REPORT OF THE BOARD OF DIRECTORS AND CORPORATE GOVERNANCE Report of the Board of Directors 28 Corporate Governance 54 Board of Directors 64 Members of Storebrand’s corporate bodies 66 Management 67
STOREBRAND ASA Profit and loss account 154 Statement of financial position 155 Cash flow statement 156 Notes 157
opened for business in 1996, and in 2006 the group relaunched its property and casualty insurance business as a service for the retail market and selected segments of the corporate market.
Storebrand shall be a leader in long-term savings and insurance. In order to achieve this, Storebrand’s ambition is to be a leader in corporate social responsibility and sustainable investments. To illustrate how corporate social responsibility is integrated in our core operations, the group reports on financial and non-financial goals and results in the group’s annual report.
At the end of 2011 there were 2,221 employees in the group, compared with 2,182 at the start of the year.
Women represent 49 per cent of our employees. The average age of our employees is 44 and the average seniority is 9 years.
There are 1.8 million people who have a customer relationship with
At the end of 2011 there were 2,221 employees in Storebrand. This corresponds to an increase of 1.8 per cent during 2010.
Group result before amortisation and tax1 1,279 1,612 1,245 1,310 2,020
Dividend per ordinary share (NOK) 0.00 1.10 0.00 0.00 1.20 1. Result figures for 2007 have not been translated for the financial statement layouts used from 2008. Figures for 2010 and 2011 are translated as a result of adjustments in the group structure. 2. Adjusted for write-downs and amortisation of intangible assets, after tax.
We are taking a position that is customer-oriented, purposeful and specific.
What will the practical consequences of the new vision be in relation to the day-to-day work of our employees?
– We are making many changes as a result of our new vision: One example will be how customers can contact us on the phone. Today our customers have different points of contact for the various product areas. In the future customers will encounter a combined Storebrand with an overview of their entire customer relationship – from occupational pensions to insurance and funds.
Another example is how we have redesigned our customer front end. Our customers can choose how they would like to contact us: by phone, online, chat or meeting in person with an advisor. We have also neutralised the incentive system for our advisers. Remuneration focuses on meeting the needs of the customers, rather than on the product the customer purchases.
Storebrand’s stated aim is to grow in the retail market. The group will establish a leading direct position, and our existing customers are the primary target group.
– We have 1.8 million customers in Norway and Sweden with occupational pensions, health insurance and paid-up policies, as well as retail market customers. In
Norway alone there are between 60,000 and 80,000 new employees every year in companies that offer occupational pensions from Storebrand. We are the leaders in
Norway within defined contribution pensions, with a market share of approximately 29 per cent. This corporate relationship is a strategically important relationship that gives us a point of contact with the employees. We are to become an even better partner to individuals, and the customers and Storebrand will both benefit from this.
Storebrand already has good solutions for insurance, savings and banking services that combined cover our customers’ overall needs. We must do better at telling our customers that they are doing the right thing when they take advantage of more of the products we offer. Last year we were ranked as the world’s most sustainable asset manager by the World Bank and Financial Times. Where the money is invested is something that an increasing number of customers are concerned about. We have participated in the development and signed on to the social responsibilities in the UN
The changes in the pension system call for a shift towards the retail market?
– Precisely. The employees have more choices, and these choices are of great importance to their future financial security. We must illustrate the consequences of these choices. There is a great need for information – and a great need for savings.
The Board of Directors has decided to propose to the Annual General Meeting that the entire annual result for 2011 will be used to strengthen the company’s equity and that no dividend will be paid.
The eurozone crisis, low interest rates and weak global growth made 2011 a challenging year for players in the financial sector. Extensive regulatory changes are being implemented for European life insurance companies at the same time – changes that Storebrand are monitoring closely. In order to become more customer-oriented, the group launched a new vision at the start of the year, CEO Idar Kreutzer tells us in this interview.
making its earnings model more robust against fluctuations in the financial markets.
To illustrate what this means, we have designed a new reporting layout for the group profit in which we combine all of the most stable profit elements and isolate the more volatile elements. The most stable portion of our earnings – the result before profit sharing and loan losses – has increased over the last five years from an annual result of NOK 277 million in 2006 to around
Dynamic risk management ensures that the risk inherent in the portfolios with interest rate guarantee is adapted to the buffer capital continuously. These portfolios with guarantee are divided into various subportfolios according to their risk-bearing capacity, and the risk is managed accordingly. It is satisfying to note that our risk management is working according to plan during these turbulent times.
Our defined contribution portfolios are governed by long-term investment strategies, and we have been net buyers of shares throughout the entire period of decline.
The life insurance industry finds itself in a period where extensive changes are being made to the regulations. Keywords here are the pension reform and Solvency II. The industry is very clear that the current business regulations for life insurance with an annual guaranteed return are not adapted to Solvency II. The authorities are working on adapting the Norwegian regulations to the European regulations, but a great deal of work remains. What changes to the regulations will be required?
(NOU 2012:3) points to the need to change the framework for defined-contribution occupational pensions, and provides important guidelines for the currently ongoing work on new product regulations. The
Commission also proposes voluntary investment choice for paid-up policies, which we consider to be a positive development.
This will provide paid-up policy customers with a better opportunity for the long-term management of their pension assets than at present. Certain other measures that we support have also been proposed, but given the current low interest rates, the effect of these measures is inadequate. - When the report was presented, the Minister of
What happens if the Norwegian regulations are not adapted to Solvency II?
– Everyone will lose if the regulations are not adapted to Solvency II. As a consequence of this the life insurance companies will be required to significantly reduce the risk in their portfolios. This will mean that the customers will receive lower pensions through a lower expected return, companies will have more expensive pension schemes and the industry will be faced with unnecessarily high capital requirements. We are working actively with the authorities to ensure a regulatory framework for occupational pensions that will facilitate good solutions for all the parties.
In order to raise the awareness and preference of Storebrand’s pension products, we are releasing three advertising films and a pension calculator.
The reorganisation of the group will make it easier to be a customer in Storebrand.
The group’s executive management team is being reduced from ten to six people and a new management forum, the executive management, is established. The executive management is composed of 30 people, including the Group’s executive management team. The new model strengthens the interaction across national borders and paves the way for efficient balance sheet management.
Asset Owner of the Year by the Financial Times and International Finance Corporation
Fondene (Norfond) was the very first Norwegian asset management company. The company was founded based on a new law allowing private persons to be able to save in funds. Today Storebrand Fondene manages over 40 funds, and two new funds have been launched in connection with the 30 year jubilee.
Maintaining a presence in social media is now part of Storebrand’s strategy to come closer to the retail market. From September
Storebrand’s climate reporting qualified again for the Leadership Index of the
Carbon Disclosure Project (CDP), which represents 550 of the world’s largest institutional investors with total assets under management of USD 71,000 billion.
Storebrand Growth tops the list of the best Norwegian equity funds in 2011.
In 2011 it was 30 years since Storebrand Fondene was established.
Our vision: [ Vision: Image of the future, a dream to aspire to. Have visions about something big. ]
[ Value: Emotional characteristics that are observed in the conduct of the organisation. Shall reflect the culture and priorities of the organisation. ]
Over 16,000 small and medium-sized enterprises offer occupational pensions from Storebrand. We know the needs of the management teams in these enterprises better than most.
Life Insurance aims to be Norway’s most respected and customer-oriented life insurance company by offering customers the most attractive products, the best advice and the best customer service.
BenCo is excluded in all numbers, except in the solvency margin for 2010.
Storebrand’s asset management business includes the companies Storebrand Kapitalforvaltning AS, Storebrand Fondene AS, SPP Fonder AB, Storebrand Eiendom AS and
Storebrand and SPP Fonder brand names. Storebrand Eiendom AS is one of Norway’s largest real estate companies.
Storebrand Bank ASA aims to establish itself as Norway’s leading direct bank in the retail market, and is also a leading provider of advice, transaction services and financing to corporate customers within commercial property. Storebrand Bank ASA has NOK 34 billion in assets under management.
Many will experience that their income is halved when they become pensioners. Do you know what sort of pension you can expect from the National Insurance Scheme, your employer and your own savings?
The pension market is already individualised in Sweden. In around 70 per cent of the market, individuals choose their occupational pensions from a selection of providers that the company selects through an option programme or broker. The relationship with individuals is therefore important with regard to being chosen as a pension provider in the Swedish pension market.
Norwegian pension system and the need for an overview and security in Sweden.
Storebrand Group has a relationship with around 1.8 million private customers, more than a million in Norway and 750,000 in
Consumer behaviour and the expectations to us as a provider of financial services are changing rapidly. Customers are much better at comparing offers from multiple providers. They use the Internet to find information, they communicate about financial services over the Internet with friends and directly with us, and they expect that we can explain what is best for them in a simple way.
Our research shows that our customers want good advice and active follow-up.
National Insurance benefits and a defined benefit pension from our employer have traditionally been the answer for a good pension in Norway. Everyone will have to take greater responsibility for their own pension as a result of Norway’s pension reform. The need for individual pension savings is increasing.
My Consumption and My Budget give our customers an overview and control of their expenses and income, and it gives them an opportunity to plan.
own pages at storebrand.no. In My Account we provide a complete overview of the customers’ commitments. In 2012 we will make it easier for customers to log in to their own pages, and we will provide information on future pension payments from the Norwegian Labour and Welfare Administration (NAV). We are also developing simpler calculators for comprehensive and long-term planning of their own finances.
Total ~1,080’ private customers �~341’ customers with retail product Ù~740’ inactive private customers
Total ~743’ private customers �~365’ individual customers with active savings and/ or discretionary portfolio management service, or savings in payment Ù~378’ inactive private customers
You will receive a fast response to your inquiries through your desired channel.
Our analysis includes finding and investing in the most sustainable companies in their respective sectors. In 2011 we initiated a project to further develop our analysis to create a tool that can ensure that sustainability is taken into account in all our investment decisions. Our analysis will identify the companies that are the best positioned to meet future challenges on the basis of a sustainability perspective. In order to benefit more from our sustainability efforts and experience, our sustainable investment department has been fully integrated with our asset management business.
We support and are active participants in: Global Compact – The UN’s corporate responsibility initiative for companies.
The World Business Council for Sustainable Devolopment (WBCSD) – an international organisation of business leaders from 200 companies.
As a result of our long-term, systematic work with sustainable investments, Storebrand was named Sustainable Asset Owner of the Year by the Financial Times and
The jury justified its decision by: “The winner in this category is a pioneer in environmental, social and commercial management with sustainability integrated in its DNA. All funds under management are invested in a sustainable manner.
Storebrand has redefined the relationship of trust between the manager and the customer in asset management.”
Work with sustainable investments reflects international conventions and guidelines and applies across all asset classes, industrial sectors and geographic regions. The map illustrates a cross section of our work: the number of companies excluded from our portfolios and cases we are working on where there are serious accusations of environmental damage, corruption or human rights violations (by country where they are listed). The text boxes provide examples of how we work and the results delivered.
The farming of salmon is associated with a number of environmental challenges. In 2011 Storebrand has had a dialogue with five of the largest fish farming companies in
Norway, focusing in particular on measures to prevent escape, salmon lice and pollution.
Sustainable investments in Storebrand are primarily based on guidelines set out by the United Nations Global Compact and the
Ottawa Treaty in regards to anti-personnel mines; the Convention on Cluster Munitions
A total of 96 companies had been excluded from the group’s portfolios at the end of the fourth quarter of 2011. Eight of these companies were excluded this year. Our most important contribution to sustainable development is to engage in active ownership, We exclude companies when we feel that the risk is unacceptable. However, we continually seek to encourage improvement. In 2011 six companies were included.
In 2011 a South Korean bank was excluded from investment due to corruption and other serious financial crime. A large number of the company’s executives have been charged with criminal offences by the prosecuting authority, and the company’s banking licence has been suspended for a long period of time.
Every year since 1996 Storebrand ASA has given its employees an opportunity to purchase shares in the company through a share purchase scheme. The purpose of the scheme is to involve the employees more closely in the company’s value creation. In
Almost 627 million shares in Storebrand were traded in 2011, which is an increase of 6 per cent over 2010. The trading volume in monetary terms totalled NOK 25,386 million in 2011, an increase from NOK 23,114 million in 2010. In monetary terms Storebrand was the 15th most traded share on Oslo Børs.
Storebrand generated a total return (including dividends) of minus 27.2 per cent in 2011. The Oslo Børs OSEBX index showed a decline of 12.4 per cent for the corresponding period. Over the last 5 years, Storebrand has shown a total return of minus 50 per cent, while the European insurance index
Storebrand’s dividend policy shall contribute towards providing shareholders with a competitive return and optimising the company’s capital structure. The dividend to shareholders will normally represent more than 35 per cent of the full-year profit after tax, but before amortisation costs.
Account Number of shares % Country 1 Gjensidige Forsikring Asa 109,458,254 24.33% NOR
Shareholders by number of shares and ownership as per 31.12.11 22 | STOREBRAND ASA
On 1 January 2006, new rules came into force in Norway concerning the taxation of dividends and gains on shares held by private individuals. The new rules are referred to as the shareholder model. Under the shareholder model, dividends, less a standard deduction, are taxable, currently at a rate of 28 per cent. If shares are sold, any unused standard deduction can be deducted from the gain on the sale. The standard deduction is calculated on the basis of the cost price of the share multiplied by the average three-month interest rate on treasury bills, which is effectively a risk-free rate of interest. The interest rate for calculating deductions in 2011 has been set at 1.5 per cent.
Storebrand attaches importance to comprehensive and efficient communication with financial markets. Maintaining a continuous dialogue with shareholders, investors and analysts both in Norway and internationally is a high priority. The group has a special investor relations unit responsible for establishing and coordinating contact between the company and external parties such as the stock exchange, analysts, shareholders and other investors. All interim reports, press releases and presentations of interim reports are published on Storebrand’s website www.
Storebrand has one class of shares, each share carrying one vote. The company holds its AGM each year by the end of June. Shareholders who wish to attend the general meeting must notify the company no later than 4:00 p.m, three business days before the general meeting. Shareholders who do not give notice of attendance before the deadline expires will be able to attend the general meeting, but not vote.
Norway was called at that time. In 1913 the scheme is converted into a public sector company called Norges Brannkasse.
Storebrand’s new energy efficient head office gains a lot of attention.
The financial crisis in the USA spreads to the global financial markets and during 2008 the New York Stock Exchange (Dow
Norwegian and international stock markets fall sharply from September 2000 to
Storebrand changes its logo – from the stylised St. Hallvard, patron saint of Oslo
UNI Storebrand’s negotiations with Skandia concerning establishing a major Norwegian led company fail to reach agreement.
Over 500,000 employees in the private sector in Norway do not have any disability insurance through their employer or privately. They only have the National Insurance Scheme to rely on if they become disabled.
Report of the Board of Directors and Corporate Governance 26 | STOREBRAND ASA
* Paid-up policies are pension rights that employees in the private sector take with them when they resign or their pension scheme is changed. 1 Dependent on regulatory changes, cf. Banking Law Commission’s report on paid-up policies and capital requirements, Norwegian Public Report (NOU) 2012:3.
Few global growth impulses, combined with an inability to deal with financial imbalances in the Eurozone have continued and somewhat increased the unrest in the global economy. Storebrand's home markets, Norway and Sweden, have, so far, only been affected by the financial turmoil to a limited extent. The group's results are, nevertheless, influenced by turbulent financial markets and in particular by historically low interest rates.
The result effect of the weak and volatile financial markets is limited by the fact that in recent years we have purposely worked on changing the company's earnings profile. This means that values are largely created independent of financial market developments. Storebrand's is gradually changing its business from dependence on guaranteed business to business with lower capital requirements and greater stability in earnings, typically fund-based products. This work continued in 2011, among other things through operational improvement programmes, revenue-increasing measures and a further streamlining of operations.
It now seems clear that the introduction of capital requirements under Solvency II will be postponed until 2014. Solvency II is a full harmonisation directive, and in only a few areas is it possible for the various countries to make national choices in connection with the implementation of the directive. Storebrand and the financial industry in Norway are in close dialogue with the Norwegian authorities, to ensure the best possible harmonisation between Solvency II and national regulations.
Storebrand's position as a leading player in the Nordic occupational pension market strengthened through 2011. In addition, several strategic and organisational adjustments were implemented in order to increase focus on the retail market. An important reason for this initiative is the transition from defined benefit to defined contribution occupational pension schemes, where the individual employees have a greater involvement. Business relationships give the group a strategic advantage in the relationships established with company employees.
STRATEGY AND CUSTOMER ORIENTATION Fusion of the corporate and retail market The shift from defined benefit to defined contribution occupational pension schemes has led to both risks and investment options being transferred from employer to employee. In addition, the pensions reform will lead to lower future pension payments for many employees. In sum, this increases both the need and interest in pensions and private savings significantly.
As part of Storebrand's focus on the retail market a series of measures are being implemented to ensure that we are perceived and experienced as an attractive choice for customers. Marketing and sales efforts have been strengthened and coordinated. The goal is a good customer experience, where customers receive guidance tailored their own life situation and in the way they want it. This means that advisory services, prices and the impression left should be the same in all Storebrand channels, be it on the internet, telephone, in letters or in face-to-face meetings. Specific customer promises are designed as a response to what customers have told us that they want. From 2012, Storebrand will work systematically and purposefully to fulfil customer promises.
The Group's vision has been simplified and changed to "Recommended by our customers". The vision will be actively used as an internal prioritisation tool. See separate article on the retail initiative on page 16 for more information.
Profit before profit sharing and loan losses4 2.5 bn 1.6 bn 1. Result after tax adjusted for amortisation costs) / (opening equity – dividends paid – half of repurchased shares during the year. 2. Corrected for one-time effect of tax income of NOK 411 million in 2010. 3. Solvency margin pursuant to Solvency I regulations.
NORWEGIAN REGULATORY ADAPTATION Regulatory framework The Board places great emphasis on ensuring that the Group actively adapts to the challenges and opportunities the changes in the framework provide. Storebrand will be an active contributor to the work of drafting new legislation in areas that are of paramount importance to the Group. The main activities in 2011 have involved the adaptation of occupational pension regulations to the pensions reform and preparations for the implementation of Solvency II in Norway.
Pensions reform The pensions reform was introduced in the National Insurance Scheme with effect from 1 January 2011. The adaptation of the regulations for occupational pension schemes in the private sector to the new national insurance is being implemented in two phases. Phase 1 was the introduction of flexible withdrawal of pensions from 62 years and continued accrual
Storebrand‘s products, system solutions and settlement processes have been renewed due to the pensions reform. The pensions calculator, which is available externally on the websites Mitt kundeforhold (My customer relationship) and Bedriftsportalen (Corporate Portal), was launched in January 2011 and provides customers with extended possibilities to simulate a variety of pension and flexible withdrawal scenarios.
Solvency II The introduction of capital requirements under Solvency II will most likely be postponed until 2014. A proposal for legal implementation of Solvency II was presented in August 2011. The main challenge in the implementation of Solvency II in Norway is the lack of consistency between Solvency II principles and existing Norwegian conditions governing business and product regulations for life insurance. In March 2011, Norway's FSA presented a paper proposing certain amendments to the Norwegian conditions governing business in order to adapt them to Solvency II. This, together with the Financial Crisis Committee's indication of the need for adjustments in Norwegian regulations, was submitted to the Banking Law Commission for further consideration.
The assessments that the Banking Law Commission presents in the report correspond, to a large extent, with the assessments that Storebrand has previously expressed regarding the need for adjustments of the Norwegian framework to Solvency II. Changes in the Norwegian regulations are necessary to ensure a good and stable occupational pension system for companies and employees alike.
Storebrand is in favour of the proposed measures, but emphasises that these are not sufficient to solve the challenges related to the introduction of Solvency II under current Norwegian regulations. Storebrand is in a constructive dialogue with the authorities on these issues.
The Banking Law Commission plans to revert to this in May/June 2012.
The turmoil in the financial markets affects the Group's results. The decline in equity markets has reduced the return and resulted in slower growth in assets under management. This reduces the administrative and management revenues and reduces profit sharing. The business areas performed well and the shift towards less capital-intensive products continues. Improved efficiency and cost reduction programmes increase the quality of the underlying earnings in the business.
Administration result There has been a good development in the administration result to the owner in 2011. Throughout the year, we have been working on cost-saving measures that have proven effective. On the income side, the turbulent financial markets had negative implications for defined contribution pensions and unit-linked, but this is offset by good results in the group portfolio.
Risk result The reduction in the risk result compared with last year is quite significant, and was due to the on-going strengthening of the disability provisions for collective one-year risk in 2011. Disability results of group lines in general are good in 2011.
In general, premium income for group defined benefit pensions is declining gradually as a result of a steady transition to defined contribution pensions. The increase this year is partly due to wage growth. There is good growth in premium income for defined contribution schemes for businesses. We are no longer writing traditional individual capital and pension, and this has led to a decline in premium income compared with previous years. The decline in premium income for unit-linked is a result of the good sales of the Guarantee account in the previous year not being maintained to the same degree.
Storebrand is the market leader in the occupational pensions in the private sector with a market share of 30 per cent of gross premiums written for defined contribution pensions and 43 per cent for defined benefits pensions1. The private sector market has been characterised by a strong shift from defined benefit to defined contribution pensions, and it is expected that this trend will continue in 2012. Changed framework conditions for defined benefit pension and the expectation of increased contribution rates will enhance this development. Storebrand is focusing on further developing product and service solutions that are adapted to new conditions and customer needs.
Retail market Storebrand has a new offensive strategy under implementation with high ambitions in the retail market, and has launched a range of measures to support this initiative. In 2011, total sales were lower than expected, especially as a result of low net sales of fund products, due to the negative performance of the financial markets. Storebrand is focusing sharply on providing affordable products and solutions to our corporate customers' employees. These efforts are developing positively.
New premiums (APE): • Guaranteed products: NOK 325 million in 2011 compared with NOK 778 million in 2010. • Unit-linked: NOK 299 million in 2011 compared with NOK 499 million in 2010. • BenCo: NOK 34 million in 2011 compared with NOK 37 million in 2010.
SPP SPP offers pension and insurance solutions, and advice to companies in that part of the occupational pensions market in Sweden that is exposed to competition. The company also offers private pension insurance and medical and health insurance.
Administration result The administration result was NOK 23 million higher than in the preceding year. Revenues rose by 7 per cent2, due to the growth in assets under management and higher fee-based income. Expenses rose by 5 per cent2. The high volume of sales and a larger portion of sales going through brokers, resulting in higher commission costs, can explain this.
Falling interest rates increase the value of the guaranteed liabilities. The annual return was not sufficient to cover this increase. This, together with an open equity exposure, led to a deferred capital contribtion (DCC) of minus NOK 741 million against NOK 100 million in 2010. The company has a hedge portfolio to reduce the effect of falling stock markets on the result. The weak stock market meant that the hedge portfolio recorded a gain of NOK 131 million. Other effects on the financial result aggregated minus NOK 65 million.
Other result The other result developed very positively during the year, amounting to NOK 129 million, compared with NOK 34 million in 2010. The result consists of the return on the company's own investments, representing the equity, which are largely invested in the short interestbearing securities. The good result is due to the short-term interest rates rising significantly over the past year.
During the course of the year, the buffer capital (conditional bonus) decreased by NOK 1.1 billion to NOK 7.4 billion. This decrease is due to falling equity markets and lower interest rates.
In 2011, total assets rose from NOK 109 billion to NOK 113 billion. Capital within unit-linked insurance was unchanged at NOK 32 billion, despite a weak stock market. The value of the capital stock fell by 8 per cent during the year. However, this was offset by the continued good net inflow to unit-linked insurance products. Assets under management in traditional insurance had on average a return of 8 per cent, so that the capital has increased to NOK 81 billion.
Premium income In 2011, we experienced a continuation in the shift from traditional insurance to unit-linked insurance. This is beneficial to the company as profitability is higher in unit linked business. Unit linked insurance accounted to approximately 59 per cent of the premium income, an increase of 10 percentage points. Premium income for unit linked insurance rose by 4 per cent, while it declined by 31 per cent for traditional insurance.
SPP strengthened its position for unit linked in the Swedish occupational pensions market in 2011. The market share of unit linked products rose from 13 to 15 per cent in the open occupational insurance market that is exposed to competition. Net premium income (premiums minus claims payments and transferred funds) increased in unit linked from NOK 2,358 million to NOK 2,634 million in 2011. Net premium income in traditional products aggregated minus NOK 2,220 million, up from minus NOK 1,502 million in 2010.
New business In 2011, new sales were slightly higher than the year before. Sales excluding options centres rose by 15 per cent, from NOK 984 million to NOK 1,034 million. Sales by the company's own sales staff and sales through agents both contributed to the increase.
New premiums (APE): • Guaranteed products: NOK 323 million in 2011 compared with NOK 291 million in 2010. • Unit linked: NOK 695 million in 2011 compared with NOK 683 million in 2010. • Other: NOK 16 million in 2011 compared with NOK 10 million in 2010.
ASSET MANAGEMENT Storebrand's asset management business encompasses the companies Storebrand Kapitalforvaltning, Storebrand Fondene, SPP Fonder, Storebrand Eiendom and Storebrand Realinvestering.
Fixed and volume-based revenue was slightly higher than in 2010, while performance-based income was significantly lower in 2011 compared with the previous year. Value creation in the managed portfolio was weak. Total income, including performance-based fees and financial income totalled NOK 765 million, against NOK 814 million in 2010. Costs are overall some what lower than in 2010, and total operating expenses amounted to NOK 483 million compared with NOK 496 million in 2010. This includes NOK 2 million in performancebased pay in 2011 against NOK 46 million in 2010. Costs excluding performance-based pay show a growth over the year due to expansion of business in the Swedish market, as well as investments in Norway relating to improved reporting solutions and increased levels of computerisation.
Total assets At the end of 2011, Storebrand Kapitalforvaltning managed NOK 414 billion in mutual funds, funds of funds, and individual portfolios for fund management companies, insurance companies, pension funds, local authorities, institutional investors and investment companies. At 31 December 2010, assets under management amounted to NOK 407 billion. Growth in 2011 relates primarily to corporate customers.
In 2011, the volume of net new sales amounted to NOK 5.5 billion compared with NOK 14.7 billion in 2010.
Sustainable investments The Storebrand Group sets strict corporate responsibility criteria for the management of the customers' capital. We believe it is important that we utilise the influence our ownership affords us to promote sustainable development, and we are one of a few European asset managers with a dedicated team of professionals in this area. More than 4,500 companies around the world are monitored and analysed, and Storebrand Kapitalforvaltning is an active owner. The company is in contact with several hundred companies each year. In cases where the risk is deemed unacceptable, the company in question is excluded from investments. However, Storebrand is always trying to encourage improvements. As per 31 December 2011, 96 companies were excluded from participation due to breaches of human rights, corruption, or serious environmental harm, the production of landmines, cluster munitions, nuclear weapons, or sales of tobacco. Companies that operate in high-risk industries or whose risk management has severe deficiencies in relation to climate change and sustainable development in general are also excluded.
Storebrand Bank continues its positive development and the 2011 result from banking operations3 improved in a number of key areas compared with 2010. In 2011, the banking group resolved to discontinue the ownership of Ring Eiendomsmegling, the real estate brokers.
Profit before amortisation and impairment of losses for the Storebrand Bank Group was NOK 213 million compared with NOK 162 million in 2010. Stable growth in income and expenses, coupled with low loan losses gave the bank group a profit before tax from continuing operations amounting to NOK 190 million, compared with NOK 135 million in 2010. Profit after tax for sold/discontinued operations in Ring Eiendomsmegling was minus NOK 60 million for 2011 compared with minus NOK 5 million in 2010.
Net interest income for the bank group amounted to NOK 443 million against NOK 457 million last year. Net interest income as a percentage of average total assets amounted to 1.13 per cent in 2011, up 0.03 per cent from 2010. Turbulent financial markets led to increased funding costs, which, when combined with the competitive situation, has led to lower lending margins and higher deposit spreads. Due to the increasing international financial unrest towards the end of the year, lending margins are about to be increased.
3 The banking business encompasses Storebrand Bank ASA, Storebrand Boligkreditt AS and Storebrand Eiendomskreditt AS under liquidation.
The bank group's retail market portfolio accounted for 67 per cent of total loans, consisting primarily of loans against mortgages in residential properties, which represent a low risk. The average loan to value ratio (LVR) is about 54 per cent. Corporate loans account for 33 per cent of the portfolio and year-end 2011 comprised approximately 80 per cent loans to income-generating property and 20 per cent loans to construction projects. There are few customers in default, and the level of losses in the portfolio is low.
Market Retail market In the retail market, the bank has strengthened its competitiveness in 2011 and was voted the third best total bank by Norwegian Family Finances, up 82 places from 2010. The bank has reversed the negative trend in loans and deposits compared with the previous two years. Lending volumes have shown a positive trend in the last three quarters of the year, while deposits showed a slight increase during the year. At the end of 2011, the bank had about 72,000 active retail customers, which is a slight decrease from 2010. At the same time, profitability has been maintained at the same level as last year.
Corporate market The bank's commitment to the business market is aimed at the professional property market. The bank's competitive advantage is linked to its extensive experience and cutting-edge expertise in this market segment, and its ability to offer comprehensive solutions and excellent service. In addition, the Corporate market department, together with other units in the Storebrand Group, offers services to selected niche markets, including investors and the SMB segment.
The transaction volume in commercial property was lower than expected in 2011. The international financial unrest reduced trading volumes and thus Storebrand Bank's access to customers. The development in residential properties has increased in both volume and activity in 2011. Overall, loan volume fell by NOK 0.8 billion in 2011, but there are a good number of new projects that are expected to increase loan volume moderately in 2012. The portfolio quality improved substantially during the year and there are no new major problem loans.
Net income in Storebrand Insurance improved from the preceding year and totalled NOK 281 million, against NOK 155 million in 2010. In particular, the insurance result improved in 2011. This is driven by a stronger risk result and increased cost effectiveness. Premiums earned for own account increased by 9 per cent compared with the previous year. This growth is in line with market growth.
Storebrand Insurance's investment portfolios composes in excess of NOK 3 billion and are mainly invested in various corporate bonds with short and medium durations. Financial income is on par with last year and marked by sustained low interest rates. The investment portfolio generated total financial income of NOK 119 million.
The corporate market is a mature market with the exception of health insurance, which has an annual growth rate of 20 per cent. In the health insurance market, Storebrand Insurance har acquired a leading position. For other segments within personal insurance, Storebrand Insurance is one of several major players. There is an increased demand for product solutions that connect healthcare and private insurance and disability cover. This is being driven by companies seeking to reduce absenteeism due to illness, increase job satisfaction and reduce overall insurance costs.
Official financial statements of Storebrand ASA Storebrand ASA‘s official financial statements, which are prepared pursuant to Norwegian accounting law, show a pre-tax profit of NOK 196 million compared to NOK 502 million in 2010. Group contributions from investments in subsidiaries amounted to NOK 474 million, a NOK 684 million reduction compared to 2010. NOK 504 million has been taken to income
Storebrand Life Insurance Major risk factors are financial risk - interest rates, equities, properties and credit - and the insurance risk inherent in increased life expectancy and disability rates.
Solvency Overall, the solidity capital of the life insurance group decreased by NOK 2.6 billion in 2011, mainly due to reduced customer buffers. Storebrand Life Insurance achieved a solvency ratio of 161 per cent, a reduction of 4 percentage points. The solvency ratio was negatively impacted by estimated taxes and positive as a result of permission from the FSA to change the way that investments in real estate interests with stakes of between 10 and 15 per cent are treated.
Customer returns in 2011 were good, especially in the profiles with low exposure to the equity market. The largest positive contribution to customer returns came from the bond portfolios, especially portfolios with low credit risk, following the sharp fall in long Swedish interest rates.
At the end of the year, SPP's solvency margin was 141 per cent compared with 199 per cent at the end of 2010. In Sweden the solvency calculation discounts insurance liabilities using a market interest rate. During the year, interest rates fell sharply in Sweden. This resulted in the insurance liabilities in the solvency calculation rising and the solvency capital falling. To ensure a stable solvency margin in volatile interest rate markets, it was resolved to strengthen SPP Livförsäkring AB's capital with a capital injection of NOK 0.9 billion.
The Swedish Financial Supervisory Authority's stress test is referred to as Traffic Light Reporting and has much in common with the Risk-based Supervision in Norway.
Solvency margin 1. BenCo is inluded in the numbers excluding for Q4 2011.
Asset management The company provides active management and management of fund-in-fund structures for the customer‘s account and risk, and bears no risks above normal commercial and operational risk for this type of business. Operational risk is considered the company's most important risk factor. The most common types of operational risk in the asset management business are errors that occur in the trading and settlement process, pricing errors, breaches of investment mandates, erroneous reporting and faults in core systems. The company uses the standardised approach for credit risk in capital adequacy regulations and the basic method for operational risk. In its ICAAP process, the company has assessed the total need for capital. Estimated capital requirements, take into account, in addition to credit, market and operational risks, the additional capital requirements related to the concentration, liquidity, market, reputational risk, and more. The credit risk is considered to be low, and the company is considered to be well capitalised in relation to the risk profile. The company has a good liquidity buffer and monitors liquidity reserves on an on-going basis in relation to internal limits.
The asset management business‘ direct exposure to market risk is very limited since the company’s investments in securities are limited to investing surplus liquidity. The company‘s own investments are in Norwegian government papers and the company is exposed to market risk associated with this. However, indirectly the company‘s results are affected by developments in the securities markets, primarily through fees being linked to the market value of assets under management. Furthermore, a weak return can affect the customers‘ capacity and willingness to take risks through actively managed mandates, as well as affect the customers‘ asset composition, which in turn can result in a shift from products with high margins to products with lower margins.
The company bears a compliance risk related to compliance with legislation and regulations. The company pays special attention to risks associated with amendments to relevant legislation. In accordance with the management agreements that are entered into, the company conducts major checks and monitoring for its customers. On a daily basis, investment portfolios are followed up against a wide range of investment restrictions.
The greatest risk in the portfolio is considered to be related to development projects, where the bank has a total exposure of about NOK 2.5 billion. This segment consists primarily of loans to construction projects within the residential and office segment in central Oslo. A high proportion of pre-sales is required for lending to new residential projects, and the risk is considered to be satisfactory.
Credit risk has improved during the year as new low risk commitments were recorded, while existing commitments developed in a positive way. Concentration risk related to large commitments has have been reduced in recent years.
Credit quality in the retail market portfolio is considered to be good. Virtually all of the portfolio is secured by way of mortgages on real estate. The portfolio's high collateral coverage implies that there is little risk of losses arising. The property commitments LVR is relatively low and loans in excess of 80 per cent of market value are only granted exceptionally.
Liquidity The bank has established good liquidity buffers and places great emphasis on having a balanced funding structure in relation to its maturities and issuances in the various markets. Credit facilities/credit agreements have been established with other banks, which the bank can draw on when needed. Storebrand Bank ASA is rated by S&P and Moody's (See the article on rating below).
Market The bank's aggregate market risk through interest rate and currency exposure and the maximum risk of loss for the liquidity portfolio is limited by way of low exposure limits. The bank has no active investment strategy for shares. Operational risk is reduced through the systematic risk assessments in all areas of the bank, at least every quarter, and at the commencement of projects and if certain incidents occur.
Storebrand Insurance Insurance risk is the greatest risk for Storebrand Insurance. A one percentage point rise or fall in the claims ratio will amount to about a NOK 20 million improvement or impairment in the 2012 result. To limit the impact, several risk-reducing measures have been introduced. Initially, the most important risk-reducing measures are the underwriting regulations and risk pricing. Thereafter, the risk is limited by way of reinsurance contracts. The need for reinsurance is assessed for each product range, in relation to the volatility of the risk results. Storebrand Insurance's largest exposures to insurance risk relate to property fires and contents, third party liability for motor and personal risk in group life and occupational injury. To reduce the risk in these areas, Storebrand has entered into reinsurance contracts with sound reinsurers.
CAPITAL SITUATION Continuously and systematically, Storebrand pays particular attention to the level of equity and loans in the Group. The level is adjusted to the financial risk and capital requirements, where the growth and composition of its business areas will be important drivers in the need for capital. Capital management aims to ensure an efficient capital structure and preserve an appropriate balance between internal goals and regulatory requirements. The Group's goal over time is to have a solvency margin in life insurance business of over 150 per cent and a core capital ratio in the bank of over 11 per cent in good economic times. Storebrand Livsforsikring AS also aims to have an A-level rating. The holding company's goal is to have a zero net debt ratio over time.
bearing liabilities amounted to NOK 3.5 billion at the end of the year. Storebrand ASA has a bond loan amounting to NOK 282 million that matures in 2012 and in 2011 it redeemed a bond loan amounting to NOK 750 million and issued new bonds for NOK 1.0 bn. Storebrand ASA's debt is normally refinanced well before maturity.
From CSR to sustainability For 15 years, Storebrand has used CSR as a concept for the work being carried out within the environment, social issues and social commitment. To ensure long-term development as a company calls for more than just assuming responsibility. It calls for a sustainable strategy. The concept of sustainability defines the core of long-term success, "sustainable development should maintain this generation's needs without compromising the ability of future generations to meet their own needs5". This is a guiding star for the Group's strategic planning and daily operations, and is followed up, among other things, by asset management's analysis of enterprises in the investment process. Sustainability is also one of the Group's new promises to its customers.
Changes in PSI - Principles for Sustainable Insurance In 2012, UNEP FI, the United Nations Environment programme, will introduce the principles for sustainable insurance, an expansion of UNPRI - which are the UN Principles for Responsible Investment. These principles will be an important tool for the industry's sustainability efforts and hopefully contribute to building confidence in the financial and insurance industry globally, which for years has struggled with low a confidence rate among people in general.
Environment Storebrand is committed to reducing the environmental impact of its business, both through its own operations, investments, procurement and property management. High requirements on our investments also contribute to a positive environmental impact. The absolute greatest impact on the environment can be achieved through the strict requirements that our investments are subjected to.
The Group's head office at Lysaker is a building with high environmental demands, and we work constantly to reduce energy consumption in all properties that we manage ourselves. The Group is also working on eco-labelling of its properties. At the end of 2011, 60 per cent of the properties that Storebrand operates and manages are Eco-lighthouse certified. All are energy labelled.
The Group works to eliminate all company cars in Norway and Sweden and has both electric cars and bicycles that can be borrowed. The environment weighs heavily on all our procurement.
HUMAN RESOURCES AND ORGANISATION At year-end, the Group had 2 221 employees, compared with 2 182 at the beginning of the year. Of these, 49 per cent were women. The average age is 44 years and average length of service is 9 years.
Equality and diversity In all Storebrand's job listings, the Group emphasises that it is committed to diversity and that we encourage qualified candidates to apply regardless of age, gender, disability, cultural background or sexual orientation. The Group's working environment surveys are an important tool to measure the employees' experience of Group diversity, and the importance of having this topic on the agenda.
Head office employees can train in their own sports hall during working hours and the sports club, which has administrative responsibility for activities in the hall, has more than 900 members covering 17 branches of athletics.
No injuries to people, property damage, or accidents of significance were reported in Storebrand in 2011.
Skills and training A common e-learning platform has made the training on offer more visible and available than before. This has resulted in more people taking advantage of the varied training the company offers. The Group has developed training plans for different roles in Storebrand, in which skills training in all arenas is combined. There are also standardised courses on offer that are readily available to all employees.
In 2010/2011, Storebrand's trainee programme was adjusted in line with the retail market strategy, and a more diverse group of trainees were employed with a focus on the subject matter, customer or project management. The programme runs for two years and gives trainees a unique experience of the entire Group. The trainees are offered four trainee positions in Norway, SPP or in Lithuania, and feedback from trainees and the areas in which the trainees work are very good. In addition, we offer a summer programme for students who have one year left before taking their masters degree.
Storebrand is working continuously to strengthen personal and professional development in the Group and emphasises performance appraisal as an important part of this. All employees go through two mandatory appraisals a year involving follow-up and documentation of performance, collaboration and compliance with corporate values. In 2012, performance appraisals will be even more important as a way of supporting the Group's efforts to strengthen customer orientation.
CORPORATE GOVERNANCE Storebrand's Board of Directors and its executive management review corporate governance principles annually. Storebrand established its corporate governance principles in 1998. In accordance with § 3-3b of the Accounting Act and the Norwegian Code of Practice for Corporate Governance dated 20 October 2011, Storebrand issues a statement of the principles and practices of corporate governance. For a detailed account of Storebrand's corporate governance and a report on corporate governance under the Accounting Act § 3-3b, see the separate article on page 54 of the annual report.
The Board carried out an evaluation in 2011, where executive management participated. In 2011, 13 board meetings and one board seminar were held. The Board's working methods are regulated by a separate set of rules of procedure. The Board has established two advisory committees: the Compensation Committee and Audit Committee. In 2011 it also
Despite a weak macro picture in the Eurozone and the ripple effects this will have on the Nordic countries, we still expect continued growth in Storebrand's core markets. Wage growth in Norway is strong and is expected to be about 3.5 per cent in 2012. The growth in the life insurance and pensions market will be characterised by the fact that demand is shifting from defined benefit pensions with guaranteed interest, to defined contribution products with no guaranteed return. We expect low growth in assets under management for benefits products, while growth in defined contribution pensions will be maintained.
In the long term, the proposed limitation of the exemption method will have a negative effect on life insurance business's earnings, and the embedded value of insurance contracts. Similarly, the proposed change have a positive effect in that it reduces the potential tax charge when share values fall. The effect will depend on the proportion of shares, share market performances and the exploitation of carry forward losses.
The Banking Law Commission continues to work on new regulations for insurance-based occupational pension schemes adapted to the pensions reform, changing market conditions and new capital adequacy requirements. It has been indicated that this report will be published in May/June 2012. Storebrand follows the regulatory processes closely and enjoys a constructive dialogue with the authorities on these issues.
Future reserves for increased life expectancy Norway's FSA has requested FNO to complete their work with new mortality tables. The FSA will review the life insurance companies' need for additional reserves for long life based on the new tables.
In its assessment of the dividend for 2011, the Board has focused on: • Necessary adjustments of the Norwegian product regulations to Solvency II are still not clarified. • Expectations of new mortality assumptions. • Historically low interest rates in Norway and Sweden.
Lysaker, 13 February 2012 The Board of Directors of Storebrand ASA Translation - not to be signed
Board (NUES). This Code of Practice is available at www.nues.no. Any deviation from this Code of Practice is commented on under each section in the statement below.
4. Description of the main elements of the group’s systems for internal control and risk management related to the financial reporting process
7. Provisions in the Articles of Association that regulate the appointment and replacement of board members
The statement below describes how Storebrand complies with the 15 sections of the
There are no significant deviations between the Code of Practice and how Storebrand complies with the code. Two deviations have been accounted for below under sections 3 and 14, respectively. Storebrand established its own corporate governance policies as early as 1998 and views the
Norwegian Code of Practice as a natural extension of its own policies. The Board of
Code of Practice and refers to compliance with the Code of Practice in the Board of
Storebrand’s corporate values are described by the group’s position, vision, core values and corporate policies. Combined they provide the group with a common direction and goals. The vision describes the group’s goals and ambitions. The three core values characterise what Storebrand stands for as a company. Further discussion and clarification of the group’s corporate values can be found on the group’s website.
Storebrand’s principal focus within corporate responsibility is sustainable investments. The group has more than 15 years of experience within systematic, goaloriented corporate responsibility, and its work is based on the group’s vision, core values and corporate policies. The group’s corporate responsibility guidelines are based on the principles set forth in the UN
The group also has its own code of ethics, as well as guidelines for whistle-blowing, social events and combating corruption. An employee survey was conducted within the group in 2011, after which the employees on a scale of 0-100 where to state to
The market is kept informed of the group’s goals and strategies through investor presentations held in connection with interim and annual reports and other specialised presentations, such as the
At the same AGM the Board was authorised to acquire the company’s own shares for a maximum value of NOK 224,954,945.
The total holdings of treasury shares must, however, never exceed 10 per cent of the group’s share capital. The buyback of treasury shares may be a tool for the distribution of profit capital to shareholders in addition to dividends. In addition,
Storebrand’s Articles of Association that regulate the buyback or issuance of shares.
Board’s authorisation to increase the share capital is not limited to defined purposes.
Storebrand ASA has only one class of shares, and Norwegian legislation does not permit shareholders to accumulate votes from one matter in order to cast additional votes for another matter (cumulative voting). Storebrand has no specific restrictions on the ownership of shares or voting rights beyond the restrictions imposed by the Financial Institutions Act.
The general competence rules for board members and executive personnel can be found in the rules of procedure for the
Board of Storebrand ASA and the group’s code of ethics. Board members must inform the company if they have direct or indirect material interests in an agreement concluded by one of the group’s companies. The Board shall ensure that an independent third party assesses the value of transactions that are not insubstantial in nature. Furthermore, the rules of procedure for the Board stipulate that no board member may participate in discussions or a decision concerning matters that are of such material importance to them or a close associate that the member must be regarded as having a conspicuous personal or special financial interest in the matter.
Employees shall on their own initiative immediately report conflicts of interest that may arise to their immediate superior as
ation. In general, an employee is defined as disqualified if circumstances exist that could result in others questioning the person’s impartiality in relation to matters other than the interests of the Storebrand Group.
Pursuant to the company’s Articles of Association, Storebrand ASA’s AGM shall be held by the end of June each year. The 2011 AGM
At the 2010 AGM, the Articles of Association were amended so that if documents concerning the business to be transacted at the annual general meeting have been made available to shareholders on the
Companies Act or the Articles of Association that the documents shall be sent to shareholders shall not apply. This shall also apply to documents which, under the Norwegian Public Limited Companies
Act or the Articles of Association, shall be included in or enclosed with the notice of the annual general meeting. A shareholder may nevertheless require that the documents that concern business to be transacted at the annual general meeting are sent free of charge. This provision in the Articles of Association deviates from the main rule in chapter 5 of the Norwegian Public Limited Companies Act that the annual financial statement, annual report, statement by the Board of Representatives and the Board’s declaration on the remuneration for executive personnel shall be sent to all shareholders no later than one week prior to the AGM. The Board’s proposal to amend the Articles of Association on this point was justified by a desire to achieve environmental benefits and cost savings. The Articles of Association were amended at the 2011 AGM to allow shareholders to vote in advance by means of electronic communication, cf. section 5-8b of the Norwegian Public Limited
Companies Act. Such an arrangement gives the shareholders an opportunity to vote without being represented at the AGM. This amendment was proposed to give as many shareholders as possible an opportunity to exert influence on the company through exercising their voting rights. The right to vote in advance is subject to the existence of an adequate method for authentication of the sender. The notice of the AGM shall state whether voting in advance is allowed and what guidelines have been determined for such voting.
AGM, and it is also possible to vote by proxy. Provisions have been made so that the proxy form is linked to each individual item to be considered, and Storebrand will seek whenever possible to design the form so that it allows voting for candidates who are to be elected. The voting rules for the
AGM allow separate votes for each member of the various bodies. Further information about the exercising of proxies and shareholders ’ rights to have matters discussed at the AGM is available in the notice of the
Storebrand’s Articles of Association stipulate that the chairman of the Board of
The AGM makes decisions concerning the following: • Approval of the annual report, financial statements and any dividend proposed by the Board.
Control Committee. • Election of an external auditor and fixing the auditor’s remuneration.
Articles of Association or authorisations to increase or reduce the share capital. Such decisions require approval by at least two thirds of both the votes cast and the share capital represented at the AGM.
Storebrand ASA and all of the aforementioned subsidiaries or group companies. The committee is independent of the respective boards and management of the companies.
Storebrand ASA’s Articles of Association regulate the Nomination Committee, which consists of four members and an observer elected by the employees. The chairman of the Nomination Committee and the other members are elected by the AGM.
The Articles of Association stipulate that the chairman of the Board of Representatives shall be a permanent member of the Nomination Committee, if the person concerned has not already been elected by the AGM. An employee representative will also participate as a permanent member in discussions and recommendations concerning the election of the chairman and deputy chairman of the Board of Representatives and the Chairman of the Board, as well as in other contexts where this would be natural pursuant to an invitation from the chairman of the committee. The
Nomination Committee is independent of the Board and management, and its composition aims to ensure broad representation of the shareholders’ interests.
governing and controlling bodies: competence, experience, capacity, gender distribution, independence and the interests of the community of shareholders. More information about the members has been published on the group’s website. The
Committee and Nomination Committee, and the remuneration for the members of these bodies. The committee’s members are also members of the nomination committees of Storebrand Livsforsikring AS, Storebrand
Board and Control Committee. The Nomination Committee also prepared matters that will be considered in 2012.
Storebrand ASA is legally required to have a board of representatives. It has 18 members, 12 of whom are elected by the
The Board of Representatives elects the Board’s members and supervises the management of the company by the Board and CEO.
Chairman of the Board, fixing the remuneration paid to board members, prescribing the rules of procedure for the Control
Representatives is entitled to make recommendations to the Board on any matter.
The Articles of Association stipulate that the Board of Directors may consist of nine or ten members. The Board’s members are elected for one year at a time. One new board member was elected at the Board of Representatives meeting in 2011. The
Storebrand Group owned by members of governing bodies as at 31 December 2011 is included in the notes to the financial statements for Storebrand ASA (Information about close associates) on page 167.
A total of 13 board meetings and one board seminar on Solvency II were held in 2011. The group’s future strategy is discussed at the Board’s annual strategy meeting, which establishes guidelines for the management’s preparation of plans and budgets in connection with the annual planning process, which must be approved by the Board. The Board shall stay informed about Storebrand’s financial position and development, ensure that its activities are subjected to adequate control and ensure that the group has adequate capital based on the scope of, and risks associated with, its activities. The attendance records of individual board members are provided in the overview of the governing and controlling bodies on page 66. The work of the
The final agenda is fixed in consultation with the Chairman of the Board. Time is set aside at each board meeting to evaluate the meeting without the management present. The Board is entitled to appoint external advisers to help it with its work whenever it deems this necessary. The
Both committees consist of three board members, two shareholder-elected board members and one-employee elected board member. This helps ensure thorough and independent consideration of matters that concern internal control, financial reporting and the remuneration of executive personnel. The committees are preparatory and advisory working committees and assist the Board with the preparation of items for consideration. Decisions are made, however, by the full Board. Both committees are able to hold meetings and consider matters without the involvement of the company’s management.
Norwegian group companies pursuant to section 3, third paragraph of the Compensation Regulations. The Compensation
Board’s and CEO’s areas of responsibility are defined in the rules of procedure for the Board and instructions for the CEO, respectively.
The group’s corporate responsibility guidelines summarise how corporate responsibility is an integral part of the group’s management and control processes for investments, product development, purchasing, employee monitoring and internal operations. The group’s corporate responsibility goals are adopted by the Board. The group also complies with the GRI (Global
Reporting Initiative) international reporting standard. The results are audited by the group’s external auditor.
As an extension of the general policies and guidelines, a code of ethics has been drawn up that applies to all employees and representatives of the group, in addition to corporate rules for areas such as risk management and internal control, financial reporting, handling inside information and share trading by primary insiders. Guidelines and information about information security, contingency plans and financial criminality have also been drawn up. In addition to its own supervisory bodies and external auditor, the group is subject to statutory supervision by the Financial
The assessment and management of risk are integrated into the group’s value-based management system. This management system shall ensure that there is a correlation between goals and actions at all levels of the group and the overall policy of creating value for Storebrand’s stakeholders.
For the 13th year in a row the group qualified for the international Dow Jones Sustainability Index, which includes the top 10 per cent most sustainable companies within all industries on a global basis.
The responsibility for the group’s control functions for risk management and internal control lies in the Enterprise Risk Management unit under the management of the
The financial statements shall satisfy legal and regulatory requirements and be prepared in accordance with the adopted accounting policies and published according to the schedule adopted by the Board of
Instead it exercises a control function in relation to the accounting processes of the group’s companies.
A series of risk assessment and control measures have been established in connection with the preparation of the financial statements. Specific reporting instructions are drawn up each quarter and communicated to the subsidiaries. Internal meetings are held prior to the subsidiaries reporting, as well as meetings in which the external auditor participates, to identify risk factors and measures linked to significant accounting items or other factors. Corresponding quarterly meetings also held with various specialist areas in the group that play an important role in the assessment and appraisal of insurance obligations, investment properties and financial instruments, including lending. These meetings particularly focus on any changes in the market, specific situations relating to individual investments, transactions and operational factors, etc. Valuations associated with significant accounting items and any
The Storebrand Group publishes four interim financial statements, in addition to the ordinary annual financial statements.
Monthly and quarterly operating reports are prepared in which the results per business area and product area are analysed and assessed against set budgets.
Memo). The Board’s Audit Committee conducts a preparatory review of interim financial statements and annual financial statements, focusing in particular on the discretional valuations and estimations that have been made prior to consideration by the Board. The external auditor attends meetings of the Board as required and meetings of the Board’s Audit Committee.
Board carry out any duties for the company beyond their appointment to the Board.
The remuneration consists of fixed salaries, bonuses, pension schemes and other fringe benefits deemed to be natural in a financial group. In the opinion of the Board the overall remuneration shall be competitive, but not leading. An annual assessment is carried out based on external market data to ensure remuneration is adequate in relation to equivalent positions in the market.
Specific goals are set annually for how the company’s creation of value shall finance bonuses. The financing is calculated based on the creation of value over the last two years and the value creation target is based on the risk-adjusted result. The bonuses awarded are also determined by the unit’s and individual’s results in addition to the creation of value. The units’ results are measured by means of a scorecard, which incorporates both quantitative and qualitative goals, and these goals are both financial and operational. The employees’
For Norwegian executive personnel half of the awarded bonus is paid in cash, while the remaining half is converted to a number of synthetic shares based on a weighted average price before payment.
of the fixed salary. More detailed information about the remuneration of executive personnel can be found in notes 24 (Group)
and 5 (ASA). Executive personnel are encouraged to hold shares in the group, even beyond the lock-in period.
The Board has issued guidelines for the company’s reporting of financial and other information and for contact with shareholders other than through the AGM. The group’s financial calendar is published on the Internet and in the company’s annual report. All reporting is based on the principle of transparency and takes into account the need for the equal treatment of all participants in the securities markets and the rules concerning good stock exchange practice. Further information can be found on page 22.
The Articles of Association do not include any restrictions on the purchase of shares in Storebrand. The Board shall ensure that all shareholders are treated equally and have an opportunity to consider any bid presented. The Board will, as far as possible, obtain information about the bidder and make this available to all shareholders. In addition, the Board will consider the bid, seek to issue a statement on the
Deviation from the Code of Practice: No guiding principles have been prepared for how Storebrand will act in the event of a takeover bid beyond what is stated here.
Norwegian stock market, Storebrand has considerable potential influence over the development of listed companies. Storebrand attaches importance to exercising its ownership in listed companies on the basis of straightforward and consistent ownership principles. Storebrand applies the Norwegian Code of Practice for Corporate Governance in this role. Storebrand has had an administrative Corporate
Further information on Storebrand’s corporate governance can be found at www.storebrand.no > About Storebrand > Corporate Governance, where we have also published an overview and CVs of the members of Storebrand’s governing and controlling bodies, the Articles of Association, and ownership policies.
Previous positions: 1996-2009 Group Director of Schibsted ASA l 1985-1996 Partner in McKinsey & Co l 19821984 General Manager in Magnus Data l 19801982 Systems Consultant in Honeywell Bull
Positions of trust: 2010-, Chairman of Hafslund ASA l 2010-, Board Member of Aschehoug l 2010-, Chairman of bMenu A/S l 2010-, Chairman of Statoil Fuel & Retail ASA l 2010-, Chairman of the Kristian Gerhard Jebsen Foundation l 2002-, Board Member of Kristian Gerhard Jebsens Skibsrederi AS
Previous positions: 1997–2006 Member of Orkla’s executive management l 1988–2006 Managing Director of Orkla’s corporate staff functions l 1979-1988 Senior VP of Christiania Bank l 1981-1984 Parliamentary Secretary
Previous positions: 2003–2006 Adviser in Nielsen & Axelsson Asp. l 1992–2003 CP/ CFO in FLS Industries AS l 1983–1992 Danske Bank (1990–1992 as Vice President)
Positions of trust: 2011 -, Board Member of KIRK Kapital AG l 2008-, Board Member of Financial Stability AS l 2006-, Board Member of Novenco AS l 2006-, Board Member of Arkil AS l 2005-, Board Member of Buy-Aid AS
Group Director of Lindorff Group AB and CEO of Lindorff AS l Board Member of Storebrand ASA since 2010 1986 Master’s degree in economics and business administration from University of Washington, USA
Previous positions: 2001–2008 CEO of KANO Bank, Norway l 1987–2000 Bank Director of DNB ASA l 1986–1987 Financial Services Officer in Bank of America
Positions of trust: 2008- , Chairman of Lindorff Norge AS l 2008-, Board Member of Lindorff A/S
Positions of trust: 2010-, Board Member of Statoil Fuel & Retail ASA
Board Member of Storebrand ASA since 2011 1976 MBA and MSc in economics from Stockholm School of Economics
Previous positions: 1991– 2001 Various positions in SEB: Deputy CEO, ECP and Manager Corporate and Institutions, Deputy CEO, ECP, Retail Services Nordic and Baltic Operations, Director Deputy Group CEO Retail Services, Deputy Head Retail Services, Regional Manager Greater Stockholm, Regional Manager Southern Greater Stockholm, Manager SEB Cards l 1997-1991 Finansskandic
Positions of trust: 2004-, Board Member of Electronic Transaction Group Nordic Holding AB. l 2008-, Chairman of Fourth Swedish National Pension Fund l 2002-, Board Member of Investment AB, Ôresund l 2006-, Chairman of Allenex AB. l 2004-, Board Member of Poolia AB l 2003-, Board Member of Schibsted ASA l 2010-, Board Member of SAS AB l 2007-, Board Member of My Safety AB l 2010-, Board Member of Intermail AS l 2011-, Chairman of Big Bag AB l 2010-, Chairman of Arion Bank hf l 2010-, Chairman of Frösunda LSS AB l 2002-, Board Member of SOS Children’s Villages
Special Adviser in Storebrand Livsforsikring AS l Employee Representative Board Member of Storebrand ASA since 2006
Previous positions: 1998–1999 Marketing Director in Sparebank1 Livsforsikring l 1978– 1998 Various positions in Storebrand Livsforsikring l 1990–2006 Lecturer and author at BI Norwegian Business School (the Centre for Financial Education and the Insurance Academy)
Positions of trust: 2000-, Chairman of Housing Foundation Youth Housing in Asker l 2002-, Chairman for authorisation of insurance consultants for Finance Norway (FNO) l 2007-, Board Member of Asker and Bærum Housing Cooperative l 2007-, Member of the Council for banking, insurance and finance studies, BI l 2009-, Member of the Professional Council for financial education in Europe l 2010-, Manager for project integration of expertise in the financial services industry for FNO
Aasnæs has a degree in agronomy from the Agricultural University of Norway (NLH), in addition to a postgraduate degree in business analysis from the Norwegian School of Economics and Business Administration (NHH). He is also an Authorised Financial Analyst (AFA).
Sarah McPhee is the Managing Director of SPP. She has broad experience from the financial sector and has held executive positions with AMF Pension, Fjärde AP-Fonden and GE Capital Norden.
He has a Master of Science in Economics and Business Administration from BI Norwegian Business School and an MBA from Thunderbird in the US.
Idar Kreutzer has a Master of Science in Economics and Business Administration from the Norwegian School of Economics and Business Administration (NHH).
Odd Arild Grefstad is the Managing Director of Storebrand Life Insurance. He has been the CFO of Storebrand for many years and has also held a number of other positions within the Storebrand Group. He has previously worked as an external auditor for Arthur Andersen.
Odd Arild Grefstad is a State Authorised Public Accountant and Authorised Financial Analyst (AFA).
Around 23,000 enterprises with a total of 486,000 employees have occupational pensions from Storebrand in Norway.
Other notes note 50 Hedge accounting 149 note 51 Collateral 149 note 52 Contingent liabilities 150 note 53 Securities lending and buy-back guarantees 150 note 54 Capital adequacy and solvency requirements 151 note 55 Information about close associates 153 note 56 Sold business and discontinued operations 153
Cash flow analysis 156 note 1 Accounting policies 157 note 2 Income from investments in sucsidiaries 158 note 3 Personnel costs 159 note 4 Pensions costs and pension liabilities 159 note 5 Remuneration of the CEO and elected officers of the company 161 note 6 Tax 162 note 7 Parent company’s shares in subsidiaries and associated companies 163 note 8 Equities and units 163 note 9 Bonds and other fixed-income securities 164 note 10 Financial derivatives 164 note 11 Financial risks 164 note 12 Tangible fixed assets 165 note 13 Equity 166 note 14 Bond and bank loans 166 note 15 Hedge accounting 166 note 16 Shareholders 167 note 17 Information about close associates 167 note 18 Number of employees/person-years 168
Declaration by the members of the Board and the CEO 169
Statement of the Control Committee and The Board of Representatives for 2011 172
Net income from financial assets and real estate for the company: - equities and other units at fair value 15 26 64 - bonds and other fixed-income securities at fair value 15 503 265 - financial derivatives at fair value 15 38 221 - net income from bonds at amortised cost 15 50 15 - net income from real estate 16 82 52 - result from investments in associated companies 32 -4 2
Net income from financial assets and real estate for the customers: - equities and other units at fair value 15 -5,998 9,031 - bonds and other fixed-income securities at fair value 15 7,890 3,197 - financial derivatives at fair value 15 2,852 2,494 - net income from bonds at amortised cost 15 2,850 2,069 - net interest income lending 126 114 - net income from real estate 16 1,581 1,389 - result from investments in associated companies 32 72 58
Average number of shares as basis for calculation (million) 446.2 446.0
Profit and loss account Storebrand Group 1 January – 31 December
Total comprehensive income due to: Majority's share of total comprehensive income 841 1,207
Financial assets at fair value: - Bonds and other fixed-income securities 7, 9, 11, 34, 43 20,059 19,013
Equity at 31 December 2011 1. 449,909,891 shares with a nominal value of NOK 5. 2. Includes undistributable funds in the risk equalisation fund amounting to NOK 469 million and security reserves amounting NOK 225 million.
Equity changes with the result for the individual period, equity transactions with the owners and items recognised in the total comprehensive income. The share premium fund and other equity is evaluated and managed together. The share premium fund may be used to cover a loss, and other equity may be used in accordance with the provisions of the Public Limited Liabilities Company Act.
The Group's goals are to achieve a core (tier 1) capital ratio in the bank of more than 10 per cent and a solvency margin in life and pensions of more than 150 per cent over time. In general, the equity of the Group can be managed without material restrictions if the capital requirements are met and the respective legal entities have adequate solidity. Capital can be transferred from foreign legal entities with the consent of local supervisory authorities.
For further information on the Group’s fulfilment of the capital requirements, see note 54.
Net cash flow from financial assets and banking customers 369 2,685
Net receits/payments - purchase/capitalization of associated companies and joint ventures -217
Net receipts/payments - deposits from Norges Bank and other financial institutions -2,044 -2,163
Cash and cash equivalents at the end of the period1 4,192 3,146 1 Consist of: Lending to financial institutions 269 675
The cash flow analysis shows the Group's cash flows for operational, investment and financial activities pursuant to the direct method. The cash flows show the overall change in means of payment over the year.
OPERATIONAL ACTIVITIES A substantial part of the activities in a financial group will be classified as operational. All receipts and payments from insurance activities are included from the insurance companies, and these cash flows are invested in financial assets that are also defined as operational activities. One subtotal is generated in the statement that shows the net cash flow from operations before financial assets and banking customers, and one subtotal that shows the cash flows from financial assets and banking customers. This shows that the composition of net cash flows from operational activities for a financial group includes cash flows from both operations and investments in financial assets. The life insurance companies' balance sheets include substantial items linked to the insurance customers that are included on the individual lines in the cash flow analysis. Since the cash flow analysis is intended to show the change in cash flow for the company, the change in bank deposits for insurance customers is included on its own line in operating activities to neutralise the cash flows associated with the customer portfolio in life insurance.
Notes Storebrand Group note 1 | Corporate information and accounting policies 1. CORPORATE INFORMATION Storebrand ASA is a Norwegian public limited company that is listed on Oslo Stock Exchange. The Board of Directors approved the annual accounts for 2011 on 13.2.2012.
Storebrand Livsforsikring AS, Storebrand Kapitalforvaltning AS, Storebrand Fondene AS, Storebrand Bank ASA and Storebrand Forsikring AS are significant subsidiaries that are directly owned by Storebrand ASA. Storebrand Livsforsikring AS also owns the Swedish holding company Storebrand Holding AB, which in turn owns SPP Livförsäkring AB. On acquiring the Swedish activities in 2007, the authorities instructed Storebrand to make an application to maintain a group structure by the end of 2009. Storebrand has submitted an application to maintain the current group structure, and it is of the opinion that it is natural to see possible changes in the group structure in light of the upcoming solvency framework (Solvency II).
In 2011, SPP Livförsäkring AB's stake in the subsidiary Benco was sold to Storebrand Livsforsikring AS.
2. BASIS FOR PREPARATION OF FINANCIAL STATEMENTS The accounting policies applied in the Group accounts are described below. These policies are applied consistently for similar transactions and other events under similar circumstances.
Storebrand ASA's group financial statements are presented using EU-approved International Financial Reporting Standards (IFRS) and related interpretations, as well as other Norwegian disclosure requirements laid down in legislation and regulations.
The liabilities side of the Group's statement of financial position comprises, for the most part, financial instruments (liabilities) and technical insurance reserves. With the exception of derivatives, which are recognised at fair value, the majority of the financial liabilities are recognised at amortised cost. Technical insurance reserves are intended to cover liabilities relating to issued insurance contracts, and the requirement is that these reserves shall be adequate. Various methods and principles are used when assessing the reserves for different insurance contracts. A considerable part of the insurance liabilities relate to insurance contracts with interest guarantees. Recognised liabilities relating to Norwegian insurance contracts with interest guarantees are discounted at the market rate (liquid and non-liquid swap rate). In the case of unit-linked insurance contracts, reserves are the savings element will correspond to the related asset portfolios.
5. CONSOLIDATION The Group's consolidated accounts combine Storebrand ASA and companies where Storebrand ASA has a controlling interest. A controlling influence is normally achieved when the Group owns, directly or indirectly, more than 50 per cent of the company's shares and the Group have the power to exercise control over the company. Minority interests are included in the Group's equity.
When investments are made, including those in investment properties, the company considers whether the acquisition is a business combination pursuant to IFRS 3. When such acquisitions do not cover business combinations, the purchase method is not applied, pursuant to IFRS3 Business Combination, so that possible excess values are not calculated and no provisions are made for deferred tax as in a business combination.
Net interest income – banking activities Interest income is included in the profit and loss account using the effective interest method.
Goodwill relating to acquisitions of interests in associated companies is included in the investment in that associate company, and test for impairment as part of the book value of the write-down.
9. INVESTMENT PROPERTIES Investment properties are recognised at fair value. Fair value is the amount an asset could be sold for in a transaction at arm’s length between well informed, voluntary parties.
Financial assets are derecognised when the contractual right to the cash flows from the financial assets expire, or when the company transfers the financial asset to another party in a transaction by which all, or virtually all, of the risk and reward associated with ownership of the asset is transferred.
Financial liabilities are derecognised in the statement of financial position when they cease to exist, i.e. when the contractual liability has been fulfilled, cancelled or has expired.
If a market for a financial instrument is not active, fair value is determined by using recognised valuation techniques. Such valuation techniques make use of recent arm’s length market transactions between knowledgeable and independent parties where available, reference to the current fair value of another instrument that is substantially similar, discounted cash flow analysis, and options pricing models. If the valuation technique is in common use by participants in the market and this method has proved to provide reliable estimates of prices actually achieved in market transactions, this method is used.
Impairment of doubtful financial assets In the case of financial assets that are recognised at amortised value, consideration is given on each statement of financial position date as to whether there is objective evidence that the value of a financial asset or a group of financial assets is impaired.
If there is objective evidence that impairment has occurred, the amount of the loss is measured as the difference between the asset’s book value and the present value of estimated cash flows (excluding future credit losses that have not occurred) discounted at the financial asset’s original effective interest rate (effective interest rate calculated at the time of initial recognition). The amount of the loss is recognised in the profit and loss account.
Held for sale A financial asset is classified as held for sale if it is: • acquired or incurred principally for the purpose of selling or repurchasing it in the short term, is part of a portfolio of identified financial instruments that are managed on a portfolio basis and for which there is evidence of a recent actual pattern of short-term profittaking, or
Held-for-sale financial assets are recorded at fair value on the statement of financial position date. Changes in fair value are recognised in the profit and loss account.
At fair value through profit or loss in accordance with the fair value option (FVO) A significant proportion of Storebrand’s financial instruments are classified at fair value through profit and loss because: • such classification reduces the mismatch that would otherwise have occurred in measurement or recognition as a result of different rules for measurement of assets and liabilities, or because • the financial assets form part of a portfolio that is managed and reported on a fair value basis.
Investments held to maturity Held to maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity and that a company has the intention and ability to hold to maturity, with the exclusion of: • assets that are designated in initial recognition as assets at fair value in profit and loss, and • assets that are defined as loans and receivables.
Assets held to maturity are recognised at amortised costs using the effective interest method.
10-3 SHARE LENDING A stock loan involves a transfer of shares from the company against the borrower pledging collateral security in the form of cash or securities. At the maturity of the stock loan, the identical securities are to be returned to Storebrand. The borrower is required to compensate the lender for various events related to the shares lent, such as distributions of subscription rights, dividends etc. The borrower is entitled to exercise voting rights represented by the shares during the term of the stock loan. Shares lent by Storebrand are not removed from the Storebrand's statement of financial position, and fees earned on stock lending are recognised as income as they are received. Received cash collateral and any reinvested collateral are recognised at their gross value. Cash collateral and any reinvested collateral is recognised at its gross value in the statement of financial position under the individual asset.
10-4 DERIVATIVES Derivatives are defined as follows: A derivative is a financial instrument or other contract within the scope of IAS 39 and which has all three of the following characteristics: • its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable (sometimes called the ‘underlying’) • it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar reaction to changes in market factors • it will be settled at a future date
Accounting treatment of derivatives that are not hedging Derivatives that do not meet the criteria for hedge accounting are treated as financial instruments that are held for sale. The fair value of such derivatives is classified as either an asset or a liability with changes in fair value over profit or loss.
10-5 ACCOUNTING TREATMENT OF DERIVATIVES THAT ARE HEDGING Fair value hedging Storebrand uses fair value hedging, where the items hedged are financial assets and financial liabilities measured at amortised cost. Derivatives are recognised at fair value over profit or loss account (FVO). Changes in the value of the hedged item that relate to the hedged risk are applied to the book value of the item and are recognised over profit or loss.
11. ACCOUNTING FOR THE INSURANCE BUSINESS The accounting standard IFRS 4 Insurance Contracts addresses the accounting treatment of insurance contracts. The Storebrand Group’s insurance contracts fall within the scope of this standard. IFRS 4 is meant to be a temporary standard and it allows the use of non-uniform principles for the treatment of insurance contracts in consolidated financial statements. In the consolidated accounts the technical insurance reserves in the respective subsidiaries, calculated on the basis of the individual countries’ particular laws, are included. This also applies to insurance contracts acquired via business combinations. In such cases, positive excess values, cf. IFRS 4 no. 31b), are capitalised as intangible assets.
11-1 GENERAL - LIFE INSURANCE Claims for own account Claims for own account comprise claims settlements paid out, less reinsurance received, premium reserves transferred to other companies, reinsurance ceded and changes in claims reserves. Claims not settled or paid out are provided for by allocation to the claims reserve as part of allocations to technical insurance . Changes in insurance liabilities These comprise premium savings that are taken to income under premium income and that are paid under claims. This item also includes guaranteed returns on the premium reserve and the premium fund, as well as returns to customers beyond the guarantees.
Insurance liabilities Premium reserve Premium reserve represents the present value of the company’s total insurance liabilities, including future administration costs in accordance with the individual insurance contracts, after deducting the present value of agreed future premiums. In the case of individual account policies with flexible premium payments, the total policy value is included in the premium reserve. The premium reserve is equivalent to 100 per cent of the guaranteed surrender/transfer value of insurance contracts prior to any fees for early surrender/transfer and the policies’ share of the adjustment fund.
The premium reserve includes reserve amounts for future administration costs for all lines of insurance including settlement costs (administration reserve). In the case of paid-up policies, the present value of all future administration costs is allocated in full to the premium reserve. In the case of policies with future premium payments, a deduction is made for the proportion of future administration costs expected to be financed by future premium receipts.
11-2 LIFE INSURANCE – NORWAY Additional statutory reserves The company is allowed to make additional statutory allocations to the insurance fund in order to ensure the solvency of its life insurance business. The maximum additional statutory provision is set as the difference between the premium reserve calculated on the basis of a guaranteed return on policies outstanding, and the premium reserve calculated based on the actual guaranteed return in the policies. Finanstilsynet (the Norwegian FSA) has specified a limit for the additional statutory reserves that applies to each policy. This is defined as the premium reserve for the policy multiplied by twice the guaranteed rate for the policy.
Market value adjustment reserve The current year's net unrealised gains/losses on financial assets at fair value in the group portfolio in Storebrand Livsforsikring AS are allocated to/reversed from the adjustment fund in the statement of financial position assuming the portfolio has a net unrealised excess value. That part of the current year's net unrealised gains/ losses on financial current assets denominated in foreign currencies that can be attributed to fluctuations in exchange rates is not transferred to the adjustment fund. Similarly, the change in the value of the hedging instrument is not transferred to the adjustment fund, but is charged directly to the profit and loss account. The foreign exchange fluctuations associated with investments denominated in foreign currencies are largely hedged through foreign exchange contracts on a portfolio basis. Transactions with In accordance with legal security funds are considered realisations inasmuch as the company, as an investor, cannot be considered to have control over the securities fund. Pursuant to accounting standard for insurance contracts (IFRS 4) the adjustment fund is shown as a liability.
11-3 LIFE INSURANCE – SPP Life insurance reserves In 2009, SPP introduced a cash flow model for use when discounting life insurance reserves. The model employs a swap curve (monthly) for the term to maturity in those cases where it is assessed that there is sufficient liquidity in the Swedish market.
In Sweden, SPP, has agreed, in accordance with The Finance Companies Service Pension Plan ((BTP Plan), predefined collective pension plans for its employees. A predefined pension implies that an employee is guaranteed a certain pension based on the pay scale at the time of retirement on termination of the employment arrangement.
Actuarial gains and the effect of changes in assumptions are recognised in comprehensive income in the statement of recognised income, expenses and changes in the period in which they occur. The effects of changes in pension plans are recognised as they occur, unless plan changes are conditional on future earnings. The effect is distributed on a straight-line basis over the period through to the benefit being fully earned. Employer's contributions to the National Insurance Scheme are included as part of the pension liability and as part of the estimate deviation shown in the total result.
Storebrand has an insured and an uninsured pension plan. The insured plan in Norway is written by Storebrand Livsforsikring AS, which is part of the Storebrand Group. Premiums relating to employees in Norway are eliminated in premium income in the consolidated accounts.
13. TANGIBLE FIXED ASSETS The Group’s tangible fixed assets comprise equipment, fixtures and fittings, vehicles, IT systems and properties used by the Group for its own activities.
Properties used for the Group’s own activities are recorded at appreciated value less accumulated depreciation and write-downs. The fair value of these properties is tested annually in the same way as described for investment properties. Increases in the value of properties used for the Group’s own activities are not recognised in the profit and loss account but are recognised as a change in the revaluation reserve that forms part of equity. Any write-down of the value of such a property is first applied to the revaluation reserve for increases in the value of the property in question. If the write-down exceeds the revaluation reserve for the property n question, the excess is expensed over the profit and loss account.
14. TAX The tax cost in the profit and loss account consists of tax payable for the accounting year and changes in deferred tax, and is based on the IAS 12 Taxable Profit accounting standard. Tax is recognised in the profit and loss account, except when it relates to items that are recognised directly against equity. Deferred tax and deferred tax assets are calculated on the basis of differences between values of assets and liabilities for accounting and tax purposes. Deferred tax assets are recognised in the statement of financial position to the extent it is considered likely that the companies in the Group will have sufficient taxable profit in the future to make use of the tax asset.
Deferred tax is calculated on the basis of the Group's carry forward tax losses, tax-reducing temporary differences and tax-increasing temporary differences. The Group's tax-increasing temporary differences also include temporary differences linked to the Group's investment properties. These properties are primarily found in the Norwegian life company's customer portfolio and in companies that are owned by Storebrand Eiendom Holding AS, which in turn is directly owned by Storebrand Livsforsikring AS. Even though these property companies are included in the customer portfolio, and can be sold virtually free of tax, the tax-increasing temporary differences linked to the underlying properties are included in the Group's temporary differences, where deferred tax is calculated at a 28 per cent nominal tax rate.
17. STATEMENT OF CASH FLOWS The Statement of cash flows is prepared using the direct method, and shows cash flows grouped according to sources and applications. Cash is defined as cash, receivables from central banks and receivables from financial institutions at call.
The statement of cash flows is classified by operating, investing and financing activities 18. BIOLOGICAL ASSETS Pursuant to IAS 41, investments in forestry are considered biological assets. Biological assets are assessed at fair value, which is defined based on alternative fair value estimates, or the present value of expected net cash flows. Changes in the value of biological assets are recorded at the time the purchase agreement is signed. Annual revenues and expenses are calculated for forestry and outlying fields.
note 2 | Profit sharing and result allocated to owners – life insurance
Storebrand Group comprises a number of companies which, because of the size and the type of business they a engaged in, have different impacts on Group profits. For most of the companies, the profit is allocated to the owner in its entirety, but this is not the case for a life insurance company. For life insurance companies, the profit shall be split between customers and the owner, and the generation of profit to customers and the owner can be more difficult to understand in the case of life insurance companies than for other companies. Storebrand Livsforsikring AS and its Swedish subsidiary SPP are the companies that have the greatest impact on the Storebrand Group profit. Since the results from the life insurance companies are so important to the Group's profit, the profit sharing and the allocation of the owner's result are described in more detail in this note. In addition, this note provides a description of the content of the various elements of the generated result and an overview of the results allocated to owners and customers.
The profit and loss account for a life insurance company includes result elements relating to both customers and owner. The result generation comprises net yield on the company's equity and risk products where the profit devolves entirely on the owner. In the case of Storebrand, the risk products are included in the segment Insurance and are not part of life insurance. There are also products with profit sharing where the profit is distributed to the customers. In addition, there are collective pension products with interest guarantees where the customer pays a fee for the interest guarantee. Unit Linked products are fee based and without any interest guarantee.
• Risk result The risk result consists of premiums the company charges to cover insurance risks less the actual costs in the form of insurance reserves and payments for insured events such as death, pensions, disability and accidents.
Administration result The administration result line includes all products apart from traditional individual products with profit sharing. Administration and management costs are paid annually in advance. The insurance company must then meet any deficit in the administration and management result, and similarly any profit is retained by the company. Where a policy’s assets are managed in the investment choice portfolio, the fee charged for asset management must be shown as a separate element.
Profit sharing Profit sharing is also included in the financial result line. A modified profit sharing regime was introduced for old and new individual policies that have left group pension insurance policies (paid-up policies), which allows the company to retain up to 20 per cent of the profit from returns after any allocations to additional statutory reserves. The modified profit sharing model means that any negative risk result can be deducted from the customers’ interest profit before sharing, if it is not covered by the risk equalisation fund.
Price of return guarantee and profit risk The return guarantees in group pension insurance with a return guarantee must be priced upfront. The level of the return guarantee, size of the buffer capital (additional statutory reserves and unrealised gains), and the investment risk of the portfolio in which the pensions assets are invested determines the price that the customer pays for his or her return guarantee. Return guarantees are priced on the basis of the risk to which the equity is exposed. Group pension customers can choose an investment profile with a low proportion of equities, which normally results in a lower risk of losses and lower expected return. A larger proportion of equities will normally result in a higher expected return, but also a higher price for the return guarantee. The insurance company bears all the downside risk, and must carry reserves against the policy if the buffer reserves are insufficient or unavailable.
Customers can choose long-term contracts with guarantee periods of up to 5 years. Prices for multi-year return guarantees will be lower than for an annual return guarantee over the same period. However, there is a requirement that the liabilities to the insured must at all times be covered by adequate technical insurance reserves, and that, if necessary, equity can also be used to ensure adequate reserves during the agreement period. Greater contractual freedom exists between the customer and the company in the regulations pertaining
Customers’ result generation In the case of group with investment choice and unit linked based products the customers receive the returns on the invested assets. Individual products receive 65 per cent of the total positive administration, risk and financial results. Paid-up policies receive 80 per cent of the positive financial result as well as a minimum of 50 per cent of the positive risk result (up to 50 per cent of the risk result can be allocated to the risk equalisation fund). Group defined benefit fee-based receive the positive financial result as well as a minimum of 50 per cent of the positive risk result (up to 50 per cent of the risk result can be allocated to the risk equalisation fund).
In the case of defined benefit contracts (DB portfolio), the company is entitled to charge an indexing fee if the group profit allows the indexing of the insurance, up to a maximum equalling the change in the consumer price index (CPI). The indexing is based on the return between 1 October to 30 September. Half of the fee is charged if the pensions can be indexed by the entire change in the CPI. The entire fee can be charged if the paid-up policies can also be indexed by the entire change in the CPI. A 100 per cent fee equals 0.8 per cent of the insurance capital.
The guaranteed liability is continuously monitored. If the guaranteed liability is higher than the value of assets, a provision must be made in the form of a deferred capital contribution. If the assets are lower than the guaranteed liability when the insurance payments start, the company supplies capital up to the guaranteed value in the form of a realised capital contribution. Changes in the deferred capital contribution are included in the financial result. The financial result also includes the result of the hedging programme, which the company uses to protect itself against effects in deferred capital contribution.
When preparing the consolidated accounts, management must make estimates, discretionary judgments and make assumptions on uncertain values. Estimates and judgements are continually evaluated on the basis of historical experience and anticipated future events. In the future, actual experience may deviate from these accounting estimates, but the estimates are based on best judgement at the time the financial statements are presented. The actual results may vary from the accounting estimates.
Pursuant to the IFRS 4 Insurance Contracts standard, the insurance liabilities included shall be adequate and a liability adequacy test shall be carried out. The Norwegian insurance liabilities are calculated in accordance with regulations peculiar to Norway, including the Act relating to Insurance Activity Act and regulations. For the Norwegian life insurance liabilities, a test is carried out at a general level by conducting an analysis that is based on the Norwegian premium reserve principles. The analysis is based on the assumptions made when estimating embedded value, where the company uses best estimates of the future basic elements based on current experience. The test implies that the company analyses current margins between assessments in the reservation basis and the assumptions in the Embedded Value analysis. This test was also carried out prior to implementing IFRS 4.
In Storebrand's life insurance activities, changes in estimates relating to technical insurance reserves, financial instruments and investment properties assigned to life customers will not necessarily have any impact on the owner's result, but changes in estimates and assessment may have an effect on the owner's result. One major factor will be the whether the life customers' assets, including the current year' return, exceeds guaranteed liabilities. There will be uncertainty associated with these tests. For more details about the uncertainty associated with the insurance provisions, see below.
There are no contracts with an annual interest guarantee in the Swedish business (SPP). However, there are insurance contracts with a final value guarantee. These contracts are discounted by a market interest rate. If the relevant customer assets have a higher value than the recognised values of these insurance liabilities, the difference will constitute a conditional customer allocated fund - conditional bonus (buffer capital). Changes to estimates and judgments may result in changed returns in customer portfolios. Depending on the size of any impairment, such a fall in value could be countered, wholly or partly, by a reduction in the conditional bonus such that the effect on the
owner's result can be limited. If the value of the individual insurance contract is higher than the relevant customer assets, the owners will have to cover the deficient capital.
The profit sharing rules in life insurance are also discussed in more detail in note 2.
Key elements included in valuations and which require the exercising of judgment are: • Market rent and vacancy trends • The quality and duration of rent incomes • Owners’ costs • Technical standards and any need for upgrading • Discount rates for both certain and uncertain cash flow, as well as residual value
FINANCIAL INSTRUMENTS AT FAIR VALUE There will be some uncertainty associated with the pricing of financial instruments not priced in an active market. This is particularly true for the types of securities priced on the basis of non-observable assumptions, and for these investments various valuation techniques are applied in order to fix fair value. These include private equity investments, investments in foreign properties, and other financial instruments where theoretical models are used in pricing. Any changes to the assumptions could affect the recognised values. The majority of such financial instruments are included in the customer portfolio.
TECHNICAL INSURANCE RESERVES Technical insurance reserves in life insurance are based on assumptions concerning life expectancy, mortality, disability, interest rate levels, and future costs, etc. Changes in such assumptions will affect the size of the liabilities, which in turn can affect the owner's result. In the Norwegian life insurance business, the majority of the calculated payments are discounted by the appropriate guaranteed interest rate. Storebrand continuously builds up reserves to new tariffs in connection with increased life expectancy, and the building up of reserves in a time-limited period can be charged to the running return. Any deficient future return in connection with this may reduce the profit allocated to the owner.
In the Swedish business (SPP), the insurance liabilities are largely discounted using a yield curve in which parts of the yield curve are not liquid, and insurance liabilities in the Swedish business are impacted by changes in the market rate. Since different rate are used for assets and liabilities, changes in interest rates will affect the owner's result and equity.
The majority of the intangible assets recognised from the acquisition of SPP were linked to the existing life insurance contracts at the time of the acquisition. These recognised intangible assets are, together with the pertinent recognised insurance liabilities, tested for impairment using a liability adequacy test pursuant to IFRS 4 Insurance Contracts. A key element of this assessment involves calculating future profit margins using embedded value calculations. Embedded value calculations are affected, among other things, by volatility in the financial markets, interest rate expectations and the amount of buffer capital in SPP.
On 1 January 2012, the Ministry of Finance distributed, for consultation purposes, its proposal to limit the exemption method for shares etc. held by life insurance companies and pension companies in customer portfolios. Under the proposal, these rules may apply from 1.1.2012. An implementation of the new tax regulations can have an impact on the deferred tax calculation.
CONTINGENT LIABILITIES The companies in the Storebrand Group operate an extensive business in Norway and abroad, and may become a party to litigations. Contingent liabilities are assessed in each case and will be based on legal considerations.
Premiums paid are invested in securities until the assets, including the yield, are repaid to the customers as pensions or compensation. Storebrand Group assumes, therefore, a further financial market risk to satisfy the customers' needs and through its goal to achieve an
Managers at all levels in the organisation are responsible for risks, risk management and internal control within their own area of responsibility, and shall continuously consider the implementation of internal control. The managements prepare annual internal control reports that show how the internal control that has been established functions. At least once a year, the Chief Executive Officer shall prepare an overall review of the risk situation and submit this to the Board of Directors for action.
Storebrand has staff members who are dedicated to following up and managing risks for various product groups and for the company as a whole. Control functions, i.e. risk management, internal control and compliance shall support the line organisation in identifying, assessing, managing and controlling risk-taking. Responsibility for the Group's control functions for risk management and internal control lie with the Group's Chief Financial Officer.
COMPLIANCE The compliance function is an advisory function that supports the Board and management in managing and follow-up the risk of failing to comply with the external and internal rules and regulations that apply to the business.
The compliance officer in the individual company produces written reports on the company’s compliance with the regulations for the board of directors and executive management in the company informing about the company's compliance with internal and external regulations. Compliance reporting is seen as being on a par with the Group companies’ internal control reporting, operation risk reporting and event reporting.
Storebrand Life Insurance Norway A significant proportion of savings products in the Norwegian life insurance business incorporate a guaranteed annual return. Financial risk relates primarily to the ability to meet the customers’ guaranteed return, which for the majority of the products applies for one year at a time. Therefore, risk management in this business aims to reduce the probability of the return falling below the annual guaranteed return for the various product groups in any single year.
The company’s total risk picture is monitored continuously using tools such as The Norwegian FSA’s risk based-supervision and self-developed risk goals.
In traditional insurance with an interest guarantee, SPP bears the risk of achieving a return equal to the guaranteed interest on the policyholders ’ assets and that the level of the contracts’ assets is greater than the present value of the insurance liabilities. Profit sharing becomes relevant in SPP if the total return exceeds the guaranteed yield. In the case of some products a certain degree of consolidation, i.e. the assets are greater than the present value of the liabilities by a certain percentage, is required in order for owner to have earnings. If the assets in an insurance contract in the company are smaller than the market value of the liability, an equity contribution is allocated that reflects this shortfall. This is termed a deferred capital contribution (DCC) and changes in its size are recognised in the profit and loss account as they occur. The contracts’ buffer capital must be intact in order for profit sharing to represent a net income for the owner. When the contracts’ assets exceed the present value of the liabilities, a buffer, which is termed the conditional bonus, is established. Changes in this customer buffer are not, however, recognised in the profit and loss account. It is the policyholder who bears the financial risk in unit linked insurance contracts.
Storebrand Bank has identified the following areas of risk: credit risk, liquidity risk, market risk, operational risk, business risk and compliance risk. The company's risk strategy forms the foundation for managing the risks through policies aimed at achieving the bank's desired risk profile. The risk strategy is adopted by the Board of Directors and is updated at least annually. The Risk Management Unit prepares monthly risk reports, where the types of risk are followed up in line with the respective policies. The risk reports are dealt with by the liabilities management committee and the bank's Board of Directors.
Solvency II is a set of rules covering solvency that will apply to all insurance companies in the EU and the EEC area. Under the current schedule, the regulations shall take effect from 2013, but transitional arrangements have been heralded which imply that the capital requirements will apply from 1 January 2014.
The Solvency II framework builds, inter alia, on the assumption that companies can manage the interest risk by investing in assets with an interest rate sensitivity that is similar to that of the insurance liabilities. Norwegian pension schemes are prevented from doing this due to the lack of assets available in the Norwegian market with long-term fixed interest rates, as well as the risk linked to the annual return guarantee (the requirement that the excess return must at the least be equivalent to the basis interest that is irrevocably credited to the customer annually).
The risk entailed in the annual return guarantee arises because it relates only to the asset side. By increasing interest rate sensitivity, the fluctuations in the annual return on assets increase and a risk management dilemma arises. High interest rate sensitivity represents a small risk to the company's solvency position, but a large risk of a negative return in the case of a rise in interest rates. Low interest rate sensitivity represents a small risk to the result but a major risk to solvency in the event of a decline in interest rates.
LIFE INSURANCE PRODUCTS Life, pension and unit linked insurance contracts are offered as both group and individual contracts.
GROUP CONTRACTS 1. Group defined benefit pensions are guaranteed pension payments from a specified age for as long as the insured person lives. Alternatively, it can be agreed that the pension ends at a specified age. The product is offered in both the private and the public sectors. The cover includes retirement, disability and survivor pensions.
2. Group defined contribution pensions are pensions where the premium is stated as a percentage of pay, while the payments are unknown. The customer bears all the financial risk during the saving period.
PROBLEMS ASSOCIATED WITH LONG LIFE 1. Age and gender are not sufficient as explanatory variables, since other factors such as education, pay, civil status and place of residence also affect mortality.
2. Mortality is falling faster than expected. 3. Medical “quantum leaps” that mean that people will live significantly longer than today.
For individual insurance, the premiums for life and long life cover are based on tariffs produced by insurance companies on the basis of their shared experience: namely T1984 for endowment insurance and R1963 for pensions insurance. Disability premiums are based on the company’s own experience, and were last amended in 2002.
In the case of group pension insurance, the premiums for traditional retirement and survivor cover follow the industry tariff K2005. Premiums for disability pensions are based on the company’s own experience. Expense premiums are determined annually with a view to securing full cover for the next year’s expected costs.
For disability pensions, the premium for annual disability pension of NOK 10.000 paid until the person turns 67 years old.
SPP and BenCo The risk premium for contracts is an equalised premium based on the group's age and gender composition. Ideally, individual contracts have individual risk premiums based on age and gender. The tariffs contain no assumptions about inflation or transfer, as is true for Storebrand Life Norway.
The future is not equally predictable as far as disability insurance is concerned. Changes in new incidences of disability are taking place much faster than changes in mortality/life expectancy. One of the reasons for this is the problems involved with determining the causes of and the degree of disability. The rapidly increasing level of disability in the first few years of the 21st century resulted in significant premium increases within the sector. Many insurance companies were doubtful about offering voluntary disability cover in the future. However, since 2005 the number of disability incidences has fallen in a more balanced trend and resulted in SPP reducing the risk premiums for disability cover. Nonetheless, disability has been significantly lower than assumed in the tariff.
RISK MANAGEMENT 1) Evaluation of insurance risk (underwriting) When writing individual risk cover, the customer is subject to a health check. The result of the health check is reflected in the level of premium quoted. When arranging group policies with risk cover, all employees of small companies are subject to a health check, while for companies with many employees a declaration of fitness for work are required. Underwriting also takes into account the company’s industrial category, sector and sickness record.
2) Control and monitoring of insurance risk Insurance risk is separately monitored for every line of insurance in the current insurance portfolio. The risk result for each product group is broken down into the elements of mortality, long life and disability risks. The development of risk result is followed throughout the year. For each type of risk, the ordinary risk result for a period represents the difference between the risk premiums the company has collected for the period and the sum of provisions and payments that must be made for insured events that occur in the period. The risk result takes into account insured events that have not yet been reported but which the company, on the basis of experience, assumes has occurred.
3) Provisions for long life The last years' follow-up has illustrated the need to further strengthen premium reserves as they relate to long life. The need for provisions applies in general to products that involve a guaranteed benefit, but the impact varies depending on the composition, product characteristics, and amendments to regulations, i.a. as a result of the pension reform. The need for provisions for group pensions (private) and paid-up policies exceed what has been the annual interest excess for these products over the last few years. In a letter from the FSA dated 16 December 2011, a three-year plan for increasing reserves is proposed, starting in 2011. Through Finance Norway (FNO), the industry will set a mortality tariff in the course of 2012, and implementation is expected from 1.1.2013. The final process, the level of mortality tariffs, and the need to increase reserves will depend on the work being done by the Banking Law Commission in connection with the design of the new occupational pension in the private sector. Amongst other things, the question of implementation of the longevity adjustment in light of the constitutional protection might have an impact on these considerations. Furthermore, the need for provisions will depend on issues such as cover composition, the size of security margins etc. In the field of group public insurance, the need will be considerably lower because of changes in the product (introduction of a longevity adjustment) as a result of the pension reform.
4) Reinsurance The company also manages its insurance risk through a variety of reinsurance programmes. Through catastrophe reinsurance (excess of loss), the company covers losses (single claims and reserves provisions) where a single event causes more than 3 deaths or disability cases. This cover is also subject to an upper limit. Surplus reinsurance on life policies covers death and disability risk that exceeds the maximum risk amount for own account the company practices. The company’s maximum risk amount for own account is relatively high, and the risk reinsured is therefore relatively modest.
5) Pooling The company also manages its insurance risk through international pooling. This implies that multinational corporate customers can equalise the results between the various units internationally. Pooling applies to group life and risk cover within group defined benefit and defined contribution pensions.
A 20 per cent fall in mortality results in an annual risk result for SPP that is approximately SEK 124 million lower. If the probability of reactivation in the event of disability sinks by 20 per cent, this would entail an annual risk result that is approximately SEK 46 million lower. SPP’s cancellation risk is very low since the majority of the policy portfolio cannot be surrendered.
RISK RESULT The table below specifies the risk result in the various risk areas and also state the effect of reinsurance and pooling on the result.
The risk result in the table above shows the total risk result for distribution to customers and owner.
TRANSFER RIGHT A transfer right exists that allows for the transferring of insurance liabilities linked to group and individual pension insurance contracts to or from other insurance companies. The settlement deadline is two months for contracts where the transfer value exceeds NOK 300 million. The transfer right may constitute a liquidity risk.
GUARANTEED RATE (DISCOUNTING RATE) Storebrand Life Insurance Norway The Norwegian FSA sets the highest basic interest rate permitted for new policies and for new members/new accrual of benefits in group pension insurance. The highest basic interest rate for new policies was set at 3 per cent in 1993 and subsequently reduced in 2005 to 2.75 per cent for policies entered into after 1.1. 2006. The highest basic interest rate for new members/new accrual of benefits in group pension insurance was reduced from 4 per cent to 3 per cent with effect from annual renewals in 2004. The guaranteed rate has been set at 2.5 per cent for new contracts with effect from 1.1. 2011.
The above table includes the premium reserve, deposit reserve and pensioners’ surplus reserve with 3 per cent and additional statutory reserves with 0 per cent.
The total average guaranteed interest rate for all lines of insurance was 3.4 per cent in 2011. The guaranteed interest rate must be met on an annual basis. If the company’s investment return in any given year is lower than the guaranteed interest rate, current legislation permits the equivalent of up to one year’s guaranteed return for the individual policy to be covered by transfers from the policy’s additional statutory reserves.
Premiums and provisions for pension entitlements earned in 2011 in group pension insurance are calculated on the basis of a 3 per cent guaranteed rate for contracts established before 1.1. 2006. New insurance contracts established after this date are calculated at a guaranteed rate of 2.75 per cent.
SPP The table below shows the distribution of insurance liabilities as per 31.12.2010 with the following different final value guarantees: interest rate guarantee 2011 2010
P&C INSURANCE The Group offers the following products: • Motor vehicle • Leisure boats • Combined products • Travel • Accident
• Occupational hazard • Group life • Critical illness and cancer insurance • Child insurance • Life insurance
In the P&C business, large claims or special events represent the greatest risk. Typically, the largest claims will arise from third party insurance for motor vehicles, and home and contents fire insurance, as well as personal injuries in the fields of group life and occupational hazard. In order to lower this risk, Storebrand has covered itself with excess of loss reinsurance for vehicle and property insurance, with a deductible of NOK 5 million per claim after the first claim, which has a deductible of NOK 10 million. The cover has unlimited capacity in the case of motor vehicles. The cover has a capacity of NOK 35 million for property. In addition, the risk exposure arising from travel insurance may accumulate in the event of possible catastrophes such as the tsunami in South East Asia in 2004. Personal insurance such as travel, accident and occupational hazard insurance is therefore now also included in the Group’s catastrophe reinsurance.
The risk inherent in occupational hazard insurance is also covered by quota reinsurance and excess of loss reassurance, with a deductible of NOK 5 million.
Storebrand Life Insurance Norway The largest contributions to short-term, result-related market risk for the Norwegian life insurance business are falls in the value of equities and real estate, increased risk for corporate bonds and rapid increases in interest rates. In the longer term, low market interest rates over time represent a significant market risk for the company. The current formulation of the regulations means that technical insurance reserves in Storebrand Life Insurance are not affected by changes in market interest rates. Solvency II is expected to be introduced in 2014, and this may result in the reserves being evaluated at market value also for the Norwegian activities.
SPP SPP is largely exposed to the same market risk factors as Storebrand Life Insurance, but differences in product design, general framework conditions and asset allocation nonetheless result in some differences in the contributions for different types of market risk. In the shortterm, the market risk from equities is relatively greater in SPP than in Storebrand Life Insurance, but at the same time, the company is exposed to little risk from the asset class real estate. SPP is also exposed to market risk from increased risk on corporate bonds. However, as far as the result is concerned, the short-term risk from changes in interest rates is small in SPP because of the adjustment of the assets’ interest rate sensitivity (duration) in relation to the liabilities’ interest rate sensitivity. However, the current regulatory requirements mean the company cannot have low interest rate sensitivity in the profit and loss account and in the solvency account at the same time, and falling interest rates will have a negative effect on the solvency ratio. Persistent low interest rates also represent a substantial risk for SPP as well, both for the financial result and for the solvency margin percentage.
Bank activities Storebrand Bank manages its interest rate risk through interest rate swap agreements to minimise the effect of a change in interest rates on its deposits and lending. Market risk represents a minor part of the bank activities’ total risk.
Other subsidiaries The other subsidiaries in the Group are not particularly exposed to market risk.
Sensitivity analyses Assets and liabilities (funding and insurance liabilities in Sweden) are stress tested to show how much this affects the owner's result compared to the expectations for 2012. The estimated effects include an estimated normalised return throughout the year based on uncertain
assumptions of future returns, and other uncertain factors and uncertain assumptions. The stress tests were carried out on the investment portfolio at 31.12.2011 and the result shows the estimated effect on the result for one stress after the other for the year as a whole. The analysis was done with immediate individual stresses, i.e. a class of assets experiences a day with sharp market fluctuations, and then develops as anticipated in the remaining days of the year. In this scenario, the other asset classes develop as anticipated throughout 2012. The stresses were as follows: shares +/ - 20 per cent, interest +/- 150 basis points and properties +/- 12 per cent. With respect to currency risks, the investment portfolios are essentially fully hedged, and changes in exchange rates will have little effect on the companies’ expected results for 2012.
For changes in market risk that arise during the course of 1 year, the effect on the result and equity will be as presented below, based on the statement of financial position at 31 December 2011.
Life insurance Since it is the immediate market changes that are shown in the note above, the dynamic risk management for the Group's life insurance companies will not affect the outcome. If it is assumed that the market changes will occur over a period of time, then dynamic risk management would reduce the effect of the negative outcomes and reinforce the positive.
Storebrand Life Insurance Norway The stress tests were carried out on all investment profiles with guaranteed return and the effect of each stress test reduces or increases the expected return in each profile. For the negative stress tests (equities down, interest rates up and property down) the return in some individual profiles falls below the guarantee. The guarantee and buffer situation for each contract will then decide how much equity the company must use if the return remains at this level in 2012. In addition to the need to use equity to cover for the guaranteed return, it is changes in profit sharing on paid-up policies and individual contracts, as well as the return and interest costs in the corporate portfolio that deviate from the expected result in 2012. The effect of negative stresses has increased somewhat since last year. The most important reasons for this are the reduction in unrealised gains in 2012 and an anticipated return that is closer to the guaranteed return due to lower market interest rates.
The stress tests were applied individually. If several of the negative stress tests were to occur simultaneously, the negative effect on the result would be greater than simply the sum of the two individual effects alone (a larger proportion of gross stresses would be retained by the owner). In addition to the negative result effect for the owner, the expected building up of buffer capital will, to a substantial degree, fall away in the negative stress tests. In the case of the positive stress tests, greater building up of buffer capital is also assumed, in addition to the positive result effects for the owner in the form of the market value adjustment reserve and additional statutory reserves.
SPP The note that shows the effect on the result/equity shows the effect on the financial result excluding profit sharing. Not all changes in market value affect the financial result. The part of a change in market value that affects the result is the part that cannot be offset against conditional bonuses.
Items affected by one-time effects and which are recognised at fair value are primarily the investment portfolio, fixed rate lending, funding via the government swap scheme, deposits with equity returns, and derivatives.
Exposure to selected countries There is a great deal of uncertainty as to whether certain Euro countries will be able to service their national debt. The situation is most critical for Greece, but also Portugal and the Irish Republic have to pay high interest rates. It is also feared that Italy and Spain are in an exposed position. One direct result of payment problems will be that the banking sector will be affected because of its large loans to the exposed countries. An indirect consequence will be that essential economic austerity measures will have an impact on economic growth and thus corporate earnings. The European problems come in addition to the weak economic prospects in the USA .The table below shows the direct exposure to selected countries with amounts at fair value.
Liquidity risk is one of the most important risk factors in banking activities. The company’s risk strategy establishes general limits for how much liquidity risk the bank group is willing to accept. A policy has been drawn up specifying principles for liquidity management, minimum liquidity reserves and financing indicators for measuring liquidity risk. In addition to this, an annual funding strategy and funding plan are drawn up that set out the overall limits for the bank’s funding activities.
In addition to clear strategies and the risk management of liquidity reserves in each subsidiary, the Group’s holding company has established a liquidity buffer. At Group level, developments in the liquid holdings are constantly followed in relation to internal limits. Committed credit lines from banks have also been established that the companies can draw on if necessary.
Undiscounted cash flows for financial liabilities 0-6 months months 1-3 years 3-5 years > 5 years
Lending commitments 1,409 1,409 1. Of which the minority interests in the real estate fund amount to NOK 1,540 million. After 3 years, participants can present a demand for redemption every year. Redemption is conditional on a total demand of NOK 100 million. The redemption sum is set at 98.75 per cent of value-adjusted equity (VEK). Also see note 48.
The agreed maturity provides limited information on the company's liquidity risk, since the vast majority of the investment assets can be realised faster in the secondary market than the agreed maturity indicates. In the case of perpetual subordinated loans the cash flow is calculated through to the first call date.
Loan agreements entered into are subject to standard covenants. The terms and conditions have been satisfied for all signed loan agreements. In accordance with the loan programme in Storebrand Boligkreditt AS the company's requirements for excess pledges is 109.5 per cent satisfied.
Accumulated change in fair value due to changes in credit risk 5 6
Fair value is fixed on the basis of a theoretical estimation where the cash flow is discontinued at the rate offered.
Mortgage and asset backed securities 32,101 4,419 90 235 229 37,074
Mortgage and asset backed securities 22,609 1,526 153 559 510 25,357
Rating classes based on Standard & Poor's. NIG = Non-investment grade
Sale and operation of real estate 10,954 300 2,495 13,749 69 44 24 - Individual write-downs -103 -103
The division into customer groups is based on Statistics Norway's standard for sector and business grouping. The placement of the individual customer is determined by that customer's primary business.
The average weighted loan-to-value ratio (LVR) in the bank group is approximately 55 per cent for housing loans, and approximately 94 per cent of the housing loans are within an 80 per cent LVR. About 97 per cent are within 90 per cent LVR. In the bank group, about 58 per cent of the housing commitments have a 60 per cent LVR. The portfolio is considered to have a low credit risk.
Commitments are regarded as non-performing and loss exposed when a credit facility has been overdrawn for more than 90 days and when an instalment loan has arrears older than 90 days and the amount is at least NOK 500. The same definition as that used in the Capital Requirements Regulations is used for overdue commitments, but the number of days in the definition is equal to the age distribution.
Change in fair value of liabilities due to changes in credit risk -2 7
The company carries out a comprehensive process to ensure that the values established for financial instruments are as in line with the market as possible. Listed financial instruments are valued on the basis of official closing prices on stock exchanges obtained via Reuters and Bloomberg. Fund units are generally stated at the updated official NAV prices where these exist. As a rule, bonds are valued based on prices from Reuters and Bloomberg. Bonds that are not quoted regularly will normally be valued based on recognised theoretical models. The latter is particularly true for bonds denominated in NOK. Such valuations are based on discount rates consisting of swap interest rates plus a credit premium. The credit premium will often be issuer specific and normally based on a consensus of credit spreads quoted by a selected brokerage house.
Unlisted derivatives, including primarily interest rate and currency instruments, are also valued theoretically. The money market rates, swap rates, exchange rates, and volatilities that provide the basis for valuations are obtained from Reuters, and Bloomberg.
The Group categorises financial instruments valued at fair value on three different levels, which are described in more detail below. The levels express the differing degree of liquidity and different measuring methods. Significant market volatility during the year, where one can periodically register significant price divergences between the various sources, and bigger bid-ask spread in general, imply, seen in isolation, more uncertainty regarding the valuation of some classes of assets. Because of the market unrest, the company has carried out a thorough valuation of all types of securities, based on classification. Naturally, the principles applied for the classification of corporate bonds have been considered in this connection. Inasmuch as the company has established models that gather information from a wide range of wellinformed brokerage houses in our valuations, we have come to the conclusion that we have managed to remove most of the uncertainty. We can assume that the sources we use, overall, carry out the majority of the transactions in the primary and secondary market so that our valuation nevertheless provides a representative picture of the market as a whole.
LEVEL 2: FINANCIAL INSTRUMENTS VALUED ON THE BASIS OF OBSERVABLE MARKET INFORMATION NOT COVERED BY LEVEL 1 This category encompasses financial instruments that are valued on the basis of market information that can be directly observable or indirectly observable. Market information that is indirectly observable means that prices can be derived from observable, related markets. Level 2 encompasses equities or equivalent equity instruments for which market prices are available, but where the turnover volume is too limited to meet the criteria in level 1. Equities on this level will normally have been traded during the last month. Bonds and equivalent instruments are generally classified as level 2. Interest rate and currency swaps, non-standardised interest rate and currency derivatives, and credit default swaps are also classified as level 2. Funds are generally classified as level 2, and encompass equity, interest rate, and hedge funds.
LEVEL 3: FINANCIAL INSTRUMENTS VALUED ON THE BASIS OF INFORMATION THAT IS NOT OBSERVABLE PURSUANT TO LEVEL 2 Equities classified as level 3 encompass investments in primarily unlisted/private companies. These include investments in forestry, real estate and infrastructure. Private equity is generally classified as level 3 through direct investments or investments in funds.
In the case of direct private equity investments, the valuation is based on either recently conducted transactions or a model in which a company that is in continuous operation is assessed by comparing the key figures with equivalent listed companies or groups of equivalent listed companies. In some cases, the value is reduced by a liquidity discount, which can vary from investment to investment. Companies that are in a start up phase, have undergone previous expansions, or which are undergoing structural changes for some other reasons that make them harder to price in relation to a reference group will be stated at the lowest of cost or estimated value, where the estimated value is apparent from a variance analysis vis-à-vis its plans.
In the case of investments in which Storebrand participates as a co-investor together with a leading investor that conducts a valuation, and no recent transactions exist, Storebrand will use this value after it has been quality assured. In the case of investments for which Storebrand has not received an up-to-date valuation as per 31.12 from a leading investor by the time the annual financial statements are closed, the previous valuation is used and adjusted for any market effects during the period from the last valuation up to the reporting date. In those cases where no valuation is available from a leading investor in the syndicate, a separate valuation will be made, as described above.
ASSET BACKED SECURITIES This category primarily encompasses asset-backed securities (ABS), residential mortgage backed securities (RMBS) and commercial mortgage backed securities (CMBS). These are primarily valued on the basis of quoted prices from brokers or valuations obtained from international banks. The number of brokers who quote prices is very limited and the volume of transactions in the market relatively low.
INDIRECT REAL ESTATE INVESTMENTS Indirect real estate investments are primarily investments in funds with underlying real estate investments where Storebrand's intention is to own the investments throughout the fund's lifetime. No units in funds that confirm the market price of the units have been traded recently. Real estate funds are valued on the basis of information received from the individual fund manager.
Most managers’ report on a quarterly basis and the most common method used by the individual fund managers is an external quarterly valuation of the fund’s assets. This involves the manager calculating a net asset value (NAV). Funds often report NAV with a quarter’s delay in relation to the preparation of Storebrand’s financial statements. In order to take account of the changes in value in the last quarter, internal estimates are made of the changes in value based on developments in the market and by conferring with the respective managers.
Storebrand’s private equity investments are for the most part made through unlisted companies meaning no observable market prices are available. Large proportions of the portfolio are priced using comparable listed companies, while a smaller proportion of the portfolio is listed. The valuation of the private equity portfolio will thus be sensitive to fluctuations in global equity markets. In the period 1997-2011, Storebrand’s private equity portfolio has had a beta against the MSCI World (Net currency hedged to NOK) of around 0.4. The annualised alpha in the same period has been around 8.9 per cent.
Valuations of asset-backed securities will generally be sensitive to estimated loan repayment periods, probability of losses and discount rate requirements. Key assumptions for these factors will also be based on the securities' characteristics and quality. The specified composition of the ABS/RMBS /CMBS portfolio below is stated at fair value. The company’s valuation of asset-backed securities is based on external sources. Based on experience with procured tradable prices from brokers, the company is of the opinion that reasonable alternative assumptions entail a valuation that could be 2-3 per cent higher or lower than that indicated by fair value. We have obtained indicative prices from alternative sources at 31.12. that indicate market values that are 0.25 per cent higher than the valuation used.
Valuations of indirect real estate investments are sensitive to changes in the required rate of return and assumed future cash flows. Indirect real estate investments are mortgaged structures. On average, 47 per cent of the portfolio is mortgaged.
Bonds and other fixed-income securities - Government and government guaranteed bonds - Mortgage and asset backed securities
Storebrand's activities are operationally divided into five business areas: life and pensions, asset management, bank and P&C insurance. Two result areas are reported for life and pensions: Life and Pensions Norway (LPN) and Life and Pensions Sweden (LPS). Storebrand is the Nordic region's leading provider of life insurance and pensions, and offers a comprehensive range of products to retail customers, local authorities, and the public sector.
STOREBRAND LIFE INSURANCE Includes the companies in the Storebrand Life Insurance Group, except Storebrand Eiendom AS, Storebrand Realinvesteringer AS and Storebrand Holding AB, and personal risk and employee cover in Storebrand Livsforsikring AS. Storebrand Life Insurance offers a wide range of products within occupational pensions, private pension savings and life insurance to companies, public sector entities and private individuals. Storebrand Life Insurance's branch in Sweden provides occupational pensions products based on Norwegian law in the Swedish market. BenCo is also included and offers pension products to multinational companies via Nordben and Euroben.
BANK Storebrand Bank offers traditional banking services such as accounts and loans in the retail market and project financing to selected corporate customers.
INSURANCE The insurance segment comprises the companies Storebrand Forsikring AS, Storebrand Helseforsikring AS (50 per cent stake) and P&C insurance in Storebrand Livsforsikring AS. Storebrand Insurance AS offers standard insurance products in the Norwegian retail market, and some corporate insurance in the SMB market. Storebrand Health Insurance AS offers treatment insurance in the Norwegian and Swedish corporate and retail markets. It also includes personal risk insurance in the Norwegian retail market and employee insurance in the corporate market in Norway, which is included in Storebrand Livsforsikring AS.
The Storebrand Group are represented in the following countries: Segment/Country Norway Sweden Lithuania Ireland Guernsey
Insurance liabilities 206,339 201,265 - of which products with guaranteed return 170,965 167,438
1. Consists of equity, subordinated loan capital, market value adjustment reserve, risk equalisation fund, unrealised gains, bonds at amortised cost, additional statutory reserves, conditional bonus and accrued profit.
2. Storebrand Livsforsikring AS has some 10 to 15 per cent ownership interests in undertakings that invest in real estate. A capital adequacy reserve of 100 per cent of the carrying amount has previously been allocated in primary capital for these investments. An authority approved calculation method was adopted as per the close of 3Q in which proportional consolidation is used for these investments. The new calculation method provides a more comprehensive picture of the underlying risk. The change results in a marginal improvement in capital adequacy and an improvement of 5 per cent in the solvency margin in the figures as per 31 Dectember 2011 compared with the previously used method.
Fixed income and similar income from lending to and receivables from customers 1,394 1,391
Interest and similar costs from deposits from and liabilities to customers -475 -452
Net costs borrowing at fair value (FVO) -179 -228 note 15 | Spesification net financial income
Total gains and losses on financial assets at fair value - of which FVO (fair value option) 6,709 2,486 -7,223 1,972 527 1,439 12,290 - of which available-for-sale 312 140 452 452 368
Operating costs (including maintenance and repairs) relating to real estates that have provided rent income during the period2 -408 -337
Allocation by company and customers: Total income from real estate 1,663 1,441
Wholly owned real estate investments - investment real estate 249 154
The table below shows the anticipated compensation payments (excluding repurchase and payment). The residual balance after 3 years is equal to the obligations carried on the statement of financial position in the financial statements.
At end of the policy year 29 79 197 298 425 481 - four years later 28 83 - five years later 28
Change in insurance liabilities - life insurance note 21 | Losses from lendings and reversal of previous losses
Pensions paid to employees between the ages of 65 and 67 years, and pensions relating to salaries in excess of 12G are paid directly by the companies, and apply to both defined contribution scheme members and defined benefit scheme members. Guarantees have been issued for earned pensions for salaries exceeding 12G on retirement before the age of 65. Pension terms and conditions are in accordance with the pension regulations. Storebrand is obliged to have a mandatory occupational pension scheme pursuant to the Act on Mandatory Occupational Pensions. The company's pension schemes satisfy the requirements of this Act. The pension plan for employees in SPP follows the plan for bank employees in Sweden. The ordinary retirement age is 65 in accordance with the pension agreement between the Employer’s Association of the Swedish Banking Institutions (BAO) and the trade unions that are part of BTP. The amount is 10 percent of the annual salary up to 7.5 times the national insurance basic amount, which was SEK 52 100 in 2011 and will be SEK 54 600 in 2012. The retirement pension is 65 per cent of the annual salary for the portion of salary between 7.5-20 times the national insurance basic amount, and 32.5 per cent of annual salary between 20-30 times the national insurance basic amount. No retirement pension is paid for the portion of salary in excess of 30 times the national insurance basic amount.. Full pension earning period calls for 30 years' membership in the pension scheme. In addition to benefit part the BTP plan has a smaller defined contribution part. As to this part, the employees can decide themselves how assets are to be invested (traditional insurance or funds insurance). The defined contribution part is 2 per cent of annual salary. The retirement age for SPP's CEO is 62 years. The CEO is also covered by a contribution-based pension plan which implies that the company pays 35 per cent of the fixed salary in pension premium. In addition, he ahs a predefined pension plan that implies a lifetime pension with 16.25 per cent of fixed salary in the interval 30 to 50 times the NI basic amount. The pension from 62 to 65 years amounts to 65 per cent of fixed salary limited upward to SEK 4 045 000. The pension terms comply other wise with the pension agreement between BAO/Finance and SACO (BTP plan). The company secures its pension liabilities through payment of pension premiums during the employment period.
Net pension liabilities recognised in statement of financial position 1,583 1,427
Changes in the net defined benefit pension liabilities in the period
Net pension cost booked to profit and loss account, specified as follows
Net pension cost recognised in profit and loss account in the period 268 225
ACTUARIAL ASSUMPTIONS In Norway, there are standardised assumptions for mortality/disability trends, and other demographic factors, prepared by Finance Norway. The mortality table K2005 is used until new mutual mortality tariffs are adopted by the industry and can provide a basis for more precise calculations. The average employee turnover rate is 2-3 per cent for the entire work force , with turnover falling in the higher age groups.
In 2011, a common Remuneration Board was established for those Group companies that are subject to the requiremens regarding remuneation pursuant to the regulations issued by the Ministry of Finance on 1.12.10 "Regarding remuneration in the financial sector". This Com-
Financial remuneration shall be designed to: 1. Help support continuous improvement, stimulate internal cooperation and create a values-based performance culture 2. Help focus the efforts of employees 3. Ensure the Group‘s strategy and plans provide the basis for the goals and requirements set for employees‘ performance 4. Ensure it is based on long-term thinking, balanced goal-oriented management, and real value creation 5. Ensure it is based on an assessment of the individual‘s results and compliance with corporate principles 6. Facilitate a clear, transparent and team-based process for setting goals and goal structures 7. Ensure that both the development of financial remuneration and job requirements are embedded in the employee‘s role, responsibilities and influence in the Group 8. Ensure that the composition and level of the components of the financial remuneration are balanced and in line with the market
The salaries of senior employees are fixed on the basis of a position’s responsibilities and complexity. Regular comparisons are made with corresponding positions in the market in order to adjust the pay level to the market. Storebrand does not wish to be a pay leader in relation to the sector.
2.1 THE BONUS SYSTEM The main elements of the bonus system will be continued
The Storebrand Group‘s bonus scheme for the 2012 financial year complies with the regulations laid down by the Ministry of Finance on 1 December 2010 relating to remuneration schemes in financial institutions. Much of the Group‘s bonus scheme for senior employees in 2012i is a continuation of earlier bonus schemes. Earlier bonus schemes have been very robust with regard to ensuring the overall goals of increasing the correspondence between owners‘ and executives‘ incentives and helping to ensure that management does not take inappropriately large risks.
Two categories of financial remuneration Senior employees and employees who influence the company‘s risk are divided into two categories with regard to financial remuneration. Senior employees for whom accounting and control functions make up a large part of their duties receive fixed salaries only. The other senior employees have a bonus scheme linked to value creation in the Group, in the unit and through the performances of individual employees.
Overall structure of the bonus scheme The overall structure of the bonus scheme is outlined in the figure below
Financing Each year, specific quantitative targets are set governing how value creation in the company will provide the financing of bonus. The goal of value creation is based on risk-adjusted results that exclude the market-based results and profit sharing. Significant one-time effects shall be excluded. The calculation of the financing is based on the last two years' value creation. For 2012, the previous year is used as no corresponding risk-adjusted result is available for 2010. For 2012, the creation value is the average of the percentage achievement of targets for 2011 and 2012 respectively. The overall Group result also must be in excess of a predetermined level to prevent curtailment of bonus earnings based on risk-adjusted profit. Negative group profit before tax result in full deduction and zero bonus. In addition, an RoE (before tax) greater than 5% and satisfactory financial strength are assumed.
Calculation of bonus entitlement The target bonus for senior employees is intended over time to amount to between 20 per cent and 40 per cent of fixed salary. The maximum target attainment for funding and allotment is 150 per cent respectively. Senior employees‘ bonus entitlements are calculated using the following formula: Expected bonus level x Funding result x Allotment result The maximum possible bonus entitlement is 90 per cent of annual salary.
Payment of bonus Individual bonus banks have been set up for senior employees with bonus schemes. The bonus entitlement is not paid directly, but must be credited to the bonus bank. The amount credited to the bonus bank is exposed 50 percent to the bank interest rate and 50 percent to Storebrand’s share price in the relevant qualifying year. 1/3 of the bonus account balance is paid each year. The bonus bank balance can be withheld if the bonus entitlement has been calculated on the basis of incorrect information.
2.2 PENSION SCHEME The company shall arrange and pay for an ordinary group pension insurance common to all employees and which applies from the moment employment commences. Otherwise, the applicable pension rules at any given time apply. The current retirement age is 65 years old.
4. STATEMENT CONCERNING THE EFFECTS OF SHARE-BASED REMUNERATION AGREEMENTS FOR THE COMPANY AND SHAREHOLDERS In accordance with the new guidelines , section 2.1 above, for half of senior employees‘ net paid out bonus in 2012 must be spent on purchasing shares in Storebrand ASA at market prices with a 3 year lock-in period. In the opinion of the Board of Directors this has no negative consequences for the company and shareholders given the orientation of the scheme and the size of the individual executive vice presidents‘ portfolio of shares in Storebrand ASA.
Share dividends received 164 -10 associated companies 21 -6 permanent differences -309 337 recognition/write-down of tax assets 949 -1 174
On 1 January 2012, the Ministry of Finance distributed, for consultation purposes, its proposal to limit the exemption method for shares etc. owned by life insurance companies and pension companies. This refers primarily to shares that are included in the Norwegian life insurance companies' customer portfolios. Under the proposal, any amendment to the legislation will have effect from 1.1.2012. The exemption method for shares as currently formulated, including the deduction for provisions to the insurance reserve, implies that life insurance companies may have a profit for tax purposes in the case of a decline in values and a loss for tax purposes in the case of an increase in value of shares within the EEC area. In the event that the proposed amendment is implemented, new calculations will be made of the Norwegian group's tax positions. If the proposed amendment to the tax legislation is passed, it is assumed that the tax charge will be close to 28% of the Norwegian business' pre-tax profit. Not all aspects of the proposed amendments are clear as yet and the proposal has not yet been adopted. The current tax regulations have been applied when preparing the accounts that are presented at 31.12.2011.
taxation purposes, and the fact that that tax-increasing temporary differences relating to the investment properties referred to are included in the basis on which deferred tax is calculated, a tax charge has arisen for the Group in 2011, comprising changes in deferred tax. The value of the Group's existing tax-related deficit is included in the calculation of deferred tax.
In 2011, write-downs totalling NOK 4.6 million related to the VPS nominee solution linkede to the Fund sales and capialisations related to Basel II project from 2006.
INTANGIBLE ASSETS LINKED TO ACQUISITION OF SPP Storebrand Livsforsikring AS acquired SPP Livförsäkring AB and its subsidiaries in 2007. The majority of the intangible assets associated with SPP are assets of VIF (value of business in force), for which a separate sufficiency test has been performed as per the requirements of IFRS 4. In order to determine whether goodwill and other intangible assets connected with SPP has been the subject of a drop in value, estimates are made of the recyclable amount for the relevant cash-flow generating units. Recyclable amounts are established by computing the enterprise’s utility value. SPP is regarded as a single cash flow generating unit and the development of future administration results, risk results and financial results for SPP will affect its utility value. In the computation of this utility value, the management have made use of Board-addressed budgets and prognoses for the coming three-year period.
INTANGIBLE ASSETS LINKED TO BANKING ACTIVITIES A cash flow based valuation based on the expected pre-tax result is conducted when calculating the utility value for the banking group. The calculation is based on Board approved budgets and prognoses for the coming three-year period. The prognosis assumes an improvement in the result where the costs programme is implemented, and growth in other income based on developments and the efforts made in recent years. A stable growth rate of 2.5 per cent is assumed in the calculation of the terminal value, equal to expected inflation. The utility value is calculated using a required rate of return after tax of 9 per cent. The required rate of return is computed on the basis of risk-free interest and a premium that reflects the risk in the enterprise.
Sensitivity analyses are conducted with respect to the assumptions regarding the development of the result and required rate of return. The management are of the opinion that it is improbable that possible reasonable changes in the key presumptions would bring about a need for a write-down.
NOK million Useful economic life Depr. rate Depr. method Book value 2011
Fixtures & fittings 4-6 years note 31 | Tangible fixed assets - operational leasing
The external lease regarding office buildings durate from 2012 until 2019, with an optional renewal.
The consolidated financial statements include the following companies with the amounts shown
The fair values of lending, liabilities to financial institutions and debt raised by issuance of securities are based on valuation techniques. The valuation techniques use interest rate curves and credit spreads from external sources. The calculations are made using the QRM risk management system.
Distribution beween company and customers: Bonds held to maturity - company 169
A yield is calculated for each bond, based on both the paper's book value and the observed market price (fair value). For fixed income securities with no observed market prices the effective interest rate is calculated on the basis of of the fixed interest rate period and classification of the individual security with respect to liquidity and credit risk. Calculated effective yields are weighted to give an average effective yield on the basis of each security’s share of the total interest rate sensitivity.
Distribution by company and customers: Total income from real estate 28,747 27,102 1. Consists of investment properties in Storebrand Life Insurance Group and taken over properties in Storebrand Bank Group 2. Storebrand Bank Group has taken over properties in connection with defaulted loans.The properties are valued individually on the basis of the estimated income and costs associated with the completion/sale of the property projects.
CALCULATION OF FAIR VALUE FOR REAL ESTATE Investment properties are valued at fair value. Fair value is the amount an asset could be sold for in a transaction at arm's length between well informed, voluntary parties. Investment properties consists mainly of office buildings and shopping centres.
External valuations To ensure that every property will be taxated as a minimum every third year, there is a methodic approach in order to choose a representative selection of property to taxate every quarter. As per 31 December 2011, valuations had been obtained for approximately 35 per cent of Storebrand's property portfolio in Norway.
The properties are valued on the basis of the following effective required rate of return (incl. 2.5 per cent inflation): Segment
Allocation by company and customers: Properties for own use - company 407 352
Biological assets booked in the statement of financial statement consist of forests in the subsidiaries AS Værdalsbruket and Foran Real Estate SIA in Latvia.
Allocation by company and customers: Accounts receivable and other short-term receivables - company 1,803 1,892
Net accounts receivable /receivables from reinsurance note 42 | Equities and units
Allocation by company and customers: Equities and units - company 322 351
Storeband Life Insurance The company actively hedges the major part of its foreign currency risk. Currency risk arises from investments in international securities, and to a lesser extent from subordinated loans denominated in foreign currencies. Currency risk is hedged through forward foreign exchange contracts at the portfolio level, and currency positions are regularly monitored within specified total limits. Negative foreign exchange positions are closed no later than the business day following the date on which they arise. In addition, there are separate limits for entering into active currency positions. These positions are included in the note relating to short-term positions. Storebrand utilises a currency hedging principle called block hedging, which makes currency hedging more efficient. The currency hedging of the investment in the subsidiary Storebrand Holding AB was reduced in 2011 and from 2011 the subsdiiary BenCo is no longer hedged.
Total insurance liabilities - life insurance *) Including personal risk and employee insurance of the Insurance segment.
Book value 31.12 *) Including personal risk and employee insurance of the Insurance segment.
Claims reserve 282 207 - fo which RBNS 128 113 - of which IBNR 143 94
Other current liabilities 1,004 1,145 1. As of January 2014 the partisipants are able to claim redemption on a yearly basis.The redemption are conditioned to a total demand of NOK 100 million. The redemption amounts to 98,75% of VEK. See note 8.
The effectiveness of hedging is monitored at the individual security level, except in the case of structured bond loans where effectiveness is monitored at the portfolio level. Each portfolio consists of swaps and hedging items that mature within the same half-year period.
Debt raised through issuance of securities 1. Book values as at 31.12.
CURRENCY HEDGING OF NET INVESTMENT IN SPP In 2011, Storebrand utilised cash flow hedging for the currency risk linked to Storebrand’s net investment in SPP. 3 month rolling currency derivatives were used in which the spot element in these is used as the hedging instrument. The effective share of hedging instruments is recognised in total profit. The net amount recognised in total profit in 2011, i.e. the effective share of the hedging instruments and the currency effect on the hedged object was NOK 117million. The net investment in SPP is partly hedged and therefore the expectation is that future hedge effectiveness will be around 100 per cent.
Collateral pledged in connection with futures and options are regulated on a daily basis in the daily margin clearing on individual contracts. Received collateral for Security Lending Programme will be made up by the return of the loaned seurities.
Securities pledged as collateral are linked to lending access in Norges Bank for which, pursuant to the regulations, the loans must be fully guaranteed with collateral in interest-bearing securities and/or the bank's deposits in Norges bank. Storebrand Bank ASA has a F-loan for NOK 1.4 billion in Norges Bank as per 31.12.2011.
Storebrand Bank was in 2009 sued for damages based on economic loss from two customers’ investment in one of Storebrand Banks structured savings products. The bank won both in the local and district court and the case has been appealed to the Norwegian High Court, due to the case’s principle question. The High Court heard the case in January 2012 but no conclusion has been communicated at the date of the accounts completion. The bank sees it as highly probable that the case for damages will not succeed and has therefore not made any provisions in the accounts.
Collateral received in cash and reinvested in bondsr - nominal value 227 296
Transferred financial assets consist of swap agreements with the state through the Ministry of Finance concerning the posting of financial collateral (see note 51). The swap agreements are entered into through auctions that are administrated by Norges Bank. In the swap arrangement, the state sells treasury bills to the bank through a time-restricted swap for covered bonds. The bank can either keep the treasury bill and receive payment from the state when the bill falls due for repayment, or it may sell the treasury bill in the market. When bills matures within the term of the swap agreement, the bank must purchase new bills from the state at the price that is determined by the market price for treasury bills. This roll-over will be on-going throughout the entire term of the agreement. Upon expiry of the swap agreement, the bank is obliged to purchase the covered bonds back from the state at the same price that the state purchased them for. Storebrand Bank ASA will receive the returns on the transferred covered bonds.
The Storebrand Group is a cross-sectoral financial group subject to capital requirements pursuant to Basel I/II (capital adequacy) and the solvency rules on a consolidated basis. Pursuant to the solvency rules, solvency margin requirements are calculated for the insurance companies in the Group, while for the other companies a capital requirement pursuant the capital adequacy regulations is calculated. The calculations in the tables below conform to the regulations relating to the application of the solvency rules on a consolidated basis, etc., cf. Section 7.
In a cross-sectoral financial group the sum of the primary capital and other solvency margin capital shall cover the sum of the solvency margin requirements for the insurance activities and the requirements for primary capital of financial institutions and securities firms.
Storebrand ASA‘s largest owner is Gjensidige Forsikring with an ownership interest of 24.3 per cent. Storebrand Kapitalforvaltning AS sells some management services to Gjensidige Forsikring. These services are provided on normal commercial conditions.
For further information about close associates, see note 32, 33 and 49.
Agreement was reached on the sale of Oslo Reinsurance Company (UK) Ltd in December 2010. The sale was subject to the approval of the authorities. Approval was granted in February 2011 and control of the company was finally transferred to the buyer in March. The company changed its name to OX RE at the same time. The agreed transfer sum was transferred at the same time and Storebrand's result has not been affected by the transfer in 2011.
Storebrand Bank ASA have decided to exit estate agency business and the Ring Eiendomsmegling AS Group will be liquidated or sold. As a consequence the annual result, assets and liabilities are classified as hold for sale in the Group accounting. The 2010 corresponding figures have been revised.
Statement of financial position 1 January - 31 December Storebrand ASA
Net receipts/payments – sale/purchase of real estate and fixed assets 11 -5
The financial statements of Storebrand ASA have been prepared in accordance with the Accounting Act, generally accepted accounting policies in Norway, and the Regulations relating to annual accounts, etc. for insurance companies. Storebrand ASA does not apply IFRS to the company’s financial statements.
USE OF ESTIMATES AND DISCRETIONARY ASSUMPTIONS In preparing the annual financial statements, Storebrand has made assumptions and used estimates that affect reported amounts of assets, liabilities, revenues, costs, as well as the information provided on contingent liabilities. Future events may cause these estimates to change. Such changes will be recognised in the financial statements when there is a sufficient basis for using new estimates.
PROFIT AND LOSS ACCOUNT AND STATEMENT OF FINANCIAL POSITION Storebrand ASA is a holding company with subsidiaries within insurance, banking and asset management. The layout plan in the Regulations relating to annual financial statements etc. for insurance companies has not been used. A layout plan that complies with the Accounting Act has been used.
DIVIDENDS AND GROUP CONTRIBUTIONS In the company’s accounts, investments in subsidiaries and associated companies are valued at acquisition cost less any write-downs. Storebrand ASA's primary income is the return on capital invested in subsidiaries. Group contributions and dividends received in respect of these investments are therefore recorded as ordinary operating income. Proposed and approved dividends and group contributions from subsidiaries at the end of the year are recognised in the financial statements of Storebrand ASA as income in that accounting year.
PENSION LIABILITIES FOR ITS OWN EMPLOYEES The company uses the Norwegian standard for pensions accounting NRS 6, which permits the use of IAS 19 Employee Benefits. With effect from 1 January 2010, Storebrand ASA booked actuarial gains and losses directly against equity. The entire effect of the change was recognised in 2010. The comparable figures remain unchanged.
The net pension cost for the period is made up of the sum of pension entitlement accrued in the period, interest cost on the calculated pension liability and the expected return on pension assets. Pension costs and pension liabilities for defined benefit schemes are calculated using a linear profile for the accrual of pension entitlement and expected final salary as the basis for calculating the benefit obligation, based on assumptions about discount rate, future increases in salary, pensions and social security pension benefits, the future return on pension assets and actuarial assumptions about mortality, voluntary retirement etc. The discount rate used is the risk-free interest rate appropriate for the remaining term. Where a scheme is funded, the pension assets are valued at fair value and deducted from the net liability in the balance sheet.
TAX The tax cost in the profit and loss account consists of tax payable and changes in deferred tax. Deferred tax and deferred tax assets are calculated on the differences between accounting and tax values of assets and liabilities. Deferred tax assets are recorded in the balance sheet to the extent it is considered likely that the company will have sufficient taxable profit in the future to make use of the tax asset. Deferred tax is applied directly against equity to the extent that it relates to items that are themselves directly applied against equity.
Bonds and other fixed income securities are recognised at fair value. Fair value is the amount for which an asset could be sold for, or a liability settled with, between knowledgeable, willing parties in an arm’s length transaction. For financial assets that are listed on a stock exchange or another regulated market place, fair value is determined as the bid price on the last trading day up to and including the balance sheet date, and in the case of an asset that is to be acquired or a liability that is held, the offer price.
Bond loans Bond loans are recorded at amortised cost using the effective yield method. The amortised cost includes the transaction costs on the date of issue.
Fair value hedging Storebrand uses fair value hedging, where the item hedged is fixed rate funding measured at amortised cost. Derivatives that fall within this category are recognised at fair value in the profit and loss account. The gain or loss on the hedged item attributable to the hedged risk adjusts the book value of the hedged item and is recognised in profit or loss.
Other benefits -9 -8 1. See the specification in note 4.
Employees who are members of the defined benefit contribution scheme are secured a pension equivalent to approximately 70 per cent of the pension basis at the date of retirement. Full pension rights are earned after 30 years membership in the scheme. The period's cost shows the employees' pension earnings of future defined pensions in the accounting year. From 1.7.2011, retirement age is 67 years. Nevertheless, employees are entitled to retire at the age of 65 and receive a pension which is paid directly over the income statement. In the case of underwriters, retirement age is 65 years.
Pensions paid to employees between the ages of 65 and 67 years, and pensions relating to salaries in excess of 12G are paid directly by the companies, and apply to both defined contribution scheme members and defined benefit scheme members. Guarantees have been issued for earned pensions for salaries exceeding 12G on retirement before the age of 65. Pension terms and conditions are in accordance with the pension regulations. Storebrand is obliged to have a mandatory occupational pension scheme pursuant to the Act on Mandatory Occupational Pensions. The company's pension schemes satisfy the requirements of this Act.
Booked in the statement of financial position: Pension asset 46 30
Changes in the net defined benefits pension liabilities in the period
Pension assets are based on the financial assets held by Storebrand Life Insurance, which are composed of as per 31.12.: Properties and real estate 17% 16%
Net pension cost booked to profit and loss accounts in the period
Net pension cost booked to profit and loss accounts in the period 1 -9
ACTUARIAL ASSUMPTIONS: Standarised assumptions regarding the development of mortality and other demographic factors as produced by the Norwegian Financial Services Association. Average employee turnover rate of 2-3 per cent of entire workforce. The disability table was developed by Storebrand Livsforsikriing AS.
2. Pension costs relate to accrual for the year. 3. The Control Committee covers all the Norwegian companies in the group which are required to have a control committee.
For further information on senior employees, the Board of Directors, the Control Committee and the Board’s statement on fixing the salary and other remuneration of senioremployees, see note 24 in the Storebrand Group.
The following is a specification of the difference between accounting proft and taxable income for the year: NOK million 2011 2010
Effective tax rate -258 note 7 | Parent company’s shares in subsidiaries and associated companies
An increase/reduction of 1.5 percentage points in the interest rate will change the value of bonds and other securities by NOK 3 million.
Undiscounted cash flows for financial liabilities NOK million 0–6 months 6–12 months 1–3 years 3–5 years
Per-Erik Hauge 2,018 1. The summary shows the number of shares owned by the individual, as well as his or her immediate family and companies where the individual exercises significant influence, confer the Accounting Act, Section 7-26.
Profit and loss account items: Group contributions and dividends from subsidiaries 474 1 158
Payable to group companies 46 54 1. Loan to Storeband Holding AB in the amount of SEK 1,100 million, recorded in the accounts as NOK 968 million. Loan to Storebrand Bank AS NOK 17 million.
The consolidated financial statements are prepared in accordance with the EU-approved International Financial Reporting Standards (IFRS) and interpretations, as well as the other disclosure obligations stipulated in the Norwegian Accounting Act and which must be applied as per 31 December 2010. The annual financial statements for the parent company were prepared in accordance with the Norwegian Accounting Act, Norwegian Annual Accounts Regulations as they apply to Insurance Companies and the additional requirements in the Norwegian Securities Trading Act. The annual report for the Group and parent company complies with the requirements of the Norwegian Accounting Act and Norwegian Accounting Standard no. 16 as per 31 December 2011.
In the best judgment of the Board and the CEO, the annual financial statements for 2011 have been prepared in accordance with applicable accounting standards, and the information in the financial statements provides a fair and true picture of the parent company’s and Group’s assets, liabilities, financial standing and results as a whole as per 31 December 2011. In the best judgment of the Board and the CEO, the annual report provides a fair and true overview of important events during the accounting period and their effects on the annual financial statements for Storebrand ASA and the Storebrand Group. In the best judgment of the Board of Directors and the CEO, the descriptions of the most important risk and uncertainty factors the Group will face in the next accounting period, as well as the descriptions of related parties’ significant transactions, also provide a fair and true overview.
With reference to the auditor's report of 16 February 2012, the Control Committee finds that the proposed annual report and accounts can be adopted as Storebrand ASA's annual report and accounts for 2011.
The annual financial statements as proposed by the Board, the Board's report, the auditor’s report and the Control Committee's statement have been submitted to the Board of Representatives, in the manner prescribed by the law.
The Board of Representatives recommends that Annual General Meeting approve the Board's annual report and accounts of Storebrand ASA and the Storebrand Group.
Storebrand ASA Statement of the Control Committee and The Board of Representatives for 2011
Deloitte AS Karenslyst allé 20 P.O.Box 347 Skøyen NO-0213 Oslo Norway
Tel: +47 23 27 90 00 Fax: +47 23 27 90 01 www.deloitte.no
We have reviewed the reporting on 2011 Corporate Sustainability Indicators presented in the “Storebrand’s corporate sustainability work”, pages 174 – 175 in the Annual Report 2011 Storebrand ASA. The selection of indicators and the information presented are the responsibility of and have been approved by the management of the Company. Our responsibility is to draw a conclusion based on our review
We have based our work on the international standard ISAE 3000 “Assurance Engagements other than Audits and Reviews of Historical Financial Information”, issued by the International Auditing and Assurance Standards Board. The objective and scope of the engagement were agreed with the management of the Company and included those subject matters on which we have concluded below.
• Storebrand ASA applies a reporting practice for its reporting on sustainability that is aligned with the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines reporting principles and the reporting fulfils Application Level B+ according to the GRI guidelines. The GRI Index referred to on page 175 appropriately reflects where relevant information on each of the elements and performance indicators of the GRI guidelines is presented.
Dow Jones Sustainability Index 74 points 78 points ≥ 75 points
In upper quartile in 2 out of 7 areas In upper quartile in 3 out of 7 areas
Proportion of investments (on balance) that have a clear sustainable profile
Ensure compliance with internal guidelines and participate in external professional forums
CO2 emissions (metric tons)5 1.394 Reduced by 6% to 1.308 Reduce by 14% to 1.200
Air travel (individual flights)6 8.408 individual flights 9.053 individual flights Stable level
— Work on the assessment has been initiated. Completion in 2012
Energy consumption (managed properties)7 253 kWh/m2 Reduced by 6% to 238 kWh/m2 Reduce by 3% to 245 kWh/m2
— 60% certified 50% certified 1. Revised target for 2012 is 65. Originally announced target for the period 2011-2012 was 67. 2. Measures employee awareness, proportion of employees who complete e-learning course (every third year), proportion who participate in dilemma training and proportion of manager who have reported on compliance with the code of ethics.
3. One-year target for 2011 of 3.5% continued in 2012. 4. Productivity report is prepared from Q12011 and processed quarterly in corporate management.
CORPORATE SUSTAINABILITY REPORTING Since 1995, Storebrand Group has published environmental and sustainability reports. Since 2008, sustainability reporting has been incorporated into the Group’s annual reports. We use Global Reporting Initiative’s guidelines as a tool for corporate sustainability reporting. In our opinion, our reporting practice confirms, in general, with GRI’s reporting principles and qualifies for level B in accordance with these guidelines. Our website (www.storebrand.no) provides references to where information on the indicators is to be found, and whether these are answered completely or partly.
The Scorecard for sustainability is owned and followed up by the Group’s Strategy Department. This implies that the Strategy Department selects the corporate targets that are material to our work relating to sustainability. Only in exceptional cases, does the Strategy Department set its own goals for this sustainability work and delegate these throughout the organisation. The relevant Executive Vice President is responsible for all of these targets. The targets are set for a two-year period, but results are reported annually. Status reports on Scorecard for sustainability targets are made annually to corporate management and the Board of Directors.
Duration The average remaining term of the 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 Earnings per share is calculated as the majority’s proportion of the result after tax costs divided by the number of shares. 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.
IBNR reserves (incurred but not reported) Reserves for the compensation of insured events that have incurred but not yet been reported to the company.
RBNS reserves (reported but not settled) Reserves for the compensation of reported but not yet settled claims.
Paid-up policies (benefit) and pension capital certificate (contribution) These are contracts with earned rights that are issued upon withdrawal from or the termination of pension contracts.
Individual contracts Individual allocated annuity or pension insurance Contracts with guaranteed payments for as long as the insured person lives. Alternatively it can be agreed that the pension will end at a specified age.
calculation method). Additional benefits due to an added surplus are included.
Result Administration result The administration result is the difference between the premiums paid by customers pursuant to the tariff and the company’s actual operating costs. The income consists of fees based on the size of customer assets, premium volumes or number in the form of unit price. Operating costs consist of, among other things, personnel costs, marketing, commissions and IT costs.
Profit sharing and result allocated to owner See note 2 page 89-91.
Other terms Insurance reserves – life insurance For a more detailed description of the technical insurance reserves and accrual accounting for premiums and compensation see note 1 – accounting policies, section 11, page 84-86.
Solidity capital The term solidity capital includes equity, subordinated loan capital, market value adjustment reserve, additional statutory reserves, conditional bonuses, surplus/ deficit related to bonds at amortised cost and accrued profit. The solvency capital is also calculated as a percentage of total customer funds excluding additional statutory reserves and conditional bonus.
Solvency margin requirements An expression of the risk associated with the insurance-related liabilities. Calculated on the basis of the insurance fund and the risk policies total for each insurance sector.
Solvency margin capital Primary capital as in capital adequacy plus 50 percent of additional statutory reserves and risk equalisation fund, plus 55 percent of the lower limit for the contingency funds in P&C insurance.
Buffer capital Buffer capital consists of the market value adjustment reserve, additional statutory reserves and conditional bonuses.
Combined ratio The sum of the cost ratio and the claims ratio.
Level repayment loan Periodic payments (representing both capital and interest) on a level repayment loan remain constant throughout the life of the loan.
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 per annum, and all fees and commissions.
Net interest income Total interest income less total interest expense. Often expressed as a percentage of average total assets (net interest margin).
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.
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.
Share options The purchase of share options confers a right (but not an obligation) to buy or sell shares at a pre-determined price. Share options may be related to stock market indices as well as to specific individual stocks. The sale of share options implies the equivalent onesided obligation. In the main, exchange traded and cleared options are used.
Forward Rate Agreements (FRA) FRAs are agreements to pay or receive the difference between an agreed fixed rate of interest and the actual rate for a fixed amount and period of time. This difference is settled at the start of the future interest period. FRA contracts are particularly appropriate to the management of short-term interest rate exposure.
Interest rate swaps/asset swaps Interest rate swaps/asset swaps are agreements between two-parties to exchange interest rate terms for a specified period. This is normally an agreement to exchange floating rate payments for fixed rate payments, and this instrument is used in the management of long term interest rate risk.
Interest rate options Interest rate options can be related to either bond yields or money market rates. The purchase of interest rate options related to bonds (also known as bond options) confers a right (but not an obligation) to buy or sell bonds at a pre-determined price. Interest rate options can be used as a flexible instrument for the management of both long and short-term interest rate exposure.