in 2009. Excluding gains on claims provisions it increased from 88.1% to 93.6%.
• The share buy-back for 2010 is DKK 900m representing a yield of 8.3%. Topdanmark has not bought back own shares since the announcement of the interim report for Q1 - Q3 2009.
Q4 2009 Key features • The post-tax result increased to a DKK 337m profit in
Steffen Heegaard Head of IR and Group Communications Direct tel.: +45 4474 4017, Mobile: +45 4025 3524
Annual accounts - Group 52 Profit and loss account 53 Statement of comprehensive income 54 Assets 55 Shareholders' equity and liabilities 56 Cash flow statement 57 Movements in shareholders' equity 58 Notes to the accounts 59 Segment information 87 Accounting policies 96 Annual accounts - Parent company
Other movements in shareholders' equity 19 (5) 1 10 2 0 0 Shareholders' equity of parent company
Deferred tax on security funds (389) (389) (348) (348) (348) (348) (348) Shareholders' equity of Group end of period 3,584 3,977 3,368 2,895 4,117 2,895 4,117
Number of shares end of period ('000) 19,189 17,896 15,995 15,663 15,496 15,663 15,496
Non-life insurance - Investment return after transfer to technical result etc. (375) 119 Profit on non-life insurance 42 323 Life insurance 13 118 Parent company etc. (8) 16 Pre-tax profit 47 457
The post-tax result for Q4 was a DKK 337m profit (Q4 2008: DKK 26m loss) while the pre-tax result increased to a profit of DKK 457m from DKK 47m. This improvement was primarily due to an increase in the investment return in non-life insurance to DKK 119m from a DKK 375m loss. The technical result declined to DKK 204m from DKK 417m mostly due to lower interest rates and more agricultural and weather-related claims. The result of life insurance also improved to DKK 118m from DKK 13m which, besides an improved return on investments, was due to the recognition as income of the allowance for risk and the shadow account in Life V.
Non-life insurance Non-life insurance market Key features of the Danish non-life insurance market in 2009: • Financial recession • Estimated premium growth of 0.5 - 1% • Increase in level of fire and theft claims • Increasing loss ratio in workers' compensation insurance • Increasing claims frequency in motor insurance • Declining interest rates • Increasing expense ratio • Continued increasing combined ratios • More disciplined behaviour in the personal insurance market; premium increases announced • Increased competition in the industrial market
The financial recession had an adverse impact on premiums earned and the combined ratio. It is estimated that premiums earned were adversely affected by 2pp due to numerous factors: a decline in the number of cars in use in Denmark, more companies going into liquidation, a reduction in values being insured, fewer employees and fewer change of ownership and contractor’s insurance policies being taken out. The impact of the financial recession on the combined ratio contributed to, among other factors, an increase in fire
Given the developments in the first three quarters of 2009 the growth in gross premiums earned is expected to be 0.5 – 1% for the full year. The automatic price indexation in the personal and SME markets was 4.4%. However, as prices in the industrial market, particularly workers’ compensation, were under pressure in 2009, the average effect of the indexation of premiums is estimated to be around 3%. In addition, there was also the negative recessionary effect of 2%.
Based on Topdanmark’s historical claims data, the level of fire and theft claims increased significantly in 2009.
The claims trend in workers’ compensation was adversely impacted by a Danish Supreme Court decision, the tax reform, declining interest rates and an increase in the expected wage and salary indexation.
The lower interest rates as compared with 2008 had an adverse effect on the combined ratio. As most companies in the Danish market discount their provisions for outstanding claims to present value, the decline in interest rates increased their loss ratios.
Result of non-life insurance Pre-tax profit on non-life insurance was DKK 1,592m (2008: DKK 91m) primarily reflecting a DKK 2,421m increase in the investment return but a DKK 927m decline in the technical result due to lower interest rates, price cuts and an increase in the level of theft and fire claims. Furthermore, the gains on claims provisions were significantly lower than in 2008.
Premiums earned declined 3.2% to DKK 8,665m in 2009. The negative trend in premiums slowed down in Q4 with the decline being 1.3% this quarter.
The effect of indexation was about 3% but the fall in premiums of 3.2% was due to price cuts (minus 1.6pp), lost business in workers’ compensation insurance (minus 2.7pp), lower sales through banks (minus 0.7pp) and a downturn in areas impacted by the recession (approx. minus 2pp) including lower premiums in workers' compensation due to fewer employees, lower premiums in change of ownership insurance due to fewer house sales and fewer vehicles - particularly vans - to be insured.
The claims trend increased to 76.2% in 2009 from 67.7% in 2008.
Gains on claims provisions on own account were DKK 214m in 2009 (2008: DKK 506m) and before reinsurance they were DKK 231m (2008: DKK 498m). This decline increased the claims trend by 3.2pp. The gains of DKK 214m were primarily due to gains on illness / accident and motor insurance, see the table below. Topdanmark continues to believe the provisions are conservative.
The level of fire claims increased DKK 59m or 9.0% to DKK 715m in 2009 from DKK 656m in 2008 providing a 0.7pp adverse effect on the claims trend. Fire claims in Q1 2009 were exceptionally high at DKK 240m while in the last three quarters they were constant at around DKK 160m. The level of fire claims has increased 37% since 2006. Topdanmark does not expect that building claims will decline to the lower level seen in previous years. Therefore, as announced in the H1 report for 2009 Topdanmark has started giving policyholders notice of price increases of an average of 9% in building insurance for businesses and 12% in house insurance for individual households.
As all provisions for outstanding claims are discounted to present value, lower interest rates increase the claims trend. Due to the discounting effect of lower interest rates this year as compared to 2008 the claims trend increased 1.3pp.
The level of large weather-related claims, defined as gross claims exceeding DKK 4.5m per event within a 72 hour period, increased to DKK 63m in 2009 from DKK 41m in 2008 giving a 0.2pp adverse effect on the claims trend.
In spite of the negative effect of the price cuts, the claims trend in motor insurance improved 0.8pp partly due to Topdanmark's more risk-based pricing structure (micro rating) which was initiated in 2007. This contributed to a 3% decline in the claims frequency (the proportion of vehicles with claims) in 2009 while the overall market claims frequency increased 1%.
The expense ratio increased to 14.9% from 14.7%. Expenses reduced DKK 25m as a consequence of, among other factors, an employment freeze which was introduced in 2008. The expense ratio is calculated by comparing expenses with premiums earned. Since premiums earned declined 3.2%, the 1.9% reduction in expenses was not sufficient to avoid a 0.2pp increase in the expense ratio.
The combined ratio excluding gains on claims provisions increased to 93.6% in 2009 from 88.1% in 2008. In the interim report for Q1 - Q3 2009 it was assumed to be "just over 94%" for the full year.
Investment return after transfer to technical result (375) 115 (1,717) 704
The expense ratio declined slightly to 15.6% in Q4 2009 from 15.7% in Q4 2008.
Segment reporting Topdanmark has divided its non-life insurance business into segments: Personal, SME and Industrial.
Personal In 2009 the personal market suffered from the recession (fewer cars, fewer house sales etc.) price cuts in motor insurance and an increase in thefts and fires, which resulted in a relatively limited growth in premiums and an increase in the combined ratios. For example, a number of small and medium-sized companies in the personal market are operating with combined ratios over 100%. Due to the pressure on profitability most of the companies in the personal market gave notice of price increases in contents and house insurance.
The personal segment includes policies for individual households sold by Topdanmark's own sales channels and its distribution partners. Premiums earned increased 1.4% to DKK 4,638m. This growth was adversely impacted by premium cuts previously made in motor insurance, the recession and lower sales through banks, but benefited from the improvement in sales via Topdanmark's own sales channels.
The technical result declined DKK 253m to DKK 448m in 2009 mainly due to a deteriorated claims trend and lower interest rates.
The combined ratio increased to 91.5% in 2009 from 87.1% in 2008.
SME The SME market suffered significantly from the recession in 2009 resulting in a lower volume of premiums due to more business liquidations, reduced insurance covers, fewer employees and a reduced need for, for example, contractors' insurance policies. The SME market was also hit by the increase in fire and theft claims. Furthermore this market saw continued intense competition in workers' compensation insurance.
Premiums earned declined 8.3% to DKK 3,249m primarily due to the loss of business in workers' compensation insurance (corresponding to an 8.4pp decline from 2008), but also due to the recessionary effect (fewer vehicles (primarily vans), a reduction in production facilities, more business liquidations etc.).
The claims trend increased 10.7pp due to lower gains on the claims provisions (5.8pp), more large fire claims and an increase in the number of thefts. In order to improve the poor claims trend premium increases have been implemented on building and property policies for SMEcustomers.
The expense ratio increased 1.1pp to 14.6% due to the decline in premiums.
Premiums earned declined 6.6% from the previous year primarily due to the loss of a number of large customers in workers' compensation insurance (6.4pp). Topdanmark gives priority to profitability over volume and its return requirements were significantly higher than those of a few other players in the compensation insurance market. Topdanmark does not want to participate in the market's periodical focusing on premium growth rather than profitability.
The combined ratio increased to 96.2% in 2009 from 78.3% in 2008. Excluding the gains on claims provisions it increased to 99.6% from 92.9%.
Life insurance Life insurance and pension fund market Key features of the Danish life insurance and pension fund market in 2009: • Financial crisis limited growth • Loss participation schemes introduced in 2008 were either reduced or removed • Moderate bonus rates
In recent years there has been a greater appreciation by the general public that they need to establish private savings for their old age and not only rely on public funds received as a pension. This need is reflected in the collective agreements in the labour market where there has been a general increase in pension contributions obtained through collective agreements, which has in previous years created strong growth in pension savings in Denmark. However, growth slowed significantly in 2009 in step with the after-effects of the financial crisis on people's financial status with the result that their desire to continue spending part of their disposable income on additional pension savings reduced. On the other hand the Danish Parliament passed a tax reform limiting the future deductibility of term life insurance premiums to a maximum of DKK 100,000 which meant a number of savers used the unlimited deductibility for the last time.
As most major businesses have already established corporate pension schemes, competition concentrated on moving existing customers. A number of the market players incurred investment losses in 2008 which made inroads in both collective and individual bonus potential.
Consequently several companies introduced loss participation schemes to ensure that those pension customers who surrender or terminate their contracts also pay their proportion of the equity losses incurred. These loss participation schemes were in force in much of 2009 and significantly reduced the companies’ incentive to change to another life insurance and pension supplier. Due to the improved situation in the financial markets collective and individual reserves were reinstated during 2009 and the loss participation schemes were either reduced or removed.
The turnaround in the result to a DKK 292m profit in 2009 from a DKK 57m loss in 2008 was primarily due to: • The increase in the investment return on shareholders’ equity to a DKK 102m profit in 2009 from a DKK 5m loss in 2008.
(2008: DKK 112m). In Life I "the insurance technical result before bonus contribution” was insufficient to offset the withdrawal from the individual bonus potential and include a consequent allowance for risk in income. Therefore a total of DKK 73m was transferred to the shadow account of Life I which totalled DKK 137m at the end of 2009. The shadow account will be included in income in a subsequent period when the "insurance technical result before bonus contribution" is sufficiently high and the withdrawal from the individual bonus potential has been offset. In Life V the "insurance technical result before bonus contribution" was sufficient to include in income both the risk allowance for the year of DKK 52m and the shadow account, including interest, of DKK 113m.
The return on funds owned by customers, before pension return tax, was 11.5% in Life I and 7.9% in Life V. After pension return tax and the change in provisions to strengthen the guarantees the net return was 10% in Life I and 6.4% in Life V.
Trend in premiums Gross premiums declined 19.4% to DKK 3,208m in 2009 from DKK 3,980m in 2008 due to a reduction in single premiums.
A downturn was also seen in premiums in unit-linked pension savings in 2009 due to a 64.3% decline in single premiums to DKK 138m in 2009 from DKK 387m in 2008 despite regular premiums increasing 14.4% to DKK 431m in 2009 from DKK 377m in 2008. The share of new business written by unit-linked savings was 32.5% in 2009.
Consequently, overall payments into pension schemes in Topdanmark Livsforsikring - including investment contracts – declined to DKK 3,372m from DKK 4,208m.
Developments in Q4 2009 The result of life insurance increased to a DKK 118m profit in Q4 2009 (Q4 2008: DKK 13m) due to, among other factors, a DKK 12m improvement in the investment return on shareholders’ equity and recognition as income of the full risk allowance of DKK 14m and the shadow account of DKK 77m in Life V in Q4 2009.
Transferred to / from shadow account (14) (13) (27) (19) 77 58 Profit in Topdanmark Link 4 6 Financing charges Liv Holding (5) (1)
As a result of the development in the financial markets the collective bonus potential of Life I was used up in 2008 and it was necessary to draw on the portfolio of individual bonus potential on paid-up benefits. The individual bonus potential must be reinstated before shareholders’ can again include a risk allowance in income. Until then risk allowances will be transferred to the shadow account to be included in income in a subsequent period. As a consequence of the withdrawal from the individual bonus potential on paid-up benefits Life I introduced loss participation in 2008.
In 2009 this withdrawal was reduced to DKK 185m from DKK 1,247m and the loss participation was gradually reduced to 3% at the end of 2009. With effect from 1 March 2010 it has been further reduced to 1%.
Loss participation has at no time been introduced in Life V.
However this agreement has been extended until 2011 which has influenced the decision on the rate of interest on policyholders’ savings for 2010. The rate before pension return tax for 2010 has been increased to 2.65% in Life I and maintained at 3.5% in Life V. As in previous years these rates may be subject to change later in the year if the development in the financial markets is different from expectations.
100,000 with tax deductibility. It is expected that these two agreements will increase premium income.
Investment activities Topdanmark Group excluding the life insurance group The investment return in Topdanmark Group excluding Topdanmark Livsforsikring Group was DKK 1,192m in 2009 including revaluation of provisions and income from associated companies but before the transfer to the technical result (2008: DKK 1,052m loss).
This was just over DKK 400m higher than the level assumed at the beginning of the year, calculated using Topdanmark's previous standard forecast assumptions
(equities: 7% p.a., interest-bearing investment assets: three-month forward rate plus 0.75% p.a.). DKK 300m of the increase was due to a higher than assumed return on equities with the remainder from a combination of several contradicting factors predominantly the narrowing of credit spreads and a significantly lower market rate.
It is Topdanmark's policy to accept a certain level of financial risk, given its strong liquid position and stable high earnings from insurance operations, see Risk Management. Topdanmark has invested in, among others, equities, properties and CDOs in order to improve the average investment return. The return in 2009 on the most significant classes of assets is disclosed in the table below: Investment return Portfolio (DKKbn)
The equity portfolios are well diversified with no large individual positions. The composition of the portfolios is based on OMXCCAP for Danish equities (representing 25% of the portfolio at 31 December 2009) and MSCI World in the original currency for foreign equities.
The market value of interest-bearing investment assets owned by the Group excluding life insurance was DKK 14,427m at 31 December 2009, equivalent to 89.2% of total investment assets. The Group's investments have no significant concentration of credit risk except for AAArated Danish mortgage bonds which are considered to be particularly safe assets according to the Danish Financial Business Act.
The class of government and mortgage bonds comprises primarily Danish mortgage bonds and revaluation of technical provisions. In addition, there are a small number of government and covered bonds and derivatives. Covered bonds are AAA-rated mortgage bonds where the size of the loan may not exceed 70% of the value of the security. If the value of the security declines so much that the requirement is not fulfilled, the issuer will provide further security.
The underlying assets of CDOs with a rating lower than AA (DKK 550m) are primarily leveraged loans (DKK 428m) while the remainder are primarily CDOs with investment grade investments as the underlying assets. The underlying assets in CDOs with ratings of AA and AAA (DKK 338m) comprise primarily leveraged loans (DKK 104m), prime mortgage-backed securities (DKK 148m) and investment grade bonds etc. (DKK 50m).
The property portfolio comprises mainly owner-occupied property (DKK 739m), rental property (DKK 351m), rental office property (DKK 68m) and property rented for hotel use (DKK 112m). The tenancies for the residential and hotel properties are subject to a short termination notice but re-letting is not considered to be a problem. The office property is rented under long-term contracts with no option to terminate prior to 2015. Over 99% of the property portfolio is currently let. The properties are valued in accordance with the rules of the DFSA i.e. at market value taking into account the level of rent and the terms of the tenancy agreements.
The class of "Assets related to IA" (illness / accident) comprises the investments in Topdanmark Livsforsikring corresponding to the size of the illness / accident provisions. These investments are calculated as a share of Topdanmark Livsforsikring's overall investments,
Money market etc however, equities and equity instruments have, in advance, been allocated to the life insurance customers.
Model prices As an offshoot of the financial crisis the market pricing of a proportion of Topdanmark's investment assets ceased. Therefore it was not immediately possible to record these assets at market price and Topdanmark did not want to change to the principle of amortised cost widely used by the banking sector. Instead Topdanmark has used the mark-to-model method, as from Q4 2008, on part of the CDO portfolio and other structured products as well as illiquid loans and credit bonds. In the model it is assumed that the default ratio of loans and credit bonds would be 10% p.a. up to and including Q3 2011 when subsequently the rate would gradually decline to a normal level of 3% p.a. Recovery rates are assumed to be 60% for senior debt and 20% for subordinated debt. The calculation rate used is 10% p.a., see note 33 of the accounts.
The assets are only calculated by means of the mark-tomodel method if it is specifically considered that there is no strong market pricing for the specific asset. In line with the improved market of credits in H2 2009, a significant proportion of those investment assets previously recorded at model price at the end of 2008 have now again been recorded at a publicly available value. In the group excluding life insurance the asset exposure totalling DKK 554m at 31 December 2009 was calculated by means of the mark-to-model method, see note 33 (2008: DKK 1,084m).
Topdanmark Livsforsikring Group Profit on investment business in the Topdanmark Livsforsikring Group was DKK 2,583m in 2009 (2008: DKK 2,187m loss) of which DKK 123m (2008: DKK 41m loss) was distributed to shareholders.
The return for the year was substantial, reflecting the significant improvement in the financial markets particularly in the second half of the year.
Specifically, the entire return on equities, equity-related investments and instruments earmarked to hedge the interest rate risk on guaranteed benefits, has been allocated to the benefit of the customers before allocating the remaining return proportionally between the customers, provisions for illness / accident insurance and shareholders, see www.topdanmark.com → Shares → Normalised returns → Life insurance.
At 31 December 2009 the market value of the life insurance group's investment assets was DKK 33,470m of which DKK 14,596m was in Danish fixed-rate bonds, DKK 3,716m in foreign bonds and DKK 1,460m in indexlinked bonds. The life insurance group's property investments had a value of DKK 3,528m.
The investment in shares totalled DKK 4,317m, comprising DKK 1,357m in Danish listed equities, DKK 85m in unlisted Danish equities, DKK 2,351m in foreign listed equities and DKK 524m in unlisted foreign equities. The exposure in foreign equities was adjusted by means of derivatives and consequently the exposure in foreign equities including derivatives was DKK 3,494m.
As stated above, the return on the equity exposure is solely payable to life insurance customers. Life customers' equity exposure in Life I reflects the equity proportion of 22% of the portfolio, while the life insurance customers' equity exposure in Life V reflects 9% of the portfolio.
Life V has invested in interest rate options to hedge the guaranteed benefits. The value of interest options solely payable to life insurance customers is highly sensitive to movements in interest rates as, other things being equal, if there is a 1pp parallel shift downwards in the interest rate curve, their value would increase by about DKK 541m after pension return tax. If the curve makes a parallel shift upwards by 1pp, the value of the interest options will decline by about DKK 319m after pension return tax. If there is a 1pp decline in interest rates, the liability on the guaranteed benefits increases by about DKK 561m and correspondingly drops by about DKK 364m in the event of a 1pp increase in interest rates.
Financing Up to now the goal of Topdanmark's capital structure has been to ensure that its capital base (shareholders' equity and hybrid capital) is sufficient to support its current operations. Equity in excess of this amount is distributed to shareholders by way of regular share buy-backs throughout the year. As a result of this approach to capital structure Topdanmark is financing part of the investment in the insurance group with loans.
Against this background it is believed that the future regulation of the insurance sector will require a minimum level of solvency capital in insurance holding companies corresponding to the solvency requirements of the underlying group companies. Topdanmark has no intention to accumulate unnecessary capital in the group companies and therefore looking forward it is expected that broadly the capital base of the parent company will be sufficient to finance the investments in the group companies. Consequently the parent company will not need significant net refinancing in excess of its capital base.
Taxation The tax charge was DKK 417m of a pre-tax profit of DKK 1,863m. The actual tax rate of 22% deviates from the official tax rate of 25% mainly because equity gains on equities owned for more than three years (DKK 256m in 2009) were not taxable.
The financial recession is continuing into 2010 and is believed to be having an adverse effect on both premium growth and the combined ratio.
In the autumn of 2009 CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) sent a number of recommendations to the EU Commission on an increase in solvency requirements for European insurance companies. The EU Commission is now adapting these recommendations for implementation in November 2012. It is expected that the increase in capital requirements will result in a more disciplined competitive situation with increased focus on profitability in order to meet the tightened capital requirements (Solvency II).
Expected trend in life insurance and pension fund market It is expected that in 2010 the life insurance and pension fund market in general will be characterised by: • Companies ceasing to operate loss participation schemes • Decline in desire to establish pension savings • Several significant regulatory measures • New contribution order
The premium growth for 2010 was based on the following assumptions: • Automatic price indexation in the personal and SME
• Topdanmark will increase prices generating an uplift of DKK 150m in 2010. The full effect of this corresponds to premium growth of 1.7%. However, due to the competitive situation Topdanmark assumes a positive effect on premiums of only 1pp
The assumed combined ratio for 2010 of 91 - 92%, in the Q1 - Q3 2009 report was based on: • Normal annual weather-related expenses of DKK
150m (100% normal storm and cloudburst claims) • At annual report for current financial year: DKK 100m
• At Q1 report for current financial year: DKK 75m (50% normal storm claims and 50% normal cloudburst claims)
• At Q1 - Q3 report for current financial year: DKK 50m (50% normal storm claims and no normal cloudburst claims)
• Declining interest rates from the level on 13 November 2009, corresponding to 0.2pp
Adjusted for the effect of the winter weather-related claims exceeding a normal level by 3 - 4pp, the underlying assumed combined ratio is around 92% for 2010, excluding any gains on / strengthening of claims provisions.
In this light the result of non-life insurance is assumed to be DKK 770 - 880m.
For 2010 there is assumed to be zero growth in regular premiums, although additionally there will be any potential new business from expanded co-operation with Nykredit and Sydbank, see page 15. At this time of the year it is not appropriate to assume the level of growth in single premiums.
It is assumed that both the risk allowances in Life I and Life V in 2010 totalling DKK 137m as well as part of the shadow account of Life I of about DKK 107m will all be included in income. Subsequently the shadow account balance of Life I will be DKK 30m. The shadow account is an accumulation of previous years' risk allowances which it was not possible to include in income because "the insurance technical result before bonus contribution" was not sufficiently high or because the company had used some of the individual bonus potential.
Until the end of 2009 gains on those equities owned for more than three years by the Group excluding life insurance were not taxable. This exception was cancelled from the beginning of 2010. Given a corporation tax rate of 25%, the tax charge is expected to be DKK 260 - 300m.
Total Group profit Overall, in accordance with the profit forecast model, Topdanmark expects a post-tax profit of DKK 800 - 900m
Non-life insurance - Investment return after transfer to technical result etc. 723 280 - 340 Profit on non-life insurance 1,592 770 - 880
Share buy-back In the Q1 - Q3 2009 interim report Topdanmark said that the actual share buy-back in 2009 would be DKK 575m. It also said that at that time it had bought back own shares of DKK 355m and therefore the remaining buy-back for 2009 was DKK 220m. However, no further buy-backs were made in 2009 and therefore the DKK 220m has been transferred to the share buy-back programme for 2010.
Subject to a result corresponding to the profit forecast model for 2010 of DKK 800 - 900m and on the basis of the actual share buy-back effected in 2009, the share buy-back potential for 2010 will be DKK 961m in accordance with the new share buy-back model on www.topdanmark.com → Corp. Gov. → Value Creation → Capital Model → Share buy-back.
At its Capital Markets Day on 9 December 2009 and in announcement No. 18/2009 Topdanmark said that based on a normal profit of DKK 1bn the normal share buy-back in each of the years 2010 and 2011 would be DKK 500 - 600m.
Risk management Topdanmark's policy is to hedge against risks arising from the Company's activities or to limit such risks to a level that allows the Company to maintain normal operations and implement its planned measures even in the case of highly unfavourable events.
Topdanmark could choose to use the excess capital base to accept financial risk but this is not what is intended. On the contrary Topdanmark has introduced more restrictive limits on its financial positions in order to ensure that, with a very high probability, the Company would generate an overall profit even in the event of further breakdown in the financial markets.
The internal auditors report to the Board of Directors on, among other things, the observance of the risk policies and limits set within them.
Review Topdanmark's risk management relates to the following main areas: • Insurance risk • Market risk • Credit risk • Operational risk
Topdanmark's pricing has been aligned with the individual markets and types of customers. In the personal and commercial markets prices are mostly based on standardised rates while major commercial and industrial customers are offered rather more individualised charges.
Provisions are generally calculated on a monthly basis across all lines of business and with the claims trend being assessed monthly, followed up by any necessary price changes. For example, in 2009 and again in 2010, the prices of the house and contents policies were adjusted to counteract the unsatisfactory trend in theft, fire and plumbing claims.
Claims handling In order to ensure uniform and efficient claims handling Topdanmark has grouped the handling of all types of claims into one operational unit.
The claims department operates with day-to-day management of claims notifications and other claims handling in order that the value of the claim does not increase. Simple notification is attended to immediately over the telephone. The time it takes to handle a claim is continuously monitored.
The responsibility for arranging service and purchase agreements has been channelled into one centralised purchasing function to ensure the highest possible discount, quality and security when delivering products and services. Service agreements have been made with, for example, Falck, Falck Health Care, tradesmen, garages, Scalepoint, damage service companies etc.
Quality Topdanmark has developed routines for all major claims processes to ensure that they are handled in a uniform and controlled manner. These are supplemented by rules governing the level of professional and financial competence expected of each of the claims employees.
Claims handling supported by a new claims system Topdanmark has implemented a new claims handling system in its personal lines and motor insurance intended to support, among other things, professional accuracy. From measurements taken of the system it can be seen that there has been a significant improvement in quality.
Topdanmark's level of provisions for change of ownership policies is based on statistical analyses of the pattern of claims notifications compared to the remaining period of the policies.
The sufficiency of the provisions is tested in key lines by calculating the provisions using alternative models as well and then comparing the compensation with information from external sources, primarily statistical material from the National Board of Industrial Injuries and the Danish Road Sector / Road Directorate.
In the event of a third or fourth storm in the same year there is cover up to DKK 795m with a retention of DKK 20m. Most of the cover of the third and fourth storm is dependent on there not being two individual storms each exceeding DKK 3.8bn.
Topdanmark has reinsurance cover of DKK 100m for accumulated annual cloudburst claims exceeding DKK 50m. For a claim to be accumulated, it must exceed DKK 7.5m.
It is expected that the national guarantee scheme covering terror claims which include an element of NBCR (nuclear, biological, chemical, radiological) will take effect in 2010. At the same time the Danish non-life insurance companies will work to establish a terror pool. Each company's share of the pool will be based on its market share in the non-life insurance market.
Cumulative risk Cumulative risk comprises both known and unknown cumulative risks.
Known cumulative risk is where it has been recognised prior to the event that several policyholders could suffer from the same event. An example of known cumulative risk is where Topdanmark insures several shops in the same shopping centre. In the event of a fire it is foreseeable that several policyholders could suffer together.
Unknown cumulative risk is where several policyholders could suffer from the same individual event without the common risk being recognised prior to the event occurring. An example of this is the fireworks disaster in Seest in 2004 when many personal, commercial and industrial customers, quite unexpectedly, were hit by the same event.
Industrial accident and disease Industrial accident insurance is a compulsory policy paid by employers by taking out workers' compensation policies with Danish insurance companies. In workers' compensation the reinsurance companies cover up to
Flood and storm-damaged forests Danish insurance companies do not cover damage arising from floods or the cost of replanting of forests following storms.
These types of claim are covered by the Danish Flood Fund which is a self-sustaining, public fund financed by an annual fee of DKK 20 per fire policy charged on to the customers by the insurance companies.
The limits for these financial risks are fixed by Topdanmark's Board of Directors. In practice, Topdanmark Kapitalforvaltning (asset management) handles the investment, finance and risk alignment processes. It is controlled on a day-to-day basis to ensure that the limits are observed. The result of this is reported to the Board of Directors.
Equity risk Topdanmark is exposed to equity risk from direct investments as well as those investments made via derivatives. The equity risk is calculated as the loss arising if there was a 10% decline in all equities.
All of the Group's insurance companies may raise money market loans as part of the day-to-day liquidity management. Typically the maturity of such loans is less than a month. Both the subordinated loan raised by Topdanmark Forsikring and any outstanding money market loans will be repaid from the cash generated from operations.
Risk of investments in the life insurance group The goal and risk profile for those customers who are saving in the life insurance companies is fundamentally different from the profile for Topdanmark's investment in the shareholders' equity of the life insurance company.
Specifically, the return on equities, equity-related investments and instruments earmarked to hedge the interest rate risk on guaranteed benefits, has been transferred to the life customers, before allocating the remaining return between customers, shareholders’ equity and provisions for illness / accident.
Bonus potential A proportion of the customers’ accumulated value comprises both collective and individual bonus potential. The collective bonus potential is an undistributed reserve acting as a buffer against fluctuations in the value of the customers’ share of assets and liabilities. At 31 December 2009 the collective bonus potential was zero in Life I and DKK 185m in Life V. If the adverse fluctuations exceed the value of the collective bonus potential, the individual bonus potential would be affected. Looking at it simply, the individual bonus potential is calculated as the difference between the customer’s savings and the market value of the accrued commitment earned by the customers at the time of their calculation. If the market value of the customers’ share of the assets is lower than their savings, the individual bonus potential will be reduced. Thus the individual bonus potential also acts as a buffer against fluctuations in the value of the customers’ share of assets and liabilities. A significant proportion of the individual bonus potential in Life I can be used before its shareholders' equity would be affected. In Life V the adverse fluctuations exceeding the value of the collective bonus potential will be partially covered by a reduction in the individual bonus potential. The remainder will be covered by shareholders’ equity. As the total individual bonus potential was DKK 4,523m in Life I and DKK 173m in Life V at 31 December 2009, together they represent considerable protection of shareholders’ equity.
However, the utilisation of the individual bonus potential provides a restriction as it must be reinstated before a risk return and a reinstated shadow account, if any, can be included as income in shareholders’ equity.
In January 2004 all the 4.5% policies were transferred to a newly established company (Life V), the investment policy of which focuses on ensuring that the company can meet the benefits guaranteed. The proportion of equities is low and most of the interest rate risk in liabilities has been hedged.
Risk of increase in life expectancy Topdanmarks best estimate of the rate of mortality used for the calculation of the life insurance provisions is the Company’s assessment of the existing actual rate of mortality and the future improvement in life expectancy. The mortality rate used is based on assumptions up to five years for men and 6.75 years for women above the G82 life expectancy assumptions. Such an increase in life expectancy above the existing best estimate will increase the life insurance provisions and will be covered by the collective and individual bonus potential as described above. A significant change in the mortality assumptions as at 31 December 2009 corresponding to a 25% reduction in the mortality rate would reduce the individual bonus potential in Life I by about DKK 50m and the collective bonus potential in Life V by about DKK 140m.
Topdanmark is exposed to credit risk in both its insurance and investment business. Within insurance the reinsurance companies' ability to pay is the most important risk factor. Topdanmark minimises this risk by primarily buying reinsurance cover from reinsurance companies with a minimum rating of A-. Accordingly 99% of its storm cover has been placed with such reinsurance companies.
The investors of the top tranche will incur losses only if these are of such a size that the lower tranches lose their value. Accordingly the risk of the investors of the top CDO tranche is much lower than that of the investors of the underlying portfolio. The risk profile is comparable to an investment in an underlying asset where cash security has been provided to cover any losses. This protection is relatively high: in a typical CDO with bank loans as the underlying asset (CLO) the AAA tranche will only suffer if the size of the overall losses, following the sale of securities, exceeds between a third and a quarter of the portfolio value.
It is the opposite for the investors in the sub-tranche who are the first to bear any losses that cannot be covered by earnings. Once the bottom tranche has been eliminated, any further losses will move upwards in the subordination order. However, the sub tranche is not without protection. The losses on the portfolio are not incurred immediately and normally the cash flows attributed to the sub-tranche will be high during the first years of the CDO's life. If the underlying assets perform adversely, the cash flow of the sub-tranche will stop for a shorter or longer period or stop completely but before then a good deal of the original investment will have returned by way of regular payments.
Operational risk Operational risk is a term for all those risks of financial losses a company is exposed to besides credit risk, market risk and liquidity risk. It includes the occurrence of unforeseen events with an adverse impact on the company, for example, errors in internal processes, human errors, system errors, breakdowns of IT systems and losses incurred due to external events.
IT exposure The strategy for Topdanmark’s IT emergency plan has been accepted by the Board of Directors. This includes plans for re-establishing the IT environment if the systems suffer breakdowns.
In order to reduce the probability of breakdowns of the IT systems and limit the duration of them, Topdanmark has invested in, for example, emergency power plants with a diesel generator, disk mirroring, alarms and automatic fire fighting equipment. Critical IT equipment is in duplicate and placed in two machine rooms 300 metres apart. Topdanmark has also invested in IT systems to control the employees’ behaviour.
If all the events of the table occurred at the same time, the losses would to a great extent be covered by the collective and individual bonus potential. The overall effect for Topdanmark would be a loss of DKK 525.4m representing 11.8% of the parent company's shareholders' equity.
Excess return on interest-bearing assets 18 1.3 percentage point decline in loss ratio 115
Assuming a 1pp increase in interest rates from one day to the next and unchanged inflation, the first year's effect of the increase in interest rates is illustrated below.
The current European solvency rules and the traffic light rule have been known and used for a number of years while individual solvency requirement is a calculation which was reported on for the first time after the publication of the 2007 accounts.
During 2009 the parent company and the Group have observed the current solvency requirements.
Topdanmark views the individual solvency requirement as a temporary solution prior to the introduction of the expected principles of Solvency II. Therefore it has chosen to base its calculation of individual solvency requirement on the model for the EU's Solvency II test calculation QIS4 which is expected to be similar to the future Solvency II standard. However, in several respects Topdanmark has used other methods to make the individual risk calculation more accurate, such as: • For non-life insurance risks Topdanmark uses an internal model with random simulation of the risks
• For the life insurance companies Topdanmark uses the QIS3 model but with its own scenario model for the distribution of risk between customers and shareholders' equity which better reflects the riskcontrolling effect of the bonus potential than the QIS3 model
In its 2008 Annual Report Topdanmark presented a consolidated solvency calculation with the corresponding capital base. It has now been clarified that the individual solvency requirement is to be calculated at individual company level and consequently the consolidated calculation is not relevant.
It is expected that the Solvency II principles of the effect of risk management and risk control on the size of the solvency capital requirement will be similar to those of individual solvency requirement. These principles aim to achieve good risk management and a high degree of risk control which in turn will reduce the solvency capital requirement. Topdanmark's current spread of risk, risk management, risk control and risk measurement already provide a basis for a relatively low solvency under individual solvency requirements. Therefore Topdanmark feels well prepared to meet the expected requirement of Solvency II in 2012.
Topdanmark is preparing for Solvency II by having employees from claims actuarial services, asset management, financial and compliance departments and others all together working on a project reporting to the CFO.
Today Topdanmark uses a partial, internal model to calculate the non-life insurance risk, which is expected to be approved as a partial, internal model in the Solvency II calculations of solvency requirements.
Topdanmark has included the expected numerical consequences of Solvency II in its capital model.
However, as Topdanmark is subject to public regulation, it must meet the capital requirements of Solvency II. Initially Solvency II was intended as a risk-based regulation but due to the financial crisis, amongst other factors, a number of additional buffers and requirements have been suggested which are not proportional to the actual risk. As a result of this Topdanmark is particularly hit by the fact that the solvency requirement is not adjusted for profitability and consequently the capital requirement on Topdanmark is the same as that on a similar company with significantly lower profitability and consequently higher risk.
Topdanmark's Board of Directors has an authorisation granted in the Articles of Association to increase the Company's share capital, to raise convertible loans and / or issue warrants. The issues may be with or without preemptive rights for the Company's shareholders. The total authorisation is restricted to 250,000 shares. The current authorisation expires on 15 April 2013.
Finally, for the period until the Annual General Meeting in 2010 the Board of Directors is authorised to acquire own shares up to 10% of the share capital for the purpose of ownership or security. The shares can be acquired at a minimum market price of DKK 10.5 per share and a maximum price of current market value plus 10%. It is a standing authorisation which, subject to the approval of the general meeting, is renewed each year at the Company's Annual General Meeting.
At 31 December 2009 Topdanmark’s share capital totalled DKK 169,064,930 divided into 16,906,493 shares of DKK 10 each, corresponding to 16,906,493 voting rights.
The process of accounts preparation The Board of Directors and the Board of Management have the overall responsibility for the risk management and the organisation of controls of the Topdanmark Group in respect of the process of accounts preparation including the observance of relevant legislation and other regulations related to the accounts preparation.
The Board of Management continuously monitors the observance of relevant legislation and other rules and
provisions on the accounts preparation and regularly reports on this to the Board of Directors.
The working plans adopted for the audit committees include: • Monitoring of the process of accounts preparation including regular check and assessment of annual and interim reports, schedules for closing of interim accounts, the organisation and competence of the accounting function as well as material accounting policies and accounting estimates
• Monitoring of the efficiency of internal risk management and control systems including check and assessment of systems for identification, prioritisation and prevention of financial and operational risks, procedures to prevent fraud including accounting manipulation, internal controls of the reliability of the accounts preparation and observance of relevant legislation
The Company has internal auditors who refer and report to the Board of Directors and, in accordance with an audit plan adopted by the Board of Directors, randomly select and audit routines and internal controls in significant and high risk areas which include the Annual Report and preparation of the accounts.
Risk assessment The Board of Directors' working plan ensures that at least once a year the Board of Directors and the Board of Management make a general assessment of the risks relating to the accounts preparation process. In this assessment the Board of Directors specifically considers the organisation of the Topdanmark Group in respect of: • Risk measurement and risk management • Accounting and budgetary organisation • Internal controls • Rules governing the authority to bind the company • Division of duties or compensating procedures • IT organisation and IT security • Outsourcing
Accounting process The risk management and internal controls of the accounts preparation is intended to present an annual report which meet International Financial Reporting Standards as adopted by the EU and the additional Danish disclosure requirements of Nasdaq OMX, Copenhagen and the Danish Financial Business Act on annual reports prepared by listed financial services companies.
The accounting department is responsible for the preparation of interim and annual reports. Key contributors are: • Non-life and life actuarial services (technical provisions) • Asset Management (financial assets and liabilities) • Finance functions (calculation and distribution of costs etc.)
Announcement No. 02/2010 from Topdanmark A/S Page 37 of 108 business sector to review developments in their portfolios, the results of the past period and the forecast for the year.
The Management's Review is prepared by the Investor Relations Department (IR) on the basis of information provided by a number of departments such as the accounting and finance functions, Asset Management and business segments.
Internal and external auditors review the book keeping, the presentation of the accounts and the Annual Report in general by focusing particularly on the most significant risk elements.
This is done by, among other things, incorporating and maintaining a responsible company culture with good management throughout the organisation. Topdanmark has a decentralised organisational structure based on framework control. In the day-to-day activities homogenous behaviour is supported by a set of management and customer-oriented values, see www.topdanmark.com → Corp. Gov. → Management principles.
They are all entitled to attend and vote at general meetings. Shareholders who are not able to attend general meetings can vote by proxy on each item of the agenda, however their proxy is only valid for one general meeting.
Decisions at general meetings are made by a simple majority of votes unless a special majority or representation is required by the Danish Companies Act or the Articles of Association. The Articles of Association provide that decisions on the alteration of the Articles of Association are only valid if adopted by an affirmative vote of not less than two thirds of the votes cast as well as of the capital represented at the general meeting. The Articles of Association provide no restrictions on voting rights.
The Board holds at least six ordinary Board meetings a year plus an annual Board seminar dealing with strategic issues and other forward-looking topics.
Topdanmark’s current Board of Directors reflects diversity in many areas including professional background and education, sex and age. Its members have experience from both the financial, industrial and agricultural sectors, both nationally and internationally. The Board of Directors believes that this composition enables it to consider a given problem from many different angles which is confirmed by experience from the day-to-day Board work. Read more about each Board member’s background and competence on www.topdanmark.com → Corp. Org. → Organisation → Board of Directors and under “Board of Directors and Board of Management” in this Annual Report.
The Board of Directors believes that due to their many years' managerial positions in listed and financial services companies all three members possess the necessary accounting qualifications to perform the tasks required of the audit committee. As far as the two independent audit committee members are concerned the Board highlights the following for special mention: • Anders Knutsen graduated with an MSc (Economics)
statutory audit have been prepared and performed in an appropriate way considering its size and complexity.
Therefore the Board of Directors considers both Anders Knutsen and Annette Sadolin to be independent members with appropriate accounting qualifications.
The audit committee holds at least four meetings a year. On www.topdanmark.com → Corp.Gov. → Internal controls → Audit → Audit committee → the rules of procedure for the audit committee of Topdanmark A/S and the joint audit committee for Topdanmark Forsikring Group are available.
This was followed by new recommendations for Corporate Governance in Denmark in 2005 by the Committee on Corporate Governance. The recommendations were updated on 6 February and 10 December 2008. They are available to the public on the Committee's website www.corporategovernance.dk. On 15 December 2009 the Committee submitted proposals for new Corporate Governance recommendations for consultation. The new recommendations are expected to take effect from April 2010.
• The Annual Report to disclose the amounts of total remuneration of the individual members of the Board of Directors and the Board of Management as well as other benefits.
In response, Topdanmark publishes information on the shares and the basic and performance-related pay at a group level for both the entire Board of Directors and the entire Board of Management.
Topdanmark believes that the market will receive no further relevant information by publishing this information at an individual level.
Of course Topdanmark observes the relevant rules on reporting the details of the trading and other transactions in the Company's shares by insiders. Therefore any changes in the shareholdings etc. in Topdanmark held by the Board of Directors and Board of Management are regularly reported at an individual level.
Topdanmark believes that there is no need for additional information in the Annual Report on the shareholdings.
• The Annual Report to disclose information on the individual pension schemes of the Board of Directors and the Board of Management.
• Board members who are the managing director of an active company may hold a maximum of three ordinary directorships or one chairmanship and one ordinary directorship besides the directorship in Topdanmark.
Topdanmark has set no fixed limits on the number of other positions a Board member can hold. Topdanmark believes that it is up to each individual Board member to decide how many other positions they can handle and that the amount of managerial work varies significantly from company to company.
The share price reflects expected value creation potential at group level. This is one of the reasons why Topdanmark believes that the right to purchase options rather than the receipt of individual bonuses encourages the executives to be more holistic in their approach to value creation.
The cost of the issue of employee shares and bonds was DKK 63m in 2009, which has been calculated at fair value according to the IFRS 2 on share-based payments. At the end of 2009 employee shares represented 3.01% of shareholders' equity.
For 2010 Topdanmark has already granted 130,000 share options to its Board of Management and a number of executives. The strike price of DKK 776 was fixed at 110% of the market price of Topdanmark's shares on 30 December 2009 (average of all trades). The options were paid for by the individuals concerned.
At the end of 2009 the exposure of the options held by the Board of Management represented 0.7% of shareholders' equity.
The key words of Topdanmark's CSR policy are responsibility and prevention: responsibility in the form of focusing on its main talent - to conduct insurance business in the Danish market - and responsibility for its most important stakeholders.
Prevention The foundation of Topdanmark's insurance business is to operate the company as efficiently as possible in order to offer good products at competitive prices.
Environment Topdanmark’s CO2 emissions (heat, electricity, transport and air travel) reduced by 2.5% in 2009 to 8,412 tons of CO2 primarily due to a decline in the consumption of electricity following investments in green IT. Topdanmark has initiated a number of CO2-limiting initiatives such as renovation of lighting and ventilation at the head office and continued utilisation of green IT. It is expected that these initiatives will help reduce the CO2 emissions from the 2009 level through to 2013.
In 2009 Topdanmark joined the CDP, which is an independent, international non-profit organisation supported by a number of large institutional investors intended to promote the dialogue on companies' CO2 emissions and climate strategies.
Investor relations Topdanmark gives a high priority to Investor Relations (IR) in order to ensure that as far as possible: • Value creating activities are reflected in a fair price for Topdanmark's shares • The liquidity of Topdanmark's shares is high in order that they are not traded at a discount due to a lack of liquidity
• High level of knowledge of and confidence in Topdanmark's shares is secured
Topdanmark endeavours to be active and outreaching to investors in Denmark and abroad through the use of information channels such as: • Investor meetings • Telephone meetings
• Conference calls • Web casts • Investment and insurance conferences
During the past year Topdanmark held just over 150 investor meetings.
The following shareholders own between 5 and 10% of the share capital. • Danish Labour Market Supplementary Pension (incl.
• The Capital Group Companies 40 Grosvenor Place London SW1X 7GG UK
Annual General Meeting The Annual General Meeting will be held on Tuesday 20 April 2010, 15:00 (CET) at: Radisson SAS Scandinavia Hotel Amager Boulevard 70 2300 Copenhagen S
The Board of Directors proposes election of: Anders Knutsen Jens Maaløe Michael Pram Rasmussen Annette Sadolin Søren Thorup Sørensen Knud J. Vest
Company announcements Topdanmark submits announcements to Nasdaq OMX, Copenhagen with information on material and relevant events in the Group which can affect the price of Topdanmark's shares. The announcements are also sent to the press, share analysts, investors and other interested parties.
The announcements are available on www.topdanmark.com → Announcements 2010 04 Jan 01/2010: Issue of options 2009 30 Dec 19/2009: Share capital and voting rights in Topdanmark 09 Dec 18/2009: Topdanmark’s Capital Markets Day 2009 02 Dec 17/2009: Exercise of warrants 30 Nov 16/2009: Result of sale of employee shares and issue of employee bonds 24 Nov 15/2009: Topdanmark Interim Report for Q1 - Q3 2009 29 Sep 14/2009: Options and employee shares - Share capital and voting rights in Topdanmark - New audit manager 04 Sep 13/2009: Exercise of warrants 25 Aug 12/2009: Topdanmark 2009 Half Year Report 17 Jul 11/2009: Major shareholder information pursuant to Section 29 of the Danish Securities Trading Act 30 Jun 10/2009: Share capital and voting rights in Topdanmark 09 Jun 09/2009: Exercise of warrants 19 May 08/2009: Topdanmark's Interim Report for Q1 2009 05 May 07/2009: DKK 35m profit in Q1 2009 and unchanged profit forecast model for 2009 21 Apr 06/2009: Annual General Meeting of Topdanmark on 21 April 2009 31 Mar 05/2009: Notice convening AGM of Topdanmark - Share capital and voting rights in Topdanmark 26 Mar 04/2009: Major shareholder information pursuant to Section 29 of the Danish Securities Trading Act 26 Mar 03/2009: Exercise of warrants 11 Mar 02/2009: Topdanmark's Annual Report 2008 02 Jan 01/2009: Issue of options
Trading reports 2010 04 Jan 01/2010: Trading in Topdanmark's shares by insiders 2009 04 Sep 04/2009: Trading in Topdanmark's shares by insiders 27 Mar 03/2009: Trading in Topdanmark's shares by insiders 23 Mar 02/2009: Trading in Topdanmark's shares by insiders 02 Jan 01/2009: Trading in Topdanmark's shares by insiders
Previous positions held: 1979 - 1982: Nye Danske Lloyd 1982 - 1984: Baltica Forsikring A/S 1984 - 1986: Deputy General Manager, Baltica Forsikring A/S 1986 - 1988: General Manager, Baltica Forsikring A/S 1988 - 1995: Group Managing Director, Baltica Forsikring A/S 1995 - 1996: Group Managing Director, Tryg-Baltica Forsikring A/S 1996 - 2006: CEO of Topdanmark A/S and Topdanmark Forsikring A/S
Offices held: Member of the Boards of Directors of: • Rossini Caviar A/S (Chairman) • Copenhagen Business School (Chairman) • LADEGAARD A/S (Chairman) • Fritz Hansen A/S (Deputy Chairman) • Augustinus Fabrikker A/S • kk-group A/S
Offices held: Member of the Boards of Directors of: • NKT A/S • Ingeniørhøjskolen i Århus
Offices held: Member of the Boards of Directors of: • EFBA (Chairman) • Danish Agro (Deputy Chairman) • Dansk Pelsdyravlerforening/Danske Pelsauktioner • Danske Andelsselskaber • DLA Group
Board of Management Christian Sagild CEO of Topdanmark A/S DOB 1959, joined Topdanmark in 1996, joined Topdanmark's Board of Management on 1 January 2006
Information on the Board of Management's responsibilities, as required by Article 80 of the Danish Financial Business Act, is shown in the Annual Report for Topdanmark Forsikring A/S
TECHNICAL PROFIT ON NON-LIFE INSURANCE 904 1,437 1,601 1,824 905 LIFE INSURANCE
TECHNICAL PROFIT / (LOSS) ON LIFE INSURANCE 98 41 21 (41) 123 Profit / (loss) on investment activities after transfer to technical results 493 775 67 (1,765) 878
PROFIT / (LOSS) FOR THE YEAR 1,160 1,692 1,271 (189) 1,446
Strengthening of / gains on claims provisions on own account (47) 34 324 506 214
Acquisition costs (778) (738) Administrative expenses (530) (534) Reinsurance commission and share of profits 80 70 Total operating expenses on own account (1,228) (1,202) TECHNICAL PROFIT ON NON-LIFE INSURANCE 4 1,824 905
Claims and benefits paid 6 (2,031) (1,428) Reinsurance cover received 4 6 Change in the provisions for claims and benefits (7) 5 Claims and benefits paid on own account (2,034) (1,417)
Technical profit on non-life insurance 1,824 905 Technical profit / (loss) on life insurance (41) 123
Income from associated companies (21) (11) Income from investment properties 8 200 255 Interest income and dividends etc. 2,172 2,048
Profit / (loss) per share 13 (12.1) 92.2 Profit / (loss) per share, diluted 13 (12.1) 91.7
Profit / (loss) for the year (189) 1,446 Revaluation of owner-occupied properties 118 3 Transferred to the collective bonus potential (97) 0 Pension return tax (7) 0
Other comprehensive income taken to shareholders' equity 10 2 Total comprehensive income for the year (179) 1,448
Current tax assets 296 260 Deferred tax assets 22 73 40 Liquid funds 174 259
Accrued interest and rent 541 435 Other prepayments and accrued income 123 197 TOTAL PREPAYMENTS AND ACCRUED INCOME 664 632 TOTAL ASSETS 52,035 56,554
Pensions and similar commitments 29 52 46 Deferred tax liabilities 22 162 249 Deferred tax on security funds 348 348 TOTAL LIABILITIES PROVIDED 562 643 DEPOSITS RECEIVED FROM REINSURERS 49 68
Gross premiums written 3,713 3,229 Claims and benefits (2,015) (1,413) Expenses paid (307) (304) Reinsurance ceded 2 23 Cash flow from life insurance 1,393 1,535
Payments made and received on investment contracts 203 132 Interest income and dividends etc. 2,347 2,395 Interest charges (190) (317) Pension return tax 23 (121) Corporation tax (230) (259) Other income and expenses (40) (39) Total cash flow from operations 4,897 4,256
Cash and cash equivalents at 1 January 3,991 9,001 Revaluation of cash and cash equivalents (8) 14
Cancellation of own shares (10) 10 0 Share buy-back (371) (371) Sale of employee shares 22 22 Issue of share options 17 17 Exercise of share options / warrants 1 36 37
Share buy-back (376) (376) Sale of employee shares 26 26 Issue of share options 15 15 Exercise of share options 2 103 105 Pension return tax 1 1
Per- Indu- min- Parent min- (DKKm) sonal SME strial ated Non-life Life etc. ated Group
Life insurance Gross premiums written 3,980 3,980 Allocated investment return (2,138) (5) (2,143) Benefits and change in provisions (1,556) (1,556)
Net reinsurance (2) (2) Technical loss on life insurance (41) 0 (41)
Total provisions for insurance and investment contracts 13,685 24,938 0 38,623 Amounts due to affiliated companies 283 275 212 (770) 0
Purchase of tangible and intangible assets 166 1 0 167 Results from associated companies 3 (24) 0 (21)
Shares in associated companies 56 283 0 339 Loans to associated companies 0 460 0 460 Other financial investment assets 15,552 29,199 3 44,754 Investment assets related to unit-linked contracts 0 2,486 0 2,486 Reinsurers' share of provisions 624 32 0 656 Amounts due from affiliated companies 1,255 2 32 (1,289) 0
Gross premiums written 9,010 8,671 Change in gross provisions for unearned premiums 19 36 Gross premiums earned 9,029 8,707
Calculated interest 685 466 Discounting (annual amortisation) of technical provisions and reinsurers' share (463) (364) Technical interest on own account 222 102
Gains on claims provisions: Gross business 498 231 Reinsurance ceded 8 (17) Gains on claims provisions on own account 506 214
Note 4. Technical result - non-life 2008 2009 2008 2009 2008 2009
Gains on claims provisions on own account 172 91 285 19 147 116 Claims provisions on own account 2,055 2,223 4,681 5,153 1,755 1,732
Average value of claim (DKK '000) 37 41 45 65 28 32
Claims provisions on own account 150 144 1 0 10,406 11,226
Average value of claim (DKK '000) 4 4 - - 15 16
Bonuses paid in cash 250 173 Claims and benefits paid 2,031 1,428
Rental income 244 300 Operating expenses from properties rented out (30) (32) Operating expenses from properties not rented out (2) (2) Gross profit 212 266 Administrative expenses (12) (11) Income from investment properties 200 255
Total designated at fair value (547) 492 Revaluations of financial assets and liabilities at fair value through profit and loss account (5,554) 2,460 Of which revaluation of inflation swaps transferred to claims incurred 81 (107) Investment properties 25 88 Provisions for claims and benefits (310) (279) Reinsurers' share 4 10
Current tax 137 245 Change in deferred tax 36 120 Prior year adjustment (2) 50 Taken over by purchase (3) 0 Tax for the year 168 415 Tax taken to shareholders' equity (3) 2
Average number of shares ('000) 15,640 15,688 Diluting impact of options ('000) 0 81
The total of 248,000 outstanding options were not included in the calculation of the diluted profit / (loss) per share at 31 December 2008 as the result for the year was a loss. Therefore profit / loss per share and diluted profit / loss per share were the same in 2008.
Impairment and amortisation at 1 January (12) (69) (22) 0 (103)
Impairment and amortisation at 31 December (12) (99) (80) 0 (191)
The valuation of the owner-occupied properties has been based on a required average return of: 5.9% 5.7%
Cost of revalued owner-occupied properties 618 618 Machinery and equipment includes assets under finance leases of 12 16
The valuation of the properties has been based on a required average return of: Non-residential 6.2% 6.0% Residential and part residential 4.7% 4.7%
Share of loss (21) (11) Shares in associated companies 352 339
Reimbursement of claims relating to previous years (252) (202) Change in expected income relating to previous years 8 (17)
Recognised as: Deferred tax assets 70 73 40 Deferred tax liabilities (123) (162) (249)
In 2007 Topdanmark A/S issued EUR 55m of hybrid core capital.
This bullet loan has no final maturity date but if permitted by the DFSA, the debtor can give notice of termination as from 15 September 2017 at par. The loan carries a floating interest rate determined as EURIBOR 3 months + 1.90%, currently 2.614%, and as from 15 September 2017 EURIBOR 3 months + 2.90%.
In 2005 Topdanmark Forsikring A/S issued a subordinated loan of DKK 250m.
This bullet loan expires on 27 June 2013 but if permitted by the DFSA, the debtor can give notice of termination as from 27 June 2010. The loan carries a floating interest rate determined as CIBOR 3 months + 100 bp, currently 2.548% annually. As from 27 June 2010 the rate will increase to CIBOR 3 months + 250 bp.
Guaranteed benefits 13,495 13,797 Bonus potential on future premiums 6,424 7,298 Bonus potential on paid-up benefits 3,043 4,696 Life insurance provisions 22,962 25,791
Portfolios analysed by capitalisation rates Guaranteed future paid-up 2008 benefits premiums benefits
Note 26. Provisions for claims 2008 2009 Non-life insurance: Gross Provisions at 1 January 10,578 10,940 Claims paid relating to previous years (3,080) (3,045) Change in expected claims payments relating to previous years (498) (231) Claims paid relating to this year (3,036) (3,205) Expected claims payments relating to this year 6,267 6,556 Inflation swaps (81) 107 Discounting (annual amortisation) 480 376
On own account Provisions at 1 January 10,034 10,406 Claims paid relating to previous years (2,828) (2,843) Change in expected claims payments relating to previous years (506) (214) Claims paid relating to this year (2,931) (3,086) Expected claims payments relating to this year 5,949 6,223 Inflation swaps (81) 107 Discounting (annual amortisation) 463 364
Provisions for workers' compensation insurance on own account 4,681 5,153 Average period of settlement 7 years 7 years Illness / accident insurance on own account administered by the life insurance business 1,216 1,314 Average period of settlement 14 years 14 years
Less paid incl. inflation swaps (3,205) (4,541) (4,872) (4,610) (5,680) (4,969) (4,559) (4,842) (4,444) (4,353) (46,075) Provisions before discounting
Provisions relating to previous years at 31 December 1,051 Gross provisions at 31 December 2009 - non-life insurance 11,777
Provisions relating to previous years at 31 December 1,037 Provisions on own account at 31 December 2009 - non-life insurance 11,226
Reconciliation: Provisions for claims 11,863 Less amount relating to life insurance (86) Less reinsurers' share of provisions (551) Provisions on own account at 31 December 2009 - non-life insurance 11,226
Claims handling etc. at 1 January 2004 - - - 127 37 27 12 203 Discounting / revaluation workers' compensation insur-
The table shows the historical development in the estimated final liability (the sum of claims payments and provisions) for each claims year from 2000. Significant proportions of the liabilities shown have been calculated without discounting which to a great extent eliminates changes in discounting rates and methods after the change to IFRS. However, workers' compensation and illness / accident administered by the life insurance business are included at discounted values.
The claims handling expenses for the claims years 2000-2003 have been included on an on-going basis at the amounts provided in the opening balance sheet at 1 January 2004.
Book value at 1 January 1,735 66 Change taken to the profit and loss account (1,766) 118 Change taken to shareholders' equity 97 0 Collective bonus potential 66 184
Claims and benefits (70) (13) (83) Expense loading inclusive of expense bonus (26) (7) (33) Risk gain after addition of risk bonus (1) 0 (1) Premiums waived transferred to life insurance provisions (12) 0 (12)
Retrospective provisions at 31 December 2,128 693 2,821 Provisions for unit-linked contracts 2009 2,128 693 2,821 The Group has 3,136 customers with investment contracts (2008: 2,523) The contracts written do not have guarantees.
Expenses by their nature: Commission - non-life insurance 258 257 Commission - life insurance 93 66 Staff costs (excl. commission) 1,423 1,456 Other staff costs 124 119 Premises costs 174 176 IT operations and maintenance 163 130 Impairment and amortisation 104 116 Other expenses 107 107 Total expenses 2,446 2,427 These expenses have been disclosed in: Non-life insurance: Acquisition costs 778 738 Administrative expenses 530 534 Claims paid (claims handling and assessment) 683 712
Income from investment properties (administration and operation) 44 45 Expenses on investment business 43 45 Other expenses 48 48 Total expenses 2,446 2,427
Share options Topdanmark's share option scheme is for its Board of Management and senior executives. The strike price has been fixed at 110% of the market price on 31 December the prior year. The options can be exercised 3 - 5 years subsequent to the granting, see below.
Strike Board of Manage- execuTotal number of options ('000) price Directors ment tives Resigned Total
Per granting: Fair value of granting 2008 4 13 17 Fair value of granting 2009 4 11 15
Loans and receivables at amortised cost Loans to associated companies 286 460 Amounts due from policyholders 416 407 Amounts due from insurance companies 152 193 Other debtors 88 100 Liquid funds 174 259
Inputs based Inputs not based 2009 Quoted on observable on observable Financial assets recorded at fair value prices market data market data Total Held for trading: Non-life insurance: Government bonds 0.4 0.4
Investment assets related to unit-linked contracts 2.3 0.1 0.1 2.5 Total financial assets at fair value 29.2 16.4 1.6 47.2 *) Assets valued in life insurance by reference to inputs not based on observable market data include an exposure of DKK 0.2bn hedged by a total return swap with non-life insurance.
Measurement of fair value The calculation at fair value is based on the listed prices of transactions in active markets. If there is an active market for listed bonds, the measuring is generally based on the closing price on 31 December. If there is no closing price, another public price is used which is believed to be the most appropriate. Valuation methods or other publicly available information are used to value listed securities where the closing price does not reflect the fair value. If there is no active market for the financial instrument, as far as possible, valuations methods are used where the input is based on publicly available market information. Depending on the nature of the asset or liability, the calculation is based on underlying parameters such as interest and foreign exchange rates, volatility or comparison with the market prices of corresponding instruments. In those cases where, in Topdanmark's opinion, it is not possible to base the valuation on publicly available market data, it has calculated a value based on assumptions which are generally the same for all loans and credit bonds whether they are owned directly or as an underlying asset in CDOs.
Note 34. Financial liabilities Financial liabilities measured at fair value through profit and loss Held for trading: Designated at fair value: Amounts due to credit institutions 7,790 6,575 Total financial liabilities measured at fair value through profit and loss 8,276 6,690
Book value of financial liabilities at amortised cost approximately corresponds to fair value, except for hybrid core capital (DKK 403m) with an assumed value significantly lower than nominal value.
Note 37. Shares analysed by industry and region(%) - life insurance Other North Other Other Not analy2009 Denmark Europe America Japan Far East countries sed Total
Derivatives to hedge against the net change in assets and liabilities** 955 589 0 * Annual return as a percentage before pension return and corporation tax.
The return percentages on derivatives are calculated as the return on derivatives as a percentage of the size to the exposure of the underlying asset.
The exposure in foreign shares is adjusted by means of derivatives. After including derivatives the exposure in foreign shares on 31 December 2009 was DKK 3,494m.
Not- Adjusted Not- Adjusted adjusted interest adjusted interest interest rate curve interest rate curve rate curve (accounts) rate curve (accounts)
Event 0.7-1.0 pp increase in interest rates (41) (78) 1,018 (133) 0.7-1.0 pp decline in interest rates 40 112 (1,068) 111
Note 41. Compensation for pension return tax The previous exemption from pension return tax (PAL) for certain index-linked bonds and properties was cancelled on 1 January 2008. Topdanmark has received from the Danish tax authority (SKAT) compensation amounts which as required by the customer were either deposited into a scheme in the Company, deposited into another scheme or paid out to the customer.
The overall PAL compensation was DKK 24m in 2008, of which DKK 19m was deposited into a scheme in a group company, and DKK 5m transferred to another scheme or paid out.
The overall related expenses were calculated at DKK 4m which were covered by deducting DKK 30 from each policyholder's compensation amount in the event of deposits into a scheme in the Group and DKK 330 and DKK 370 in the event of transfer to another scheme or payment to the customer. The expenses were primarily related to IT-development, customer service, mailing and indirect expenses.
Note 42. Leasing Finance lease for mainframe CPU: Minimum lease Present Book 2008 payment Interest value liabilities
Weighted items 1,849 2,531 Core capital as a percentage of weighted items 113.7 131.6 Solvency ratio 32.7 71.0 * Before provisioning for deferred tax on security funds Solvency has been calculated according to the rules for financial services holding companies. See "Solvency" in Management's review.
Shares issued at 1 January 17,631 16,686 Own shares at 1 January (1,636) (1,023) Number of shares at 1 January 15,995 15,663
Shares issued at 31 December 16,686 16,907 Own shares at 31 December (1,023) (1,411) Number of shares at 31 December 15,663 15,496
Note 46. Credit risk Group 2008 excl. life Life Group Financial assets measured at fair value: Loans guaranteed by mortgages and other loans 20 3 23 Deposits with credit institutions 4,414 4,413 8,827
Financial assets measured at amortised cost: Loans to associated companies 0 286 286 Amounts due from policyholders 228 188 416 Amounts due from insurance companies 145 7 152
Note 46. Credit risk - continued Group 2009 excl. life Life Group Financial assets measured at fair value: Loans guaranteed by mortgages and other loans 18 2 20 Deposits with credit institutions 2,333 4,497 6,830
Reinsurers' share: Life insurance provisions 0 32 32 Provisions for claims 551 0 551
Financial assets measured at amortised cost: Loans to associated companies 0 460 460 Amounts due from policyholders 238 169 407 Amounts due from insurance companies 192 1 193
The Group has received cash margin payments securing unrealised gains on derivatives 756 462
Future cash flows for life insurance will deviate from those expected due to observed insurance events, surrenders etc.
Emoluments paid to the Boards of Management and Directors are disclosed in the note on staff costs.
Nominal value in DKK '000 of 4% Topdanmark bonds held by the Board of Management
Shares are disclosed in the balance sheet and specified in the note on shares in associated companies.
Assets at book value registered as security for technical provisions 37,426 51,621
Bonds provided as security for loans in accordance with standard repo-contracts for Danish mortgage and government bonds 6,158 6,006
Derivatives: Purchased forward contracts 24,118 23,303 Sold forward contracts 27,158 23,722
The companies are also jointly liable for A-tax and pay-roll tax etc. and VAT chargeable to the jointly registered companies.
Note 50. Contingent liabilities - continued Pending cases As described in previous Annual Reports, following a change in the Group's taxable income for 2001, the Danish tax authority (SKAT)’s interpretation of Section 13 of the Danish Corporation Tax Act is different from that which Topdanmark has used.
SKAT's interpretation is that groups comprising both life and non-life insurance business will be double taxed by taxing capital gains on equities and at the same time disallowing deductions for capital losses. This is contrary to the intention of how the Act was to be implemented and will result in distortion in the market place between those groups carrying out both non-life and life insurance and those carrying out only non-life insurance business or only life insurance and pension fund business.
If contrary to expectation, the Court agrees with SKAT, the consequence will be a tax liability of DKK 220m including interest for the years 2001 - 2004. As the Act was changed with effect from 2005 there will be no similar tax liability in 2005 or subsequently.
Note 51. Other disclosures The five-year summary in accordance with Section 91(a) of the Danish executive order on financial reports for insurance companies and lateral pension funds is the last page of Management's review.
Non-life: Topdanmark Forsikring A/S Ballerup Insurance Danske Forsikring A/S Ballerup Insurance Industriens Arbejdsskadeforsikring A/S Ballerup Insurance TDP.0007 A/S Ballerup Property TDP.0015 P/S Ballerup Property Topdanmark EDB A/S Ballerup Internal IT services Komplementarselskabet TDE.700 ApS Ballerup Investment E. & G. Business Holding A/S Ballerup Holding Topdanmark Holding S.A. Luxembourg Holding Risk & Insurance Services S.A. Luxembourg Administration TDLII.0087 A/S Ballerup Investment Komplementarselskabet TDP.0015 ApS Ballerup Investment
Other companies: Topdanmark Kapitalforvaltning A/S Ballerup Asset management Topdanmark Invest A/S Ballerup Investment Hotel Kongens Ege ApS Ballerup Property Topdanmark Ejendomsadministration A/S Ballerup Property TDLII.0132 ApS Ballerup Investment TD.0151 ApS Ballerup Investment TDL.0139 ApS Ballerup Investment web-postkassen.dk ApS Ballerup Consumer service
Topdanmark Group's 2009 Annual Report has been prepared in accordance with International Financial Reporting Standards as adopted by the EU and the additional Danish disclosure requirements of Nasdaq OMX, Copenhagen and the Danish Financial Business Act on annual reports prepared by listed financial services companies. The Annual Report also meets the International Financial Reporting Standards issued by the International Accounting Standards Board (IASB).
New accounting regulation In 2009 Topdanmark implemented the following amendments to accounting standards which only have effect on the presentation and disclosures. • Amendment to IAS 1: “Presentation of Financial
• Amendment to IFRS 7: “Financial Instruments: Disclosures” changing the disclosure requirements on the fair values of financial instruments.
The IASB has issued a number of standards, amendments and interpretations which have not yet taken effect. They are not expected to change Topdanmark’s accounting policies.
General Consolidated accounts The consolidated accounts include the parent company Topdanmark and all of the companies that are controlled by the parent company. The parent company is considered to control the companies through direct or indirect ownership of more than 50% of the voting rights
Properties owned by the subsidiaries and used by the Group have been re-classified from investment properties to owner-occupied properties, and shares in Topdanmark A/S and liabilities on management share options based on shares in Topdanmark A/S have been re-classified to equity instruments.
Insurance and investment contracts - classification The Topdanmark Group writes contracts which transfer insurance risk, investment risk or both.
Options and warrants which are settled with own shares are considered to be equity instruments. The fair value at the date of granting is set off against shareholders' equity. Any amount received on the exercise of the options / warrants is taken to shareholders’ equity. Options / warrants involving a cash payment are considered to be instruments of debt. The fair value will be recognised as a liability and re-calculated until the exercise date with any changes in value being taken to the profit and loss account.
As from 2004 the scheme has been based on options / warrants which are settled with own shares and therefore no liability has been disclosed in the balance sheet.
Calculation of profit in life insurance The calculation of profit for those life insurance companies with portfolios of bonus-participating policies (Topdanmark Livsforsikring and Topdanmark Livsforsikring V) is regulated by the Danish Financial Business Act, which sets requirements on how the "insurance technical result before bonus contribution" (pre-bonus result) should be allocated between the policyholders and the shareholders. The calculation of the result of life insurance is disclosed in a note.
Segment information Topdanmark has divided its non-life insurance activities into the following three business segments: Personal includes policies for individual households sold by Topdanmark's own sales channels and its distribution partners.
SME includes policies for commercial and agricultural businesses with fewer than 50 employees, sold by Topdanmark's own sales channels and distribution partners.
Topdanmark carries out insurance business only in Denmark and therefore no specific geographical segmental information is provided.
Announcement No. 02/2010 from Topdanmark A/S Page 90 of 108 accumulation of completely different portfolios. Recognising that the interests of different portfolios are different, Topdanmark has established a portfolio-based structure of life insurance companies offering, among other services, different investment strategies to different groups of customers. Each company presents its ratios in its own annual report where further details are available.
Profit and loss account Premiums earned Gross premiums in non-life insurance comprise those premiums receivable during the year and an estimate of premiums on insurance contracts written, either directly or indirectly, for which the period of risk has commenced before the end of the financial year. They do not include own risks. Premiums earned on own account comprise gross premiums for the year adjusted for changes in the provisions for unearned premiums and net of reinsurance. Effectively, this means the premiums are being recognised in line with the distribution of risk over the period of cover.
Technical interest on own account in non-life insurance The technical result on non-life insurance includes a return on the technical provisions on own account. The interest on the provisions is calculated using the relevant interest rate corresponding to the expected date of settlement. The discount expense of the regular revaluation of the present value of the provisions until the expected time of settlement is offset against the interest income. The interest and discount expense on discounted provisions, primarily provisions for outstanding claims on own account, are calculated on the same basis. Accordingly the interest and discount expense on discounted provisions are exactly netted off each other. For non-discounted provisions, primarily provisions for unearned premiums on own account, the interest on the average value of the provisions is calculated using the relevant interest rate corresponding to the weighted average date of settlement.
Allocated investment return on own account in life insurance The investment return is calculated as the overall investment return in the life insurance group net of the proportion of the investment return relating to illness and accident insurance and the proportion transferred to shareholders' equity in accordance with the definition of profit reported to the DFSA.
Claims incurred and benefits paid In non-life insurance, claims incurred on own account comprise claims paid during the year adjusted for changes in the provisions for outstanding claims and net of the reinsurers' share. Accordingly, claims incurred comprise known and expected claims relating to the year as well as any adjustments to the provisions made in previous years. Furthermore they comprise direct and indirect expenses on claims handling. However, the proportion of the change in provisions for outstanding claims relating to changes in discounting and revaluation is included in technical interest on own account and revaluations respectively. Topdanmark has entered into swaps partially hedging the provisions for workers’ compensation and annuities in illness and accident insurance against changes in future wage and price indexation provided that the growth in the real value of the payments on claims remains stable. The revaluation of these swaps is included in claims incurred.
In life insurance, claims and benefits paid on own account comprise payments relating to claims, surrenders and cash bonuses.
Bonuses and rebates Bonuses and rebates include those premium amounts that have been or will be paid back to policyholders, on the basis that the amount of the repayment is calculated with reference to the claims trend of the financial year for each insurance contract or a portfolio of insurance contracts using criteria determined prior to the beginning of the financial year or when the insurance contracts were written.
Pension return tax Pension return tax includes the return tax that arises from the return in life insurance included in the profit and loss account, whether the tax is current or to be paid in subsequent periods. Pension return tax on shareholders' equity items is taken to shareholders' equity.
Other income and expenses Other income and expenses that do not relate to the administration of insurance portfolios or investment assets are included in other income and expenses.
The jointly taxed companies' joint tax contributions are settled by dividing the current Danish corporation tax between them in proportion to their taxable income. Furthermore those companies with tax losses receive joint tax contributions from those companies which have been able to use this loss to reduce their own tax gain.
Assets Intangible assets Goodwill relates to the acquisition of companies prior to 2004 and is included at the book value on the change to IFRS. Goodwill is not amortised but subjected to an impairment test at the end of the financial year and written down to its recoverable amount, as required.
Finance leases for machinery and equipment are those leases where the Company substantially bears all the risks and benefits of ownership: the relevant assets are
Announcement No. 02/2010 from Topdanmark A/S Page 92 of 108 shown in the balance sheet at the lower of their fair value and the present value of future lease payments. Once recognised as a finance lease, the assets are treated as any other type of machinery and equipment. Machinery and equipment comprising IT equipment, cars and other equipment as well as improvements of rental properties are depreciated over their expected useful life of up to five years.
Associated companies Shares held in associated companies are measured at their net asset value, in accordance with the Group's accounting policies. Associated companies are companies which are not subsidiaries although the Group has substantial influence through a significant shareholding and representation on the board of the company.
All financial assets included in "other financial investments assets" and "investment assets related to unit-linked contracts" are measured at fair value with any value adjustment taken to the profit and loss account.
In certain cases the valuation cannot only be based on publicly available market data. In these cases the valuation models used could imply the use of estimates of both the future and the nature of the current market situation.
Announcement No. 02/2010 from Topdanmark A/S Page 93 of 108 irrevocable, the value of the impairment is transferred out of the account for collective allowances.
Reinsurers' share Reinsurers' share of provisions for unearned premiums represents the proportion of reinsurance premiums paid which, net of commission received and based on the spread of risk during the period of cover, relate to the period after the end of the financial year.
Reserve for foreign currency translation This reserve comprises foreign currency translation of results and shareholders' equity in foreign companies. If the companies are sold or dissolved, the balance will be recognised in the profit and loss account.
Life insurance provisions Life insurance provisions are measured at fair value. Accordingly, the liabilities are calculated on the basis of the market value independent of the original technical base. The fair value of the life insurance provisions is based on the realistically expected future premiums to be received, benefit payments to be made and administrative expenses incurred on the contracts written. The future payments to be received and made have been based on the assumed incidents of death, disability and resumption of work. The risk of death and disability is dependent on the age, sex and health of the policyholder and is based on the company's experience. For all policies in Topdanmark Livsforsikring and Topdanmark Livsforsikring V the mortality rate used has been based on an increase of up to five years for men and 6.75 years for women as set out in the G82 life expectancy assumptions. However, for the portfolio of annuities in Topdanmark Livsforsikring II, a reduced rate of mortality has been assumed, corresponding to 55% of G82 for women and 85% for men. G82 is the technical base developed by the industry in the 1980's.
The present value of the expected future payments has been calculated using an interest rate structure. The interest rate structure is published by the DFSA as the combined weighting of swap rates and option adjusted mortgage credit rates. It is published as the "adjusted interest rate curve" on the DFSA's website. For policies subject to pension return tax each interest rate used is reduced by the tax rate of 15%.
Announcement No. 02/2010 from Topdanmark A/S Page 94 of 108 demanded by an arms-length purchaser of the company's portfolio of life insurance policies to compensate for the risk of fluctuations in the expected payments. The overall allowance for risk is an estimate calculated as the interest rate used less 5%.
Provisions for outstanding claims are assessed for each line of business either on a claim by claim basis (individual provisions) or by using statistical methods (collective as well as incurred but not reported (IBNR) and incurred but not enough reported (IBNER) provisions). Claims exceeding a fixed amount, dependent on the line of business, are assessed individually and provisions for smaller claims are assessed collectively. IBNR provisions cover expenses on post-notified large claims. IBNER provisions cover individually assessed claims which have been reported but which have been inadequately provided for. The collective provisions are calculated using de Vylder's credibility model adjusted for each line of business. The IBNR and IBNER provisions are calculated using in-house developed models. In agricultural and commercial lines claims are assessed individually. IBNR and IBNER provisions are also included in the total provision. In personal lines claims not exceeding DKK 100,000 are assessed collectively while larger claims and all claims on change of ownership policies are assessed individually. IBNR and IBNER provisions are also included in the total provision. All motor and accident claims are included in the collective provisions. Large claims and claims relating to previous years are individually assessed within personal liability in motor insurance.
Provisions for outstanding claims in workers' compensation insurance comprise provisions for annuities and other provisions for outstanding claims. The assessment of the future annuities is based on the present annuities including the expected wage and salary indexation fixed as the forward inflation rates plus 1.16% p.a. and a rate of mortality corresponding to G82 with monthly age write-downs. Workers’ compensation claims are often paid as the capitalised value of an annuity. The capitalisation rate at the time of capitalisation is to be calculated as a sliding average of the most recent five years’ interest rate on leading mortgage bonds less tax. The capitalisation rate is calculated as the forward swap rates plus 0.85% p.a. and less a deduction for tax corresponding to the base tax rate.
Due to the instability having surrounded payments on disability claims for a number of years, Topdanmark has used an in-house developed model, which takes into account the stage each claim has reached. The benefits are included with an allowance for the expected wage and salary indexation.
Deferred tax on security funds comprises deferred tax on untaxed amounts transferred to the security funds under shareholders' equity. The security funds will be taxed in the proportion of 10% for every 10pp decline in technical provisions on own account from the level at 31 December 1994. A decline of 10% from the 1994 level is considered improbable as long as Topdanmark Forsikring, in which the transfers were made, continues its current operations. Therefore the security funds will only be taxed if the insurance portfolio is transferred or the company ceases to carry out insurance business.
Creditors Amounts due to credit institutions and derivatives are measured at fair value, see the fair value option in IAS 39 on elimination or significant reduction of accounting inconsistency. The fair value of amounts due to credit institutions usually corresponds to their nominal value. The fair value of derivatives is calculated on the same basis as financial assets.
Interest charges (67) (43) Expenses on investment business 0 (1) Total investment return (178) 1,479
Proposed appropriation of profit for the year: Transfer to net revaluation reserve at net asset value (112) 1,519 Transfer to profit carried forward (77) (73)
Other reserves 709 1,411 Total reserves 709 1,411 Profit carried forward 2,367 2,885 TOTAL SHAREHOLDERS' EQUITY 3,243 4,465 SUBORDINATED LOAN CAPITAL 9 402 4
Bond loans 43 70 Amounts due to credit institutions 811 64 Amounts due to affiliated companies 311 462
Other creditors 7 3 TOTAL CREDITORS 1,174 599 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 4,819 5,467
Staff costs 10 Auditors' fee 11 Solvency 12 Own shares 13 Related parties 14 Other disclosures 15 Accountin g policies 16
Dividends received from subsidiaries (548) 548 0 Other movements in capital of subsidiaries 24 7 31
Cancellation of own shares (10) 10 0 Share buy-back (371) (371) Sale of employee shares 22 22 Issue of share options 17 17 Exercise of share options 1 18 19
Dividends received from subsidiaries (829) 829 0 Other movements in capital of subsidiaries 12 8 20 Share buy-back (376) (376) Sale of employee shares 26 26 Issue of share options 15 15 Exercise of share options 2 89 91
Adjusted for the tax effect of: Non-deductible expenses / income not liable to tax 1 0 Tax in affiliated companeis 2 0 Prior year adjustment 0 2
Note 5. Machinery and equipment Cost at 1 January 6 6 Additions, including improvements 0 1
Cost at 31 December 6 5 Impairment and amortisation at 1 January (1) (2) Amortisation for the year (1) 0 Reversal of total impairment and amortisation of assets sold or withdrawn from operations during the year 0 1 Impairment and amortisation at 31 December (2) (1) Machinery and equipment 4 4
Of which companies with a negative net asset value 0 2 Shares in affiliated companies 4,415 5,126 The same accounting policies are applied by the subsidiaries as by the parent company. However, properties owned by the subsidiaries and used by the Group have been re-classified from investment properties to owner-occupied properties, and shares in Topdanmark A/S and liabilities on management share options based on shares in Topdanmark A/S have been re-classified to equity instruments. The affiliated companies are domiciled in Ballerup.
DKK Share capital at 1 January 176,310,000 166,859,030 Reduction in capital (9,910,000) 0 Increase in capital 459,030 2,205,900 Share capital 166,859,030 169,064,930
The following shareholders have notified Topdanmark that they own more than 5% of the share capital: ATP, DMP, SP The Capital Group Companies Sampo Plc ATP-huset 40 Grosvenor Place Fabianinkatu 27 Kongens Vænge 8 London SW1X 7GG F1-00100 Helsinki 3400 Hillerød UK Finland
This bullet loan has no final maturity date but if permitted by the DFSA, the debtor can give notice of termination as from 15 September 2017 at par. The loan carries a floating interest rate determined as EURIBOR 3 months + 1.90%, currently 2.614%, and as from 15 September 2017 increased to EURIBOR 3 months + 2.90%.
Share of loan included in capital base 402 403 Interest charges 28 15
Salaries and emoluments 10 12 Employee bonds 1 1 Share options 4 4
Topdanmark's share option scheme is for its Board of Management and senior executives. The strike price has been fixed at 110% of the market price on 31 December the prior year. The options can be exercised 3 - 5 years subsequent to the granting, see below.
The scheme is settled by shares (equity instruments) Up to and including 2003 the share option scheme was also for the Board of Directors. These options were paid for in cash and the liability has been recorded at fair value in the balance sheet. At 31 December 2008 the accounting liability was DKK 2m corresponding to the net asset value. The options were settled in 2009.
The Group's overall option scheme is disclosed in the Group note on staff costs.
Note 12. Solvency Shareholders' equity 3,243 4,465 Deferred tax assets (44) (1) Hybrid core capital 402 403 Capital adequacy requirements for insurance companies (1,498) (1,535) Core capital 2,103 3,332 Capital requirements in insurance companies (1,498) (1,535) Capital base 605 1,797
Emoluments paid to the Boards of Directors and Management are disclosed in the Group note 10 Staff costs.
The annual accounts for the parent company Topdanmark A/S have been prepared in accordance with the Danish Financial Business Act, including the executive order issued by the Danish Financial Supervisory Authority (DFSA) on financial reports for insurance companies and lateral pension funds (nationwide, occupational pension funds specific to Denmark).
Shares held in affiliated companies are recognised and measured at their net asset value. If the net asset value exceeds the recoverable amount, the share is written down to this lower amount. The share of the post-tax results of affiliated companies is included in the profit and loss account under income from affiliated companies less any write-downs. The share of the movements in the shareholders' equity of affiliated companies is included directly in the shareholders' equity.
Many factors may cause a significant deviation from the forecasts set out in the Annual Report. Such factors could be, for example, cyclical movements, changes in the financial markets, the financial effect of non-anticipated events like acts of terror or exceptional weather conditions, changes in Danish and EU rules, competitive factors in the insurance industry and the trend in reinsurance market. Also see Risk management.
This publication is a translation. In case of any divergence, the original Danish text shall prevail.
We consider the chosen accounting policies to be appropriate such that the Annual Report gives a true and fair view of the Group’s and the parent company’s assets, liabilities and financial position at 31 December 2009 as well as the result of the Group's and parent company's activities and the Group's cash flows for the financial year 1 January - 31 December 2009.
Internal auditors We have audited the consolidated accounts and the annual accounts for Topdanmark A/S for the financial year 1 January to 31 December 2009, which comprises the profit and loss account, the balance sheet, the movements in shareholders’ equity and the notes to the accounts, including accounting policies, as well as Management’s review for both the Group and the Parent and the consolidated statement of comprehensive income and cash flow. The consolidated accounts have been prepared in accordance with International Financial Reporting Standards as adopted by the EU, and the Parent’s annual accounts and Management’s review have been prepared in accordance with the Danish Financial Business Act. In addition, the consolidated accounts and the annual accounts have been prepared in ccordance with additional Danish disclosure requirements for listed financial services companies. a
Basis of opinion We have conducted our audit on the basis of the executive order issued by the Danish Financial Supervisory Authority on an audit in financial services companies etc. and financial services groups and in accordance with Danish and international auditing standards. Those standards require that we plan and perform the audit to obtain a high degree of assurance whether the consolidated accounts, the annual accounts and Management’s review are free from material isstatement. We have participated in the audit of the material and risky areas. m
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated accounts, the annual accounts and Management’s review. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated accounts, the annual accounts and Management’s review, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation and fair presentation of the consolidated accounts and the annual accounts and the preparation of a Management’s review which gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal controls. An audit also includes evaluating the appropriateness of the accounting policies chosen by and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the onsolidated accounts, the annual accounts and Management’s review. c
Opinion In our opinion, the consolidated accounts give a true and fair view of the Group’s assets, liabilities and financial position at 31 December 2009 and of its financial performance and its cash flows for the financial year 1 January to 31 December 2009 in accordance with International Financial Reporting Standards as adopted by the EU and additional Danish isclosure requirements for listed financial services companies. d
Management’s responsibility for the consolidated accounts, the annual accounts and the Management’s review Management is responsible for the preparation and fair presentation of the consolidated accounts and the annual accounts in accordance with International Financial Reporting Standards as adopted by the EU in respect of the consolidated accounts, in accordance with the Danish Financial Business Act in respect of the Parent’s accounts, and additional Danish disclosure requirements for listed financial services companies, and Management’s review which gives a true and fair view in accordance with the Danish Financial Business Act. This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation and presentation of the consolidated accounts, the annual accounts and Management’s review that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the ircumstances. c
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated accounts, the annual accounts and Management’s review. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated accounts, the annual accounts and Management’s review, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation and fair presentation of the consolidated accounts and the annual accounts and the preparation of Management’s review which gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal controls. An audit also includes evaluating the appropriateness of the accounting policies chosen by and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the onsolidated accounts, the annual accounts and Management’s review. c
In addition, in our opinion, the consolidated accounts give a true and fair view of the Parent’s assets, liabilities and financial position at 31 December 2009 and of its financial performance for the financial year 1 January to 31 December 2009 in accordance with the Danish Financial Business Act and additional Danish disclosure requirements for listed nancial services companies. fi
Anders O. Gjelstrup Martin Faarborg State Authorised Public Accountant State Authorised Public Accountant