Consolidated 2008 Financial Statements • Consolidated balance sheet 16 • Consolidated income statement 17 • Consolidated statement of changes in equity 18 • Consolidated cash flow statement 19 2 Financial reporting principles 21 3 Acquisitions and divestments 42 4 Shareholders’ equity 42 5 Non-controlling interests 44 6 Risk management 44 7 Supervision and solvency 69 8 Post-employment benefits and other long-term employee benefits 70 9 Remuneration in shares and options 75 10 Remuneration of Supervisory Board and Board of Directors of ASR 75 11 Auditor’s fees 77 12 Transactions with related parties 77 13 Information by segment 78 14 Cash and cash equivalents 82 15 Other assets and receivables 82 17 Property, plant and equipment 87 18 Goodwill and other intangible assets 89 19 Accrued interest and other liabilities 91 20 Due to banks 92 21 Liabilities arising from insurance contracts 92 22 Liabilities related to unit-linked contracts 93 23 Other borrowings 93 24 Current and deferred tax liabilities 93 26 Subordinated liabilities 96 27 Non-cumulative guaranteed Trust Capital Securities 96 29 Fair value of financial assets and financial liabilities 101 30 Insurance premiums 105 31 Interest income 106 32 Dividend and other investment income 106 33 Other income 106 34 Other realised and unrealised gains and losses 107 35 Insurance claims and benefits 108 36 Operating and staff expenses 108 37 Interest expense 109 38 Changes in impairments 109 39 Income tax expense 110 41 Contingent liabilities 114 42 Lease agreements 114 43 Funds under management 115 44 Subsequent events 115
Unless stated otherwise, all amounts presented in the financial statements are in millions of euros.
The Supervisory Board will monitor a swift and careful unbundling from Fortis, the consequences of the financial crisis particularly on ASR’s capital position and the far-reaching transformation of the company to an insurer fully capable of solidly fulfilling its ‘utility function’ for its customers with continuity.
Financial statements The Supervisory Board discussed and adopted the 2008 financial statements at its meeting on 26 May 2009. The annual results were published earlier, on 2 April 2009, in a press release discussed beforehand by the Board of Directors and the Supervisory Board. External auditors KPMG issued an unqualified auditor’s report for the 2008 financial statements.
Life There was a net loss of EUR (646) million in 2008 compared with a net profit of EUR 657 million in 2007 due to negative results in the financial markets and additions to the guarantee provision and the provision for compensation for life insurance policies with an investment component (‘beleggingsverzekeringen’). These same factors explain the fall in the technical result of Life from a loss of EUR (86) million to a loss of EUR (998) million.
This experience will form part of the basis for our revised strategy that we will present later this year. The core of the strategy will be the need to find a new balance in the value that our company offers to relevant stakeholders, each with their own particular interests: customers, shareholders, employees and society. We must focus swiftly and vigorously on the changing needs of the modern customer. We must be able and willing to discharge accountability for everything that we do, both publicly and politicosocially. This calls for a change of mindset.
Property, plant and equipment 17 264 227 329 Goodwill and other intangible assets 18 407 405 428
Result carried over from previous financial year 0 0 -533 0 0 533 0 0 0 Net result for the period 0 0 624 0 0 0 624 5 629
Purchases in investments -12,556 -11,719 -8,481 Proceeds from sales and redemptions 10,758 12,116 7,551 Purchase of investment property -428 -143 -766 Proceeds from sales of investment property 624 214 497 Investments in associates and joint ventures -14 -3 6 Proceeds from sales of associates and joint ventures 21 1 2 Purchases of property, plant and equipment -55 -26 -133 Proceeds from sales of property, plant and equipment 0 0 2 Acquisitions of group companies (less acquired cash positions) 0 -3 94 Divestments of group companies (less sold cash position) 2 2 47 Purchase of intangible assets -16 -4 -43 Changes in scope 0 0 -11 Cash flow from investing activities -1,664 435 -1,235
Until 3 October 2008, ASR formed part of the Fortis Group (as a subsidiary of Fortis Insurance N.V.). On 3 October, the State of the Netherlands became the sole shareholder. This followed developments surrounding the former parent company. Under an amendment of the articles of association, the name of the company was changed on 5 March 2009 to ASR Nederland N.V.
Profits on transactions between ASR and associates measured according to the equity method are eliminated in proportion to the share of ASR. Losses are also eliminated, unless it appears from the transaction that the transferred asset has been subject to impairment (see chapter 2.10).
Information about derivatives and hedging can be found in chapter 2.24.
The most important methods and assumptions that ASR uses to determine the fair value of financial instruments are: • the fair value of securities available for sale and of securities at fair value with value changes in the income statement is determined by means of market prices in active markets. If quoted prices are unavailable in an active market, the fair value is determined using present value calculations of the cash flows. Discount factors are based on the swap curve plus a spread to reflect the features of the instrument; • the fair value of derivatives is obtained from active markets or, if applicable, it is determined using net present value calculations of the cash flows and option valuation models; • the fair value of loans is determined using present value calculations of cash flows based on ASR’s prevailing interest rates for loans of the same type. The fair value of loans with a variable interest rate, which have a price that changes frequently and exhibit no identifiable credit risk change, is approximated by the balance sheet value. Option valuation models are used to value an interest-rate ceiling and prepayment options embedded in loans and are presented separately on the basis of IFRS; • the fair value of unlisted private equity investments is estimated using the applicable market multiplies (e.g. net asset value, price/earnings ratios or price/cash flow ratios). These are refined to reflect the specific circumstances of the entity.
The balance sheet value of impaired assets is lowered to their estimated realisable value. The amount of the movement in the provision in the current reporting period is presented in the income statement. Adjustments, write-offs and reversals of impairments are recognised in the income statement as part of the change to the impairment.
Interest received and interest paid is presented in the cash flow statement as cash flows from operating activities. Received dividends are presented in the cash flow statement as cash flows from operating activities. Paid dividends are presented as a financing activity.
Reinsurance contracts are measured to determine whether a significant insurance risk will be transferred within the contract. Reinsurance contracts that do not transfer any significant insurance risk are recognised using the deposit method under loans (credits or loans) as financial assets or financial liabilities for reinsurance. A financial asset or financial liability for reinsurance is presented at the paid or received amount, less any explicitly identified premiums or fees to which the reinsured party is entitled. The paid or received amounts resulting from these contracts are recognised as deposits using the effective interest method.
Only assets, liabilities, defined benefits or very probable transactions involving a party outside ASR are considered to be hedged positions.
Refer to chapter 2.6, Foreign currency, for information on hedging of net investments.
2.32 Insurance premiums, claims and payments A short-term investment contract (less than one year) is a contract that provides for insurance protection for a short but fixed period of time. It gives the insurer and the customer the possibility of cancelling the contract or amending its provisions on expiry of the contractual term.
For financial instruments presented in the income statement at fair value through profit or loss, the difference between the balance sheet value at the end of the current reporting period and the previous reporting period is presented under ‘Other realised and unrealised gains and losses’.
6.3.1.1 Financial Risk & Value Management The Financial Risk & Value Management (FR&VM) department is headed by the Chief Risk Officer. The role of this department is to ensure that the organisation continuously satisfies the highest qualitative standards of risk management, increase awareness of and insight into the risks taken by management, stimulate an optimum risk/return ratio, measure economic capital and approve risk models. Moreover, FR&VM supports the businesses in risk matters and the work of various risk committees. The department also coordinates implementation of risk initiatives and risk communication.
Government Credit Business Retail Other Total and public sector institutions customers customers 31 December 2008 Balance sheet Benelux 2,694 2,288 4,126 2,192 734 12,034 6.4.1.4 Credit risk rating ASR controls the credit risk in its investment portfolio with the aid of credit ratings such as those issued by external rating agencies.
Total credit risk on balance sheet (net) 22,610 Market value relative to credit risk (as percentage of) 12.15%
Structured credit instruments The investments corresponding with long-term liabilities require not only stable and balanced risks, but also high financial revenues. Structured credit instruments, including CDOs, exist to generate fixed, relatively high revenues on a diversified and highly valued portfolio of asset classes for terms of 5 to 10 years.
Interest risk: swaptions Swaptions are sold to mitigate some of the risk of falling interest rates. The characteristics of the swaptions (exercise price, option term, swap term) are geared to the characteristics of the insurance products (guaranteed interest rate, interest, systematic profit-sharing).
In the insurance sector the liquidity risk has always been limited. Payments made to policyholders are highly predictable, and there is hardly ever an unexpected demand for payments without acceptable losses on the liquidation of investments. At yearend 2008, the cash position was EUR 0.6 billion and the portfolio included EUR 6.3 billion of liquid government bonds.
All technical insurance risks are modelled and measured in a consistent manner. They are based on determination of the fair value of assets and liabilities. Another key factor is the development of a model for a value spread around the best possible estimate in response to life and non-life technical insurance risk.
When contracts roll over into the next accounting period, the entire insurance modelling will be subdivided in the following way: • Reserve risk: this is related to liabilities that arise from events that have already occurred and for which a provision had already been explicitly created4.
Third-party motor 1,000,000 2 1,000,000 Unlimited 1,000,000 2 1,000,000 Unlimited 1) Reinsurance in accordance with acceptance guidelines and policy limits.
Economic climate, government intervention, medical advances and costs influence the occurrence of disability and recovery. The standards applied in assessing disability also play a role. This risk is managed by regular evaluation of historical claims patterns, expected future developments, adjustment of pricing, liabilities and acceptance policy. ASR limits the disability risk also by medical selection strategies and appropriate reinsurance.
The table below provides information about sensitivity to the most important technical insurance risks. The sensitivities for the life sector were chosen in accordance with the sensitivities used in the embedded value publication.
ASR Nederland N.V. 2008 68 ASR Nederland N.V. 2008 69 6.7.4 Business continuity management Business Continuity Management (BCM) is the entirety of activities focused on ensuring the continuity of business. It provides a framework for building a resilient organisation capable of reducing the impact of effectuated threads and responding effectively to them so as to protect the interests of stakeholders, reputation, brand and value-creating activities.
Required minimum capital 1,484 Buffer capital as percentage of required minimum capital 233%
The tables below provide further information about gross liabilities, qualifying plan assets and the amounts recognised in the balance sheet for pensions and other post-employment benefits.
Present value of liabilities with qualifying plan assets 0 1,637 1,700 1,923 1,799 Present value of liabilities without qualifying plan assets 1,707 0 0 0 0 Liability for defined benefits plans 1,707 1,637 1,700 1,923 1,799 Fair value qualifying plan assets 0 -1,265 -1,344 -1,302 -1,404 Unrecognised pension income (expense) of elapsed length of service 24 27 30 0 0
Unrecognised past service cost at 31 December 24 27 0 0
Name of director ‘Restricted Options Options Options Options Options shares’ awarded exercised outstanding at exercise- expiry in 2008 in 2008 31-12-2008 price date
The segment report of ASR reflects the complete economic contribution of the various segments. ASR makes a distinction between Life and Non-life segments. The purpose of this report is the full allocation of all items in the balance sheet and income statement to the segments that hold complete management responsibility for them.
The decreases in 2008 and 2007 were caused mainly by the writing down of the value of the CDOs as a result of changed market conditions caused by the credit crisis.
Changes to property, plant and equipment The table below shows changes to Property, plant and equipment in the years of 2006, 2007 and 2008.
There is no significant difference between the carrying amount of the liabilities held at fair value through profit or loss in the income statement and the face value of the liabilities.
The provisions for premature departure of personnel are based on arrangements agreed in the collective labour agreement and are created at the time of conclusion of the agreement. The outgoing cash flows have the same time horizon as the collective labour agreement.
Share derivatives concern share swaps, options, futures and forward contracts. A share swap is a swap whereby the exchanged cash flows are based on the total revenues of a certain stock market index and an interest rate (fixed or variable). Share options carry the right to purchase (in the case of a call option) or sell (in the case of a put option) a fixed amount of shares, at a predetermined price, before or on a deadline.
Measured on the basis of market information 0 31 1 31
Measured on the basis of market information 0 123 1 123
ASR uses the following hierarchy to determine the fair value of financial instruments: • Listed (quoted prices in an active market); • Measured on the basis of market information (measurement methods); • Measured on the basis of theoretical models (including measurement at cost price).
ASR has formulated a policy for quantifying and monitoring the uncertainties concerning the calculation of fair value by means of valuation methods and internal models. Related uncertainties are named in the ‘model risk’ concept.
The ASR fair value adjustment policy goes beyond existing procedures aiming to assess the quality of regular fair valuations processes. Any related model uncertainty is quantified as best as possible and is the basis in adjusting the fair value calculated by the valuation techniques and internal models.
Non-unit-linked products Group business Single premiums written 578 93 718 Regular premiums written 215 160 242 Group business total 793 253 960
All changes to the fair value of assets and liabilities held at fair value with value changes in the income statement are presented in this column. They include unrealised gains and losses through revaluation and realised gains and losses on the sale of assets or the settlement of liabilities.
The decrease in staff expenses in 2008 compared with 2007 is due mainly to the higher discount rate than in 2007. The other costs increase because of expenses allowances and commuting reimbursements.
Asset backed securities -144 -108 -1 Total change in impairments in investments -902 -139 -3
This table shows the components of income tax expenses: Tax over current financial year -196 -76 -151 Entered adjustment of tax expenses previous years 4 90 154 Previously unrecognised tax losses, tax credits and other temporary differences that reduce present profit taxation 0 0 8 Total current tax expenses -192 14 11
The table below shows a reconciliation of expected profit taxation with actual profit taxation. The expected profit taxation was determined by relating the result before tax to the tax rate in the Netherlands. In 2008 the rate was 25.5% (2007: 25.5%; 2006: 29.6%).
The current assessment of the legal risks stemming from this case do not provide any reason for ASR to create a material provision.
6. Entitlement to distribution shall cease to exist on expiry of a period of five years starting from the date payment is made available.
Provision A liability of a certain size or with an uncertain point in time. Provisions are recognised as liabilities if it is likely that an outflow of funds that carry economic benefits will be required in order to deal with the liabilities, always assuming that a reliable estimate can be made.