Company financial statement 2008 • Company balance sheet 118 • Company income statement 120 • Notes to the balance sheet and income statement 120
A few reclassifications have been made in the presentation of previous years in the consolidated financial statements to allow better comparison with the performance of the year under review.
Remuneration The Supervisory Board wishes to express its appreciation for the decision by the Board of Directors to refrain from taking variable remuneration for management for 2008.
Final word The Supervisory Board wishes to take this opportunity to thank the members of the Board of Directors and all employees for their considerable contribution and effort in the difficult year of 2008.
Members of Supervisory Board The composition of the Supervisory Board has changed because of the change to the shareholdership of ASR Nederland N.V. (the former Fortis Verzekeringen Nederland N.V.). The shareholders’ meeting appointed four new supervisory directors. Effective 15 December 2008, Mr. Depovere, Mr. De Mey, Mr. Mittler and Mr. Verwilst stepped down from the Supervisory Board.
Supervisory Board meeting On 15 December 2008, C. van de Pol, M. Scheltema and C. van den Bos were appointed supervisory directors on the recommendation of the State of the Netherlands in its capacity as a shareholder. The Supervisory Board of ASR Nederland N.V. (hereinafter ‘ASR’) met for the first time on 15 December 2008. At that meeting the Supervisory Board appointed C. van der Pol as its chairman and decided that the desired size of the Supervisory Board should be four members for the time being. On the recommendation of the Staff Council, M. Bax joined the Supervisory Board on 12 February 2009.
The Supervisory Board has drawn up an annual calendar. Each year the Supervisory Board will meet at least six times. Extra meetings have been scheduled for 2009 mainly to discuss the new strategy of ASR. To give supervisory directors greater insight more quickly into the operations of ASR, several introductory sessions were organised early 2009 and the supervisory directors held individual introductory talks with the members of the Board of Directors and members of the Staff Council.
• Selection, Appointment and Remuneration Committee. The members are M. Bax (chairman) and C. van der Pol. Each year the Committee will meet at least twice. The Selection, Appointment and Remuneration Committee will each year draw up and publish a report on its deliberations and findings. In 2009, the Committee will submit proposals for a new, sustainable remuneration policy for the Board of Directors.
Non-life The net profit decreased to EUR 6 million. The decrease was caused mainly by lower investment returns (EUR 119 million gross) due to the writing down of fixed-interest securities, a higher Non-life claims burden and exceptionally high added values in 2007. The combined ratio increased in 2008 by 1.3 percentage points to 94.1% (2007: 92.8%). The increase was driven by a higher Non-life ratio of 2.9 percentage points from 59.2% to 62.1% in 2008. The main drivers of the increase were the claims frequency at Medical and other Non-life. The expense ratio decreased slightly because the cost increase was roughly in line with the increase in premiums.
ASR’s buffer capital, expressed as a percentage of the required minimum assets, amounted at year-end to a percentage of 233%. For the calculation of the buffer capital, several additions were made to assets, besides the revaluation of real estate, such as capital securities and the overvalue in the technical provisions - for which the Dutch central bank (DNB) gave its approval - as determined using the IFRS adequacy test. The calculation for 2007 was made using the Fortis Capital Model.
ASR announced on 26 March 2009 that it would not exercise the option to repay early two tranches of outstanding hybrid securities with a par value of EUR 600 million. One of the reasons behind this decision is that we are currently working on unbundling from the Fortis Group. ASR intends to exchange the existing securities.
This financial report provides a picture not only of developments at our company, but also of the environment in which we operate. In 2008 it was an extraordinarily turbulent environment. The credit crisis, the increasingly perceptible recession, the collapse of Fortis and the influence of new legislation and media pressure impacted severely on our sector and our company. The financial sector now finds itself in a new economic reality.
Life The life insurance market came under pressure. This stemmed directly from the crisis in the financial markets, which made customers less inclined to purchase life insurance products. There was also a reduced demand for new mortgages, with a direct impact on coupled life insurance products. Nevertheless, the gross premiums in the Life sector rose in 2008 by 12% to EUR 3,491 million. This growth was driven mainly by a few large Group contracts in the first half of 2008. The increase was supported by the individual Life sector, where releases were lower than in previous years. In the second half of 2008, the developments in the financial markets and, particularly in the final quarter, the negative sentiment with respect to Fortis, put pressure on the further development of ASR’s turnover, especially in Group contracts.
Non-life Fierce price competition characterised the Dutch market in 2008. Premiums were under pressure in various sectors (including disability and motor). Virtually all product lines contributed to the 7% growth of gross premiums to EUR 2,268 million. The increase at Medical was the largest, thanks to a successful campaign towards the end of 2007.
Market conditions have changed. To remain competitive a further reduction of our costs/turnover ratio will be essential in any strategy. As the growth of turnover can no longer be taken for granted, the importance of a lower level of costs will increase still further. Therefore, by mid-2010, we will achieve cost savings of EUR 100 million on a total gross cost base of EUR 730 million. Our objective is to lower our expense ratio significantly. This means that our focus in 2009 will be on growing towards an efficient (as well as cost-efficient) customer-oriented organisation. The pursuit of this objective will be supported by the introduction in 2009 of the next generation of life and non-life products.
Following the separation from Fortis and because ASR wants to continue offering customers savings and investment products, we reached agreement with Fortis Bank Nederland on the acquisition of Fortis ASR Bank as of 1 January 2009.
Final word Times have never been tougher for the insurance market in the Netherlands. On the one hand this is the result of the economic conditions, while on the other it is due to developments in society. Unfortunately, we have to admit that the financial sector’s reputation has been severely harmed. Therefore, the highest priority must be given to regaining trust. This requires a focused and consistent approach by the sector and by individual companies. For ASR it means, more than before, that we will take our ‘utility function’ as our baseline and permanent point of reference. This will result in a fundamental and structural adaptation of our business model. We have already taken the first steps in that direction.
Members of the Board of Directors The members of the Board of Directors of ASR Nederland are: J.P.M. Baeten Since 1 December 2001 member of the Board of Management of AMEV Stad Rotterdam Verzekeringsgroep (ASR) N.V., currently chairman of the Board of Directors of ASR Nederland.
J.W.M. van der Knaap Member of the Board of Directors of ASR Nederland since 1 April 2003.
T. Pluijter Member of the Board of Directors of ASR Nederland since 5 March 2004.
J. Rijsdijk Member of the Board of Directors of ASR Nederland since 1 April 2009.
R. T. Wijmenga Member of the Board of Directors of ASR Nederland since 1 February 2009.
The members of the Board of Directors hold various positions as executive directors or supervisory directors at various group companies. Mr. Van Harten stepped down as a member of the Board of Directors of ASR Nederland on 26 January 2009.
Fee and commission income 120 114 122 Dividend and other investment income 32 301 298 290
Income related to unit-linked contracts 2,359 119 998 Other realised and unrealised gains and losses 34 -17 768 219 Share in result of associates and joint ventures 27 38 31
Expenses Insurance claims and benefits 35 -5,360 -4,288 -4,712 Fee and commission expense -541 -554 -577 Depreciation and amortisation of tangible and intangible assets -79 -68 -80 Operating and staff expenses 36 -923 -862 -727
Consolidated balance sheet (before profit appropriation) Chapter 31 December 31 December 31 December
Cash and cash equivalents 14 654 483 1,004 Other assets and receivables 15 8,677 8,148 8,548 Investments available for sale 16 16,291 15,568 16,059 Investments held at fair value through Profit or Loss 16 410 1,475 1,749
Share Share Net result Unrealised Exchange Other Share- Non Equity capital premium attributable gains and rate reserves holders’ controlling- reserve to losses differences equity interests stakeholder reserve
(Re)payment of debt certificates 0 0 0 Proceeds from the issuance of subordinated liabilities 0 0 -8 (Re)payment of subordinated liabilities 0 -59 -556 Proceeds from the issuance of other loans 793 11 97 Repayment of other loans -1,341 -310 -69 Dividends paid to shareholders 0 -1,200 -250 Non-controlling interests 0 26 0 Cash flow from financing activities -548 -1,532 -786
Cash and cash equivalents as at 31 December 654 483 1,004
ASR Nederland N.V. 2008 20 ASR Nederland N.V. 2008 21 1 General
ASR Nederland N.V. (hereafter ‘ASR’), established and headquartered at Utrecht, the Netherlands, is a public limited company under Dutch law. The address of its registered office is Archimedeslaan 10, 3584 BA, Utrecht, the Netherlands.
Wherever this report refers to ASR, it means ASR Nederland N.V. or its insurance subsidiaries.
2.2 Estimates Preparation of financial statements under IFRS requires a number of estimates. Management is required to give an opinion of the estimates while preparing this annual report. Actual results may differ from these estimates and assessments.
Estimates and assessments are made mainly in the following fields: • estimation of realisable value in the event of impairments; • determination of the fair value of unlisted financial instruments; • determination of the expected useful life and residual value of property, plant and equipment, investment properties and intangible fixed assets; • valuation of liabilities under insurance contracts; • actuarial assumptions regarding the valuation of pension liabilities and pension assets; • estimation of existing liabilities stemming from past events on recognition of provisions.
On 13 October 2008, IASB issued amendments to IAS 39, Financial Instruments: Recognition and Measurement, and IFRS 7, Financial Instruments: Disclosures (approved by the European Union on 15 October 2008). The amendments to IAS 39 allow reclassifications of the categories ‘held for trading’ and ‘available for sale’ to ‘loans and receivables’ if the entity has the intention and possibility to hold the financial assets for a foreseeable period of time into the future. The amendments also allow reclassification in rare circumstances of financial assets held for trading that are not derivatives. The amendments to IFRS 7 specify the information to be provided in the event of transfers. The amendments take effect on 1 July 2008. ASR has decided not to use these reclassification possibilities.
On 17 January 2008, IASB issued an amendment to IFRS 2, Share-based Payment (approved by the European Union on 16 December 2008). This amendment explains that vesting conditions are service conditions and performance conditions only and it introduces conditions unrelated to service and performance conditions. This amendment will come into effect from the 2009 financial year (earlier application is allowed) and is not expected to have any material effect on ASR.
On 22 May 2008, IASB issued ‘Improvements to the IFRSs’, a set of minor amendments to a number of IFRS standards (approved by the European Union on 23 January 2009). These amendments have various dates of application and are not expected to have any material effect on ASR.
On the same date, IFRIC issued interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operation (not yet approved by the European Union). IFRIC 16 provides clarity regarding the risks that must be taken into account when incorporating the hedge. IFRIC 16 will take effect from the 2009 financial year (earlier application is allowed) and is not expected to have any material effect on ASR.
On 27 November 2008, IFRIC issued interpretation IFRIC 17, Distributions of Non-Cash Assets (not yet approved by the European Union). IFRIC states that a payable dividend must be presented on approval if it subsequently becomes a liability for the entity. The payable dividend must be carried at the fair value of the distributable net asset, whereby the difference between the paid dividend and the carrying amount of the non-asset must be presented in the income statement. IFRI 17 will take effect from the 2010 financial year (earlier application is allowed) and is not expected to have any material effect on ASR.
• IAS 23, Borrowing costs. This standard requires the capitalisation of all borrowing costs. The principles applied by ASR are already in line with this requirement.
2.4 Segment information The business segments reported by ASR provide financial products or services that are subject to various risks and returns.
Intercompany transactions, balances and gains and losses on transactions between ASR companies are eliminated. Noncontrolling interests in the net assets and net results of consolidated subsidiaries are shown separately in the balance sheet and in income statement. Non-controlling interests are carried at the fair value of the net asset at acquisition date. After acquisition date non-controlling interests consist of the amount calculated at acquisition date and the non-controlling share in equity movements since acquisition date.
Joint ventures These interests are recognised according to the equity method, i.e. the joint venture is initially recognised at cost price. Subsequently, this price is adjusted to make allowance for the change in the share of ASR in the net assets of the joint venture. The result of ASR in the joint venture consists of the share in the result of the joint venture. Joint ventures are contractual arrangements under which ASR and other parties enter into an economic activity over which they jointly have proportionate control.
Associates Investments in associates are recognised according to the equity method. These are investments in which ASR has a significant influence but not predominant control. The share of ASR in the annual net profit is recognised as investment income. The investment in the associate is recognised according to the share of ASR in the net asset of the associate interest. Goodwill that stems from the acquisition of an associate is recognised as part of the investment in the associate.
2.6 Foreign currency The consolidated financial statements are stated in euros, the working currency of ASR.
Monetary items At balance sheet date any outstanding balances in foreign currency are recognised at the closing rate for monetary items. Exchange rate differences that occur on translation of monetary items are recognised in the income statement.
The distinction between exchange rate differences (which are recognised in the income statement) and realised revaluations of fair values (recognised under equity) on financial assets available for sale is determined according to the following rules: • the exchange rate differences are determined on the basis of how the exchange rate has developed relative to the previous reporting period; • the realised results (in terms of fair value) are determined on the basis of the difference between the balances stated in euro of the previous and new reporting periods based on the new exchange rate.
Translation of foreign currency On consolidation the income statement and cash flow statement of entities whose working currency is not stated in euro are translated into ASR’s presentation currency, i.e. the euro. This is done at the average daily exchange rates for the current year or, in exceptional cases, at the exchange rate on the day of the transaction if the exchange rates fluctuate significantly. Their balance sheets are translated at the closing rate on balance sheet date.
Exchange rate differences resulting from translation are presented under equity. Exchange rate differences that occur on translation of monetary items that are part of a net investment in a foreign entity are presented in the consolidated financial statements under equity until disposal of the net investment.
Goodwill stemming from the acquisition of a foreign entity and from adjustments of the fair value of assets and liabilities resulting from the acquisition of the foreign activity are treated as assets and liabilities of the foreign entity. They are translated at the closing rate on balance sheet date. All resulting differences are presented under equity (in the ‘Exchange rate differences’ column). On the sale of the foreign entity there is a transfer to the income statement.
2.7 Transaction date and settlement date All purchases and sales of financial assets and liabilities that must be completed within the period of time prescribed by regulation or market conventions are presented on the basis of the transaction date. This is the date when ASR becomes involved as a party to the contractual provisions of the instrument.
2.9 Presentation and valuation of financial assets and liabilities ASR presents financial assets and liabilities according to the purpose of the transactions.
b. Investments held until maturity are instruments with fixed or determinable payments and a fixed term. ASR must firmly intend and be able to hold these investments until maturity. The instruments are measured on the date of first recognition in the balance sheet at their fair value (including transaction costs). After initial measurement they are carried at amortised cost using the effective interest method, with the regular amortisation being presented in the income statement.
These financial assets are carried at fair value, with movements in value affecting the results.
Mortgages and other loans: these investments are initially carried at fair value (including transaction costs) and are subsequently carried at amortised cost using the effective interest method.
This IFRS classification determines the valuation and presentation of the results in the following way: 1. Financial liabilities at fair value with value changes in the income statement include: a. financial liabilities held for trading, including derivatives that do not qualify for hedge accounting, and b. financial liabilities that ASR irrevocably designated at the time of first recognition or first-time application of IFRS as being carried at fair value through profit or loss. 2. Other financial liabilities are first carried at fair value (including transaction costs). Subsequently they are carried at amortised cost using the effective interest method, with the regular amortisation presented in the income statement.
2.10 Fair value of financial instruments The fair value of a financial instrument is determined on the basis of published price quotations in an active market. If there is no active market for the financial instrument, the fair value is determined with the aid of measurement methods. Measurement methods make the fullest possible use of market information. However, they are influenced by the assumptions that are made, such as discount rates and estimates of future cash flows. Such methods include market prices of similar investments, present value calculations, option measurement methods and measurement methods for market multiples. In the unlikely case of it not being possible to determine the fair value of a financial instrument, it will be recognised at cost.
On first recognition the fair value of a financial instrument is the transaction price, unless the fair value is evident from recently observed market transactions involving the same instrument, or it will be based on a measurement method with the variables consisting solely of data originating from observable markets.
If the amount of the impairments on assets, other than goodwill or equity instruments available for sale, decreases in a subsequent period due to an event that occurs after impairment, the amount is reversed through the income statement.
Financial assets A financial asset (or group of financial assets) is impaired if there are objective indications of impairments because of one or more events that occurred after the first recognition of the asset. The event or events that caused the loss have an effect on the estimated future cash flows from the financial asset (or group of financial assets) that can be estimated reliably.
Objective indicators for impairments of shares include the circumstance that the fair value is significantly below the cost price at balance sheet date or has been below cost price for a long time at balance sheet date.
Depending upon the type of financial asset, the realisable value can be estimated in the following manner: • fair value using an observable market price; • present value of expected future cash flows discounted at the original effective interest rate of the financial asset, or • based on the fair value of collateral furnished.
Impairments allocated to equity instruments available for sale cannot be reversed in subsequent periods via the income statement.
Other assets The realisable value of non-financial assets is determined as the highest of either fair value less selling costs or the value in use. The fair value less selling costs is the amount obtained through the sale of an asset in an arm’s-length transaction between knowledgeable and willing parties after deduction of the selling costs. The value in use is the present value of estimated future cash flows likely to stem from continued use of an asset and from disposal at the end of its useful life.
Cash flow statement ASR presents cash flows from operating activities by means of the indirect method. The net result is adjusted with a view to the effects of non-cash transactions, any deferred items for received or future cash receipts or cash payments from operations and income and expense items in connection with investment or financing cash flows.
2.13 Due from banks and customers Classification Receivables from banks and receivables from customers consist of loans initiated by ASR by providing money directly to the borrower or intermediary. This category also includes loans purchased from third parties that are presented at amortised cost. Rights to trade receivables assumed directly from the issuer in the primary market are presented as loans provided that no active market exists for such rights. Loans initiated or purchased with the intention of selling or effectuating them in the shortterm are presented as assets held for trading. Loans designated as being held at fair value through profit or loss or as being available for sale are presented as such at the time of first recognition.
Impairments are presented as a decrease in the balance sheet value of receivables from banks and receivables from customers.
ASR adopts a portfolio approach to groups of similar loans, such as mortgages and credits, for the determination of impairments. The expected losses are calculated for different periods of arrears based on historical data. The parameters for bad debts are reviewed regularly.
2.14 Sale and repurchase agreements and the lending/borrowing of securities Securities covered by a repurchase agreement (‘repo’) continue to be recognised on the balance sheet. The debt that results from the obligation to repurchase the assets is included in amounts owed to banks or amounts owed to customers, depending upon the counterparty. Securities purchased under a repurchase agreement (reverse repo) are not presented on the balance sheet. The entitlement to the funds of the counterparty is presented as receivables from banks or receivables from customers, depending upon the counterparty. The difference between the selling price and the repurchasing price is presented as interest and allocated over the term of the agreements using the effective interest method.
Securities loaned to counterparties continue to be recognised on the balance sheet. By analogy, borrowed securities are not recognised on the balance sheet. If securities loaned to third parties are sold, the sale proceeds and the debt from the obligation to return the collateral are disclosed. The obligation to return the collateral is carried at fair value. This obligation is presented as a liability held for trading, with movements in value in the income statement.
2.15 Assets and liabilities held for trading A financial asset or a financial liability is presented as being held for trading if it: • was acquired or entered into mainly for the purpose of selling or buying back the asset or liability in the short term; • forms part of identified financial instruments that are jointly managed and for which indications exist of a recent, factual pattern of short-term profit-taking; • is a derivative (except a derivative designated as a hedge instrument and it is an effective hedge).
Investment properties are carried at cost less accumulated depreciation and impairments. Depreciation is calculated using the straight-line method so as to lower the cost of the assets over their estimated useful life to their residual value. The residual value and the estimated period of use of investment properties are determined separately for each significant part (‘component approach’). They are re-examined at each balance sheet date. Depreciation is calculated until the residual value is reached. The residual value is always nil. There is no depreciation on land.
Transfers to or from investment properties occur only if there is a change of use: • in investment properties at the end of use by ASR or at the start of an operating lease to another party or at the end of construction or development; • from investment properties at the start of use by ASR or at the start of development with a view to sale; • new purchases in completed construction or development.
Projects under development A project under development means real estate that is being built or developed for future use as an investment property. This does not concern existing real estate that is being redeveloped, which continues to be classified as an investment property. Projects under development are carried at acquisition price plus acquisition costs and allocated interest, or at the lower estimated realisable value.
From such time as a sale contract has been concluded for a project with a third party and the main rights to economic benefits and the main risks have been transferred to this party, the result is recognised in proportion to the progress of the project.
Any benefits received from the lessor in connection with operating lease transactions are recognised on a straight-line basis over the term of the lease as a reduction of the leasing expenses.
2.18 Investments related to unit-linked contracts Investments in unit-linked insurance and investment contracts concern investments held to meet specific investment objectives of the third parties that run the investment risk. These investments are presented at fair value. Unrealised and realised value increases are recognised in the income statement.
Contracts that transfer a significant insurance risk are presented as reinsurance contracts.
Trade receivables and other receivables Trade receivables and other receivables that result from normal operations and arise through actions by ASR are presented at their initial fair value less any impairment.
2.20 Property, plant and equipment All real estate held for ASR’s own use and all fixed assets are recognised at cost. This amount is reduced by accumulated depreciation (except for sites not written down) and any accumulated impairments. The cost price is the equivalent of the current price that was paid, or the fair value of the payment given to acquire the asset at the time of acquisition or the construction of the asset.
Depreciation on buildings is calculated on a straight-line basis so as to write down the costs of these assets to their residual value over the expected useful life. The useful life of buildings is determined for each individual part (component approach). This is re-examined at the end of each year. The real estate is split into the following components: land, skeleton, outer shell, systems and furnishings (both rough finishing and detailed finishing).
Refer to the table in section 2.16 for the maximum economic life of components.
IT, office and other equipment and motor vehicles are written down over their respective economic lives as individually determined (usually between three and five years). As a rule the residual values are set to nil, except for land.
Intangible assets with an indefinite economic life are not written down but are examined at least once each year for impairments. Any identified impairments are recognised in the income statement. Intangible assets with a particular economic life are generally written down on a straight-line basis over their economic life. Intangible assets are recognised on the balance sheet at cost, less any cumulative amortisation and any cumulative impairment. The residual value of the estimated period of use of intangible assets is re-examined at each balance sheet date. With the exception of goodwill, ASR has no intangible assets with an indefinite economic life.
Other intangible assets Value of Business Acquired (VOBA) Value of Business Acquired represents the difference between the fair value on acquisition and the carrying amount of a portfolio of contracts acquired as part of an acquisition of a business or portfolio. VOBA is presented as an intangible asset and written down over the period of recognition of the revenues from the acquired portfolio.
Internally generated intangible assets Internally generated intangible assets are capitalised if ASR is able to demonstrate all of the following points: • the technical feasibility of completing the intangible asset, so that it will be available for use or sale; • the intention to complete the intangible asset and to use or sell it; • the ability to use or sell the intangible asset; • the probable generation of future economic benefits by the intangible asset; • the availability of adequate technical, financial and other means to complete the development and to use or sell the intangible asset; • the ability to reliably measure the expenditure that may be allocated to the intangible asset during its development.
Intangible assets that arise from research and internally generated goodwill are not capitalised.
Software Software for computer hardware that will not work without that specific software, such as the operating system, forms an integral part of the hardware and is treated as property, plant and equipment. If the software is not an integral part of the hardware, the costs incurred in the development phase are capitalised as an intangible asset and written down on a straightline basis over the estimated economic life, provided that ASR can demonstrate compliance with all the above-mentioned criteria. Software is generally written down over five years at most.
Other intangible assets with a particular economic life Other intangible assets, such as those with a particular economic life, such as trademarks and licences, are generally written down on a straight-line basis over their economic life. At each reporting date, intangible assets with a particular economic life are examined for impairments. Such intangible assets generally have an economic life of 10 years at most.
2.22 Deferred acquisition costs The costs of acquiring new and renewed insurances are capitalised and written down. This mainly relates to commission and expenditure concerning intermediaries and the issue of new policies. Costs vary and relate mainly to the production of new insurances. Deferred acquisition costs (‘Deferred Acquisition Costs’, or DAC) are examined regularly for their realisability on the basis of estimates of future cost mark-ups on the underlying contracts.
For life-insurance products and investment products of the ‘life’ type without discretionary profit-sharing elements, the deferred acquisition costs are amortised in proportion to the expected premiums or to the mark-up included in the premium for repayment of the acquisition costs. Expected premiums are estimated at policy issue date and are consistently applied during the term of the contracts. Discrepancies between actual results and results estimated on the basis of past experience are recognised in the income statement in the reporting period in which the discrepancies occur. For these contracts the amortisation periods may be equal to the total term of the premium payment or shorter, depending upon the type of insurance.
For short-term contracts the deferred acquisition costs are amortised over the reporting period in which the written premiums will be earned.
2.23 Fixed assets held for sale and discontinued business activities Fixed assets or a group of assets and liabilities that ASR presents as being held for sale are those with a balance sheet value that will be realised mainly in a sales transaction likely to occur within the year and not through their continued use.
2.24 Derivatives and hedging Recognition and presentation Derivatives are derived financial instruments such as swaps, forward contracts, futures and (written and sold) options. Such instruments have a value that changes in line with the changes in the underlying instruments or securities. They require little if any net initial investment and are settled at a future time.
All derivatives are first presented on the balance sheet at fair value on the transaction date: • derivatives held for trading in ‘Assets held for trading’ and ‘Liabilities held for trading’; • derivatives held for hedging in ‘Accrued interest and other assets and ‘Accrued interest and other liabilities’.
Financial assets or liabilities may include derivatives embedded in a contract. Such financial instruments are often called ‘hybrid financial instruments’. If the basic contract is not recognised at fair value through profit or loss and the features and the risks of the derivatives embedded in the contract are not closely aligned to those of the basic contract, the derivative embedded in the contract must be separated from the basic contract and carried at fair value as a stand-alone derivative. Fair value movements are recognised in the income statement. The basic contract is presented and measured by applying the rules of the relevant category of financial instrument.
However, if the basic contract is recognised at fair value through profit or loss, or if the features and risks of the derivatives embedded in a contract are closely aligned to those of the basic contract, the derivative embedded in a contract is not separated and the hybrid financial instrument is measured as a single instrument.
Hedge accounting ASR uses hedge accounting. This means that on the date a derivative is concluded ASR may designate that contract as either a hedge for the fair value of a recognised asset or liability, or as a hedge for future cash flows allocable to a recognised asset or liability or an expected transaction (cash flow hedging). Hedging of defined benefits are hedges at fair value, except hedges of exchange rate risks recognised as cash flow hedges.
Fair value movements of derivatives designated as qualifying as cash flow hedges are recognised under equity as an unrealised gain or an unrealised loss. Ineffective hedges are immediately recognised in the income statement.
2.25 Liabilities arising from insurance contracts General ASR issues contracts that transfer the insurance risk or financial risk, or both, from the insured party to ASR. Contracts with a significant insurance risk are presented as insurance contracts or reinsurance contracts. These contracts may also transfer a financial risk.
If the profit-sharing decision was taken before the end of the financial year, the profit-sharing will be recognised as a liability.
Shadow accounting With some of the financial instruments held by ASR, the realised/unrealised gains or losses on assets have a direct effect on the measurement of insurance liabilities (or some of them) or related deferred acquisition costs. ASR uses shadow accounting for the fair value movements in the fixed-interest investments and assets and liabilities held for trading that are related to, and thus have an influence on, the measurement of the insurance liabilities. The measurement of the insurance liabilities after shadow accounting is at least equal to the test provision made under the Financial Supervision Act. The fair value movements, insofar as not limited by the test provision under the Act, will consequently not form part of equity or net result.
Adequacy test for liabilities (LAT) This test is performed at the end of each year to determine whether the recognised liabilities are adequate. Use is made of the current portfolio returns to estimate future cash flows. The adequacy of the liabilities is tested at the level of homogenous product groups. If the liabilities are inadequate to provide future cash flows, including cash flows such as management costs and cash flows that result from options and guarantees embedded in a contract and depreciation of the deferred acquisition costs (DAC), the deferred acquisition costs will be subject to an extra write-down and/or supplemental liabilities will be recognised on the basis of best possible estimates. As and when necessary, a calculated deficit will be recognised immediately in the income statement. A similar adequacy test was performed with current market returns of the investment portfolio, excluding unrealised profits, being used to calculate future cash flows.
Life Future liabilities for policy benefits under life insurance contracts are calculated using a net premium method (present value of future net liabilities less present value of future net premiums) by applying the same principles used to determine the insurance premium. For contracts with a future duration of premium payments that is shorter than the future duration of the insurance, or for which no further premiums are being paid, a provision will be recognised for future administrative costs. Profit-sharing policies include any supplementary liabilities for any contractual dividends of profit-sharing. For certain designated contracts, the future liabilities for policy benefits have been remeasured to take current market interest rates into account.
Non-life Claims and claim handling costs are recognised in the income statement at the time claims are reported or arose. Unpaid claims and claim handling costs consist of estimates for reported claims and provisions for claims that occurred but were not reported. Estimates of occurred-but-unreported claims are established based on past experience, current claim trends and prevailing social, economic and legal frameworks. The liability for non-life insurance claims and claim handling costs (less indemnifications, recovered claims, residual values and subrogation) is based on estimates of expected future payments and costs. Allowance is made for management’s assessment of the expected level of inflation, costs of handling claims, legal risks and claim trends. Non-life liabilities concerning incapacity for work are presented at their net present value. The presented provisions are sufficient to cover the ultimate costs of claims and claim handling costs. The resulting adjustments are recognised in the income statement. ASR discounts its commitments for non-life only for claims with determinable and fixed payment terms.
Reinsurance commitments Liabilities concerning matters accepted in reinsurance that do not transfer any substantial insurance risk may be regarded as financial liabilities. These liabilities are presented in the same way as the other financial liabilities, as referred to under 29.
The accounting procedures for liabilities from inbound reinsurance contracts with a substantial insurance risk are the same as the procedures that apply to direct, written insurance contracts.
2.26 Liabilities related to unit-linked contracts Unit linked agreements are insurances in investment units. A unit is a share in an investment fund that ASR has purchased on behalf of policyholders using the net premiums paid by policyholders. The benefit on the end-date of the contract equals the present value of the units of that fund. The present value of a unit is the unit value and equals the fair value of the investments of the investment fund divided by the number of units.
The insurance liability for a unit-linked contract equals the number of units of that insurance multiplied by the unit value at that time.
Pension liabilities ASR has a number of defined benefit plans for its employees. These are pension schemes that provide for defined benefit. The liabilities are determined by means of regular actuarial calculations.
Differences between expected and actual returns on qualifying investments caused by changes in actuarial assumptions and adjustments of experience-based figures are not presented in the income statement. However, they are presented if the totality of the cumulative changes falls outside the 10% corridor of the greater of the liability under the plan or the fair value of the associated qualifying investments. The part that falls outside the corridor is charged or added to the income statement over the expected average remaining number of years of service of the pension plan members.
Pension costs of elapsed length of service are recognised immediately in the income statement. This does not occur if the changes to a pension plan depend on the number of employees that remain in the employ of the company during a certain period of time (‘waiting period’ or ‘vesting period’). The fund investments accompanying the pension liabilities must satisfy certain criteria (they must ‘qualify’) in order to be presented as ‘qualifying fund investments of pension plans’. These criteria concern the circumstance that the fund investments must legally be segregated from ASR and its creditors. If the criteria are not fulfilled, the fund investments are presented in the relevant column of the balance sheet (investments, property, plant and equipment, etc.). If the fund investments do satisfy the criteria (qualify), they are set off against the pension liability.
Set-off of the fair value of fund investments against the present value of the liabilities under pension plans based on defined benefits can result in a negative amount (an asset). If this occurs, the presented asset may not exceed the sum of: • the cumulative unrecognised actuarial net losses, and • the pension costs of elapsed length of service, and • the present value of economic benefits available in the form of repayments from the plan or reductions of future contributions to the plan.
Other liabilities after employment ends ASR offers post-employment benefits, such as mortgage loans at favourable interest rates and medical insurance schemes. To be entitled to this remuneration it is generally obligatory for the employee to remain in the company’s employ up to and including pensionable age and to have reached a minimum length of service. The expected costs of this remuneration are allocated over the period of the employment. This is done on the basis of a methodology similar to that used for defined benefit plans. The liabilities are determined by means of actuarial calculations.
Remuneration based on shares (or plans for participation in share capital) Share options of the former parent company Fortis N.V. were allocated to directors and to employees in recognition of services rendered. The fair value of the rendered services is determined with reference to the fair value of the awarded share options. The compensation costs are measured at allocation date on the basis of the value of the options and the costs recognised during the vesting period of the options. The fair value is determined on the basis of an option measurement. This takes account of the share price and allocation date, the exercise price, the expected term of the option, the expected volatility of the underlying shares and the expected dividends on them, as well as the risk-free interest rate over the expected term of the option. If the options are exercised and new shares are issued, the revenues received are accounted for, less any transaction costs, in the share capital of Fortis N.V. (par value). The surplus is presented under the issue premium (share premium).
Personnel rights Personnel rights attached to awarded annual holidays and days of leave earned through long service are recognised when they can be taken by the employees. A liability is created for any days of leave to which employees are entitled but have not taken by the end of the period.
Provisional liabilities Provisional liabilities are the contingencies with an amount that cannot be estimated with sufficient reliability or for which payment is unlikely to be required in order to fulfil a commitment. These events are stated under ‘Liabilities not shown on the balance sheet’.
Financial guarantees Financial guarantee contracts, which anticipate payments as a result of changes in a particular interest rate, securities price, commodities price, exchange rate, index of prices or interest rates, credit rating or credit index or other variable, are recognised as derivatives. A condition is this must not be specific to one of the parties to the contract in the case of a non-financial variable.
Financial guarantee contracts that provide for particular payments by ASR to the holder as compensation for a loss because a particular debtor is unable to fulfil its commitments are recognised as insurance contracts if a significant insurance risk transfers to ASR.
Other equity components Other elements presented under equity relate to: • foreign currency (see chapter 2.6); • financial assets available for sale (see chapter 2.9, Presentation and valuation of financial assets and liabilities); • cash flow hedges (see 2.2 4, Derivatives and hedging); • discretionary profit-sharing elements (see 2.2 5, Liabilities related to insurance contracts).
If the value of a financial asset has decreased to its estimated realisable value, the interest income is recognised on the basis of an effective interest rate. This is the interest rate that was used for the discounting of the future cash flows when determining the realisable value.
A long-term contract is a contract (longer than one year) that is not generally subject to unilateral amendment of the conditions, such as a non-cancellable contract or a contract with predetermined amendments, and for which various services (including insurance protection) are provided for a long period.
Premiums obtained from life insurance policies are presented as revenues if they can be collected from policyholders. The resulting estimated future benefits and expenditure are presented as an expense. This is done so as to realise profits over the estimated term of the policies and matching is achieved by determining the liabilities of the insurance policies and capitalising and then writing down acquisition costs.
Medical costs concern short-term contracts that cannot be cancelled by the company.
2.33 Realised and unrealised gains and losses For financial instruments presented as being available for sale, the realised gains or losses on sales and divestments represent the difference between the received proceeds and the (amortised) cost price of the sold asset or liability. This takes place after deduction of any impairments already presented in earlier periods in the income statement and after making allowance for the impact of any adjustments under hedge accounting.
Unrealised gains and losses incorporated directly into equity in the past (the difference between balance sheet value and amortised cost) are transferred upon sale to the income statement. Realised gains and losses on sales are recognised in the income statement under the ‘Realised gains (losses) on investments’ column.
2.34 Fee and commission income Fees and commissions for rendered services are generally presented as revenues if the service is performed. If it is unlikely that a particular loan will be allowed and the credit agreement is not regarded as a derivative, the fee/commission is presented under revenues, proportionally over the term of the agreement.
Capitalisation ends when the asset is almost ready for its intended use or for sale. Capitalisation is deferred if development of the asset is interrupted for a prolonged period of time. If construction is completed in various parts and each individual part is usable while construction of other parts continues, the capitalisation is ended for each part at such time as it is almost completed.
Deferred tax claims are recognised to the extent that a future taxable profit is likely to exist against which the temporary differences can be offset.
ASR Nederland N.V. 2008 42 ASR Nederland N.V. 2008 43 3 Acquisitions and divestments
There were no acquisitions or divestments in 2008 (2007: nil) that led to material or substantial changes in the assets and liabilities of the organisation as a whole.
The table below shows the composition of Shareholders’ equity at 31 December 2008: Shareholders’ equity 2008 Ordinary shares; 200,000 issued at a par value of EUR 500 100 Share premium reserve 962 Net result attributable to shareholder -640 Unrealised gains and losses -648 Exchange rate differences -10 Other reserves 668
Size of non-controlling Amount at Amount at Amount at Group company interest 31 December 2008 31 December 2007 31 December 2006 Fortis Fixed Rate Quarterly Capital Funding Trust 50 50 50 ASR Nederland Vastgoed Maatschappij N.V. 5% 44 43 0
Non-core risks: these are risks that the company does not actively seek in principle, but come about through the normal conduct of business. These include operational risks. They consist of business risks and event risks. The risks have been reduced to acceptable proportions, taking into account cost/benefit analyses. ASR endeavours to control its operational risks and to protect its reputation by meeting the highest standards of integrity in the conduct of its business, in accordance with its internal code of conduct.
6.3 Risk management organisation The risk management organisation of ASR exists to implement the company’s risk strategy and to achieve the following objectives: • clearly defined responsibility and liability for risk management; • independent risk management functions; • transparent and cohesive decision-making process within ASR, covering all risks in the ASR risk taxonomy model.
6.3.1 Risk management and supervision Risk management and supervision are carried out within ASR using a system of delegated responsibilities from central and local risk management bodies, Financial Risk & Value Management and Operational Risk & Management Control.
6.3.1.1.3 Reinsurance Reinsurance is responsible for formulating and implementing the reinsurance policy, in accordance with ASR.
6.3.1.2 Operational Risk & Management Control Insurance Risk & Value Management (IR&VM) is responsible for keeping a sharp watch on technical insurance risks entered into by ASR entities. IR&VM does this in accordance with decisions taken by the IRC (Insurance Risk Committee). It observes the guidelines of ASR and external regulators. IR&VM defines risk tolerance and controls risks by establishing guidelines and standards. IR&VM endeavours to apply best practices in risk management, as required by external regulators and rating agencies.
6.3.2.1 Risk Committees 6.3.2.2 ASR Risk Committee The ASR Risk Committee (ASRRC) provides assurances to enable ASR to identify the most important risks and to possess a comprehensive risk management mechanism. A key function of ASRRC is to ensure that a consistent policy is conducted group-wide and that all risk aspects are addressed.
6.3.2.4.6 ASR Audit Committee The ASR Audit Committee is not a risk committee, but supports the Supervisory Board in fulfilling its supervision and monitoring responsibilities for internal control in the widest sense within ASR, including internal control of financial reporting.
6.4 Financial risks Financial risks can be divided into two categories, i.e. credit risk and market risk.
6.4.1 Credit risk Credit risk is defined as the risk with respect to the result or equity that occurs if a debtor is unable to fulfil its contractual obligations.
6.4.1.1 Credit risk management Within ASR credit risk is controlled by means of various rules, guidelines, principles and procedures for identifying, measuring, approving and reporting risks. This concerns risks in the form of direct issue of credit or through other activities that give rise to a credit risk, such as investment activities and/or reinsurance claims. Given the characteristics of an insurance company, the emphasis is on managing the credit risk in the investment portfolio.
6.4.1.2 Outstanding credit risk The total outstanding credit risk of ASR is measured and presented as the sum of balance sheet totals and potential off-balance sheet balances of customers and counterparties as at 31 December1. The outstanding credit risk is presented on the basis of the classification used in the balance sheet. The basic principle is that this best portrays the nature and the characteristics of the outstanding credit risk.
The table below shows the positions that are subject to credit risk. 2008 2007 Cash and cash equivalents (see chapter 14) 654 483
Total credit risk on balance sheet (net) 22,610 21,042 *) For derivatives held for trading cash positions have been received totalling EUR 150 million.
The duration of impairments, i.e. the period between the first moment of impairment and 31 December, is mostly less than one year.
Carrying amount Total % Carrying amount Total % of receivables of receivables due from customers due from customers Industry sector Private individuals 3,280 74.44% 3,630 79.08%
The table below shows the concentration of balance sheet credit risk as at 31 December according to the place of residence of the customer and the type of counterparty.
Credit risk Percentage Credit risk Percentage on balance sheet on balance sheet Customer’s place of residence Benelux 12,034 51.41% 11,103 52.31%
The table below contains a breakdown of the balance sheet credit risk as at 31 December, according to the place where the customer resides and the type of counterparty with which the transaction was concluded.
All business segments possess adequate measurement instruments, guidelines and procedures to control credit risk, including a completely independent process for examining credits and setting creditworthiness limits and a process for maintaining supervision.
The table below provides an overview of credit quality itemised according to investment quality of debt certificates as at 31 December, based on external ratings.
Total net investments in interest- bearing securities 14,779 100% 13,219 100% Impairments -749 -126 Total gross investments in interest- bearing securities 15,528 13,345 6.4.1.5 Reduction of credit risk Risk avoidance is the technique of lowering the credit risk by hedging or by obtaining securities (pledges or collateral). Hedging is a financial technique that seeks to reduce or eliminate risks caused by products or activities.
A pledge is any promise or any privilege of the counterparty, or a third party, to which ASR can seek recourse for limiting reductions in the value of receivables if the counterparty remains in default. Lending is never purely or solely based on pledges or hedging. These forms of risk avoidance are invoked only in the second instance.
The table below shows the pledges and guarantees received as security for financial receivables and agreements.
Pledges received Carrying amount Financial Property, Other Added value of Non instruments plant and pledges and pledges relative guaranteed equipment guarantees to impairments1) outstanding amount
Total receivables due from customers 4,407 0 2,029 237 719 2,252 1) The amount of received securities and guarantees that exceeds the actual credit risk (calculated on contract basis).
Pledges received Carrying amount Financial Property, Other Added value of Non instruments plant and pledges and pledges relative guaranteed equipment guarantees to impairments1) outstanding amount 2007 Cash and cash equivalents 483 0 0 0 0 483
Due from customers Government and public sector, total 436 0 0 0 0 436
Total receivables due from customers 4,590 0 2,565 191 696 2,530 1) The amount of received securities and guarantees that exceeds the actual credit risk (calculated on contract basis).
An impairment for specific credit risks occurs if there are objective indications that ASR will be unable to collect all outstanding amounts in accordance with the contractual conditions. The scale of the impairment is the difference between carrying amount and realisable value, or the present value of the expected cash flow and the value of security less the costs that must be incurred to realise the security.
Subordinated debt instruments There is currently great uncertainty in the financial markets about the situation concerning financial institutions’ subordinated debt instruments. This uncertainty is being fuelled by all kinds of speculations by analysts, rating agencies and the media about the possibility that interest payments will be missed and call options will not be exercised, and on the other hand by reassuring words by the entities themselves, indicating that interest payments will be met. This uncertainty is causing an absence of liquidity in the market and, by consequence, the extremely low valuation of subordinated loans.
ASR has a widely-spread portfolio of subordinated loans from financial institutions. Therefore, it is not inconceivable that ASR will be affected by actual losses on some items in this portfolio. At present there are no instruments in the portfolio where cash flows are lacking, despite the usually low market valuation.
The table below provides an overview of all positions in the fixed interest portfolio of ASR where a heightened risk is recognised based on the assessed level of concern. For positions with level of concern 3 it is assumed that there is likely to be a permanent and unavoidable reduction of value leading to an impairment.
In line with IAS 39.70, ASR will apply the principle that the positive price changes of impaired instruments will be reversed in the income statement as soon as a change has occurred in the impairment trigger (impairment reversal). An increase in the fair value of an impaired fixed-interest instrument will not lead automatically to reversal of an impairment in the income statement. Internally, ASR applies the principle that on the alteration of the Level of Concern from 3 to a lower level there must be a change in the impairment trigger and as a consequence of a major, irreversible and objectively identifiable positive development in the instrument, meaning that by reasonable standards no further doubt can exist about the collectability of the instrument. In the event of positive price changes in an impaired instrument that retains ‘Level of Concern 3’ status, there will be a reversal of the impairment only to the extent that the price change is a result of the discontinuation of the initial impairment trigger.
‘Held at fair value through profit or loss‘ applies to synthetic instruments with embedded derivatives. In 2002, EUR 358.0 million of the decrease in the fair value of these instruments was attributable to changes to the credit risk attached to the instruments. The ASR portfolio of structured credit instruments was reduced sharply in 2008 as a result of repayments, thus further lowering the risks in structured credit instruments. Management is vigilantly watching the remaining exposure. No new investments were made in structured credit instruments in 2008.
The table below provides information about the period of arrears since the due date of financial assets that have not yet undergone any impairment.
Total receivables due from customers 4,361 0 0 0 0 4,520 27 0 0 27 6.4.2 Market risk Market risk concerns losses that may arise through unfavourable movements in the market that are related to trading in of holding a position in financial instruments. Market risk stems from a variety of factors, such as: • interest-rate fluctuations that influence bonds, other assets with interest-sensitive income and insurance liabilities; • changes to securities prices that influence the value of investment portfolios and insurance liabilities; • exchange rate fluctuations that influence non-hedge cash flows; • changes in the volatility of interest rate levels and securities prices that influence options and other derivatives.
Market risk falls into two categories: ALM risk and trading risk, depending on the term. Trading risk concerns positions taken to make a short-term profit. This does not occur at ASR, so no further attention will be devoted to this risk. ALM risk includes all other positions.
6.4.2.2 ALM risk evaluation All amounts stated in this section of the report are amounts before taxation. ALM risks are assessed, monitored and reported according to four types of risks: interest rate risk, exchange rate risk, share risk and real estate risk. The risk of volatility and credit spread changes has been disregarded in these figures.
The table below shows the maximum loss in the worst-case scenario2, related to the fair value of the equity. This is calculated using a VaR model with a time horizon of one year and a reliability interval of 99.97%. VaR includes risk mitigating instruments (swap options, put options).
Value at Risk 2008 2007 share risk 13% 24% Intrest risk 44% 12% Real estate risk 11% 14% Exchange rate risk 0% 1%
6.4.2.2.1 Interest rate risk The strategic policy is to align the fixed-rate cash flow of investments with the liabilities. Part of the risk that stems from the options in the liabilities is also hedged by means of swaptions. The interest rate risk is measured as part of the VaR. Additional insight is obtained by means of the duration of equity and interest sensitivity of equity criteria.
Duration of equity is an application of the duration analysis used to measure the consolidated interest rate sensitivity. Duration of equity is calculated as the weighted duration of the assets and liabilities. The more the fair value of equity decreases, the more the absolute value of the duration of equity will increase. The calculation assumes that shares and real estate have no duration.
The insurance business generally has a negative duration of equity. This means an interest rate increase leads to a higher value of equity and vice versa.
< 30 days & <= 60 days arrears >60 days arrears 2) Worst-case scenario’s are based on assumptions related to probabilities based on 10 year historical observations.
Duration of equity measures the sensitivity of the value to minor interest rate movements. ASR is naturally also interested in the value variation in the event of sharper interest rate decreases or increases. This matter is discussed in the next section.
6.4.2.2.2 Exchange rate risk The policy is for exchange rate risks to be hedged in principle. This can be set aside if: • the impact of exchange rate volatility is relatively limited; • there is a conviction that a value increase of foreign currency will exceed any interest in euro less any additional hedging fees
(such as non-deliverable forwards); • an (effective) hedge is not operationally possible.
The table below shows the main foreign currency positions as at 31 December 2008 translated into euros (millions).
The main foreign currency positions at 31 December 2007 are shown below. These are net positions (assets less liabilities), after hedging.
6.4.2.2.3 Share risk Some investments consist of shares with the aim of achieving an extra return. To control the share risk the strategic allocation depends on the value at risk (related to the fair value of equity) and solvency. The share risk is reducible by selling shares or by hedging the share position with put options. The share risk is measured as part of the value at risk.
6.4.2.3 Risk mitigation ALM risk is mitigated by means of various instruments. The most important ones are summarised below.
Put options limit the downward risk of a decrease in market of more than 10-22%.
The duration of fixed-interest investments was lengthened in 2008 by the purchase of long-term government bonds and interest rate swaps.
6.5 Liquidity risk Liquidity risk is the risk that occurs if it is not possible to fulfil current (and potential) liabilities or pledged liabilities on the due date. It consists of two components: 1. Finance liquidity risk: the risk that it is not possible to meet expected and unexpected demand for cash by policyholders and other contractual parties without incurring unacceptable losses or damaging the conduct of business.
2. Market liquidity risk: the risk related to an inability to convert assets to cash flows because of unfavourable market conditions or because of market disruptions. In a certain sense it has to do with market risk. Market liquidity risk concerns the liquid value sensitivity of a portfolio due to changes in the size of the corrections to the cash flows and changes in market value. It is also related to the uncertain timeline in realising the liquid value of assets.
Cash flows As at 31 December 2007 < 1 year 1-5 years 5-10 years 10-20 years > 20 years
• Uncertainty: the risk that the actual outcomes will differ from the outcomes predicted by the model. This might occur on the one hand because the circumstances may have changed since the model was developed and on the other hand because the model and its parameters have not been specified up to a certain level. Examples are: - in the case of life: a greater than expected increase in life expectancy as a result of medical advances, or because the random sample on which the models were based is not representative of the company’s portfolio; - in the case of non-life: higher-than-expected general insurance claims because of changes in customer behaviour or because of a legal decision not predicted in the model.
• Extreme events: these are events that do not occur very often, but have a major impact when they do occur. These are oneoff shock movements at the unfavourable end of the distribution of probability. In effect, this is an extreme form of volatility. But these events are identified individually on account of their impact (they often carry a heavy weight in the risk measurement, especially in the high reliability intervals) and because they require specific modelling. Examples are: - in the case of life: a major accident at a company with which group insurance has been concluded leading to the death of a large number of people, or a revolutionary medicine against cancer that leads to a substantial adjustment of life expectancy; - in the case of non-life: a catastrophic natural disaster like a very severe storm, or man-made disasters like a car that causes a train accident.
Reinsurance and other forms of risk mitigation can alter the form of the value distribution. They are used to reduce or limit the volatility of income or to spread the negative impact on value as an alternative to capital.
Periodically there is an evaluation of the extent to which the insurance liabilities are adequate. Any increases in the liabilities found to be necessary are recognised immediately and charged to the income statement. The ASR testing policy for liabilities and processes satisfies the IFRS requirements. They were laid down to give management the assurance that sufficient assets are being held to cover the liabilities. This is done by means of the best possible estimate, on an economic basis and with a high degree of reliability. A mechanism that provides early warnings ensures that appropriate action will be taken. This occurs if the critical level of additional caution (i.e. assets held higher than the best possible estimated level of the liabilities) drops below the 95% reliability interval. Policy also ensures that all legal obligations and obligations in relation to the regulatory authority are met at both the group and local level.
The general adequacy of the liabilities under the insurance contracts as at 31 December 2008 was confirmed by internal and certificated external actuaries.
The table below provides an overview of the premiums paid at product to reinsurers in 2008.
Insurance sector 2008 Written Reinsurance Net premiums premiums written premiums Accident and medical 1,312 -207 1,105
Insurance sector 2006 Written Reinsurance Net premiums premiums written premiums Accident and medical 996 -171 825
To limit the claim risk the insurance company applies a selection and acceptance policy based on claims history and risk models. This is done for each customer segment and each type of activity. The risk of unexpected large claims is confined by policy limits, concentration risk management and specially established risk transfer agreements (like reinsurance).
Liabilities for non-life claims are created for claim events that have already occurred but have not yet been resolved (expired risks). Generally speaking, ASR establishes liabilities for claims for each product category, cover and year. It does so by taking into account cautious, non-discounted benefit estimates concerning past claims and estimates of claims that have not (yet) occurred. Allowance is also made for the costs for resolving the claim and for inflation.
Current risks for claims for which premiums have been received but the risk has not yet ceased to exist are covered by the unearned premiums. The adequacy of the liabilities is tested at least once a year against group policy. Any adjustments that ensue from changes to the estimates of liabilities for insurance contracts are reflected in the current operating result.
The table below provides a prudent estimate of the development of claims over time and an insight into the adequacy of claims liabilities.
Year of claim As at 31 December 2008 (in euro x 1,000) All key figures have not been discounted
The life expectancy of the insured population is expected to continue increasing. Therefore, the probability of an unexpected increase in the mortality risk in the existing activities at portfolio level is not considered significant at this stage. However, there is a chance of an extreme value in the mortality risk as a result of epidemics, an industrial disaster or terrorist attacks. This kind of mortality risk is reduced by conducting acceptance policy, responding alertly to mortality tables and having various insurance excesses and reinsurance agreements for major disasters.
Mortality ratio -5% -16 7 Expenses -10% 174 130 Communication ratio -10% 38 31
6.7 Operational risk The Operational Risk & Management Control department supports management in managing operational risks within ASR. Operational risks may occur due to external factors or uncontrolled internal factors. A distinction is made within operational risk between event risk and business risk. Event risk concerns on the one hand the risk of losses through inadequate or failing internal processes, people and systems and on the other the risk of losses resulting from external events. Legal risks are considered part of event risk, while the strategic risk and reputational risk fall outside the scope. The event risk is controlled internally and can be limited by using the right control processes and controls.
Business risk concerns the risk of losses that result from events that can cause damage to a business activity or from the business environment, such as legal or fiscal changes. The effect generally takes the form of changes in volumes, pricing or margins in relation to a fixed cost level. The business risk is controlled externally but can be limited by effective management.
Assessment and Loss Data Collection; • calculate the Economic Capital in order to cover the operational (event and business) risk for ASR; • ensure that the Operational Risk Framework and its implementation satisfy the applicable laws and regulations such as
The management teams sign off their management control statements and formulate, if necessary, plans of action for improving control. The OR&MC department coordinates reporting on the status and progress of the action plans. At the end of each year, the Management Control Statements serve as affirmation of the functioning of risk management and internal control systems. The MCS process covers the entire ASR organisation. .
As ASR is an organisation that provides financial services, the company recognises the importance of BCM. ASR’s policy is based on international legislation and guidelines for best practices, as described by: • The Business Continuity Institute: Good Practice Guidelines (BCI GPG); • The British Standards Institute6.
The Business Continuity Officer works within the OR&MC department, functionally controlling the local business continuity officers within the different labels and horizontal functions of ASR.
6.7.5 Information Security Information is crucially important to a financial service provider like ASR. This is because a financial service provider has a high intensity of knowledge and information and reliable information is vitally important. Information must be properly protected all the time against a wide range of threats. ASR does this by ensuring a sufficient degree of information confidentiality, integrity and availability by means of a structured approach to information security.
The ASR Information Security Policy (ISP) sets out the organisational structure, its control and the responsibilities and the mandatory guidelines to be followed for information security for ASR and the third parties with which it exchanges information. The ISP of ASR is based on international best practices like ISO/IEC 27001 and ISO/IEC 17799-2005.
The Information Security Officer of ASR works at the OR&MC department, with functional control of the local business information security officers (BISOs) within the various labels, horizontal functions and corporate departments of ASR.
6.7.6 Risk transfer by means of insurance: Corporate Insurance ASR considers insurance a useful instrument for mitigating operational risks. More specifically, ASR is insured against financial loss caused by fraud, computer crime, corporate liability and personal liability.
Entirely in line with established practices in the industry, the following insurance agreements have been concluded with third parties: • corporate liability insurance; • directors’ liability insurance; • fraud insurance.
As a financial institution ASR is subject to supervision by regulatory authorities. Supervision is exercised at the level of ASR and also at the level of individual operating companies.
ASR’s buffer capital was composed in the following manner as at 31 December 2008: Share capital and reserves 1,720 Net result attributable to shareholders -640 Unrealised gains and losses -648 Shareholders’ equity 432 Non-controlling interests 97 Revaluation of real estate to fair value 1,228 Total available capital including remeasured real estate 1,757 Goodwill -48 Intangible assets -16 Value of business acquired (VOBA) -256 Correction for third-party interest in real estate -45 Correction for shadow accounting -404 Innovative capital instruments 598 Subordinated liabilities 88 Test margin 851 Total available capital according to DNB solvency 2,525 Correction for test margin for commutation 876 Correction for test margin for prudential filter 51 Buffer capital 3,452
6) Standaard BS25999-1: Code of practice for Business Continuity Management en BS25999-2: Specifications for Business Continuity Management.
The costs of post-employment benefits and other long-term employee benefits are stated in de table below.
Defined benefit plans -113 -59 -102 Other post-employment benefits -1 -1 23 Total post-employment benefits -114 -60 -79 Other long-term employee benefits -1 -1 -1
The costs concern all members of an ASR pension plan, including a number of employees of (former) Dutch Fortis entities. In 2008, EUR 4 million of the aforementioned costs (2007: EUR 3 million; 2006: EUR 7 million) were charged on and were not for the account of ASR.
The pension costs and other costs of post-employment benefits are stated in the table below
Total defined pension right expense -113 -60 -102 -1 -1 23
Actual return on plan assets 0 -24 23 0 0 0
If the non-qualifying investments were allowed to be considered plan assets, the pension expense would come to EUR 39 million.
Present value of liabilities with qualifying plan assets 0 0 0 0 0 Present value of liabilities without qualifying plan assets 23 20 26 91 81 Liability for defined benefits plans 23 20 26 91 81 Fair value of qualifying plan assets 0 0 0 0 0 Unrecognised pension income (expense) of elapsed length of service 0 0 0 0 0
Assets managed by insurance companies that form part of the group have not been included in the above figures. As at yearend 2008, the fair value of these assets came to EUR 1,350 million (2007: EUR 183 million; 2006: EUR 208 million).
Fair value of qualifying plan assets as at 31 December 0 1,265 0 0
Unrecognised actuarial gains (losses) at 31 December 154 87 18 24
ASR uses the IRS curve as a reference for the expected return on bonds and adds to that return a risk premium for shares and real estate.
Present value of the defined benefit liability 6.8 6.5 6.0 Fair value of plan assets 0,0 0.0 0.2 Net recognised liabilites 6.8 6.5 6.2
The table below shows the changes to liabilities concerning other long-term employee benefits during the year.
Every proposal, every recommendation and every decision concerning remuneration of members of the Board of Directors was subject in 2008 to the provisions of the Fortis Governance Statement. This statement sets out remuneration policy.
10.1 Remuneration of members of the Supervisory Board The members of the former Supervisory Board received no remuneration over 2008 (as in 2007).
A breakdown of the auditor’s fees is provided below: (in millions of euros)
Other non-audit fees 1 2 1 12 Transactions with related parties
Parties related with ASR include non-controlling interests, pension funds, joint ventures, members of the Board of Directors, members of the Supervisory Board and immediate family members of the aforementioned persons. These parties further include entities over which the aforementioned persons exercise control or exercise substantial influence and other related entities.
ASR regularly enters into transactions with related parties during the conduct of its business. The transactions concern mainly loans, deposits, commission and reinsurance contracts and are carried out under the commercial and market conditions applied to non-related parties.
The table below shows the financial scope of the activities ASR entered into with the following related parties: • associates; • joint ventures; • other related parties.
Balance sheet items with related parties as at 31 December: 2008 2007 2006 Investments in associates 143 326 172
Transactions in the income statement for the financial year 2008 2007 2006
The change in balance sheet items with related parties compared with the 2007 financial year was caused by the circumstance that as of 3 October 2008 ASR ceased to be part of the Fortis group. The income and expense items recognise transactions with the Fortis group up to and including 3 October 2008.
The segment information is prepared in accordance with the valuation principles used in the preparation of the consolidated financial statements of ASR (refer to chapter 2).
Transactions between the various segments occur under normal market conditions (at arm’s length).
Balance sheet items are allocated to segments according to the products sold to external customers.
Income related to unit-linked contracts 2,359 0 0 2,359 Other realised and unrealised gains and losses 40 -57 0 -17 Share in result of associates and joint ventures 28 -1 0 27
Fee and commission income 19 95 0 114 Dividend and other investment income 276 22 0 298
Net result for the period 674 232 0 906 Net result attributable to non-controlling interests -17 0 0 -17 Net result attributable to shareholders 657 232 0 889
ASR Nederland N.V. 2008 80 ASR Nederland N.V. 2008 81 13.3 Balance sheet for Life and Non-life business The table below shows the balance sheet data itemised according to life and non-life as at 31 December.
Other assets and receivables as at 31 December were: Derivatives held for trading 371 183 160 Due from banks 871 943 1,177 Due from customers 4,406 4,592 4,887 Trade and other receivables 1,005 1,095 1,029 Accrued interest and other assets 2,024 1,335 1,295 Other assets and receivables 8,677 8,148 8,548 15.1 Derivatives held for trading Derivative financial instruments held for trading as at 31 December were: Derivative financial instruments: Unlisted 334 181 149
The details of the derivatives are described in chapter 28, ‘Derivatives’. Chapter 29, ‘Fair values of financial assets and financial liabilities’, provides further details of the calculation of fair values.
15.2 Due from banks Receivables due from banks as at 31 December were: Interest-bearing deposits 156 179 188 Loans and advances 558 606 835
Receivables due from banks concern business loans and deposits. They are carried at amortised value, if necessary less a provision for bad debts.
15.3 Due from customers Receivables due from customer as at 31 December were: Government and official institutions 382 436 463
The loans concern business credits and are carried at par value, if necessary less a provision for bad debts.
All purchases and sales of financial assets with obligatory delivery within a period of time prescribed by regulation or market convention are recognised at transaction date. This is the date at which ASR enters into the contractual provisions of the instrument. The ‘Other’ line contains mainly the balance of the temporary difference between the amounts at purchase date and at delivery date.
Balance sheet at 1 January 678 689 709 Deferred acquisition costs 90 118 123
As at 31 December the composition of investments was: Investments Available for sale 17,311 15,781 16,164 Held at fair value through profit or loss 410 1,475 1,749
Debt certificates covered by mortgage 370 -42 0 328 Debt certificates covered by other assets 644 -91 -239 314 Private equities and venture capital 23 25 -2 46
Debt certificates covered by mortgage 333 -9 0 324 Debt certificates covered by other assets 656 -26 -109 521 Private equities and venture capital 13 112 -1 124 31 December 2006 Investments available for sale Short-term government securities and other discountable securities 99 0 0 99
Debt certificates covered by mortgage 379 0 0 379 Debt certificates covered by other assets 688 -2 -1 685 Private equities and venture capital 80 83 -14 149
The increase in translation differences and other adjustments stem mainly from exchange rate differences on investments available for sale.
16.2 Investments held at fair value through profit or loss The table below contains details of the investments held at fair value with the incorporation of unrealised impairments in the income statement as at 31 December: Debt certificates covered by other assets 410 1,475 1,749
Measured on the basis of market information 41 Listed 369 Measured on the basis of theoretical models 0 Total 410
Debt certificates covered by other assets are mainly synthetic collateralised debt obligations with embedded derivatives.
Investments in real estate concern mainly land, homes, offices, shops and car parks, primarily in the Netherlands. Real estate investments as at 31 December were: Cost price as at 1 January 2,074 2,022 1,769
Reversal through divestments -593 -163 -544 Transfer to (from) real estate for own use 2 121 -77
Reversal of depreciation through divestments 69 14 25 Other changes 11 20 0 Cumulative depreciation as at 31 December -316 -363 -368
16.4 Investments in associates and joint ventures The table below provides an overview of the carrying amount of the main investments in associates and joint ventures: Joint ventures Deltafort 127 149 171
ASR Nederland N.V. 2008 88 ASR Nederland N.V. 2008 89 2007 Land and Inventory and Buildings Total buildings for motor vehicles under own use construction Cost price as at 1 January 187 110 205 502
Changes in goodwill and other intangible assets The table below shows the changes in goodwill and other intangible assets in the years of 2008, 2007 and 2006: 2008 Goodwill Value of Software and Total business other acquired intangable (VOBA) assets Cost price as at 1 January 41 502 44 587
Cumulative amortisation as at 31 December 0 -134 -37 -171 2006 Cost price as at 1 January 2 502 33 537
Software and other intangible assets generally have a useful life of three years at most.
Amortisation schedule for Value of Business Acquired (VOBA) VOBA is recognised at the time of acquisition of an insurance company or an insurance portfolio. VOBA is written down over the expected term of the acquired portfolio. At least once a year there is an evaluation of whether there is an impairment. This occurs by comparing the carrying amount with the fair value. The expected amortisation schedule for future years is shown below.
All purchased and sold financial assets with obligatory delivery within a period of time prescribed by regulation or market convention are recognised at transaction date. This is the date ASR entered into the contractual provisions of the instrument.
Amounts owed to banks as at 31 December were: Bank deposits Payable on demand 0 0 121
Collateral received for security lending consists of three deposits and one loan, i.e.: • Deposit: EUR 483 million, due date 6 January 2009, interest 2.898% • Deposit: EUR 250 million, due date 12 January 2009, interest 3.147% • Deposit: EUR 168 million, due date 9 February 2009, interest 4.69% and • Loan: EUR 600 million, due date 19 October 2009, interest 5.17%.
Items under ‘Other’ concern collateral received under ISDAs concluded with counterparties. Interest is paid over received collateral. The interest rates for the collateral of EUR 136 million and EUR 14 million are 1.86% and 1.84%, respectively. There are no specific terms, because the term depends upon the development of the value of the instrument, which in principle is determined from week to week.
The table below shows the movements of liabilities arising from insurance contracts: Life insurance- contracts Balance sheet as at 1 January 2006 17,176 Additions charged to the income statement 450 Shadow accounting adjustment -446 Balance sheet as at 1 January 2006 17,180 Additions charged to the income statement 179 Shadow accounting adjustment -472 Balance sheet as at 1 January 2007 16,887 Additions charged to the income statement 1,119 Shadow accounting adjustment -163 Balance sheet as at 1 January 2008 17,843 22 Liabilities related to unit-linked contracts
The table below shows movement of liabilities related to unit-linked contracts based on insurance contracts.
Liabilities related to unit-linked contracts include the guarantee provision and transparency provision.
Deferred tax assets: Assets held for trading (securities trading portfolio/derivative financial instruments/other trading assets) 65 0 2 Investments (held until maturity/available for sale) 84 4 -4
Property, plant and equipment 0 0 0 Intangible assets (excluding goodwill) 0 0 0 Insurance policy and claim reserves -50 -46 -60 Impairment on loans 0 -1 0 Debt certificates and subordinated liabilities 0 -1 -4 Provisions for pensions and benefits after employment ends 0 -33 -10
Deferred costs and revenues received in advance 12 9 6 Unused compensable losses 0 0 0
Gross deferred tax assets 133 -72 -225 Write-down of deferred tax assets 0 0 0 Total deferred tax assets, net of write-down 133 -72 -225
Deferred tax liabilities: Trading assets (securities trading portfolio/derivative financial instruments/other trading assets) 14 20 0 Trading liabilities (sold securities/derivative financial instruments/other trading liabilities) 0 0 -6 Investments (held until maturity/available for sale) -19 -42 -14
Property, plant and equipment -14 28 -15 Intangible assets (excluding goodwill) 0 0 0 Insurance policy and claim reserves -213 1 0 Due from customers 0 -1 -3 Debt certificates and subordinated loans 0 0 0
The final figures for deferred revenues reconcile with chapter 39, ‘Income tax exponse’.
ASR Nederland N.V. 2008 96 ASR Nederland N.V. 2008 97 25 Provisions The table below shows the movements in provisions: Balance sheet as at 1 January 26 26 39 Additional foreseen amounts 28 9 9 Reversal of unused amounts -7 0 -1 Usages in course of year -12 -10 -28
Subordinated liabilities as at 31 December were: The average interest rate on the subordinated loans was 4.9% (2007: 4.9%; 2006: 5.0%).
The subordinated liabilities include an amount of EUR 600 million in non-cumulative guaranteed Trust Capital Securities. Of the remaining EUR 87 million, EUR 67 million has a term less than one year. The other EUR 20 million has a term of between one and five years.
The issue consisted of three tranches: • a tranche of EUR 400 million with a variable coupon of 3-month Euribor plus 1.30% for the first 10 years and an interest-rate of 3-month Euribor plus 2.30% in the subsequent years; • a tranche of EUR 200 million with a fixed coupon of 5.50% for the first 10 years and an interest rate of 3-month Euribor plus 2.30% in the subsequent years; • a tranche of EUR 50 million with a fixed interest rate of 6.25% per year. This applies to the entire term of the instrument, which has been classified as a non-controlling interest (for information refer to chapter 5, ‘Non-controlling interests’).
The tranche of EUR 50 million has been classified as a non-controlling interest. The tranches of EUR 400 million and EUR 200 million have been classified as subordinated liabilities. In the past, this was done with the expectation that these tranches would be repaid on the contractual date of interest rate change. However, it has since been decided not to make use of the early repayment. ASR expects to put forward a proposal in the coming months for exchanging the existing securities.
Derivatives includes swaps, futures, forward contracts and options contracts. The value of all derivative types is derived from underlying interest rates, exchange rates, commodities prices or share prices.
A derivative contract is tradable on the stock market or over-the-counter (‘OTC’). Derivatives traded on the stock market, such as futures and options, are standardised. As a result of the margin obligations imposed by the various stock exchanges they do not generally carry any significant counterparty risk. Derivative contracts traded over-the-counter are agreed mutually by the contractual parties. Other derivatives include the derivatives embedded in some contracts. The hybrid instrument also includes a non-derivative host contract. Consequently, certain cash flows of the hybrid instrument vary in the same way as a separate derivative.
The notional amounts are not recognised as assets or liabilities in the balance sheet. They do not reflect the potential gain or loss that can accompany such a transaction. The risk that ASR runs if a counterparty is unable to fulfil its obligations is limited to the positive net replacement value of the OTC contracts.
Interest rate swaps are contractual agreements between two parties under which interest cash flows are exchanged in the same currency. These liabilities are calculated based on different interest types. For most interest rate swaps there is a net exchange of cash flows. This consists of the difference between the fixed and variable interest payments. ASR uses interest rate swaps among other things to alter the interest features of certain assets and liabilities. For long-term liabilities, for example, an interest swap can be entered into so as to convert an interest instrument with a fixed interest rate to one with a variable rate with a view to reducing the interest rate mismatch. Additionally, ASR uses interest rate swaps to hedge the risk of price fluctuations in the commercial portfolio of securities.
In their most simple form currency swaps are contractual agreements under which payments in different currencies are exchanged regularly or once-only. The value of the contracts depends on the expiry date, interest rates, exchange rates and timing of payments.
Exchange rate contracts, including spot, forward and future contracts, are agreements for exchanging payments in different currencies on a certain date at a pre-agreed exchange rate. The purpose of these contracts is to hedge the net investment and foreign exchange positions.
ASR Nederland N.V. 2008 98 ASR Nederland N.V. 2008 99 28.1 Derivatives held for trading The table below shows derivatives held for trading as at 31 December: Fair Assets Fair Liabilities values notional values notional amount amount 2008 Exchange rate contracts Forward contracts 3 76 1 74 Interest rate and exchange rate swaps 17 177 4 157
Measured on the basis of market information 333 9,491 36 10,072 Measured on the basis of theoretical models 0 0 0 0
Exchange rate contracts Forward contracts 2 177 0 174 Interest rate and exchange rate swaps 41 316 0 263
Capital and indexation contracts Forwards and futures 0 7 0 17
Measured on the basis of market information 181 12,934 23 12,852 Measured on the basis of theoretical models 0 0 0 0
Capital and indexation contracts Options and warrants 59 788 0 24
Measured on the basis of market information 149 9,794 25 9,741 Measured on the basis of theoretical models 0 0 0 0 28.2 Derivatives held for hedging purposes Derivatives held for hedging consist mainly of cash flow hedges. ASR uses derivatives, especially interest rate swaps, to hedge positions in the management of its own assets and liabilities portfolios and to hedge structural positions. This allows ASR to limit the market risk that would otherwise occur through structural disparities between the terms and other features of its assets and liabilities.
The table below shows the derivatives held for hedging as at 31 December: Fair Assets Fair Liabilities values notional values notional amount amount 2008 Exchange rate contracts Forward contracts 0 0 0 0 Interest rate and exchange rate swaps 0 0 0 0
Balance sheet as at 31 December 2008 0 31 1 31
Balance sheet as at 31 December 2006 0 142 1 138
Measured on the basis of market information 0 142 1 138 29 Fair value of financial assets and financial liabilities
The table below shows the carrying amount and the fair value of financial assets and financial liabilities that are not carried at their fair value on the consolidated balance sheet of ASR. The table has been fleshed out with a description of the methods used to determine the fair value of financial instruments.
Liabilities Due to banks 1,651 1,651 Due to customers 59 59 Debt certificates 4 4 Subordinated liabilities 687 446 Other borrowings 509 509 Total financial liabilities 2,910 2,669 2007 Assets Cash and cash equivalents 483 483 Due from banks 943 996 Due from customers 4,592 4,510 Reinsurance, trade and other receivables 1,623 1,623 Total financial assets 7,641 7,612
Liabilities Due to banks 1,690 1,690 Due to customers 13 13 Debt certificates 5 5 Subordinated liabilities 747 751 Other borrowings 1,323 1,332 Total financial liabilities 3,778 3,791
Fair value is the amount for which an asset could be exchanged, or a liability settled between knowledgeable, willing parties in an arm’s length transaction.
If a financial instrument is traded in an active and liquid market, the quoted price or value is the best indicator of the fair value. This will then be applied. The fair value of a large holdings of shares will not be adjusted, unless a binding agreement has been made to sell the shares at a price other than the market price. The most appropriate market price for an asset held or a liability to be issued is the current bid price and for an asset to be acquired or a liability held, the asking price. If ASR holds assets and liabilities with offsetting market risks, mid-market prices are used as a basis for determining the fair value.
If a market price in an active market is unavailable, the fair value is calculated based on the present value or some other valuation method. This will be based on the market conditions prevailing at reporting date. If a valuation method is customarily used in the market to determining the price of an instrument and it has been demonstrated that this method produces a reliable estimate of the price in an actual market transaction, ASR will use this method.
Generally accepted methods in the financial market are recent market transactions, discounted cash flows and option pricing models. An accepted valuation method embodies all factors that market players consider important for pricing purposes. The method must also be consistent with accepted economic models for pricing financial instruments.
Unlisted financial instruments are often traded in over-the-counter (OTC) markets where the market prices are obtainable from traders or other intermediaries.
Market quotations are obtainable from various sources for a number of financial instruments regularly traded on an OTC market. Examples of such sources include the financial press, stock market publications and information from individual market makers.
Instruments without optional features Straight loans, deposits, etc. Discounted cash flow methodology; discounting yield curve is the swap curve plus spread (assets) or the swap curve minus spread (liabilities); spread is based on commercial margin computed based on the average on new production during the last three months.
Subordinated liabilities Subordinated liabilities Discounted cash flow methodology in which spread is based on subordination cost for ASR based on market quotations. .
In general based on the European Venture Capital Association valuation guidelines, using amongst others Enterprise Value/EBITDA, Price/Cash flow and Price/Earnings.. .
Model risk occurs when the product pricing requires valuation techniques which are not yet standardised or for which input data cannot be directly observed in the market leading to assumptions on the input data themselves.
The table below shows the structure of the Insurance premiums presented in the income statement.
Reinsurance premiums are presented in the consolidated income statement under ‘Insurance claims and benefits’.
Individual business Single premiums written 52 101 139 Regular premiums written 870 873 868 Individual business total 922 974 1,007
Individual business Single premiums written 904 808 767 Regular premiums written 605 572 569 Individual business total 1,509 1,380 1,336
Accident and Other Total 2008 health non-life Gross premiums 1,312 1,008 2,320 Changes in provisions for unearned premiums 11 7 18 Gross earned premiums 1,323 1,015 2,338
Changes in provisions for unearned premiums -21 1 -20 Gross earned premiums 1,142 982 2,124
Changes in provisions for unearned premiums -6 6 0 Gross earned premiums 990 987 1,977
The table below shows a breakdown of interest income per product: Interest income on cash equivalents 42 22 22 Interest income on receivables due from credit institutions 60 70 66 Interest income on investments 778 670 573 Interest income from receives due from customers 291 281 370 Other interest income 160 190 330 Total interest income 1,331 1,233 1,361
Total other income 316 335 144 34 Other realised and unrealised gains and losses
The table below shows other realised and unrealised gains and losses on investments: Realised (gains) losses on investments 197 867 231 Other realised and unrealised gains and losses -214 -99 -12 Total other realised and unrealised gains and losses on investments -17 768 219 34.1 Realised (gains) losses on investments The table below itemised the realised and unrealised (gains) losses on investments.
Group companies, associates and joint ventures 37 3 -1 Realised and unrealised (gains) losses on investments 197 867 231 34.2 Other realised and unrealised gains and losses
Other realised and unrealised gains and losses presented in the income statement concern: Assets/liabilities held for trading and derivatives 179 2 -11 Assets/liabilities at fair value with impairments in the income statement -394 -95 -2
All changes to the fair value as presented here are changes to the clean fair value. This is the value without taking into account the allocated interest recognised under interest income and interest expense.
The results of hedging contain the changes to the fair value attributable to the hedged risk. In most cases this concerns the interest rate risk of hedged assets and liabilities and the change to the fair value of the hedging instruments.
For the portfolio hedging of interest rate risks (macro hedging), the initial difference between the fair value and the carrying amount of the hedged item is amortised on allocation of the hedge relationship over the remaining term of the hedged item.
The table below shows the structure of claims and benefits presented in the income statement: Life insurance products -3,749 -2,831 -3,524 Non-life products -1,611 -1,459 -1,237 Other and eliminations 0 2 49 Total claims expense and benefits -5,360 -4,288 -4,712
The table below shows details of the net claims expense and benefits for non-life Insurance: Claims and changes to provision for payable claims -1,203 -1,093 -986 Changes to unearned premiums -185 -154 -24 Changes to liabilities arising from insurance contracts -223 -212 -227 Total claims expense and benefits, Non-life -1,611 -1,459 -1,237 36 Operating and staff expenses
The table below itemises operating expenses and staff expenses: Total operating expenses and sraff expenses -923 -862 -727 36.1 Operating expenses The table below itemises operating expenses.
Rent and related costs of operating lease -5 -5 -5 Rent and other direct costs for property investment -27 -26 -27
Changes to deferred acquisition costs -32 -12 5 Marketing, advertising and public relations -33 -32 -22 Technology and system costs -17 -33 -32 Other investment costs 31 32 9 Maintenance and repair costs -1 -2 -1
Cost price of sales of investment property under development -91 -106 -43
The Other item includes travel & subsistence, Telephone, staff training and depreciation costs.
The personnel establishment at 31 December (in FTEs) was: The average number of employees (FTEs) in 2008 came to 4,588.
Real Estate investments -21 -16 -3 Reinsurance, trade and other receivables -9 -1 -6 Goodwill and other intangible assets 0 -2 -3
Increase/decrease of tax through: Tax-free interest 9 11 17 Tax-free dividends 13 19 23 Tax-free added values 24 102 14 Changes in impairments -51 -4 0 Business and administrative expenses that cannot be set off 0 -1 1 Previously unrecognised tax losses and temporary differences -7 -75 -144 Impact of tax rate changes or temporary differences 0 0 -6 Adjustments for current tax of previous financial years 4 90 154
The change in the previously unrecognised tax losses and the adjustments for owed tax concern mainly the resolution of disputed items with the tax authorities for which a deferred tax liability and an immediate debt were recognised.
The costs and revenues are allocated to the various life and non-life products to determine the technical result. The investment revenues, less the investment costs, are allocated based on the investment profile that covers the insurance liabilities of the product. Investment revenues include the added values that influence the valuation of insurance liabilities and also related deferred acquisition costs and other intangible assets.
The costs are allocated based on the relationship with the product. The non-technical results include all unallocated revenues and costs such as unallocated added values and certain general costs.
Technical result Life The table below shows the technical result for Life: Investment result allocated to non-technical result -38 30 53 Other technical account, after reinsurance -2,598 854 2,043
Benefits and surrenders -2,538 -2,438 -2,939 Changes in liabilities related to Insurance and investment contracts 1,186 -1,149 -1,845 Business costs Acquisition costs -146 -175 -212 Change in deferred acquisition costs -49 -27 -16
Result of technical account for life Insurance before taxes -998 -86 276
Technical result Non-life The table below shows the technical result for Non-life: Net written premiums 2,051 1,895 1,760 Investment result allocated to non-technical result -47 72 113
Fire and other property damage 315 319 -151 -45 7 40.3 Non-life ratios The table below provides an overview of ratios in each Insurance segment.
Claims & disputes ASR is involved as defendant in a number of claims, disputes and legal proceedings arising from the normal conduct of business.
ASR provides for such matters when, in the opinion of the management and after consultation with its legal advisors, its likely that ASR will have to make payments and the payable amount can be reasonable estimated (see chapter 25, ‘Provisions’).
With regard to further claims and legal proceedings against ASR known to the management (and for which, in accordance with the defined principles, no provision has been created), the management is of the opinion, after obtaining professional advice, that the claims have no chance of succeeding, or that ASR can successfully mount a defence against them or that the outcome of the cases is unlikely to result in a significant loss for ASR.
Groeivermogen ASR is involved in a number of legal proceedings concerning the products of Groeivermogen (equity lease products) that have been launched against certain ASR operating companies by individuals or consumer organisations. The claims are based on one or more of the following accusations: • violation of the duty of care; • absence of the second signature required for hire purchase agreements; • absence of a sales licence required under the Financial Supervision Act for the products in question.
‘Funds under management for customers’ presents the investments for customers that are not already on the ASR balance sheet and for which ASR receives a management or advice fee. The managed assets consist of investments in real estate.
The table below shows the changes in the management asset customers.
There have been no material events after the balance sheet date that would require adjustment to the consolidated financial statements of ASR as at 31 December 2008.
Profit from group companies -512 892 686 Other results after taxes -128 -3 -62
The consolidated ASR financial statements for 2008 were prepared on the basis of IFRS as approved by the European Union. Under Section 2:362(8) of the Netherlands Civil Code, the Board of Directors of ASR decided to use the principles for valuation and determination of the result used for the ASR consolidated financial statements for its separate financial statements, commencing in 2005.
The interests held in group companies are carried at net asset value, in accordance with the valuation principles used in the consolidated financial statements of ASR. The share in the results of the interests held in group companies are reported in conformity with principles for valuation and determination of the result used for the consolidated financial statements of ASR.
Participating interest in group companies 2,648 3,465 4,957 Loans to group companies 117 147 316 Deposits with group companies 622 332 552 Total group companies and associates 3,387 3,944 5,825
Revaluation of associates -1,124 -609 377 Change in DPF component -43 -22 0
Loans to group companies 2008 2007 2006 Balance sheet value as at 1 January 147 316 320
Balance sheet value as at 31 December 117 147 316 2 Shares The cost price of the share as at 31 December was: 2008 2007 2006 3 Receivables due from group companies The increase in receivables due from group companies in 2008 is related to the increase in pensions.
5 Cash and cash equivalents Cash and cash equivalents are carried at face value and are at the disposal of the company.
Balance sheet value as at 1 January 2,262 3,257 2,496 Result current financial year -640 889 624 Revaluation of investments -1,124 -686 393
Balance sheet value at 31 December 432 2,262 3,257 7 Paid-up and called-up capital Movements in paid-up and called-up capital were: Subscribed capital as at 1 January 2007: 200,000 shares 100 Subscribed capital as at 31 December 2007: 200,000 shares 100 Subscribed capital as at 31 December 2008: 200,000 shares 100
The par value of ordinary shares is EUR 500 per share. The shares have been fully paid up.
8 Share premium reserve The following movements occurred in the share premium reserve: Position as at 1 January 2007 962 Position as at 31 December 2007 962 Position as at 31 December 2008 962 9 Reserves The table below shows movements in reserves: Net result Statutory Unrealised Other Total attributable reserves gains reserves other to of associates and reserves shareholder losses Balance sheet as at 1 January 2006 533 698 82 121 1,434 Result carried over from previous financial year -533 0 0 533 0 Net result current financial year 624 0 0 0 624
Balance sheet as at 31 December 2006 624 1,075 98 398 2,195 Result carried over from previous financial year -624 0 0 624 0 Net result current financial year 889 0 0 0 889
Result carried over from previous financial year -889 0 0 889 0 Net result current financial year -640 0 0 0 -640
13 Current liabilities 13 Debts owed to group companies The increase in the debts owed to group companies in 2008 is related to the capital additions to participating interests in group companies.
14 Deposits of group companies The increase in group company deposits in 2008 is related to the increase in the group company deposits recognised under group companies and associates (assets). These deposits expire in the first quarter of 2009.
15 Deposits The increase in group company deposits in 2008 concerns mainly deposits with associated companies. These deposits expire In the first quarter of 2009.
Tax on profit Since 3 October 2008, ASR and its subsidiaries have been part of the corporation tax entity of ASR Nederland N.V. Up to and including 2 October 2008, ASR and its subsidiaries formed part of the Fortis Utrecht N.V. corporation tax entity. By law the individual companies are jointly and severally liable for corporation tax owed by the tax entity as a whole. For value added tax purposes, ASR formed up to and including 31 December 2008 part of a tax entity with ASR companies and other former group companies of Fortis with their registered offices in the Netherlands. Since 1 January 2009, there has been a new tax entity with ASR companies for value added tax purposes. By law the individual companies in the tax entity are jointly and severally liable for one another’s VAT debts.
Opinion with respect to the company financial statements In our opinion, the company financial statements give a true and fair view of the financial position of ASR Nederland N.V. as at 31 December 2008, and of its result for the year then ended in accordance with Part 9 of Book 2 of the Netherlands Civil Code.
These provisions come from article 21 of the articles of association. 1. The company may make payments to shareholders and other parties entitled to the distributable profit only to the extent that the equity of the company exceeds the sum of the paid-up and called-up part of the capital of the company, plus the reserves that must be held by law.
4. There shall be no distribution in favour of the company on shares obtained by the company in its own capital. 5. The calculation of profit distribution shall disregard shares on which, under the provisions of clause 4, no distributions may be made in favour of the company.
Appropriation of result The Board of Directors proposes to withdraw from the other reserves the 2008 loss of EUR 640 million.
Company name Fin. % Registered office * Assurantie Maatschappij “De Nieuwe Prudentia” N.V. 100.00 Rotterdam Assure-Money B.V. 30.00 IJsselstein AXI-Plan Beheer B.V. 30.00 Capelle a/d Ijssel * B.V. Dordrechtsche Landbouwonderneming 100.00 Utrecht B.V. Nederlandse Hulpverleningsorganisatie-SOS International 100.00 Amsterdam Banville B.V. 100.00 Utrecht Beheer- en Beleggingsmaatschappij Europlaza B.V. 100.00 Amsterdam * Beheermaatschappij Verenigd Bezit N.V. 100.00 Rotterdam * Beleggingsmaatschappij “De Hoofdpoort” N.V. 100.00 Rotterdam * Bewaarmaatschappij ASR Vastgoed Kantorenfonds B.V. 100.00 Utrecht * Bewaarmaatschappij ASR Vastgoed Winkelfonds B.V. 100.00 Utrecht Breedijk & Biesenbeek Fin. Dienstverl. B.V. 45.00 Amsterdam C.V. Prisma Bleiswijk 21.00 Bleiswijk Campri Vastgoed B.V. 75.00 Utrecht * Caprilande B.V. 95.01 Utrecht CED Holding B.V. 15.96 Capelle a/d Ijssel Combinatie Abel Tasmanstraat 50.00 Rotterdam Combinatie Oostzijde Stationsplein Schiedam C.V. 49.50 Utrecht DAS Holding N.V. 18.14 Amsterdam * De Amersfoortse Beleggingen B.V. 100.00 Amersfoort * De Amersfoortse Onroerend Goed B.V. 100.00 Amersfoort De Amersfoortse Reinsurance Limited 100.00 Dublin. Ierland De Woerd V.O.F. 40.75 Amersfoort * Defensio 1 B.V. 100.00 Utrecht * Defensio 2 B.V. 100.00 Utrecht Deltafort Beleggingen I B.V. 50.00 Amsterdam * Detachering & Support B.V. 100.00 Zeist Dinytei B.V. 19.95 Amsterdam * Ditzo B.V. 100.00 Zeist Eerste Tocht Beheer B.V. 25.00 Nieuwegein Eerste Tocht C.V. 24.50 Nieuwegein Europeesche Verzekering Maatschappij N.V. 100.00 Amsterdam * Falcon Leven N.V. 100.00 Hoofddorp * Falcon Verzekeringen N.V. 100.00 Utrecht Fortis ASR Fonds 99.84 Luxembourg. Luxemburg Fortis Capital Funding LP 100.00 Delaware. USA Fortis Dutch Retail General Partner I B.V. 100.00 Utrecht FRM Ontwikkeling B.V. 33.33 Utrecht
Company name Fin. % Registered office Utrechtse Maatschappij tot Stadsherstel N.V. 13.03 Utrecht V&P Holding B.V. 31.00 Valkenswaard V.O.F. Mahler 4 33.33 Amsterdam * Van Dalen Vastgoed B.V. 100.00 Utrecht Vandenende Adviesgroep B.V. 25.00 Huis ter Heide VanKlaverenStigter B.V. 5.00 Spijkenisse Verenigde Assurantiebedrijven Nederland N.V. 14.35 Rijswijk Villa Academica Monumenten B.V. 100.00 Utrecht Vleuterweide Centrumplan Beheer B.V. 50.00 Gouda Vleuterweide Centrumplan C.V. 49.00 Gouda Vlieg Advies Groep B.V. 30.29 Alkmaar VOF Bouwfonds-Fortis Vastgoed Ontwikkeling Leidsche Rijn 50.00 De Meern * VSB Leven N.V. 100.00 Utrecht Wester IJ-Dock Beheer B.V. 100.00 Utrecht Wester IJ-Dock C.V. 100.00 Utrecht William House LIV B.V. 50.00 Utrecht William House LX B.V. 100.00 Utrecht William House VII B.V. 50.00 Utrecht William House VIII B.V. 50.00 Utrecht William House XIV B.V. 50.00 Utrecht William House XIX B.V. 50.00 Utrecht William House XLI B.V. 100.00 Utrecht William House XLIII B.V. 100.00 Utrecht William House XLIX B.V. 100.00 Utrecht William House XLVI B.V. 50.00 Utrecht William House XVIII B.V. 50.00 Utrecht William Properties B.V. 100.00 Utrecht Wonen op Enka Beheer B.V. 50.00 Nieuwegein Wonen op Enka C.V. 49.00 Nieuwegein Woodpecker Investments B.V. 100.00 Utrecht *) This concerns companies for which a 403 statement has been issued.
This annual report contains certain forward-looking statements, including but no confined to the statements made in the sections headed ‘Report of the Board of Directors’ and ‘Note 6, Risk management’, and other forward-looking statements that are based on present views, estimates and assumptions of the management regarding such future events. The statements are made subject to risks and uncertainties that may result in actual results, performances or events differing materially from those explicitly or implicitly presented in the statements. More general factors capable of influencing results include but are not confined to: 1) general economic conditions, including specific economic conditions in the core market in the Netherlands; 2) changes in interest rate levels and in the performances of financial markets; 3) frequency and scale of insurance claims; 4) level and development of mortality and health figures and the robustness of the insurance portfolio: 5) exchange rates, including the exchange rate of the euro against the US dollar; 6) changes in competition and price climate, including an increase in competition in the Netherlands; 7) amendments to Dutch and foreign laws, regulations and taxes; 8) regional or general changes in the valuation of assets; 9) major natural or other disasters; 10) the ability to reinsure certain risks in an economically responsible manner; 11) the adequacy of loss reserves; 12) amendments to legislation concerning the insurance sector; 13) changes in the policy of regulators and/or foreign authorities; 14) general competition factors on a national scale.
Embedded derivative (in a contract) A component of a hybrid instrument that also includes a non-derivative basic contract. The basic contract may be a bond or share, a lease agreement, an insurance contract or a buy or sell contract.
Derivative A financial instrument (traded on or off the stock market) with a price that depends directly (‘derived from’) the value of one or more underlying values, such as share price indices, securities, commodities prices, other derived instruments or another agreed price index or arrangement.
Discretionary Participation Feature The right of holders of certain insurance contracts and/or financial instruments to get an additional return (besides a guaranteed benefit). The time and/or level of this return depend on the decision of the issuer.
Employee benefits The entirety of non-obligatory insurances and other facilities that employees receive, in addition to their salary, in return for the services they perform.
Core capital The total capital available at group level, based on the definition of Tier 1 capital (core capital expressed as a percentage of the risk-weighted balance sheet total).
Private equity Securities of companies that are not listed on a stock exchange. The sale of private equity is subject to strict rules. Because of the absence of a market an investor must personally find a buyer if he wishes to sell his share in such a company.
Fair value hedge A hedge to limit exposure to fluctuations in the fair value of an asset, a liability or an established agreement. The fluctuation of fair value is related to a specific risk and influences the reported net profit.
Shadow accounting Under IFRS 4 insurers are allowed, but not obliged, to amend their financial reporting principles in such a way that the influence of a recognised part of the unrealised gain or unrealised loss on these valuations is the same as that of a realised gain or an unrealised loss. The related adjustment of the insurance liability (or deferred acquisition costs of intangible assets) must be recognised in the equity if and only if the unrealised gains or losses are incorporated directly into equity.
Value of Business Acquired (VOBA) The present value of future profits (sometimes defined as ‘Value of Business Acquired’, or ‘VOBA) from acquired insurance contracts is presented as an intangible asset and written down over the period of recognition of the premium or gross profit of the acquired policies.
Insurance contracts Contracts that transfer to one party (ASR) a substantial insurance risk from another party (the insuring party) by agreeing to reimburse the insuring party for an unforeseen event that harms the insured party.