risk-dependent pricing structure.
Activities associated with pricing • Topdanmark continues its work with more finely meshed and risk-based prices • Topdanmark has no current plans to make general price increases. Instead it is implementing measures for less profitable customers (e.g. loss prevention, lower sums insured, increased retention and selective price increases)
Topdanmark increased prices, in line with the other players in this market segment, to ensure better consistency between price and risk
• Topdanmark has an internal Lean concept (TRIM) which regularly reviews relevant departments in the Company in order to increase efficiency in customeroriented processes.
Activities associated with customer satisfaction • Topdanmark continues to work to improve customers'
experience which is an important factor in increasing a customer's relationship with Topdanmark. In 2012 Topdanmark held an internal competition to ensure that the entire organisation would give priority to customers' experience as the most important goal for our customer services. In 2013 the improvement of customers' experience will be integrated into the success criteria of the customer-oriented departments
• During 2012 and at the beginning of 2013, it has been the subject of executive meetings and after-hours meetings with the Executive Board to make the entire organisation work to create the best customer experience
• Topdanmark has set up retention teams to ensure that the number of customers leaving Topdanmark continues to decline
In this light it is Topdanmark's opinion that the Company's future annual results would, with a very high probability, be a profit even in the event of, for example, another collapse in the financial markets as in 2008.
The Board of Directors determines the overall risk policies and limits. The internal auditors refer to the Board of Directors and report on, among other things, the observance of the risk policies and limits set within them.
Review Topdanmark believes that the Group's most important risks relate to the following main areas: • Non-life insurance risks • Life insurance risks • Market risks • Credit and counterparty risks • Operational risks • Strategic risks.
The most important risks are described in the following survey. A more detailed description is available in note 1.
Non-life insurance risks Personal, liability and property insurance for the personal, SME, industrial and agricultural markets Most important risks Risk preferences Risk reducing activities Underwriting risk • Acceptance policy • Follow-up policy
Disaster risks • Storm and rainstorm • Fire • Terror • Cumulative risk • Workers' comp
Life insurance risks Life insurance contracts entitled to a bonus, unit-linked contracts with no investment guarantees and group life Most important risks Risk preferences Risk reducing activities Limited loss-absorbing buffers in the event of low interest rates
For agreements entitled to a bonus we aim at balancing return and risk so that ordinary risks are covered by the related bonus potential
The calculation of profit is viewed as a risk return on shareholders' equity where fluctuations are adjusted via bonus potential and shadow account
All policies are classified by the guaranteed benefit, and the investment policy is intended to ensure the ability to meet the benefits guaranteed
In order to improve the average investment return and limit the overall market risk Topdanmark invests in a wide range of asset categories
Credit and counterparty risks Most important risks Risk preferences Risk reducing activities Reinsurance
Counterparty risk is limited by mainly buying hedging from reinsurance companies which as a minimum has a rating of A-
In the calculation of the effect on the results it is assumed that the bonus reserves and the individual bonus potential in the life insurance group could offset adverse fluctuations at the levels described as the overall collective bonus potential was DKK 768m at 31 December 2012 (2011: DKK 540m) and the bonus potential on paid-up benefits DKK 1,849m (2011: 2,306m).
Non-life insurance Underwriting risk Combined ratio − 1pp increase (65) (66)
Provisioning risk Provisions on own account − 1% increase (93) (96)
Market risk Interest-bearing assets 1 pp increase (493) (509) Provisions for claims in effective and benefits etc. interest rate 473 498
Annual currency loss with an up to 2.5% probability (15) (19)
Solvency Danish insurance companies are subject to European and Danish solvency rules ensuring that the companies hold sufficient capital relative to the risks they accept. The most important rules are: • Solvency I – the current European solvency rules • Individual solvency requirement • Traffic light rules.
The DFSA has announced that the rules of individual solvency requirement will be changed during 2013. From 2014, individual solvency requirement is to be calculated on the basis of the QIS5 test calculation from the EU with later updates from EIOPA and the coming results of the LTGA assessment of long-term guarantees. The companies' internal models are intended to continue to be used for calculating the solvency requirement. The individual solvency requirement is to be in line with the expected requirements of Solvency II.
In recent years Topdanmark has calculated the solvency requirement of life insurance using a method based on the QIS5 test calculations with adjustments towards the expected final Solvency II model. However, at the end of 2012 the DFSA informed the industry that the inclusion of the life insurance provisions in individual solvency requirement must be in accordance with the relevant accounting rules. This implies a mismatch between the handling of assets (Solvency II risk) and liabilities (inclusion of buffers in compliance with Solvency I).
For the sake of good order it should be noted that the life insurance company has surplus capital over the individual solvency requirement irrespective of the risk scenario of paid-up benefits referred to above being included in the QIS5 calculation or handled separately.
Therefore, Solvency II gives the companies the opportunity to fully or partially develop their own risk model (internal model) for the solvency calculation. However, the DFSA must approve the model that is used for the calculation of Solvency II capital requirements. Today Topdanmark uses a risk model it has developed inhouse to calculate the non-life risk. The inclusion of nonlife risks in Topdanmark's calculation of the individual solvency requirement has been based on this model.
Topdanmark is in constant dialogue with the DFSA on the model. It is expected that the application for the Solvency II approval will be submitted to the DFSA in 2014 and that the model will be approved before Solvency II takes effect.
The size of the necessary solvency capital has been calculated to be DKK 4,700m. This amount is the forecast solvency requirement under Solvency II plus an adequate buffer ensuring that usual fluctuations in earnings will not result in insufficient solvency cover.
The necessary solvency capital is assumed to comprise shareholders' equity (DKK 4,050m), hybrid capital (DKK 400m) and subordinated loan capital (DKK 250m), see www.topdanmark.com → Investor Relations → Capital Model. If the capital requirement is higher than expected, the difference will be covered by issuing further supplementary loan capital.
The necessary capital of DKK 4,700m under Solvency II has been based on an expected approval of Topdanmark's internal model for non-life insurance risk. If it is not approved, the necessary capital will increase by DKK 600-700m. This potential increase in the capital requirement can be covered by the safety margin of DKK 500m referred to above supplemented by a marginal adjustment of the financial risk.
Topdanmark's Solvency II project Topdanmark is preparing for Solvency II by having employees from claims actuarial services, life actuarial services, asset management, financial and compliance departments, IT, Group Development and others working together on a project reporting to the CFO.
Holding (%) Shareholder 31 Dec 2012 If P&C Insurance Holding Ltd (publ) Barks Väg, Solna 10680 Stockholm Sweden
The three most important elements of this project are to prepare new, very detailed external reports to the DFSA and for publication on the website, to adapt data processes and calculation methods in the life insurance business and to adapt Topdanmark's own risk model for non-life insurance risk to be approved as a partial, internal model under Solvency II. The reporting to the DFSA and reporting for publication are the most resourcedemanding parts of the Solvency II project.
Capital structure and ownership For the period until the Annual General Meeting in 2015, the Board of Directors is authorised to acquire own shares up to 15% of the share capital for the purpose of ownership or security. The shares can be acquired at a minimum market price of DKK 10.5 per share and a maximum price of current market value plus 10%. It is a standing authorisation which, subject to the approval of the general meeting, is renewed regularly.
Shareholders At 31 January 2013 Topdanmark had 48,148 shareholders registered by name.
The following shareholders own more than 5% of the share capital:
Topdanmark's Board of Directors comprises nine members, six of them elected by shareholders at the general meeting and three by Topdanmark's employees in accordance with the Danish Companies Act.
In accordance with this Act the number of Board members elected by employees should be equivalent to no fewer than half the number of those elected by shareholders in general meeting. The rights, duties and responsibility of the Board members elected by employees are the same as those of the Board members elected by shareholders at the general meeting.
Shareholders who are not associated with the Company by their employment or who are not employed by a competing company are eligible for election to the Board of Directors by shareholders at the general meeting.
Topdanmark has no fixed general selection criteria. It believes that by imposing very specific requirements on the Board of Directors it may prevent the election of an obviously qualified Board candidate who does not fully meet the requirements. Instead an individual decision will be made on each Board candidate based upon an overall consideration of their qualifications, the Company's present needs and the composition of the rest of the Board of Directors. Topdanmark believes that in a company like Topdanmark, between them its Board members ought to possess skills within accounting, finance, financing, insurance operations, reinsurance and marketing and sales in the personal and professional markets. With its current composition Topdanmark's Board of Directors possesses all these skills.
Topdanmark’s current Board of Directors reflects diversity in many areas including professional background and education, sex and age. Its members have experience from the financial, industrial and agricultural sectors, nationally and internationally. The Board of Directors believes that this composition enables it to consider a given problem from many different angles which is confirmed by experience from the day-to-day Board work. Read more about each Board member’s background and competence on www.topdanmark.com → About Topdanmark → Executive Board and Board of Directors and Board of Directors and Executive Board in this Annual Report.
Four of the nine Board members are women, one of them elected at the general meeting and three by Topdanmark's employees. The proportion of female Board members elected at the AGM has been stable since 2004. Under AGM the Board of Directors proposes that another female Board member is elected. In 2011 the number of female Board members elected by employees increased from one to three.
Topdanmark believes that diversity provides business value and that it is important that the greatest management talents, irrespective of gender, nationality, religion or other characteristic achieve the highest executive positions at all levels. Topdanmark has no wish to favour women over men and therefore it has not imposed real quotas. Instead it has defined initiatives and policies for diversity which it aims to meet.
No special pension contribution is paid to the Executive Board, and therefore they are paid a personal allowance of 25% of their cash salary. Consequently Topdanmark has no pension commitments towards the Executive Board and no type of pension compensation on retirement is granted. The Friday Team and significant risk takers receive a pension contribution of up to 25% of their cash salary. The amount is paid to the chosen pension provider and consequently all pension obligations are fully covered by them.
Due to a change in tax rules it is no longer advantageous to receive employee shares. The Board of Directors has therefore decided not to issue employee shares for 2013.
Options Besides the revolving scheme above a further 19,850 share options have been granted for 2013 to a number of other executives who are expected to make a special effort or otherwise contribute extraordinarily to value creation in the Company.
For 2013 Topdanmark has granted 34,824 share options to its Executive Board and a number of executives. The strike price of DKK 1,333 was fixed at 110% of the market price of Topdanmark's shares on 28 December 2012 (average of all trades).
Corporate Governance The options granted for 2013 may not be exercised any earlier than subsequent to the publication of the 2015 Annual Report in 2016 and no later than subsequent to the publication of the 2017 Annual Report in 2018. In the intervening period the options can only be exercised up to three banking days subsequent to Topdanmark's publication of annual and interim reports.
Topdanmark's "Statutory Corporate Governance Report, see Section 131 of Executive Order on Financial Reports for insurance Companies and Lateral Pension Funds" (”Accounting Order”) is available on www.topdanmark.com → Investor Relations → Reports and presentations → Statutory Corporate Governance Reports (
The market value of the options for 2013 has been calculated to be DKK 9m at the time of granting.
CSR The value was calculated using the Black and Scholes model based on a share price of DKK 1,211.42, an interest rate corresponding to the zero coupon rate based on the swap curve on 28 December 2012, future annual volatility of 22%, corporation tax rate of 25% and a pattern of exercise similar to Topdanmark's previous granting of share options, see IFRS 2 on share-based payments.
Topdanmark's "Statutory report on Corporate Social Responsibility, see Section 132 of Executive Order on Financial Reports for insurance Companies and Lateral Pension Funds" is available on www.topdanmark.com → Investor Relations → Reports and presentations → CSR reports (
At the end of 2012 the exposure of the options held by the
• The liquidity of its shares is high enough in order that they are not traded at a discount due to lack of liquidity
• There is a high level of knowledge of and confidence in Topdanmark's shares
Communication to investors and analysts is performed through the following information channels: • Investor meetings • Telephone meetings
Topdanmark is monitored by 20 analysts. Share analysts' recommendations of Topdanmark's shares are available on Topdanmark's investor site www.topdanmark.com → Investor Relations → Share profile → Analysts. Deadline for submitting items for AGM agenda 05 Mar 2013
2013 03 Jan 02/2013: Topdanmark increases its holding of own shares 02 Jan 01/2013: Issue of options 2012 26 Nov 12/2012: Result of sale of employee shares 13 Nov 11/2012: Topdanmark Interim Report Q1-Q3 2012 27 Aug 10/2012: Reduction in ATP's shareholding in Topdanmark 21 Aug 09/2012: Topdanmark 2012 Half Year Report 29 Jun 08/2012: Share capital and voting rights in Topdanmark 25 Jun 07/2012: Topdanmark's holding of own shares under 10% 25 Jun 06/2012: Write-down of share capital 22 May 05/2012: Topdanmark Interim Report for Q1 2012 19 Apr 04/2012: Annual General Meeting of Topdanmark − 19 April 2012 23 Mar 03/2012: Notice convening AGM of Topdanmark 06 Mar 02/2012: Topdanmark's Annual Report 2011 02 Jan 01/2012: Issue of options
Independence: Michael Pram Rasmussen meets the definition of independence set out by the Committee on Corporate Governance
Anders Colding Friis* DOB: 25 August 1963 Joined Topdanmark's Board of Directors: 2012 Current position held: Group CEO of Scandinavian Tobacco Group A/S Previous positions held: 1987-1989: Marketing trainee, Mölnlycke Kemtekniske Produkter 1989-1991: Product Manager, Mölnlycke Kemtekniske Produkter Göteborg 1991-1992: Product Group Manager, Mölnlycke Kemtekniske Produkter Allerød 1992-1994: Market Manager, Estrella A/S 1994-1996: Sales and Marketing Manager, Schulstad Brød A/S 1996-1998: Sales and Marketing Manager, Schulstad Gruppen A/S 1998-1999: Group Managing Director, Schulstad Gruppen A/S and CEO, Schulstad Brød A/S 1999-2006: Group Managing Director, Skandinavisk Tobakskompagni A/S and CEO, House of Prince A/S
− and two subsidiaries • Industral Employers in Copenhagen (Deputy Chairman) • The Foundation of Ejnar and Meta Thorsen • IC Companys A/S • Executive Committee and Governing Body of DI
(The Confederation of Danish Industry) Independence: Anders Colding Friis meets the definition of independence set out by the
Annette Sadolin*,*** DOB: 4 January 1947 Joined Topdanmark’s Board of Directors: 2004 Current position held: Since 2003 solely directorships Previous positions held: 1980-1986: Assistant to management and subsequently Divisional
Desirée Schultz** DOB: 11 May 1952 Joined Topdanmark’s Board of Directors: 2011 Current position held: Head of department Offices held: Chairman of Topdanmark's Senior Officers' Association
Independence: Søren Thorup Sørensen meets the definition of independence set out by the Committee on Corporate Governance
Executive Board Christian Sagild CEO of Topdanmark A/S DOB 1959, joined Topdanmark in 1996, joined Topdanmark's Executive Board on 1 January 2006
Kim Bruhn-Petersen Group Managing Director of Topdanmark A/S DOB 1956, joined Topdanmark in 1989, joined Topdanmark's Executive Board on 1 January 2006
Provisions for insurance and investment contracts: Relative run-off profits, net of reinsurance (%) 5.0 2.1 1.8 1.3 1.6 * Before deducting bonuses and rebates
Gross premiums written 4 8,734 8,851 Reinsurance ceded (703) (660) Change in the provisions for unearned premiums, gross 4 (26) (29) Change in the reinsurers' share of the provisions for unearned premiums 2 8 Premiums earned, net of reinsurance 8,008 8,170
Change in the life insurance provisions 10 435 (684) Change in the reinsurers' share 2 1 Change in the life insurance provisions, net of reinsurance 437 (683)
Interest charges (113) (89) Expenses on investment business (35) (43) Total investment return 1,463 4,261
Profit per share, DKK 17 74.4 142.1 Profit per share, diluted DKK 17 74.4 142.1
Profit for the year 1,023 1,823 Exchange rate adjustment of foreign business 0 1 Revaluation of owner-occupied properties 1 1
Other comprehensive income 1 2 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1,024 1,825
Shares in associated companies 21 385 928 Loans to associated companies 22 707 173 Total investment in associated companies 1,091 1,101
Loans guaranteed by mortgages 9 8 Other loans 1 1 Deposits with credit institutions 2,025 1,657
Reinsurers' share of the provisions for unearned premiums 24 68 75 Reinsurers' share of the life insurance provisions 38 38 Reinsurers' share of the provisions for claims and benefits 25 1,079 683 Total reinsurers' share of provisions 1,184 797
Accrued interest and rent 494 376 Other prepayments and accrued income 161 151 TOTAL PREPAYMENTS AND ACCRUED INCOME 655 527 TOTAL ASSETS 61,013 59,435
Collective bonus potential 31 540 768 Provisions for bonuses and rebates 89 105 Provisions for unit-linked contracts 32 3,737 4,757 TOTAL PROVISIONS FOR INSURANCE AND INVESTMENT CONTRACTS 46,846 48,804
Pensions and similar commitments 33 39 33 Deferred tax liabilities 26 121 109 Deferred tax on security funds 348 348 TOTAL LIABILITIES PROVIDED 508 489 DEPOSITS RECEIVED FROM REINSURERS 116 141
Creditors arising out of direct insurance operations 89 95 Creditors arising out of reinsurance operations 61 35 Bond loans 72 74 Amounts due to credit institutions 5,997 2,007 Amounts due to associated companies 0 7 Current tax liabilities 30 54
Investment assets related to unit-linked contracts (385) (582) Balances with associated companies 58 21
Cash and cash equivalents comprise: Liquid funds 241 368 Deposits with credit institutions 2,025 1,657
Non-life insurance Underwriting risk Acceptance policy Topdanmark's acceptance policy is based on the desire to make a profit from both products and customer segments. Topdanmark varies the pricing of its products depending on the relevant risk criteria and the costs of administering those products.
Topdanmark's pricing is aligned with the individual markets and types of customers. In the personal and commercial markets prices are mostly based on standardised rates while major SME and industrial customers are offered more individualised charges.
Provisions are generally calculated on a monthly basis across all lines of business. The claims trend is assessed monthly, followed up by any necessary price changes.
Topdanmark continues to improve its administration systems to achieve more finely meshed data capture which in turn enables it to identify the claims trends at an earlier point in time and compile information on the constituent parts of the various types of claims.
Provisioning risk Provisions for outstanding claims Traditionally, the insurance classes are divided into short-tail (i.e. those lines where the period from notification until settlement is short) and long-tail (those lines where the period from notification until settlement is long).
The following table shows a breakdown of Topdanmark's total provisions for outstanding claims:
The much higher provisioning risk in long-tail than in short-tail lines is due to the longer period of claims settlement. It is not unusual that claims in long-tail lines are settled three to five years after notification and in rare cases up to 10-15 years.
Provisions for unearned premiums The risk on provisions for unearned premiums is relevant particularly within change of ownership insurance where typically the policy covers a period of ten years and the full ten-year payment is made up front.
Storm and rainstorms Reinsurance covers storm claims of up to DKK 5.1bn with a retention of DKK 100m. Snow loading, snow thawing and rainstorms are also covered. When using its reinsurance cover, Topdanmark will have to pay a reinstatement premium. In the event of another storm within the same year there is cover of up to a further DKK 5.1bn with a retention of DKK 100m. In the event of a third or fourth storm there is cover of DKK 670m with a retention of DKK 20m. The cover of a third or fourth storm is dependent on the storm programme not having been hit previously by two individual storms each exceeding DKK 3.6bn. The storm programme is renewed on 1 July.
Specific reinsurance cover of DKK 100m for rainstorms takes effect if accumulated annual rainstorm claims exceed DKK 50m. For a claim to be accumulated, the event must exceed DKK 10m. The maximum retention in the event of an extreme rainstorm is DKK 75m plus reinstatement premiums.
Life insurance Limited loss absorbing buffers in the event of low interest rates Bonus potential on paid-up benefits and collective bonus potential are the loss absorbing buffers in life insurance against any losses incurred by customers on investment activities.
Disability Disability risk is the risk of increasing disability intensity or declines in the rates of resumption of work, in that the benefits have been guaranteed until expiry. Losses may be incurred due to a general increase in disability frequency or due to inadequate health evaluation when the policy is written.
Extra costs due to longer lifetimes will be partially covered by collective bonus potential and bonus potential on paid-up benefits. The remainder affects profit / loss for the year and consequently shareholders' equity.
Market risk Market risk represents the risk of losses due to changes in the market value of the Group's assets, liabilities and off-balance items as a result of changes in market conditions. Market risk includes interest rate, equity, property, currency, inflation and liquidity risk.
Generally, the interest rate risk is limited and controlled by investing in interest-bearing assets in order to reduce the overall interest rate exposure of the assets and liabilities to the desired level
The risk on the property portfolio is limited by a strategy focusing on the four largest cities in Denmark, where Topdanmark invests in well situated properties within the segments of housing and flexible office properties
Workers' compensation and illness / accident insurance differ from the general principles regarding the inclusion of an allowance for inflation. The provisions in workers' compensation insurance are directly linked to the expected future indexation of wages and salaries and those in illness / accident insurance are directly linked to the net price index
In order to reduce the risk of inflation within workers' compensation and illness / accident insurance Topdanmark has written inflation swap contracts and bought index-linked bonds hedging a significant proportion of the expected cash flows
Liquidity risk In insurance companies the liquidity risk is very limited as premiums are paid prior to the beginning of the risk period
Topdanmark finances its activities and share buy-back programme by using its subsidiaries' surplus liquidity via inter-group accounts, which are reduced by paying dividends
Undiscounted expected cash flows for the Group's most significant liabilities: The Group uses derivatives to hedge investment risks. The hedging of currency risk in particular often results in significant positive or negative changes to balance sheet values.
All of the Group's insurance companies may raise money market loans as part of the day-to-day liquidity management. Typically the maturity of such loans is less than a month. Both the subordinated loans raised by Topdanmark Forsikring and any outstanding money market loans will be repaid from the cash generated from operations.
Furthermore, the Group has a significant liquidity base of high-quality liquid bonds. % 2011 2012
Credit and counterparty risk Credit risk is the risk of losses caused by one or more counterparties' full or partial breach of their payment obligations. Topdanmark is exposed to credit risk in both its insurance and investment business.
Investment Topdanmark's investment risk is the inability of bond, loan or financial contract counterparties to meet their obligations. Most of Topdanmark's interest-bearing assets comprise Danish mortgage bonds and debt issued or guaranteed by top-rated European states. The risk of losses is considered to be very small due to the high quality of the issuers and a desired spread on both issuers and issues. To limit the risk on other bond and loan debtors the portfolio is well diversified both geographically and with regard to type of debtor - and therefore the exposure to the concentration of risks is insignificant.
Risk assessments of each operational IT risk are made regularly. Group IT Security reports quarterly on risks and events to the Executive Board.
Topdanmark's IT security policy and IT emergency strategy (both based on IS027001) are revised each year by the Executive Board to be accepted by the Board of Directors.
The actual IT emergency plan includes plans for reestablishing the IT environment if the systems suffer breakdowns. The IT emergency plan is tested regularly. Topdanmark's business critical systems can be inaccessible for 24 hours without causing significant business problems. In order to reduce the probability of breakdowns of the IT systems and limit their duration, Topdanmark has invested in, for example, emergency power plants with a diesel generator, disk mirroring, alarms and automatic fire fighting equipment. Critical IT equipment is in duplicate and placed in two physically separated machine rooms.
It is Topdanmark's goal that the accessibility of its main systems is no less than 99.5%. In 2012 it was 99.9%. For many years the accessibility for the central applications has exceeded this goal.
Life insurance Gross premiums written 3,161 3,161 Allocated investment return 2,364 2,364 Benefits and change in provisions (5,195) (5,195)
Net reinsurance 3 3 Technical profit on life insurance 4 4 7
Taxation (512) Profit for the year 1,823 Amortisations: * After discounting DKK 217m (2011: DKK 323m)
Shares in associated companies 53 332 0 385 Loans to associated companies 0 707 0 707 Other financial investment assets 18,050 29,988 1 48,039 Investment assets related to unit-linked contracts 0 3,283 0 3,283 Reinsurers' share of provisions 1,146 38 0 1,184 Amounts due from affiliated companies 3,073 455 18 (3,546) 0
Total provisions for insurance and investment contracts 16,228 30,618 0 46,846 Amounts due to affiliated companies 461 2,374 711 (3,546) 0
Purchase of tangible and intangible assets 159 6 0 165 Results from associated companies 7 19 0 26
Run-off profit: Gross business 221 201 Reinsurance ceded (73) 1 Run-off profit, net of reinsurance 148 201
Run-off profits, net of reinsurance 148 201 Claims provisions, net of reinsurance 12,382 12,750 Number of claims incurred ('000) 434 393 Average value of claim (DKK '000) 16 16 Annual frequency of claims 120 108 The loss ratio and the combined ratio have been calculated before elimination of internal rent. The annual frequency of claims has been calculated as a per thousand value.
Gross premiums written 8,734 8,851 Change in gross provisions for unearned premiums (26) (29) Gross premiums earned 8,709 8,823
Technical interest, net of reinsurance 8 3 0 0 7 2
Technical interest, net of reinsurance 6 2 11 4 14 5
Run-off profits / (losses), net of reinsurance (49) 30 2 (4) 8 24 Claims provisions, net of reinsurance 1,697 1,690 155 157 597 608
Average value of claim (DKK '000) 26 28 10 9 14 13
Technical interest, net of reinsurance 9 3 2 1 7 1
Run-off profits / (losses), net of reinsurance 45 28 (18) (11) 16 (47) Claims provisions, net of reinsurance 574 574 517 533 197 256
Proportion of gross premiums represented by premiums related to unit-linked contracts not eligible for bonus 1,188 1,257 Investment risk is taken by the policyholder. All other gross premiums relate to bonus eligible insurance contracts.
Claims payable on death 135 138 Claims payable on maturity 256 174 Pension and annuity payments 560 576
Rental income 264 262 Operating expenses from properties rented out (40) (50) Operating expenses from properties not rented out (5) (4) Gross profit 219 207 Administrative expenses (11) (8) Income from investment properties 209 200
Current tax 288 577 Change in deferred tax 33 (20) Prior year adjustment (4) (49) Tax in foreign companies 5 2 Tax for the year 323 509 Current tax taken to shareholders' equity 3 3
Impairment and amortisation at 31 December 0 (136) (218) 0 (355)
Revaluations taken to shareholders' equity 0 1 1 Revaluations recorded in the income statement 0 (1) (1) Cost / revaluation at 31 December 587 818 1,404
Note 20. Investment properties Fair value at 1 January 4,046 4,104
The valuation of the properties has been based on a required average return of: Non-residential 6.0% 6.0% Residential and part residential 4.6% 4.7%
Note 22. Loans to associated companies Average effective interest rate 1.1% 1.7%
Share of profit 29 26 Share of other comprehensive income 0 1 Dividends received (28) (65) Shares in associated companies 385 928
Note 25. Reinsurers' share of the provisions for claims Non-life insurance Reinsurers' share at 1 January 667 1,079
Reimbursement of claims relating to this year (309) (108) Expected income relating to this year 1,018 383
Reinsurers' share of the provisions for claims at 31 December 1,079 683
Non-capitalised balance of equity losses that can be carried forward 411 317
Note 28. Provisions for unearned premiums Provisions for unearned premiums at 1 January 2,646 2,678 Gross premiums written 8,734 8,851 Premiums earned (8,709) (8,823)
Note 29. Life insurance provisions Life insurance provisions at 1 January 26,692 26,257 Accumulated revaluation at 1 January (870) (897) Retrospective provisions at 1 January 25,821 25,360 Gross premiums written 2,115 1,903 Accrued interest 775 555 Claims and benefits (3,110) (2,555) Expense loading inclusive of expense bonus (184) (165) Risk gain after allocating policyholders' risk bonus (48) (28)
Note 30. Provisions for claims 2011 2012 Non-life insurance: Gross Provisions at 1 January 12,364 13,461 Claims paid relating to previous years (3,306) (3,642) Change in expected claims payments relating to previous years (221) (201) Claims paid relating to this year (3,444) (3,040) Expected claims payments relating to this year 6,980 6,323 Inflation swaps 103 (32) Discounting (annual amortisation) 329 221
Net of reinsurance Provisions at 1 January 11,697 12,382 Claims paid relating to previous years (3,060) (2,958) Change in expected claims payments relating to previous years (148) (201) Claims paid relating to this year (3,135) (2,932) Expected claims payments relating to this year 5,962 5,939 Inflation swaps 103 (32) Discounting (annual amortisation) 320 215
Non-life insurance, net of reinsurance, at 31 December 12,382 12,750 Life insurance 84 87 Provisions for claims, net of reinsurance 12,467 12,837
Note 30. Provisions for claims - continued Claims liabilities analysed by claims year
Number of customers with investment contracts 2,810 2,728 The contracts written do not have guarantees.
Topdanmark Livsforsikring V A/S: Risk groups 49 79 Cost groups 6 6
Gross provisions at 1 January 3,335 402 3,737 Retrospective provisions at 1 January 3,335 402 3,737
Retrospective provisions at 31 December 4,320 437 4,757 Provisions for unit-linked contracts 2012 4,320 437 4,757
Other pension commitments 3 0 Pensions and similar commitments 39 33
Specification of profit on life insurance: Pre-tax profit / (loss) Topdanmark Link (5) (5) 11 11 Pre-tax profit Nykredit Livsforsikring 2 2 2 2
Expenses by their nature: Commission - non-life insurance 226 228 Commission - life insurance 54 45 Staff costs (excl. commission) 1,622 1,672 Other staff costs 111 107 Premises costs etc. 164 172 IT operations and maintenance 139 156 Impairment and amortisation 160 145 Other expenses 111 110 Total expenses 2,587 2,634
Income from investment properties (administration and operation) 55 62 Expenses on investment business 35 43 Other expenses 40 40 Total expenses 2,587 2,634
Social security costs 40 39 Payroll tax 165 171 Share options 6 6 Employee shares 44 42
Note 37. Staff costs - continued Share options Topdanmark's share option scheme is for its Executive Board and senior executives. The strike price has been fixed at 110% of the market price on the last trading date in the prior financial year (average of all trades). The options can be exercised 3-5 years subsequent to the granting. The scheme is settled by shares (equity instruments).
Per granting: Average strike price exercised options 2011 608 641 608 622 Average strike price exercised options 2012 802 788 800 792 Fair value of granting 2011 1 6 7 Fair value of granting 2012 2 6 7
The fair value of the granting for the year has been calculated using the Black and Scholes model assuming a price of DKK 897.78 (2011: DKK 734.73) per share, an interest rate corresponding to the zero coupon rate based on the swap curve on 31 December the previous year, future volatility of 22% (2011: 22%) p.a., corporate tax rate of 25% (2011: 25%) and a pattern of exercise similar to Topdanmark's previous granting of share options. The volatility has been calculated on the basis of previous years' volatility, which continues to be Management's best estimate of future volatility.
Related parties with significant influence comprise the Board of Directors, the Executive Board and their families.
Remuneration of the Executive Board Salaries etc. 16 16 Employee shares 1 1 Share options 1 2 Total remuneration to three members of the Executive Board 18 19
Designated at fair value: Deposits with credit institutions 2,025 1,657 Investment assets related to unit-linked contracts 3,283 4,313
Total financial assets at fair value where the revaluation is taken to the income statement 51,323 50,117
Loans and receivables at amortised cost Loans to associated companies 707 173 Amounts due from policyholders 379 390 Amounts due from insurance companies 79 157 Other debtors 128 193 Liquid funds 241 368
Investment assets related to unit-linked contracts 2.8 0.5 3.3 Total financial assets at fair value 36.4 14.9 51.3
Held for trading: Designated at fair value: Amounts due to credit institutions 5,997 2,007 Total financial liabilities measured at fair value through the income statement 6,534 2,029
Financial liabilities measured at amortised cost Subordinated loan capital 1,150 1,153 Deposits with ceding undertakings 116 141 Creditors arising out of direct insurance operations 89 95 Creditors arising out of reinsurance operations 61 35 Bond loans 72 74 Amounts due to associated companies 0 7 Current tax liabilities 30 54 Other creditors 952 1,097 Total financial liabilities measured at amortised cost 2,471 2,655 Total financial liabilities 9,005 4,684
Book value of financial liabilities at amortised cost approximately corresponds to fair value, except for hybrid core capital (DKK 406m) with an assumed value lower than nominal value.
Inputs based 2012 Quoted on observable Financial assets recorded at fair value prices market data Total
Investment assets related to unit-linked contracts 3.0 1.2 4.3 Total financial assets at fair value 29.8 20.3 50.1 The Group has no financial assets recorded at fair value using valuation models based on non-observable inputs.
Financial liabilities payable after five years or more: Subordinated loan capital 404 406 Amounts due to credit institutions 5 5
It is expected that the following significant liabilities will be settled 12 months or more after the balance sheet date: Subordinated loan capital 1,150 1,153 Provisions for unearned premiums 174 187 Guaranteed benefits 18,121 19,410 Bonus potential on future premiums 3,345 3,338 Bonus potential on paid-up benefits 2,033 1,673 Provisions for claims and benefits 9,564 10,121 Collective bonus potential 513 716 Provisions for unit-linked contracts 3,162 4,121 Deferred tax on security funds 348 348
Note 42. Analysis of assets and their return - life insurance
Announcement No. 03/2013 from Topdanmark A/S Page 74 of 101 ** Life V has invested in interest rate options - Euro-CMS-floors with a strike rate of 5% - to hedge the guaranteed benefits.
Max. effect on before change bonus potential collective in bonus poten- used for 2011 Min. effect on bonus tial used for benefits on Event capital base potential such benefits paid-up policies 0.7-1.0 pp increase in interest rates (127) (48) 718 (26) 0.7-1.0 pp decline in interest rates 125 40 (910) (95)
Event 0.7-1.0 pp increase in interest rates (148) (106) 1,045 16 0.7-1.0 pp decline in interest rates 84 114 (1,008) (130)
Note 44. Shares analysed by industry and region (%) - life insurance Other North South Other Other Not 2012 Denmark Europe America America Japan Far East countries analysed Total
Shareholders' equity according to Danish rules * 4,915 5,716 Deferred tax assets (0) (1) Hybrid core capital 404 406 Capital adequacy requirements for insurance companies – 50% (1,540) (1,521) Core capital 3,779 4,600 Capital adequacy requirements for insurance companies – 50% (1,540) (1,521) Capital base 2,240 3,078 Weighted items 3,689 4,238 Core capital as a percentage of weighted items 102.4 108.5 Solvency ratio 60.7 72.6 * Before provisioning for deferred tax on security funds. Solvency has been calculated according to the rules for financial services holding companies. See "Solvency" in Management's Review.
Shares issued at 1 January 17,087 14,826 Own shares at 1 January (2,615) (1,494) Number of shares at 1 January 14,472 13,332
Number of shares held to cover the granting of options: 402,000 (2011: 498,000)
Deposits with credit institutions 1,641 1,560 Investment assets related to unit-linked contracts 3,282 4,278 Liquid funds 62 123 Accrued interest 408 348 Shares in and amounts due from affiliated companies eliminated in the consolidated accounts 7,767 7,464
In the financial year TDE.700 A/S merged with Topdanmark Ejendom A/S.
TDF.0141 ApS and TD.0151 ApS were liquidated by submitting a statement to the authorities.
Note 53. Other disclosures The five-year summary in accordance with Section 91(a) of the Danish executive order on financial reports for insurance companies and lateral pension funds is the last page of Management's review. For further details see "Risk management", "Risk scenarios" and "Capital model" in "Management's review".
In illness / accident insurance the inflation assumptions used to calculate the value of the expected future payouts have changed from forward inflation to a specific estimate. On the date of change, 30 September 2012, the change had no effect on the size of overall provisions in illness / accident.
Discount curve Technical provisions and other provisions have been calculated using the DFSA's changed discount curve which, for cash flows with maturity exceeding 20 years, was extrapolated using a fixed forward interest rate of 4.2%.
Future accounting regulation The IASB has issued a number of new and revised standards and interpretations which have not yet taken effect.
Accounting estimates and judgements In the preparation of Topdanmark's financial statements, estimates and judgements have been made which affect the size of assets and liabilities and consequently the results in this and subsequent financial years.
The most significant estimates and judgements are made ín the calculation of the provisions for outstanding claims.
Provisions for outstanding claims have been calculated as the best possible estimate at the end of any given year. As, at this time of the year, all necessary information is not available, there will be deviations between the actual claims paid and the provisions made in the form of either run-off losses (too low provisions) or run-off profits (too high provisions).
The provision risk is significant, in particular in lines with a long period of claims settlement such as workers' compensation, accident, commercial and motor liability. The levels of compensation could be significantly affected by any changes in legislation, case-law or the practice in the award of damages adopted by, for example, the Danish National Board of Industrial Injuries.
The five-year summary discloses the most recent financial years' run-off profits/losses. The movement in the provisions for outstanding claims and run-off profits/losses analysed by claims year is shown in the note on "Provisions for outstanding claims". The note on "Technical result − non-life" specifies run-off profits/losses for the year analysed by line of business. For further details see Management's review.
General Consolidated financial statements The consolidated financial statements include the parent company Topdanmark A/S and all of the companies that are controlled by the parent company. The parent company is considered to control the companies through direct or indirect ownership of more than 50% of the voting rights or when it can have or has an otherwise controlling influence.
The income statement and balance sheet are presented in accordance with the DFSA's IFRS-compatible accounting order for insurance companies and lateral pension funds.
Consolidation The consolidated financial statements have been prepared by aggregating items within the financial statements of the parent company and the subsidiaries on a line-by-line basis. The same accounting policies are applied by the subsidiaries as by the parent company.
Announcement No. 03/2013 from Topdanmark A/S Page 81 of 101 with any revaluation of the fair value taken to the income statement are included in expenses on investment activities when incurred. However, financial instruments which, subsequent to the initial recognition, have been measured at amortised cost are recognised at fair value adjusted for direct expenses on the acquisition or issue of the financial instrument.
An investment contract is one where the amount of insurance risk is not sufficient for it to be classified as an insurance contract. However, if the investment contract entitles the policyholder to receive a bonus, it is treated as an insurance contract. Payments received and made on investment contracts where the policyholder is not entitled to a bonus have been taken directly to the balance sheet.
The initial recognition of transactions in currencies other than DKK is made at the exchange rates prevailing at the date of the transactions. Debtors, creditors and other monetary items which have not been settled on 31 December are translated at the closing exchange rates on 31 December. Translation differences are disclosed in Revaluations in the Income Statement.
Expenses Expenses are recognised in the Group’s income statement and disclosed classified by function: Claims incurred (claims handling), acquisition and administrative expenses, investment return and other expenses. Expenses which do not directly relate to a function are allocated proportionally on the basis of the size of the direct expenses.
The fair value, on the date the option is granted less the subscription proceeds, is included in staff costs in the income statement, with the relevant credit shown as a change in equity. The fair value is calculated using the Black & Scholes model and in accordance with IFRS 2 on share-based payments.
The options are settled with own shares. Any strike amount received on the exercise of the options is taken to shareholders’ equity.
Employee shares The fair value, on the date the share is granted, is included as staff costs in the income statement, with the relevant credit shown as a change in equity. The fair value is measured in accordance with IFRS 2 taking into account the specific conditions for the issue of employee shares.
Calculation of profit in life insurance The calculation of profit for those life insurance companies with portfolios of bonus-participating policies (Topdanmark Livsforsikring and Topdanmark Livsforsikring V) is regulated by the Danish Financial Business Act. The definition of Topdanmark's policy on the calculation of the profit for the year has been reported to the DFSA.
The result of life insurance and how the "insurance technical result before bonus contribution" is allocated is disclosed in a note.
SME and Industrial includes policies for agricultural, SME and industrial businesses, sold by Topdanmark's sales organisation and its distribution partners, as well as captive-based policies.
Cash flow statement The cash flow statement for the Group has been prepared in accordance with the direct method disclosing cash flow from operations, investments and financing as well as the changes in the Group’s liquid funds between the beginning and the end of the financial year. Investment activities also include amounts received and paid on the purchase and sale of investment, intangible and tangible assets. Cash flows from financing comprise changes in capital, including the purchase and sale of own shares. Furthermore it includes the raising of loans and repayments on interest-bearing debt. Cash and cash equivalents comprise liquid funds as well as deposits with credit institutions.
Income statement Premiums earned Gross premiums in non-life insurance comprise those premiums receivable during the year and an estimate of premiums on insurance contracts written, either directly or indirectly, for which the period of risk has commenced before the end of the financial year. They do not include own risks. Premiums earned net of reinsurance comprise
Operating expenses Technical operating expenses which relate, either directly or indirectly, to the acquisition and renewal of the portfolios are included in acquisition costs. New business commission is generally recorded in the income statement on the date the insurance takes effect. Administrative expenses comprise other costs incurred in the administration of the portfolios which relate to the financial year and which have been accounted for on an accruals basis. Commission received from reinsurers has been accounted for on an accruals basis over the policies’ period of cover.
Taxation The tax charge for the year comprises the current corporation tax for the year and any changes in deferred tax. The share of the tax charge that relates to the profit for the year is included in the income statement, the share that relates to other comprehensive income items is included in other comprehensive income and the share that relates to shareholders' equity items is taken to shareholders' equity. The current tax for the year is calculated using the tax rates and rules applicable on 31 December.
Investment properties The initial recognition of investment properties is made at cost and subsequent recognitions are made at fair value with revaluations in the income statement. A value has been calculated for each property on the basis of an expected future return on its operations and a rate of return (required yield). This value is adjusted for any special conditions having a temporary effect on the earning capacity of the property as well as the level of maintenance required on each property. The yield has been fixed taking into account the relevant market conditions for each type of property, its position, use, tenure of lease etc. and sales efforts within a reasonable time frame. The properties are reviewed and assessed annually by the Group's own valuation experts.
Measurement of fair value The calculation at fair value is based on the listed prices of transactions in active markets. If there is an active market for listed shares, bonds, derivatives etc., the measuring is generally based on the closing price on 31
Life insurance provisions Life insurance provisions are measured at fair value. Accordingly, the liabilities are calculated on the basis of the market value independent of the original technical base. The fair value of the life insurance provisions is based on the realistically expected future premiums to be received, benefit payments to be made and administrative expenses incurred on the contracts written.
Remaining life expectancy for a 60 year old man and a 60 year old woman is as follows: Provisions for claims incurred are calculated using an inhouse statistical model that is based on the relationship between the possibility of resumption of work and the period passed since the occurrence of the claim. The provisions include amounts to cover the expected expenses on the future administration of the insurance contracts written. These expenses have been calculated using an annual indexation of 2%.
Provisions for claims and benefits are assessed for each line of business either on a claim by claim basis (individual provisions) or by using statistical methods (collective as well as incurred but not reported (IBNR) and incurred but not enough reported (IBNER) provisions). Claims exceeding a fixed amount, dependent on the line of business, are assessed individually and provisions for smaller claims are assessed collectively. IBNR provisions cover expenses on post-notified large claims. IBNER provisions cover extra expenses on already reported claims for which the individually assessed provisions are not sufficient due to, for example, inadequate information at the time of assessment. The collective provisions are calculated using de Vylder's credibility model adjusted for each line of business. The IBNR and IBNER provisions are calculated using in-house developed models. In agricultural and commercial lines claims are assessed individually. IBNR and IBNER provisions are also included in the total provision. In personal lines claims not exceeding DKK 100,000 are assessed collectively while larger claims and all claims on change of ownership policies are assessed individually. IBNR and IBNER provisions are also included in the total provision. In motor and accident lines total provisions comprise the sum of the collective and individual provisions. Individual provisions are the result of an assessment where the claims handler has assessed the total claim payment to exceed DKK 1.5m and the case is estimated to exceed the amount paid out. Large claims and claims relating to previous years are individually assessed within personal liability in motor insurance.
Provisions for unit-linked contracts Provisions for unit-linked schemes are measured at fair value in accordance with the value of the assets linked to the schemes: see the fair value option in IAS 39 on elimination or significant reduction of accounting inconsistency.
Proposed appropriation of profit for the year: Transfer to net revaluation reserve at net asset value 1,068 1,825 Transfer to profit carried forward (45) (2)
Profit for the year 1,023 1,823 Other comprehensive income in affiliated companies 1 2 Other comprehensive income 1 2 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1,024 1,825
Machinery and equipment 5 4 3 TOTAL TANGIBLE ASSETS 4 3
Other reserves 2,563 2,991 Total reserves 2,563 2,991 Profit carried forward 2,204 2,587 TOTAL SHAREHOLDERS' EQUITY 4,915 5,716 SUBORDINATED LOAN CAPITAL 9 404 4
Shareholders' equity at 31 December prior year 171 1,845 2,884 4,901
Cost at 31 December 4 4 Impairment and amortisation at 1 January (1) (0) Impairment and amortisation at 31 December (0) (1) Machinery and equipment 4 3
Topdanmark Forsikring A/S 5,964 6,427 Topdanmark Invest A/S (investment) 190 31 Topdanmark Kapitalforvaltning A/S 99 173 TD.0151 ApS (Investment) 31 82
Shares in affiliated companies 6,285 6,714 The affiliated companies are domiciled in Ballerup.
Share of loan included in capital base 404 406 Interest charges 13 11
Notes to the financial statements • Parent company (DKKm) 2010 2011 20
Salaries etc. 16 16 Employee shares 1 1 Share options 1 2 Total remuneration to three members of the Executive Board 18 19 Christian Sagild 7.8 8.3 Kim Bruhn-Petersen 5.2 5.5 Lars Thykier 5.2 5.5 10% of the fixed salary etc. paid to the Executive Board is paid as share options. The Executive Board receives only a fixed remuneration. The Group has no unhedged pension commitments.
Shares, bonds and subordinated notes held by the Board of Directors and Executive Board Board of Directors Number of shares 2,908 3,083 Bonds, nominal value DKK '000 128 128 Subordinated notes (subordinated loan capital) Topdanmark Forsikring, nominal value DKK '000 19,610 19,610
Executive Board Number of shares 35,630 30,635 Bonds, nominal value DKK '000 1,364 1,364 Subordinated notes (subordinated loan capital) Topdanmark Forsikring, nominal value DKK '000 3,850 0
Share options Topdanmark's share option scheme is for its Executive Board and senior executives. The strike price has been fixed at 110% of the market price on the last trading date in the prior financial year (average of all trades). The options can be exercised 3-5 years subsequent to the granting. The scheme is settled by shares (equity instruments).
Weighted items 3,846 4,390 Core capital as a percentage of weighted items 98.0 104.8 Solvency ratio 58.2 70.1
Note 14. Other disclosures The five-year summary in accordance with Section 91(a) of the Danish executive order on financial reports for insurance companies and lateral pension funds is included in financial highlights on page 3. Risk disclosures in accordance with Section 91(b) are included in Management's review for the Group in Risk management and Risk scenarios and in Note 1 of the consolidated financial statements.
Many factors may cause a significant deviation from the forecasts and assumptions set out in the Annual Report. Such factors could be, for example, cyclical movements, changes in the financial markets, the financial effect of nonanticipated events like acts of terror or exceptional weather conditions, changes in Danish and EU rules, competitive factors in the insurance industry and the trend in reinsurance market. Also see Risk management.
The above description of risk factors is not exhaustive. Investors and others, who may base decisions relating to Topdanmark on statements relating to the future, should make their own careful considerations on these and other factors of uncertainty.
The consolidated financial statements are presented in accordance with International Financial Reporting Standards as adopted by the EU, and the annual financial statements for the Company are presented in accordance with the Danish Financial Business Act. Further, the Annual Report is presented in accordance with additional Danish disclosure requirements for listed financial services companies.
Management is responsible for the consolidated financial statements and annual financial statements. Our responsibility is to express an opinion on the consolidated financial statements and annual financial statements.
Management’s responsibility for the consolidated financial statements and annual financial statements Management is responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the EU and Danish disclosure requirements for listed financial services companies as well as the preparation of annual financial statements that give a true and fair view in accordance with the Danish Financial Business Act. Management is also responsible for such internal control as it determines is necessary to enable the preparation of consolidated financial statements and annual financial statements that are free from material misstatement, whether due to fraud or error.
Further, in our opinion, the annual financial statements give a true and fair view of the Company's assets, liabilities and financial position at 31 December 2012, and of the results of its activities for the financial year 1 January to 31 December 2012 in accordance with the Danish Financial Business Act.
On this basis, it is our opinion that the information provided in the management review is consistent with the consolidated financial statements and annual financial statements.