• Gjensidige Forsikring and the Icelandic company Kaupthing purchase sharehold­ ings in Storebrand ASA. Both state that their purchases of shares in Storebrand are a financial investment.
• The Norsk Kundebarometer survey of customer satisfaction shows that Store­ brand is the highest­ranked company for customer satisfaction in the corporate market for pensions and life insurance
• Storebrand Bank celebrates its 10­year anniversary, and by the end of the year the bank has opened almost 20,000 new customer accounts.
• Storebrand announces that the company intends to re­launch sales of P&C insur­ ance products.
• HRH Crown Prince Haakon visits Store­ brand and is presented with a review of important trends in the Norwegian finance industry.
• University and college students vote Store­ brand the best company in Norway for business ethics and social responsibility.
Storebrand’s head office is in Oslo, and Storebrand has a nationwide network of branch offices throughout Norway. The company’s primary market is Norway. Storebrand has gradually increased its activities in the Swedish market in recent years, and currently offers occupational pension products, asset management services and health insurance products in Sweden.
Storebrand strives for diversity. Storebrand treats all its employees equally, regardless of gender, age, disability, faith, cultural differences or sexual orientation.
Vision Storebrand’s objective is to be the leading and most respected institution in the Norwegian market for long-term savings and insurance
Number of employees1: 1,455 Allocation of employees between business areas: 1 Includes all employees in the Storebrand group
Group profit 1)Tallene for 2004 - 2006 er etter IFRS. 2) Inkl. 1 571 mill. kroner i konserngevinst ved salg av aksjene i If Skadeförsäkring
Storebrand Life Insurance offers a wide range of products for occupational pen­ sions, individual pension savings, life insur­ ance and health insurance for companies, public sector entities and private individu­ als. Storebrand Life Insurance’s objective is to be the most respected and customer focused life insurance company in Norway by offering its customers the best advice.
Storebrand Bank offers traditional bank­ ing services such as accounts and lending to the retail market, as well as project financing for selected corporate custom­ ers. The bank is a commercial bank with total assets of NOK 34.2 billion. The bank aims to actively recruit new customers to Storebrand by offering 'no­fees' banking for routine banking services.
Storebrand Investments offers a complete asset management concept with a clear socially responsible investment profile for institutional investors and the retail market. Asset management products include discre­ tionary management, specialist products and mutual funds. Storebrand Investments’ ob­ jective is to be the preferred asset manager for long­term savings and pension assets.
Total revenue 399 242 Total cots -280 -232 Net financial/other 37 15 Pre-tax profit 156 24
Message from the CEO 2 Storebrand’s history 4 Key figures 5 Corporate market strategy 6 Retail market strategy 12 Corporate responsibility 16 Content Annual report and Notes 21 Report of the Board of Directors 22 Shareholder matters 30 Corporate governance 32
Financial performance and business development 36 Highlights 37 Life insurance 40 Asset management 46 Banking 48 Other activities 50
Accounts Storebrand Group 54 Cash flow analysis 56 Accounting principles 2006 58 Notes Storebrand Group 64
For Storebrand, a company that has offered occupational pension products since 1917, last year offered a unique opportunity to tackle new problems and challenges. The company’s strong position in the market, its long traditions and highly developed expertise provided a good foundation for success, but could not guarantee that Storebrand would emerge as one of the market’s winners for the future. Storebrand’s ability to compete for customers in 2006 depended on three major factors: attractive new products that met clearly-defined customer requirements, the productivity of core business processes and efficient distribution.
The developments seen in 2006 created a more dynamic market for long-term savings and insurance. We are addressing this new environment by meeting the wider range of customer requirements with customised and targeted customer service solutions. Our sales of P&C insurance products over the Internet are a good example of this. We intend to improve the productivity of all the group’s main business processes by 20% over three years through the Storebrand Competitiveness project. We will build new and value-added partnerships with external distributors, and one of our main targets for the year is to increase the average number of Storebrand products per customer. The growth in customer numbers at Storebrand Bank, our success in the mandatory occupational pensions market and the re-launch of P&C insurance in 2006 all provide a sound basis for growth in sales and cross selling.
Occupational pension schemes for companies with 200 000 employees in total have been set up
Norske Folk is established as a life insurance company with the involvement of seven companies. Idun is one of the companies instrumental in the transaction.
A scheme is established for compulsory fire insurance of properties in Norwegian towns, administered by ‘Den almindelige Brand-Forsikrings - Anstalt’ in Copenhagen.
The regional newspaper Adresseavisen was published for the first time (3 July) under its original name ‘Trondheims Adresse-Contoirs Efter- retninger’. Adresseavisen is the oldest daily newspaper still published in Norway.
Storebrand’s owners establish ‘Idun’, the first privately owned life insurance company in Norway.
The company changes its name to Storebrand ASA and establishes Storebrand Bank AS.
29 August – Svalbard air crash: The worst aeroplane crash ever on Norwegian soil claims 141 lives.
Storebrand, Skandia and Pohjola bring together their P&C insurance businesses into a new Swedish -registered Nordic company, If Skadeförsäkring AB.
The Norwegian Parliament rules that all companies must have an occupational pension scheme in place by 2007. Storebrand responds to the challenge with its new product Storebrand Folkepensjon.
4 May - Falklands War: the Norwegian Parliament approves an economic boycott of Argentina as a reaction to the invasion of the Falkland Islands.
The terrorist attacks of 11 September serve to deepen and prolong the slump. The Oslo stock market falls by 15% in 2001, and by 44% from 14 September 2000 to February 2003.
Norway wins 20 medals at the Winter Olympics in Albertville, and 7 medals at the Olympics in Barcelona. Bjørn Dæhlie wins three gold medals and one silver medal, and wins the World Cup for men’s cross-country skiing.
Centennial anniversary of the dissolution of the union between Norway and Sweden in 1905.
Storebrand decides to return to P&C insurance again, 7 years after If was established.
The P&C insurance company ‘Norden’ is established as a competitor for Storebrand.
Figures for 2002 - 2003 are historic NGAAP figures, while the figures for 2004 - 2006 are prepared in accordance with IFRS.
Dividend per ordinary share (NOK) 1.80 4.00 7.00 0.80 1 Calculation is based on average number of shares outstanding. 2 Calculation is based on profit for the year adjusted for the year’s legally required post-tax allocations to security reserves etc. for P&C insurance and the share of profit due to minority interests.
The new requirements for mandatory employers’ pensions caused a significant increase in the number of companies offering products in this area, and created greater competition. However, sales
Opposition parties demand a new structure for private pension savings. Committee established to propose reform of disability pensions.
Storebrand is well equipped for this market, with satisfied customers and competitive products. As in 2005, Storebrand was again a winner in the market for transfers of occupational pension schemes in 2006. During the course of the year, a number of major customers transferred their pension schemes to Storebrand. The net inflow of pension reserves to Storebrand from its competitors in 2006 totalled NOK 5.3 billion.
Good investment return in the long term is key to the quality of a pen-
Storebrand has prioritised collaboration on pensions with employers’ organisations and trade associations. Since 2003, it has increased the number of collaboration agreements from 5 to 27. This represents an increase in the number of companies covered by these agreements from 93 to 5,800, and the number of active pension scheme members (employees) has increased from around 4,000 to 160,000 in the same period. Through these agreements, members of the various organisations can arrange a simple and straightforward employers’ pension scheme through Storebrand on attractive terms. Collaborating with these organisations has played an important role in Storebrand’s success in the market for mandatory occupational pensions.
sion scheme. Storebrand Life Insurance ’s pension assets are managed by Storebrand Investments, a wholly owned subsidiary of Storebrand ASA, in accordance with guidelines issued by Storebrand Life Insurance. Storebrand Life Insurance achieved a value adjusted return of 8.3% in 2006.
In the case of defined contribution pension schemes, the investment return achieved will depend on the investment choices made by the company or individual employees. Most companies with these schemes allow their employees to choose between investment alternatives with different risk profiles. The Storebrand Folkepensjon product offers a choice of three profiles with differing exposures to equities: Cautious (20% equities), Balanced (50% equities) and Aggressive (80% equities).
Paid-up policies The market for paid-up policies is set to grow strongly in future years as a result of the introduction of mandatory employers’ pensions and increasing numbers of companies switching from defined benefit to defined contribution schemes. This market is expected to become more competitive, and has attracted new participants. Storebrand intends to respond aggressively to this competition, offering a competitive product and long experience in managing pension assets to ensure financial security for the customer.
Storebrand works continuously on measures to improve the pension benefits accruing in paid-up policies. In 2006, Storebrand offered customers with more than one paid-up policy the opportunity to automatically amalgamate their policies. This not only simplifies the customer’s pension arrangements, but also reduces costs and so increases pension benefits. Customers are also offered simple procedures to transfer paid-up policies from other companies and amalgamate these with their paid-up policy with Storebrand.
Pension reform The Norwegian pension reform will be implemented in 2010. In October 2006, the government published a White Paper on a new model for accruing pension rights in the national insurance scheme and the payment of state pensions. The White Paper proposes that pension rights will only accrue in respect of income up to seven times the national insurance base amount, and will accrue on this amount at the equivalent of 1.35% of income. The “best years” rule and the 40-year maximum pension contribution period are to be abolished. All years with income from employment will count towards the state pension. The proposals also include a flexible retirement age and the opportunity to draw state pension from 62 years of age. People who retire before 67 years of age will receive a reduced pension, while those who work beyond 67 will increase their annual pension. The existing early retirement scheme (AFP) will be adapted to the new proposals in collaboration with employers, and it seems that AFP will continue in the form of an annual addition to the state pension.
The Norwegian Parliament is expected to debate the White Paper during the 2007 spring session. In 2006, Parliament approved a proposal by the government to withdraw the tax incentives for personal pension contracts (IPA) and both personal and group annuities. However, in November 2006 the government parties agreed to a proposal from the opposition for general agreement on the need for a new model of tax incentives for private pension savings.
Under the new legislation, the cost of insurance must, as a general principle, be fixed and paid in advance. This means the end of the current arrangements for profit sharing between an insurance company and its customers in important product areas such as defined benefit pensions and defined contribution products with a guaranteed return. The various aspects of a pension scheme must be priced separately, and the price must include the fees earned by the insurance company.
In the case of personal policies, including existing and new paid-up policies, the new legislation represents a move to a modified model of profit sharing, where the maximum limit for the proportion of profit retained by the insurance company is reduced from 35% to 20%.
While around 30 municipalities invited competitive bidding for their pension arrangements in 2005, only 11 municipalities took this step in 2006. Only three of these subsequently decided to change their pension supplier. Karasjok municipality invited competitive bidding for its pension scheme with Storebrand, and elected to stay with the company. No municipality with a Storebrand pension scheme has yet moved its arrangements away from Storebrand.
Many insurers brokers have advised municipalities to delay inviting competitive bidding on their pension schemes until the new insurance legislation is in force. Insurance companies will introduce new pricing structures once the legislation comes into force on 1 January 2008. This is a major reason for the small number of municipality schemes put out to tender in 2006. In addition, with effect from 2006 municipalities did not have the same freedom to determine the procedures and criteria for competitive bidding as in earlier years, and this played a part in reducing the number of schemes put out to tender.
Storebrand offers lower disability premiums for businesses that enter into a Storebrand HSE agreement. This product provides both health insurance and HSE advice from Storebrand. Health
I 2007 vil det være flere medlemmer i innskuddsbaserte enn i ytelsesbaserte tjenestepensjonsordninger. Dette fordi flere bedrifter omdanner ytelsesordninger til innskuddsordninger, og fordi OTP i all hovedsak har blitt tegnet som innskuddsbaserte ordninger.
In 2007 there will be more members of defined contribution than defined benefit pension schemes. This is because more companies are converting to defined contribution schemes, and most companies setting up mandatory schemes have chosen defined contribution.
Mandatory occupational pensions 2006 was the first year for mandatory employers’ pension schemes in Norway. The deadline for companies to provide an occupational pension scheme was 31 December 2006. Companies must contribute at least 2%
Scheme basic amount), starting no later than 1 July 2006. The employer must also meet the administration and management costs of the pension scheme.
Storebrand Livsforsikring AS – No. of corporate customers more than doubled in 2006
Antall bedriftskunder i Storebrand Livsforsikring AS ble mer enn doblet gjennom OTP-året 2006
Storebrand’s Swedish branch has so far focused on sales of traditional life and pension insurance products with guaranteed returns. In 2007, it will expand its activities to include mutual fund products. This will make Storebrand a complete alternative supplier in the Swedish market.
Storebrand operates as a flexible challenger in the Swedish pension market, able to rapidly adapt to changing customer requirements while at the same time drawing on Storebrand’s extensive experience of the Norwegian pensions market. The launch of the Swedish branch and sales in the Swedish market also provide an important stimulus to developing Storebrand’s pensions business in Norway, not least by providing experience from operating under a different national framework.
Starting in the mid-1980s, Storebrand has built up a separate international unit for customers that need a crossborder service for pension and insurance arrangements. This unit is now the leading centre of expertise in this area in the Nordic countries, and offers a range of products and services particularly relevant for companies with foreign subsidiaries or that send employees on short or long-term foreign assignments, as well as companies with employees not subject to national social security arrangements.
In 2006, the products that attracted greatest interest from retail customers were guaranteed savings products and real estate funds. Despite the media’s critical spotlight on products offering investment in shares combined with guarantees, these remain very popular products. Storebrand Eiendomfond, a real estate investment fund offered by Storebrand in collaboration with Union Eiendomskapital, attracted NOK 1.5 billion of investment in 2006.
The market for life insurance, health insurance and child insurance has shown steady growth over recent years, and further growth is expected. However, it is still the case that most Norwegians put a higher priority on insuring their possessions than their life and health. In order to increase sales of life and health insurance, Storebrand is working on simplifying these products so that customers find them simpler and easier to set up. At the same time, Storebrand is tailoring its communications with customers to highlight which products are relevant for their particular life situation.
Ring Eiendomsmegling, a chain of real estate brokers established in 2004, collaborates with Storebrand to offer mortgage financing and other banking services on competitive terms. Ring Eiendomsmegling continued its expansion in 2006 and increased its presence from 30 to 35 offices. The Ring chain acted as broker in 2006 for NOK 500 million of lending by Storebrand Bank, double the volume achieved in 2005. By the close of 2006, Storebrand Bank held 70% of Ring.
Re-launch of P&C insurance Storebrand re-launched P&C insurance in autumn 2006. This means that Storebrand is once again a total supplier of financial security. The decision to resume P&C business is a response to customers’ wishes to be able to use Storebrand for all their financial needs. Storebrand Skadeforsikring offers standard P&C insurance products for the Norwegian retail market. Of the 15 areas of insurance offered, the most important are motor, buildings and contents, and second homes.
Market research has demonstrated that price is the most important criteria when Norwegians buy P&C insurance. Storebrand accordingly sells these products mainly through the Internet and by telephone, which are cost-effective distribution channels that allow the company to offer peace of mind at low prices. Customers can use a newly developed and extremely user-friendly Internet system to check prices and buy insurance products online.
Storebrand arranges everything, and takes responsibility for ensuring a safe and easy transfer for the customer.
The Norwegian P&C insurance market is currently dominated by relatively few companies. Storebrand’s return to this market paved the way for increased price competition and greater mobility among customers. Storebrand Skadeforsikring will focus on profitable and steady growth, and its target is to win a 15% share of the market over the next seven to nine years.
Research has demonstrated that customer satisfaction is normally positively correlated with the quantity of relevant information provided to customers. Storebrand started work in 2006 on promoting more systematic dialogue with its customers. This program will continue in 2007 with the introduction of a new ’welcome’ dialogue for customers. This includes better initial information when a customer signs up for a product, a follow-up customer service conversation one month after the product is established and a customer satisfaction questionnaire after six months.
In parallel with these specific measures, Storebrand is working on improving communication with its customer base as a whole. Focus on developing letters, e-mails and SMS messages that are customised for the individual recipient will continue to be an important part of this work in 2007.
The financial adviser channel is the group’s largest and most important distribution channel, with around 160 advisers offering customers comprehensive financial advice on savings, banking and insurance. The company’s advisers operate from a nationwide network of 40 offices.
New products well received Storebrand strives to respond quickly by offering new products to meet changing requirements, emerging trends and changing conditions. We launched Storebrand Futura in spring 2006 to meet the need for a simplified mutual fund concept for the mass market. Customers can choose between three Futura funds with differing risk profiles, and it is easy and simple to purchase this product over the Internet or by telephone. Moreover, no purchase fees are charged on investment agreements for this product.
As mentioned above, the major new initiative in 2006 was the re-launch of P&C insurance through Storebrand Skadeforsikring.
Greater efficiency produces results Work on improving the efficiency of customer service systems continued in 2006. The retail market unit carried out a project to improve the efficiency of opening new policies and settlement for life insurance products as well as projects for the external distribution channel and for deposits and sales support at Storebrand Bank. The objective of this program is to address efficiency in all units before the start of 2009, and to improve efficiency by more than 20% in all these units. Improvements of over 30% have already been achieved on some of the business processes that have been reviewed.
Changes in tax legislation for private pension saving One of the major surprises of 2006 was the Norwegian government’s decision to abolish the favourable taxation treatment of private pension savings. With effect from 12 May 2006, contributions to personal pension plans (IPA pensions) are no longer tax-deductible. In addition, from 1 January 2007 annuity policies are no longer exempt from wealth tax. At the close of 2006,
Storebrand managed some NOK 18 billion of investments in IPA pensions and NOK 6.5 billion of annuity policies. Inflows to IPA pensions and annuities totalled NOK 1 billion in 2006 as compared to NOK 1.1 billion in 2005.
People, with their skills and expertise, are Storebrand’s most important resource. Storebrand’s products are financial services in the areas of insurance and long-term savings. We can best contribute to sustainable development through areas such as competence development, gender equality, responsible investment and working to reduce illness absence.
All Storebrand’s funds and pension portfolios are subject to comprehensive standards on corporate responsibility. We call this our group standard for responsible investments (see figure). As of 1 January 2007 the group standard listed 80 companies whose activities or engagement were considered unacceptable. The overall objective is not to exclude companies, but to promote more sustainable business practices.
A total of 80 companies are excluded from all Storebrand funds and pension portfolios as of December 2006. The number of companies excluded are in brackets. Certain companies are exclu­ ded in more than one area.
“Storebrand is quite simply in the lead when it comes to ethics”
Microfinance Microfinance is a new direction within responsible investments and involves providing financial services to people who would not normally have access to bank savings, credit and insurance. Storebrand first got involved in microfinancing in 2005, and has so far committed USD 9 million with two microfinance funds, investing in microcredit. Microcredit comprises small loans with short repayment periods and have experienced only limited losses.
Microfinance has proved to be an effective tool in fighting poverty. We intend to increase our investments in microfinance over the next two-year period, given that we can find acceptable investment opportunities.
We measure our performance by Status 2004 Status 2006 Target 2008 Sh ar eh o ld er s Return on capital employed (annualised) 25.1%1 19% 15%
Percentage of post-tax group profit distributed as dividend 78%2 29.3% > 30%
Inclusion in the Dow Jones Sustainability Index and FTSE4Good Included Included Included
Proportion of tel. calls answered within 20 sec. (customer centre) 83% 81% 80%
Avoid investing in companies involved in corruption Criteria introduced In place -
Responsible Invement criteria for Emerging Market Debt (EMD) - In place -
Environmental and socially responsible criteria included in the Storebrand Bank credit approval processes
Launch new health and safety product for corporate customers to reduce illness absence and disability
Em p lo ye e s Percentage of management positions held by women 38% 38% 40%
Percentage of employees satisfied with personal development opportunities 80% Spring 20075 80%
Illness absence as an average annual percentage6 4.1% 5.1% Maximum 4.8% (4%)7
rs Environmental and social responsibility standards for suppliers Work started Purchasing policy produced -
So ci et y as a w h o le Financial support for charitable organisations and other measures for society as a whole NOK 3.5 mill. NOK 3.35 mill. Stable
International collaboration: Membership of WBCSD, UNEP, GC and TI Member Member Member
In May 2006, Storebrand was voted the best company in Norway for business ethics and corporate responsibility. Voting was based on a survey of 3 500 Norwegian students at 13 universities and colleges.
ment, and our ambition is to have the most adaptable, highly skilled and motivated managers and employees in the financial sector. To further this objective, we have developed a module-based management development program through which all managers take part in training for specific skills.
Gender equality Storebrand is fully committed to increasing the number of women in senior management. The group’s target is for 40 per cent of female representation. In 2006, 37.9 per cent of the group’s managers were female and 50 per cent of the shareholder-elected members of the Board of Storebrand ASA were women.
CEO Key figures Corporate Retail Corporate responsibility Board Report Shareholder matters Corporate governance Management Report
Members (elected by shareholders): Stein Erik Hagen, Ole Enger, Terje R. Venold, Margareth Øvrum, Olaug Svarva, Eli Sætersmoen, Johan H. Andresen jr., Vibeke Hammer Madsen, Merete Egelund Valderhaug, Roar Engeland
Board members: Halvor Stenstadvold, Knut G. Heje, Mette K. Johnsen, Birgitte Nielsen og Barbara Rose Millian Thoralfsson
Board members (elected by employees): Nina Elisabeth Smeby, Erik Haug Hansen, Knut Dyre Haug
Members (elected by shareholders): Dag J. Opedal, Johan H. Andresen jr., Olaug Svarva
Note 6: Holding company's shares in subsidiaries and associated companies 103
Nina Elisabeth Smeby (41), employee elected. Principal employee representative. Various banking courses. 2002­2003 head of banking products. 1996­2000 Account manager Storebrand Bank. 1986­1996 Storebrand Norden, accounting and finance. 2000­, board member Storebrand ASA.
Report of the board of directors Main features The Storebrand group is made up of four business areas: Life Insurance,
P&C (property and casualty) insurance in autumn 2006. This development means that Storebrand is once again a total supplier in the market for long-term savings and insurance. The group carries out the major part of its business activities in Norway, and its head office is in Oslo. It has in addition established life insurance, asset management and health insurance activities in Sweden.
The Board considers 2006 another good year in Storebrand’s development. Conditions in the financial markets are very important for Storebrand, and 2006 was the fourth year in a row with good investment returns in stockmarkets both globally and in Norway. Moreover, the real estate market performed well and interest rates rose both in Norway and internationally. The introduction of mandatory occupational pensions in
Norwegians more aware of the need for personal savings. Guaranteed savings products and real estate funds were the most popular products for
Knut Dyre Haug (51), employee elected. Ass. director Storebrand Life Insurance. Officer’s Training School, authorised insurance advisor. 2000­, Storebrand Livsforsikring AS. 1998­1999 Markets director Sparebank1 Livsforsikring. 1978­1998 Storebrand. 1990­2006 BI Center for Finance and Forsikringsakademiet as lecturer and author. 1999­2001 board member Eiendomsstyret Asker Kommune. 2002­2006 member of Board of Representatives, Asker og Bærum Boligbyggelag. 2002­, head of project board for authorisations FNH. 2001­, board member and later chairman Boligstiftelsen Ungdomsboliger, Asker.
retail customers in 2006. The re-launch of P&C insurance was successful, and Storebrand’s new Internet service makes it easy for customers to check prices and buy insurance products online.
Measured in terms of share price, Storebrand performed strongly in 2006.
Storebrand shareholders enjoyed a total return of 44% for the year.
The new Insurance Activities Act came into force on 1 July 2006, but with transitional rules that mean the new business rules come into force from 2008. One change that did come into force in 2006 was the opportunity to sell traditional insurance products and unit linked products from the same company. As a result of this change, Storebrand Livsforsikring AS and Storebrand Fondsforsikring
The accounts of the holding company, Storebrand ASA, are produced in accordance with Norwegian accounting legislation, and the company has elected not to apply IFRS to the holding company’s unconsolidated
5,549 million for 2006 as compared to NOK 4,740 million for 2005.
Group profit before tax and changes to security reserves was NOK
The risk result was NOK 145 million lower than in 2005. Individual endowment and individual pension business showed an improvement, while group pension, group life insurance and non-life products showed a decline. The decline in risk result for group pension insurance was caused by a weaker disability result. Group life insurance showed a decline due to lower premium tariffs. The decline for non-life products was mainly due to industrial injuries claims, where the regulations dictate that an increase in business volume is reflected in higher security reserves and a lower risk result.
Following the introduction of OTP, the occupational pension market will in future mainly be a market for transfers between pension suppliers. Storebrand is well equipped for this. As in 2005, Storebrand was again a winner in the market for transfers of occupational pension schemes in 2006, with notified transfers of NOK 2.6 billion. Sales of savings-related life insurance products levelled off in 2006 after 2-3 record years. The market for life insurance, health insurance and child insurance has grown steadily in recent years, and continuing growth is expected. Total life insurance policyholders ’ funds increased by 9.4% in 2006 to NOK 153.6 billion. Storebrand
Life Insurance achieved a good investment return in 2006, and unrealised gains on current asset investments totalled NOK 5.9 billion at year-end.
The regulatory and operating framework for life insurance is undergoing a process of change in a number of areas. Storebrand is working on preparations for these changes. This includes changes to prices and investment portfolios, as well as changes to risk management and systems.
(real estate mutual fund) 2005. The fund performed well in 2006.
Asset management: 2006 was characterised by strong investment performance and a good inflow of new assets under management.
Despite improving conditions in stockmarkets over recent years, sales of equity mutual funds to the retail market have remained at a low level.
Other activities: Property and casualty insurance: Storebrand Skadeforsikring underwent major changes in 2006. It started the year as a company in run-off, but on 28 March 2006 the Board of Directors of Storebrand
ASA resolved to re-launch a P&C insurance business. Following a rapid period of preparation, Storebrand Skadeforsikring moved from a project phase into ordinary operation in October 2006, and on 8 December the company opened for sales of P&C products by telephone and over the Internet. The re-launch of P&C insurance completes Storebrand’s product range and strengthens its commitment to the retail market. The re-launch was accomplished in line with the original plan and schedule, and the new business has attracted a stronger inflow of customers than expected. The company had 2,044 customers at the close of 2006.
Storebrand Skadeforsikring will focus on profitable and steady growth, and its target is to win a 15% share of the market over the next seven to nine years.
Storebrand ASA reported a pre-tax profit of NOK 1,020 million, as compared to NOK 1,009 million in 2005. Income from investments in subsidiaries totalled NOK 1,036 million, an increase of NOK 10 million from 2005. The consolidated accounts of Storebrand ASA are not produced in accordance with IFRS. The proposed dividend of NOK 442 million is charged to reported equity at 31 December 2006 in the company accounts, but in the consolidated accounts prepared in accordance with
Rising interest rates over the course of 2006 have helped to strengthen the life company’s risk-bearing capacity. The company has invested a significant part of its financial fixed assets in bonds classified as hold to maturity, which generate a running yield in excess of 5%.
Insurance policies are long-term agreements, and involve uncertainty in respect of assumptions about future rates of mortality and invalidity. The life insurance company uses tariffs based on historical statistical data that are notified to the authorities. The company follows developments in mortality and invalidity rates very closely, and adjusts its reserves in accordance with these trends.
Risk Capital as % of policyholders’ funds excluding additional statutory reserves
Tilleggsavsetninger adjustment reserve 1 Risk capital includes NOK 0.6 billion of additional statutory reserves in excess of one year’s guaranteed return.
The overall risk associated with the bank’s lending portfolio continued to reduce in 2006, evidenced by a reduction in the incidence of default and a shift towards retail and mortgage lending.
The volume of non-performing and loss-exposed loans totalled NOK 533 million following a reduction of NOK 221 million over the course of 2006, and is equivalent to 1.7% of gross lending. Storebrand has established sound liquidity buffers in Storebrand Bank and other group companies, and continuously monitors liquidity relative to internal limits. Committed credit facilities with other banks have also been established which the group companies can draw on if necessary.
In addition, the risk exposure arising from travel insurance may increase sharply in the event of possible catastrophe scenarios. Travel insurance is therefore now also included in the group’s catastrophe reinsurance.
Storebrand will monitor this portfolio carefully in 2007, and may consider laying off cumulative risk with reinsurers.
Oslo Reinsurance Company ASA has been in run-off since 1994. The company’s risk exposure has reduced significantly over this period.
Capital situation The level of equity and debt in the company is managed relative to financial risk exposure and regulatory requirements. The group has set long-term targets for the capital ratio of its banking activities to be over 10% and for the life insurance company’s solvency margin to be at least 150%. Both these targets were satisfied at 31 December 2006.
Storebrand Life Insurance aims to be rated at the ‘A’ level. The holding company aims to have a net debt ratio of zero over the longer term.
The group’s capital base, which consists of equity, subordinated loan capital, the market value adjustment reserve and additional statutory reserves, amounted to NOK 24.1 billion at 31 December 2006 as compared to NOK 21.0 billion at the end of 2005.
At the close of 2006, Storebrand Livsforsikring AS was rated A and A2 respectively by Standard & Poor’s and Moody’s. Storebrand ASA was rated
& Poor’s rated Storebrand Bank ASA for the first time in 2006, giving the bank a rating of BBB+. Moody’s rating for Storebrand Bank ASA is Baa2. All ratings of companies in the Storebrand group have a stable outlook.
The group’s two-year corporate responsibility action plan expired in 2006. The majority of the objectives were achieved. In addition, a number of measures were implemented that were not included in the two-year plan, including investment in microfinancing. Some of the targets in the action plan proved too challenging to achieve within the timetable set for various reasons, but these objectives are included in the next two-year action plan. A report on the status of all the objectives for 2006 can be found in the Corporate Responsibility article (page 18).
In 2006, Storebrand was included in the Global 100, a list of the hundred most sustainable companies in the world. Norwegian students voted
Storebrand as the best company in Norway for business ethics and corporate responsibility, and Storebrand continued to qualify for inclusion in the sustainability indices FTSE4Good and Dow Jones Sustainability Index.
Environment: Storebrand is committed to reducing its impact on the environment. This includes measuring the group’s consumption of water, reducing energy consumption and paper usage, sorting waste and recycling all electronic equipment through FairRecycling. In addition, Storebrand sets environmental standards for the management of its properties, and has developed a purchasing policy that imposes environmental and social responsibility requirements on its suppliers.
Storebrand’s holding of forest land at Værdalsbruket is certified in accordance with the Living Forest standard. During the course of 2008,
Storebrand will start monitoring and reporting its CO2 discharges and will evaluate measures to become a carbon-neutral company.
Gender equality/diversity: Storebrand is fully committed to increasing the number of women in senior management. The group’s target is for 40% female representation among its management staff and on its internal and external boards of directors. In 2006, 50% of the shareholderelected members of the Board of Storebrand ASA were women. 37.9%
The group employed 21 employees over the pension age of 65 in 2006 as compared to 13 in 2005. 45 new members of staff over the age of 45 were recruited in 2006. Storebrand carries out an annual senior survey, and one of its targets is that 90% of older employees should be satisfied with Storebrand as an employer. This target was not achieved in 2006, but continues unchanged for 2008. A particularly positive feature of the survey was that 39.4% of older employees wished to continue working after reaching 65 years of age as compared to 27.9% in 2004.
Absence due to illness: Storebrand has worked systematically to reduce absence due to illness over many years, and the group has participated in the ‘Inclusive workplace’ scheme since 1992. Absence due to illness in the group in 2006 was 5.1%. This represents an increase from 2005 and is somewhat above the target of 4.8%. The incidence of long-term sickness has increased, while short-term absence has remained stable. Storebrand will continue to concentrate on reducing absence due to illness, and this will include training employees in the internal procedures for sick leave that were reissued in 2006.
In order to strengthen Storebrand’s work on corporate governance further, an in-house Corporate Governance committee was established in 2006. The Norwegian Code of Practice for Corporate Governance was first published in December 2004, and was most recently revised on 28 November 2006. Storebrand meets the recommendations set out in the Code in all major respects. The question of whether to elect a deputy chairman for the Board of Storebrand ASA was considered in 2006, but such an appointment was not considered necessary.
Further information on Storebrand’s policies and procedures for corporate governance can be found in a separate article on page 37.
The Board carried out an evaluation of its work in 2006 where the executive management team also participated. The Board held 11 meetings and one Board Conference in 2006. The work of the Board is subject to a specific mandate. The Board has established advisory committees on remuneration and internal audit.
Changes in the membership of Storebrand’s corporate bodies in 2006 were as follows: Board of Directors: Barbara Rose Milian Thoralfsson was elected as a new member of the Board to replace Grace Reksten Skaugen, who had been a member since 2002.
Olaug Svarva was elected as a new member. Trond Bjørgan, Petter Jansen and Karen Helene Ulltveit-Moe were elected as new deputy members.
Election Committee. Arvid Grundekjøn was elected as the new Chairman, and Olaug Svarva was elected as a new member.
The Board wishes to thank the retiring members of the Board of Representatives, the Election Committee and the Control Committee for the valuable contribution they have made to the company
Future prospects Over recent years, Storebrand has built a sound financial and market foundation for further growth and improvement. The company has a strong position in an attractive and growing market for long-term savings and insurance.
The group’s profitability is good, and the life company has satisfactory risk capital. This provides a good starting point for further financial success. Through its active risk management and the level of its risk capital, Storebrand is well prepared to manage any future turbulence in equity and fixed income markets.
Storebrand has attracted a very good inflow of customers over recent years in important areas such as pension saving, asset management and banking. In 2006, companies with some 200,000 employees set up pension schemes through Storebrand. These schemes represent regular annual savings, and provide the basis for growth in future business volumes.
Sales of products and services linked to long-term savings and insurance will also benefit from demographic trends. Longer life expectancy, combined with a general wish to maintain a high standard of living in retirement, create increasing demand for products in this area.
Greater efficiency will ensure that Storebrand can handle increasing business volumes without an equivalent increase in costs. An extensive program of further product improvement is underway, and over the next two years this will be rolled out across the entire group.
The introduction of a new regulatory framework for life insurance with effect from 2008 will have a significant effect on Storebrand’s business model and traditional pension products. Storebrand is working intensively to adapt products and systems for the new regime, as well as providing extensive guidance to customers in connection with the changes. Storebrand believes that the new regulatory framework represents a positive development, and will permit greater flexibility and improve the group’s quality of earnings.
Storebrand ASA recorded a profit for 2006 of NOK 1,020 million. The company’s dividend policy aims for stable year-on-year growth in dividend per share. The policy is also intended to contribute towards giving shareholders a competitive return and optimising the company’s capital structure. The dividend to shareholders will normally represent above 30% of the full-year profit after tax. The Board wishes to have a dividend policy with a long-term horizon. The objective of the dividend policy is that the Storebrand group should make effective use of a sufficient level of capital relative to its risk profile.
Distributable reserves amounted to NOK 3,636 million at 31 December 2006.
Halvor Stenstadvold Mette K. Johnsen Knut G. Heje Barbara Rose Millian Thoralfsson
The annual general meeting held on 3 May 2006 granted a mandate for the company to buy back up to 10% of its own shares. Storebrand has used this mandate, and at 31 December 2006 the company held 4.5 million of its own shares, equivalent to 1.80% of total share capital.
Shareholders Storebrand ASA is the seventh largest company listed on the OSE by number of shareholders. The company has shareholders from almost all the municipalities in Norway and from 41 countries. In terms of market capitalisation, Storebrand was the 15th largest company listed on the OSE at the close of 2006.
Analysis of shareholders by number or shares and ownership at 1–200 shares 201–1,000 shares 1001–
The object of the scheme is to involve employees more closely in the company's value creation. Employees were again offered this opportunity in 2006. In March 2006, each employee was offered the opportunity to buy between 100 and 410 ordinary shares at NOK 58.97 per share. 45%
of employees participated and purchased 171,270 shares. Note 11 provides information on shares held by senior management.
Turnover in the Storebrand share Almost 564 million Storebrand shares changed hands in 2006, 9%
more than 2005. Trading in Storebrand shares has grown strongly since 2002, with average annual growth of 17%. The value of shares traded in 2006 was NOK 39,825 million, up from NOK 30,318 million in 2005. This made Storebrand the 14th most traded share on the OSE
Shareholder matters 20 largest shareholders at 31 December 2006: Shareholder Account type1
Gjensidige Forsikring ORD 24 956 550 9.99 NOR JPMorgan Chase Bank ORD 4 895 000 1.96 USA
Arion Custody NOM 10 505 274 4.21 ISL Mellon Bank AS Agent NOM 3 733 481 1.49 USA
Share price development The Storebrand share produced a total return (including dividend) of 44% over the course of 2006. The OSE benchmark index (OSEBX)
rose by 32% over the same period. Over the last three years, the Storebrand share has produced a total return of 124%, while the OSEBX
Dividend policy Storebrand’s dividend policy shall contribute towards giving shareholders a competitive return and optimising the company’s capital structure. The dividend to shareholders will normally represent above 30% of the full-year profit after tax. The Board wishes to have a dividend policy with a long-term horizon, and will aim for stable year-on-year growth in dividend per share.
Shareholders’ contact with the company Shareholders should generally contact the administrator of their share account with queries and notice of changes. Storebrand’s own shareholders’
In order to strengthen Storebrand’s work on corporate governance further, an in-house Corporate Governance committee was established in 2006. The committee is responsible for ensuring good corporate governance practice across the Storebrand group.
Storebrand’s principles for corporate governance correspond in all material respects with the Norwegian Code of Practice (CoP).
Storebrand launched its own principles for corporate governance in 1998, and sees the Norwegian Code of Practice as a natural extension of its own principles. The Board of Directors (the “Board”) has resolved that the company shall adhere to the Norwegian Code of Practice, and its statement on adherence to the Code of Practice can be found on page 28. An account of the definition and implementation of Storebrand's corporate values can be found in the Corporate Responsibility Report and Action Plan for 2007-2008, and also at pages 16-19 of this annual report. The group has produced guidelines for business ethics. Monitoring and compliance with these guidelines is subject to a thorough internal process. Further information in this respect can be found on page 28, and also in the Corporate Responsibility Report and Action Plan for 2007-2008. Further information on the company's objectives and main strategies can be found on pages 38-39. In addition, Storebrand keeps the market advised of its objectives and strategies through investor presentations held in connection with presentations of its interim and annual reports and other specialised presentations, such as the capital market days that are held every second year. Deviation from Sections 1 and 2 of the Code of Practice: None
SHAREHOLDER MATTERS (CoP sections 3,4 and 5) The Board continually monitors the company's capital adequacy in the light of its objectives, strategy and risk profile. The Board has established a clear and consistent dividend policy. The decision on payment of a dividend is made by the Annual General Meeting (“AGM”), based on a proposal put forward by the Board. Storebrand ASA has only one class of shares, and Norwegian legislation does not permit shareholders to accumulate votes from one matter in order to cast additional votes for another matter. (Cumulative voting). Storebrand has no specific restrictions on ownership of shares or voting rights in the company other than the restrictions imposed by the Financial Institutions Act. All shares have equal rights, and are freely negotiable. The Articles of Association do not impose any limitations on the negotiability of Storebrand shares. Deviation from Sections 3,4 and 5 of the Code of Practice: None
Annual General Meeting (CoP section 6) Storebrand ASA holds its AGM no later than the end of June each year. The 2006 AGM was held on 3 May. All shareholders of known address receive written notice of the AGM by post, sent out no later than 14 days before the AGM. The notice calling the meeting includes supporting papers for all resolutions to be considered by the meeting, including the candidates nominated by the election committee.
All shareholders are entitled to attend general meetings, and arrangements are also made for proxy voting. Shareholders can only exercise their formal rights through the general meeting. Norwegian law does not permit shareholders to exercise their rights through what is known as ”written consent” (formal group action outside the general meeting). Storebrand has considered a system for future use that would encourage a high level of participation by allowing shareholders to vote over the Internet, but this kind of arrangement is not currently permitted by Norwegian law. Deviation from Section 6 of the Code of Practice: None
Election Committee (CoP section 7) Storebrand ASA’s Articles of Association regulate the company’s Election Committee, which has four members. In accordance with the provisions of the Articles of Association approved by the AGM, the Chairman of the Board of Representatives is a permanent member of the Election Committee and its chairman. The other members are elected by the AGM. The company’s employees elect an observer to the committee, who participates as a full member in making recommendations for the election of the Chairman of the Board of Directors. The Election Committee is independent of the company's Board and management, and its composition ensures a broad representation of shareholder interests. The Election Committee reviews the annual appraisal of the work of the Board, and is responsible for proposing candidates to the Board of Representatives, the Board of Directors, the Control Committee and the Election Committee, and the remuneration of the members of these bodies. The Election Committee applies specific criteria, and works in accordance with a formal mandate. The members of the Storebrand ASA Election Committee are also members of the election committees for Storebrand Livsforsikring AS (Storebrand Life Insurance) and Storebrand Bank ASA. Deviation from Section 7 of the Code of Practice: Storebrand's Articles of Association stipulate that the Chairman of the Board of Representa­ tives is a permanent member of the Election Committee and is the Committee's chairman. This means that the chairman of the Election Committee is not directly elected to this position by the AGM. However, the AGM elects 2/3 of the Board of Representatives, which elects the chairman. The arrangement is therefore assumed to satisfy the principle that the composition of the election committee should be decided by the AGM.
Board of Representatives (CoP section 8) The Board of Representatives in Storebrand ASA is a legal requirement, and has 18 members, of which 12 are elected by the AGM and six by the group’s employees. Members are each elected for a two-year term of office so that half the members retire each year. It is a statutory requirement that the members elected by the AGM shall reflect the company 's interest groups, customer structure and its function in society. A broad cross-section of shareholders is represented through elections to the Board of Representatives.
The duties of the Board of Representatives include making recommendations to the AGM on the Board’s proposal for the annual report and accounts, electing the six shareholder nominated directors, including the Chairman, to the Board of Directors, determining the fees paid to the directors, issuing the mandate for the work of the Control Committee and considering reports from the Control Committee. The Board of Representatives is entitled to make recommendations to the Board of Directors on any matter. Deviation from Section 8 of the Code of Practice: None
The work of the Board of Directors (CoP section 9) The Board meets at least nine times each year. In 2006, the Board held 11 meetings and one Board conference. Attendance records of individual Board members can be found on the group's website. The work of the Board is subject to a specific mandate. In order to ensure sound and well-considered decisions, meetings of the Board are well prepared so that all members can participate in the decision making process. The Board prepares an annual schedule for its meetings and the issues to be considered. The agenda is set by the Chairman based on the approved schedule for the year and a list of matters carried forward from previous meetings. Time is made available at every second Board meeting to discuss matters without the management present. The Board is entitled to appoint external advisers whenever it considers this necessary.
The Board carries out an annual appraisal of its work, which is made available to the Election Committee for consideration in their work.
Board committees (CoP section 9) The Board has established a Remuneration Committee and an Audit Committee. Each comprises two shareholder elected and one employee elected Board member. This helps to ensure thorough and independent attention to matters such as financial reporting and the remuneration of senior employees. The committees assist the Board by preparing matters for consideration, but decisions are taken by the entire Board. Both committees are able to carry out meetings and consider matters without involvement from the company's management.
GROUP MANAGEMENT Internal management bodies Storebrand’s business model has a particular emphasis on life insurance.
The Board has issued a written mandate setting out the management responsibilities of the Group CEO of Storebrand ASA. The Group CEO’s role does not give rise to any conflicts of interest.
The group’s management and monitoring of the business areas takes place largely through the subsidiaries’ board meetings, executive management meetings, business reviews and process reviews.
Annual programs for internal audit work are determined by the boards of the group companies, based on the auditor’s recommendations and a risk evaluation carried out by the group’s senior management. Internal audit produces quarterly reports for the boards. Reports from special investigations initiated by internal audit or management in respect of possible breaches of ethical rules are immediately reported to the chairman of the Audit Committee and the Group CEO with copies to the heads of Legal Services and Human Resources. Internal audit is subject to a formal mandate in accordance with current legislation, regulations and international standards. The Control Committee is entitled to use the resources of internal audit as required.
Each business area carries out an annual strategy and planning process used to produce a rolling three-year plan for the group, including detailed targets, strategies and budgets. The Board of Storebrand ASA is involved throughout the strategy and planning process. Risk evaluation and internal control reporting form an integrated part of the strategy and planning process. The management teams work actively to identify areas of risk and measures to promote the company 's strategy and objectives. This work is summarised in an internal control report submitted to the Audit’s Committee and the boards.
Storebrand’s management reporting system, Storebrand Compass, provides management and the Board with monthly reports on financial and operational performance relative to approved targets. The system highlights parameters that fall short of targets so that appropriate measures can be implemented.
The appraisal and remuneration of Storebrand employees forms an integral part of the value-based management system, and is designed to ensure that the group's strategies are implemented. Bonus payments are dependent on both the overall level of value creation and individual performance. Storebrand’s remuneration systems follow internationally recognised principles. Remuneration does not include share options. Historic data on share options can be found in the annual reports for 2004 and earlier years.
Business ethics and “whistle blowing” Storebrand has established ethical rules for the group and its employees.
Business ethics and ethical dilemmas are a standard feature of seminars for new employees, and are discussed annually by all departments. Employees can seek advice anonymously from a business ethics page on the Storebrand Intranet, and can refer any concerns directly to the chairman of Storebrand ASA’s Audit Committee. Deviation from Sections 10 and 15 of the Code of Practice: None
Remuneration of the Board and executive management (CoP sections 11 and 12) The remuneration of the members of the Board is decided annually by the AGM. The fees paid to the members of the Board are not linked to profits, option programs or similar arrangements. The members of the Board do not receive incentive-based consideration, but receive a fixed annual fee plus an additional payment for each Board meeting in excess of 11 meetings in any one year. The shareholderelected members of the Board do not participate in the company's pension arrangements. None of the shareholder-elected members of the Board carries out any duties for the company other than their appointment to the Board. More detailed information on remuneration, loans and shareholdings of the members of the Board can be found in Notes x and x of the notes to the accounts. Members of the Board are encouraged to hold shares in the company.
Take-overs (CoP section 14) The Articles of Association do not impose any restrictions on the purchase of shares in Storebrand. The Board has detemined guiding principles on how a take-over bid will be handled. Deviation from Section 14 of the Code of Practice. None
Other matters As one of the largest investors in the Norwegian stock market, Storebrand has considerable potential influence over listed companies, and pays great attention to exercising its ownership on the basis of straightforward and consistent ownership principles. Storebrand applies the Norwegian Code of Practice for Corporate Governance in this role, a natural extension of the principles it first established in 1998. Storebrand has issued guidelines in respect of employees holding non-executive appointments in companies outside the group, and the guidelines include restrictions on the number of such appointments any employee may hold.
Egil Thompson (42), Executive Vice Presedent, Corporate Communications. Degree in political science, University of Oslo. 1999–2000 Deputy Director, Corporate Communications, Storebrand ASA. 1994– 1999 Journalist and head of editorial staff, Aftenposten. 1990–1994 Journalist with the Norwegian News Agency (NTB).
Idar Kreutzer (44), Group Chief Executive Officer, Storebrand ASA and Managing Director, Storebrand Livsforsikring AS. Norwegian School of Economics and Business Administration (NHH). 1995–2000 Chief Financial Officer, Storebrand ASA. 1992–1995 Various positions in treasury and business development, Storebrand. 1988–1991 Consultant, Medinor Project. 1986–1987 Political Secretary & Advisor to the City Council, the Municipality of Oslo.
Klaus-Anders Nysteen (41), Managing Director Storebrand Bank ASA. AFF Solstrand Management Programme. MBA Norwegian School of Management and Administration (NHH). Management Programme in Logistics, Norwegian School of Management (BI). Royal Norwegian Naval Academy. 2001-2006 Executive Vice President and CFO, Posten Norge AS. 1999-2000 CFO, Hydro Seafood AS. 1998-1999 acting CEO and CFO, Hydro Seafgood GSP Ltd, Scotland. 1997-1998 Finance Director, Hydro Seafood Norway AS. 1993-1997 Lecturer in Logistics, Norwegian School of Management (BI) Bergen campus.
This report should be read in conjunction with the information provided in the Report of the Board of Directors the consolidated accounts and notes to the accounts. Further information on the accounts and notes to the accounts for subsidiaries can be found in the subsidiaries’ annual reports.
Average number of shares (in million) 248.0 258.6 272.9 277.9 277.7
Total policyholders' funds (traditional life insurance) 146 126 134 508 121 014 108 760 99 108
Total premium income (excluding policy transfers) 13 069 16 805 15 822 9 754 7 281
Balance of pension transfers (including unit linked) 5 260 564 -758 1 493 381
Operating costs as % of policyholders' funds2 1.10% 1.10% 0.96% 1.00% 0.98%
Retail mortgages as proportion of total lending 54% 55% 55% 48% 43%
Volume of non-performing and loss-exposed loans 533 754 909 1 717 2 362
Percentage of total funds under management invested in equities 22% 23% 21% 17% 16%
Ratio of external funds under management retail/institutional clients (%) 19 / 81 20 / 80 26 / 74 17 / 83 16 / 84
Figures for 2004, 2005 and 2006 are based on IFRS. Figures for 2001 - 2003 are based on NGAAP. 1 Post-tax profit/(Opening equity - provision for dividend - 50% of own shares purchased during the year) 2 2005 includes 10 basis points of non-recurring costs in respect of pensions. 3 Excluding financial income
The group’s strategic development Strong growth continues for the Norwegian economy. 2006 was the third year in a row with GDP growth for mainland Norway of around 4.5%. The Norwegian central bank provided an account of the state of the Norwegian economy at the close of 2006 in its Financial
Stability Report . The central bank concluded that the economy is enjoying a continued upturn, driven by relatively low interest rates, high oil prices and a high level of activity in the global economy. Norwegian unemployment is at the lowest level since the previous peak of the economic cycle at the end of the 1990s. The central bank's deposit rate was 3.5% at the close of 2006, up from 2.25% at the start of the year.
Storebrand Life Insurance's branch office in Sweden continues to expand. The Swedish branch has so far focused on sales of traditional life and pension insurance products with guaranteed returns. In 2007, it will expand its activities to include mutual fund products. This will make
In the retail market, Storebrand has a broad focus on long-term savings and insurance. The market for life insurance and long-term savings is growing, and Storebrand has high ambitions for the future of these products. It sees an important role for lending products (principally residential mortgage lending) and bank account products in recruiting new customers to the group. The introduction of no-fees routine banking by Storebrand Bank, together with more competitive mortgage lending products, started a positive trend in 2005. This trend continued throughout 2006, and 21,000 new customer accounts were opened in the year. The re-launch of P&C insurance for the retail market is also playing a role in recruiting new customers, and is furthermore important for the group's commitment to increasing the average number of
Storebrand products per customer. In the first months of operation, almost 75% of P&C sales were to existing Storebrand customers.
The efficiency targets announced in 2004 were confirmed, but the target for Storebrand Bank’s cost/income ratio (C/I ratio) was adjusted from 55% to 60%, and the target date was extended to 2008. The change in this target principally reflects the level of growth expected over the next few years, as well as the relocation of Storebrand's retail market distribution from the bank to the life insurance company.
Capital efficiency. Storebrand’s subsidiaries currently have sufficient capital resources for the growth expected over the next few years. Storebrand ASA (the holding company) aims to achieve zero net indebtedness over time. This implies that liquid assets shall be equivalent to the level of interest-bearing liabilities. Maintaining an efficient capital base is one of the essential factors in ensuring that the company is able to generate a satisfactory annual profit relative to the group's equity (return on equity). The Board will ask the 2007
Annual General Meeting (AGM) for a new mandate to buy back more of the company's own shares.
Financial objectives for the group Storebrand has published financial objectives for the group and for each business area. This provides the basis for setting targets for each department and employee. Storebrand has communicated its financial objectives to the market, most recently at the capital markets day held in 2006. The objectives represent a sound and efficient use of capital, with growth in profitability and dividends.
AS was approved in the third quarter of 2006. The merger was implemented with accounting effect from 1 January 2006. In addition to the presentation of consolidated profit and loss on page 54, the group result can be analysed by business area as shown in the table below. These figures include the life insurance business of Storebrand Livsforsikring AS (including subsidiaries) and the ownership interest in Storebrand Helseforsikring AS.
AS including subsidiaries and Storebrand’s ownership interest in Storebrand Alternative Investments ASA. Other activities comprises the holding company Storebrand ASA and Storebrand Skadeforsikring AS
Earnings per share, based on the average number of shares outstanding, amounted to NOK 6.03 in 2006 and NOK 5.41 in 2005. Further information on the business areas can be found on pages 40–51.
The Storebrand group produced a post-tax return on equity (RoE) of
Storebrand has made plans for the next few years to continue to achieve the profitability target of 15% ROE.
Capital situation Storebrand pays particular attention to the active management of its equity and borrowings. The composition of its business areas and their growth will be an important driver for the group’s capital requirements.
The level of indebtedness is managed in relation to the company's commercial risk and capital requirements. The group has set long-term targets for the capital ratio of its banking activities to be 10% and the life insurance solvency margin to be at least 150%. Storebrand Life Insurance also aims to be rated at the A level. The holding company aims to have a net debt ratio of zero over the longer term.
Storebrand's capital situation - key figures 2006 2005 2004 2003 2002
Storebrand Group: Storebrand ASA: Storebrand Livsforsikring AS: Storebrand Bank ASA: 1 Net debt ratio is debt minus liquid assets divided be assets minus liquid assets 2004–2006 based on IFRS, 2002–2003 based on NGAAP
Storebrand ASA repurchased 7.3 million of its shares in 2006 at an average price of NOK 68.69 per share, representing a total cost of NOK 503 million
(after taking into account own shares sold through the employee purchase scheme). The shares were bought in the market, with purchases taking place on 36 trading days. The company reduced its share capital in August by 8.7 million shares to 249.8 million shares by cancelling own shares. The 2006 AGM granted the Board a mandate to purchase up to 10% of the company's own shares in the period up to the 2007 AGM. Storebrand held 4.5 million of the company’s own shares at the close of 2006.
In view of the group’s sizeable tax losses carried forward and the low tax rate expected for the life insurance activities in normal financial market conditions, it is unlikely that Storebrand will pay any tax for several years. For further information, see note 6 to the annual accounts on page 67. The group has net negative timing differences between accounting and tax values of around NOK 10.6 billion that provide the basis for a deferred tax asset of NOK 3 billion (28% tax rate). This amount includes losses carried forward of NOK 8.7 billion and tax allowances carried forward of NOK 1.4 billion. Tax allowances can be carried forward for 10 years, but expire if not used within this period.
INFORMATION ON THE BUSINESS AREAS Life insurance activities Markets and strategy Strong position for pensions and life insurance. Storebrand Life
Insurance is one of the leading companies in Norway for pensions and life insurance products for private individuals, companies and public sector bodies. The company has a market share of 27% in terms of policyholders ' funds in the Norwegian life insurance market. This market is expected to grow strongly, and Storebrand intends to develop its position by delivering customer-oriented and attractive product solutions.
Norway's most satisfied customers. Storebrand Life Insurance’s objective is to be recognised by customers as the most respected and customer-focused life insurance company in Norway. Storebrand’s competitive position was confirmed by the number of major new customers that it won in 2006, as well as the high level of customer satisfaction reported by the Norsk Kundebarometer survey.
Group pension insurance represents the major part of activities as measured in terms of both policyholders’ funds and profit to the owner. Group pension insurance accounted for 72% of Storebrand's policyholders’ funds at 31 December 2006, while individual pensions and life insurance products represented 28% of total policyholders’ funds. In terms of profit to the owner, group pension insurance contributed 59%, personal life insurance products contributed 36% and group life insurance contributed 5% in 2006.
Storebrand has established a sizeable number of framework agreements with employers' organisations and trade associations over recent years. These agreements played an important role when mandatory occupational pension schemes were introduced, and accounted for 55% of all the company's sales of mandatory schemes.
One of the major surprises of 2006 was the Norwegian government's decision to abolish the favourable taxation treatment of private pension saving. With effect from 12 May 2006, contributions to personal pension plans (IPA pensions) are no longer tax deductible. In addition, from 1 January 2007 annuity policies are no longer exempt from wealth tax. At the close of 2006, Storebrand managed some
Individual pension insurance Non-life - of which transferred to premium reserve -126 -14 -7 -147 -125 -134 11. Change in premium reserve/security fund -10 -6 -1 -1 -18 -11 -181
To(-)/from(+) owner's equity: -net return on share capital1 579 491 409 -risk margin earned by owner's equity 49 47 46 14. Profit/loss for the year 1 181 1 157 938 1 Includes: Security reserve subordinated loan capital book equity and liability items.
Gross financial income is the total return on both customers' and owner's assets. Required yield is the return on customers' assets. Surplus/deficit on result elements solely for the company's account.
Financial results for 2006 Storebrand Fondsforsikring AS merged with Storebrand Livsforsikring
The total contribution of profit from the life insurance activities to group profit in accordance with IFRS amounted to NOK 1,198 million in 2006 compared to NOK 1,229 million in 2005. The following table shows the breakdown of this profit contribution between the life insurance business areas.
The following sections provide an account of the financial results for
Storebrand Life Insurance. This is followed by the financial results for other life insurance activities. Finally, information is provided on embedded value figures for Storebrand Life Insurance in accordance with the principles for European Embedded Value.
Norwegian insurance companies are not currently permitted to prepare their accounts in accordance with IFRS. Except as otherwise stated, the following comments apply to accounting figures prepared in accordance with Norwegian accounting legislation and accounting regulations for insurance companies.
Good operating result and profit to owner. Operating profit for 2006 was NOK 5,175 million, compared to NOK 4,372 million in 2005.
and the profit to the owner was NOK 1,182 million, including NOK 135 million from products not subject to profit sharing. In addition, insurance products with investment choice generated a loss of NOK 77 million. The good result for policyholders means that pensions currently in payment and fully paid-up pension policies will increase.
After IFRS effects of NOK 8 million, the Storebrand Life Insurance group produced a pre-tax profit in 2006 of NOK 1,191 million, equivalent to 23% return on equity, in line with 2005 and 2004.
Analysis of results – explanatory notes. Interest result is the difference between the net booked return, including interest costs on subordinated loan capital, and the guaranteed return on policies. The average guaranteed return on insurance policies in 2006 was 3.6%.
Risk result arises as a consequence of the incidence of mortality and disability during the period differing from that assumed for the premium tariffs. Administration result shows the difference between the administration premium charged and actual operating costs.
Insurance’s total premium income for 2006, excluding policy transfers, was NOK 13,069 million. This represents a decline of 22% from NOK
This was caused by the Norwegian Government's proposal to abolish the current tax arrangements for personal pensions.
The life insurance company’s risk bearing capacity was satisfactory at the close of 2006. The solvency margin was 174.6% compared to 175.9% at the close of 2005. The company’s capital ratio was 9.7% in 2006 while the minimum required is 8%.
Booked Value adjusted excluding unrealised gains on financial fixed assets Value adjusted including unrealised gains on financial fixed assets
Costs. The administration result showed a loss of NOK 601 million, which represents a deterioration of NOK 217 million from 2005.
These strengthened by NOK 1,000 million in 2006 to stand at NOK
5,551 million at the close of the year. This combined with the strength of risk management systems ensures that Storebrand Life Insurance is again well equipped to generate a good investment return in 2007.
Total invested assets 8.3% 161 064 1 Exposure is adjusted for derivative holdings in the separate portfolios.
Norwegian shares in the equity portfolio reduced in 2006 from around 25% to 15%. The proportion of the portfolio allocated to Private Equity increased to 2.2% in 2006. Hedging programs were again used for the equity portfolio in 2006 to limit the effect on risk capital in the event of a sudden sharp fall in the financial markets.
Financial results for other life insurance activities Storebrand Helseforsikring AS. Storebrand Helsefors ikring, in which
Storebrand ASA owns 50%, reported an operating profit of NOK 14 million for 2006 and a pre-tax profit of NOK 13 million compared to NOK 10 million and NOK 9 million respectively in 2005. Premium income for health insurance products increased by 20% from 2005 to 2006, and totalled
European Embedded Value Embedded Value (EV) is defined as the net present value of future profits to the owner from existing business, including the value of shareholder surplus. Embedded Value does not include the net present value of future new business. The method used is based on accepted actuarial principles, and follows the standard for European Embedded Value (EEV) reporting issued by the CFO Forum. This standard imposes requirements for more consistent and transparent reporting by the insurance industry, in particular the valuation of financial options and guarantees associated with insurance products, and a more realistic cost of capital.
Storebrand has calculated Embedded Value for 2006 in accordance with the new principles, using the same structure as in 2005. Embedded value at the close of 2006 was NOK 14,544 million, compared to NOK 12,025 million in 2005. Dividend paid and other equity movements in 2006 totalled NOK 832 million, giving a total Embedded Value result (change in EV
Comprising - Other non-profit-sharing business 1 151 1 175 1 031 1 Including value previously reported for Storebrand Fondsforsikring AS
Interest on the opening balance based on the economic assumptions in the model amounted to NOK 735 million. The value of new business written in 2006 increased Embedded Value by NOK 700 million. Operating variances from lower outward transfers of business and better than expected claims experience, together with changes in operation assumptions, caused an increase in Embedded Value of NOK 1,138 million. Higher interest rates in 2006 caused a reduction in relative terms of the cost of financial options and guarantees to a total of NOK 1,259 million. This combined with a good investment return in 2006, as well as higher expected returns and wage inflation, to give an increase in Embedded Value of NOK
Sensitivity analysis. The sensitivity analysis shows the effect of changes in assumptions on the Embedded Value of Storebrand Life Insurance.
8. Equity and property market values -10% 12 612 -13.3% 701 0.1%
(company or private individual). The insurance company must then meet any deficit in the administration result, and similarly any surplus is retained by the insurance company. Where a policy's assets are managed in the investment trust portfolio, the price of asset management must also be shown as a separate element of the overall charge.
New opportunities: investment choice, separating group portfolios and long-term contracts At present, Storebrand determines how a pension policy's assets are invested, and the entire portfolio is managed in the same portfolio.
Policies with a low interest rate guarantee and high risk capital (additional statutory reserves and unrealised gains) may therefore be able to maintain a higher exposure to equities in their portfolio at the same price as similar contracts that have a higher level of guaranteed interest or lower buffer capital. The basis for pricing the interest rate guarantee is the risk to which the available equity is exposed. This means that the customer can choose an investment profile with a lower equity exposure and therefore lower risk exposure in order to reduce the level of premium, although this will also reduce the expected return. A higher exposure to equities represents a higher expected return and higher contributions to the premium fund. Under the new Act, a shortfall in the return on the customer's policy can be met from its additional statutory reserves, and the new rules allow greater flexibility in building up the level of additional statutory reserves.
The new legislation also permits a new type of long-term policy.
The interest rate guarantee has so far been linked to a single financial year, but it will now be possible to agree a guaranteed return for periods of up to five years. The premium for a guaranteed return over a number of years will be lower than for annual guarantees over the same period. The employer's liabilities must still be supported by sufficient insurance reserves. If necessary, equity can be used to ensure satisfactory reserves during the agreed guarantee period.
Attractive products. Storebrand Investments offers a full range of savings and investment products, from equity and bond funds for personal saving to advanced specialist funds for professional investors.
The company has a well-established team of investment managers, and many of its managers have extensive experience. A survey carried out by Formuesforvaltning identified investment manager Alf Inge
Gjerde of Storebrand Investments as the best manager for Norwegian equities in 2006. Gjerde and his team manage the Storebrand Verdi retail market mutual fund. The fund is based on a model portfolio that provides the basis for all our customers' Norwegian equity portfolios. The Storebrand AksjeInnland fund is based on the same model portfolio. This fund is designed for large institutional investors, and has outperformed its benchmark index for seven successive years.
The Storebrand Optimér product developed in 2006 represents a new type of savings product, combining investment in commercial property managed by Storebrand Eiendom with investment in international equities managed by Storebrand Investments. Storebrand Optimér is not structured as a traditional mutual fund, but is a limited company and investors buy shares in the company.
Strong sales to institutional customers. A separate unit of investment advisers works closely with major institutional customers to develop customised investment strategies that meet customers’
Fund products for the retail market are distributed through Storebrand’s network of financial advisers, external distributors and direct sales channels such as the Internet and customer call centres. Storebrand
Investments also offers its products through defined contribution pension products and savings-related life insurance products, areas in which Storebrand Life Insurance enjoys a strong position.
A good return, but not at any price. Storebrand’s funds will not invest in companies involved in breaches of human rights, breaches of employees ' rights, serious environmental damage, corruption, land mines, cluster bombs, nuclear weapons or tobacco, as well as companies that are among the worst 10% in high-risk industries. This group-wide standard meant that 80 companies were excluded from consideration for investment as at 31 December 2006. It is important to stress that the overall objective is not to exclude companies, but to encourage improvement. We wish to use our role as an investor and owner to encourage more sustainable development over the longer term. Our experience demonstrates that investment returns are just as good even if we set restrictions on the investment choices our managers can make.
25 million, equivalent to 11%. The increase in volume-based revenue was driven by the generally good return seen for stock market investments.
2006 saw some shift away from discretionary portfolios to mutual funds, and this also helped to increase fixed and volume-based revenue. Storebrand Alternative Investments also enjoyed a very good year in 2006, and contributed NOK 30 million of revenue to the asset management activities. This represents an increase of NOK 19 million from 2005.
Lower c/i. Total costs increased by 20% in 2006. This was due almost entirely to performance-based costs, since other operating costs only increased by NOK 3 million or 1.5%. Performance-based costs, principally personnel costs, are largely linked to performance-based revenue, and were therefore higher as a result of the increase in this revenue.
Increase in assets under management. Assets under management increased by NOK 12 billion in 2006 to NOK 217 billion at year-end.
Following a weak year in Norway in 2005 for new business in retail market equity funds (including unit linked), with a net outflow of NOK
Real estate 9% Other 4% Norwegian equities 5% Hold to maturity 27% International money market 2%
International equities 17% Alpha 4% Norwegian money market 15% Credit bonds 3% International Bonds 8% Norwegian Bonds 8%
Returns on Norwegian equity funds were particularly strong. This reflects both the performance of the Oslo stock exchange in 2006 and a degree of outperformance relative to the benchmark index. Fixed income funds also produced very good returns in 2006. Global equity funds produce a good absolute return in 2006, and Delphi Europa stands out for its return of 34% in 2006.
Profitable growth. Storebrand Investments continued its work to improve cost efficiency and simplify its asset management products in 2006. Higher volumes and more complex instruments were handled without any need to increase staffing and with consistently good quality. The increase in assets under management, particularly mutual funds, provides a good foundation for profitable growth in future years. The results of this work are shown in the chart below. This shows a clear improvement in the underlying margin generated by
Bank group has total assets of NOK 34.2 billion and 183 employees.
Selective growth. The bank set ambitious targets for growth in 2006. Storebrand Bank maintained its position as a ‘no-fees’ bank, while significantly strengthening its competitive position for residential mortgage lending. This resulted in significant growth in both business volumes and customer numbers. The lending portfolio increased in 2006 from NOK 26.8 billion to NOK 31.2 billion. The upward trend in customer numbers that started with the launch of free everyday banking in 2005 continued in 2006. The bank opened 21,000 new customer accounts in 2006 compared to 11,700 in 2005. At the close of 2006, Storebrand Bank had 61,000 active customers.
Storebrand Bank established a stockbroking operation in the second quarter of 2006. The business has so far focused on executing orders for Storebrand Investments, and reports a good performance.
The stockbroking operation helps to reduce costs for the Storebrand group, and provides a basis to develop additional products for banking customers.
The quality of the bank's lending portfolio at the close of 2006 was satisfactory.
NOK 143 million in 2006, compared to NOK 207 million in 2005. Loan and guarantee losses and write-downs represented a net write-back of NOK 47 million for 2006, compared to a write-back of NOK 34 million in 2005. Post-tax profit for 2006 was NOK 147 million, compared to NOK 194 million in 2005.
Lower net interest income. Net interest income amounted to NOK 419 million compared to NOK 447 million in 2005. This represents a net interest margin calculated on average total assets of 1.32%, compared to 1.59% in 2005. Net interest income showed a falling trend in 2006, mainly due to pressure on margins and increased competition in the lending market.
Utvikling netto renteinntekter i prosent av gjennomsnittlig forvaltningskapital Storebank Bank Konsern
Net fee and commission income/other operating income. Net fee and commission income amounted to NOK 32 million in 2006, compared to NOK 18 million in 2005. The increase results from the successful launch of new savings products. Other operating income amounted to NOK 47 million, compared to NOK 76 million in 2005 that included a gain on the sale of Finansbanken A/S in Denmark.
The bank is committed to a continuous program of measures to reduce operating expenses relative to its total assets and revenue. As part of this, the bank has implemented measures to ensure continuous improvement and greater efficiency for its internal processes.
Loan portfolio and loan write-downs Gross lending to customers increased by NOK 4.4 billion in 2006, equivalent to 17%. Lending to both the retail and corporate markets increased, by 21% and 24% respectively after taking into account lending booked on the balance sheet of Storebrand Livsforsikring AS that is managed by Storebrand Bank. Growth in retail lending reflects interest rate changes applied in 2006 that made Storebrand Bank relatively more competitive for loans in excess of NOK 1 million, as well as continued marketing based on the ‘no-fees’ banking concept.
Losses and write-downs on loans and guarantees represented a net writeback of NOK 47 million in 2006. By the close of the year, write-downs of individual loans in the balance sheet totalled NOK 360 million, a reduction of NOK 30 million from 31 December 2005. Grouped write-downs totalled
Storebrand Bank ASA had sound capital adequacy and liquidity at the close of 2006.
January 2007. The bank expects to be able to use the underlying IRB
method from the second quarter of 2009. The bank’s preparations for
Basle II focus on the commercial opportunities of the new regime. The transition to Basle II requires major investments in systems and procedures as well as changes to the bank’s organisation and main business processes, but will also create significant commercial benefits.
II regulations are of general commercial benefit for financial management and marketing. Making proper use of the migration to the new regime will ensure that the bank retains a competitive position relative to its competitors.
Other activities Other activities principally comprise Storebrand ASA (holding company ), and Storebrand Skadeforsikring.
Storebrand ASA (holding company) The following table shows the profit before tax of Storebrand ASA in accordance with IFRS. The statutory accounts of Storebrand ASA are prepared in accordance with Norwegian accounting legislation and
NGAAP and can be found on page 94. Storebrand ASA reported profit before tax in accordance with IFRS of NOK 1,012 million for 2006 compared to NOK 599 million for 2005.
Storebrand ASA’s operating revenue is principally made up of return on the capital invested in subsidiaries through group contributions and dividends.
Revenue in 2006 was in line with 2005. The life company accounted for the major part of revenue at NOK 885 million, an increase of 14% from 2005. The contribution to revenue made by asset management activities was NOK 150 million, representing a sharp improvement from 2005.
Ranking of life company's investment return relative to selected competitors (1-5)1 2 3 Satisfactory
Growth in SBL (inc. SBFF) premium income excluding transfers, last year (NOK million) -3 737 984 Room for improvement
Growth in investment management fees from external clients, last year (SBK) (NOK million) 36 -28 Very good
Storebrand Skadeforsikring Following the sale of Storebrand’s interest in Fair Forsikring in 2005, the group’s property and casualty (P&C) insurance activities now consist of Storebrand Skadeforsikring AS and Oslo Reinsurance Company
The Board of Directors of Storebrand ASA resolved on 28 March 2006 to re-launch P&C insurance for the retail market through the existing company Storebrand Skadeforsikring AS. Following a rapid period of preparation, Storebrand Skadeforsikring moved from a project phase into ordinary operation on 12 October 2006, when the customer centre opened for incoming calls. Internet sales started on 8 December, and the company was launched externally. The re-launch of P&C
Monitoring value drivers – Storebrand’s value-based management system Storebrand’s strategic planning process brings together targets, action plans, reporting and employee remuneration, as described in the article on Corporate Governance on pages 32-35.
In addition to monitoring financial and accounting results, Storebrand also monitors the group’s performance in relation to defined value drivers. This lets the Board and management identify trends at an early stage, implement measures and focus on long-term value creation.
The monthly management report, Storebrand Compass, reports on performance of key figures and value drivers relative to targets for each business area. Storebrand Compass is based on balanced scorecard management principles, with the value drivers divided into the areas of finance, customers and processes as well as skills and growth. The table on the previous page shows, as an example, selected parameters in the categories of finance and customers together with an evaluation of the company's performance in these areas in 2006.
savings and pension assets until they are paid as benefits, with the objective of achieving the highest possible return, while at the same time managing the overall portfolio in relation to the contractual commitments that Storebrand has to its policyholders. As an example, all savings-related life insurance policies are guaranteed a minimum annual return, currently 3.6% on average. This has an effect on how the life insurance company allocates its investments between asset classes such as shares, bonds and real estate.
The expected return on the investment portfolio is calculated on the basis of asset allocation and the expected return on asset classes based on historic return, expected risk premium and forward prices.
If investment return is not sufficient to meet the guaranteed interest rate on policyholders’ funds, currently 3.6% on average, the shortfall will be met by using risk capital built up from previous surpluses. The owner is responsible for meeting any remaining shortfall. The average guaranteed interest rate is expected to fall in future years since the guaranteed rate on new contracts is 2.75%.
The Norwegian authorities specify that the company’s risk capital is the total of the market value adjustment reserve, additional statutory reserves, core capital in excess of the regulatory minimum and accrued earnings.
Risk exposure is monitored using a stress test that estimates potential loss in the event of extreme market movements. Storebrand ensures that it meets all regulatory requirements, such as capital ratio and solvency capital ratio, by a satisfactory margin. The Board of Directors approves limits for these and other risk measures. The life insurance company monitors risk exposure and reports to management regularly (daily if required).
Directors in several ways: Firstly, considerable importance is attached to building sufficient risk capital to absorb losses. Secondly, risk exposure is diversified as much as possible by investing in assets that are not expected to cause losses as the same time. Thirdly, risk is managed dynamically in relation to the company's risk bearing capacity by buying and selling securities with different levels of risk. Finally, hedging instruments such as options are used. This combination allows a good control of the life insurance company's total exposure to financial risk.
In brief, Solvency II will require insurers’ liabilities to be discounted using the current risk-free interest rate applicable at any time, and assets will be subject to a stress test. Introducing such a regime in
Insurance Activities Act, the unique Norwegian rules on transfers of insurance business and the arrangements for unconditional profit sharing in Norwegian insurance companies. Storebrand is of the view that an uncritical acceptance of the proposed regulations may have unfortunate consequences for policyholders and owners, and the company is working actively to contribute to a satisfactory formulation of Solvency II in Norway.
These bonds will produce a stable book investment return of 5% to 6% for a number of years.
Risk management: Asset management Storebrand actively manages a large portion of its assets. This means that its fund managers are allowed a degree of freedom with the objective of producing a better return than the market. The group’s asset management activities are structured into a number of specialist teams so that each team concentrates solely on taking advantage of investment opportunities in a specific area, subject to clearly defined investment criteria and risk limits. Performance, risk exposure and investment profile are continuously monitored. In addition, the co-variance of the teams’ exposure is monitored to ensure the greatest possible independence in order to achieve the highest possible risk-adjusted return.
The bank manages its exposure to counterparty risk when placing its liquidity or through other exposure on the basis of the counterparty's credit rating and size. The bank places great importance on the quality of its counterparties, and it limits its exposure to any one counterparty in order to avoid loss and ensure high liquidity in its holdings of securities.
Overall risk management for the group Storebrand has invested over recent years in building a model to handle risk management and reporting based on integrated balance sheet management of its life insurance activities. This allows the liabilities and assets of the life insurance company to be evaluated in relation to changes in exogenous variables such as interest rate levels. The model also incorporates established management principles for handling financial risk. The model is used for reporting European
Embedded Value, and is used increasingly for management purposes, including risk management.
Net income from bonds at amortised cost 18 2 397.2 2 409.9 2 492.0
Insurance claims for own account -14 493.0 -10 823.1 -10 451.2
To/from additional statutory reserves - life insurance 35 -1 000.0 -950.0 -500.0
Changes in security reserves etc. - P&C insurance 35 -0.2 10.0 16.2
Profit/loss from ordinary activities before tax 1 585.1 1 463.4 2 571.5
Profit is due to: Minority interests' share of profit 9.5 3.6 1.6
Average number of shares as basis for calculation (million) 248.0 258.6 272.9
Storebrand has not issued any options or other financial instruments that could cause dilution of its shares.
Reinsurers' share of technical reserves 35 1 799.7 2 395.5 2 804.8 Real estate at fair value 15 17 447.0 13 503.6 12 240.8
Reserve for life insurance with investment choice 35 7 364.1 5 719.4 4 476.4 Premium and claims reserves - P&C insurance 35 2 268.7 2 992.1 3 396.9
Comparable figures for 2004 and 2005 have been restated for the effect of changed accounting principles for pensions.
Net premiums received - direct insurance 10 691.8 16 116.4 14 773.9
Net claims and benefits paid - direct insurance -13 321.7 -8 629.9 -7 185.5
Net receipts/payments - lending to customers -6 025.3 -3 055.5 -407.3
Net receipts/payments - real estate activities -2 015.9 -315.2 -2 090.2
Payments to employees, pensioners, employment taxes etc. -1 124.4 -1 078.9 -1 286.6
Net cash flow from operational activities 8 045.8 -2 985.8 -6 204.1
Net cash flow for the period 7 447.3 -1 189.1 1 194.9
Cash and cash equivalent assets at start of the period 5 768.7 6 957.8 5 762.9
Cash and cash equivalent assets at the end of the period 13 216.0 5 768.7 6 957.8
Profit and loss items applied directly to equity: Revaluation of properties for own use 7.2 7.2
Total revenue and costs for the period 7.2 -180.6 2 351.9 2 171.3 1.3 2 179.8
Other items applied directly to equity: New accounting principle for security reserves 27.2 27.2 27.2
Profit and loss items applied directly to equity: Revaluation of properties for own use 4.8 4.8
Total revenue and costs for the period 12.0 -227.9 1 496.3 1 268,4 9.5 1 289.9
Standards (IFRS). The accounts are prepared in accordance with the historic cost principle, with the exception of: • Investment properties valued at fair value
Storebrand changed its accounting principles for experience adjustments in 2006, and such adjustments are now applied directly to equity. Prior to this change, experience adjustments were amortised over the average remaining period for accrual of pensions entitlement to the extent that the effect exceeded 10% of the higher of either pension liability or pension assets. The changes this causes are reported in the reconciliation of changes in equity, and comparable figures for previous periods have been restated.
Storebrand has changed its accounting principle for valuing security reserves with very high security margins in P&C insurance. Such reserves are not treated as liabilities. This change is shown in the reconciliation of equity, and comparable historical figures have been restated.
IFRS 7 introduces new additional information in respect of financial instruments. The standard does not affect the evaluation or classification of financial instruments. (IFRS 7 is obligatory from 2007).
The group’s presentation currency and functional currency is the Norwegian krone (NOK). Foreign companies included in the group that use a different functional currency are translated to NOK by translating the profit and loss account at the average exchange rate for the accounting year and translating the balance sheet at the exchange rate at close of the accounting year. Any translation differences are booked directly to equity.
P&C insurance. Business areas are the group’s primary reporting segments. Financial information in respect of these segments is presented in note 2. No geographic segment information is produced since there are no material differences in risk or yield profile between different geographic areas within Norway, and the group’s foreign activities are immaterial in relation to the activities in Norway.
Equipment, fixtures and fittings, vehicles and IT systems are valued at acquisition cost reduced by accumulated depreciation and any write-downs.
Properties used for the group’s own activities are valued at writtenup value less accumulated depreciation and write-downs. The fair value of these properties is tested annually in the same way as described for investment properties. Increases in the value of properties used for the group’s own activities are not recognised to profit and loss but are recognised as a change in the revaluation reserve that forms part of equity. Any write-down of the value of such a property is first applied to the revaluation reserve for increases in the value of the property in question. If the write-down exceeds the revaluation reserve for the property, the excess is recognised to profit and loss.
The depreciation period and the method of depreciation are reviewed annually to ensure that the method and period used correspond with the commercial reality for the asset in question. This also applies to the disposal value. Properties are split into components if different parts have different periods of expected commercial life. The depreciation period and method of depreciation are evaluated separately for each component.
Investment properties are valued at fair value. Fair value is assessed at each reporting date. Changes in value are recognised to profit and loss. Each investment property is valued separately by discounting the future net income stream by the appropriate yield requirement for the investment in question. The net income stream takes into account current and future loss of income due to vacancy, essential investment and an estimate of future changes in market rent. The yield requirement is determined on the basis of the expected future risk-free interest rate plus an individually determined risk premium dependent on the rental situation and the location and standard of the property. Valuation is also compared against observed market prices
If an investment property becomes a property used by the group for its own activities, the cost price for the property in own use is deemed to be fair value at the time of reclassification. If a property previously used by the group for its own activities is rented to external tenants, the property is reclassified as an investment property and any difference between book value and fair value at the time of reclassification is recognised as a valuation change to properties carried at written-up value. (See the description for properties held as fixed assets.) Changes in fair value that arise following the reclassification are applied to profit and loss.
The value of an intangible asset is tested for impairment if there are indications of a fall in its value, otherwise intangible assets are subject to write-downs and reversals of write-downs in the manner described for tangible fixed assets.
(experience adjustments) and changes in assumptions are applied directly to equity. The effect of changes to the pension scheme are recognised to profit and loss as they are incurred, unless the change is conditional on future accrual of pension entitlement. In such a case, the effect is amortised linearly over the time until the entitlement is fully earned.
Employer’s social security contributions are included in pension liability and in experience adjustments shown in equity.
Storebrand has both insured and uninsured pension arrangements. The insured scheme is insured with Storebrand Livsforsikring AS (Storebrand
Life Insurance), which is a company in the Storebrand group. Premiums paid in respect of Storebrand employees are eliminated from consolidated premium income.
Provision for dividend Proposed dividend is classified as equity until such time as the general meeting approves the dividend payment.
The pensioners’ surplus fund contains surplus premium reserve amounts allocated in respect of pensions in payment that are part of group pension policies. The fund is applied each year as a single premium payment to secure additional benefits for pensioners.
(IBNR and RBNS). The reserve only covers amounts which might have been paid in the accounting year had the claim been settled.
The claims reserve is a reserve for expected claims that have been notified but not settled. The reserve also covers expected claims for losses that have been incurred, but have not been reported at the expiry of the accounting period. The reserve includes the full amount of claims reported but not completed. A calculated provision is made in the reserve for claims incurred but not reported (IBNR) and claims reported but not settled (RBNS).
The insurance companies in the group are subject to their own specific legal requirements for technical insurance reserves, including administration reserves, security reserves, guarantee reserves and reinsurance reserves (credit risk in respect of reinsurers). In Storebrand's consolidated accounts, which are prepared in accordance with IFRS, security reserves with high security margin, guarantee reserves and reinsurance reserves are not treated as liabilities.
Financial assets and liabilities are included in the balance sheet from such time as Storebrand becomes party to the instrument’s contractual terms and conditions. Normal purchases and sales of financial instruments are booked on the transaction date. When a financial asset or a financial liability is first recognised in the accounts, it is valued at fair value. First time recognition includes transaction costs directly related to the acquisition or issue of the financial asset or the financial liability if it is not a financial asset or a financial liability at fair value through profit and loss,
Subsequent to inception, hold to maturity financial assets, loans and receivables as well as financial liabilities not at fair value through profit and loss, are valued at amortised cost using the effective interest method.
In the case of financial assets that are not recognised at fair value, consideration is given on each balance sheet date to whether there are objective signs that the value of a financial asset or a group of financial assets is impaired. If there is objective evidence that impairment has occurred, the amount of the loss is measured as the difference between the asset’s book value and the present value of estimated cash flows
A financial asset is classified as available for sale if it is: • acquired or incurred principally for the purpose of selling or repur­
chasing it in the near term, is part of a portfolio of identified finan­
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, with the exception of such assets that the company intends to sell immediately or in the short term that are classified as available for sale and such assets that the company designates at inception as assets at fair value through profit and loss.
Shares lent by Storebrand are not removed from the Storebrand balance sheet, and fees earned on stock lending are recognised to income as they are received.
• it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors
The major part of derivatives used routinely for asset management fall into this category.
Storebrand uses only fair value hedging, where the items hedged are financial assets and financial liabilities measured at amortised cost. Derivatives that fall within this category are recognised at fair value through profit and loss, while changes in the value of the hedged item that relate to the risk hedged are applied to the book value of the item and are recognised through profit and loss.
Net unrealised gains/losses for the current year on financial assets at fair value are applied to the market value adjustment reserve in the balance sheet and are therefore not included in the profit for the year. If the total portfolio of financial current assets shows a cumulative unrealised loss, this loss is charged to the profit and loss account. If specific financial current assets are considered to have suffered a permanent loss in value, the change in value of the financial asset in question is charged to profit and loss. The market value adjustment reserve applies only to
Net unrealised gains/losses for the current year on financial current assets denominated in foreign currencies that can be attributed to movements in exchange rates are not transferred to the market value adjustment reserve if the investment is hedged against currency movements. Similarly, the change in the value of the hedging instrument is not transferred to the market value adjustment reserve, but is charged directly to profit and loss. The foreign exchange risk associated with investments denominated in foreign currencies is to a very large extent hedged through foreign exchange contracts on a portfolio basis.
Commercial paper/Bonds The accounting treatment applied is as for structured products.
Interest income and interest expense-banking Interest income and interest expense are charged to profit and loss at amortised cost using the effective interest method. The effective interest method includes set-up charges.
Income recognition for asset management activities Asset management fees and performance fees are recognised when the income can be measured reliably and it is likely that Storebrand
Kapitalforvaltning AS will receive the commercial benefit arising from the transaction. In accordance with the contractual agreements for performance fees, performance fees are recognised to income at year-end.
Notes to the accounts of Storebrand Group 01 Critical accounting estimates and judgements
Fair value of financial instruments The fair value of financial instruments that are not traded in an active market (for example unlisted shares and derivatives) is determined by using valuation techniques. Such valuation techniques are principally based on market conditions on the balance sheet date.
P&C insurance: The main risk for the newly established P&C business is that it will initially have a small portfolio to absorb claims. This can mean that single large claims may have a disproportionate impact on profit. In order to offset this risk, Storebrand has arranged reinsurance. The commercial operations of Oslo Reinsurance Company are concentrated on the run-off of its existing reinsurance portfolios, either by paying claims that are reported to the company or by seeking to extricate itself from policies by negotiating a settlement amount with the insured party (cedent) by commuting the cover. For further information on insurance risk, see note 35.
The calculation of pension liabilities at 31 December 2006 was carried out by an actuary. The calculation includes 1,486 active members and 2,283 pensioners.
Storebrand changed its accounting principles for the accounting recognition of actuarial gains and losses (experience adjustments) in 2006, and such adjustments are now applied directly to equity. Prior to this change, experience adjustments were amortised over the average remaining period for accrual of pensions entitlement to the extent that the effect exceeded 10% of the higher of either pension liability or pension assets. Storebrand is of the view that this change in accounting principle will produce more reliable and relevant information. For further information, see note 10.
A more detailed description of the various matters considered in this note can be found in the statement of accounting principles.
Revenue from other group companies1 117 88 24 2 1 159
Revenue from other group companies1 196 93 150 -316 -182 -332
Other/elimination Principally comprises the holding company Storebrand ASA and Storebrand Skadeforsikring. Storebrand started sales of P&C insurance products to the retail market in 2006. This completes the group's product range, and strengthens its business in the retail market.
Policyholder's funds inc. accrued profit 153 568 140 276 125 526
Assets under management for external clients 54 825 49 176 25 389 1 Key figures are presented in accordance with NGAAP, except for premiums and policyholders' funds that are presented in accordance with IFRS. 2 Investment yield I: Realised financial income including revaluations (positive or negative) of real estate.
Other revenue from companies other than banking and insurance 123.6 127.0 114,1
Total fee and commisssion income from financial instruments not at fair value totalled NOK 38.3 million in 2006. Total fee and commission expenses on financial instruments not at fair value totalled NOK 25.9 million in 2006.
Total tax increasing timing differences 2 314.1 3 136.0 3 994.5
Total tax reducing the timing differences -2 869.9 -2 754.8 -2 113.6
Write-down of basis for deferred tax assets 10 281.4 6 299.2 2 094.7
Net deferred tax asset/liability in the balance sheet -90.5 -100.4 -180.2
Booked in the balance sheet: Defered tax assets 207.0 290.0 354.5
Deferred tax assets have been written down as a result of uncertainty as to whether future taxable income will be sufficient for all losses carried forward to be used. The 2004 tax reform introduced exemption from taxation for dividends and gains/losses on shares in the EEA area, and it is expected that the group will continued to derive income from such investments in future years. Allowances carried forward date from the years 1998 - 2003, and must be used within 10 years.
Additions in the period: Acquired through mergers, acquisitions etc. 0.5 0.5
Changes to value over the balance sheet 48.1 48.1 24.5 28.9
Accumulated depreciation and write-downs opening balance -70.0 1.1 3.0 71.8 5.8 -407.7 -582.8
Accumulated depreciation and write-downs closing balance -87.8 0.1 1.8 77.3 -8.6 -177.4 -609.5
Revaluation fund closing balance 24.0 1 Properties for own use, see also note 15.
Real estate 15 years 09 Tangible fixed assets - operational leasing
Assets leased in by company relate to leasing of cars and copying machines, and leases of office premises. Assets leased out by the company relate to office premises at Aker Brygge (Oslo) and in Bergen. Lease contracts for cars are normally for 36 months. Lease contracts for copying machines expire in 2007 and 2010. Lease contracts for office premises and leasing out offices at Aker Brygge (Oslo) expire July/September 2007 Other leases on office premises are for 3-6 years with options for renewal.
Reconciliation of pension assets and liabilities in the balance sheet: Present value of insured pension benefit obligations including employment taxes 3 105.5 2 762.4 2 820.9
Reconsiliation to show the change in net defined benefit pension liability in the period: Net pension liability at 1.1. including provision for employment taxes 3 257.8 3 307.0 3 138.7
Net pension cost recognised in the period including provision for employment taxes 111.6 88.9 97.6
Reconciliation to show the change in fair value of pension assets in the period: Fair value of pension assets at 1.1. 2 599.9 2 627.0 2 580.7
Net pension cost booked to profit and loss account, specified as follows: Current service cost including employment taxes 87.8 94.1 88.9
Net pension cost booked to profit and loss in the period 80.8 74.6 77.9
Main assumptions used when calculating net pension liability at 31.12.: Financial: Expected retun on pension fund assets in the period 5.6% 6.0% 6.0%
Net pension liability/surplus pr. 31.12.: Discounted current value of defined benefit pension liabilities 3 559.8 3 257.8 3 283.5
(cf. Accounting Act § 7-26). 3 Outstanding at 31.12.2006. Senior executives are contractually entitled to performance related bonuses related to the group's value-based management system. The group’s value creation finances the overall amount of the bonus, but individual performance determines what proportion of the bonus is allocated. The bonus allocated to an individual is credited to a bonus account, and 1/3 of the balance on the bonus account is paid each year. When the bonus accounts were introduced, Storebrand created an initial deposit. If the employee leaves the company, the positive amount of the initial deposit will be retained by Storebrand. The balance of the bonus account is exposed 50% to Storebrand's share price and 50% to the best interest rate paid by Storebrand Bank. Over time the balances in the "share bank" and "interest bank" will grow separately.
4 The return on the "share bank" shows the annual gain in value of the individual's bonus account caused by the performance of the Storebrand share price in 2006 adjusted for dividend.
Nordben Life and Pension Insurance Co. Ltd. 7 108.0 6 417.0 6 013.2
NOK million Ownership interest Acquisition cost Balance sheet value at 1.1 Additions/ disposals Share in profit
Nordben Life and Pension Insurance Co. Ltd 25% 29.5 62.0 -4.2 18.0 75.8
Institute of London Underwriters (ILU)1 USD Unlimited 1 Counter indemnity of Oslo Reinsurance Company ASA , which is 100% owned by Storebrand Skadeforsikring AS.
Operating costs (including maintenance and repairs) for investment properties that produced rental income in the period. -156.5 -128.3 -110.3
Net unrealised gains/losses on shares, other equity investments and equity derivatives 1 680.8 2 643.7
Total bonds, bond funds and other fixed-income securities 1 356.1 1 585.4 - of which FVO (fair value option) 814.6 1 413.4
Net income and gains from financial assets at fair value 8 772.4 8 090.8 - of which FVO (fair value option) 6 880.6 8 923,3
Interest income from bonds held to maturity 1 739.9 1 879.7
Net income from bonds at amortised cost 2 397.2 2 409.9
Realised losses on loans where provisions have previously been made -17.2 -81.9
Realised losses on loans where no provisions have previously been made -6.2 -0.9
Reversals of write-downs of individual loans in the period -59.6 -103.4
Grouped write-downs of loans, guarantees etc. at 31.12. 73.3 89.2 20 Classification of financial assets and liabilities 2006
Bonds and other fixed-income securities 29 922.3 9 909.6 40 873.0 13 176.5 93 881.4
Liabilities to financial institutions, amortised cost 2 786.0 2 786.0 1 464.6 1 464.4
Subordinated loan capital, amortised cost 3 711.7 3 786.9 3 524.9 3 615.3 22 Collateral
Book value of assets pledged as security for lending etc.1 1 698.6 1 703.1
On items hedged 83.3 61.1 1 Book value at 31.12. 2 Amounts are included in the accounts in the item "Net interest income".
Other fund units within EEA 2 653.5 2 773.3 2 874.4 2 022.5 2 109.6
The note includes short positions in indirect investments. The effective yield for each security is calculated using the observed market price. Calculated effective yields are weighted to give an average effective yield on the basis of each security's share of the total interest rate sensitivity.
Units in investment portfolios 3 111.8 1 899.0 28 Financial derivatives
Subordinated loan 2002-2012, call 2007 100.0 NOK NIBOR + 2% 100.0
Subordinated loan 2005-2015, call 2010 175.0 NOK NIBOR + 0.70% 175.0
Subordinated loan 2004-2014, call 2009 1 435.1 EUR EURIBOR + 0.9% 1 394.3
Loans and deposits from credit institutions without notice or fixed term 8.9 76.5
Loans and deposits from credit institutions with notice or fixed term 2 777.1 1 388.1
Storebrand Life Insurance is contractually committed to guarantee an annual return for all its savings customers, currently 3.6% on overage. The guaranteed annual return places particular demands on how investments are allocated between different classes of security and other assets. Given the current investment portfolio, the annual return will normally fluctuate between 2% and 10%. Active risk management and hedging transactions reduce the likelihood of a low investment return. If investment return is not sufficient to meet the guaranteed interest rate of 3.6%, the shortfall will be met by using
Credit risk Maximum limits for credit exposure to individual debtors and for overall credit exposure to rating categories for Storebrand Life Insurance and other companies in the group are set by the board. Particular attention is paid to ensuring diversification of credit exposure to avoid concentrating credit exposure on any particular debtors or sectors. Storebrand Investments monitors changes in the credit standing of debtors. Storebrand uses published credit ratings wherever possible, supplemented by the company's own credit evaluation where there are no published ratings.
All credit approvals by Storebrand Bank over a certain limit require the approval of a credit committee chaired by the bank’s managing director, or by the bank’s board of directors. Credit risk is monitored through a risk classification system that ranks each customer by ability to pay, financial condition and collateral. The risk classification system estimates the likelihood of a borrower defaulting (ability to pay/financial condition) and the likely loss given default (collateral). All loans on the bank’s watch list are reviewed at least quarterly in respect of the condition of the borrower and collateral, and of the steps being taken to protect the bank’s position. Retail lending is assessed on the basis of credit scoring, combined with case-by-case evaluation of the borrower’s ability to repay. Lending is principally secured by charges over residential property or structured products.
Long-term holdings of interest-bearing securities Category of issuer or guarantor NOK million
Loans in default and loss-exposed lending 532.7 5.0 537.8 -360.0 -4.0 173.8 357.0
Loans in default and loss-exposed loans with identified impairment 423.7 641.1
Analysis by sector and industry: Commercial services and real estate operations 12 253.2 9 013.1 32 Liquidity risk
Bonds and other fixed-income securities 828.7 101.4 3 031.6 3 881.2 24 518.2 15 434.0 47 795.1 1 Figures for derivatives are net figures in this note
NOK million Up to 1 month 1-3 months 1 year 1-5 years Over 5 years Total value
Period to next interest rate fixing for financial assets NOK million
Up to 1 month 1-3 months 3 months- 1 year 1-5 years
Total short-term holdings of financial assets -4.8 -3.6 -57.9 -291.3 -990.7 -1 348.3
Total quantified interest rate sensitivity 2006 -5.6 1.6 -65.8 -557.0 -2 780.9 -3 407.7
Total quantified interest rate sensitivity 2005 -10.9 -21.0 -244.1 -380.2 -2 814.4 -3 470.5
Financial assets and liabilities in foreign currency Balance sheet items excluding currency derivatives Currency forwards Net position
Specification of balance sheet items in respect of life insurance and non-life insurance: NOK million
Life Insurance: The item Reserves – life insurance includes NOK 7.2 billion that the company assumes will be paid as claims or benefits in 2007.
+ Guaranteed interest rate/unit linked return 4 777.0 680.9 147.2 5 605.1 5 447.0
+/- Transfers and additions to reserves 85.5 -19.0 -66.5 17.7 17.7 -
For products subject to profit sharing, the profit is in principle allocated between policyholders and the owner in accordance with the company’s internal profit-sharing model. The profit to the owner is made of three elements: net return on the company’s equity, a return of up to 0.40% of policyholders funds (subject to investment return being sufficiently higher than the guaranteed return to permit this) and a risk margin of 12% of actual risk premium (subject to the risk surplus being sufficient to permit this). Under current legislation, the owner’s share of profit cannot exceed 35%.
Profit-sharing model -net return on equity 1 579 491 -0.40% of policyholders' fund 567 521 -risk margin earned by owner 49 47 -products without profit sharing 58 159
Profit allocated to the owner 1 191 1 224 1 Includes security reserve, subordinated loan capital, book equity and liability items
Risk exposure/sensitivity Life insurance The following table shows the net annual risk premium for the most common types of cover. The premiums apply to persons of normal health and risk.
Net annual risk premium for a sum assured of NOK 100,000. In the case of disability pension policies, the premium shown is for an annual disability pension of NOK 10,000 paid until 67 years of age.
Life cover, individual endowment insurance 122 325 1 416 61 163 711
Critical illness, non-smoker, individual 226 573 1 602 203 433 1 059
No changes were made to premium tariffs in 2006 that caused any additions to or withdrawals from the premium reserve.
The above table includes the premium reserve, deposit reserve and pensioners’ surplus reserve with 3% and additional statutory reserves with 0%.
The total average guaranteed interest rate for all lines of insurance has reduced from 3.83% in 2000 to 3.57% in 2006. The guaranteed interest rate must be delivered on an annual basis. If the company’s investment return in a year is lower than the guaranteed interest rate, current legislation permits the equivalent of up to one year’s guaranteed return to be met by transfer from additional statutory reserves. Any negative return must be met from the company’s equity.
New business written in 2006 is subject to a 2.75% basic interest rate. In the case of policies transferred to the company, the basic interest rate is determined by the rate applied to the policy by the insurance company from which the business is transferred, subject to a maximum of 4%.
Control and monitoring of insurance risk: Insurance risk is separately monitored for every line of insurance in the current insurance portfolio. The risk result for each product group is broken down
The sufficiency test for 2006 did not identify any need to increase reserves held in respect of liabilities to insurance customers.
Risk exposure and insurance risk – Storebrand Skadeforsikring AS The main risk for the newly established P&C business is that it will initially have a small portfolio to absorb claims. This can mean that single large claims may have a disproportionate impact on profit. The largest claims will typically arise from liability and motor insurance. In order to offset this risk, Storebrand has arranged reinsurance with a deductible of NOK 5 million per loss and unlimited capacity. In addition, the risk exposure arising from travel insurance may increase sharply in the event of possible catastrophes such as the tsunami in South East Asia in 2004. Travel insurance is therefore now also included in the group's catastrophe reinsurance. We will monitor this portfolio carefully in 2007, and may consider laying off cumulative risk with reinsurers.
In 2000, Storebrand Skadeforsikring transferred all its run-off land-based Norwegian non-life insurance and all direct marine insurance to If through a 100% reinsurance arrangement. The result is that the company has retained fronting responsibility, but has no commercial responsibility for the business transferred unless If becomes insolvent. This risk is therefore limited to a credit exposure to If. If has a Standard & Poor's rating of ’A’, which suggests that this represents a very limited risk exposure for Storebrand.
Trading portfolio investments: – shares and other equity investments 7 271.4 119.3 492.6
– bonds and other fixed-income securities 8 1 919.6 2 394.6 3 300.7
Comparable figures for 2004 are restated to reflect the new pension accounting standard. Guarantees issued: See note 16
Net cash flow from operational activities 1 307.3 507.9 -2 014.1
Dividends and group contribution In the company’s unconsolidated accounts, investments in subsidiaries and associated companies are valued at acquisition cost as reduced by any write-downs. The main income of Storebrand ASA
This treatment can only be applied to income earned by subsidiaries during Storebrand’s ownership. Otherwise, receipts are recognised as equity transactions, and the value of the investment in the subsidiary is reduced by the amount of group contribution or dividend received.
NRS 6A, which permits the use of IAS 19 (International Financial Reporting Standards) ‘Employee Benefits’.
Pension costs and pension liabilities for defined benefit schemes are calculated using a linear profile for the accrual of pension entitlement and expected final salary as the basis for calculating the benefit obligation, based on assumptions on discount rate, future increases in salary, pensions and social security pension benefits, the future return on pension assets and actuarial assumptions on mortality, staff turnover etc. The discount rate used is the risk-free interest rate appropriate for the remaining maturity. Where a scheme is funded, the pension assets are valued at fair value and deducted to show the net liability in the balance sheet.
Financial instruments Shares and other equity investments Investments in shares in subsidiaries and associated companies are valued at cost price less any write-down of value. The need for any write-down is assessed at the end of each accounting period in the same way as for other fixed assets.
Purchases of the company’s own shares are treated as an equity transaction, and holdings of own shares are reported as a reduction in equity capital.
Financial assets and liabilities are included in the balance sheet from such time as Storebrand becomes party to the instrument’s contractual terms and conditions. Normal purchases and sales of financial instruments are booked on the transaction date. When a financial asset or a financial liability is first recognised in the accounts, it is valued at fair value plus, in the case of a financial asset or a financial liability that is not a financial asset or a financial liability at fair value through profit and loss, transaction costs directly related to the acquisition or issue of the financial asset or the financial liability.
Financial derivatives are valued at fair value, cf. Section 5-8 of the Accounting Act. Financial derivatives are designated as financial assets or financial liabilities at fair value through profit and loss.
Bond loans are valued at amortised cost using the effective yield method. Amortised cost includes transaction costs at the date of issue.
Employer's social security contributions -5.4 -4.8 -9.9 03 Pension costs and pension liabilities
Employees are assured a retirement pension equivalent to 70% of pensionable salary at the time of retirement. The ordinary retirement age is 65. Staff pensions are provided by a group pension scheme with Storebrand Livsforsikring AS. Pension payments from the this scheme come into effect from the pension age, which is 67 for employees and 65 for underwriters. Pension payments to employees between 65 and 67 are paid directly by the company. Pension rights are part of the group's collective employment agreement.
Experience adjustments not applied to profit and loss -171.3 -137.8 -84.1
Reconciliation to show the change in fair value of pension assets in the period: Fair value of pension assets at 1.1. 1 962.0 2 033.3 2 077.5
The table shows the percentage asset allocation of pension assets managed by Storebrand Livsforsikring at year-end. The book investment return on assets managed by Storebrand Livsforsikring was 7.1% in 2006, 6.9% in 2005 and 6.4% in 2004.
Main assumptions used when calculating net pension liability at 31.12.: Financial: Expected return on pension fund assets in the period 5.6% 6.0% 6.0%
Present value of defined benefit pension obligations 2 114.4 2 128.6 2 205.5
4 Remuneration of the Chief Executive Officer and elected officers of the company
Idar Kreutzer is Chief Executive Officer of Storebrand ASA and Managing Director of Storebrand Livsforsikring AS, and the figures provided in the notes are for total remuneration from the group. He is entitled to 24 months' salary following the expiry of the normal notice period. All forms of work-related income from other sources, including consultancy assignments, will be deducted from such payments. Kreutzer is entitled to a performance-related bonus based on the group’s ordinary bonus scheme which is linked to the group's value-based management system. The group’s value creation finances the overall amount of the bonus, but individual performance determines allocation. Kreutzer's individual bonus entitlement is credited to a bonus account, and 1/3 of the balance on the bonus account is paid each year. The amount credited to the bonus bank is exposed 50% to Storebrand's share price and 50% to the best interest rate paid by Storebrand Bank. Kreutzer is a member of the Storebrand pension scheme. The discounted present value of his pension entitlement amounts to NOK 10.1 million. These amounts represent the liability calculated on a linear basis using the financial assumptions specified in the accounts.
Tax base for the year -162.5 -622.8 40.7 - Tax losses carried forward 162.5 622.8 -40.7
Associated/jointly-controlled companies 1 Storebrand ASA has made a group contribution of NOK 200 million to Storebrand Bank ASA. This is recognised as an equity transaction. 2 74.9% held by Storebrand Livsforsikring AS. Minority interests amount to 0.2%
Forward foreign exchange contracts 2.8 6.6 -2.8 10 Real estate and operating assets
Over-provision for dividend 11.3 11.3 17.0 1 249,819,105 shares of nominal value NOK 5.
Interest expense on bonds issued -77.1 -53.0 -112.1 1 Loans are booked at amortised cost. Storebrand ASA has an undrawn committed credit facility of EUR 225 million.
State Street Bank & Trust Co 4.87 Credit Agricole Investment 1.67
Bank of New York, Brussel 2.75 State Street Bank & Trust Co. 0.95
JPMorgan Chase Bank 1.96 Foreign ownership of total share capital 70.6%
To the Annual Shareholders' Meeting of Storebrand ASA We have audited the annual financial statements of Storebrand ASA as of 31 December 2006, showing a profit of NOK 1.020,2 million for the parent company and a profit of NOK 1.505,8 million for the group. We have also audited the information in the Board of Directors’ report concerning the financial statements, the going concern assumption, and the proposal for the allocation of the profit. The annual financial statements comprise the parent company’s financial statements and the group accounts. The parent company’s financial statements comprise the balance sheet, the statements of income and cash flows and the accompanying notes. The group accounts comprise the balance sheet, the statements of income and cash flows, the statement of changes in equity and the accompanying notes. The rules of the Norwegian accounting act and good accounting practice in Norway have been applied to produce the parent company’s financial statements. The rules of the International Financial Reporting Standards as adopted by the EU have been applied to produce the group accounts. These financial statements are the responsibility of the Company’s Board of Directors and Chief Executive Officer. Our responsibility is to express an opinion on these financial statements and on the other information according to the requirements of the Norwegian Act on Auditing and Auditors.
In our opinion, • the parent company’s financial statements are prepared in accordance with the law and regulations and give a true and fair view of the financial position of the
• the group accounts are prepared in accordance with the law and regulations and give a true and fair view of the financial position of the Group as of 31 December 2006, and the results of its operations and its cash flows and the changes in equity for the year then ended, in accordance with the International Financial Reporting Standards as adopted by the EU
• the information in the Board of Directors’ report concerning the financial statements, the going concern assumption, and the proposal for the allocation of the profit is consistent with the financial statements and complies with the law and regulations.
Control Committee’s Statement for 2006 At its meeting on 26 February 2007, the Control Committee of Storebrand ASA reviewed the Board of Directors’ proposed Annual Report and Accounts for 2006 for Storebrand ASA and the Storebrand Group.
1 Storebrand ASA owns 24.9% directly and Storebrand's total interest is 99.8%. 2 Storebrand Livsforsikring AS holds 40% and Uni Norden Personforsikring Holding AS holds 60%.
The number of shares used in the calculation is taken as the average number of ordinary shares outstanding over the course of the year. In case of new issues of shares, the new shares are included from the date of subscription.
Tier 2 capital: Tier 2 capital is part of primary capital and consists of subordinated loan capital. In order to be eligible as primary capital, Tier 2 capital cannot exceed Tier 1 capital. Perpetual subordinated loan capital, together with other Tier 2 capital, cannot exceed 100% of Tier 1 capital, whilst dated subordinated loan capital cannot exceed 50% of Tier 1 capital.
Group pension insurance: A group pension insurance scheme where pensions are paid in instalments from an agreed age, during the life of the insured.
Gross premiums: Used both for premiums written and earned and corresponds to total premiums without deduction for reinsurance ceded.
Premiums written: The sum of all notified (invoiced) premiums with the main due date in the accounting period for direct insurance, together with premiums booked in the period for insurance assumed from other companies (reinsurance).
In calculating the APR, allowance must be made for whether interest is paid in advance or arrears, the number of interest periods during the year and all fees and commissions.
Credit derivatives: Credit derivatives are financial contracts that transfer all or part of the credit risk associated with loans, bonds or similar instruments from the purchaser of the protection (seller of the risk) to the seller of the protection (purchaser of the risk). Credit derivatives are tradable instruments that make it possible to transfer the credit risk associated with particular assets to a third party without selling the assets.
Other group companies:Head office: Storebrand Filipstad Brygge 1 P.O.Box 1380 Vika NO­0114 Oslo Norway Tel: +47 22 31 50 50 www.storebrand.no
Storebrand Livsforsikring Sverige, Swedish branch office Kungsgatan 12­14, level 7 P.O.Box 5541 S­114 85 Stockholm Sweden www.storebrand.se