Topdanmark Annual Report 2011 6 March 2012 Announcement No. 02/2012 2011 Key features 2011 • Post-tax profit of DKK 1,023m (2010: DKK 1,168m). • Better than assumed result as most recent profit forecast model for 2011 was DKK 900-1,000m (Q1Q3 2011 interim report).
• Result of life insurance was DKK 187m after transfer of DKK 114m to shadow account (2010: DKK 384m after recognition as income of shadow account balance of DKK 144m).
• Post-tax profit forecast model is DKK 1,150-1,250m, excluding run-off profits / losses, being DKK 90 profit per share.
Annual accounts - Group 52 Profit and loss account 53 Statement of comprehensive income 54 Assets 55 Shareholders' equity and liabilities 56 Cash flow statement 57 Movements in shareholders' equity 58 Notes to the accounts 86 Accounting policies 97 Annual accounts - Parent company 106 Statement by Management on the Annual Report
Auditors' reports 107 Internal auditor's report 108 Independent auditor's report 109 Group Structure
Deferred tax on security funds (348) (348) (348) (348) (348) (348) (348) Shareholders' equity of Group end of period 3,368 2,895 4,117 4,553 4,567 4,553 4,567
Average number of shares, diluted ('000) 17,351 15,640 15,769 15,159 13,746 14,583 13,448
Non-life insurance - Investment return after transfer to technical result etc. 465 150 – 200 179 Profit on non-life insurance 1,092 970 – 1,070 1,086
Profit of DKK 1,023m in 2011 Topdanmark’s post-tax profit for 2011 was DKK 1,023m (2010: DKK 1,168m) representing a profit per share of DKK 74.4 (2010: DKK 77.2).
This was better than the DKK 900-1,000m assumed in the most recent profit forecast model for 2011 (Q1-Q3 2011 report) due to both the technical result of non-life insurance and the life insurance result being better than assumed.
The technical result increased DKK 281m to DKK 907m benefitting from weather-related claims being DKK 125 lower than the 2010 level but adversely affected by run-off profits being DKK 56m lower than in 2010.
The investment return in non-life insurance declined DKK 286m due to the generally more adverse financial markets than in 2010.
Profit on life insurance declined by DKK 197m because the developments in the financial markets caused a DKK 114m transfer to the shadow account whereas in 2010 DKK 144m was transferred from the shadow account.
Non-life insurance - Investment return after transfer to technical result etc. 137 138 Profit on non-life insurance 377 374 Life insurance 190 69 Parent company etc. 38 13 Pre-tax profit 605 457
The claims trend in the Danish market in 2011 was affected by storm claims in Q1 and Q4 of approximately DKK 500m which was not reimbursed by the reinsurance companies. The claims trend was also affected by rainstorm claims in Q3 of just over DKK 5bn before reinsurance cover and DKK 1bn after cover from the reinsurance companies. Claims in Q3 2011 were particularly affected by an isolated rainstorm which hit central Copenhagen on 2 July. 2010 was impacted by extraordinarily large snow loading and rainstorm claims and for the entire Danish non-life insurance market it is believed that the 2011 level of weather-related claims was unchanged from that in 2010.
The payroll tax for all financial businesses increased from 9.1% to 10.5% of payroll expenses, which caused a deterioration in the combined ratio of around 0.2pp.
As provisions for outstanding claims are discounted to present value, lower interest rates will increase the claims trend. The decline in interest rates in 2011 had only a marginal effect on the combined ratio in 2011 because most of the decline was seen at the end of the year and average rates were similar to those in 2010.
2011 benefitted from a generally better claims trend in, for example, motor insurance and as a consequence of the mild winter in Q4.
Result of non-life insurance in Topdanmark Premiums earned Premiums increased 1.4% to DKK 8,668m in 2011, which was in line with the assumed premium growth of 1-2% (as in the Q1-Q3 2011 interim report).
It was also announced in the 2010 Annual Report that one large customer had given notice to terminate its relationship with the life insurance company and that the customer would also reduce its portfolio of illness / accident policies administered by life insurance (I/A). The loss of this portfolio had a 0.4pp adverse effect on premiums.
Claims trend The claims trend improved to 74.6% in 2011 (2010: 77.9%) This 3.3pp improvement was a combination of a number of factors: Weather-related claims declined to DKK 285m net of reinsurance in 2011 (2010: DKK 410m) corresponding to 1.5pp. In 2010 Denmark was extraordinarily hard hit by weather-related claims such as snow loading, rainstorm and frost-related claims.
In Q1 and Q4 Topdanmark was hit by storm claims of DKK 70m and DKK 69m respectively, net of reinsurance.
In general the claims trend improved in both SME / agricultural and personal areas with a 0.5pp and 0.3pp positive effect, respectively, on the claims trend.
The abovementioned premium adjustments for previous years were DKK 31m lower than the 2010 level which improved the claims trend by 0.2pp.
The interest rate curve used to discount the provisions for outstanding claims was slightly higher than in 2010 which improved the claims trend marginally by 0.1pp.
Run-off profits were DKK 148m in 2011 (2010: DKK 204m). As compared to 2010 run-off profits had a 0.7pp adverse effect on the claims trend. Run-off profits in workers' compensation insurance represented DKK 130m of run-off profits in 2011.
Workers' compensation insurance had a 0.5pp adverse effect on the claims trend due to the retirement reform and an increase in the number of reported claims.
The expense ratio increased to 15.7% (2010: 15.4%) due to, among other factors, investment in increased market pressure and the increase in payroll tax from 9.1% to 10.5% with effect from 1 January 2011.
Combined ratio Overall expenses on claims, reinsurance, sales and administration as a percentage of gross premiums earned
Developments in Q4 Premiums earned in Q4 2011 increased 2.3% to DKK 2,201m.
The claims trend deteriorated 0.8pp to 73.7% in 2011 (2010: 72.9%) due to an increase in weather-related claims (1.8pp) and lower run-off profits (2.1pp). On the other hand SME and Agricultural were hit by only a few large-scale claims which together with fewer fire claims helped improve the claims trend by 2.8pp. Furthermore, the mild winter weather in Q4 2011 caused fewer traffic accidents which had a 0.5pp favourable effect on the claims trend.
The combined ratio was 89.6% this quarter (Q4 2010: 89.2%). Excluding run-off profits it improved to 91.5% (Q4 2010: 93.2%).
The technical result increased DKK 31m to DKK 501m in 2011.
The expense ratio increased to 15.8% from 15.0% due to expansion of the sales team and the increase in pay-roll tax at 1 January 2011.
The combined ratio improved to 90.2% from 90.7%. Excluding run-off it improved to 90.7% from 94.3%.
The technical result increased DKK 249m to DKK 403m in 2011.
The claims trend improved 5.9pp to 74.9% primarily due to a favourable agricultural claims trend with no extraordinary winter claims as in 2010. On the other hand the claims trend was affected by rainstorm claims in Q3 and the fire in the KB Hall in Q3 (DKK 25m after reimbursement from the reinsurance companies.) Fire claims in Q4 were 16.5% lower than in the same period in 2010.
Competition between insurance brokers and insurance companies has also intensified. The market served by brokers has moved from large and medium-sized corporate pension schemes increasingly to also smaller pension schemes which previously were rarely served by brokers. At the same time there has been a trend that the largest corporate pension schemes in the market were being directly served by pension fund companies not using insurance brokers to regularly service the schemes.
In December 2011 the DFSA introduced a new discount rate curve, where the inclusion of the interest rate spread between Danish and German zero coupon rates is based on a 12-month moving average. It is believed that virtually all life insurance and pension fund companies have changed to the new curve. The decision to use this new interest rate curve adjusted for country spreads is binding until Solvency II takes effect.
Result of life insurance Topdanmark's result from life insurance was a profit of DKK 187m in 2011 (2010: DKK 384m).
The decline in profit to DKK 187m in 2011 (2010: DKK 384m) was primarily due to the recognition as income of DKK 144m from the shadow account in 2010 whereas in 2011 DKK 114m was transferred to the shadow account. The balance of the shadow account will be recognised as income in line with profits being generated in those contribution groups which have made transfers to the shadow account.
The investment return on shareholders’ equity increased to DKK 105m in 2011 (2010: DKK 91m).
Trend in premiums Gross premiums declined 2.7% to DKK 3,303m in 2011 (2010: DKK 3,395m).
The equity portfolios are well diversified with no large individual positions. The composition of the portfolios is based on OMXCCAP for Danish equities (representing around 30% of the portfolio at 31 December 2011) and MSCI World in the original currency for foreign equities.
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. The portfolio is dominated by high-quality mortgage bonds, which ensures consistency between the investment return and the discount rate.
Credit bonds with a rating lower than BBB (DKK 262m) comprise senior secured bank loans and high yield bonds, part of which are convertible, and subordinated bank capital issued by EU banks. Credit bonds with a rating of BBB and A (DKK 227m) are ordinary and convertible corporate bonds, annuity policies and subordinated bank capital issued by EU banks. Credit bonds with a rating higher than A (DKK 23m) are corporate bonds.
The property portfolio comprises mainly owner-occupied property (DKK 818m), rental property (DKK 366m), rental office property (DKK 68m) and property rented for hotel use (DKK 121m). The tenancies for the residential and hotel properties are subject to a short termination notice but re-letting is not considered to be a problem. The office property is rented under contracts with no option to terminate prior to 2015. Over 99% of the property portfolio is currently let. The properties are valued in accordance with the rules of the DFSA i.e. at market value taking into account the level of rent and the terms of the tenancy agreements.
Parent company etc. The parent company Topdanmark A/S does not perform any independent activities. The result of the parent company, Topdanmark A/S, includes the results of subsidiaries excluding insurance business, (primarily Topdanmark Kapitalforvaltning, the asset management company), and financing costs.
Profit increased to DKK 76m in 2011 (2010: DKK 31m) primarily due to a higher performance fee paid to Topdanmark Kapitalforvaltning.
• Continued disciplined market • Increase in expenses on reinsurance • 1.5pp improvement in combined ratio due to normal level of weather-related claims
In 2010 and 2011 most major insurance companies implemented price increases and in 2011 a number of small and medium-sized companies introduced price increases going into 2012. A few companies have given notice of further price increases which will take effect for customers in 2012. It is believed that price increases will have an effect on gross premiums of around 0.5pp in 2012.
Continued disciplined competition is expected in the Danish market. Accordingly, all of the six largest insurance companies, representing a market share of 75%, are quoted on the stock exchange or owned by a quoted company. Furthermore, the prospects of an increase in capital requirement under Solvency II will increase the focus on profitability.
It is expected that the increase in rainstorm claims in 2011 will cause an increase in reinsurance expenses in
2012 corresponding to an adverse effect of around 0.5pp on the claims trend.
Expected trend in Danish life and pension market It is expected that in 2012 the life and pension market in general will be characterised by: • Limitations on the deductibility of term life premiums • No increase from the 2011 level in overall payments into pension savings
Due to the limitation on the deductibility of term life premiums from an annual DKK 100,000 to DKK 50,000, the savings of term life insurance will reduce. On the other hand, there will be an increased demand for annuities for which full deductibility continues.
Topdanmark's profit forecast model for 2012 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.
As can be seen, the investment return forecast model is not based on a specific estimate of the expected investment return for the rest of the year but solely on a long-term standard assumption of the return.
Non-life insurance In the interim report for Q1-Q3 2011 Topdanmark expected, for 2012, premium growth of 1-2% and a combined ratio of 91-92%, excluding any run-off profits / losses, based on the following assumptions: • Price increases implemented in 2011 will have an annual effect of DKK 17m which will be recognised in the accounts for Q1 2012. As stated in Value creation in Topdanmark, Topdanmark plans no further general price increases. Instead it will implement profitability promoting initiatives for less profitable customers.
• Limited increase in expenses on reinsurance. • A level of interest rates corresponding to the interest rate curve on 4 November 2011. • A favourable effect of profitability promoting initiatives • An expense ratio of 16%.
For 2012 Topdanmark continues to assume premium growth of 1-2% and a combined ratio of 91-92%, excluding any run-off profits / losses. Overall the pre-tax result of non-life insurance is assumed to be DKK 1,120-
Any recognition of risk allowances as income will be considered in the preparation of the 2012 Annual Report.
Risk factors and financial goals The profit forecast model for the parent company including subsidiaries outside of the insurance group shows a pre-tax profit of DKK 20-30m.
"Risk factors" shows an exposure analysis of Topdanmark's most significant risk factors.
Total Group profit The overall post-tax profit forecast model is assumed to be DKK 1,150-1,250m in 2012 representing a profit per share of DKK 90.
A description of Topdanmark's financial goals for non-life insurance is available in Value creation in Topdanmark.
Parent company etc. 76 20 – 30 Pre-tax profit 1,349 1,520 – 1,660
The reduction in shareholders' equity of DKK 1,159m was partly offset by DKK 150m strengthening of shareholders' equity by the sale of share options, redemption of share options and issue of employee shares.
To date in 2012 Topdanmark has bought back own shares of DKK 133m which leaves a balance of DKK 1,167m of the 2012 programme. Since 2000 the annual average buy-back yield has been 9%.
The number of Topdanmark's shares was 14,825,896 on 23 February 2012 of which 566,104 shares are held by Topdanmark to cover Management's share option scheme. Furthermore, at present Topdanmark holds 1,075,896 of own shares to be written down at the AGM on 19 April 2012. If before the AGM, contrary to expectation, no further shares to be written down are bought back, the number of voting shares will be 13,183,896 shares at 19 April.
Since 1998 when Topdanmark started buying back own shares, it has made decisions to cancel DKK 9.5bn of shares representing a 64.1% write-down of the share capital, with an average price of DKK 358 per share that has been written down.
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 or warrants. In addition it does not buy back own shares for another three days after the announcement of the interim report for Q1-Q3 2012 due to the allocation of employee shares. Below is a table of the periods when Topdanmark is allowed to buy back own shares.
Distribution power Topdanmark has a multi-distribution strategy in which its own sales channels (certified insurance sales representatives, sales centres, telephone sales etc.) are supplemented by sales or referral of leads through its distribution partners such as banks, car dealers and insurance brokers.
Activities under distribution power • Topdanmark has renewed its distribution agreement for non-life insurance with Danske Bank. Non-life insurance continues to be a strategically important product for Danske Bank. However, in the future Topdanmark will be responsible for sales and advice while Danske Bank will only refer leads to Topdanmark's sales organisation. This new distribution agreement is expected to have a minor adverse effect on premium growth in 2012 but to improve growth from 2013.
• Topdanmark has decided to concentrate sales through its own sales channels in the personal market. It has therefore been decided to close down 26 small insurance sales centres and instead increase the number of large sales centres from four to nine. This is intended to increase market pressure and create more efficient outbound sales environments in the sales centres. It is expected that growth will be slightly lower in 2012 due to the change in the sales organisation but that premium growth will benefit from it in future years.
Pricing Topdanmark's pricing philosophy is that it has differentiated pricing based on risk-appropriate prices, i.e. micro rating. This makes Topdanmark an attractive insurance company to customers with relatively favourable claims trends while typically customers with less favourable claims trends change to other insurance companies with a less risk-dependent pricing structure.
Activities under pricing • Topdanmark continues its work with more finely meshed and risk-based prices. • Topdanmark has no immediate plans to make general price increases. Instead it is implementing measures for less profitable customers (e.g. loss prevention, lower sums insured, increased retention and selective price increases).
• The rejection of general price increases and Topdanmark's initiatives for less profitable customers will improve its competitive strength in profitable customer segments in the long term.
Activities under efficiency • With payments of just under DKK 7bn on claims
Customer satisfaction It is Topdanmark's ambition that its customers feel "wellhelped " in all communication between them and the Company. Therefore all customer contacts are regularly measured: 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.
• Topdanmark wishes to be good with new customers but best with existing customers. 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 was just over 90% in the personal segment in 2011.
Discount rate To help increase the value of its future cash flow Topdanmark continually works to reduce the risk premium used by the equity market to price Topdanmark's shares, which is achieved by focusing on: • Risk management • Capital consumption • Corporate Governance • Remuneration policy • CSR • Investor Relations
Expense ratio • To ensure that the expense ratio is lower than the general Danish market level.
Risk management Risk profile Topdanmark's policy is to hedge against risks arising from the Company's activities or to limit such risks to a level that allows the Company to maintain normal operations and implement its planned measures even in the case of highly unfavourable events in the outside world.
Follow-up policy In order that both products and customers are profitable, Topdanmark systematically acts upon changes in its customer portfolios.
Provisions are generally calculated on a monthly basis across all lines of business. The claims trend is assessed monthly, followed up by any necessary price changes. For example, in both 2009 and 2010, the prices of the house and contents policies were adjusted. In 2011 the price of change of ownership policies was raised significantly.
Topdanmark is continuously focusing on making its claims handling processes more efficient under the following three main headings: • Promptness • Better replacement purchasing power • Quality
Promptness It is important to promptly obtain an overall impression of the size of a claim, implement any damage controlling actions and / or commence the claims handling process. Prompt attention not only reduces the compensation paid but also provides a better experience for the customer.
The responsibility for arranging service and purchase agreements has been channelled into one centralised purchasing function to ensure the highest possible discount, quality and security when delivering products and services. Service agreements have been made with, for example, Falck, Falck Health Care, Scalepoint, Bygma, tradesmen, garages and damage service companies.
The following chart shows the distribution of Topdanmark's total provisions for outstanding claims.
The much higher provision risk in long-tail than in shorttail lines is due to the longer period of claims settlement. It is not unusual that claims in long-tail lines are settled three to five years after notification and in rare cases up to 10-15 years.
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 the Danish National Board of Industrial Injuries who awards compensation for injury and disability in all cases of serious industrial injuries.
The provisioning risk represents mostly the ordinary uncertainty of calculation and claims inflation, i.e. an increase in the level of compensation due to the annual increase in compensation per policy being higher than the
level of general indexation or due to a change in judicial practice / legislation.
Weather The reinsurance contracts for storm cover claims up to DKK 5.1bn with a retention of DKK 100m. Events like snow loading, snow thawing and rainstorm are covered by the same contract as the storm cover. When using its reinsurance cover, Topdanmark will have to pay a reinstatement premium proportional to the amount of the reinsurance programme that has been utilised.
handles the investment, finance and risk alignment processes. It is controlled on a day-to-day basis to ensure that the limits set by the Board of Directors are observed. The result of this is reported to the Board of Directors.
Inflation risk Future inflation is implicitly included in a number of the models Topdanmark uses to calculate its provisions. An expected higher future inflation rate would generally be included in the provisions with a certain time delay while at the same time the result would be impacted by higher future indexation of premiums. Therefore a change in the expected future inflation rate would only have a marginal impact on the profit for the year.
The Group uses derivatives to hedge investment risks. The hedging of currency risk in particular often results in significant positive or negative changes to balance sheet values.
Topdanmark pays or receives cash security for any changes in value. The extent of these daily changes is limited such that there is no challenge to liquidity.
In June 2011 Topdanmark Forsikring raised a new subordinated loan of DKK 400m expiring in 2019, which may be terminated by Topdanmark Forsikring in 2016. Previously it raised another subordinated loan of DKK 350m expiring in 2018, which may be terminated by Topdanmark Forsikring in 2015.
Risk of investments in the life insurance group The goal and risk profile for those customers who are saving in the life insurance companies is different from the profile for Topdanmark's investment in the shareholders' equity of the life insurance group.
Consequently, from Q4 2004 Topdanmark separated its investment policy for funds owned by customers, (the life insurance provisions) from that of the funds owned by shareholders (the shareholders' equity of the life insurance group and provisions for illness / accident insurance). This ensures an appropriate distribution of risk and return.
Bonus potential The DFSA has issued a new contribution order taking effect on 1 January 2011 applying to all life insurance policies entitled to a bonus. As a result of the new order, all insurance policies are to be split into interest rate, risk and cost groups of homogeneous characteristics. The interval between the interest rate groups must not exceed 1 pp. Accordingly, each policy will belong to one interest rate group, one / more risk groups and one cost group.
on basis of the Company's contribution groups and consequently transferred to those policies within those groups. In the event of a loss in a group, this loss must be transferred to a shadow account which can only be recognised as income when that group returns to being in profit. Therefore, from now on, shareholders will not be allowed to recognise an allowance for risk as income if there is a balance in the shadow account. Seen in isolation this implies a greater risk for the owners.
Risk of increase in life expectancy Topdanmark has introduced a new mortality rate assumption to calculate its life insurance provisions at market value. This new rate is calculated by considering the DFSA's population mortality rate, Topdanmark's own observed mortality rate and the DFSA's assessed improvement in future life expectancy.
Until the end of 2011 the mortality rate used had been based on an increase of up to five years for men and 6.6 years for women from the G82 life expectancy assumptions developed by the insurance industry in the 1980's.
An increase in life expectancy above the existing best estimate will increase the life insurance provisions and will be covered by the collective and individual bonus potential as described above. A significant change of a 20% reduction in the mortality rate assumptions as at 31 December 2011 would reduce the collective bonus potential about DKK 95m in Life I and about DKK 175m in Life V.
IT exposure Topdanmark’s IT emergency strategy is revised each year by the Board of Management to be accepted by the Board of Directors. The actual IT emergency plan includes plans for re-establishing the IT environment if the systems suffer breakdowns. The IT emergency plan is tested regularly.
Topdanmark's business critical systems can be inaccessible for 24 hours without causing significant business problems.
It is Topdanmark's goal that the accessibility of its main systems is no less than 99.5%, and for many years it has been better for the central applications.
Risk scenarios The Group's risk factors are illustrated in the table overleaf. This table is an illustration of the impact of various assumptions on the most significant risk factors. The given assumptions do not reflect Topdanmark's expected risks, but are shown only as examples.
Excess return on interest-bearing assets 11 1.2 percentage point decline in loss ratio 81
One year's effect of increase in interest rates 92 Non-recurring effect of increase in interest rates (20)
Assuming a 1pp increase in interest rates from one day to the next and unchanged inflation, the first year's effect of the increase in interest rates is illustrated as follows: Solvency Danish insurance companies are subject to European and Danish solvency rules ensuring that the companies hold sufficient capital relative to the risks they accept. The most important rules which are reported to the DFSA today are: • Solvency I – the current European solvency rules • Traffic light rule • Individual solvency requirement
The companies of the Group observed the current solvency rules in 2011.
New EU solvency rules – called Solvency II – are on their way, expected to take effect on 1 January 2014.
Individual solvency requirement Individual solvency requirement is a set of Danish rules in force until the new Solvency II rules take effect. Topdanmark views the individual solvency requirement as a temporary solution for the introduction of the Solvency II rules in respect of both the solvency calculation in numerical terms and the insurance companies' risk management.
The individual solvency requirement rules calculate the capital requirement on each insurance company whereas the parent company and the Group are not covered by these rules.
Solvency calculation and capital requirements The EU's goal of Solvency II has been to promote good risk management. The intention has been that Solvency II will be 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 of company-specific values for some variables, the standard model will not provide a fair view of all the risk elements of all companies.
Therefore Solvency II gives the companies the opportunity to fully or partially develop their own risk model (internal model) for the solvency calculation. However, the DFSA must approve the model that is used for the calculation of Solvency II capital requirements.
Topdanmark is in constant dialogue with the DFSA on the model with the intention to have it approved as a partial, internal model to calculate capital requirements under Solvency II. Topdanmark expects that its model will be approved to be used when Solvency II takes effect. The first draft application was submitted to the DFSA at the beginning of 2012 and it is expected that the final application will be submitted to the DFSA in May / June 2013.
The necessary solvency capital is assumed to comprise shareholders' equity (DKK 4,050m), hybrid capital (DKK 400m) and subordinated loan capital (DKK 250m), see www.topdanmark.com → Investor Relations → Capital Model. If the capital requirement is higher than expected, the difference will be covered by issuing further supplementary loan capital. In June 2010 Topdanmark Forsikring redeemed a subordinated loan of DKK 250m and issued a new subordinated loan of DKK 350m. Furthermore, Topdanmark Forsikring issued another subordinated loan of DKK 400m in June 2011. The difference of DKK 500m between the DKK 750m of subordinated loans and the DKK 250m of subordinated loan capital included in the necessary solvency capital is considered to be a safety margin to the forecast capital requirement.
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. However, the capital base will be regularly increased in line with the natural growth in portfolios, provisions and financial investments. This adjustment will be made when excess capital is allocated to share buy-back.
Topdanmark has taken into account the expected numerical consequences of Solvency II in its capital model.
Capital model Topdanmark wishes to pursue a policy of keeping its shareholders' equity at a relatively low level and pay out to shareholders any amounts in excess of the conservatively estimated shareholders' equity necessary to support the underlying business.
However, as Topdanmark is subject to public regulation, it must meet the capital requirements of Solvency II. Initially Solvency II was intended as a risk-based regulation but due to the financial crisis, amongst other factors, a number of additional buffers and requirements have been suggested which are not proportional to the actual risk. As a result of this Topdanmark has been particularly hit by the fact that the solvency requirement is adjusted, only on a limited basis, for profitability and consequently the capital requirement on Topdanmark is not much lower than that on a similar company with significantly lower profitability and consequently higher risk.
In this light Topdanmark has decided on a capital model that has a relatively high proportion of shareholders' equity. Topdanmark expects that this model provides adequate solvency capital which will meet the requirements of Solvency II when it is implemented. At the same time the amount of equity within the solvency capital will be sufficient to cover any further regulatory requirements solely by issuing further supplementary capital.
The Board of Directors of Topdanmark has set up an audit committee and the Board of Directors of Topdanmark Forsikring has set up a joint audit committee for those relevant companies of the Topdanmark Forsikring Group. The two audit committees have identical members.
Furthermore, the Company has internal auditors who refer and report to the Board of Directors and, in accordance with an audit plan adopted by the Board of Directors, randomly select and audit certain routines and internal controls in significant and high risk areas which include the Consolidated and Annual Accounts and preparation of the accounts.
Risk assessment The Board of Directors' working plan ensures that at least once a year the Board of Directors, the audit committee and the Board of Management make a general assessment of the risks relating to the accounts preparation process. In this assessment the Board of Directors specifically considers the organisation of the Topdanmark Group in respect of: • Division into organisational units • Division of duties or compensating procedures • Procedures intended to handle and prevent conflicts of interest • Routines / working procedures / emergency plans /
As part of the risk assessment the Board of Directors makes annual decisions on the risk of fraud and discusses: • Potential incentives or motives for manipulating the accounts or undertaking other types of fraud • Management reporting in order to prevent or identify and respond to any accounting manipulation
Day-to-day risk management is performed at segment level and by the administrative departments on the basis of risk limits set by the Board of Management and approved by the Board of Directors.
Prior to each annual and quarterly report being published the report is discussed at a meeting between the Board of Management and the auditors, also attended by the IR and accounting departments.
As a consequence of its regular work to keep up with changes in the rules for accounts presentation (primarily IFRS and the Danish Accounting Order) the accounting department plans and takes initiatives for its future annual reports and regularly updates accounting policies and the presentation of the accounts and notes (by using, for example, detailed check lists).
Monitoring The Group's internal control and risk management systems are regularly updated and have been established in order to eliminate misstatement and omissions in the accounts. However, the internal control and risk management systems do not absolutely ensure that all material misstatement and omissions are found and corrected.
General meetings The general meeting is Topdanmark's supreme decisionmaking vehicle. About four weeks before the Annual General Meeting those shareholders who are registered by name and have requested an invitation, are invited by letter to attend the meeting. The Annual General Meeting is convened in accordance with the provisions of the
Danish Companies Act with a notice period of between three and five weeks.
All shareholders are entitled to attend and vote at general meetings. Shareholders who are not able to attend general meetings can vote by proxy or letter on each item of the agenda, however their proxy is only valid for one general meeting.
Shareholders can, by e-mail or postal letter, send questions to be answered at general meetings.
Board of Directors The Board of Directors, which is elected by 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 significant importance or unusual in nature to the Company.
The Board of Directors supervises the Company ensuring that it is managed in a proper way in accordance with legislation and the Articles of Association. It does not participate in day-to-day management of the Company.
The Board holds six or seven ordinary Board meetings a year plus an annual Board seminar dealing with strategic issues and other forward-looking topics.
Board members are elected individually, and no Board member may be appointed by any individual shareholder. More than half of the Board members elected by the shareholders in general meeting meet the definition of independence set out by the Committee on Corporate Governance.
Topdanmark has joined "Operation Chain Reaction" initiated by the Danish Ministry of Gender Equality. The aim is to increase the diversity of boards of directors of businesses without imposing real quotas for female managers. Correspondingly Topdanmark has signed up to the UN Global Compact intended to ensure, among other things, the prevention of discrimination in businesses.
In 2011 Topdanmark focused on, among other things, women in management. A number of specific initiatives have been planned for 2011/2012 including a questionnaire survey among Topdanmark's executives, for example whether specific initiatives are necessary in order to motivate women to apply for top executive positions. Topdanmark has also held a meeting after hours for employees intended to inspire women to apply for executive positions and established an internal website allowing employees to discuss gender questions and get helpful advice from female executives. Furthermore, it is Topdanmark's ambition to invite at least one female candidate for a job interview when an executive vacancy is to be filled. This goal has been met in all situations except for one executive position where there were no female applicants.
assesses itself during the annual Board seminar. Selfassessment is included in the rules of procedure and the working plan of the Board of Directors. The Board of Directors also evaluates the co-operation between the Board of Management and itself at the annual Board seminar.
Audit committee According to Section 31 of the Danish Audit Act the Board of Directors of Topdanmark has set up an audit committee. According to Sections 6(1) and 2(4) of the executive order on audit committees in companies and groups that are subject to supervision by the Danish Financial Supervisory Authority, the Board of Directors of Topdanmark Forsikring has set up a joint audit committee for those relevant companies of the Topdanmark Forsikring Group. The two audit committees have identical members.
The Board of Directors has elected Michael Pram Rasmussen, Chairman of the Board, Annette Sadolin, Board member, and Søren Thorup Sørensen, Board member, to be members of the audit committee. The Board of Directors has elected Søren Thorup Sørensen to be chairman of the audit committee.
All members of the audit committee meet all the criteria of independence set out in the "Recommendations for Corporate Governance" of August 2011 by the Committee on Corporate Governance.
The Board of Directors therefore considers all three members of the audit committee to be independent members with appropriate accounting qualifications.
The audit committee holds at least four meetings a year. On www.topdanmark.com → Investor Relations → Corporate Governance → Internal controls, Auditors →Audit committee → The rules of procedure for the audit committee of Topdanmark A/S and the joint audit committee for Topdanmark Forsikring Group are available.
Remuneration committee Pursuant to Section 77(c) of the Danish Financial Business Act, the Board of Directors of Topdanmark A/S and Topdanmark Forsikring A/S has set up a remuneration committee for Topdanmark A/S and a joint remuneration committee for the Topdanmark Forsikring Group. The two committees have identical members.
The Board of Directors has elected Michael Pram Rasmussen, Chairman of the Board, and Anders Knutsen, Deputy Chairman of the Board, to be members of the remuneration committee. The Board of Directors has elected Michael Pram Rasmussen to be chairman of the remuneration committee.
Company's risk management. The rules of procedure for the remuneration committee of Topdanmark A/S and Topdanmark Forsikring A/S are available on www.topdanmark.com → Investor Relations → Corporate Governance → Remuneration structure → Read more about the Remuneration Committee of the Topdanmark Group.
However, Topdanmark does not fully meet the following recommendations: 5.7.2 bullet 3: • The Committee recommends that the annual report contain the following information about the members of the supreme governing body: "… The number of shares, options, warrants, etc. that the member holds in the company and its consolidated companies and any changes in such holdings during the financial year"
Annually evaluate the structure, size, composition and performance of the governing bodies and make recommendations to the supreme governing body with regard to any changes.
Consider proposals submitted by relevant persons, including shareholders and members of the governing bodies, for candidates for executive positions.
Topdanmark has chosen to have a small and active Board of Directors. As one of the consequences of this decision Topdanmark has chosen not to set up an independent nomination committee but instead the entire Board of Directors performs those tasks
The skills, knowledge and experience held by each member of the governing bodies.
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, Board of Management, 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.
Besides options, which in accordance with the revolving option scheme are paid to the Board of Management, significant risk takers and the Friday Team as part of their fixed salaries, the Board of Management may grant a total of up to 20,000 options to employees who are expected to
In 2011 Topdanmark allocated 38,402 free employee shares and sold 30,099 employee shares at an advantageous price.
Options For 2012 Topdanmark has granted 40,261 share options to its Board of Management and a number of executives. The strike price of DKK 988 was fixed at 110% of the market price of Topdanmark's shares on 30 December 2011 (average of all trades).
Besides the revolving scheme above a further 19,900 share options have been granted for 2012 to a number of other executives who are expected to make a special effort or otherwise contribute extraordinarily to value creation in the Company.
The value was calculated using the Black and Scholes model based on a share price of DKK 897.78, an interest rate corresponding to the zero coupon rate based on the swap curve on 30 December 2011, future annual volatility
Detailed information on Topdanmark's option scheme is available on www.topdanmark.com → Investor Relations → Corporate Governance → Remuneration structure
• There is low price volatility in Topdanmark's shares secured through the provision of uniform and consistent information, thereby helping to reduce the cost of capital.
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 It is Topdanmark's policy 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 9.5bn of own shares representing a 64.1% write-down of the share capital. In the years 2000-2011 the annual average buy-back yield has been 9%.
Trading in Topdanmark's shares Daily share trading on all trading platforms was DKK 49m in 2011 (2010: DKK 52m). At NASDAQ OMX Copenhagen daily trading was DKK 43m (2010: DKK 47m). New trading platforms such as Chi-X, BATS Europe, Turquoise and Burgundy represented 12% of the trading in Topdanmark's shares in 2011.
Breakdown of those brokers with the highest trading activity in Topdanmark's shares at NASDAQ OMX Copenhagen: Topdanmark is followed by 21 analysts. Share analysts' recommendations of Topdanmark's shares are available on Topdanmark's investor site www.topdanmark.com → Investor Relations → Share profile → Analysts.
AGM 19 Apr 2012 Q1 2012 Interim Report 22 May 2012 2012 Half-year Report 21 Aug 2012 Q1-Q3 2012 Interim Report 13 Nov 2012 2012 Annual Report 05 Mar 2013
Shareholders At the end of February 2012 Topdanmark had 50,826 shareholders registered by name.
The following shareholders own more that 5% of the share capital: Holding (%) Shareholder 31 Dec 2011 If P&C Insurance Holding Ltd (publ) Barks Väg, Solna 10680 Stockholm 3400 Hillerød Denmark
Annual General Meeting The AGM will be held on Thursday 19 April 2012, 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. Knud J. Vest does not offer himself for re-election. The Board of Directors proposes that Anders Colding Friis 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 Knutsen • Jens Maaløe • Michael Pram Rasmussen • Annette Sadolin • Søren Thorup Sørensen • Anders Colding Friis
Proposals to be transacted at the AGM must be received by Topdanmark no later than 7 March 2012.
The agenda for the AGM will be published in mid-March 2012.
Michael Pram Rasmussen, Chairman*, ***, **** DOB: 14 January 1955 Joined Topdanmark’s Board of Directors: 2006 Current position held: Chairman Previous positions held: 1979-1982: Nye Danske Lloyd A/S
Charlotte Hougaard** DOB: 1 October 1964 Joined Topdanmark’s Board of Directors: 2007 Current position held: Chairman of Topdanmark's staff association
Offices held: Member of the Boards of Directors of: • DSB • DSV A/S • Ratos AB • Lindab International AB • Blue Square Re • Skodsborg Kurhotel & Spa A/S
Offices held: Member of the Boards of Directors of: • TDC A/S • 7 subsidiaries of KIRKBI A/ • Koldingvej 2, Billund A/S • KIRKBI AG • Merlin Entertainments Ltd. • Falck Holding A/S • Falck A/S • Boston Holding A/S
Independence: As Knud J. Vest 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
Member of the Boards of Directors of: • The Danish Insurance Association • The Danish Employers’ Association for the Financial Sector
Lars Thykier CFO of Topdanmark A/S DOB 1955, joined Topdanmark in 1986, joined Topdanmark's Board of Management on 1 June 2009
Change in the life insurance provisions (1,418) (1,223) (2,829) (900) 435
TECHNICAL PROFIT / (LOSS) ON LIFE INSURANCE 21 (41) 123 214 38 Profit / (loss) on investment activities after transfer to technical results 67 (1,765) 878 668 359
Gross premiums written 5 3,395 3,303 Reinsurance ceded (7) (5) Premiums, net of reinsurance 3,388 3,298
Claims and benefits paid 6 (2,866) (3,702) Reinsurance cover received 4 5 Change in the provisions for claims and benefits (9) 11 Claims and benefits paid, net of reinsurance (2,871) (3,686)
Profit per share, DKK 14 77.2 74.4 Profit per share, diluted DKK 14 77.0 74.4
Machinery and equipment 148 126 Owner-occupied properties 757 818 TOTAL TANGIBLE ASSETS 16 905 943
Loans guaranteed by mortgages 11 9 Other loans 2 1 Deposits with credit institutions 1,011 2,025
Total other financial investment assets 44,951 48,039 TOTAL INVESTMENT ASSETS 50,147 53,235 INVESTMENT ASSETS RELATED TO UNIT-LINKED CONTRACTS 20 3,264 3,283
Reinsurers' share of the provisions for unearned premiums 21 65 68 Reinsurers' share of the life insurance provisions 36 38 Reinsurers' share of the provisions for claims and benefits 22 667 1,079 Total reinsurers' share of provisions 768 1,184
Amounts due from policyholders 417 379 Amounts due from insurance companies 184 79 Amounts due from associated companies 18 4 Other debtors 101 128 TOTAL DEBTORS 1,487 1,774
Current tax assets 58 0 Deferred tax assets 23 19 12 Liquid funds 194 241
Accrued interest and rent 501 494 Other prepayments and accrued income 150 161 TOTAL PREPAYMENTS AND ACCRUED INCOME 651 655 TOTAL ASSETS 57,542 61,013
Guaranteed pension benefits 16,601 20,233 Bonus potential on future premiums 5,831 3,718 Bonus potential on paid-up benefits 4,260 2,306 Total life insurance provisions 26 26,692 26,257
Pensions and similar commitments 30 42 39 Deferred tax liabilities 23 94 121 Deferred tax on security funds 348 348 TOTAL LIABILITIES PROVIDED 485 508 DEPOSITS RECEIVED FROM REINSURERS 90 116
Financing Shares bought back (892) (1,159) Share-based payments 94 94 Subordinated loan capital 98 398 Amounts due to credit institutions (2,735) 2,157
Cash and cash equivalents at 1 January 7,089 1,205 Revaluation of cash and cash equivalents (4) 3 Cash and cash equivalents at 31 December 1,205 2,266
Profit for the year 4 1,164 1,168 Revaluation of owner-occupied properties 1 0 0 0 1 Total comprehensive income for the year 1 0 4 1,164 1,169
Profit for the year 2 1,021 1,023 Revaluation of owner-occupied properties 1 0 0 (0) 1 Total comprehensive income for the year 1 0 2 1,021 1,024
Life insurance Gross premiums written 3,395 3,395 Allocated investment return 2,233 2,233 Benefits and change in provisions (5,113) (5,113)
Shares in associated companies 53 332 0 385 Loans to associated companies 0 707 0 707 Other financial investment assets 18,050 29,988 1 48,039 Investment assets related to unit-linked contracts 0 3,283 0 3,283 Reinsurers' share of provisions 1,146 38 0 1,184 Amounts due from affiliated companies 3,040 4 18 (3,062) 0
Total provisions for insurance and investment contracts 16,228 30,618 0 46,846 Amounts due to affiliated companies (23) 2,374 711 (3,062) 0
Gross premiums written 8,661 8,734 Change in gross provisions for unearned premiums (39) (26) Gross premiums earned 8,622 8,709
Gross premiums earned, direct business, by location of the risk: Other EU-countries 5 4 Other countries 1 1
Gross premiums written 8,661 8,734 Gross premiums earned 8,622 8,709 Gross claims incurred (6,444) (6,759) Bonuses and rebates (74) (41) Gross operating expenses (1,298) (1,340) Net reinsurance (204) 312 Technical interest, net of reinsurance 58 65 Technical profit 660 945 Gross loss ratio (%) 75.5 78.2
Average value of claim (DKK '000) 41 38 7 7 60 60
Technical interest, net of reinsurance 6 6 10 11 13 14
Average value of claim (DKK '000) 42 39 36 30 4 4 liability
Individual policies 393 377 Policies which are part of a tenure 1,766 1,526 Group life 413 409 Regular premiums 2,572 2,312
Proportion of gross premiums represented by premiums related to unit-linked contracts not eligible for bonus 887 1,188 Investment risk is taken by the policyholder. All other gross premiums relate to bonus eligible insurance contracts.
Number of policyholders at 31 December ('000): Individual policies 61 56 Policies which are part of a tenure 99 86 Group life 193 182
Bonuses paid in cash 205 208 Claims and benefits paid 2,866 3,702
Designated at fair value: Deposits with credit institutions 2 2 Investment assets related to unit-linked contracts: Unit trusts 113 (59)
Total designated at fair value 385 (363) Revaluations of financial assets and liabilities at fair value through profit and loss account 1,666 37 Of which revaluation of inflation swaps transferred to claims incurred 44 (103) Investment properties (3) 31 Provisions for unearned premiums (2) (2) Provisions for claims and benefits (231) (654) Reinsurers' share 2 12 Liquid funds (6) 1
Current tax 435 288 Change in deferred tax (134) 33 Prior year adjustment 25 (4) Tax in foreign companies 8 5 Tax for the year 335 323 Current tax taken to shareholders' equity 3 3
Completed projects IT developm't under con2010 Goodwill software projects struction Total
Cost / revaluation at 1 January 542 739 1,282 Additions, including improvements 43 18 61
Revaluations taken to shareholders' equity 0 1 1 Revaluations recorded in the profit and loss account 0 (1) (1) Cost / revaluation at 31 December 557 757 1,314
Revaluations taken to shareholders' equity 0 1 1 Revaluations recorded in the profit and loss account 0 (1) (1) Cost / revaluation at 31 December 587 818 1,404
Impairment and amortisation at 1 January (409) 0 (409) Amortisation for the year (60) (1) (61) Transferred on revaluation 0 1 1 Reversal of total impairment and amortisation of assets sold or withdrawn from operations during the year 8 0 8 Impairment and amortisation at 31 December (461) 0 (461)
Cost of revalued owner-occupied properties 635 696 Machinery and equipment includes assets under finance leases of 11 7
Investment assets related to unit-linked contracts 3,264 3,283 The return on the above assets and derivatives is allocated to customers.
Reimbursement of claims relating to this year (98) (309) Expected income relating to this year 421 1,018
Reinsurers' share of the provisions for claims at 31 December 667 1,079
In 2010 Topdanmark Forsikring A/S redeemed a subordinated loan of DKK 250m.
Hybrid core capital has been fully included in the parent company's capital base 404 404
Note 25. Provisions for unearned premiums Provisions for unearned premiums at 1 January 2,601 2,646 Gross premiums written 8,661 8,734 Premiums earned (8,622) (8,709)
Note 26. Life insurance provisions Life insurance provisions at 1 January 25,791 26,692 Accumulated revaluation at 1 January (392) (870) Retrospective provisions at 1 January 25,399 25,821 Gross premiums written 2,508 2,115 Accrued interest 739 775 Claims and benefits (2,623) (3,110) Expense loading inclusive of expense bonus (204) (184) Risk gain after allocating policyholders' risk bonus (58) (48)
Guaranteed benefits 16,601 20,233 Bonus potential on future premiums 5,831 3,718 Bonus potential on paid-up benefits 4,260 2,306 Life insurance provisions 26,692 26,257
Reduction in bonus potential on paid-up benefits when allocating "the insurance technical result before bonus contribution" in Topdanmark Livsforsikring A/S 0 398
Increase in guaranteed benefits as life insurance provisions must not be lower than the guaranteed surrender value 72 3
Net of reinsurance Provisions at 1 January 11,226 11,697 Claims paid relating to previous years (2,852) (3,060) Change in expected claims payments relating to previous years (204) (148) Claims paid relating to this year (3,239) (3,135) Expected claims payments relating to this year 6,281 5,962 Inflation swaps (44) 103 Discounting (annual amortisation) 300 320
Non-life insurance, net of reinsurance, at 31 December 11,697 12,382 Life insurance 95 84 Provisions for claims, net of reinsurance 11,792 12,467
Provisions relating to previous years at 31 December 1,183 Gross provisions at 31 December
Less paid incl. inflation swaps 3,125 4,642 4,889 5,108 5,105 4,776 4,702 4,529 4,342 4,470 4,148 49,837 Provisions before discounting
Note 27. Provisions for claims - continued The table shows the historical development in the estimated final liability (the sum of claims payments and provisions) for each claims year from 2001. Significant proportions of the liabilities shown have been calculated
Topdanmark Livsforsikring A/S: Interest rate group 1 97 0 Interest rate group 2 0 0 Risk groups 14 24 Cost groups 6 0
Claims and benefits (253) (86) (338) Expense loading inclusive of expense bonus (32) (8) (39) Risk gain after addition of risk bonus 1 0 1 Premiums waived transferred to life insurance provisions (14) 0 (14) Retrospective provisions at 31 December 2,997 829 3,826 Provisions for unit-linked contracts 2010 2,997 829 3,826
Other pension commitments 3 3 Pensions and similar commitments 42 39
Income from investment properties (administration and operation) 50 55 Expenses on investment business 41 35 Other expenses 47 40 Total expenses 2,541 2,587
Total number of options ('000) price Directors ment tives Resigned Total
Per granting: Fair value of granting 2010 4 12 16 Fair value of granting 2011 1 6 7
The fair value of the granting for the year has been calculated using the Black and Scholes model assuming a price of DKK 734.73 (2010: DKK 705.72) per share, an interest rate corresponding to the zero coupon rate based on the swap curve on 31 December the previous year, future volatility of 22% (2010: 22%) p.a., corporate tax rate of 25% (2010: 25%) and a pattern of exercise similar to Topdanmark's previous granting of share options. The volatility has been calculated on the basis of previous years' volatility, which continues to be Management's best estimate of future volatility.
Note 35. Related parties The Group has no related parties who hold a controlling influence. Related parties with substantial influence comprise the Board of Directors, the Board of Management and their families.
Ole Døssing Christensen 83 Per Krogsgaard Mathiesen 83 Total fee paid to nine Board members 4,275 The Board of Directors receive only a fixed remuneration.
Remuneration of the Board of Management Salaries etc. 11 16 Employee shares 1 1 Share options 4 1 Total remuneration to three members of the Board of Management 16 18
Associated companies Premiums ceded 145 146 Commission received (6) (6) Reimbursed claims (76) (58) 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 36. Financial assets Financial assets at fair value where the revaluation is taken to profit and loss account Held for trading: Loans guaranteed by mortgages and other loans 13 10
Designated at fair value: Deposits with credit institutions 1,011 2,025 Investment assets related to unit-linked contracts 3,264 3,283
Loans and receivables at amortised cost Loans to associated companies 762 707 Amounts due from policyholders 417 379 Amounts due from insurance companies 184 79 Other debtors 101 128 Liquid funds 194 241
Held for trading: Non-life insurance: Loans guaranteed by mortgages and other loans 0.0 0.0
In those cases where it was not possible to estimate a value based on observable market data, the value was calculated on the basis of the assumptions which basically are the same for loan and credit bonds whether they are owned directly or as an underlying asset in CDOs (model prices). From 31 March 2011 market pricing was so strong that it was no longer necessary to record investment assets at model prices and therefore all these investment assets have since been recorded at an observable value.
Bonds measured by reference to inputs not based on observable market data Portfolio at 1 January 1.6 0.6 Gains and losses 0.3 0.0 Transfers to another category (1.3) (0.6) Portfolio at 31 December 0.6 0.0 Gains and losses on bonds included in revaluations held at 31 December 0.0 0.0
Financial liabilities recorded at fair value Observable inputs Held for trading: Derivatives: Group excl. life 78 101 Life insurance 89 436 Total derivatives 167 537 Designated at fair value: Amounts due to credit institutions: Group excl. life 1,413 2,708 Life insurance 2,427 3,289 Total amounts due to credit institutions 3,840 5,997 Total financial liabilities recorded at fair value 4,007 6,534
It is expected that the following significant liabilities will be settled 12 months or more after the balance sheet date: Subordinated loan capital 752 1,150 Provisions for unearned premiums 157 174 Guaranteed benefits 14,870 18,121 Bonus potential on future premiums 5,244 3,345 Bonus potential on paid-up benefits 3,830 2,033 Provisions for claims and benefits 9,334 9,564 Collective bonus potential 554 513 Provisions for unit-linked contracts 3,426 3,162 Deferred tax on security funds 348 348
Derivatives to hedge against the net change in assets and liabilities** 720 1,218 0
** Life V has invested in interest rate options - Euro-CMS-floors with a strike rate of 5% - to hedge the guaranteed benefits. The return percentages on derivatives are calculated as the return on derivatives as a percentage of the size to the exposure of 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 2011 was DKK 3,703m (2010: DKK 3,864m).
y 0.7-1.0 pp increase in interest rates (86) (35) 0.7-1.0 pp decline in interest rates 59 (3) 12% decline in equity prices (140) (122) 8% decline in property prices (94) (100) Exchange rate exposure (VaR 99.0%) (13) (11) Loss on counterparties of 8% (197) (180)
Max. effect on before change bonus potential collective in bonus poten- used for 2010 Min. effect on bonus tial used for benefits on Event capital base potential such benefits paid-up policies 0.7-1.0 pp increase in interest rates (58) (183) 1,072 (25) 0.7-1.0 pp decline in interest rates 57 174 (1,143) 0
Event 0.7-1.0 pp increase in interest rates (127) (48) 718 (26) 0.7-1.0 pp decline in interest rates 125 40 (910) (95)
Note 42. Leasing Finance lease for mainframe CPU: Minimum lease Present Book 2010 payment Interest value liabilities
Shares issued at 1 January 16,907 17,087 Own shares at 1 January (1,411) (2,615) Number of shares at 1 January 15,496 14,472
Note 46. Credit risk The Group has received cash margin payments securing unrealised gains on derivatives 675 937
The Group's insurance companies have registered the following assets as security for technical provisions: Shares in associated companies 192 200 Loans to associated companies 688 707
Adjustments to VAT liabilities 47 37 Other liabilities 10 9 Capital commitments made to loan funds and private equity funds 250 215 The Group companies participate in technical insurance collaboration where they are jointly liable for the insurance liabilities.
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 Komplementarselskabet TDE.700 ApS Ballerup Investment 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 TDF.0141 ApS 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 TDLII.0018 ApS Ballerup Holding Topdanmark Ejendom A/S Ballerup Property TDE.200 ApS Ballerup Property TDE.201 ApS Ballerup Property TDE.700 P/S Ballerup Property
Other companies: Topdanmark Kapitalforvaltning A/S Ballerup Asset management Topdanmark Invest A/S Ballerup Investment Hotel Kongens Ege ApS Ballerup Property Topdanmark Ejendomsadministration A/S Ballerup Property TD.0151 ApS Ballerup Investment
Topdanmark Group's 2011 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. The Annual Report also meets the International Financial Reporting Standards issued by the International Accounting Standards Board (IASB).
For example, remaining life expectancy for a 60 year old man and a 60 year old woman is: Adjusted interest rate curve In December 2011 the DFSA allowed insurance companies and lateral pension funds to use a new interest rate curve adjusted for country spreads, where the inclusion of the interest rate spread between Danish and German zero coupon rates is based on a 12-month moving average.
The decision to use this interest rate curve is binding until Solvency II takes effect.
All the life insurance companies of the Topdanmark Group have decided to use the curve.
These amounts include the effect of the increased tax rate from 15.0% to 15.3% on policies subject to pension return tax.
Over the period of settlement the levels of compensation could be significantly affected by any changes in legislation, case-law or the practice in the award of damages adopted by, for example, the Danish National Board of Industrial Injuries.
Valuation methods are based, as far as possible, on publicly available market data if there is no active market for the financial instrument. Depending on the nature of the asset or liability, the calculation is based on underlying parameters such as interest and foreign exchange rates, volatility or comparison with the market prices of corresponding instruments.
The profit and loss account and balance sheet are presented in accordance with the DFSA's IFRScompatible accounting order for insurance companies and lateral pension funds.
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 with any revaluation of the fair value taken to the profit and loss account are included in expenses on investment activities when incurred. However, financial instruments which, subsequent to the initial recognition, have been measured at amortised cost are recognised at fair value adjusted for direct expenses on the acquisition or issue of the financial instrument.
Income and expenses of foreign companies which prepare their accounts in functional currencies other than DKK are translated at average exchange rates for the year while balance sheet items are translated at the closing exchange rates on 31 December. Any translation differences are included in other comprehensive income.
Share-based payments Share options/warrants The Board of Management and Senior Management participate in a share option / warrant scheme. The fair value, on the date the option / warrant is granted less the subscription proceeds, is included in staff costs in the profit and loss account, with the relevant credit shown as
The risk return is only transferred to shareholders' equity where it can be covered by a sufficient "insurance technical profit before bonus contribution" for each contribution group. Any surplus risk return is transferred to a shadow account which will be included as income when the group returns to being in profit.
In life insurance, premiums net of reinsurance comprise those premiums, including single premiums, which are receivable within the year, net of reinsurance, for all insurance contracts and bonus eligible investment contracts.
Taxation The tax charge for the year comprises the current corporation tax for the year and any changes in deferred tax. The share of the tax charge that relates to the profit for the year is included in the profit and loss account, the share that relates to other comprehensive income items is included in other comprehensive income and the share that relates to shareholders' equity items is taken to shareholders' equity. The current tax for the year is calculated using the tax rates and rules applicable on 31 December. 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.
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 profit and loss account or
Liabilities Shareholders' equity Revaluation reserves Gains on the revaluation of owner-occupied properties are transferred to the revaluation reserves net of pension return tax, corporation tax and bonus. The reserve will be dissolved if the revaluation is reversed or if the property is sold.
Provisions for insurance and investment contracts Provisions for unearned premiums These provisions represent the proportion of premiums collected which, based on the spread of risk during the period of cover, relates to the period after the end of the financial year. The provisions for unearned premiums cover future payments of claims not yet incurred in the remaining period of risk as well as administration costs of the insurance contracts written. Therefore they are calculated per line of business at the present value of these amounts, as a minimum. The sufficiency of the provisions is regularly tested on the basis of the current expectations of future cash flow.
For annuities in Life II, for all ages until 77, the mortality rate used for men is higher than the DFSA's population mortality rate plus the DFSA's assessed improvement in future life expectancy. After 77, it is lower than the DFSA's population mortality rate. The mortality rate used for women is identical with the rate used by the DFSA for all ages. For example, remaining life expectancy for a 70 year old man is 15 years and for a 70 year old woman 18 years. There are no men under the age of 77 in Life II.
The present value of the expected future payments has been calculated using an interest rate structure. The interest rate structure is published by the DFSA as the combined weighting of swap rates and option adjusted mortgage credit rates. It is published as the "interest rate curve adjusted for country spreads" on the DFSA's website. For policies subject to pension return tax each interest rate used is reduced by the tax rate of 15.3%.
Guaranteed benefits have been calculated without taking into account the conversion of insurance contracts into paid-up policies and surrenders.
Provisions for outstanding claims in workers' compensation insurance comprise provisions for annuities
and other provisions for outstanding claims. The assessment of the future annuities is based on the present annuities including the expected wage and salary indexation fixed as the forward inflation rates plus 1.16% p.a. and a rate of mortality corresponding to G82 with monthly age write-downs. Workers’ compensation claims are often paid as the capitalised value of an annuity. The capitalisation rate at the time of capitalisation is to be calculated as a moving average of the most recent five years’ interest rate on leading mortgage bonds less tax. The capitalisation rate is calculated as the forward swap rates plus 0.85% p.a. and less a deduction for tax corresponding to the base tax rate.
The provisions for outstanding claims include the amounts that are expected to be included to cover direct and indirect expenses on settlement of the liabilities.
Collective bonus potential The collective bonus potential is used to equalise the individual years' payments of bonus. Amounts will be provided for the collective bonus potential in years where the investment and technical results exceed the bonus promised, while amounts will be transferred from the reserve in years where the result is not sufficient to finance the bonus promised. The collective bonus potential can only be reduced by a transfer to another item under technical provisions or as a result of "insurance technical losses before bonus contribution" relating to bonus eligible insurance contracts.
Provisions for unit-linked contracts Provisions for unit-linked schemes are measured at fair value in accordance with the value of the assets linked to the schemes, see the fair value option in IAS 39 on elimination or significant reduction of accounting inconsistency.
Other liabilities Provisions for pensions and similar liabilities Provisions for anniversary bonuses and retirement benefits are built up on an on-going basis over the period of employment. The liability is calculated taking into account the expected level of staff reduction based on the Company's experience. The liability is measured at present value by discounting the expected future payments using the structure of interest rates.
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
Deferred tax on security funds comprises deferred tax on untaxed amounts transferred to the security funds under shareholders' equity. The security funds will be taxed in the proportion of 10% for every 10pp decline in technical provisions net of reinsurance from the level at 31 December 1994. A decline of 10% from the 1994 level is considered improbable as long as Topdanmark Forsikring, in which the transfers were made, continues its current operations. Therefore the security funds will only be taxed if the insurance portfolio is transferred or the company ceases to carry out insurance business.
Proposed appropriation of profit for the year: Transfer to net revaluation reserve at net asset value 1,184 1,068 Transfer to profit carried forward (16) (45)
Total other financial investment assets 2 1 TOTAL INVESTMENT ASSETS 5,568 6,286
Current tax assets 58 0 Deferred tax assets 7 1 0 Liquid funds 3 4 TOTAL OTHER ASSETS 62 4 TOTAL ASSETS 5,712 6,408
Other reserves 1,845 2,563 Total reserves 1,845 2,563 Profit carried forward 2,884 2,204 TOTAL SHAREHOLDERS' EQUITY 4,900 4,915 SUBORDINATED LOAN CAPITAL 9 404 404
Bond loans 71 72 Amounts due to affiliated companies 327 985 Current tax liabilities 0 1 Other creditors 10 14 TOTAL CREDITORS 407 1,089 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 5,712 6,408
Dividends received from subsidiaries (740) 740 0 Other movements in capital of subsidiaries (10) 14 3 Share buy-back (892) (892) Sale of employee shares 46 46 Issue of share options 16 16 Exercise of share options / warrants 2 92 94
Profit / (loss) for the year 1,068 (45) 1,023 Other comprehensive income in affiliated companies 1 0 1 Total comprehensive income for the year 1,069 (45) 1,024
Dividends received from subsidiaries (341) 341 0 Other movements in capital of subsidiaries (10) 14 4 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
In 2007 Topdanmark A/S issued EUR 55m of hybrid core capital. This bullet loan has no final maturity date but if permitted by the DFSA, the debtor can give notice of termination as from 15 September 2017 at par. The loan carries a floating interest rate determined as EURIBOR 3 months + 1.90%. From 15 September 2017 increased to EURIBOR 3 months + 2.90%.
Notes to the accounts • Parent company (DKKm) 2009 2010 20
Salaries etc. 11 16 Employee shares 1 1 Share options 4 1 Total remuneration to three members of the Board of Management 16 18
Remuneration paid to the Board of Management for 2011: Christian Sagild 7.8 Kim Bruhn-Petersen 5.2 Lars Thykier 5.5
From 2011, 10% of the fixed salaries etc. paid to the Board of Management is paid as share options. The Board of Management receive only a fixed remuneration. The Group has no unhedged pension commitments.
Shares, bonds and subordinated notes held by the Board of Directors and Board of Management Board of Directors Number of shares 6,251 2,908 Bonds, nominal vaule DKK '000 254 128 Subordinated notes (subordinated loan capital) Topdanmark forsikring, nominal vaule DKK '000 10,400 19,610
Share options Topdanmark's share option scheme is for its Board of Management and senior executives. The strike price has been fixed at 110% of the market price on 31 December the prior year. The options can be exercised 3-5 years subsequent to the granting.
Weighted items 3,025 3,846 Core capital as a percentage of weighted items 124.1 98.0 Solvency ratio 72.9 58.2
Differences from the Group's accounting policies The company's accounting policies for recognition and measurement is in accordance with the Group's accounting policies with the following exceptions: Shares held in affiliated companies are recognised and measured at their net asset value. If the net asset value exceeds the recoverable amount, the investment is written down to this lower amount. The share of the posttax results of affiliated companies is included in the profit and loss account under income from affiliated companies less any write-downs. Where investments in affiliated companies are revalued to net asset value, the net revaluation reserve is included in shareholders' equity. The share of the movements in the shareholders' equity of affiliated companies is included directly in the shareholders' equity.
Other matters Generally all the amounts in the report are disclosed in whole numbers of DKKm. The amounts have been rounded and consequently the sum of the rounded amounts and totals may differ slightly.
Disclaimer This Annual Report includes statements relating to the future. Such statements are uncertain and involve both general and specific risks.
We have today considered and approved the Annual Report of Topdanmark A/S for 2011.
The consolidated accounts are presented in accordance with International Financial Reporting Standards as adopted by the EU and the annual accounts for the Company are presented in accordance with the Danish Financial Business Act. Further, the Annual Report is presented in accordance with additional Danish disclosure requirements for listed financial services companies.
Board of Directors: Michael Pram Rasmussen Anders Knutsen Charlotte Hougaard (Chairman) (Deputy Chairman)
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 accounts and annual accounts are free from material misstatement. We have participated in the audit of the material and risky areas.
Opinion In our opinion, the consolidated accounts give a true and fair view of the Group’s assets, liabilities and financial position at 31 December 2011, and of the results of its activities and cash flows for the financial year 1 January to 31 December 2011 in accordance with International Financial Reporting Standards as adopted by the EU and Danish disclosure requirements for listed financial services companies.
Statement on the management review Pursuant to the Danish Financial Business Act, we have read the management review. We have not performed any further procedures in addition to the audit of the consolidated accounts and annual accounts.
On this basis, it is our opinion that the information provided in the management review is consistent with the consolidated accounts and annual accounts.