Key features of Annual Report 2012 • Post-tax profit of DKK 1,823m (2011: DKK 1,023m) −
1,200m, which was in line with the buy-back assumed in the Q1-Q3 2012 interim report.
(Q4 2011: 91.5%) • Premiums increased 0.3% in non-life insurance and declined 21.7% in life insurance • Investment return increased to DKK 343m (Q4 2011: DKK 233m).
Profit forecast model for 2013 • Assumed combined ratio for 2013 has been increased from around 91% to 91-92%, excluding run-off profits / losses due to reforms affecting the level of compensation for loss of earnings potential
• Post-tax profit forecast model is DKK 1,050-1,150m, excluding run-off profits / losses, being DKK 95 profit per share.
In a webcast today Topdanmark's CEO, Christian Sagild, will present the financial highlights and comment on the forecast.
In order to participate in the conference call, please phone: UK dial in number: +44 (0)20 7162 0125 US dial in number: +1 866 803 8344 quoting reference 929302 10-15 minutes before the conference asking the operator to connect you to the Topdanmark conference call – or listen to the live transmission of the call.
Contents Management’s review 1 Key features of Annual report 3 Financial highlights 4 Profit of DKK 1,823m in 2012 4 Profit of DKK 453m in Q4 2012 5 Non-life insurance 11 Life insurance 13 Investment activities 16 Parent company etc. 16 Taxation 16 Prospects for 2013 19 Share buy-back 20 Share split 20 Value creation in Topdanmark 22 Risk management 25 Solvency 27 Capital model 28 Board of Directors and Articles of Association 29 Severance pay 29 Remuneration structure 30 Corporate Governance 30 CSR 30 Investor Relations 32 Annual General Meeting 32 Financial calendar 33 List of company announcements and trading reports 34 Board of Directors and Executive Board 39 Five-year summary - Group
Annual financial statements - Group 40 Income statement 41 Statement of comprehensive income 42 Assets 43 Shareholders' equity and liabilities 44 Cash flow statement 45 Statement of changes in equity 46 Notes to the financial statements 79 Accounting policies 89 Annual financial statements - Parent company 98 Statement by Management on the Annual Report
Auditors' reports 99 Internal audit's reports 100 Independent auditor's reports 101 Group Structure
Deferred tax on security funds (348) (348) (348) (348) (348) (348) (348) Shareholders' equity of Group end of period 2,895 4,117 4,553 4,567 5,368 4,567 5,368
Provisions for insurance and investment contracts: Financial ratios (parent company) Post-tax profit / (loss) as a % of shareholders' equity (5.6) 36.6 24.1 21.1 33.9 7.2 8.0 Post-tax profit / (loss) per share (DKK) (12.1) 92.2 77.2 74.4 142.1 26.0 36.4 Post-tax profit / (loss) per share, diluted (DKK) (12.1) 91.7 77.0 74.4 142.1 26.0 36.4 Net asset value per share (DKK) 207.1 288.1 338.6 368.7 461.2 368.7 461.2 Share buy-back per share (DKK) 23.4 23.8 58.8 84.3 93.6 13.8 21.8 Listed share price end of period 687 703 738 895 1,213 895 1,213
Profit of DKK 1,823m in 2012 Topdanmark’s post-tax profit for 2012 increased 78.2% to DKK 1,823m (2011: DKK 1,023m). Profit per share increased 91.0% to DKK 142.1.
Non-life insurance - Investment return after transfer to technical result etc. 179 1,036 Profit on non-life insurance 1,086 2,103 Life insurance 187 210 Parent company etc. 76 22 Pre-tax profit 1,349 2,335
The technical result increased DKK 161m to DKK 1,068m mostly due to lower weather-related claims and higher run-off profits. On the other hand, the technical result was adversely affected by the declining interest rates.
The investment return increased DKK 857m to DKK 1,036m due to the generally positive financial markets for equities and credit products in 2012.
Profit on life insurance increased DKK 23m to DKK 210m due to, among other factors, a higher investment return.
Profit of the parent company etc. declined DKK 54m to DKK 22m. This decline was due to a DKK 25m writedown of a property and particularly high earnings in Topdanmark Kapitalforvaltning in 2011.
Pre-tax profit was DKK 593m in Q4 2012 (Q4 2011: DKK 457m).
Profit on life insurance declined DKK 23m to DKK 46m primarily due to a slightly lower risk allowance, lower recognition as income from the shadow account of Life V and a lower return on Topdanmark Link.
Non-life insurance Danish non-life insurance market Key features of the Danish non-life insurance market in 2012: • Positive effect of price increases • 1% growth in premiums • Exceptionally low level of weather-related claims improved the combined ratio by around 1.5pp • Lower average premium in motor insurance • In spite of declining theft frequency for contents insurance policies, an increase in the average claim increased the overall claims trend
• Lower interest rates had a 1-2pp adverse effect on the combined ratio
Automatic price indexation in the personal and SME market was 1.9%, which is estimated to have an overall effect of around 1.4% for the entire market. Also in 2012 prices in the industrial market were under pressure. Including the effect of price increases growth in gross premiums earned is estimated to be around 1%.
The level of rainstorm claims was lower than normal. This applies to both storm and rainstorm claims, which are the highest weather-related risks. The lower level of weatherrelated claims is estimated to have had a favourable effect on the combined ratio of around 1.5pp.
Car sales moved towards relatively smaller and more roadworthy cars from 2011 to 2012, which contributed to a decline of around 0.8% in average premium, in spite of automatic indexation of 1.9%. The number of reported incidents of car damage declined 9% from 2011 to 2012.
At the end of 2012, the Danish Parliament adopted a reform of the rules for early retirement pension taking effect on 1 January 2013. As there is a relation between workers' compensation, motor liability, illness / accident insurance claims and the reform, the reform will have financial consequences for the size of the compensation. Generally, the public subsidy to people in flex-jobs will decline, meaning that a larger share of the loss incurred by a claimant in a flex-job needs to be covered by the
It is estimated that the overall combined ratio, excluding any run-off profits / losses, was around 92% for the entire market in 2012. However, there are significant differences between the combined ratios of the individual companies.
In 2012 Topdanmark increased market pressure on the personal segment, the SME segment and farms which improved its competitive situation. For example, the customer exchange ratio in the personal segment gradually improved during the year due to, among other factors, an increase in the retention percentage. The improved customer exchange ratio was not reflected in premiums earned in 2012 but is expected to have a favourable effect on premium growth in 2013.
Run-off profits net of reinsurance were DKK 201m in 2012 (2011: DKK 148m). As compared to 2011 run-off profits had a 0.6pp positive effect on the claims trend. Run-off profits in workers' compensation insurance represented DKK 148m of run-off profits in 2012.
Fire claims net of reinsurance declined DKK 32m, corresponding to a 0.4pp improvement of the claims trend. The improvement was mainly due to a favourable claims trend in the personal segment.
The interest rate curve used to discount the provisions for outstanding claims was lower in 2012 than the previous year, which impacted the claims trend adversely by 1.6pp.
Expense ratio The expense ratio increased marginally to 15.8% (2011: 15.7%).
Combined ratio Overall expenses on claims, reinsurance, sales and administration as a percentage of gross premiums earned (combined ratio) improved to 88.0% (2011: 90.3%).
Weather-related claims of the year had an effect on the combined ratio, which was 1.4pp lower than the normal effect. Accordingly, the underlying combined ratio was 91.7% (2011: 90.7%) excluding run-off profits.
Claims incurred (1,587) (1,541) (6,773) (6,131) Expenses (351) (353) (1,365) (1,388) Net reinsurance (35) (54) 312 (193) Technical profit 236 263 907 1,068
Investment return after transfer to technical result 130 260 123 1,015
The claims trend improved 1.5pp to 72.2% in Q4 2012 (Q4 2011: 73.7%) due to a lower level of weather-related claims (2.9pp) and higher run-off profits (1.6pp). On the other hand, the lower interest rates had a 1.1pp adverse effect on the claims trend. Furthermore, a worse claims trend in fire had a 0.9pp adverse effect on Topdanmark's claims trend. Finally, the reform referred to in The Danish non-life insurance market increased payments on claims. The size of these extra costs is very uncertain, but it has been decided to recognise extra claims of DKK 35m, which had a 1.6pp adverse effect on the claims trend in Q4 2012.
The combined ratio improved to 88.2% in Q4 2012 (Q4 2011: 89.6%). Excluding run-off profits it was 91.7% (Q4 2011: 91.5%).
Segment reporting Personal The Personal segment sells policies for individual households in Denmark.
Premiums earned increased 0.2% to DKK 4,767m in 2012 reflecting growth in house and contents insurance while there was a decline in motor insurance. Furthermore, premiums were affected by a decline in premiums earned in illness / accident insurance (I/A). The growth in premiums was 0.3% negative in Q4. Adjusted for I/A, premium growth was 0.5% in 2012 and 0.8% in Q4.
Premiums earned on motor insurance declined 2.4% in 2012 due to, among other things, a lower average premium because increasingly smaller and more roadworthy cars are sold.
The claims trend improved 1.2pp to 73.2% primarily due to an improved claims trend for weather-related claims.
The expense ratio increased to 16.2% from 15.8% due to the strengthening of distribution efficiency in the personal segment, see Distribution power.
The combined ratio improved to 89.4% from 90.2%. Excluding run-off it improved to 90.1% from 90.7%.
Premiums earned increased 2.0% to DKK 4,011m in 2012 and in Q4 they increased 0.9%. The growth in premiums was impacted by severe competition in workers' compensation insurance and a premium bonus of DKK 19m on a captive scheme − a premium bonus which was deducted from premiums earned. Generally, the loss of customers was lower − except for workers' compensation insurance − due to, among other factors, a new servicing concept.
SME and Industrial saw a 2.6% increase in motor insurance customers which more than offset the decline in these customers in the personal segment.
The deductibility of payments into term life premiums and terminable annuities was reduced from an annual DKK 100,000 to DKK 50,000 with effect from 1 January 2012. This lowering of the deductibility ceiling reduced the savings of term life insurance. On the other hand, there was an increased demand for annuities for which there is full deductibility.
It is believed that overall pension payments into regular premiums were relatively unchanged in 2012.
Result of life insurance in Topdanmark The result from life insurance was a profit of DKK 210m in 2012 (2011: DKK 187m) mainly due to an improved investment return.
Profit on life insurance activities comprises the sum of the profits generated by Life I and Life V plus the investment return of Life Holding. These profits were calculated in accordance with the stated policy on the calculation of profit for the life insurance companies: see www.topdanmark.com → Investor →Business → Life insurance → Policy for the calculation of profit in life insurance.
Shadow account end of period 112 2 114 233 4 236
The risk allowance was DKK 165m in 2012 (2011: DKK 178m). The “insurance technical result before bonus” of Life I and Life V was not sufficient to fully include in income a risk allowance in all the contribution groups. Therefore DKK 117m was transferred to the shadow account which totalled DKK 236m at the end of 2012.
"Other" comprises primarily the investment return of Life Holding of DKK 14m and the result from Topdanmark Link of DKK 11m. The improvement of DKK 16m to DKK 34m was mainly due to a DKK 16m improvement in Topdanmark Link.
Trend in premiums Gross premiums declined 4.3% to DKK 3,161m in 2012 (2011: DKK 3,303m).
There was an overall increase of 5.8% in premiums in unit-linked pension schemes. Regular premiums increased 9.9% to DKK 572m and single premiums 2.7% to DKK 685m. The share of new business written by unitlinked savings increased to DKK 60.6% in 2012 (2011: 52.6%).
Developments in Q4 2012 The decline in profit to DKK 46m in Q4 2012 (Q4 2011: DKK 69m) was primarily due to a slightly lower risk allowance, lower recognition as income from the shadow account of Life V and a lower return on Topdanmark Link.
Rate of interest on policyholders’ savings in 2012 and 2013 On 1 July 2012 the rate of interest on policyholders' savings was reduced in Life I and Life V. In Life I it was reduced from 2.25% to 1.8% before pension return tax and in Life V from 4.35% to 2.0% before pension return tax.
These rates may be subject to change if the development in the financial markets is different from expectations.
Due to the development in the financial markets with a decline in equity prices and declining interest rates, Life I had to introduce loss participation in 2012. The loss participation scheme is calculated and adjusted once a month and was 0.8% on 5 March 2013 in interest rate group 2 in Life I. There are no loss participation schemes in the other interest rate groups of Life I. As long as the loss participation scheme is in force, the risk allowance will be transferred from the interest rate group concerned to the shadow account from where it will be brought into income when the scheme has been removed. Loss participation has at no time been introduced in Life V.
It is Topdanmark's policy to accept a certain level of financial risk, given its strong liquid position and stable, high earnings from insurance operations. Topdanmark has invested in, among others, equities, properties and CDOs in order to improve the average investment return. The return in Q4 2012 and in 2012 on the most significant classes of assets is disclosed in the following table:
Generally, the difference between the interest rate exposure of assets and liabilities has been relatively small. Therefore, given the expected development in general interest rates, the positioning has only contributed modestly to the excess return.
The post-tax equity exposure was DKK 682m (pre-tax: DKK 909m) excluding associated companies but including the impact of derivatives.
Since 31 October 2008, Danish insurance companies and pension funds have calculated the value of provisions by using a discount rate representing the combined weighting of the swap rate and the option-adjusted Danish mortgage credit rate. With effect from June 2012, the curve has been adjusted as convergence towards a fixed forward interest rate of 4.2% has been incorporated from the 20-year point. Therefore, the revaluation of longtail provisions is less sensitive to changes in the market rate for long-term assets.
Most of the portfolio comprises high-quality mortgage bonds, which ensures consistency between the investment return and the discount rate. The class of government and mortgage bonds comprises primarily Danish mortgage bonds and revaluation of technical provisions. In addition, there are government bonds mainly from European core countries, covered bonds and derivatives. Covered bonds are AAA-rated mortgage bonds where the size of the loan may not exceed 70% of the value of the security. If the value of the security declines so much that the requirement is not fulfilled, the issuer will provide further security.
The underlying assets of CDOs are mostly senior secured bank loans while the remainder are primarily CDOs with investment grade investments as the underlying assets.
Book value 31 December AAA and AA 100 99 Lower than AA 592 719 Total book value 692 818
The class of "Assets related to IA" (illness / accident) comprises the investments in Topdanmark Livsforsikring corresponding to the size of the illness / accident provisions.
"Money market etc." comprises primarily money market deposits and intra-group balances but also the result of currency positions.
Financing It is expected that Solvency II will require a minimum level of solvency capital in insurance holding companies corresponding to the solvency requirements of the underlying group companies. When Solvency II has taken effect, the capital base of the parent company will be sufficient to finance the investments in the group companies.
• Run-off profits for 2013 are expected to be lower than in 2012.
2013 is expected to be affected by continued low economic growth. It is expected that BNP growth in the Danish economy will be around 1%.
It is believed that most of the insurance companies in the Danish market have completed their general price increases. A number of those companies with a high combined ratio are expected to continue to implement selective price increases.
The reform of the rules for early retirement pension, see Danish non-life insurance market, will also in the future
The claims trend was affected by low storm and rainstorm claims in 2012. If the level of weather-related claims is normal in 2013, the claims trend will deteriorate around 1.5pp from the 2012 level.
Assuming a normal level of large-scale claims, it is expected that the combined ratio for the market, excluding any run-off profits / losses, will be around 95% in 2013.
Due to the increase in life expectancy and expected lower investment returns pension customers will need larger savings.
Due to the tax reform overall payments into regular premiums are expected to decline in 2013. The growth in premiums is expected to follow wage increases in the future.
Topdanmark's profit forecast model for 2013 Traditionally Topdanmark does not publish actual profit forecasts but instead the expected level of results if a number of assumptions of the return in the financial markets are met. As the return in the financial markets changes on a daily basis, Topdanmark's profit forecast model will already deviate from actual expectations by the time it is published. Therefore set out in Risk scenarios is additional information on how changes in the assumptions underlying the profit forecast model will affect the results.
• In order to improve the quality of its customer portfolio Topdanmark is implementing profitability promoting initiatives for less profitable customers, which is also expected to generate some loss of customers: Activities associated with pricing.
• A normal year for weather-related claims of DKK 170m, broken down by quarter: • Q1: DKK 50m • Q2: DKK 25m • Q3: DKK 45m • Q4: DKK 50m
• A level of interest rates corresponding to the interest rate curve on 2 November 2012
Since the most recent profit forecast model was published in the interim report for Q1-Q3 2012, the reform of early retirement pension, referred to above, has increased payments on claims by around 0.4pp. Therefore the assumed combined ratio, excluding run-off profits / losses, has been increased from around 91% to 91-92%.
Life insurance Due to the tax reform limiting deductibility of term life premiums and the opportunity to prepay the tax on capital pension schemes, Topdanmark assumes a decline in regular premiums of around 5% in 2013.
The DFSA has announced that the rules for calculation of individual solvency requirement will be changed with effect from 1 January 2014 and that concept of shadow account will be removed at the same time. It is not clear how the shadow account will be removed. One possibility is that the amount of the shadow account balance that could reasonably be expected to be recognised as income in keeping with the relevant rules will be posted to shareholders' equity on 1 January 2014. In such a scenario it is assessed that Topdanmark will have to write down DKK 30-40m of the remainder of the shadow account at 31 December 2013, after which the balance of the shadow account will be DKK 65-75m.
Overall, pre-tax profit on life insurance is assumed to be DKK 390-420m.
Parent company The profit forecast model for the parent company including subsidiaries outside of the insurance group shows a pre-tax profit of DKK 30-40m.
Taxation Given a corporation tax rate of 25%, the tax charge is expected to be DKK 330-370m. The Danish Government has introduced a bill for reducing corporation tax, probably from 25% to 22%. It has also introduced a bill for increasing the payroll tax (tax on payroll costs in the financial sector) offsetting the reduction in corporation tax.
Share buy-back In the interim report for Q1-Q3 2012 Topdanmark said that it had increased the share buy-back programme for 2012 by DKK 250m to DKK 1,700m, of which DKK 500m would be postponed to 2013.
The reduction in shareholders' equity of DKK 1,200m was partly offset by a DKK 177m strengthening of shareholders' equity through the issue of share options, exercise of share options and issue of employee shares.
This issue is now in place and the DKK 500m can be used for share buy-back.
In 2013 the intention is to buy back own shares of a total of DKK 2,000m including the buy-back of DKK 500m transferred from 2012. The buy-back of DKK 2,000m assumes a profit in line with the profit forecast model of DKK 1,050-1,150m for 2013.
The share buy-back programme for 2013 represents a buy-back yield of 12.4% (calculated on the basis of the price of Topdanmark's shares on 22 February 2013).
Since 1998 when Topdanmark started buying back own shares, it has made decisions to cancel DKK 10.4bn of own shares representing a 66.6% write-down of the share capital, with an average price of DKK 378 per cancelled share.
In the years 2000-2012 the annual average buy-back yield has been 9.3%.
Topdanmark does not buy back own shares in those periods where the Company would be considered an insider and during the three weeks immediately preceding the announcement of interim and annual reports. Furthermore it does not buy back own shares during the period of five banking days after the announcement of a quarterly report as this is the period in which the executives may exercise their share options. Below is a table of the periods when Topdanmark is allowed to buy back own shares.
Topdanmark's value creation efforts are intended to increase the cash flow it can pay out to investors while at the same time reduce the discount rate used by the market to discount the future cash flow to net present value.
Topdanmark's systematic value creation efforts have built a strong business model which, with relatively limited financial risk, substantially ensures that a profit is made even in years with extremely poor financial markets.
Activities associated with distribution power • Topdanmark has renewed its distribution agreement for non-life insurance with Danske Bank with effect from September 2011. Non-life insurance continues to be a strategically important product for Danske Bank. Topdanmark is now responsible for sale and advice while Danske Bank refers leads to Topdanmark's sales
• Topdanmark has concentrated sales through its own sales channels in the personal market. It closed down 26 small insurance outlets in 2012. Instead it increased the number of large sales centres from four to seven. This is intended to increase market pressure including the creation of more efficient outbound sales environments in the sales centres. It is expected that premium growth will benefit from the change in the sales organisation from 2013
• Topdanmark has increased market pressure in the personal market, SMEs and farms. Market pressure was improved by outbound telephone sales and the employment of more certified insurance sales representatives
• The rejection of general price increases improved competitive strength in profitable customer segments in 2012
• In 2012 Topdanmark introduced a new policy and pricing system in the SME market
• Change of ownership insurance policies covering hidden defects and deficiencies in houses being sold have been loss-making since this type of policy was introduced in 1996. In 2012 the Danish Parliament adopted a new set of minimum requirements on the cover provided by a change of ownership policy. When introducing this new change of ownership product
• Workers' compensation insurance policies for the industrial segments have been unprofitable for a number of years. As Topdanmark's risk-based prices have not been competitive, its workers' compensation portfolio has declined one-third since 2008. Topdanmark maintains its risk-based prices which, among other things, take into account the lower interest rates, the increase in retirement age up to 70 years and the new reform of early retirement.
Efficiency Topdanmark wishes to operate its insurance business as efficiently as possible in order to combine value creation for customers by providing good service and offering competitive prices with value creation for shareholders by generating a significant return. A number of activities have been implemented which impact upon both the expense ratio and the claims trend.
Activities associated with efficiency • With payments of just over DKK 6bn on claims
Topdanmark is a significant buyer of work time and materials. Therefore it is focusing on utilising the Company's purchasing power
• Focus on digital communication with customers. Topdanmark continuously works to reduce paperintensive mailings to customers including both policies and insurance details. The number of customers using e-Boks increased to more than 440,000 in 2012. All insurance conditions have been published on the website making it easy for customers to find their conditions
Customer satisfaction Topdanmark's ambition is for its customers to feel "wellhelped " in all communication between them and the Company. Therefore all customer contacts are regularly evaluated: telephone, email, letters or personal contact showing the customers' opinion of their contact with Topdanmark. Around 60,000 customer interviews are conducted each year and if a customer's answer indicates that Topdanmark's services were not satisfactory, they will be contacted within 24 hours. Besides the internal monitoring, Topdanmark also participates in the annual
EPSI survey across most major insurance companies. For the last two years Topdanmark has been the insurance company that has achieved the highest growth in customer satisfaction in this survey.
• Topdanmark wishes to achieve increasing customer loyalty as a basis for profitable growth. Generally, profitability is better for existing customers than for new customers. Therefore Topdanmark has implemented a number of initiatives in order to increase its retention percentage which is estimated to have increased in both the personal and SME segments in 2012.
Topdanmark's Risk management function identifies, assesses and quantifies risks. It refers to the Risk Committee which is responsible for risk policies, risk limits, solvency calculation, capital plans, Topdanmark's own risk and solvency assessment (ORSA) and Topdanmark's partial, internal model for non-life insurance risks. The members of the Risk Committee are the CFO of the Group, the CEO of Topdanmark Livsforsikring and the heads of the primary risk areas: Asset Management, Statistical Services, Reinsurance, Finance, Life Actuarial Services and Life Finance. The Risk Committee reports and recommends to the Board of Directors via the Executive Board.
Interest rate risk is hedged in Life V. In Life I movements in interest rates are followed and risk reducing actions are performed as required
Topdanmark's policy is to accept a certain level of market risk in order to profit from the Group's strong liquid position and its high, stable earnings from insurance operations
A certain level of credit risk is accepted as an element of the creation of return. Counterparty risk is due to the use of derivatives which are primarily used to control and reduce market risk
Generally, operational risks are to be reduced to a low level
Strategic risks Most important risks Risk preferences Risk reducing activities Generally, strategic risks are related to the Company's business model, political conditions, reputation, alliance partners' and competitors' behaviour as well as macroeconomic conditions
Topdanmark's business model stands strong against strategic risks. The results of the Company will, with a very high probability, be a profit even in the event of another collapse in the financial markets as in 2008. The results of the Company will also be a profit if it is hit by a storm like the 1999-hurricane, which was the largest storm event in the Company's history
In a situation when Topdanmark's solvency might come under pressure, the share buy-back will be stopped. Additionally, the cancellation of own shares bought under the buy-back programme will be effected with a certain delay giving Topdanmark the opportunity to increase its solvency capital by selling own shares
Those rules imposing the greatest requirements on the Group's capital are the rules on individual solvency requirement, and in reality Topdanmark's capital planning is based on these rules.
It is uncertain when the Solvency II rules will take effect but following several postponements, the beginning of 2016 is currently considered to be the earliest possible effective date.
Individual solvency requirement Individual solvency requirement is a set of Danish rules in force until the Solvency II rules take effect. Each insurance company is to calculate a solvency requirement representing their minimum required capital based on the risks they accept. Additionally, the companies are required to provide documentation for how they identify, manage, limit and calculate risks.
Topdanmark already bases its calculation of individual solvency requirement on the expectations for the future rules on solvency calculation under Solvency II. Therefore, it is not expected that the changes of the rules will increase Topdanmark's individual solvency requirements. On the contrary, Topdanmark is looking forward to the new rules which are assumed to mitigate or eliminate some of the inappropriateness caused by the simultaneous use of several different sets of rules.
In this light Topdanmark has chosen to use a new method for calculation of the individual solvency requirement in life insurance with effect from 31 December 2012. According to the accounting rules, the accounting life insurance provisions are included in a risk scenario of paid-up benefits in which the total portfolio is converted into paid-up benefits immediately, which means that the bonus potential on future premiums lapses. This risk scenario of paid-up benefits is included in the calculation of the individual solvency requirement, which, incidentally, continues to be based on QIS5. Topdanmark believes that this method gives the most true and fair result taking into account the current accounting rules and the movement towards Solvency II.
Solvency II Solvency II is the future EU regulation for insurance companies setting requirements for solvency calculations, capital base and risk management. In addition there are requirements for detailed reporting on risk management to supervisory authorities and for publication. The completion of the rules is taking time and it is highly uncertain when Solvency II will take effect. At present it is not considered probable that Solvency II will take effect until 2016 at the earliest.
Solvency calculation and capital requirements An important goal of Solvency II is to promote good risk management based on market values and actual risk calculations. Solvency II will include a standard model for calculation of solvency requirements which will be common to all insurance companies in the EU. Although the model will provide the opportunity for companyspecific values for some variables, the standard model will not provide a fair view of all the risk elements of all companies.
Under the Solvency II rules the companies may influence the solvency requirement themselves by adjusting their risk. This means that if the solvency requirement increases, Topdanmark will consider an adjustment of the risk before increasing its capital base.
If P&C Insurance Company Ltd Barks Väg, Solna 10680 Stockholm Sweden
Topdanmark's Solvency II project regularly revises contents, resources and use of time to ensure that Topdanmark will meet the Solvency II rules when they take effect.
At 31 December 2012 Topdanmark’s share capital totalled DKK 137,500,000 divided into 13,750,000 shares of DKK 10 each, corresponding to 13,750,000 voting rights. As of 5 March 2013, Topdanmark holds 1,595,000 of own shares representing 11.6% of the share capital, of which 457,083 shares are earmarked to cover Management's share option scheme.
Board of Directors and Articles of Association Appointment and replacement of members of the Company's Board of Directors The Board of Directors, which is elected at the general meeting and the Topdanmark Group's employees, is the Company's top threshold of management formulating the Company's objectives, goals and strategies and making decisions on matters that are of high importance or unusual in nature to the Company.
Amendments to the Company's Articles of Association The general meeting is Topdanmark's supreme decisionmaking vehicle. Decisions at general meetings are made by a simple majority of votes unless a special majority or representation is required by the Danish Companies Act or the Articles of Association. The Articles of Association
Announcement No. 03/2013 from Topdanmark A/S Page 29 of 101 provide that decisions on the alteration of the Articles of Association are only valid if adopted by an affirmative vote of not less than two thirds of the votes cast as well as of the capital represented at the general meeting. The Articles of Association provide no restrictions on voting rights.
Besides salary policy, the remuneration policy also includes Topdanmark's general guidelines for performance-related pay, its pension policy and its guidelines for the granting of severance pay. The remuneration policy covers Topdanmark's Board of Directors, Executive Board, significant risk takers and, as provided by legislation, employees involved in control functions and audit work. If specifically stated, Topdanmark's remuneration policy also covers its executive team, comprising a number of the heads of business sectors and administrative departments ("the Friday Team") and certain other employees at the discretion of the Board of Directors. The remuneration policy etc., as adopted by the AGM, is available on www.topdanmark.com → Investor Relations → Corporate Governance → Remuneration structure.
The share price reflects expected value creation potential at group level. This is one of the reasons why
Topdanmark believes that share options rather than the receipt of individual bonuses encourage the executives to be more holistic in their approach to value creation.
Employee shares Topdanmark issued employee shares in 2012. The allocation was effected simultaneously with a reduction in the recipient's cash salary.
In 2012 Topdanmark allocated 26,203 free employee shares and sold 21,002 employee shares at an advantageous price.
The cost of the issue of employee shares was DKK 43m in 2012 compensated for by a corresponding reduction in salaries. The cost has been calculated at fair value according to the IFRS 2 on share-based payments.
Investor Relations Topdanmark wishes to openly and sufficiently inform investors, analysts and other stakeholders on the Group's matters in order to ensure that as far as possible: Detailed information on Topdanmark's option scheme is available on www.topdanmark.com → Investor Relations → Corporate Governance → Remuneration structure
• Value creating activities are reflected in a fair price for Topdanmark's shares
• Conference calls • Web casts • Investment and insurance conferences.
Shares Topdanmark's shares are listed on NASDAQ OMX Copenhagen and included in a number of share indices, one of them being the OMX Copenhagen 20 index (OMXC20).
Distribution policy Topdanmark's policy is to pay out to shareholders all surplus capital by way of share buy-backs.
Since the buy-back programme was initiated in 1998, Topdanmark has cancelled DKK 10.4bn of own shares representing a 66.6% write-down of the share capital. In the years 2000-2012 the average buy-back yield has been 9.3%.
Trading in Topdanmark's shares Daily share trading on all trading platforms was DKK 39m in 2012 (2011: DKK 49m). NASDAQ OMX Copenhagen continues to be the primary stock exchange for trading in Topdanmark's shares with a market share of 81% in 2012 (2011: 85%). Consequently, the share of the trading was 19% on other trading platforms such as BATS, Chi-x and Turquoise.
AGM 17 Apr 2013 Q1 2013 Interim Report 21 May 2013 2013 Half-year Report 20 Aug 2013 Q1-Q3 2013 Interim Report 19 Nov 2013 2013 Annual Report 04 Mar 2014
Annual General Meeting The AGM will be held on 17 April 2013, 15:00 (CET) at: Tivoli Hotel & Congress Center Arni Magnussons Gade 2-4 1577 Copenhagen V
All of Topdanmark's Board members elected by the AGM are up for election. Anders Knutsen does not offer himself for re-election. The Board of Directors proposes that Birgitte Nielsen is elected as a new member of the Board; all other members of the Board are to be re-elected.
The Board of Directors proposes the election of: • Anders Colding Friis • Jens Maaløe • Birgitte Nielsen • Michael Pram Rasmussen • Annette Sadolin • Søren Thorup Sørensen
Proposals to be transacted at the AGM must be received by Topdanmark no later than 5 March 2013.
Education: Law degree, University of Copenhagen Offices held: Member of the Boards of Directors of: • A.P. Møller-Mærsk A/S (Chairman) – and one subsidiary
Anders Knutsen, Deputy Chairman*, **** DOB: 4 May 1947 Joined Topdanmark’s Board of Directors: 1999 Current position held: Chairman Previous positions held: 1977-1983: Factory Manager, Bang & Olufsen A/S
Education: MSc (Economics) Offices held: Member of the Boards of Directors of: • Rossini Caviar A/S (Chairman) • Rossi Organics ApS (Chairman) • Hersild & Heggov A/S (Chairman) • kaluna Nordic AS (Chairman) • kaluna Norge AS (Chairman) • Purix ApS • Fritz Hansen A/S • Augustinus Fabrikker A/S • kk-group A/S
Independence: As Anders Knutsen has been member of the Board of Directors for more than 12 years, he does not meet the definition of independence set by the Committee on Corporate Governance
1991-1993: CEO, NKT Dedicom A/S 1994-1995: Managing Director, DSC Communications A/S 1995-1997: Regional Manager, Tele Danmark A/S 1997-2002: CEO, NetTest Danmark A/S
Offices held: Member of the Boards of Directors of: • The Research and Education Committee of DI (The Confederation of Danish Industry) (Chairman) • Grundfos Holding A/S • The Poul Due Jensen Foundation • NKT A/S • Governing Body of DI (The Confederation of Danish Industry) • FAD (Danish Defence and Aerospace Industry) • PA (Federation of Employers in the Provincial Industry)
Manager, Baltica Re / Baltica-Nordisk Re 1986-1989: Ass. General Manager, Baltica-Nordisk Re 1989-1993: Deputy General Manager, Employers Reinsurance International, Copenhagen 1993-1996: CEO, Employers Reinsurance International, Copenhagen 1996-2003: Member of Executive Board, GE Frankona Rückversicherungs-Aktiengesellschaft, Munich
Offices held: Member of the Boards of Directors of: • DSB • DSV A/S • Ratos AB • Blue Square Re • Skodsborg Kurhotel & Spa A/S
Søren Thorup Sørensen*, *** DOB: 29 September 1965 Joined Topdanmark’s Board of Directors: 2010 Current position held: CEO of KIRKBI A/S Previous positions held: 1987-2006: KPMG Denmark and UK
Offices held: Member of the Boards of Directors of: • TDC A/S • Lego A/S • 3 subsidiaries of KIRKBI A/S • Koldingvej 2, Billund A/S • KIRKBI AG • Merlin Entertainments Ltd. • Falck Holding A/S − and two subsidiaries • Boston Holding A/S
Member of the Boards of Directors of: • The Danish Insurance Association • The Danish Employers’ Association for the Financial Sector • Ambu A/S • Bruhn Holding ApS
Change in the life insurance provisions (1,223) (2,829) (900) 435 (684)
Change in the provisions for unit-linked contracts (61) (851) (968) (294) (1,032)
TECHNICAL PROFIT / (LOSS) ON LIFE INSURANCE (41) 123 214 38 7 Profit / (loss) on investment activities after transfer to technical results (1,765) 878 668 359 1,263
PROFIT / (LOSS) FOR THE YEAR (189) 1,446 1,168 1,023 1,823
Gross claims paid (6,750) (6,682) Reinsurance cover received 555 791 Change in the provisions for claims, gross (9) 560 Change in the reinsurers' share of the provisions for claims 390 (407) Claims incurred, net of reinsurance 6 (5,814) (5,738)
Acquisition costs (797) (853) Administrative expenses (543) (519) Reinsurance commission and share of profits 67 76 Total operating expenses, net of reinsurance (1,273) (1,297) TECHNICAL PROFIT ON NON-LIFE INSURANCE 7 945 1,092
Gross premiums written 8 3,303 3,161 Reinsurance ceded (5) (4) Premiums, net of reinsurance 3,298 3,156
Acquisition costs (108) (108) Administrative expenses (201) (217) Reinsurance commission and share of profits (1) (0) Total operating expenses, net of reinsurance (309) (325) TECHNICAL PROFIT ON LIFE INSURANCE 38 7
Technical interest transferred to non-life insurance business (388) (238) Pension return tax 13 (138) (396) Investment return transferred to life insurance business (579) (2,364)
Machinery and equipment 126 146 Owner-occupied properties 818 861 TOTAL TANGIBLE ASSETS 19 943 1,007
Total other financial investment assets 48,039 45,803 TOTAL INVESTMENT ASSETS 53,235 50,887 INVESTMENT ASSETS RELATED TO UNIT-LINKED CONTRACTS 23 3,283 4,313
Amounts due from policyholders 379 390 Amounts due from insurance companies 79 157 Amounts due from associated companies 4 22 Other debtors 128 193 TOTAL DEBTORS 1,774 1,559
Assets held temporarily 0 1 Deferred tax assets 26 12 20 Liquid funds 241 368
Share capital 148 138 Revaluation reserve 17 18 Security fund 1,104 1,104 Other reserves 22 29 Total reserves 1,126 1,133 Profit carried forward 3,275 4,079 TOTAL SHAREHOLDERS' EQUITY 4,567 5,368 SUBORDINATED LOAN CAPITAL 27 1,150 1,153
Guaranteed pension benefits 20,233 21,402 Bonus potential on future premiums 3,718 3,689 Bonus potential on paid-up benefits 2,306 1,849 Total life insurance provisions 29 26,257 26,941
Other creditors 952 1,097 TOTAL CREDITORS 7,738 3,390 ACCRUALS AND DEFERRED INCOME 87 89 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 61,013 59,435
Cash flow from operations Gross premiums written 8,648 8,827 Claims paid (6,641) (6,596) Expenses paid (1,239) (1,248) Reinsurance ceded 1 99 Cash flow from non-life insurance 770 1,082
Gross premiums written 3,374 3,151 Claims and benefits (3,704) (3,251) Expenses paid (315) (318) Reinsurance ceded 19 33 Cash flow from life insurance (626) (384)
Payments made and received on investment contracts (382) (12) Dividends from associated companies 28 65 Interest income and dividends etc. 2,201 2,181 Interest charges etc. (124) (131) Pension return tax (325) (227) Corporation tax (207) (506) Other items 2 (28) Total cash flow from operations 1,336 2,040
Financing Shares bought back (1,159) (1,200) Share-based payments 94 123 Subordinated loan capital 398 (0) Amounts due to credit institutions 2,157 (3,990)
Cash and cash equivalents at 1 January 1,205 2,266 Revaluation of cash and cash equivalents 3 (22) Cash and cash equivalents at 31 December 2,266 2,025
Shareholders' equity at 31 December prior year 171 16 1,104 20 3,241 4,553
Total comprehensive income for the year 1 0 2 1,021 1,024
Cancellation of own shares (24) 24 0 Share buy-back (1,159) (1,159) Sale of employee shares 46 46 Issue of share options 7 7 Exercise of share options / warrants 1 93 94
Short-tail 14 14 Annuity provisions in workers' compensation 24 24 Other claims provisions in workers' compensation 23 22
The following description of risks in the Topdanmark Group elaborates on Risk management in Management's review.
Examples of short-tail lines are building, personal property and comprehensive motor insurance. Longtail lines relate to personal injury and liability such as workers' compensation, accident, third party insurance and commercial liability.
During such a long period of settlement the levels of compensation could be significantly affected by changes in legislation, case-law or practice in the award of damages adopted by, for example, the Danish National Board of Industrial Injuries which awards compensation for injury and loss of earnings potential in all cases of serious industrial injuries.
The practice adopted by the Danish National Board of Industrial Injuries also has some impact on the levels of compensation for accident and personal injury within motor, liability and commercial liability insurance.
A national guarantee scheme of DKK 15bn covering terror claims including an element of NBCR (nuclear, biological, chemical, radiological) has been established. The national guarantee scheme covers any market retention in excess of DKK 5bn. The Danish non-life insurance companies have established a terror pool to protect the market retention. Industrial injuries caused by any form of terror is covered by the Government with a few exceptions.
Cumulative risk Known cumulative risk is where it has been recognised prior to the event that several policyholders could be affected by the same event. In personal lines Topdanmark's retention is DKK 15m for the first claim, DKK 5m for the second and DKK 15m for any third or subsequent risk. The retention is a maximum of DKK 25m in SME and industrial lines. Unknown cumulative risk is where several policyholders could be affected by the same individual event without the common risk being recognised prior to the event occurring. The retention is a maximum of DKK 50m.
Low interest rates mean that the market value of the guarantees granted is high and that the related bonus potential is low. The lower bonus potential, the higher risk of any losses being wholly or partially born by shareholder's equity. If interest rates are high, the same losses could to a larger degree be absorbed by the bonus potential.
All policies have been split into contribution groups according to the guaranteed benefit scheme. In each contribution group the investment policy is intended to ensure the ability to meet the guaranteed benefits, and the market risk is adjusted in accordance with the risk capacity of the contribution groups.
In Life V, in which company policies with 4.5% guaranteed benefits are placed, the interest rate risk in interest groups with such schemes has been counted by EURO CMS floors with a strike rate of 5%.
In Life I, where the portfolio comprises policies with guaranteed benefits of 2.5%, 1.5% and 0.5%, the movements in interest rates are monitored and risk reducing actions are taken as needed.
Market risks Risk reducing activities Interest rate risk Topdanmark is exposed to interest rate risk due to provisions for outstanding claims in non-life insurance and guaranteed benefits in life insurance
In life V the interest rate risk on guaranteed benefits are hedged by interest rate options − by EURO CMS floors with a strike rate of 5%
Since 2007 the equity exposure in the Topdanmark group excluding life insurance has been halved
Interest-bearing assets by rating: To limit the counterparty risk of financial contracts the choice of counterparties is restrictive and security is required when the value of the financial contracts exceeds the predetermined limits. The size of the limits depends on the counterparty's credit rating and the term of the contract.
IT Group IT Security is responsible for IT security reporting to the IT manager.
Periodically Topdanmark’s critical IT systems are tested to see if they can be compromised from outside and whether the IT systems have vulnerabilities to be repaired. These tests are made by an external company with special expertise in this area. Topdanmark’s IT security committee discusses and prioritizes the performance and results of the tests.
Technical profit on non-life insurance 501 403 4 907 38 945
Pension return tax (30) (108) (138) Transferred to technical result (388) (579) (966)
Purchase of tangible and intangible assets 141 6 0 148 Results from associated companies 4 25 0 29
Shares in associated companies 60 868 0 928 Loans to associated companies 0 173 0 173 Other financial investment assets 16,766 29,036 1 45,803 Investment assets related to unit-linked contracts 0 4,313 0 4,313 Reinsurers' share of provisions 758 38 0 797 Amounts due from affiliated companies 1,718 103 12 (1,833) 0
Gross premiums earned, direct business, by location of the risk: Other EU-countries 4 4 Other countries 1 1
Calculated interest 388 238 Discounting (annual amortisation) of technical provisions and reinsurers' share (323) (217) Technical interest, net of reinsurance 65 20
Claims incurred include revaluation of inflation swaps hedging the inflation risk in workers' compensation and illness / accident insurance 103 (32)
Gross premiums written 8,734 8,851 Gross premiums earned 8,709 8,823 Gross claims incurred (6,759) (6,122) Bonuses and rebates (41) (64) Gross operating expenses (1,340) (1,372) Net reinsurance 312 (193) Technical interest, net of reinsurance 65 20 Technical profit 945 1,092 Gross loss ratio (%) 78.2 70.0
Run-off profits / (losses), net of reinsurance 10 34 4 (1) 130 148 Claims provisions, net of reinsurance 2,752 3,002 48 48 5,845 5,882
Average value of claim (DKK '000) 39 45 30 33 4 4 liability
Number of policyholders at 31 December ('000): Individual policies 56 53 Policies which are part of a tenure 86 85 Group life 182 171
Bonuses paid in cash 208 279 Claims and benefits paid 3,702 3,248
Guaranteed benefits (3,632) (1,169) Bonus potential on future premiums 2,113 29 Bonus potential on paid-up benefits 1,954 456 Change in life insurance provisions 435 (684)
Individual policies 377 365 Policies which are part of a tenure 1,526 1,392 Group life 409 399 Regular premiums 2,312 2,157
Designated at fair value: Deposits with credit institutions 2 1 Investment assets related to unit-linked contracts: Unit trusts (59) 78
Calculated tax on profit for the year (25%) 337 584 Adjusted for the tax effect of: Returns on shares etc. not liable to tax (3) (22) Non-deductible expenses / income not liable to tax (5) (9) Prior year adjustment (4) (40)
Average number of shares ('000) 13,741 12,828 Diluting impact of options ('000) 5 0
Completed projects IT developm't under con2011 Goodwill software projects struction Total
Impairment and amortisation at 1 January (12) (117) (140) 0 (269)
Completed development projects included primarily the Group's new claims system. Amortisation of intangible assets is mainly included in claims incurred and operating expenses.
Goodwill and development projects under construction are subjected to an impairment test at the end of the financial year. The discounted value of future cash flows is compared with its carrying value.
The future cash flows are based on three years' expected technical result and a terminal value of the segments to which goodwill and development projects under constructions relate. The pre-tax discount rate used is 12% (2011: 12%) corresponding to 9% (2011: 9%) post-tax. Goodwill relates to the personal segment.
Revaluations taken to shareholders' equity 0 1 1 Revaluations recorded in the income statement 0 (1) (1) Cost / revaluation at 31 December 479 861 1,340
The valuation of the owner-occupied properties has been based on a required average return of: 5.3% 5.3%
Cost of revalued owner-occupied properties 696 739 Machinery and equipment includes assets under finance leases of 7 15
Note 24. Reinsurers' share of the provisions for unearned premiums Reinsurers' share at 1 January 65 68 Reinsurance ceded 703 660 Reinsurance earned (700) (652) Reinsurers' share of the provisions for unearned premiums at 31 Decembe
Interest charges 52 63 Costs of raising the loan 2 0
Hybrid core capital has been fully included in the parent company's capital base 404 406
Retrospective provisions at 31 December 25,360 25,138 Accumulated revaluation at 31 December 897 1,803 Life insurance provisions at 31 December 26,257 26,941
Reduction in bonus potential on paid-up benefits when allocating "the insurance technical result before bonus contribution" in Topdanmark Livsforsikring A/S 398 89
Notes to the financial statements • Group d future paid-up 2011 benefits premiums benefits Topdanmark Livsforsikring A/S: Outside of contribution 102 1 13
Note 29. Life insurance provisions - continued Portfolios analysed by capitalisation rates Guaranteed future paid-up 2012 benefits premiums benefits Topdanmark Livsforsikring A/S: Outside of contribution 105 0 15
Provisions for workers' compensation insurance, net of reinsurance 5,845 5,882 Average period of settlement 7 years 7 years Illness / accident insurance, net of reinsurance, administered by the life insurance business 1,791 2,020 Average period of settlement 14 years 14 years
Less paid incl. inflation swaps 2,933 4,440 5,106 5,212 5,352 5,285 4,876 4,779 4,599 4,390 46,973 Provisions before discounting
Provisions relating to previous years at 31 December 1,494 Provisions, net of reinsurance, at 31 December 2012 - non-life insurance 12,750
Reconciliation: Provisions for claims 13,521 Less amount relating to life insurance (87) Less reinsurers' share of provisions (683) Provisions, net of reinsurance, at 31 December 2012 - non-life insurance 12,750 Composition of expected payments, net of reinsurance: Claims handling etc. at 1 January 2004 127 127 Discounting / revaluation workers' compensation
The table shows the historical development in the estimated final liability (the sum of claims payments and provisions) for each claims year from 2003. Significant proportions of the liabilities shown have been calculated without discounting which to a great extent eliminates changes in discounting rates and methods after the change to IFRS. However, workers' compensation and illness / accident administered by the life insurance business are included at discounted values.
Less paid incl. inflation swaps 3,041 5,342 5,420 5,452 5,607 5,597 5,135 6,028 5,244 4,742 51,607 Provisions before discounting
Provisions relating to previous years at 31 December 1,504 Gross provisions at 31 December 2012 - non-life insurance 13,434
Insurance Investment 2011 contracts contracts Total Gross provisions at 1 January 2,997 829 3,826 Retrospective provisions at 1 January 2,997 829 3,826
Claims and benefits (581) (442) (1,022) Expense loading inclusive of expense bonus (35) (7) (42) Risk gain after addition of risk bonus 5 0 5 Premiums waived transferred to life insurance provisions (14) 0 (14)
Claims and benefits (696) (84) (780) Expense loading inclusive of expense bonus (36) (5) (40) Risk gain after addition of risk bonus 3 0 3 Premiums waived transferred to life insurance provisions (12) 0 (12)
Customers' share of insurance technical result (245) 217 (28) 595 313 907 Illness / accident (investment return) 264 264 303 303 Share of insurance technical result
Tax etc. in subsidiaries included in insurance technical result but included in tax in the Group 28 20 48 22 13 35 Policies outside of contribution etc. 6 11 17 6 4 10 Life Holding and Group eliminations 8 15
These expenses have been disclosed in: Non-life insurance: Acquisition costs 797 853 Administrative expenses 543 519 Claims paid (claims handling and assessment) 807 793
Note 36. Auditors' fee Fee to the auditors elected by the Annual General Meeting Deloitte: Fee for statutory audit of the annual accounts 4 4 Fee for other assurance engagements 0 0 Fee for tax advice 0 0 Fee for services, other than audit work* 1 10 *Primarily fee for one-off services related to the acquisition of an IT system in the life insurance group in 2012.
Employee shares In 2012 Topdanmark issued 47,205 (2011: 68,501) employee shares offset by a reduction in their respective cash salaries. The costs have been calculated to be DKK 43m (2011: DKK 46m) in accordance with IFRS 2.
The table below is categorised by the option holders' current standing: Senior Strike Executive execu-
Number of options which could be exercised on 31 December ('000) 286 131 y Severance pay has been described in "Severance pay" in "Management's review".
Christian Sagild 7.8 8.3 Kim Bruhn-Petersen 5.2 5.5 Lars Thykier 5.2 5.5 10% of the fixed basic salary etc. paid to the Executive Board is paid as share options. The Executive Board receives only a fixed remuneration. The Group has no unhedged pension commitments.
Note 38. Related parties The Group has no related parties with controlling influence.
Associated companies Premiums ceded 146 117 Commission received (6) (6) Reimbursed claims (58) (100) Trading takes place under normal market conditions. Shares are disclosed in the balance sheet and specified in the note on shares in associated companies. Balances are disclosed in the balance sheet.
Note 39. Financial assets Financial assets at fair value where the revaluation is taken to the income statement Held for trading: Loans guaranteed by mortgages and other loans 10 9
Total financial assets 53,027 51,522 The book value of loans and receivables at amortised cost approximately corresponds to fair value.
Held for trading: Loans guaranteed by mortgages and other loans 0.0 0.0
Allowance account (policyholders and insurance companies): Group companies have agreed to lend equities against security: Book value of equities lent 1,591 1,156 Fair value of bonds received as security for the loan 2,881 1,526
Note 40. Financial liabilities Financial liabilities measured at fair value through the income statement
Credit bonds investment grade 1,841 2,524 801 11.9 Credit bonds non-investment grade and emerging market bonds 2,239 2,403 9 37.7
Derivatives to hedge against the net change in assets and liabilities** 1,218 1,340
Held for trading: Designated at fair value: Amounts due to credit institutions 5,997 2,007 Total financial liabilities recorded at fair value 6,534 2,029
Note 41. Settlement of assets and liabilities Except for tangible and intangible assets, investment properties, investments in associated companies and CDOs most other assets are expected to be settled within a year.
The return percentages are calculated as the return on derivatives as a percentage of the size of the exposure in the underlying asset.
The exposure in foreign shares is adjusted by means of derivatives. After including derivatives the exposure in foreign shares on 31 December 2012 was DKK 4,130m (2011: DKK 3,703m).
Note 42. Analysis of assets and their return - life insurance - continued * Annual return as a percentage before pension return and corporation tax.
Note 45. Leasing Finance lease for mainframe CPU: Minimum lease Present Book 2011 payment Interest value liabilities
Operational finance leases: Note 46. Core capital and capital base 2011 2012
Shares bought back (1,360) (1,141) Shares issued 140 0 Shares sold 80 203
Shares issued at 31 December 14,826 13,750 Own shares at 31 December (1,494) (1,356) Number of shares at 31 December 13,332 12,394
Note 48. Own shares Number of Nominal Percentage Bought shares value of share
Note 47. Number of shares Reconciliation of the number of shares ('000)
Bonds provided as security for loans in accordance with standard repo-contracts for Danish mortgage and government bonds 5,020 739 Other provision of security 18 18
Adjustments to VAT liabilities 37 33 Other liabilities 9 10 Capital commitments made to loan funds and private equity funds 215 136
Share of associated companies' liabilities: Contract liabilities - 452 The Group companies participate in technical insurance collaboration where they are jointly liable for the insurance liabilities.
The Group has made a change in the presentation of interest rate options, see accounting polices. The change has effect on a few items in the income statement and the cash flow statement.
Cash flow statment Interest income and dividends etc. 2,289 (88) 2,201 Total cash flow from operations 1,424 (88) 1,336
Name Registered office Activity Topdanmark A/S Ballerup Holding Non-life: Topdanmark Forsikring A/S Ballerup Insurance Danske Forsikring A/S Ballerup Insurance TDP.0007 A/S Ballerup Property Topdanmark EDB A/S Ballerup Internal IT services E. & G. Business Holding A/S Ballerup Holding Topdanmark Holding S.A. Luxembourg Holding Risk & Insurance Services S.A. Luxembourg Administration TDLII.0087 A/S Ballerup Investment Life: Topdanmark Liv Holding A/S Ballerup Holding Topdanmark Livsforsikring A/S Ballerup Insurance Topdanmark Livsforsikring V A/S Ballerup Insurance Topdanmark Link Livsforsikring A/S Ballerup Insurance Topdanmark Livsforsikring II A/S Ballerup Insurance Topdanmark Livsforsikring III A/S Ballerup Insurance Nykredit Livsforsikring A/S Ballerup Insurance Topdanmark EDB II ApS Ballerup IT services TDLII.0018 ApS Ballerup Holding Topdanmark Ejendom A/S Ballerup Property TDE.200 ApS Ballerup Property TDE.201 ApS Ballerup Property
Topdanmark Group's 2012 Annual Report has been prepared in accordance with International Financial Reporting Standards as adopted by the EU and the additional Danish disclosure requirements of NASDAQ OMX, Copenhagen and the Danish Financial Business Act on annual reports prepared by listed financial services companies.
For the financial year 2012, Topdanmark implemented a number of new standards and interpretations and revised others; the impact of this on the recognition and measurement was nil but there were minor clarifications to the notes.
In 2013 the DFSA has updated its Executive Order on financial reporting for insurance companies and lateral pension funds. The Group has implemented part of this revision already for 2012. The changes relate to disclosure requirements having no impact on recognition and measurement.
Change in accounting policies Topdanmark has made a change in the presentation of interest rate options in the income statement and consequently also in the cash flow statement. Principally derivatives are included in the income statement under equity gains. However, so far and most recently in Q3 2012, settled interest rate options to hedge guaranteed benefits calculated as the difference between the interest rate agreed and the market rate, have been presented under interest income and dividends etc. From Q4 2012 this accounting policy has been amended to comply with the principal rule. Due to the change DKK 181m (2011: DKK 88m), which were included in interest income and dividends etc. in Q3, were transferred to equity gains. The change has no effect on the profit for the year, earnings per share or other principal statements of the consolidated financial statements, except for the consequent effect on the cash flow statement. The comparatives have been restated: see note on comparatives.
Change in accounting estimates Inflation and interest rates Up to and including 2011, in workers' compensation insurance the calculation of the discounted value of expected future payouts was based on the assumption that the wage and salary indexation and the interest on mortgage bonds could be forecast as the forward inflation and the forward swap rate, respectively, with fixed allowances. With effect from 2012, this model has been changed to now using a specific estimate for development in each year. On the date of change the change in model had no effect on the size of overall provisions in workers' compensation.
Acquisition costs and administrative expenses In 2011 and 2012 the decentralised sales organisation was converted from insurance outlets to larger sales centres. Subsequently the estimates and methods applied to allocate expenses between acquisition and administration were reconsidered. Thus the decline in administrative expenses and the increase in acquisition costs from 2011 to 2012 reflect partly the change in the use of resources, and partly the change in estimates. It has not been possible to calculate the value effect of the changed estimates, seen in isolation.
Recognition and measurement Assets are recognised in the balance sheet when it is probable that future economic benefits will flow to the Group and where the asset has a value that can be measured reliably. Liabilities are recognised in the balance sheet when the Group has a legal or constructive obligation due to a previous event, when it is probable that future economic benefits will flow from the Group and where the value of the liability can be measured reliably. The recognition and measurement take into consideration predictable losses and risks which have occurred prior to the presentation of the Annual Report and which provide evidence of conditions that existed at the balance sheet date.
The initial recognition of financial instruments is made at fair value on the date of settlement. Any changes in the value between the trade and settlement dates are included in the balance sheet under the heading of derivatives. Direct expenses on the acquisition or issue of financial instruments which are measured at fair value
Income and expenses of foreign companies which prepare their financial statements in functional currencies other than DKK are translated at average exchange rates for the year while balance sheet items are translated at the closing exchange rates on 31 December. Any translation differences are included in Other comprehensive income.
Exchange rate differences on the translation of foreign associated companies are included in Other comprehensive income.
The conditional profit elements comprise the risk return which is calculated for each contribution group. The risk return for each contribution group (cost, risk and interest rate groups) has been based on their estimated risk on shareholders' equity.
If there is an "insurance technical loss before bonus contribution", which exceeds the collective bonus potential and the individual bonus potential, the excess will be debited to shareholders' equity.
Topdanmark conducts insurance business only in Denmark and therefore no specific geographical segmental information is provided.
Claims incurred and benefits paid In non-life insurance, claims incurred net of reinsurance comprise claims paid during the year adjusted for changes in the provisions for outstanding claims and net of the reinsurers' share. Accordingly, claims incurred comprise known and expected claims relating to the year as well as any adjustments to the provisions made in previous years. Furthermore they comprise direct and indirect expenses on claims handling. However, the proportion of the change in provisions for outstanding claims relating to changes in discounting and revaluation is included in technical interest net of reinsurance and revaluations respectively. Topdanmark has entered into swaps partially hedging the provisions for workers’ compensation and annuities in illness and accident insurance against changes in future wage and price indexation. The revaluation of these swaps is included in Claims incurred.
Investment activities Income from associated companies comprises a share of the post-tax results of the associated companies calculated in accordance with the Group's accounting policies. Income from investment properties comprises the operating results excluding interest charges and revaluations that have been disclosed separately in the financial statements. Interest, dividends etc. comprise all interest, dividends etc. earned in the financial year. Realised and unrealised gains and losses on investment assets and changes in the provisions for outstanding claims net of reinsurance due to changes in the interest rate structure are included in revaluations, which also includes exchange rate adjustments and realised gains and losses on owner-occupied properties. Administrative
Announcement No. 03/2013 from Topdanmark A/S Page 84 of 101 expenses on investment activities comprise the cost of asset management including transaction costs.
Other income and expenses Other income and expenses that do not relate to the administration of insurance portfolios or investment assets are included in Other income and expenses.
Topdanmark A/S is jointly taxed with all the Danish companies of the Group. As the management company of the joint taxation Topdanmark A/S settles all corporation tax payments with the tax authorities.
Owner-occupied properties Owner-occupied properties are those properties used for the Group's own operations. The properties are measured at a revalued amount being the fair value on the date of revaluation less accumulated depreciation. The properties are reviewed and assessed annually by the Group's own valuation experts. The buildings are depreciated on a straight-line basis over their expected life of 50 years, although land is not depreciated. The fair value of the revaluation of owner-occupied properties is assessed on the same basis as investment properties. Any revaluation surplus is included in other comprehensive income unless the revaluation is a reversal of a previous impairment. Impairments are included in the income statement unless the impairment is a reversal of previous revaluation included in other comprehensive income.
Financial assets Financial assets are classified at the time of their initial recognition as: • Financial assets which are measured at fair value with any value adjustment taken to the income statement or
Financial assets at fair value with any value adjustment taken to the income statement are financial assets which either are included in a trading portfolio, are derivatives or at the time of their first recognition are included in this classification because the assets are managed and measured on a fair value basis or because this eliminates or significantly reduces accounting inconsistency.
Receivables that are measured at amortised cost The initial recognition of receivables is made at fair value and subsequent recognitions are made at amortised cost. Amounts due from finance leases are included at the net investment in the lease contract. The receivables are regularly assessed for impairment and written down to their recoverable amount, as required. Such impairments are generally made collectively on the basis of the receivable ageing analysis. When an individual receivable is considered irrevocable, the value of the impairment is transferred out of the account for collective allowances.
Remaining 60 year old 60 year old life expectancy man woman
The present value of the expected future payments has been calculated using an interest rate structure, which is calculated by the DFSA and published on its website. For policies subject to pension return tax each interest rate used is reduced by the tax rate of 15.3%.
Bonus potential on future premiums comprises the present value of the agreed future premiums less the present value of the guaranteed benefits originating from these premiums.
The assessment of other provisions for claims and benefits relating to injuries, loss of provider and expenses is based on traditional actuarial triangulation models. Due to the special conditions surrounding payments on disability claims it is not possible to use traditional actuarial triangulation models for this type of provisions. Topdanmark therefore uses an in-house developed model, which, among other things, takes into account the stage each claim has reached. The calculation includes an allowance for the expected wage and salary indexation.
Topdanmark has entered into swaps partially hedging the provisions for workers’ compensation and annuities in illness and accident insurance against changes in future wage and price indexation. The revaluation of these swaps is included in claims incurred.
In illness and accident insurance, which is administered by the life insurance companies, each interest rate used of the interest rate structure is reduced by the tax rate of 15.3%.
Corporation tax and deferred tax Current tax liabilities and tax receivable, including joint tax contributions, are included in the balance sheet as calculated tax on taxable income for the year adjusted for tax on previous years' taxable income and prepaid tax on account. Deferred tax on temporary differences between the accounting and tax value of assets and liabilities is charged in accordance with the balance sheet liability method. Deferred tax on shares in subsidiaries and associated companies is not included where the Group controls the timing of the reversal of the temporary difference and where it is probable that the temporary difference will not be reversed within the foreseeable future. The calculation of deferred tax is based on the planned use of each asset and the settlement of each liability using the tax rates expected to be in force when the deferred tax is expected to crystallise as current tax, based on the tax rates and rules in force on 31 December.
Shares in affiliated companies 6 6,285 6,714 Total investment in affiliated companies 6,285 6,714
Total other financial investment assets 1 1 TOTAL INVESTMENT ASSETS 6,286 6,715
Deferred tax assets 7 0 1 Liquid funds 4 3 TOTAL OTHER ASSETS 4 4 TOTAL ASSETS 6,408 6,895
Bond loans 72 74 Amounts due to affiliated companies 985 630 Current tax liabilities 17 53 Other creditors 14 15 TOTAL CREDITORS 1,089 773 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 6,408 6,895
Related parties 10 Core capital and capital base 11 Own shares 12 Contingent liabilities 13 Other note disclosures 14 Accountin g policies 15
Dividends received from subsidiaries (1,388) 1,388 0 Other movements in capital of subsidiaries (9) 13 4
Note 5. Machinery and equipment Cost at 1 January 5 4
DKK Share capital at 1 January 170,869,530 148,258,960 Reduction in capital (24,008,570) (10,758,960) Increase in capital 1,398,000 0 Share capital 148,258,960 137,500,000 Each of Topdanmark's 13,750,000 (2011: 14,825,896) shares has a nominal value of DKK 10. No share enjoys any special rights. The shares are freely tradeable. Each share has one vote.
Topdanmark A/S has no related parties with controlling influence. Related parties with significant influence comprise the Board of Directors, the Executive Board and their families.
Remuneration of the Board of Directors Directors' fees were DKK 4,631,000 (2011: DKK 4,275,000) of which DKK 244,000 (2011: 225,000) related to Topdanmark Forsikring A/S. Fee (DKK '000): Michael Pram Rasmussen 1,200 1,300 Anders Knutsen 725 731 Anders Colding Friis - 217 Charlotte Hougaard 300 325 Jens Maaløe 300 325 Annette Sadolin 450 488 Desiree Schultz 217 325 Søren Thorup Sørensen 400 488 Trine Zappe 217 325
Deferred tax assets 1 0 1 Changes relating to the year (1) 1
The Company has paid no remuneration to the Executive Board but an adminstration agreement provides that it pays a share of the overall remuneration paid to the Executive Board
Affiliated companies Expenses charged 25 26 Dividends received 341 1,388 Interest charged 6 1
Notes to the financial statements • Parent company (DKKm) 2011 2012
Note 10. Related parties - continued Remuneration of the Executive Board
Note 11. Core capital and capital base Shareholders' equity 4,915 5,716 Deferred tax assets (0) (1) Hybrid core capital 404 406 Capital adequacy requirements for insurance companies – 50% (1,540) (1,521) Core capital 3,779 4,600 Capital adequacy requirements for insurance companies – 50% (1,540) (1,521) Capital base 2,240 3,079
Other liabilities 0 1 A number of subsidiaries have been liquidated by submitting a statement to the authorities. The Company guarantees that debt in these companies has been paid.
The annual financial statements for the parent company Topdanmark A/S have been prepared in accordance with the Danish Financial Business Act, including the executive order issued by the Danish Financial Supervisory Authority (DFSA) on financial reports for insurance companies and lateral pension funds (nationwide, occupational pension funds specific to Denmark).
Topdanmark’s statements relating to the future are solely based on information known at the time of the preparation of this Annual Report.
We have today considered and approved the Annual Report of Topdanmark A/S for 2012.
In our opinion, the consolidated financial statements and annual financial statements give a true and fair view of the Group’s and the Company's assets, liabilities and financial position at 31 December 2012 as well as of the Group’s and the Company’s financial performance and the Group’s cash flow for the financial year 1 January to 31 December 2012.
Internal audit’s reports Report on the consolidated financial statements and annual financial statements We have audited the consolidated financial statements and annual financial statements of Topdanmark A/S for the financial year 1 January to 31 December 2012, which comprise the income statement, statement of comprehensive income, balance sheet, statement of changes in equity and notes, including the accounting policies, for the Group as well as the Company, and including cash flow statement for the Group. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU and Danish disclosure requirements for listed financial services companies. The annual financial statements have been prepared in accordance with the Danish Financial Business Act.
Audit for the year We conducted our audit on the basis of the Danish Financial Supervisory Authority’s regulation on the preparation of the audit in financial services companies etc. and financial services groups and in accordance with International Standards on Auditing. This requires that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements and annual financial statements are free from material misstatement. We have participated in the audit of the material and risky areas.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements and annual financial statements. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatements of the consolidated financial statements and annual financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of consolidated financial statements and annual financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Management, as well as the overall presentation of the consolidated financial statements and annual financial statements.
Independent auditor’s reports To the shareholders of Topdanmark A/S Report on the consolidated financial statements and annual financial statements We have audited the consolidated financial statements and annual financial statements of Topdanmark A/S for the financial year 1 January to 31 December 2012, which comprise the income statement, statement of comprehensive income, balance sheet, statement of changes in equity and notes, including the accounting policies, for the Group as well as the Company, and including cash flow statement for the Group. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU and Danish disclosure requirements for listed financial services companies. The annual financial statements have been prepared in accordance with the Danish Financial Business Act.
Auditor’s responsibility Our responsibility is to express an opinion on the consolidated financial statements and annual financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing and additional requirements under Danish audit regulation. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements and annual financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements and annual financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatements of the consolidated financial statements and annual financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of consolidated financial statements and annual financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Management, as well as the overall presentation of the consolidated financial statements and annual financial statements.
Opinion In our opinion, the consolidated financial statements give a true and fair view of the Group’s assets, liabilities and financial position at 31 December 2012, and of the results of its activities and cash flows for the financial year 1 January to 31 December 2012 in accordance with International Financial Reporting Standards as adopted by the EU and Danish disclosure requirements for listed financial services companies.
Erik Holst Jørgensen Martin Faarborg State Authorised Public Accountant State Authorised Public Accountant