C o n se p t an d d e sig n : CO
Financial performance and business development 38 - Life Insurance 42 - Asset Management 46 - Non Life 49 - Financial risk management 50 - Follow-up on value drivers 51
Storebrand Life Insurance has an overall share of 28% of the Norwegian market measured in terms of customers' funds under management. The company maintained its market share in most areas in 2004 and reported good sales of new policies. Storebrand offers attractive products for long-term savings and life insurance, and keeps new product development under continual review to meet changing customer requirements. In order to strengthen its market position further, the company is working systematically to strengthen and streamline its distribution to the retail and corporate markets in order to further improve the quality and perception of its customer service and the advisory expertise it offers.
Storebrand’s banking activities, previously carried out through the two banks Storebrand Bank AS and Finansbanken ASA, were brought together as Storebrand Bank ASA from 1 January 2003. Through this merger, Storebrand has created a stronger and more efficient banking operation.
Group life policies 4) 4 100 Employees in group life schemes 307 000
Number of employees 214 Total assets NOK 27.2 bn Gross lending NOK 24.1 bn Customer deposits NOK 11.5 bn Retail mortages as % of total lending 2004 55% Retail mortages as % of total lending 2003 48% Retail mortages as % of total lending 2002 43%
By concentrating on selected investment areas and developing our specialist expertise in the major asset management functions, Storebrand Investments shall be the preferred asset manager for longterm savings and pension assets.
> Storebrand Investments was voted the best investment manager in Sweden in competition with some of the largest international fund management companies.
Storebrand Helseforsikring AS Filipstad Brygge 1 P O Box 1382 Vika N-0114 Oslo Norway www.storebrandhelse.no
Employees in group pension schemes 265 200 Individual policies – early leavers from group pension schemes 3) 275 500
Health insurance – number of group schemes 78 Employees in group health insurance schemes 6 000
> Storebrand sold its ownership interest in If Skadeförsäkring to Sampo. The sale of its shares in If was a major step forward for Storebrand’s strategy of concentrating on long-term savings and life insurance.
> Storebrand Fondene AS, Storebrand Kapitalforvaltning Holding AS and Storebrand Kapitalforvaltning ASA were merged.
> The Board of Storebrand Bank ASA decided to discontinue the use of Finansbanken as a name and brand.
> Storebrand attracted 70% by value of all pension transfers in the Norwegian municipality market.
2) Includes both defined benefit and defined contribution pension schemes, public sector pension schemes and schemes for associations etc.
5) All policies with private individuals including unit linked and health insurance (but excluding annuities and pensions in payment).
6) Pensions in payment includes those receiving retirement, disability and deferred pensions in respect of all group pension schemes, including individual policies for early leavers.
Key figures per share Average number of ordinary shares (‘000) *) 272 933 277 927 277 715 277 554 277 464 Earnings per ordinary share (NOK) **) 8.49 2.67 -3.73 -4.15 1.67 Dividend per ordinary share (NOK) ***) 7.00 0.80 - - 1.10 *) Calculation is based on average number of shares outstanding. **) Calculation is based on profit for the year adjusted for the year's legally required post-tax allocations to security reserves etc.
for non-life insurance. ***) Proposed dividend 2004. Resolution to be passed by AGM on 20 April 2005.
STOREBRAND STRENGTHENS ITS POSITION IN THE CORPORATE MARKET THROUGH INCREASED CUSTOMER FOCUS, PRODUCT DEVELOPMENT AND EXPANSION INTO NEW MARKETS (p. 14–21)
STOREBRAND CREATES VALUE FOR THOSE AFFECTED BY ITS ACTIVITIES BY RECOGNISING ITS COMMERCIAL, SOCIAL AND ENVIRONMENTAL RESPONSIBILITIES (p. 22–25)
Storebrand strives to increase the value it creates for its customers, owners and employees. Over recent years we have worked hard to improve the company's operations and make them more efficient. As part of this task we have introduced a more integrated and customer-oriented group management structure. The steps we have taken have delivered results in terms of lower costs, good investment returns and a strong market share for our core activities. All the group's business areas reported stronger earnings in 2004. Storebrand started 2005 in a strong position both financially and with its new organisational structure, and is ready to take full advantage of the opportunities offered by a growing market.
Storebrand took its first step towards a clearer focus for its strategic platform in 1999 by establishing If as a separate pan-Nordic casualty insurance company. In 2004 we sold our ownership interest in If. Storebrand has emerged from these changes as a company with a clear market position as expressed by its corporate vision to be "the leading and most respected institution in the Norwegian market for long-term savings and life insurance".
MESSAGE FROM THE CEO: Over the next few years, the Norwegian market for pensions and long-term savings will see the biggest changes since the national insurance system was established in 1967. Storebrand has been a leading name in the Norwegian life insurance market since 1861, and makes pension payments of NOK 5 billion to its customers every year.
STOREBRAND STARTED 2005 IN A STRONG POSITION BOTH FINANCIALLY AND WITH ITS NEW ORGANISATIONAL STRUCTURE, AND IS READY TO TAKE FULL ADVANTAGE OF THE OPPORTUNITIES OFFERED BY A GROWING MARKET.
Profitable growth depends on keeping our cost level under control and taking a strict approach to making the best use of the group's resources. The changes we have made to the group's management structure bode well for further improvements in productivity. We have set clear targets for costs, and will not allow the growth we expect in business volumes to distract us from these targets. Further information on these issues can be found in the Management Report (pages 38-51).
As an independent stock exchange listed business in a free market, Storebrand has to produce a competitive return for its customers and owners. This does not mean, however, that we have no view on how we should make a profit. Through our commitment to corporate social responsibility, we base our activities on social and environmental considerations as well as financial objectives. We believe that committing ourselves to this unified approach not only improves profitability but is also in the best interests of our customers, employees and owners.
The Norwegian government's proposals for pension reform will make it more attractive to work longer. One of the measures proposed is the so-called "all years" rule, whereby all working years will count in pension calculations. Abolishing the current 40-year limit will mainly benefit people who make an early start on their working life, and will have little practical effect on people who have studied for longer before starting work.
However, to avoid a significant reduction in standard of living when retiring early, people must build up their own savings to supplement what they will receive from the state pension and their employer’s pension. This means that people will have to be much more aware of the need to plan for retirement.
For defined benefit schemes, the total of state pension and employer’s pension on retirement at age 67 should be around 60% of final salary, while the minimum employer’s contribution to a defined contribution scheme should be 2% of salary.
Length of pensionable employment becomes more important. The level of pension received at retirement is highly dependent on the number of years of pensionable employment.
If an employee and employer jointly contribute to a pension over the 43-year working life assumed by the pension commission, this will produce a pension of around 65% of salary on retirement at age 67. These calculations are based on a report on compulsory employers' pensions commissioned by Storebrand from Fafo and
ECON Analyse. All these examples are based on the current regulations for defined contribution pensions, and assume a salary of
NOK 300,000, starting work at age 24, net real investment return of 2% and pension payments to age 82.
People who have remained in higher education for a particularly long time, or who have breaks in their working life (without pension contributions or pension credits as carers etc), will have fewer years of pensionable service when they retire at 67. A working life of 40 years, as currently applied for state pension calculations, would reduce the level of pension in the example above to around
Financing: Once the pension reform comes into force, everyone will be able to choose their own retirement age. However, early retirement will bring costs as well as benefits. Retiring before 67 will lead to a longer retirement and thus a lower annual pension.
Increasing importance of personal retirement savings. 2004 saw a significant increase in contributions to the IPA personal pensions permitted under current Norwegian regulations.
However, the increase was from a low level, and IPAs attract only a relatively small proportion of savings. A major reason for this is uncertainty over the tax benefits of IPA savings. Many commentators have pointed out that the tax implications of committing savings to an IPA are not necessarily beneficial for everyone.
Storebrand has demonstrated that the IPA rules are attractive for most people who want to save for retirement, but nonetheless recommends that people take individual advice before committing themselves to an IPA. This serves to demonstrate that the current regulations are complicated and difficult to predict.
The current tax legislation discriminates against anyone excluded from compulsory employers' pensions, including the self-employed and one-man businesses. Moreover, anyone who anticipates a smaller pension and wants to compensate for this by making additional savings will be in a less favourable tax position than someone expecting a good pension who does not need to make the same level of additional savings.
Storebrand believes that the authorities should review the taxation treatment of IPAs as part of the pension reform. If the rules are changed so that the tax deduction allowed on contributions to IPAs is at the same rate as the tax on pensions paid, individual pension saving will become more predictable, making IPAs a simpler and more secure way of saving to supplement the state and employer's pension at retirement. In addition, this would allow the self-employed to save for a pension without suffering a less favourable tax treatment than an employee member of a group pension scheme.
Today’s 20 year olds will have to work 2 years & 8 months longer to get the same pension - or receive a significantly lower pension
Storebrand’s objective is to be the leading and most respected institution in the Norwegian market for long-term savings and life insurance. Storebrand is one of the best-known brands in the Norwegian financial world. With its long history and strong traditions, Storebrand is well placed to take a leading position in the retail market. The new management structure introduced in 2004, which brings together all the group’s retail market activities into a single unit, has created an efficient and customer-oriented organisational structure that is well suited for an ever-changing market. The new structure also ensures efficient co-ordination between production, marketing and sales.
The company's financial advisers currently account for a large proportion of sales to the retail market. However, sales through external distributors, direct sales channels and cross selling to employees in group pension schemes run by Storebrand are growing, and will represent an increasingly more important distribution network for the company in future years.
The market for long-term savings and life insurance is growing strongly. People are recognising an ever-increasing need to save for their retirement and arrange life and health insurance protection. Storebrand has a sound foundation in these markets, and aims to take a leading position.
Storebrand’s child insurance product having been voted the best in the market.
Given the limited tax incentives currently available, we expect a major part of long-term savings to flow into mutual funds. The mutual fund market has been growing since 2002, mainly due to the positive development of world equity markets. This market is expected to continue growing in coming years, including the market for unit linked products.
Storebrand's share of the overall retail mutual fund market is around 5%, but it has a 16% share of the unit linked market. Storebrand aims to strengthen its market share in this area, and was one of the first companies to launch attractive allocation funds, which are managed on the basis of our view of future prospects for equity and bond markets. These are funds that we believe will attract increasing demand in future. Through greater focus on savings contracts and sales of allocation fund products, Storebrand will build a strong foundation for continuing growth in mutual funds and unit linked products.
Market shares *) Annual risk premiums for health insurance (retail and corporate)
Storebrand has a sound position in health and life insurance that we wish to develop further. This market is expected to grow, not least because many employers are removing insurance cover from their pension schemes. An MMI survey revealed that 70% of the population did not know what their income would be in the event of invalidity. There is also growing demand for critical illness insurance which offers quick pay-out in the event of serious illness, such as cancer or heart disease. Storebrand currently offers the most comprehensive critical illness insurance in the Norwegian market, and is the market leader.
Storebrand's personal loans are among the most competitive in the market. Storebrand Bank contributes to the group's value creation by attracting new retail customers. The bank as yet has only a small share of the retail market and is therefore a challenger to existing players, but it is working hard to expand. Banking products play a central role in attracting customers to Storebrand’s other products, and also play an important role in building customer relationships through regular contact with customers and the insight they provide into customers' finances.
For many Norwegians, mortgage repayments represent the most important form of saving. Storebrand Bank supports this form of saving by offering some of the best terms and conditions in the mortgage market. A further example of the bank's commitment to the retail market is the recent launch of the Ring Eiendomsmegling chain of real estate brokers, which will significantly increase Storebrand’s distribution capacity for mortgage loans.
Storebrand generates satisfactory profitability in the retail market as a supplier of long-term savings and life insurance products. Traditional life insurance savings products are subject to the rules on profit sharing between the company and its policyholders, giving Storebrand acceptable profitability if the investment return on policyholders' funds is moderate to high. Unit linked and mutual fund products offer significant economies of scale, so growth in business volume is a key factor in profitability.
Storebrand achieves satisfactory margins on sales of risk insurance products with no savings element. Banking products generate lower margins than other products in the group, reflecting intense competition in this market and Storebrand’s decision to use these products to attract retail customers to the group.
Storebrand's objective is to increase its share of the retail market over the next few years. This is particularly relevant for product areas where Storebrand currently has a limited market share, such as mutual funds and banking. Storebrand also intends to strengthen its market position for unit linked products.
Storebrand has identified four important areas of focus that are key to reaching its objectives: 1) Strengthen the group's brand, 2) Increase cross selling, 3) Improve efficiency, and 4) Develop its distribution network further. These factors are described in more detail below.
Storebrand already has a strong brand image and will continue to strengthen its brand by building a more clearly defined and unique position in the market. Customer surveys confirm that the company already has many of the qualities that consumers look for in that it is seen as financially safe, rich in tradition and trustworthy. Storebrand will use a variety of marketing activities to build a more distinctive profile in the market for long-term savings and life insurance.
Storebrand currently has over 800,000 customers in Norway, and it intends to strengthen its customer relationships. Storebrand currently has a direct relationship with a large number of individual customers, including customers with paid-up policies from previous employers' pensions. In addition, current members of group pension schemes managed by Storebrand represent a significant customer group.
Satisfied customers are essential for Storebrand, and customer service activities to retain customers are an important part of the marketing strategy. Considerable resources are committed to developing cost effective sales programs to increase and strengthen the value of the customer base. The company also uses advanced analytical tools to give good insight into its customer portfolio. Better targeting of marketing effort and more activities directed at selected customer groups will increase overall customer profitability. Operational objectives in this area include increasing the number of Storebrand products per customer, improving customer loyalty and making sales and customer service more cost effective. In parallel, Storebrand has a continual focus on ensuring high levels of customer satisfaction.
NEW DISTRIBUTION CHANNEL The launch of the Ring Eiendomsmegling chain of real estate brokers represents a big increase in Storebrand Bank's distribution capacity for mortgage loans. The bank and Ring have high expectations for this new venture.
Storebrand offers a nation-wide customer advice network, with 40 branches and 120 financial advisers. Storebrand has systematically developed its sales force of financial advisers over a number of years, with particular emphasis on ensuring expertise and high quality advice through certification. The company's financial advisers will continue to be an important distribution channel for Storebrand in future years. The company also has distribution agreements with many independent brokers, and this represents an important and loyal sales channel that produces good results. Storebrand expects to see continuing growth in distribution through independent brokers.
Direct channels, which comprise telephone and Internet sales, have grown by 30% over the last two years and this pace of growth is expected to continue. Work on product development, improved efficiency and training are making it possible to sell an increasing range of products through direct channels.
External distributors have made a positive contribution to sales of mutual funds and life insurance over the last two years. Storebrand has actively sought new distributors for its competitive and forward looking products in this area, building the foundation for continuing growth. Sales of both life insurance and life insurance savings products through external distributors more than doubled from 2003 to 2004.
Product summary *) Each product has a defined maturity, investors can sell before maturity
STOREBRAND STRENGTHENS ITS POSITION IN THE CORPORATE MARKET THROUGH INCREASED CUSTOMER FOCUS, PRODUCT DEVELOPMENT AND EXPANSION INTO NEW MARKETS
Storebrand's current strong position in the corporate market is a good starting point for developing the major opportunities that this market offers. Companies now have a choice of defined benefit or defined contribution pension schemes, and the expected changes that will make it compulsory for all employers to offer a pension scheme will create new opportunities for employers, whether or not they currently operate a pension scheme. The changing environment for corporate pension schemes makes it all the more important for companies to find a professional pensions provider with an understanding of the pension market, good advisory expertise and the ability to develop products to meet changing requirements.
Employer's pension schemes top of the agenda. In the current climate of lively debate over the future of state pensions in Norway, changes in the regulatory framework for occupational pensions and the introduction of compulsory employers' pensions, companies and their employees are showing an ever-increasing interest in the need to save for retirement. Employees increasingly expect their employer to offer a pension scheme, and companies are finding that pensions play a key role in any forward-looking human resources policy.
The market for occupational pension schemes is facing major changes. The move towards compulsory employers’ pensions will affect almost 600,000 employees. In addition, employers with pension schemes are focused on new opportunities.
Developments in the occupational pensions market. The last 30 years have seen strong growth in occupational pension schemes. Fewer than 500,000 employees were members of an employer's scheme in 1970, but this had grown too 1.3 million members by 2004. While all public sector employees are members of an employer's pension scheme, it is still the case that only half of private sector employees have the benefit of a pension scheme.
There is now broad political consensus that employers should be compelled to provide pensions. The earliest date this can come into force is 1 January 2006. The proposed legislation on compulsory employers' pensions will affect almost 600,000 employees (Fafo Report 457). Research by Fafo and ECON estimates that the introduction of compulsory employers' pensions will lead to at least NOK 2.7 billion of annual contributions (assuming compulsory pensions are based on existing products).
The introduction of compulsory employers’ pensions will also create opportunities for increased sales of individual savings and life insurance policies to employees and senior managers of the companies affected. Storebrand’s corporate and retail market divisions are working closely together to realise this potential by providing personal advice to the senior management of small and medium companies and ensuring effective distribution of products and services to employees of companies that use Storebrand for their group pension schemes.
Defined contribution versus defined benefit pensions. When defined contribution pension schemes were first introduced in Norway in 2001, it was generally expected that most companies establishing a pension scheme for the first time would choose the defined contribution route. Experience since 2001 shows that many companies have actually chosen to establish new defined benefit schemes.
DEFINED BENEFIT AND DEFINED CONTRIBUTION PENSIONS > Companies can choose between two types of pension scheme for their employees. A defined benefit scheme gives employees a pension defined as a percentage of their final salary when they retire. In a defined contribution scheme, the company contributes an annual fixed amount or an amount equivalent to a percentage of salary for each employee. The pension an employee receives on retirement is dependent on the amount contributed to his or her pension over the years and the investment return on the contributions. In addition to either type of pension scheme, it is common for companies to arrange insurance cover against death, invalidity or disability during the employee's working life. Defined benefit pension schemes still account for 90% of all company pension schemes.
The retail, hotel and restaurant sectors have the highest proportion of companies without pension schemes
Occupational pensions in the public sector. The public sector market for occupational pensions is made up of municipalities, health authorities, independent state owned entities and other public bodies. This market offers the greatest potential for transfers of pension schemes to private sector suppliers.
NEW OPPORTUNITIES > Companies need to keep their pension arrangements under continual review, and that means keeping an eye open for new opportunities and possible improvements – although this does not always mean changes to the pension scheme itself. Storebrand places great emphasis on keeping companies well informed and advising them of the opportunities available to them.ADJUST
Storebrand offers health insurance products that guarantee rapid access to treatment through Storebrand Helseforsikring AS. Storebrand is a dominant player in this market, and an increasing number of companies have decided to provide health insurance for their employees.
Respected and customer oriented. Storebrand Life Insurance's stated objective is to be recognised by customers as the leading and most respected institution in the Norwegian market for long-term savings and life insurance. This can only be achieved and maintained by offering the best advice, customer service and product range of any supplier in the market. In addition, Storebrand recognises its social responsibility in areas such as encouraging companies to reduce sick leave, invalidity and disability among their employees and in applying ethical criteria when managing its customers' pension assets.
bring increased downward pressure on pricing. Storebrand will meet these challenges through product development, targeted customer service, cost savings and improved efficiency.
Through the range and quality of the products it offers, Storebrand Investments has attracted most of the largest pension funds in Norway as customers. Storebrand Investments' long experience and strong expertise, coupled with the advantage of working closely with Storebrand Life Insurance on risk management, has made the company a leading asset manager in this segment.
700 PARTICIPANTS Storebrand's Pension Conference on 25 January provided an arena to debate compulsory company pensions. Storebrand presented a new report on compulsory company pensions prepared by Fafo and ECON.
STOREBRAND CREATES VALUE FOR THOSE AFFECTED BY ITS ACTIVITIES BY RECOGNISING ITS COMMERCIAL, SOCIAL AND ENVIRONMENTAL RESPONSIBILITIES.
Storebrand Life Insurance’s commitment to environmental and CSR investment criteria makes it one of the most advanced life insurance companies in the world in this area. In its management of pension and lifeinsurance funds, Storebrand refuses to invest in companies that produce landmines, cluster bombs or tobacco products, or in any company involved in breaches of human rights or corruption. Moreover when investing in industries such as chemicals, pharmaceuticals, oil and gas, mining, shipping, the textile industry, paper and forestry and electric power production, Storebrand excludes companies that score in the bottom 10% for environmental and social responsibility.
The external environment. Storebrand works to minimise its effect on the external environment and save costs by making efficient use of energy, reducing its paper consumption and minimising the amount of waste it produces. We set environmental standards for our suppliers and for the management of the company's properties and real estate.
Partnership with charitable organisations is a central feature of the company's sponsorship strategy.
December 2004 amounted to NOK 1,390.9 million, made up of 278,181,882 shares each with a par value of NOK 5.
Morgan Stanley & Co (NOM *)) 5 660 836 GBR 2.03
The Northern Trust Co (NOM *)) 3 904 625 GBR 1.40
Clearstream Banking (NOM *)) 2 840 195 LUX 1.02 *) Client account
Average number of ordinary shares (1,000) 278 181 278 070 277 715 277 554 277 464
December 2004 total foreign ownership amounted to 51.6%, as compared to 44.2% at the end of 2003.
The RISK amounts for shares in Storebrand ASA have been set as follows: RISK amount RISK amount
On a sale of shares, the opening value/purchase price of the shares will be adjusted by the total of the RISK amounts during the period of ownership. The RISK amount as at 1 January 2005 is estimated at NOK -6.70 per share
Storebrand is dependent on maintaining an orderly relationship with the financial markets and supervisory authorities. The company therefore places particular emphasis on ensuring that its routines and guidelines satisfy the formal requirements imposed by the authorities on securities trading. In this connection the company has produced internal guidelines for trading in the company ’s shares by insiders based on current legislation and regulations. The company has its own compliance system to ensure that the guidelines are followed.
Corporate governance is made ut of a number of elements. The following chart illustrates some of the most important elements for Storebrand.
Only members elected by the AGM participate in electing the directors, but all members participate in electing the Chairman.
• Issue a mandate for the work of the Control Committee.
The Board of Representatives is entitled to make recommendations to the Board of Directors on any matter. The Board of
Board. CVs for the members of the Board is provided on pages 33–35 and at www.storebrand.no.
The Board meets at least nine times each year. In 2004 the Board held 16 meetings and one Board conference. 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 for each meeting is set by the Chairman based on the approved schedule for the year and a list of matters carried forward from previous meetings. The agenda and documentation for each board meeting is normally circulated a week in advance. The Board is supported by a secretariat and one of the group's in-house attorneys acts as the Secretary to the Board.
The Board has reviewed its working procedures and practices for the preparation and conduct of board meetings on a number of occasions. Time is made available at every second board meeting to discuss matters without any member of the management present.
The results are made available to the Election Committee, which takes this into account in its work. A Board seminar was held in 2004 as part of a program of work intended to develop the expertise of the members of the Board. The members of the
Board and Board committees receive a fixed annual fee plus additional payments if more than 11 board meetings are held in a year.
The Audit Committee assists the Board by reviewing, evaluating and where necessary proposing appropriate measures in respect of the group’s overall controls, financial and operational reporting, risk management and internal and external auditing. The Audit
Committee held seven meetings in 2004. The external and internal auditors participate in meetings of the Audit Committee. The Group
The committees assist the Board by preparing matters for consideration, but decisions on such matters are taken by the entire Board.
Both committees are able to carry out meetings and consider matters without any involvement from the company's management.
Control Committee. The Control Committee has five members elected by the AGM, each for a two-year term of office. The committee ensures that the group adheres to all relevant legislation and regulations, and that it operates in accordance with the
Articles of Association and resolutions passed by the group’s corporate bodies. The committee is entitled to look into any matter, and has access to all relevant documentation and information.
The committee has the power to demand information from any employee and any member of the company's corporate bodies.
The Control Committee met nine times in 2004 and submitted reports to the Board of Representatives on its work in 2003 and
Control Committee. If the Control Committee identifies any matters of material concern for the group, it is required to communicate this immediately to the Chairman of the Board of Representatives.
Representatives. 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 reviews the annual evaluation of the work of the Board of Directors.
• The election by the Board of Representatives of six members to the Board of Directors and its Chairman.
In addition to its own controlling bodies and external audit, the company is subject to statutory supervision by Kredittilsynet
The external auditor is elected by the AGM, and is responsible for the financial audit of the group. The external auditor issues the audit opinion on the annual accounts, and undertakes a limited scope review of the interim accounts. The external auditor attends the board meetings that approve the quarterly interim accounts, and also attends meetings of the Audit Committee as appropriate.
The annual program for internal audit work is determined by the Board, based on the auditor’s recommendations and a risk evaluation carried out by the group’s senior management teams.
Internal audit produces quarterly reports for the Board. Reports from special investigations initiated by internal audit or management in respect of possible breaches of ethical rules must be immediately reported to the chairman of the Audit Committee and the Group CEO with copies to the heads of Legal Services and
Management structure. Storebrand introduced a new management structure with effect from 1 September 2004 in order to enhance the group's market and customer orientation, increase efforts in the retail market and improve efficiency in the group.
The new model establishes five operational business areas for the Storebrand group: Retail Market, Corporate Market Life, Life
The emphasis the new management model places on life insurance means that the Chairman of the Board and Group CEO are respectively the Chairman and Managing Director of Storebrand
IT, accounting/finance, legal services, human resources and corporate communications/branding. The executive management is responsible for implementing the strategies approved by the
Storebrand’s value-based management system. The management system is central to the internal audit function and is intended to ensure a relationship between targets and actions at all levels of the group and the overall objective of value creation.
The system assists the Board and executive management in planning, monitoring and managing the group’s activities.
The strategic process in 2005 will focus on growth, improved productivity, efficient use of capital and organisational development. These are the key drivers in Storebrand’s value-based based management system and are reflected in the Storebrand
The Board is involved throughout the strategy and planning process, both by setting limits and making strategic decisions and by finally approving the group's plans and budgets.
Risk evaluation and internal control reporting form an integral part of the strategy and planning process. The management teams responsible for each business area are actively involved in recognising areas of risk and identifying appropriate measures to promote the company's strategy and objectives. This work is summarised in an internal control report submitted to the Audit
Storebrand employees forms an integral part of the value-based management system, and in the same way that targets are set for
Storebrand and the business areas, each department and its individual staff members have targets that are consistent with and support the company’s objectives. Each employee agrees annual objectives and an action plan with his or her line manager.
This personal plan combines the individual's personal targets with targets for the unit in which he or she works in order to encourage teamwork and overall performance. Storebrand operates a bonus scheme for all employees, which provides for bonus payments in addition to fixed salary and other employee benefits.
Internal guidelines have been established for share trading by employees and insiders. Storebrand’s Intranet also includes a security portal that provides both rules and practical guidance on security of information, catastrophe planning, money laundering and financial crime.
Business ethics and "whistle blowing". Storebrand has established ethical rules for the group. All employees receive a copy, and seminars for new employees address business ethics and ethical dilemmas. Ethics was also a theme at the courses held in autumn 2004 for all Storebrand managers.
Audit Committee, Knut Heje". The page provides a telephone number for Knut Heje.
On 11 February 2004, Storebrand ASA entered into an agreement with Sampo Oyj for the sale of Storebrand's shares in If Skadeförsäkring, conditional on approval by the relevant authorities.
Earnings performance: The Storebrand group reports an operating profit of NOK 4,435 million for 2004 as compared to NOK
The Board confirms that the accounts have been prepared in accordance with the going concern assumption.
Life Insurance: Storebrand's life insurance activities reported good results for 2004. In addition to strengthening its position through increased sales of traditional pension and life insurance products, Storebrand continued to expand in new areas of focus such as defined contribution pensions, pension schemes for public-sector bodies and health insurance. Storebrand expects to see considerable growth in the pensions market as a result of the pension reform and the proposed introduction of mandatory employers’ pensions. Sales of savings-related life insurance products to the retail market (endowment policies) showed strong growth in 2003, and this trend continued throughout 2004. Storebrand expects demand for this kind of savings product to remain strong for as long as interest rates remain at current low levels.
Storebrand Livsforsikring (Storebrand Life Insurance) reported a consolidated profit for 2004 of NOK 2,985 million as compared to
NOK 2,653 million in 2003. Of the profit for the year, NOK 2,019 million was allocated to policyholders and NOK 966 million to the owner. The owner's profit for the year includes NOK 145 million from products not subject to profit sharing with policyholders.
Storebrand Life Insurance's total premium income, including pension transfers, was NOK 17,912 million in 2004, an increase of 39% from 2003. The figures for pension transfers reflect one large corporate customer transferring out of Storebrand 2004, which resulted in a net outflow for the year.
Storebrand Fondsforsikring reported higher premium income in 2004 for both unit linked products and defined contribution pension products. Defined contribution pension products, where the company is currently building up business, showed a loss for the year while unit linked products were profitable. Total business volume is as yet at a low level, and this was reflected in a pre-tax loss for the year of NOK 24 million. The company reported a loss of NOK 36 million in 2003. The 50% interest in Storebrand Helseforsikring contributed NOK 4 million to pre-tax group profit in 2004 as compared to NOK 3 million in 2003. Storebrand Helseforsikring reported increased sales in 2004.
Asset management activities: Storebrand simplified the legal structure of its asset management unit following changes in legislation in 2003. Norwegian legislation now allows a fund management company to manage both mutual funds and individual portfolios. From autumn 2004, Storebrand's management of mutual funds and individual portfolios was therefore brought together in a single company, Storebrand Kapitalforvaltning AS
Asset management reported better results, with an overall pre-tax profit of NOK 47 million for 2004 as compared to NOK 22 million for 2003. The improvement in earnings results from higher performance-related fees generated by good investment results and an increase in volume-based management fees as a result of new business and rising equity markets. Of the 10 portfolios managed for Storebrand Life Insurance, 8 produced a better return than the benchmark. Operating costs were 7% higher at
Assets under management increased by NOK 6 billion in 2004, to stand at NOK 165 billion at year-end. Customers continued to take a cautious approach to investment, and this was reflected in new business. The total net inflow of assets under management was
NOK 103 million for 2003. Loan losses and provisions represented a net write-back of NOK 7 million in 2004 as compared to a net charge of NOK 174 million in 2003. The bank also wrote down
securities held as fixed assets by NOK 3 million. Pre-tax profit for 2004 was NOK 125 million, an improvement of NOK 234 million from 2003.
Falling interest rates and a shift in the lending portfolio towards a lower risk profile with a higher proportion of retail mortgage lending caused a drop in net interest income as a percentage of average total assets from 1.85% in 2003 to 1.63% in 2004.
Life insurance activities: The major part of savings-related life insurance products incorporate a guaranteed minimum return.
These savings products currently have an average annual guaranteed interest rate of 3.8%. This places particular demands on how the life insurance company allocates its investments between asset classes such as shares, bonds and other assets, not least when interest rates are at their current low level.
Storebrand has fixed the future rate of return on part of its money market investments. In addition, a significant proportion of the investment portfolio is invested in bonds to be held to maturity with a running yield in the order of 6%. If interest rates remain at their current low level this will in due course make it challenging to produce a sufficiently high return on the company's assets relative to the guaranteed interest rate.
The allocation of financial assets is decided annually as part of the formal approval of the company's investment strategy. The investment strategy establishes guidelines for the composition of financial assets by setting limits and guidelines for the company's risk management. The strategy also includes limits and guidelines for credit and counterparty exposure, foreign exchange risk and the use of derivatives. The objective of active risk management is to maintain sound risk bearing capacity and to continuously adjust financial risk exposure to the company’s solidity while creating the potential for a good investment return.
The total risk capital of the life insurance company increased by NOK 2.1 billion in 2004. The company’s risk capital is made up of the market value adjustment fund, additional statutory reserves, core capital in excess of the statutory minimum and accrued earnings. Policyholders’ additional statutory reserves increased by a net NOK 313 million to NOK 3.7 billion. In addition to these figures, the portfolio of bonds held to maturity showed an unrealised gain of NOK 4.2 billion at the close of 2004.
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, and these are notified to the authorities.
Loan losses and provisions represented a write back of NOK 7 million in 2004 as compared to a charge of NOK 174 million in 2003.
NOK 910 million, representing a reduction of NOK 807 million over the course of 2004. Total specific and general loan loss provisions amounted to NOK 573 million, representing a provisioning ratio of 63% as compared to 49% in 2003. Approximately 70% of lending to the retail market is secured by mortgages with a loan to value ratio not exceeding 60%.
Bank and other companies in the group, and continuously monitors liquidity relative to internal limits. In addition, committed credit facilities have been established with other banks that the group companies can draw on if necessary.
Storebrand Fondsforsikring by NOK 50 million in 2004. The Board considers the group’s capital situation to be good relative to its risk profile and rating, and proposes a dividend of NOK 7 per share
Standard & Poor’s and Moody’s respectively, both with ‘Positive outlook ’. Storebrand Life Insurance has ratings of A- and A3 from Standard
HUMAN RESOURCES AND ORGANISATION. Employment in the group totalled 1,224 full time equivalent positions at the end of 2004 as compared to 1,263 at the start of the year. Employment in the group is virtually equally split between male and female employees. The average age of the group’s employees is 42 years, with an average length of service of 11 years. All Storebrand employees are treated equally, regardless of gender, age, disability, faith, cultural differences or sexual orientation.
Storebrand has implemented targeted measures over many years to increase the number of women in senior management. This work has so far produced improvements in many areas. However, achieving 40% female representation in the company's corporate bodies and management remains the most important challenge in this area. Female representation on internal boards of directors improved in 2004 as result of two new appointments.
The group reviewed and updated its ethical rules in 2004. In addition, a new page has been provided on the Storebrand Intranet that allows employees to seek advice on ethical dilemmas anonymously. Storebrand has also entered into a collaboration agreement with the Church of Norway and employees can arrange to meet with a priest at times of need. The Church also assists with discussions on ethical issues.
Absence due to illness for the group as a whole totalled 4.1% in 2004 as compared to 4.6% in 2003. There was some reduction in long-term illness, but short-term and medium-term absence was little changed. Storebrand did not incur any reported personal injuries, damage to property or accidents of any significance in 2004.
CORPORATE SOCIAL RESPONSIBILITY. Targeted activities to ensure that the company operates with the highest possible degree of corporate social responsibility (CSR) have been given increased weight over recent years. Recent experience shows that most of the targets set in the CSR Action Plan two years ago have been reached. Additional measures have been implemented including greater use of environmental and CSR criteria for the life company's investments and the introduction of CSR criteria for all investments managed by Storebrand Investments.
Certain of the steps taken have proved to be no longer relevant, while others have been too ambitious to achieve within the time set. The CSR Action Plan for 2005–2006 will ensure continuing attention to areas where targets have not yet been met. The new
Norwegian business and industry takes an active responsibility for the sustainable development of the wider society of which we are all part.
CORPORATE GOVERNANCE. Storebrand has established a policy for corporate governance. The Board reviews and revises this policy annually. A Norwegian Code of Practice for Corporate Governance was published in December 2004. Storebrand's policies and procedures for corporate governance meet the standards set out in the Code of Practice in all major respects. Further information on
Storebrand’s policies and procedures for corporate governance can be found in a separate article on page 28 of the annual report.
The Board carried out an evaluation of its work in 2004, and the executive management team participated in this process. The
The work of the Board is subject to a specific mandate. The Board has established advisory committees on remuneration and internal audit.
Tore Lindholt, Inger Bonnie Gjerde, Erik Berg, Ole Trasti, Brit Hoel,
Control Committee: Nils Erik Lie and Brit Seim Jahre retired from the Control Committee and Hanne Harlem was elected as a new member.
Directors, Board of Representatives and the Control Committee for the valuable contribution they have made to the company.
FUTURE PROSPECTS. Storebrand started 2005 in a strong position. This is the result of a determined focus on a clear set of priorities, with particular emphasis on financial risk management, cost effectiveness, strengthening customer relationships, more effective sales, improving the quality of the banks lending portfolio and developing employee expertise and motivation.
Through the sale of its shares in If Skadeförsäkring, the group has sharpened its focus on the market for long-term savings and life insurance. Storebrand expects this market to grow strongly in future years as a result of demographic changes, the changes currently proposed in the pension system and increased public interest and awareness of pensions and other benefits.
Storebrand intends to continue the development of the company's strong position in this market, and its clear objective is to be the leading and most respected institution in the Norwegian market for long-term savings and life insurance.
Storebrand's challenge in the corporate market is to maintain and strengthen its customer relationships and sales at a time of considerable change in the market, particularly in respect of occupational pensions for the private and municipal sectors. It is crucial for Storebrand to capitalise on its strong position by attracting corporate customers that do not currently offer any pension arrangements for their employees.
Three main themes will be central to Storebrand’s resource commitment and strategic development over the next few years: growth, productivity and efficient use of capital.
Growth will be achieved by taking full advantage of the expansion expected in the market for long-term savings and life insurance and by strengthening the group's position in areas such as municipality pension schemes and the retail market.
Greater productivity requires further improvement in the group's relative costs. Improvements to efficiency will target reducing costs in nominal terms and improving the relationship between income and costs. As part of this, the group has established clear and specific productivity targets for the next three years.
Efficient use of capital will ensure that Storebrand can take advantage of the increase in business volumes expected for longterm savings and life insurance.
Storebrand's risk management systems ensure that the group is prepared for any return of turbulent conditions in the financial markets. Through its long traditions and the expertise and motivation of its employees, Storebrand is well positioned to reach its financial and market objectives.
Information on the implementation of the new accounting standards and the effect of this on group equity can be found on page 83 of the annual report.
Storebrand ASA recorded a profit for 2004 of NOK 2,127 million.
This report should be read in conjunction with the information provided in the Directors’ Report, 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 separate annual reports published by each subsidiary.
Life Insurance (excl. unit linked, defined contribution pensions and health insurance)
Risk capital in excess of minimum (excl. unrealised gains on hold to maturity bonds) 10 950 8 854 4 724 5 823 12 477
Volume of non-performing and loss-exposed loans 909 1 717 2 362
Loan loss provisions as % of non-performing and loss-exposed loans 63% 49% 35%
Of which funds under management for external clients (incl. If) 25 500 38 500 32 300 35 500 38 200
Growth. Storebrand has a strong position in the corporate market for pensions and personal risk insurance. A number of factors point to strong potential for further growth in this market, notably defined contribution pensions in the private sector, the emergence of genuine competition for public sector (municipality)
Storebrand Kapitalforvaltning (Storebrand Investments) has a strong position in asset management for institutional customers, particularly for life insurance and pension fund assets. Focus on specialised products for this market will continue.
Asset management activities are characterised by economies of scale, and increases in assets under management have only a limited effect on costs. This business area is to reduce its cost/
GROUP STRUCTURE AND MANAGEMENT REPORTING. The chart below shows the legal structure of the group’s main subsidiaries, which is also the basis for the group’s accounting structure.
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 following table. For this purpose, the life insurance activities include Storebrand Livsforsikring AS (Storebrand Life
The group’s overall effective accounting tax rate for 2004 was 5%.
Calculated on the basis of equity at the start of 2005, this requires an annual group profit in excess of NOK 1.3 billion after tax. Group profit for 2004 excluding the contribution from If fell just short of NOK 1.0 billion before tax.
Storebrand has planned the necessary steps for 2005–2007 in order to reach its profitability target. Achieving the efficiency targets described above for the various business areas is an important part of this. Efficiency targets, together with forecast growth in sales and portfolios and measures to make more efficient use of capital, provide the basis for Storebrand to reach its RoE target over this period.
In view of the strong growth expected in the group’s life insurance activities, Storebrand Life Insurance and Storebrand Fondsforsikring were given additional capital of NOK 750 million and
NOK 50 million respectively by subscription for new shares. In parallel with this, Storebrand Bank received official approval to reduce its capital base by up to NOK 400 million. The reduction will be refunded to Storebrand ASA.
Storebrand ASA has bought back NOK 1.0 billion of a NOK 1.5 billion bond issued in the Norwegian market.
should approve a dividend payment for 2004 of NOK 7 per share, representing a total distribution of NOK 1.8 billion.
TAXATION. The Storebrand group’s tax charge for 2004 was low relative to pre-tax profit. The effective tax rate was 5%.
On 26 March 2004, the Ministry of Finance published a White
Paper on tax reform, and the final form of the legislation was approved in December 2004. The tax reform exempts dividends and gains on shares in the European Economic Area (EEA) from tax, and similarly losses on such shares are no longer tax deductible. Save for these changes, companies will be liable for tax on income as today. The exemption method will apply to dividends earned with effect from 1 January 2004 and for gains and losses on shares realised with effect from 26 March 2004.
The tax reform will therefore lead to more volatile and less predictable tax in future years, with greater fluctuation in the effective tax rate from quarter to quarter and year to year. These fluctuations will be linked to and depend on the proportion of overall results that is derived from realised income for costs on shares in the EEA.
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 26 to the annual accounts on page 74.
Standards (IFRS) for its consolidated accounts with effect from the 2005 accounting year. The major impact of the transition for the Storebrand group will result from applying IAS 19: ‘Employee
Benefits’ and from the group’s decision to follow the transition arrangements in IFRS 1: ‘First-time Adoption of International
Building on a strong position. The Norwegian pensions market is changing rapidly. The reform of state national insurance pensions, deregulation of public sector pensions and the introduction of compulsory employers’ pension schemes will create new market opportunities and challenges. Storebrand Life Insurance intends to build on its strong position in this market by becoming even more customer oriented, offering attractive product solutions and providing sound financial advice for its customers.
Pensions and life insurance are Storebrand Life Insurance’s core business. Storebrand Life Insurance’s objective is to be recognised by customers as the leading and most respected institution in the Norwegian market for long-term savings and life insurance.
Insurance reported an operating profit for the year of NOK 2,985 million, as compared to NOK 2,653 million in 2003. The profit allocated to policyholders was NOK 2,019 million (including NOK 500 million allocated to additional statutory reserves) and the profit to the owner was NOK 966 million. Profit to the owner includes NOK
Storebrand ASA: Net debt ratio *) -13% 15% 16% 8% -7%
*) Net debt ratio is net debt (debt minus liquid assets) divided by assets (total assets minus liquid assets).
Group Group Individual Individual Non life pension life endowment pension insurance Total Total Total
Profit/loss for the year 963 835 -242 a) Adjusted to show analysis of results as if subsidiaries were recognised in the accounts by the gross method rather than the equity method. b) Includes: Security reserve, subordinated loan capital, book equity and liability items. Further details on technical insurance matters can be found in the Storebrand Livsforsikring AS annual report on www.storebrand.no.
Analysis of results – explanatory notes. Interest result is the difference between the booked return and the guaranteed return on policies. The average guaranteed return on insurance policies in 2004 was 3.8%. 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 for the year and actual operating costs.
Strong growth in premium income. Storebrand Life Insurance’s total premium income for 2004, excluding policy transfers, was
Figures for business transferred between insurance companies were affected by a major customer leaving Storebrand in 2004, leading to a net outflow for the year. Premium reserves transferred to Storebrand Life Insurance totalled NOK 2,644 million as compared to NOK 3,375 million in 2003.
Life Insurance is also well equipped to generate a good investment return in 2006, for both policyholders and the owner.
The booked investment return for 2004 was 6.4%, as compared to 7.2% for 2003. The value-adjusted return on current asset investments was 7.2% as compared to 8.8% in 2003. The valueadjusted return including bonds held to maturity was 7.6% in 2004 as compared to 11.2% in 2003. At the close of 2004 unrealised gains on current asset investments totalled NOK 2,767 million, while unrealised gains on bonds held to maturity totalled
The life insurance company’s risk bearing capacity was satisfactory at the close of 2004. The solvency margin was 169% as compared to 159% at the close of 2003. The company’s capital ratio was 14.4% while the minimum required is 8%.
The increase of NOK 44 million was caused mainly by increased commission payments on a higher volume of sales to the retail market and higher performance related asset management fees to Storebrand Investments as a result of strong investment returns relative to benchmark indices.
Embedded Value. Embedded Value is defined as the net present value of future profits to owner from existing business, including the value of unrestricted equity. Embedded Value does not include the net present value of future new business.
The methodology used for calculating Embedded Value uses generally accepted actuarial principles, and does not seek to estimate
‘fair value’ on an interpretation of future IFRS principles. The methodology is based on deterministic projections (including assumptions on fixed interest rates and assuming a margin of 0.40% of policyholders funds to the owner in the first five years and 0.25% thereafter). Allowance is made for uncertainty in the assumptions on discount rate and the cost of holding capital.
of NOK 1,591 million. The value of new business written in 2004 was NOK 351 million as compared to NOK 250 million in 2003.
The value created by rolling existing business forward, based on the
The assumption made in 2004 for the long-term return on the company’ assets was 4.7% (5.3% over the first five years) as compared to the assumption made in 2003 of 5.2%. The discount rate was reduced in 2004 to 6.60% from 7.15% in 2003 in response to the general reduction in interest rates.
The following table shows the effect of changes in assumptions on Embedded Value for Storebrand Life Insurance (excluding
C h an g e in t ax a ss u m p ti o n s
V al u e o f n e w b u si n e ss
Insurance’s policy to make efficient use of its risk capital in order to increase the expected investment return for its policyholders.
Hedging programs were also used for the equity portfolio in 2004 so that risk capital would not be unnecessarily adversely affected in the event of a sudden sharp fall in equity markets.
A large proportion of the company’s unrealised gains on holdings of bonds arise from the portfolio of government and government guaranteed bonds held to maturity. The hold to maturity portfolio represented approximately 30% of total investment assets at the close of 2004. Bonds held to maturity have an average duration of around 5 years and an average effective yield of 5.9% on book value. The high stable return that the hold to maturity portfolio generates for policyholders helps to ensure that the yield
Activities Act. The revised Act was approved in autumn 2004 following some changes to the proposals in respect of the market value adjustment reserve when business is transferred. The new
The Bill paid particular attention to the structure of premiums and earnings for life insurance companies. Its main principle is that life insurance companies should charge total premiums in advance that include the owner’s remuneration. The principal change is that insurance companies will no longer be able to benefit from any technical insurance surplus after the event. Life insurance company assets must be allocated to separate portfolios so that the owner retains all the return earned from the assets that represent the company’s primary capital. Income from these assets, together with the remuneration included in the pricing structure will provide the basis for the overall profit to the owner.
Salary inflation 20% reduction in actual annual costs 9 893 40 0.4%
*) Long-term margin has been increased to 40bp as the 35% limitation does not apply in combination with a 1% higher investment return.
The Bill proposed that profit sharing between policyholders and the owner should continue for paid-up policies and any existing portfolios of personal pensions and endowment policies, with the owner receiving up to 20% of the surplus.
In connection with the national wage negotiation round in spring 2004, the government promised to formulate proposals for compulsory employers’ pensions. In its proposals on pension reform, the government has assumed that the question of compulsion for employers is resolved after the pension reform is approved. Employers pensions will be compulsory from 01.01.2006 at the earliest.
Storebrand is making the appropriate preparations for these changes. This includes product changes encompassing pricing, portfolio structure and changes to internal systems.
Storebrand Fondsforsikring AS. Storebrand Fondsforsikring reported a pre-tax loss of NOK 24 million for 2004 as compared to a loss of NOK 36 million for 2003. The loss derives from the company’s defined contribution pension business, which is a relatively new line of insurance where the company is still building business. Premiums written for defined contribution pensions increased by 179% from 2003 to 2004, while premiums written for unit linked products increased by 102% in the same period.
7.0 million for 2004 and a pre-tax profit of NOK 0.2 million as compared to NOK 6.3 million and NOK 2.0 million respectively in 2003. Premium income for health insurance products increased by 28% from 2003 to 2004. Premiums earned for own account of increased by 27%, with a 20% increase in Norway and a 35%
Simplification in the retail market. Storebrand Investments offers a full range of savings and investment products, from equity and bond funds for personal saving through to sophisticated specialist funds for professional investors. Storebrand Investments distributes its fund products through Storebrand’s financial advisers, other distributors and direct sales channels such as the Internet. Storebrand
were merged into Storebrand Fondene AS In October 2004, with accounting effect from 1 January 2004. Storebrand Fondene AS
Costs. Total costs were 7% higher in 2004. The increase in costs is due entirely to higher performance-based salary payments as a result of good investment performance and an increase in the value of the company’s bonus bank arrangement. Continuing strong focus
The overall cost/income ratio fell by 7 percentage points from 95%
in 2003 to 88% in 2004. The company’s objective is to reduce its cost/income ratio to under 70% over the next three years.
Increase in assets under management. Assets under management increased by NOK 6 billion to NOK 165 billion at the close of 2004. Assets under management in 2004 were affected by If’s decision to transfer all its assets to in-house management, leading to a withdrawal of NOK 18 billion from Storebrand
Investments. Investors continued to take a cautious approach in 2004, and this affected the level of new business. Storebrand
Investments attracted 39 new institutional customers in 2004, mostly in the municipality sector. Sales showed a shift towards specialist products.
Despite two very good years for the Norwegian stock market, retail market equity funds (including unit linked) showed a net withdrawal in 2004 of NOK 3.3 billion. Storebrand Investments had a 10.9% share of the market for Norwegian registered securities funds at the close of 2004, an improvement from 10.3% a year earlier. The proportion of assets under management invested in equities increased from 17% to 21% in 2004, while specialist products represented a smaller proportion of total assets under management. Larger discretionary risk limits combined with higher fixed and performance-based fees mean that the potential income from these products is considerable.
Storebrand were well in line with the performance of the Oslo stock exchange. International equity funds were affected by the strength of the Norwegian krone and the weakness of the US dollar. The performance of Asian equity funds was again very strong relative to benchmark indices, while other equity funds produced returns somewhat below benchmark. Money market funds produced a better return than benchmark, while bond funds were somewhat weaker than the benchmark.
Profitable growth. Storebrand Investments has once again reported improving earnings in 2004. Continuing improvements in cost efficiency provide a good basis for improving profitability based on funds and saving products for the retail market and competitive specialist products with higher margins for the institutional market.
Norwegian shares International shares Other Norwegian bonds International bonds Money market Bonds held to maturity Real estate
(loss of NOK 103 million in 2003). Loan losses and provisions represented a net write-back of NOK 7 million. A loss of NOK 3 million was recognised on securities held as fixed assets. Pre-tax profit was NOK 125 million, and after tax of NOK 50 million the group reported a post-tax profit of NOK 75 million for 2004 as compared to a loss of NOK 46 million in 2003 and a loss of NOK
NOK 427 million, equivalent to a net interest margin calculated on average total assets of 1.63%. Net interest income fell in 2004 mainly as a result of lower interest rates, a shift in the corporate lending towards a lower risk profile and a higher proportion of residential mortgage lending.
LOAN PORTFOLIO AND LOAN LOSS PROVISIONS. Gross customer lending increased by NOK 1.4 billion in 2004, equivalent to 6.0%.
The bank further reduced its portfolio non-performing and lossexposed loans, while strategic corporate lending maintained a stable level.
The deposit-to-loan ratio was 48% at year-end, a deterioration of 7 percentage points in the year. The bank has a balanced funding structure, basing its funding on customer deposits, issuing securities and borrowing in the Norwegian and international markets. At the close of the year the bank had available undrawn committed credit facilities totalling NOK 2.4 billion.
SESSED. The portfolio of non-performing and loss-exposed loans reduced in 2004. The gross value of non-performing and lossexposed loans was NOK 909 million at year end, of which interest is no longer recognised to profit on NOK 798 million. This represents an overall reduction of NOK 808 million or 47% since the start of the year. The net value of non-performing and lossexposed loans after specific loan loss provisions was NOK 531 million at the close of 2004, equivalent to 2.4% of gross lending.
R et ai l m o rt g ag e s
Authority of Norway to reduce its primary capital by up to NOK
400 million. The final decision on reducing capital will be taken in
The preparations for Basle II support the bank’s strategy and competitive position. Increased automation, improved decision support and greater use of customer data in market modelling will pave the way for rapid but controlled growth. Individual risk pricing will enable concentration on profitable customers. The systems developments driven by the Basle II regulations will also be of general commercial benefit for financial management and marketing. This will ensure that the bank retains a competitive position relative to its competitors.
MARKETS AND STRATEGY. Following the sale of Storebrand’s interest in If in 2004, the group’s non life insurance activities now consist of Fair Forsikring (50% ownership interest), Storebrand
Fair Forsikring was established in 1998 and writes non life insurance in the Danish market. The company reported a sound performance in 2004, and is growing strongly. Oslo Reinsurance
FINANCIAL RESULTS 2004. Non life insurance activities produced an operating profit of NOK 186 million in 2004, of which the group’s share in If’s earnings accounted for NOK 189 million as compared to NOK 386 million in 2003 of which If accounted for
NOK 324 million. In addition to the operating profit, non life activities recognised a transfer of NOK 61 million to profit from statutory security reserves as compared to NOK 68 million in
SALE OF IF. Non life insurance falls outside the group’s core activities.
ASA entered into an agreement with Sampo Oyj on 11 February 2004 for the sale of Storebrand’s shares in If Skadeförsäkring.
Skadeförsäkring. In addition, the holding company received higher income from subsidiaries than in previous years. Pre-tax profit for 2004 was NOK 2,358 million as compared to NOK 361 million in 2003 and a loss of NOK 392 million in 2002.
Development of nonperforming loans and loans on which interest is no longer accrued
ASA received a return from all business areas. The dividend of
1,925 million on the sale of shares in If. Other financial income was boosted by higher liquid assets following the sale. Interest expense was 50% lower in 2004, reflecting lower interest rates and the repurchase of NOK 1,040 million of bonds issued.
Storebrand assumes financial risk in the ordinary course of its core business activities. Good risk management and the control of risk exposure are essential to the group’s profitability and to ensuring that the group has the financial strength to withstand adverse developments and limit the losses these may cause.
on average. This places particular demands on how the life insurance company allocates its investments between asset classes such as equity, bonds and real estate.
The aim of risk management is to achieve the highest possible return for customers, and the owner over the long term at an acceptable risk level. Risk in the investment portfolio is continuously monitored with the help of a range of statistical tools and tests. For instance, ‘Conditional Value at Risk’ is used as a method for calculating the potential for loss on a one-year horizon for a given probability. The method also takes into account the size of the worst-case losses. The risk of loss is evaluated in the light of the guaranteed annual return and the company’s risk capital financed by policyholders and the owner.
The expected return on the investment portfolio is calculated on the basis of the allocation of assets in the portfolio and the expected return on each asset class using an evaluation of historic return, expected risk premium and forward market prices. The expected return in 2005 is estimated at slightly under 6%. Given the current investment portfolio, the annual return will normally fluctuate between 2% and 9%.
Life insurance policies are long-term commitments, and there are risks associated with the assumptions made about life expectancy and disability. There is therefore a risk that the premiums paid by policyholders and the investment returns achieved may not be sufficient to meet the payments guaranteed in the future.
portfolio of policies. The company has arranged reinsurance cover for death and disability risk in the event of unexpectedly large losses or a large number of losses caused by a single event.
Consequences of a low interest rate level. The current low level of interest rates causes both short-term and long-term problems for the company. In the short term, the most apparent risk is that the company’s investments will fall in value if bond prices are reduced by an unexpected increase in interest rates. At the close of 2004, Storebrand had sufficient risk capital to absorb a fall in market values equivalent to the company’s stress test. The stress test assumes an unexpected simultaneous increase in interest rates of 1 percentage point internationally and 2 percentage points in Norway, combined with a sharp fall in share prices and real estate values. Storebrand also uses other tools as described above to manage its investment risk.
• More transparent pricing of life insurance products. Companies will be required to set premiums and collect payment in advance.
• Clear distinction between policyholders’ funds and company funds. The company’s own funds will be held as a separate investment portfolio.
The calculation of premium reserves will continue to be based on the discounted present value of future liabilities using the basic rate. There will now be a legal requirement that changes in the basic rate only affect liabilities incurred after any such change.
The right to transfer to another company is an important feature of Norwegian insurance law, and this will not be affected by the changes. Similarly, there are no changes in the current requirements for minimum capital ratios and solvency margin.
The new legislation includes changes for policies where the policyholder ’s assets are held in specific investment portfolios as selected by the policyholder. Under the new arrangements, there will be few restrictions on such policies in respect of asset management, maturity and the level of any guaranteed minimum return. Storebrand is currently working on changes to its products, addressing in particular pricing, the composition of investment portfolios and risk capital. Storebrand’s future profitability will depend on the group’s ability to correctly price and manage the risk involved in the company’s commitments to its policyholders, particularly in respect of the guaranteed return and the investment return generated on the company’s assets.
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.
Lending to corporate customers over a certain limit requires 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 which ranks each customer by ability to pay, financial condition and collateral.
Over the last two years the bank has significantly upgraded its lending policies and credit approval procedures. Separate credit approval processes are now used for lending to retail customers.
Retail lending is assessed on the basis of credit scoring, combined with case-by-case evaluation of the borrower’s ability to repay.
Storebrand has initiated a project to evaluate the changes required, and is preparing changes to internal systems for calculating and monitoring credit risk and operational risk.
Bank and other group companies, and continuously monitors liquidity reserves against internal limits. Committed credit lines from other banks have also been arranged and may be used if necessary. Storebrand maintains relationships with a number of international banks, ensuring access to international capital market and providing greater diversity in the group’s funding.
Storebrand’s strategic planning process brings together targets, action plans, reporting and employee remuneration. The strategy process is described in detail in the article on corporate governance on pages 28–31.
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 longterm value creation. The company’s understanding of the most important value drivers for the group and its markets provide the basis for the group’s value-based management system.
The monthly management report, Storebrand Compass, reports on performance of key figures and value drivers relative to targets for the group and individual business areas. Storebrand Compass is based on the balanced scorecard management principles.
The strategic work in 2005 will focus on performance relative to the main themes of growth, productivity, efficient use of capital and organisational development. These are the key drivers in
Shares and participations in group companies 7 6 300.3 8 723.5 8 972.8
Insurance premiums for own account 18 740.6 13 805.6 10 170.1
Interest and related income – banking 22 1 171.8 1 803.9 2 599.5
Change in insurance reserves – life insurance -11 626.5 -9 862.0 -3 423.3
To/from additional statutory reserves – life insurance -500.0 -448.9 1 011.7
Changes in security reserve etc. – non life insurance 57.2 66.1 199.2
Shares and other equity investments – long term holdings 30 37.6 36.9 37.2
Net loans to and other claims on customers 35 23 876.3 23 327.1 26 160.4
Shares and other equity investments 30 29 137.4 19 514.3 11 301.9
Prepaid expenses and accrued income 1 645.4 2 008.1 2 504.5
Premium and claims reserves – non life insurance 512.5 518.0 452.3
Deposits from and due to customers 36 11 475.7 12 362.4 13 198.9
Interest, commission and fees paid to customers -236.4 -286.8 -277.7 -981.9 -1 658.1 -1 986.5
Net receipts/payments of deposits from banking customers -788.2 -837.3 -1 098.7
– Financial derivatives and other financial instruments 211.1 -2.7 -222.4 283.2 2 926.1 -2 946.7
Payments to third parties for goods and services -62.2 -57.5 -139.5 -1 791.3 -2 652.5 977.4
Payments to employees, pensioners, employment taxes etc. -124.2 -123.6 -119.1 -1 286.6 -1 135.3 -1 213.1
Net cash flow from operational activities -2 758.5 1 049.1 -1 241.4 -7 148.8 43.6 3 436.7
Net payments on purchase/sale of fixed assets etc. -15.2 -5.7 18.3 14.4 -8.4 7.1
Receipts from issue of bond loans and other long term funding 3 612.5 1 829.2
Receipts from issue of new capital 4.2 4.5 5.8 4.2 4.5 5.8
Net cash flow from financing activities -1 268.0 -1 058.6 1 193.9 2 532.6 -2 169.5 209.6
Net cash flow for the period 10.3 16.5 -29.2 250.2 -2 102.6 3 887.0
Net movement in cash and cash equivalent assets 10.3 16.5 -29.2 250.2 -2 102.6 3 887.0
Cash and cash equivalent assets at the end of the period 119.4 109.1 92.6 6 013.1 5 762.9 7 976.6
• the Company’s management has fulfilled its duty to produce proper and clearly set out registration and dokumentation of accounting information in accordance with the laws and generally accepted accounting principles in Norway
The Control Committee of Storebrand ASA has reviewed the Board of Directors’ proposed Annual Report and Accounts for 2004 for the Storebrand Group.
With reference to the auditor’s report of 15 February 2005 the Control Committee recommends that the Annual Report and Accounts proposed be adopted as the Annual Report and Accounts of Storebrand ASA and Storebrand Group for 2004.
Change in insurance reserves for own account -11 718.7 -9 353.9 -3 333.1
Expenses arising from financial assets -6 502.0 -7 278.7 -18 496.8
Shares and other equity investments 28 579.0 19 093.4 10 692.3
Bonds and other securities – fixed yield 31 785.9 20 084.4 14 346.2
Note 7: Holding company's shares in subsidiaries and associated companies page 65
Note 27: Goodwill and other intangible assets in subsidiaries page 75
The group accounts of Storebrand ASA have been prepared in accordance with the Accounting Act and the regulations for the annual accounts of insurance companies, banks and investment firms. The regulations and valuation rules for the annual accounts of insurance companies are applied to the group's insurance activities, the regulations for the accounts of banks are applied to the group's banking activities, the accounting principles for the accounts of investment firms are applied to the group's asset management activities and the general provisions of the Accounting Act are applied to all other activities. The presentation of the accounts and the information provided in the notes are based on the requirements set out in the Accounting Act and adapted for the group's activities in order to provide the best possible picture of the group's overall activities.
In preparing the annual accounts, management has to use assumptions and estimates that will affect reported figures related to assets, liabilities, revenue and costs, as well as the information on contingent liabilities included in the notes to the accounts. The actual figures in question may differ from the original estimates.
GENERAL Consolidation. The Storebrand Group is made up of companies involved in life insurance, non life insurance, asset management, banking and other activities. The group accounts consolidate Storebrand ASA and all subsidiaries where Storebrand ASA exercises control directly or indirectly through a long-term ownership interest and owns more than 50%.
Investments in companies of strategic importance where Storebrand owns between 20% and 50% of the voting capital and exercises significant influence (associated companies), are consolidated in accordance with the equity method. In the case of investments in jointly controlled businesses that are separate legal entities, the proportional consolidation method of accounting is applied.
Translation of foreign companies. The profit and loss accounts of foreign companies are translated to NOK at the average exchange rates for the year, whilst balance sheets are translated at the rate ruling at year-end. Any translation differences are posted against unrestricted equity.
Tax. The tax charge in the profit and loss account consists of tax payable for the accounting year and changes in deferred tax and deferred tax assets. Tax payable is calculated on the basis of taxable profit for the year. Deferred tax and deferred tax assets are calculated on the basis of timing differences between accounting and tax values and losses and unused allowances carried forward. Net deferred tax assets are recorded in the balance sheet to the extent it is considered likely that it will be possible to make use of the benefit they represent at some future date.
Properties and real estate. Real estate owned by Storebrand Livsforsikring AS. The rules for valuing properties and real estate in the accounts differ between the life insurance business and the group’s other businesses. The group's life insurance activities value properties and real estate at market value in accordance with Ministry of Finance guidelines. Any changes in valuation are recognised to profit and loss. Normal financial deprecation is not applied to real estate. The entry in the accounts for properties and real estate includes all types of assets, including real estate assets held through a separate limited company or through a Norwegian partnership (ANS). The accounting principle for property and real estate is that reality should take precedence over form. For the purposes of the life insurance company, these holdings are investments in property and real estate in the same way as directly owned property and real estate assets.
Method of establishing market value. Properties are individually valued by discounting estimated future net cash flow by a rate corresponding to the yield requirement for the relevant property. The net cash flow takes into account existing and future losses of income as a result of vacancy, necessary investments and an assessment of the future development in market rents. The yield requirement is based on the expected future risk-free interest rate and an individually determined risk premium, dependent on the letting situation and the building’s location and standard.
Specific loss provisions are intended to cover calculable losses on facilities which are identified as exposed to the risk of loss at the balance sheet date. In the event that a borrower becomes insolvent, enters into a composition with its creditors or is wound up, the value of any collateral security forms the basis for estimating possible losses.
Realised losses on facilities are losses which are considered to be final. These include losses arising on the borrower’s bankruptcy, insolvency or composition with creditors, or where the company considers it is very likely that the loss is final.
Long term funding/subordinated loans/bond loans. Long-term funding is recognised in the accounts at amortised cost. The direct costs involved in taking up long-term funding are capitalised and amortised to the next interest fixing date/maturity. Premiums/discounts on the issue of bonds are recognised as income/expense over the period to maturity or any earlier next interest fixing date. Holdings of own bonds are netted against bonds issued. Where own bonds are purchased in order to be cancelled, any losses or gains arising as a result of the purchase are recognised to the profit and loss account. The group's banking activities routinely buy back own bonds as part of their continuing funding activities. Losses or gains arising as a result of the purchase or sale of own bonds for this purpose are amortised over the remaining maturity.
Shares and participations held as current assets. Shares and participations are valued at market value. Where the share or participation in question is listed on a stock exchange or other regulated market, market value is determined as the closing price on the last trading day immediately prior to or on the date of the balance sheet. The market value of other shares or participations is determined on the basis of the information available.
In the event of a significant adverse change in the credit standing of an issuer, the value of bonds held will be written down as necessary.
Bonds and other interest bearing securities held as current assets. Bonds and other interest bearing securities held as current financial assets are valued at market value. Where trading prices from a liquid market are available for a security, the security is valued at the closing bid price on the last trading day immediately prior to or on the date of the balance sheet.
The discount on zero-coupon securities is amortised as interest income over the period to maturity using the effective yield method. The discount is recognised in the profit and loss account together with coupon interest as part of income from other financial assets and is included in the balance sheet together with the investment in question.
Financial derivatives classified as current assets are valued at market value. Storebrand undertakes routine mark-to-market valuations of all derivatives. Valuation is based on actual market values in a liquid market where these are available. If no market price is available, market value is calculated on the basis of the market price of the underlying instrument by using mathematical models generally accepted for pricing such instruments.
In the group’s banking activities, only financial derivatives entered into in respect of currency hedging and proprietary trading (the trading portfolio) are valued at market value. Derivatives entered into as part of interest rate hedging are not recognised in the balance sheet.
Unrealised gains or losses recognised to profit and loss do not affect the market value adjustment reserve in Storebrand Livsforsikring AS but do affect the profit available for allocation between customers and the shareholder. Profit or loss arising from active currency positions is applied to the market value adjustment reserve.
STOREBRAND ASA Dividends and group contribution. In the holding company’s accounts, investments in subsidiaries and associate companies are valued at acquisition cost as reduced by any write-downs. The main income of Storebrand ASA is the return on capital invested in subsidiaries. In the holding company’s accounts, group contributions and dividends received in respect of these investments are therefore recorded as operating income. 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.
Income and expenses of financial assets and the market value adjustment reserve. The income and expenses arising from financial assets reflect both realised items and changes in unrealised value. Net unrealised gains are applied to the market value adjustment reserve and do not affect profit and loss. Financial expenses include the administration costs associated with the financial activities.
Net unrealised gains on financial current assets – market value adjustment reserve. Net unrealised gains/losses for the current year on financial current assets 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 for the year, 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 account.
Net unrealised gain/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 applied directly to the profit and loss account. The foreign exchange risk associated with investments denominated in foreign currencies is to a very large extent hedged through foreign change contracts on a portfolio basis.
Insurance reserves. Insurance reserves comprise the insurance fund and the statutory security fund. The insurance fund includes premium reserve, additional statutory reserves, premium fund/pension adjustment fund and claims reserves.
Additional statutory reserves in the insurance fund. Additional statutory reserves are a conditional reserve allocated to policyholders, which is booked to the profit and loss account as a mandatory reserve allocation. The maximum additional statutory reserve is set as the difference between the premium reserve, calculated on the basis of a 3.5% guaranteed return, and the actual guaranteed return in the contracts. In addition, maximum limits apply in respect of individual contracts. Additional statutory reserves may be applied to meet any shortfall between actual return and the guaranteed return.
Security fund. The security fund is a statutory reserve to cover unexpected insurance risks. The calculations are made by an actuary in accordance with regulations published by the Financial Supervisory Authority of Norway.
UNIT LINKED/DEFINED CONTRIBUTION PENSIONS Unit linked products and defined contribution pension products are sold through Storebrand Fondsforsikring AS. Financial assets are valued at market value. The level of technical reserves required in respect of such contracts is determined by the market value of the financial assets. The company is not exposed to any investment risk on customers’ funds since it does not guarantee any minimum return. The sole exception is in the event of death, when the deceased’s estate is entitled to a refund of premiums paid for annuity insurance.
Dividend received from Storebrand Skadeforsikring AS *) 83.8 267.8 Storebrand Livsforsikring AS 538.7 230.0 Storebrand Bank ASA 61.6 Adviso AS 33.2 Storebrand Alternative Investment ASA 1.2 2.9 *) Dividend from Storebrand Skadeforsikring AS booked directly against equity 112.0 250.0 99.6 02 Personnel expenses
The following financial assumptions were used when calculating pension liability at year-end: • Discount rate 5.5 % • Annual earnings growth 3.0 % • Expected adjustment of Social Security Fund's base amount (G) 3.0 % • Annual pension increase 2.0 %
The calculations apply to 156 employees/early retirees and 2,180 pensioners. For further details of Storebrand's pension arrangements, see note 25.
Pension liabilities accrued for the year -6.8 -4.9 -11.7 -15.6 -19.9
Shown below is a reconciliation of estimated pension liabilities and pension funds with the liability booked in the company's balance sheet.
Estimated effect of future salary growth -18.5 -7.6 -26.1 -530.5 -503.2
Pension funds at market value 1 984.2 1 984.2 2 094.0 2 201.7
Other taxable benefits 152 181 211 Pension cost **) 414 380 341 Board of Representatives 509 572 726 Control Committee ***) 999 793 764 Chairman of the Board 404 330 500 Board of Directors including the Chairman 1 707 1 715 2 255 Auditor's fees for audit ****) 2 375 1 786 2 621 Auditor's fees for consultancy services ****) 615 1 510 9 000 *) Extraordinary bonus of NOK 2.5 million was used to buy shares in Storebrand. In salary for 2003 is included NOK 265 000 in back pay for previous years.
**) Pension cost relates to accrual for the year. ***) The Control Committee covers all the Norwegian companies in the group which are required to have a Control Committee, except for Storebrand Bank AS and Oslo Reinsurance Company ASA which have their own Control Committees.
Idar Kreutzer is Chief Executive Officer of Storebrand ASA and Managing Director of Storebrand Livsforsikring AS. 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. Payments under the ordinary bonus scheme are payable in three annual instalments. 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. Kreutzer is a member of the Storebrand pension scheme on regular terms. The discounted present value of his pension entitlement amounts to NOK 5.0 million, made up of NOK 0.7 million in the insured scheme and NOK 4.3 million in the uninsured scheme. These amounts represent the liability of the insured and uninsured scheme calculated on a linear basis using the financial assumptions specified in the accounts (cf. note 25).
The sale of shares in If Skadeförsäkring generated a gain of NOK 1,925 million after taking into account currency hedging of the settlement amount and transaction costs. The conditions stipulated for settlement of the sales agreement entered into on 11 February 2004 were satisfied by the end of April 2004, and the sales proceeds were received on 6 May 2004. Gains on sales of shares within the EEA after 26 March 2004 are free of tax. The gain on the sale of If shares, excluding the effect of currency hedging, is treated as tax-free in accordance with the exemption method.
Calculation of deferred tax assets and deferred tax Tax increasing timing differences Securities 133.4 Pre-paid pensions 589.4 551.8 509.4 Profit and loss account 8.0 10.0 12.5 Total tax increasing timing differences 597.4 561.8 655.3
Accrued pension liabilities -227.5 -251.0 -287.3 Total tax reducing timing differences -474.7 -360.5 -416.5 Net timing differences before losses carried forward 122.7 201.3 238.8 Losses carried forward -400.4 -366.7 -626.8 Allowances carried forward -661.3 -661.3 -127.6 Write-down of deferred tax assets *) 939.0 Net tax increasing/(reducing) timing differences 0.0 -826.7 -515.6 Deferred tax/Deferred tax assets (net) 0.0 231.5 144.4 *) The balance sheet value of deferred tax assets has been written down. This is because future income from subsidiaries will principally be in the form of dividends rather than taxable group contribution.
Reconciliation of tax charge and ordinary profit Pre-tax profit 2 358.0 361.2 -391.7 Expected tax at nominal rate (28%) -660.2 -101.1 109.7 Tax effect of dividends received 194.7 92.4 78.7 Tax effect of gains on shares/RISK 446.1 17.6 Tax effect of permanent differences 30.1 -1.4 21.2 Tax effect of the write-down of deferred tax assets -262.9 Tax adjustment for previous years 20.8 9.7 108.4
Forward FX contracts – equities 0.5 Total shares and other current asset investments 459.8 492.6 Of which listed Norwegian shares 485.7 Of which listed foreign shares 0.0 09 Subordinated loans AMOUNT
In June 2004 Storebrand ASA bought back EUR 5 million of exchangeable bonds. The nominal value of the Storebrand Exchangeable Bond at 31.12.04 was therefore EUR 155 million. The related hedging transactions were reduced proportionately.
Liabilities Utstedt opsjon EUR – Orkla aksjer 08.03.06 1 510.2 84.8 194.7 *) Interest element is not capitalised to the balance sheet.
Bought back 2004 *) -39.7 Amortised 97.4 Unrealised currency change 98.6 *) EUR 5 million of bonds bought back. See note 15.
**) 15 265 000 own shares bought back in 2004. Shares have been bought back to maintain an appropriate capital structure for the group and benefit shareholders.
NOK 37.60 per share. In accordance with the accounting circular issued by Oslo Børs, this issue is booked at market value.
Exchangeable bond loan 2.25% EUR 1 304.0 Orkla AS 2006 Bond loan 2002/2007 7.18% NOK 208.2 2007 Bond loan 2002/2007 3 m NIBOR+0.80 NOK 288.0 2007 Total *) 1 800.2 *) Loan is booked at amortised cost.
Folketrygdfondet 9.98 Orkla ASA 9.94 Storebrand ASA 5.49 Fidelity Funds-Europe 3.89 State Street Bank & Trust Co (NOM *)) 3.43 JPMorgan Chase Bank (NOM *)) 2.73 JPMorgan Chase Bank (NOM *)) 2.53 JPMorgan Securities 2.27 Morgan Stanley & Co (NOM *)) 2.03 JPMorgan Chase Bank (NOM *)) 1.97
OWNED *) BONUS UNITS **) NOK 1 000 AT 31.12.04 BASIS ***)
Erik Haug Hansen 1 535 *) The summary shows the number of shares owed by the individual, as well as his or her close family and companies where the individual exercises significant influence (cf. Accounting Act 7-26). **) The Storebrand Group has a cash bonus scheme for key managers which is linked to the share price development of the
Storebrand share. The bonus is calculated as the difference between market share price and the contract share price of NOK 60, and is paid out in cash. The bonus scheme has defined periods in which it can be exercised, and expires no later than 2009. After the accounting year end the scheme has been decided cancelled. NOK 7.5 million will be partially paid out in 2005, partially transferred to the basis for future bonus calculations of the relevant senior executives.
***) AN = Level payment loan, SE = Instalment loan, final payment ****) Senior employees are contractually entitled to performance related bonuses related to the group's value-based management system. In the event of termination of employment in certain defined circumstances, such as receiving notice from the company, senior employees are entitled to guaranteed income/salary for periods that vary from 18–24 months after the normal notice period. The remuneration of senior management in the form of salary and employment benefits totalled NOK 31.1 million. The discounted present value of the pension entitlements of senior management amounts to NOK 39.5 million, made up of NOK 4.4 million in the insured scheme and NOK 35.1 million in the un-insured scheme. These amounts represent the liability of the insured and uninsured scheme calculated on a linear basis using the financial assumptions specified in the accounts (cf. note 25). Details of the Chief Executive Officer's salary and remuneration can be found in note 4
No loans have been made to any member of the Control Committee, and loans to members of the Board of Representatives total NOK 5.1 million.
Balance sheet items: Subordinated loans to group companies 10.0 271.5 235.7 Net accounts payable and receivable (incl. group contribution) 687.4 529.9 18.0 18 No. of employees/Full time equivalent positions
Storebrand ASA has issued the following guarantees: CURRENCY TERMS ACCOUNTS PROVISION 1) Institute of London Underwriters (ILU) USD Ubegrenset 0 1) Counter indemnity of Oslo Reinsurance Company ASA (formerly UNI Storebrand International Insurance AS).
Policyholders' funds incl. accrued profit 121 066 108 760 99 108
Investment yield II *) 7.2% 8.8% 1.9% Capital ratio (Storebrand Life group) 14.4% 15.7% 18.4% Operating costs as % of policyholders' funds 0.90% 0.96% 0.92% Storebrand Fondsforsikring Premiums for own account 619 455 1 071
Funds under management for external clients 37 498 42 516 33 700 *) Investment yield I: Realised financial income including revaluations (positive or negative) of real estate.
Income from group and associated companies 0.3 2.1 5.6 0.3 2.1 5.6 Income from properties and real estate 888.7 775.5 950.7 888.7 775.5 950.7 Interest income – bonds & short-term debt instruments 3 764.3 4 577.4 3 842.3 3 806.9 4 648.5 3 881.2
Reversal of valuation adjustments – shares 3.0 499.6 3.0 501.2 77.7 Reversal of valuation adjustments – interest bearing instruments -334.2 2.0 -331.1 31.8 Gains on sale of shares 7 494.6 6 364.7 8 131.7 7 555.5 6 377.5 8 142.8 Gains on sale of fixed-income securities 782.1 2 225.6 5 928.8 797.0 2 270.2 5 931.4
Total costs of financial assets -6 502.0 -7 278.6 -18 496.8 -6 538.1 -7 540.0 -19 401.2 Total net income from financial assets 8 535.5 9 240.4 1 884.8 9 027.1 10 116.2 1 312.2 *) Of which administration costs -5.5 -5.5 -5.8 **) Of which administration costs -151.6 -145.1 -133.3
Interest and related income on loans to/deposits with credit institutions 24.6 56.7 69.8 Interest and related income on loans to/claims on customers 931.3 1 575.9 2 261.7 Interest and related income from short-term debt instruments, bonds and other interest bearing securities 108.4 158.7 138.7 Other interest and related income 107.5 12.6 129.3 Total interest and related income 1 171.8 1 803.9 2 599.5 Interest and related expense on liabilities to credit institutions -82.0 -159.9 -179.2 Interest and related expense on deposits from and liabilities to customers -221.6 -686.8 -1 003.3 Interest and related expense on securities issued -344.4 -411.5 -645.8 Interest and related expense on subordinated loan capital -18.4 -30.0 -38.7 Other interest and related expense -78.3 -23.0 -129.7 Total interest and related expense -744.7 -1 311.2 -1 996.7 Net interest and commission income 427.1 492.7 602.8 23 Loan losses: Banking activities
Auditors' fees for group companies Audit fees paid *) 9,3 Consultancy fees paid *) 2,6 *) Remuneration paid to Deloitte Statsautoriserte revisorer AS and related companies for audit and audit-related services amounted to NOK 3.4 million (excluding value add tax) for the group in 2004.
Staff pensions are provided by a group pension scheme, primarily with Storebrand Livsforsikring AS, in accordance with the rules on private occupational pension schemes. Pensions are payable at pension age which is 67 for executives and 65 for underwriters. The ordinary retirement age is 65, and a retirement pension equivalent to 70% of pensionable salary becomes payable on retirement. Pension benefits form a part of the group collective employment terms applicable to employment by Storebrand ASA. Early retirees are defined as those who retire before reaching age 65.
Actuarial assumptions: • Standardised assumptions on mortality/disability and other demographic factors as produced by the Norwegian Financial Services
Expected return on pension funds 175.4 175.4 196.7 201.5 Effect of changes to the pension scheme -0.2 -0.2 -0.1
Estimated effect of future salary growth -161.5 -58.2 -219.7 -699.2 -595.2
Total tax increasing timing differences 4 401.8 4 544.3 4 860.6
Accrued pension liabilities -414.7 -409.9 -456.3 Profit and loss account -3.4 -0.6 -4.7
Total tax reducing the timing differences -1 661.0 -1 060.7 -2 332.3 Net timing differences before losses carried forward 2 740.8 3 483.6 2 528.4
Not eligible for capitalisation 1 453.1 39.3 10.1 Net tax increasing/(reducing) timing differences -595.2 -1 288.2 -2 323.9 Deferred tax/Deferred tax assets (net) *) -168.1 -360.7 -650.7 *) Deferred tax in respect of new companies at the date of acquisition totals NOK 78 million and is capitalised to the balance sheet.
Office premises (incl. commercial premises, parking and storage) 7 505.6 1 101 4.9 463 918 94.3% Shopping centres (incl. parking and storage) 4 964.0 1 321 3.0 312 838 97.3%
Geographic distribution (Life company) Oslo-Vika/Filipstad Brygge 3 775.9 Greater Oslo area – other 5 202.2 Norway – other 3 886.8
Ownership structure: Directly owned 2 983.5 Property company (AS) 9 284.7 Property partnership (ANS) 596.7
NOK MILLION REAL ESTATE AND INVENTORY THE FOLLOWING PERIODS FOR OPERATING ASSETS: Purchase cost as at 01.01. 8 462.0 545.2 Equipment and inventory: 4 years Accumulated depreciation -3.3 -454.3 Motor cars: 5 years Accumulated write-downs -2.1 IT systems: 3 years Accumulated upward revaluations 1 495.9
DNH International Sarl – Redeemable conv. PECs 87 803 1.45% 17.6 18.1
Storebrand WGA Health Care 49 608 46.8 47.2 Øvrige norske fondsandeler 56.1 56.6 Total shares and other equity investments – Norwegian 9 114.7 10 856.1
Total shares and other equity investments – international 18 009.6 17 726.3 Forward foreign exchange contracts – shares 555.0
Total shares and other equity investments (current assets) 27 124.3 29 137.4 Of which listed Norwegian shares and units 6 654 Of which listed international shares and units 14 382 31 Short-term debt instruments and bonds
NOK MILLION ACQUISITION COST MARKET VALUE ACQUISITION COST MARKET VALUE ACQUISITION COST MARKET VALUE
Of which listed securities 33 050.5 Modified duration 4.72 Average effective yield 5.89 3.72
Nominal volume Financial derivatives contracts are related to underlying amounts which are not capitalised in the balance sheet. In order to quantify a derivative position, reference is made to underlying concepts such as nominal principal, nominal volume, etc. Nominal volume is arrived at differently for different classes of derivatives, and gives an indication of the size of the position and risk the derivative creates. Gross nominal volume principally indicates the size of the exposure, whilst net nominal volume gives an indication of the risk exposure. However nominal volume is not a measure which necessarily provides a comparison of the risk represented by different types of derivatives.
Interest rate risk Storebrand Livsforsikring AS – Interest rate sensitivity The figures include underlying investments in fixed-income funds held by Storebrand Life Insurance for its own account.
Total quantified interest rate sensitivity -3.7 -68.9 -175.2 -639.2 -2 314.8 -3 201.7
Interest sensitivity is a measure of interest rate risk based on how changes in interest rates will affect the market value of bonds, interest rate derivatives and other interest rate sensitive financial items. This summary shows how the values of financial current assets and financial fixed assets (bonds held to maturity) at 31 December 2004 would be affected by an increase of 1 percentage point in all interest rates. Storebrand creates interest rate positions through its assets in order to partly offset the interest rate risk implicit in the company's insurance obligations. However, the interest rate risk represented by insurance policies cannot be calculated and quantified in the same way as interest rate risk for financial items.
Storebrand Bank Group: Period to next interest rate fixing and interest rate risk Analysis of balance sheet items by period to next interest rate fixing *)
The group actively hedges the major part of its foreign currency risk. Currency risk arises from investments in international securities, and to a lesser extent from subordinated loans denominated in foreign currencies. Currency risk is hedged through forward foreign exchange contracts at the portfolio level, and currency positions are regularly monitored within specified total limits. Short positions are closed no later than the business day following the date on which they arise. In addition, there are separate limits for creating active currency positions. These positions are included in the note relating to short-term debt instruments and bonds. The currency positions outstanding at 31 December 2004 are typical of the group's small limits for currency positions.
Specific loan loss provisions -379.0 -379.0 -532.2 -510.7 General loan loss provisions -194.3 -194.3 -316.0 -317.0
Non-performing loans where interest is not accrued 790.8 1 266.4 1 125.0 Non-performing loans where interest continues to accrue 55.7 364.4 933.8
Loss-exposed loans where interest is not accrued 7.4 8.1 13.7 Loss-exposed loans where interest continues to accrue 55.7 78.1 288.9 Total loss-exposed loans 63.1 86.2 302.6 Specific loan loss provisions 13.2 28.3 91.2 Net loss-exposed loans 49.9 57.9 211.4 Total net non-performing/loss-exposed loans 530.6 1 189.1 1 857.4 36 Analysis of deposits from customers and liabilities to other financial institutions
Salary account holders (private individuals) 6 715.4 7 260.2 7 635.9
Loans and deposits from financial institutions on demand or with no fixed maturity date 2.8 65.1 7.5 Loans and deposits from financial institutions with agreed notice period or fixed maturity date 2 149.0 3 146.2 4 283.1 Total liabilities to other financial institutions 2 151.8 3 211.3 4 290.6
If Skadeforsäkring Holding AB *) 22.47% 4 354.9 3 911.5 -4 100.5 189.0 *) Companies sold in 2004 38 Equity capital
Minority interests' share of profit 1.7 0.9 2.5 Dividend received/provided -1.7 -0.9 -1.4
Total Storebrand Bank 643.4 40 Technical insurance reserves: Life insurance *)
Restating the opening balance sheet at 1 January 2004 in accordance with IFRS has reduced the group’s reported equity by NOK 323 million. The treatment of pensions for employees is one of the main reasons for this change. Restating the balance sheet at 31 December 2004 in accordance with IFRS increases the group’s reported equity by NOK 1,315 million, and a major part of this increase relates to the reversal of the provision for dividend. Profit after tax for 2004 restated in accordance with IFRS is NOK 12 million higher. The opening balance sheet at 1 January 2005 takes into account the international accounting standard for financial instruments (IAS 39). This has only a limited net effect on the group’s equity.
FURTHER INFORMATION ON CHANGES TO THE PRESENTATION OF BALANCE SHEET AND PROFIT AND LOSS ACCOUNT AND ITEMS RECLASSIFIED Insurance contracts. IFRS 4, which deals with the accounting treatment of insurance contracts, is of particular importance for Storebrand. Storebrand’s insurance products are subject to this standard, and this means that the Storebrand group can, to a large extent, continue to apply its current accounting principles for insurance contracts. IFRS 4 requires that reinsurance of the group’s insurance liabilities must be shown separately as an asset, whereas reinsurance was previously incorporated as a reduction to total gross insurance reserves. Reinsurance amounted to NOK 2,696 million at 31 December 2004. The change in presentation has no effect on the group’s equity.
Pensions (for the group’s employees). The effect of adopting IAS 19 relates mainly to the accounting treatment of deviations from estimates at 1 January 2004 and the discount rate used. The accounting treatment of deviations from estimates is described in note 25 on page 73. Storebrand has applied the deviation from estimates at 1 January 2004, as calculated in accordance with Norwegian accounting principles, directly to equity.
IAS 19 requires that the discount rate used to calculate pension liabilities is equivalent to the risk-free return over the average remaining period. The discount rates applied accordance with IFRS and the rate used in the official annual accounts are as follows: IFRS Actual
The changes caused an increase in pension cost for 2004 of NOK 15 million, and increased the restated book value of pension liabilities at 31 December 2004 to NOK 728 million.
Share-related bonus scheme payable in cash. Storebrand operates a bonus scheme for senior executives in which the value of cash bonus payments depends on the price of the Storebrand share. The accounting treatment required by IFRS causes an increase in the provision for bonus payments of NOK 9 million in the opening balance at 1 January 2004 and NOK 8 million at 31 December 2004.
Reclassification of provision for dividend. IAS 10, which deals with post-balance sheet date events, does not permit a proposed dividend to be recognised as a liability until the annual general meeting has approved the dividend payment. This caused provision for dividend to be reclassified as equity at 1 January 2004 and 31 December 2004 in the amounts NOK 224 million and NOK 1,842 million respectively.
Real estate. The Storebrand group accounts already apply actual value to most real estate assets. The implementation of IFRS requires that the group’s forestry holdings are also valued at actual value, giving a total increase in the value of the group’s real estate of NOK 98 million before tax.
IFRS requires that properties occupied by the group for its own use must be depreciated. This will cause an increase in annual depreciation in the profit and loss account of around NOK 24 million. However, real estate is carried in the balance sheet at restated actual value, so the effect on equity will only be the difference between depreciation and restated actual value.
Structured products – synthetic financial instruments. The bank’s treatment of equity linked bonds up to and including 2004 has been to recognise net commissions and fees earned at the time of issue. IAS 39 requires that bonds issued should be recognised at amortised cost using the effective yield method, and this means that all cash flows related to the loan are amortised over its life. The implementation of this change reduces equity by NOK 73 million, but this negative effect will be balanced by an equivalent reduction in interest expense in future periods.
Claims and benefits paid -10 652 -10 652 Change in insurance reserves -11 627 -11 627 Reinsurance (reinsurers' share) 21 21 Interest expense – other activities -246 -246 Other financial expense -139 -111 28 Loan losses 7 7
Minority interests' share of profit -2 -2 0 Profit/loss for the period 2 358 2 370 12
derivatives were not shown in the balance sheet up to and including 2004. IAS 39 requires that derivatives are recognised at actual value, and hedge accounting can only be applied if strict conditions on the effectiveness of hedging transactions and their documentation are satisfied. These conditions were satisfied at 1 January 2005, and hedge accounting has been applied. Hedge accounting permits some simplification as where hedging instruments and the item hedged are subject to different valuation rules, the rules applicable to the item hedged can be disregarded in order to permit equivalent treatment to the hedging instrument. The change to recognising derivatives at actual value is expected to have only a minor effect on equity in view of the use of hedge accounting.
IAS 39 also caused some changes to the bank’s previous approach to valuing certain investment in shares, which together with other items must now be valued at actual value. The changes to these items, together with the changes to derivatives that do not qualify for hedge accounting, increased equity by some NOK 30 million as of 1 January 2005.
In Storebrand’s restated consolidated accounts, the pre-tax effects of IFRS in respect of life insurance activities have been shared between the group’s equity and the accounting item policyholders’ funds in the ratio 35:65. This allocation is consistent with the accounting standard for insurance contracts.
DRAFT BALANCE SHEET 01.01.04 DRAFT BALANCE SHEET AT 31.12.04/01.01.05 BALANCE DRAFT IFRS DRAFT IFRS
BALANCE SHEET DRAFT IFRS EFFECT OF SHEET IN BALANCE BALANCE EFFECT OF IN THE OFFICIAL BALANCE TRANSITION THE OFFICIAL SHEET SHEET TRANSITION
All of Storebrand’s marketing, customer service and sales of financial products and services to the retail market was carried out by a separate business unit within Storebrand Bank ASA until 1 October 2004, when the unit was transferred to Storebrand Livsforsikring AS.
Number of employees *) 1 289 Total assets NOK 172 771 mill Equity capital NOK 8 917 mill Group profit NOK 2 415 mill *) Includes all employees in the Storebrand group
Number of employees 128 Total assets under management NOK 165.0 bn External assets under management 1) NOK 25.5 bn Market share – mutual funds 10.9% Number of mutual funds offered 50 Number of mutual funds customers 78 084 1) External discretionary clients and mutual funds.
Storebrand Life Insurance shall be recognised by its customers as the most respected and customer focused life insurance company in Norway. The company will provide the best advice and offer the most attractive products for long-term savings and life insurance in both the corporate and retail markets.
> Storebrand bank launched a chain of franchised real estate brokers to strengthen the marketing and distribution of mortgage loans. The new operation, known as Ring Eiendomsmegling, has already started recruiting real estate brokers as franchisees.
> Storebrand Bank's Partner program was voted the best in the market.
3) Paid-up policies in respect of previous membership of a group pension scheme (does not include those now drawing pension benefits).